-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GEnyy0MDP49P7dt5D6jIMDjHvZ/+M+cTF0GIw3H81ld4eHmNvVbfpzu+2CSztvd4 36EL/hRyqna32ZePhxo9Dg== 0000889812-96-001975.txt : 19961224 0000889812-96-001975.hdr.sgml : 19961224 ACCESSION NUMBER: 0000889812-96-001975 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19961223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAL FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000811644 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 232455294 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-15787 FILM NUMBER: 96684927 BUSINESS ADDRESS: STREET 1: 500 CYPRESS CREEK ROAD WEST STREET 2: STE 590 CITY: FORT LAUDERDALE STATE: FL ZIP: 33309 BUSINESS PHONE: 3059388200 MAIL ADDRESS: STREET 1: 500 CYPRESS CREEK ROAD WEST STREET 2: SUITE 590 CITY: FORT LAUDERDALE STATE: FL ZIP: 33309 FORMER COMPANY: FORMER CONFORMED NAME: CORPORATE FINANCIAL VENTURES INC DATE OF NAME CHANGE: 19920703 SB-2/A 1 PRE-EFFECTIVE AMENDMENT NO. 2 As filed with the Securities and Exchange Commission on December 23, 1996 Registration No. 333-15787 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- NAL FINANCIAL GROUP INC. (Exact name of registrant as specified in its charter) Delaware 6141 23-2455294 -------- ---- ---------- (State or other jurisdiction of (Primary Standard (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
500 Cypress Creek Road West Suite 590 Fort Lauderdale, FL 33309 ------------------------------------------------ (Address, including zip code, and telephone number, including area code, of registrant's principal executive office and principal place of business) Mr. Robert R. Bartolini 500 Cypress Creek Road West Suite 590 Fort Lauderdale, FL 33309 (954) 938-8200 ------------------------------------------------- (Name, address, including zip code, and telephone number, including area code, of agent for service) with a copy to: Stephen M. Cohen, Esquire Peter H. Darrow, Esquire Buchanan Ingersoll Professional Corporation Cleary, Gottlieb, Steen & Hamilton Two Logan Square, 12th Floor One Liberty Plaza 18th & Arch Streets New York, NY 10006 Philadelphia, PA 19103 (212) 225-2000 (215) 665-3800 -------------------- Approximate date of proposed sale to the public: As soon as practicable following the date on which this Registration Statement becomes effective. -------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement in the same offering: [ ] ____________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]____________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------- Title of Amount Proposed Proposed Shares to be to be Maximum Offering Maximum Aggregate Amount of Registered Registered Price Per Share(2) Offering Price Registration Fee(3) - ----------------------------------------------------------------------------------------------- Common Stock, par value $.15 per share 2,875,000(1) $9.75 $28,031,250 $8,494.32 - -----------------------------------------------------------------------------------------------
(1) Includes 375,000 shares to cover over-allotments, if any. (2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the registration fee. (3) Previously paid. SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1996 PROSPECTUS - -------------------------------------------------------------------------------- 2,500,000 Shares NAL FINANCIAL GROUP INC. Common Stock - -------------------------------------------------------------------------------- All 2,500,000 shares of common stock, $.15 par value per share (the 'Common Stock') offered hereby (the 'Offering') are being sold by NAL Financial Group Inc. (the 'Company'). The Company's Common Stock is included in The Nasdaq Stock Market's National Market (the 'Nasdaq National Market') under the symbol 'NALF.' On December 20, 1996, the last reported sales price for the Common Stock on the Nasdaq National Market was $9.75 per share. See 'Price Range of Common Stock.' SEE 'RISK FACTORS' ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Price to Discounts and Proceeds to Public Commissions (1) Company (2) -------- --------------- ----------- Per Share.... $ $ $ Total (3).... $ $ $
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See 'Underwriting.' (2) Before deducting expenses payable by the Company estimated to be $ . (3) The Company has granted the several Underwriters a 30-day over-allotment option to purchase up to 375,000 additional shares of Common Stock on the same terms and conditions as set forth above. If all such additional shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discounts and Commissions will be $ and the total Proceeds to Company will be $ . See 'Underwriting.' - -------------------------------------------------------------------------------- The shares of Common Stock are offered by the several Underwriters, subject to delivery by the Company and acceptance by the Underwriters, to prior sale and to withdrawal, cancellation or modification of the offer without notice. Delivery of the shares to the Underwriters is expected to be made at the office of Prudential Securities Incorporated, One New York Plaza, New York, New York on or about December , 1996. PRUDENTIAL SECURITIES INCORPORATED PIPER JAFFRAY INC. SANDS BROTHERS & CO., LTD. December , 1996 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [MAP of Headquarters and States of Operation] States of Operation Currently Currently Licensed State Operating but not Operating -------------- --------- ----------------- Arizona X California X Colorado X Connecticut X Delaware X Florida X Georgia X Illinois X Indiana X Kansas X Kentucky X Louisiana X Maryland X Michigan X Mississippi X Missouri X Nevada X New Hampshire X New Jersey X New Mexico X New York X North Carolina X Ohio X Oklahoma X Oregon X Pennsylvania X Rhode Island X South Carolina X Tennessee X Texas X Vermont X Utah X Virginia X Washington X West Virginia X As of December 20, 1996 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." ------------------------ AVAILABLE INFORMATION The Company is subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended (the 'Exchange Act') and in accordance therewith files reports and other information with the Securities and Exchange Commission (the 'Commission'). Copies of these reports may be inspected and copied at the Public Reference Facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained upon written request addressed to the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Investors should carefully consider the information set forth under the caption 'Risk Factors.' Unless the context otherwise requires, the 'Company' or 'NAL' refers to NAL Financial Group Inc. and its wholly-owned subsidiaries. THE COMPANY NAL is a specialized automobile finance company engaged in the purchase and servicing of loan and lease contracts (the 'Contracts') originated by franchised and select independent dealers ('Dealers') in connection with sales or leases of used and new automobiles to consumers with non-prime credit. Consumers with non-prime credit are perceived to be relatively high credit risks due to various factors, including the manner in which they have handled previous credit, the absence or limited extent of their prior credit history and their limited financial resources. The Company purchases Contracts relating principally to the 'C' credit segment of the automobile finance market. In addition to purchasing Contracts directly from Dealers, the Company has established diverse programs that enable it to increase the volume of Contracts purchased from a variety of Dealers with whom the Company does not maintain a direct relationship. As of September 30, 1996, the Company serviced 1,594 Dealers in 23 states and more than 90% of all Contracts acquired by the Company during the nine months ended September 30, 1996 were originated by franchised Dealers. The Company generated net income of approximately $394,000 and $2.8 million in 1994 and 1995, respectively. For the nine months ended September 30, 1995 and September 30, 1996, the Company generated net income of approximately $1.1 million and $6.1 million, respectively. The Company has experienced significant growth in its portfolio of purchased and serviced Contracts since June 1994, when the acquisition of Contracts became the principal focus of its business. Total Contracts purchased, which includes both loan contracts ('Loan Contracts') and lease contracts ('Lease Contracts'), increased from approximately $28.1 million through December 31, 1994 and $165.7 million through December 31, 1995, to approximately $205.8 million through September 30, 1996. As a result, the Company's servicing portfolio increased from approximately $44.4 million at December 31, 1994 and $153.8 million at December 31, 1995, to approximately $283.9 million at September 30, 1996. The Company's overall growth during this period was attributable to an increase in its Dealer relationships from 196 Dealers at December 31, 1994 to 1,594 Dealers at September 30, 1996, and an expansion of the sources and amounts of financing available to purchase Contracts. Loan Contracts purchased during the nine months ended September 30, 1996 had an average principal balance of $12,300, a weighted average annual percentage rate ('APR') of 19.48%, a weighted average purchase discount of 5.73% and a weighted average initial contract term of 54.7 months. Lease Contracts purchased during the nine months ended September 30, 1996 had an average principal balance of $15,800, a weighted average yield of 18.10%,which is based on the residual value assigned by the Company at the inception of the Lease Contract, and a weighted average initial contract term of 45.4 months. The Company has historically funded the purchase of its Contracts with borrowings from banks and other lenders. Currently, the Company's primary financing sources include a $100 million warehouse facility, $45 million of revolving credit facilities, including a $25 million facility with General Electric Capital Corporation ('GECC') and a specialized borrowing facility. Beginning in December 1995, the Company began securitizing the majority of its portfolio of Loan Contracts to increase the Company's liquidity, provide for the redeployment of capital, reduce risks associated with interest rate fluctuations and provide the Company with access to a cost-effective, diversified source of financing. During the last four fiscal quarters, the Company completed securitization transactions aggregating approximately $200 million. During this period, gains on sale from the securitization transactions have constituted the principal source of the Company's revenues. The Company plans to 3 continue to employ its securitization program as an integral component of its funding strategy and anticipates that it will generally complete securitization transactions on a quarterly basis. The Company also generates revenues from interest income and fees earned on Contracts held in portfolio, as well as servicing fees from Loan Contracts sold in securitization transactions. In addition, the Company receives revenues from the sale of insurance and related products through its insurance subsidiary, NAL Insurance Services, Inc. ('NIS'). The Company purchases Contracts directly from Dealers through its Dealer Program and through select third party entities that participate in the Company's Captive Program, Affinity Program, Correspondent Program, Recourse Program and Wholesale Program (collectively, the 'Origination Programs'). Participants in these Origination Programs offer Contracts to the Company under a variety of arrangements and allow the Company to increase its access to Dealers. The Company's main sources of Contracts are its Dealer Program and its Captive Program. The Captive Program includes the Company's arrangements with Special Finance, Inc. ('SFI'), which recently became a wholly-owned subsidiary of the Company. Under its Affinity Program, the Company has an agreement with General Electric Capital Auto Lease, Inc. ('GECAL') to purchase non-prime Lease Contracts through GECAL's network of Dealers in the Southeast region of the United States. As of September 30, 1996, the Company's servicing portfolio consisted of Contracts purchased through its Dealer Program (32%), Captive Program (46%), Affinity Program (5%), Correspondent Program (2%), Recourse Program (9%) and Wholesale Program (6%). Each of these programs, other than the Recourse Program, is designed to purchase Contracts relating primarily to the 'C' credit segment of the market. The Recourse Program is designed to purchase Contracts relating to the 'D' credit segment. The Company's principal objectives are to sustain controlled growth of its business and to maximize its profit potential. To achieve these objectives, the Company is currently implementing the following strategies: Expanding and Strengthening Relationships with Origination Sources. The Company plans to achieve a greater volume of business by expanding its origination sources in existing markets, by entering into new geographic markets and by strengthening its current relationships. The Company develops strong relationships with its Dealers and other origination sources by providing a high level of service specifically tailored to meet their needs. The Company typically responds to credit applications on the date received and in most cases within two to four hours, and generally pays for Contracts purchased within twenty-four hours of receipt of a complete funding package. In addition, the Company provides training to Dealer personnel on the use of the Company's credit underwriting guidelines. Providing Diverse Products and Services to Dealers. In addition to providing prompt, flexible service and a reliable source of financing, the Company increases its volume of business from Dealers by offering a 'one-stop shop' service. This service includes purchasing both Loan and Lease Contracts on used and new automobiles, addressing a broad range of credit profiles and offering insurance and related products. Employing Detailed Underwriting Guidelines. In order to evaluate and measure effectively the risks associated with lending to non-prime consumers, the Company's underwriting guidelines and approval procedures focus on balancing the creditworthiness of the borrower with the adequacy of the vehicle as collateral. The guidelines provide a high degree of credit and pricing specificity to Dealers, which enable them to improve service to their customers by increasing the efficiency of the credit application and funding process. Maintaining Effective Collection and Asset Disposition Systems. The Company employs efficient and aggressive collection policies and procedures. The Company contacts a borrower typically within 24 hours of a payment delinquency and manages accounts based on geographic regions. The Company also uses its subsidiary, Performance Cars of South Florida, Inc. ('PCSF'), with a J.D. Byrider car dealership franchise ('JDBR Franchise') to maximize recovery on some of its repossessed and off-lease vehicles. As geographic expansion requires, the 4 Company intends to establish full service regional centers, which will include servicing and collection operations. Diversifying its Financing Sources. The Company plans to continue to expand and diversify its financing sources. The Company intends to continue to sell Loan Contracts through securitization transactions on a quarterly basis. Securitization enables the Company to increase its liquidity, redeploy capital, mitigate interest rate risk and reduce credit risk. Continuing the Growth of Related Businesses. The Company's related businesses, through NIS and PCSF, complement the purchasing and servicing of Loan and Lease Contracts and enhance the Company's profitability. The Company intends to continue to offer insurance and related products to Dealers, which provide an additional source of revenue to the Company. As the volume of Contracts purchased increases, the Company plans to open additional PCSF sites with JDBR Franchises to maximize recovery from remarketing activities. Recruiting and Retaining Experienced Management. Members of the Company's management team have an average of over 20 years of experience in automobile finance, consumer finance or banking. Management believes that hiring experienced management personnel is critical to the formulation and implementation of its strategies and the maintenance of its growth and profitability. The Company intends to continue to provide incentive compensation arrangements, including stock option plans, to attract and retain members of the management team. According to CNW Marketing/Research, an independent automobile finance market research firm, the automobile finance industry (which includes new and used vehicle lending and leasing) is the second largest consumer finance industry in the United States with over $410 billion in loan and lease originations in 1995. Management believes that captive finance companies, such as General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler Credit Corporation, financed between 25% and 30% of automobile purchases and leases nationwide in 1995, while the balance was provided by banks, credit unions and independent finance companies. The industry is generally segmented according to the type of car sold (new or used) and the credit characteristics of the borrower (prime or non-prime). Management believes that the non-prime segment of the automobile finance market is in the range of $80 billion to $100 billion in annual loan and lease originations. The Company was founded in February 1991 as a specialized consumer finance company. It became publicly held by virtue of a merger (the 'Merger') with a previously inactive public company on November 30, 1994. Until June 1994, the Company's principal activities involved the bulk purchase and servicing of seasoned and non-performing portfolios of consumer and mortgage loan and automobile loan and lease receivables. The principal focus of the Company's business since June 1994 has shifted to the purchase and servicing of automobile Loan and Lease Contracts. The Company's principal executive office is located at 500 Cypress Creek Road West, Suite 590, Fort Lauderdale, Florida 33309. Its telephone number is (954) 938-8200. RECENT DEVELOPMENTS On December 18, 1996, the Company completed the sale of approximately $88 million of Loan Contracts in a privately-placed securitization transaction, the terms of which are similar to the Company's four prior securitization transactions. The securities issued in the securitization transaction were rated 'A' and 'BBB' by Duff & Phelps Credit Rating Co. and Fitch Investors Service, L.P. and carry a weighted average coupon rate of 7.03%. 5 THE OFFERING Common Stock Offered Hereby............ 2,500,000 shares Common Stock to be Outstanding after the Offering(1)(2)................................. 9,847,367 shares Use of Proceeds................................ The proceeds will be used to support growth and for general corporate purposes, including working capital, future acquisitions, the repayment of certain advances totaling $2,413,869 to the Company's Chief Executive Officer and the repayment of short-term indebtedness of $2,000,000. Pending such use, the net proceeds will be used to repay indebtedness under the Company's warehouse and other credit facilities. See 'Use of Proceeds.' Nasdaq National Market Symbol.................. NALF
- ------------------ (1) As of December 20, 1996. (2) Excludes the potential conversion of $25.0 million principal amount of outstanding debentures and the exercise of 2,913,625 outstanding related warrants. Assuming the conversion of $25.0 million of outstanding debentures into 2,537,830 shares of Common Stock (principal and interest) and the issuance of 2,913,625 shares upon the exercise of outstanding warrants, the Company would have 15,298,822 shares of Common Stock outstanding after the Offering. Of the 5,451,455 shares of Common Stock issuable upon the conversion of outstanding debentures and the exercise of outstanding related warrants, substantially all of such shares are subject to the terms of a lock-up agreement for a period of 180 days after the date of this Prospectus. In addition, assuming the conversion of such debentures and the exercise of such warrants, the Company would be released from its obligation to repay approximately $28.4 million of principal and interest, and the Company would secure additional working capital of approximately $33.0 million. See 'Risk Factors' and 'Description of Securities.' Certain debentures and warrants are subject to price protection adjustment features. Based upon the price at which the shares are being issued in this Offering, the number of shares issuable upon conversion of such debentures would likely be subject to material increase and the proceeds to the Company upon exercise of such warrants would likely decrease. See 'Description of Securities -- Price Protection.' 6 SUMMARY FINANCIAL INFORMATION The financial data set forth below should be read in conjunction with the Consolidated Financial Statements of the Company and related notes thereto and 'Management's Discussion and Analysis of Financial Condition and Results of Operations' included elsewhere herein. In the opinion of management, the interim financial information for the nine-month periods ended September 30, 1996 and 1995 includes all of the adjustments necessary to fairly present the results of such interim periods and all such adjustments which are of a normal recurring nature. The interim financial information includes the accounts of the Company and its wholly-owned subsidiaries and should be read in conjunction with the audited financial statements, and the footnotes thereto, for the year ended December 31, 1995. Certain 1995 and 1994 amounts have been reclassified to conform with the current year presentation. Operating results for the nine-month period ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996.
FOR THE NINE FOR THE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ---------------------- --------------------- 1996 1995 1995 1994 -------- -------- -------- ------- (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net interest income............................... $ 8,936 $ 6,363 $ 8,319 $ 3,430 Gain on sale of Contracts......................... 13,427 128 4,600 2,292 Servicing fees and other income................... 4,670 1,241 2,651 454 -------- -------- -------- ------- Total revenue..................................... 27,033 7,732 15,570 6,176 Provision for credit losses....................... (2,801) (1,412) (2,762) (573) Operating expenses................................ (13,844) (4,514) (7,805) (4,946) Non-cash charge for escrow shares................. (301) (80) (280) -- -------- -------- -------- ------- Income before taxes............................... 10,087 1,726 4,723 657 Provision for income taxes........................ (3,945) (656) (1,926) (263) -------- -------- -------- ------- Net income........................................ $ 6,142 $ 1,070 $ 2,797 $ 394 -------- -------- -------- ------- -------- -------- -------- ------- Primary EPS....................................... $ .81 $ .18 $ .45 $ .08 Fully diluted EPS................................. $ .75 $ .18 $ .45 $ .07 PRO FORMA EPS:(1) Net income........................................ $ $ Primary EPS....................................... $ $ Fully diluted EPS................................. $ $ OPERATING DATA: Loan Contracts purchased during the period........ $191,718 $ 92,368 $145,657 $23,382 Average Loan Contract purchased during the period(2)....................................... $ 12.3 $ 11.8 $ 12.0 $ 9.1 Weighted average Loan Contract APR................ 19.48% 19.94% 19.72% 20.98% Weighted average Loan Contract term (months)...... 54.7 50.7 48.73 43.75 Lease Contracts purchased during the period....... $ 14,071 $ 16,059 $ 20,048 $ 4,683 Average Lease Contract purchased during the period $ 15.9 $ 16.8 $ 17.7 $ 17.6 Weighted average Lease Contract yield............. 18.10% 17.74% 16.93% 16.95% Weighted average Lease Contract term (months)..... 45.4 43.7 42.5 45.5 Principal balance of Contracts securitized during the period...................................... $160,302 -- $ 40,136 -- Number of states served (at end of period)........ 23 4 8 1 Number of Dealers (at end of period)(3)........... 1,594 787 909 196 Operating expenses as a percentage of average servicing portfolio during the period(4)........ 8.59% 7.76% 8.41% 14.39% SELECTED PORTFOLIO DATA: Servicing portfolio (at end of period)............ $283,887 $111,888 $153,764 $44,415 Delinquencies as a percentage of the servicing portfolio (at end of period)(5)................. 11.69% 9.39% 13.97% 8.61% Net charge-offs as a percentage of the average servicing portfolio during the period(4)(5)..... 6.46% .79% 3.15% 0% BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents......................... $ 4,572 $ 1,336 $ 1,953 $ 1,726 Contracts receivable, net(6)...................... 87,739 99,278 101,214 29,984 Excess servicing receivable....................... 22,898 -- 4,999 -- Total assets...................................... 144,833 112,206 122,035 34,518 Debt(7)........................................... 96,716 86,977 91,794 22,502 Total liabilities................................. 107,575 91,177 98,175 23,663 Stockholders' equity.............................. 37,258 21,029 23,860 10,855
- ------------------ (1) Pro forma net income and pro forma primary and fully diluted earnings per share as adjusted to give effect to the sale by the Company of 2,500,000 shares of the Common Stock offered hereby based on a public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses, and the application of the net proceeds therefrom to the repayment of a portion of the Company's debt as if such transaction had been consummated at the beginning of the periods presented. (2) Excludes Recourse Program Loans. (3) Includes Dealers with whom SFI has relationships. (4) The percentages for the nine months ended September 30, 1996 and 1995 have been annualized. (5) Excludes non-automobile bulk purchase contracts. Delinquency information reflects Contract delinquency greater than 30 days. (6) Net of reserve available for credit losses. (7) Amounts include discount arising from the issuance of common stock purchase warrants. 7 RISK FACTORS An investment in the shares of Common Stock involves a high degree of risk. Prospective investors should carefully consider the following risk factors in addition to the other information set forth in this Prospectus in connection with the investment in the shares of Common Stock. When used in this Prospectus, the words 'may,' 'will,' 'expect,' 'anticipate,' 'continue,' 'estimate,' 'project,' 'intend' and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating results and financial position. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are described under the headings 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' 'The Company' and in the risk factors set forth below. DEPENDENCE UPON ADEQUATE SOURCES OF FINANCING. The Company is dependent upon its warehouse facility, revolving credit facilities and other financing arrangements to finance the purchase of its automobile Loan and Lease Contracts. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' Accordingly, the Company's ability to maintain and expand its portfolio of Loan and Lease Contracts, while dependent upon a number of factors, relies predominantly upon the availability of adequate financing at rates and upon terms acceptable to the Company. The Company also relies on the proceeds from its securitization transactions to pay down its warehouse facility, thereby permitting the purchase of additional Loan Contracts. The Company employs its securitization program as an integral component of its funding strategy. During the period from December 1995 through September 1996, the Company completed the sale of approximately $200 million of Loan Contracts in four privately-placed securitization transactions. The Company has historically applied the net proceeds from securitization transactions to repay indebtedness under its warehouse facility, thereby increasing the amounts available under such facility to fund future purchases of Loan Contracts. Any failure by the Company to effect additional securitizations of Loan Contracts on terms acceptable to the Company would restrict the Company's financing capabilities, could require the Company to curtail the purchase of Loan Contracts and could have a material adverse effect on the Company. Furthermore, the timing of any securitization transaction is affected by a number of factors beyond the Company's control, including, among others, conditions in the asset-backed securities markets, interest rates and approvals from third parties. Although the Company expects to complete future securitization transactions on a quarterly basis, some or all of these factors may cause delays in closing a securitization or may prevent such transactions entirely. Gains from the sale of Loan Contracts in securitization transactions constituted a significant portion of the net earnings of the Company during the nine months ended September 30, 1996 and are likely to continue to represent a significant portion of the Company's net earnings. If the Company were unable to securitize Loan Contracts in a financial reporting period, the Company would incur a significant decline in total revenues and net earnings for such period. In addition, in order for the Company to continue to fund the purchase of Contracts in accordance with its growth strategy, the Company will require financing in excess of that provided by its cash flow from operations, the net proceeds from the Offering and its credit facilities (or any successor facilities). No assurance can be given that additional financing sources, including securitization transactions, will be available on terms acceptable to the Company. The Company currently finances its Lease Contracts principally through its agreements with GECC. There can be no assurances that such financing would be available from another source upon similar terms and conditions. The inability of the Company to arrange new credit facilities or to extend its existing credit facilities would have a material adverse effect upon the Company's ability to purchase Lease Contracts. 8 The Company remains in compliance with the terms of its existing credit facilities and other financing agreements. A default under any of these agreements in the future could have a material adverse effect on the Company's financial condition. The Company's ability to keep these financing sources in place depends on its continued compliance with the terms thereof. There can be no assurance that the Company's sources of financing will continue to remain available on terms acceptable to the Company, or that the Company will be able to secure increased sources of financing. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' SUSPENSION OR LOSS OF EXCESS SERVICING CASH FLOWS AND SERVICING FEE. The gain on sale of Contracts and the amount of the excess servicing receivable recognized by the Company in each securitization reflects management's estimate of future credit losses and prepayments for the Contracts included in that securitization. If the actual rates of credit losses, prepayments, or both, on such Contracts exceeded those estimated by management, the timing and the amount of the excess servicing cash flows could be adversely affected and the value of the excess servicing receivable impaired. On a quarterly basis, the Company updates its credit loss and prepayment assumptions for the remaining life of each securitization based on the past performance of the Loan Contracts within the securitization and market conditions. If the Company concludes that its ability to realize the excess servicing receivable has been impaired, the Company reduces the amount of the excess servicing receivable by recording a charge to earnings. To date, no such adjustment has been made. However, the Company's results of operations and liquidity could be adversely affected if credit losses or prepayment levels, or both, on Contracts substantially exceed anticipated levels. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' Under the terms of each securitization, the Company is required to maintain a reserve account at specific levels during the life of the securitization. Upon the occurrence of certain trigger events, which relate to delinquency, repossession or credit loss rates exceeding certain levels, the terms of the securitization transactions require the Company to maintain the reserve account at higher levels by restricting the distribution of both contractual servicing cash flows and excess servicing cash flows to the Company. Once the reserve account is maintained at the higher level and the trigger events cease to occur for a specified period, the Company would continue to receive its contractual servicing fees and excess servicing cash flows. The occurrence of trigger events could materially adversely affect the Company's liquidity and results of operations. Two of the Company's securitization transactions have recently experienced trigger events. As a result, the Company's rights to receive contractual servicing fees and excess servicing cash flows have been suspended from these two securitization transactions. Continued occurrence of the trigger events could delay cash flows to the Company which may have a material adverse impact. Although,based upon management's analysis, there has been no impairment of the excess servicing receivable to date, there can be no assurance that the excess servicing receivable will not be impaired in the future. NEGATIVE OPERATING CASH FLOWS. The Company's business requires substantial cash to support the funding of reserve accounts in connection with securitizations, the purchase of Contracts and other cash requirements, in addition to debt service. These cash requirements increase as the volume of Contracts purchased increases. The Company has operated historically on a negative operating cash flow basis and expects to continue to do so for so long as the Company's volume of Contracts purchased continues to grow at a significant rate. As a result of the Company's historical growth rate, the Company has used increasingly larger amounts of cash than it has generated from its operating activities. The Company has funded these negative operating cash flows principally through borrowings from financial institutions and private placements of debt and equity securities. The Company's ability to execute its growth strategy depends upon its continued ability to obtain substantial additional long-term debt and equity capital through access to the capital markets or otherwise. There can be no assurance that the Company will have access to the capital markets when needed or will be able to obtain financing upon terms reasonably satisfactory to the Company. Factors that could affect the Company's access to the capital markets, or the costs of such capital, include changes in interest rates, general economic conditions, the perception in the capital markets of the Company's business, results of operations, leverage, financial condition and business prospects, and 9 the performance of the Company's securitization trusts. In addition, covenants with respect to the Company's credit facilities may restrict the Company's ability to incur additional indebtedness. DEFAULT AND PREPAYMENT RISK. The Company's results of operations, financial condition and liquidity depend, to a material extent, on the performance of the Contracts. The performance of Contracts depends upon such factors as the underwriting criteria, the collection efforts employed to prevent defaults, and the proceeds from the sale of repossessed vehicles. The Company bears the risk of losses resulting from defaults on Contracts. In the event of a default, the liquidation proceeds from repossessed vehicles may not be sufficient to cover the outstanding Contract balance and costs of recovery. The Company, therefore, maintains a reserve for credit losses on its Contracts. The reserve reflects management's estimate of anticipated credit losses based upon expectations and historical performance of Contracts. Based on static pool analyses of the performance of Contracts, management has, from time to time, modified its credit underwriting criteria. In view of the performance of Contracts purchased during the six months ended December 31, 1995, the Company modified its underwriting criteria during the fourth quarter of 1995. Notwithstanding management's approach for establishing a reserve for credit losses, its estimates for anticipated credit losses may not be adequate because the Company has a limited operating history and its Contract portfolio is unseasoned. If the reserve is inadequate, the Company would recognize as an expense the losses in excess of such reserve and results of operations would be adversely affected. Additionally, such losses may impair the Company's ability to secure credit facilities and/or securitize its Contracts. While the Company believes that it maintains a reserve adequate to cover potential credit losses, there can be no assurance to that effect. The Company's servicing income can be adversely affected by defaults and prepayments on Contracts. The Company's servicing income is based on the outstanding balance of Contracts. If Contracts are prepaid or charged-off, the Company's servicing income will decline to the extent of such prepaid and charged-off Contracts. There can be no assurance as to what level of prepayment, if any, will occur on the Contracts. Prepayments may be influenced by a variety of economic, geographic, social and other factors, including borrowers' job transfers, casualty, trade-ins and declines in interest rates. IMPLEMENTATION OF BUSINESS STRATEGIES. The Company's ability to sustain the growth of its business and maximize its profit potential is dependent upon the implementation of its business strategies. The Company's strategies include: (i) expanding and strengthening relationships with its origination sources in order to increase the volume of Contracts purchased; (ii) providing diverse products and services to Dealers; (iii) employing detailed underwriting guidelines to ensure that the Company purchases and services Contracts within acceptable levels of credit risk and loss; (iv) maintaining effective collections and asset disposition systems; (v) diversifying financing sources; (vi) continuing the growth of related businesses; and (vii) recruiting and retaining experienced management. The Company's failure with respect to any or all of these strategies could impair its ability to increase the volume of Contracts purchased, which could have a material adverse effect on the Company's results of operations and financial condition. See 'The Company -- Business Strategy.' RELATIONSHIPS WITH DEALERS AND OTHER ORIGINATION SOURCES. The Company's business depends in large part upon its ability to establish and maintain relationships with Dealers and other origination sources. While the Company believes that it has been successful in developing and maintaining relationships with Dealers and other origination sources, these relationships are not long- standing, and there can be no assurance that the Company will be successful in maintaining such relationships or increasing the number of Dealers and other origination sources with which it does business, or that its existing Dealer base, and other origination sources, will continue to generate a volume of Contracts comparable to the volume of such Contracts historically generated by such Dealers and other origination sources. See 'The Company -- Business Strategy.' RISKS ASSOCIATED WITH THE NON-PRIME MARKET. The principal focus of the Company's business is the purchase of Contracts involving consumers with non-prime credit. The non-prime market is 10 comprised of consumers who are perceived to be relatively high credit risks. Consequently, the Contracts acquired by the Company typically bear a higher rate of interest than contracts made to consumers with prime credit and are purchased at a discount. However, these Contracts involve a higher probability of default, higher delinquency rates and greater servicing costs than contracts made to consumers with prime credit. The Company's profitability depends on its ability to evaluate properly the credit risks, to price its Contracts accordingly and to service efficiently its Contracts. However, there can be no assurance that the rates of future defaults and losses will be consistent with prior experience or at levels that will maintain the Company's profitability, that the credit performance of its customers will be maintained, that the Company's credit analysis, servicing and collection systems and controls will continue to be adequate, or that the current interest rates and discount levels can be maintained in the face of competitive pressures. SENSITIVITY TO INCREASES IN INTEREST RATES. The Company's profitability is determined largely by the difference, or 'spread,' between the rate of interest collected from customers on their Contracts and the rate of interest on the funds obtained by the Company under its existing credit facilities and through securitization transactions to finance its Contracts. Generally, interest rates received by the Company on the Contracts it purchases are determined by many factors beyond the Company's control, including competition, state usury statutes and other consumer laws prohibiting or limiting the Company's ability to impose various charges on its borrowers. Significant increases in the interest rates at which the Company borrows under its revolving credit facilities could reduce the Company's spread and thereby adversely affect the Company's profitability with respect to the Contracts it purchases. In the case of securitization transactions, the interest rate demanded by investors is a function of prevailing market rates for comparable transactions and the general interest rate environment. Because the Contracts purchased by the Company have fixed interest rates, the Company bears the risk of interest rate increases during the period from the date the Contracts are purchased until the closing of its securitization for Contracts that are sold and for the entire term for Contracts that are held by the Company and are not match-funded. Moreover, the Company's warehouse facility gives the lender the right to make margin calls in the event of a specified decrease in the market value in the Contracts held for repurchase. The Company does not presently employ a hedging strategy. There can be no assurances that the Company will not sustain losses as a result of its policy relative to hedging. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' RECOVERY OF RESIDUAL VALUE. As of September 30, 1996, Lease Contracts represented approximately 10% of the Company's servicing portfolio. In connection with these Lease Contracts, the Company faces risks arising from its estimate at lease inception of the projected value of the vehicle at the end of the scheduled lease term (the 'Residual Value'). Although the Company uses industry guidelines to estimate the Residual Value and periodically reviews and updates the Residual Values as considered necessary throughout the lease term, there can be no assurance that the Residual Value will approximate the ultimate proceeds received on the disposition of the vehicle. At the end of the scheduled lease term, if the lessee does not purchase the vehicle, the Company generally sells the vehicle through wholesale auctions or through the Company's subsidiary, PCSF. To the extent that the Company realizes proceeds from such disposition in an amount less than the Residual Value, whether due to changes in the market for that vehicle, the used automobile market in general or otherwise, the Company will realize a loss on the disposition of the vehicle. Significant aggregate losses on the disposition of off-lease vehicles would have a material adverse effect on the Company's financial condition and results of operations. The Company's ability to realize a gain on the disposition of a vehicle will be substantially determined by the accuracy of the Residual Value previously estimated and by the Company's ability to remarket its off-lease vehicles in a cost-efficient manner. Due to the continued growth in the volume of Lease Contracts purchased and the trend towards shorter lease terms, the Company will likely be required to remarket increasing numbers of vehicles in the future. There can be no assurance that such increased remarketing volume will not have a material adverse effect on the Company's financial condition and results of operations. See 'The Company -- Lease Contracts.' 11 COMPETITION. The Company is subject to a high level of competition in the retail automobile finance industry. The market is highly fragmented and historically has been serviced by a variety of financial entities, including the captive finance affiliates of major automobile manufacturers, banks, savings associations, independent finance companies, credit unions and leasing companies. Many of these competitors have greater financial resources than the Company and have significantly lower cost of funds. Many of these competitors may also have long-standing relationships with automobile dealerships and may offer dealerships or their customers other forms of financing or services not provided by the Company. Furthermore, during the past two years, a number of automobile finance companies have completed public offerings of securities, the proceeds from which are to be used, at least in part, to fund expansion and finance increased purchases of contracts. There can be no assurance that the Company will be able to compete successfully with such competitors in the future. GEOGRAPHIC AND CONTRACT PURCHASE CONCENTRATIONS. As of September 30, 1996, the Company purchased 54.0% of its outstanding Contracts from Florida, 14.4% from Georgia, 7.2% from Louisiana and 6.8% from North Carolina. As a result, the Company's profitability may be influenced by the general economic conditions prevailing in any of these states, particularly Florida. As of September 30, 1996, 9.0% of the Company's portfolio were Loan Contracts purchased through its Recourse Program, which consists of Loans to consumers with 'D' credit. While Loans to 'D' credit consumers involve higher credit risks than those to 'C' credit consumers, management believes that it mitigates the credit risk through large discounts on the purchase of such Loan Contracts and full recourse to the originating entity to repurchase certain delinquent accounts. To date, the Company has not experienced any losses arising out of the failure of the originating entities to repurchase any such delinquent Loan Contracts. There can be no assurances, however, that the originating entities will continue to have sufficient resources to cover recourse obligations under this program; nor can there be any assurances that the level of discounts associated with Loan Contracts originated under this program would be sufficient to cover potential losses should the originating entity be unable to satisfy its recourse obligations thereunder. See 'The Company -- Recourse Program.' Prior to the acquisition by the Company of the business of SFI, it historically represented a significant source of Contracts for the Company. As of September 30, 1996, Loan Contracts purchased through SFI represented approximately 45% of the Company's outstanding Contracts purchased. Since the acquisition, SFI has continued to generate Loan Contract volume comparable to historic levels. As a result of a management contract with the former principals of SFI, and the retention by SFI of substantially all of the personnel necessary to the operation of the business, management believes that SFI will continue to generate Loan Contracts at a comparable volume to historic levels. However, there can be no assurance to that effect. In light of the volume of Loan Contracts purchased through SFI prior to the acquisition, a significant decline in the volume of Loan Contracts purchased through SFI could have a material adverse effect on the Company. MANAGEMENT OF RAPID GROWTH. The Company has experienced rapid growth and expansion of its business. The Company's ability to support, manage and control continued growth is dependent upon, among other things, its ability to train, supervise and manage increased personnel. The success of the Company's growth strategy is also dependent upon the Company's ability to maintain credit quality as its Contract portfolio grows, which requires, among other things, the maintenance of efficient collection procedures and adequate collection staffing, internal controls and automated systems. There can be no assurance that the Company will be successful in maintaining credit quality as its Contract portfolio grows or that the Company's personnel, procedures, staff, internal controls or systems will be adequate to support such growth. RELIANCE ON KEY PERSONNEL. The Company's future operating results depend in significant part upon the continued service of its executive officers. Should one or more of these individuals cease to be affiliated with the Company before acceptable replacements are found, there could be a material adverse effect on the Company's business and prospects. Mr. Robert R. Bartolini, the Company's Chairman and Chief Executive Officer, is the only executive officer with whom the Company has an employment agreement. Should any of the Company's executive officers elect to terminate their 12 employment, there can be no assurance that suitable replacements could be hired without substantial additional costs. The Company does not presently maintain key-man insurance on any of its executives. The Company's continued success also depends on its ability to attract and retain a sufficient number of qualified employees to support its growth strategy. There can be no assurance that the Company will be able to recruit and retain such personnel. See 'Management.' CONTROL BY DIRECTORS AND OFFICERS. After the Offering, the Company's officers and directors will own approximately 26.27% of the Common Stock of the Company. See 'Principal Stockholders.' By virtue of the concentration of a substantial block of shares with the Company's directors and officers, these stockholders are in a position to elect all of the Company's directors and control the outcome of other corporate matters without the approval of the Company's other stockholders. In addition, applicable statutory provisions and the ability of the Board of Directors to issue one or more series of Preferred Stock without stockholder approval could deter or delay unsolicited changes in control of the Company by discouraging open market purchases of the Company's stock or a non-negotiated tender or exchange offer for such stock, which may be disadvantageous to a majority of the Company's stockholders who may otherwise desire to participate in such a transaction and receive a premium for their shares. See 'Description of Securities.' REGULATION. The Company's business is subject to numerous federal and state consumer protection laws and regulations, which, among other things, require the Company to obtain and maintain certain licenses and qualifications, to limit the interest rates, charges and other fees the Company is allowed to charge, to provide specified disclosures, and to define the Company's rights to repossess and sell collateral. A change in existing laws or regulations, or in the interpretation thereof, or the promulgation of any additional laws or regulations could have an adverse effect on the Company's business. See 'The Company -- Government Regulation.' Due to the consumer-oriented nature of the industry in which the Company operates, industry participants frequently are named as defendants in litigation involving alleged violations of federal and state consumer lending or other similar laws and regulations. A significant judgment against the Company or another industry participant in connection with any litigation could have a material adverse effect on the Company's financial condition and results of operations. See 'The Company -- Government Regulation.' SUBSTANTIAL DILUTION FROM CONVERTIBLE SECURITIES. The Company is presently authorized to issue 50,000,000 shares of Common Stock, of which 7,347,367 shares are outstanding as of the date of this Prospectus. During the period from April 1995 through September 1996, the Company sold in the aggregate $38.8 million principal amount of convertible debentures ('Debentures') in private placement transactions. Primarily in connection with the sale of such Debentures, the Company issued 2,873,625 common stock purchase warrants (the 'Warrants'). The Company has granted 40,000 Warrants in connection with directors joining the Board of Directors. The Company may be caused to issue 2,537,830 additional shares upon the conversion of the principal and interest due under the outstanding Debentures and 2,913,625 shares upon the exercise of the Warrants, thus increasing the number of shares outstanding from 7,347,367 to 12,798,822. This number may be subject to material increase by virtue of certain price protection and adjustment features contained in certain Debentures and Warrants. See 'Description of Securities -- Price Protection.' The holders of the Debentures may exercise their rights of conversion, and the holders of the Warrants may choose to exercise the Warrants, at prices below the trading price of the Company's Common Stock at the time of conversion or exercise and at a time when the Company might be able to obtain additional capital through a new offering of securities at prevailing market prices. The terms on which the Company may obtain additional financing during this period may be adversely affected by the existence of such below market conversion and exercise prices. Conversion of all of the outstanding Debentures would, however, have the effect of releasing the Company from its obligation to repay approximately $28.4 million of principal and interest on the Debentures. In addition, the exercise of all of the Warrants would have the effect of securing for the Company additional working capital of up to approximately $33.0 million. The proceeds to the 13 Company of the Warrants may decrease materially by virtue of price protection and adjustment features contained in certain Warrants. See 'Description of Securities -- Price Protection.' As its rate of growth continues, the Company must secure increasing amounts of financing to fund the acquisition of additional Contracts. This may entail the sale of additional shares of Common Stock or Common Stock equivalents, which would have the effect of further increasing the number of shares outstanding. In connection with other business matters deemed appropriate by the Company's management, there can be no assurance that the Company will not undertake the issuance of more shares of Common Stock without notice to stockholders. This may be done in order to facilitate a business combination, acquire assets or stock of another business, compensate employees or consultants or for other valid business reasons in the discretion of the Company's Board of Directors. The Company has two stock option plans, which are presently authorized to grant options for the issuance in the aggregate of up to 1,250,000 shares of Common Stock. As of December 20, 1996, the Company had 564,166 options outstanding under such plans. See 'Management -- Executive Compensation.' SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the Company will have a total of 9,847,367 shares of Common Stock outstanding (10,222,367 shares if the Underwriters' over- allotment option is exercised in full). Of these shares, a total of approximately 6,111,825 shares (6,486,825 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act of 1933 (the 'Securities Act'). The remaining 3,735,542 shares of Common Stock outstanding are 'Restricted Securities' as that term is defined in Rule 144 under the Securities Act, of which approximately 2,596,752 are held by 'affiliates' (as defined in the Securities Act) of the Company. The Restricted Securities are subject to all of the limitations on resale imposed by Rule 144. In general, under Rule 144 as currently in effect, any affiliate of the Company or any person (or persons whose shares are aggregated in accordance with the Rule) who has beneficially owned Restricted Securities for at least two years would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1.0% of the outstanding shares of Common Stock (approximately 98,474 shares based upon the number of shares outstanding after the Offering) and the reported average weekly trading volume in the over-the-counter market for the four weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. Persons who have not been affiliates of the Company for at least three months and who have held their shares for more than three years are entitled to sell Restricted Securities without regard to the volume, manner of sale, notice and public information requirements of Rule 144. Substantially all of the Restricted Securities were issued in November 1994. Accordingly, under Rule 144 (and subject to the conditions thereof), the Restricted Securities are eligible for public resale. However, a majority of such shares are held by executive officers and directors of the Company who have agreed to certain restrictions upon the resale of such shares. A substantial influx of shares into the market may have a significant depressive effect upon the trading price of the Company's Common Stock. This may occur upon the public resale of up to 2,537,830 shares issuable upon the conversion of outstanding Debentures or 2,913,625 shares issuable upon the exercise of outstanding Warrants. See 'Description of Securities.' As a result of certain registration rights granted by the Company in connection with the shares issuable upon the conversion of outstanding Debentures or upon the exercise of outstanding Warrants, the Company may have an obligation to register for public resale up to 4,985,065 shares of Common Stock. The holders of substantially all of such shares have agreed to defer their registration rights for a period of 120 or 180 days after the date of this Prospectus. See 'Description of Securities -- Registration Rights.' The Company, its executive officers and directors, certain debenture holders and certain warrant holders have each agreed that they will not, directly or indirectly, offer, sell, offer to sell, contract to 14 sell, pledge, grant any option to purchase or otherwise sell or dispose of (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) any shares of Common Stock or other capital stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock or other capital stock of the Company, for a period of 180 days after the date of this Prospectus, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, except for bona fide gifts or private transfers effected by such stockholders other than on any securities exchange or in the over-the-counter market to donees or transferees that agree to be bound by similar agreements. See 'The Company -- Underwriting.' The Company is unable to predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price for the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such influx of shares into the market could occur, could adversely affect the market price for the Common Stock and could impair the Company's future ability to obtain capital through offerings of equity securities. VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be subject to significant fluctuations in response to influxes of shares into the market upon the conversion or exercise of outstanding convertible securities, variations in financial results or announcements of material events by the Company or its competitors. Developments in the automobile finance industry or changes in general conditions in the economy or the financial markets could also adversely affect the market price of the Common Stock. EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Certificate of Incorporation, Bylaws and Delaware law may delay, defer or prevent a change in control of the Company and may adversely affect the voting and other rights of the holders of Common Stock. In particular, the existence of the Company's classified Board of Directors, the ability of the Board of Directors to issue 'blank check' preferred stock without further stockholder approval and the inability of stockholders to take action by written consent may have the effect of delaying, deferring or preventing a change in control of the Company. See 'Management -- Directors and Executive Officers' and 'Description of Securities.' DIVIDENDS. No dividends have been declared or paid by NAL since the Merger. The declaration or payment of dividends is not contemplated in the foreseeable future. Earnings are expected to be retained to finance the development of the Company's business. The declaration or payment of future dividends will be directly dependent upon the earnings of the Company, its financial needs and other similarly unpredictable factors. USE OF PROCEEDS The net proceeds to the Company from the sale of 2,500,000 shares of Common Stock offered hereby, based on an offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses, are estimated to be approximately $ (approximately $ if the Underwriters over-allotment option is exercised in full). The net proceeds will be used to support the growth of the Company's operations and for general corporate purposes, including working capital, future acquisitions, the repayment of advances totaling $2,413,869 to the Company's Chief Executive Officer and the repayment of short-term indebtedness of $2,000,000. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources' and 'Certain Transactions -- Loans to the Company.' Pending such use, the net proceeds to the Company from the Offering will be used to repay indebtedness under the Company's warehouse and other credit facilities. 15 PRICE RANGE OF COMMON STOCK Commencing December 1994, the Company's Common Stock was quoted on the Over-the-Counter Bulletin Board under the symbol 'NALF.' In May 1995, the Company's Common Stock was included in the Nasdaq National Market under the same symbol. The following table sets forth the high and low market prices of the Common Stock for the period from January 1995 through December 20, 1996.
1995 HIGH LOW - -------------------------------------------------- ------ ------ First Quarter..................................... $12.00 $ 9.50 Second Quarter.................................... $13.38 $10.25 Third Quarter..................................... $18.38 $11.25 Fourth Quarter.................................... $17.38 $ 9.75 1996 - -------------------------------------------------- First Quarter..................................... $14.75 $10.63 Second Quarter.................................... $16.13 $12.38 Third Quarter..................................... $14.88 $11.75 Fourth Quarter (through December 20, 1996)........ $14.50 $ 8.63
On December 20, 1996, the last reported sales price of the Common Stock on the Nasdaq National Market was $9.75 per share. As of December 20, 1996, the Company had approximately 144 holders of record of its Common Stock. Since a number of the shares of the Company are held by financial institutions in 'street name,' it is likely that the Company has more stockholders than indicated above. DIVIDEND POLICY No dividends have been declared or paid by NAL since the Merger. The declaration or payment of dividends is not contemplated in the foreseeable future. Earnings are expected to be retained to finance and develop the Company's business. The declaration or payment of future dividends will be directly dependent upon the earnings of the Company, its financial needs and other similarly unpredictable factors. 16 CAPITALIZATION The following table sets forth, as of September 30, 1996, the actual capitalization of the Company and the capitalization of the Company as adjusted to give effect to the issuance and sale of 2,500,000 shares of Common Stock by the Company in the Offering and the application of the estimated net proceeds therefrom as described in 'Use of Proceeds.'
SEPTEMBER 30, 1996 --------------------------- ACTUAL AS ADJUSTED (1) -------- --------------- (DOLLARS IN THOUSANDS) Debt: Warehouse and other credit facilities........... $ 49,191 $ Specialized borrowing facility.................. 21,682 Convertible subordinated debentures............. 25,843 -------- --------------- Total debt................................... 96,716 -------- --------------- Stockholders' Equity:............................. Preferred Stock, $1,000 par value, 10,000,000 shares authorized; none issued and outstanding.................. -- -- Common Stock, $0.15 par value, 50,000,000 shares authorized; 7,252,935 issued and outstanding; 9,752,935 shares issued and outstanding as adjusted..................................... 1,088 Paid in capital................................... 25,698 Retained earnings................................. 10,472 -------- --------------- Total stockholders' equity........................ 37,258 Total capitalization.............................. $133,974 $ -------- --------------- -------- ---------------
- ------------------ (1) Reflects the capitalization of the Company on a pro forma basis as adjusted to give effect to the partial repayment of the Company's warehouse and other credit facilities and the sale of 2,500,000 shares of Common Stock offered by the Company hereby, (based upon a public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses, and the receipt of the estimated net proceeds therefrom. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements (including the notes thereto) and other financial data included elsewhere in this Prospectus. The Company is a specialized automobile finance company engaged in the purchase and servicing of Contracts originated by franchised and select independent Dealers in connection with sales or leases of used and new automobiles to consumers with non-prime credit. Consumers with non-prime credit are perceived to be relatively high credit risks due to various factors, including the manner in which they have handled previous credit, the absence or limited extent of their prior credit history and their limited financial resources. The Company purchases Contracts relating principally to the 'C' credit segment of the automobile finance market. More than 90% of all Contracts acquired by the Company during the nine months ended September 30, 1996 were originated by franchised Dealers. The Company is also engaged in offering insurance and related products to its Dealers and customers through its insurance subsidiary, NIS. The Company has a remarketing subsidiary, PCSF with a JDBR Franchise, which provides a cost-effective means of disposing of some of the Company's repossessed and off-lease vehicles. Contract Acquisition The Company acquires Contracts from diverse sources through its Origination Programs. In order to adjust for credit risk and achieve an acceptable rate of return, the Company typically purchases Loan Contracts from Dealers at a discount from the principal amounts of such Contracts. This discount is non-refundable to the Dealer. Currently, the discount is being allocated to the reserve for credit losses. See 'Acquisition Discounts.' During the period from July 1, 1994 through September 30, 1996, the Company purchased $360.8 million in Loan Contracts and $38.8 million in Lease Contracts through its Origination Programs. The following table provides certain material information relative to the Contracts acquired by the Company and its servicing portfolio during each of the last nine quarters.
FOR THE QUARTERS ENDED ------------------------------------------------------------------------------------------------ SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, OPERATING DATA: 1996 1996 1996 1995 1995 1995 1995 1994 1994 -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Contracts purchased during the period: Loan Contracts: Dealer Program.............. $ 23,001 $ 15,019 $ 12,143 $ 26,522 $ 16,540 $ 5,267 $ 4,805 $ 1,809 $ 395 Other Origination Programs(1)(2)............ 46,555 35,952 36,183 20,071 15,084 16,097 13,980 10,279 -- Recourse Program............ 7,091 10,568 5,206 6,696 8,203 6,554 5,838 5,415 5,484 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Loan Contracts...... 76,647 61,539 53,532 53,289 39,827 27,918 24,623 17,503 5,879 Lease Contracts............... 6,776 3,609 3,686 3,989 4,085 5,241 6,733 3,446 1,237 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Contracts........... $ 83,423 $ 65,148 $ 57,218 $ 57,278 $ 43,912 $33,159 $31,356 $20,949 $ 7,116 Number of Dealers (at end of period)(3).................. 1,594 1,381 1,271 909 787 406 296 196 83 Servicing portfolio (at end of period): Owned....................... $108,208 $111,928 $117,210 $113,830 $111,888 $87,938 $65,824 $44,415 $33,028 Serviced for securitization trusts.................... 175,679 118,818 73,741 39,934 -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total servicing portfolio............... $283,887 $230,746 $190,951 $153,764 $111,888 $87,938 $65,824 $44,415 $33,028 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
- ------------------ (1) Includes Contracts purchased during the period through the Company's Captive, Affinity, Correspondent and Wholesale Programs. (2) Includes Contracts purchased through the Company's Captive Program with SFI. (3) Includes Dealers for the Company's Captive Program with SFI. The Company has experienced significant growth in the volume of Contracts purchased. Contract volume has increased to $83.4 million for the quarter ended September 30, 1996 from $7.1 million for the quarter ended September 30, 1994, representing an average quarterly growth rate of 36%. The growth in Contract volume is attributable primarily to the increase in the number of Dealers participating in the Company's Dealer and Captive Programs, as well as an expansion of the sources and amounts of financing available to purchase Contracts. The Dealers participating in these two 18 programs increased to 1,594 Dealers at September 30, 1996 from 83 Dealers at September 30, 1994, representing an average quarterly growth rate of 45%. The growth in Contract volume has resulted in an increase in the Company's servicing portfolio, which at September 30, 1996 was $283.9 million compared to $33.0 million at September 30, 1994, representing an average quarterly growth rate of 31%. The Company experienced a significant increase in the volume of Loan Contracts purchased under its Dealer Program during the six months ended December 31, 1995, partly as a result of the relaxation of certain underwriting criteria. As a result of its analysis of the performance of the Loan Contracts originated under the Dealer Program during this period, the Company decided to strengthen its underwriting criteria during the fourth quarter of 1995 and, upon phasing-in these standards, the Company experienced a significant decline in the volume of Loan Contracts purchased under its Dealer Program during the first quarter of 1996. The volume of Loan Contracts purchased through its Dealer Program increased during the second and third quarters of 1996, however, not to the level achieved during the fourth quarter of 1995. Management expects that the volume of Loan Contracts in this program will continue to increase and may achieve, during the fourth quarter of 1996, the levels realized during the fourth quarter of 1995. The Company experienced an increase in the volume of Loan Contracts purchased through its Recourse Program for the quarters ended June 30 and September 30, 1996, when compared to the quarter ended March 31, 1996, due primarily to the addition of a participant to the program during this period. Revenues The increase in Contract volume and the servicing portfolio has led to an increase in revenues as demonstrated in the following table:
FOR THE QUARTERS ENDED -------------------------------------------------------------------------------------------------------- SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, REVENUE DATA: 1996 1996 1996 1995 1995 1995 1995 1994 1994 -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Interest income: Loan Contracts......... $ 4,072 $ 4,054 $3,326 $ 3,573 $2,978 $1,847 $ 978 $ 192 $ 5 Lease Contracts........ 1,284 1,206 1,101 1,020 919 796 587 335 118 Recourse Programs...... 763 650 644 662 660 603 492 482 277 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total interest income............. 6,119 5,910 5,071 5,255 4,557 3,246 2,057 1,009 400 Non-automobile interest income................. 92 133 114 222 319 346 476 541 831 Gain on sale of Loan Contracts.............. 7,147 3,283 2,997 4,123 478 -- -- 155 697 Servicing fees, net...... -- 302 557 104 -- -- -- -- -- Insurance fees........... 460 407 236 280 155 43 102 17 7 Other fees............... 760 1,225 722 580 372 167 53 214 94 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues....... $14,578 $11,260 $9,697 $10,564 $5,881 $3,802 $2,688 $1,936 $2,029 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
The Company generates revenues primarily through the purchase, sale and ongoing servicing of Contracts. The Company earns interest income and fees on Contracts purchased and held in portfolio, including those awaiting securitization. Upon the sale of Loan Contracts through the Company's securitization program, the Company recognizes a gain on sale on the Loan Contracts. The Company continues to service these Loan Contracts and earns a servicing fee currently equal to three percent per year of the outstanding principal balance of the Loan Contracts sold. The Company also receives revenues from the sale of insurance and related products, and other miscellaneous fees. During the quarter ended March 31, 1996, interest income declined slightly from that reported during the quarter ended December 31, 1995, due primarily to a decrease in the average balance of the Contracts held in the portfolio. This decrease was associated with the Company's first sale of Loan Contracts under a securitization transaction in December 1995. 19 Interest income on the non-automobile portfolio consists of interest earned on mortgage loans, marine loans and other consumer loans acquired by the Company through bulk purchases prior to June 30, 1994. The decline in interest income is due to the run-off of this portfolio. Gain on sale of Loan Contracts decreased during the quarters ended March 31, and June 30, 1996 when compared to that for the quarter ended December 31, 1995. The decrease was due primarily to a decline in the net spread on the March and June 1996 securitization transactions when compared to that for the December 1995 securitization transaction. See 'Gain on Sale of Loans.' The decline is also attributable to an increase in the required level of reserve account necessary to credit enhance the March and June 1996 securitization transactions when compared to the reserve account for the December 1995 transaction. The reserve account is funded upon the closing of a securitization transaction, whereby a portion of the proceeds from the sale is set aside in the reserve account to protect the purchasers of the asset-backed securities from potential losses. Gain on sale subsequently increased during the quarter ended September 30, 1996, reflecting a larger securitization with a higher net spread than the previous two securitizations. See 'Liquidity and Capital Resources -- Securitization.' The Company experienced a decline in servicing fee income since the quarter ended March 31, 1996 despite the completion of two additional securitization transactions. During the quarters ended June 30 and September 30, 1996, the Company did not receive its distribution of servicing cash flows associated with two of its securitization trusts due to an increase in the rates of delinquency, repossession and losses beyond those allowable by the structure of the securitization transaction. Consequently, the reduced level of servicing fee income was entirely offset by amortization of the Excess Servicing Receivable. The Company will receive these servicing cash flows, which are currently accumulating in the relevant reserve accounts, if the delinquency, repossession and loss rates fall below the allowable levels for a specified period. Management believes that these factors do not currently result in an impairment to the Excess Servicing Receivable relating to these securitization transactions. See 'Risk Factors.' Net Interest Income Net interest income ('Net Interest Income') is the difference between the interest earned on Contracts held in portfolio, including those awaiting securitization and the interest costs associated with the Company's borrowings to finance such Contracts. Net Interest Income will fluctuate and be impacted by the spread between the portfolio yield and the cost of the Company's borrowings, changes in overall Contract acquisition volume and the timing of securitization transactions. The following table illustrates the weighted average net interest rate spread (expressed as a percentage) earned on Contracts acquired:
FOR THE QUARTERS ENDED -------------------------------------------------------------------------------------------------------- SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, NET INTEREST SPREAD: 1996 1996 1996 1995 1995 1995 1995 1994 1994 -------- -------- -------- -------- -------- -------- -------- -------- -------- Interest income:(1) Loan Contracts......... 20.65% 20.09% 18.71% 21.76% 22.01% 23.02% 26.62% 21.63% 21.48% Lease Contracts........ 18.02 18.85 18.22 18.78 19.89 20.58 19.13 21.07 19.64 Recourse Program....... 18.75 17.31 18.60 19.96 20.43 20.11 19.69 22.93 17.83 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total automobile Contracts.......... 19.80 19.48 18.58 20.88 21.31 21.80 22.26 21.22 17.98 Non-automobile Contracts.............. 13.27 17.41 13.18 22.21 29.22 27.51 27.10 23.93 35.36 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total.................. 19.65 19.43 18.42 20.93 21.70 22.24 23.03 22.64 26.90 Interest expense(2)...... 10.32 10.80 10.12 11.07 10.93 11.04 11.54 10.50 13.59 -------- -------- -------- -------- -------- -------- -------- -------- -------- Net interest spread...... 9.33% 8.63% 8.30% 9.86% 10.77% 11.20% 11.49% 12.14% 13.31% -------- -------- -------- -------- -------- -------- -------- -------- --------
- ------------------ (1) Represents interest income plus discount accretion (if any) and fees less amortization of capitalized costs, expressed as a percentage of average receivables outstanding. (2) Represents interest expense as a percentage of average total debt outstanding. During the period from September 30, 1994 to March 31, 1996, the Company has generally experienced a decline in the net interest spread. This reflected the shift in the composition of the Company's portfolio from bulk purchase non-automobile contracts purchased prior to 1995 at large 20 discounts, which yielded higher rates, to a gradually greater concentration in automobile Contracts, which yielded lower rates. The net interest spread subsequently increased during the quarter ended June 30, 1996 as the Company began to benefit from the expansion into additional states with higher allowable rates of interest when compared to the allowable rate of interest in Florida, where the Company has a large concentration. See 'The Company -- Origination Sources.' This increase was partially offset by an increase in the cost incurred on borrowings in connection with the additional placement of convertible subordinated debentures during the quarter ended June 30, 1996. Gain on Sale of Loans The Company has sold Loan Contracts through its securitization program in each of the last four quarters. The Company recognizes a gain on sale of Loan Contracts in an amount equal to: (i) the excess servicing receivable ('Excess Servicing Receivable') from the trust during the life of the securitization, plus (ii) the net proceeds received from the securitization less the aggregate book value of the Loan Contracts transferred to the trust. The Excess Servicing Receivable represents the estimated present value of excess servicing cash flows ('Excess Servicing Cash Flows') based on the Company's estimates for loss and prepayments during the life of the securitization transaction. Quarterly, the Company reviews the assumptions made in determining the Excess Servicing Receivable. If the present value of future aggregate Excess Servicing Cash Flows is less than the aggregate capitalized amount, a valuation adjustment would be recorded. Excess Servicing Cash Flows represent the difference between the cash flows on Loan Contracts in a securitization trust and the sum of (i) payments of principal and interest required to be made to investors in the securitized pool, (ii) the contractual servicing fee, currently at the rate of three percent per year, and (iii) other on-going expenses of such trust. See 'Liquidity and Capital Resources -- Securitization.' The gain on sale of Loan Contracts is affected by, among other things, the amount of Loan Contracts sold in the securitization transaction, the net spread on the transaction, the up-front costs of the transaction and estimated losses and prepayments on the Loan Contracts. Net spread is the major component of the total gain on sale. The following table illustrates the net spread for each of the Company's securitization transactions:
WEIGHTED AVERAGE INTEREST RATE ORIGINAL CONTRACT PAID TO GROSS NET SECURITIZATION: BALANCE RATE INVESTORS(1) SPREAD(2) SPREAD(3) -------- -------- ------------- --------- --------- (DOLLARS IN THOUSANDS) 1996-3 Securitization Trust... $ 70,052 19.37% 7.42% 11.95% 8.95% 1996-2 Securitization Trust... 49,500 19.20% 7.58% 11.62% 8.62% 1996-1 Securitization Trust... 40,750 19.26% 7.47% 11.79% 8.79% 1995-1 Securitization Trust... 40,136 19.58% 7.10% 12.48% 9.48% -------- Total....................... $200,438 -------- --------
- ------------------ (1) Weighted average interest rate paid to investors in the securitization transaction. (2) Difference between weighted average Contract rate and weighted average interest rate paid to investors. (3) Difference between gross spread less contractual servicing fees. The increase in the net spread for the 1996-3 Securitization Trust, compared to the prior two securitization transactions, was attributable to a higher weighted average coupon rate due primarily to the Company's expansion outside the State of Florida. A corresponding decrease in the interest rate paid to investors, due primarily to a decrease in market rates, also contributed to a higher net spread. The decrease in the net spread from the 1995-1 Securitization Trust to the 1996-1 Securitization Trust, and the further decline in the net spread on the 1996-2 Securitization Trust, was primarily due to an increase in the interest rate paid to investors, due primarily to an increase in market interest rates. Servicing Fee Income Throughout the life of the Loan Contract, the Company earns a contractual servicing fee from the securitization trust, currently equal to three percent per year of the principal balance outstanding of the Loan Contracts sold to the trust. Servicing fee income increased from $104,000 for the quarter ended December 31, 1995, representing one month's servicing income from the December securitization transaction, to $557,000 for the quarter ended March 31, 1996, and then decreased to $302,000 for the 21 quarter ended June 30, 1996. During the quarters ended June 30 and September 30, 1996, the Company did not receive its distribution of servicing cash flows associated with two of its securitization trusts due to an increase in the rates of delinquency, repossession and losses beyond those allowable by the structure of the securitization transaction. Consequently, the reduced level of servicing fee income was entirely offset by amortization of the Excess Servicing Receivable. The Company will receive these servicing cash flows, which are currently accumulating in the relevant reserve accounts, if the delinquency, repossession and loss rates fall below the allowable levels for a specified period. Management believes that these factors do not currently result in an impairment to the Excess Servicing Receivable relating to these securitization transactions. See 'Risk Factors.' Servicing fee income and the Excess Servicing Receivable may be impacted by changes in the amount of losses and levels of prepayments from those assumed by the Company at the time of the securitization. To the extent the assumptions used are materially different from actual results, the amount of Excess Servicing Cash Flows received by the Company over the remaining life of the securitization could be significantly affected. See 'Risk Factors.' Other Income The Company generates revenues from the sale of a variety of insurance and related products to Dealers and its customers, acting as agent for third party insurance companies. The Company recognizes as revenue the commissions or fees received upon the sale of these products to customers. Other fees consist primarily of late fees earned on the Company's servicing portfolio. Insurance and other fees have continued to increase due primarily to the increase in the volume of Contracts purchased and the growth in the servicing portfolio. RESULTS OF OPERATIONS The following table provides the principal components of the Company's net income for the periods presented:
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED ------------------------------ ---------------------------- SEP. 30, SEP. 30, DEC. 31, DEC. 31, RESULTS OF OPERATIONS: 1996 1995 1995 1994 ------------- ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Net interest income.......................... $ 8,936 $ 6,363 $ 8,319 $3,430 Gain on sale of Loan Contracts............... 13,427 128 4,600 2,292 Servicing fees and other income.............. 4,670 1,241 2,651 454 ------------- ------ ------------ ------ Total revenue.............................. 27,033 7,732 15,570 6,176 Provision for credit losses.................. (2,801) (1,412) (2,762) (573) Operating expenses........................... (13,844) (4,514) (7,805) (4,946) Non-cash charge for escrow shares............ (301) (80) (280) -- ------------- ------ ------------ ------ Income before taxes.......................... 10,087 1,726 4,723 657 Provision for income taxes................... (3,945) (656) (1,926) (263) ------------- ------ ------------ ------ Net income................................. $ 6,142 $ 1,070 $ 2,797 $ 394 ------------- ------ ------------ ------ ------------- ------ ------------ ------
Nine Months Ended September 30, 1996 and 1995. Net Interest Income. Net Interest Income for the nine months ended September 30, 1996 was $8.9 million compared to $6.4 million for the nine months ended September 30, 1995, representing a 40% increase. This increase was primarily a result of the growth in average Contracts held in portfolio and those awaiting securitization from $77.5 million for the nine months ended September 30, 1995 to $112.8 million for the nine months ended September 30, 1996. Gain on Sale of Loans. Gain on Sale of Loans for the nine months ended September 30, 1996 was $13.4 million compared to $128,000 for the nine months ended September 30, 1995 because no securitization transactions were completed during the nine months ended September 30, 1995. Servicing Fees and Other Income. During the period from December 1995 through September 1996, the Company completed four securitization transactions aggregating approximately $200.4 million. As a result, the Company received servicing fee income of $859,000 for the nine months ended September 30, 1996. Prior to this period, the Company did not complete a securitization transaction. Other income, consisting primarily of insurance and other fees, increased from $892,000 to 22 $3.8 million for the nine months ended September 30, 1995 and 1996, respectively. These increases were primarily due to an increase in the volume of Contracts purchased and the growth in the servicing portfolio to $283.9 million at September 30, 1996 from $111.9 million at September 30, 1995. In addition, the Company recorded approximately $517,000 to other income relating to the settlement of outstanding litigation during June 1996. Provision for Credit Losses. The Company's provision for credit losses for the nine months ended September 30, 1996 was $2.8 million compared to $1.4 million for the nine months ended September 30, 1995. This increase related primarily to provisions recorded for an estimate of possible losses that may be incurred in connection with the acquisition of new Contracts during 1996 and the performance of previously purchased Contracts. Operating Expenses. Operating expenses increased to $13.8 million for the nine months ended September 30, 1996 compared to $4.5 million for the nine months ended September 30, 1995. This increase was attributable to the hiring of additional personnel in almost all areas of the Company's operations to support its growth. The increase is also due to the absorption of the operating expenses of SFI, which was acquired in June 1996. As a percentage of average total servicing portfolio, operating expenses were approximately 9% and 8% for the nine months ended September 30, 1996 and 1995, respectively, on an annualized basis. Non-Cash Charge For Escrow Shares. The Company recorded a non-cash charge to earnings of $301,000 for the nine months ended September 30, 1996 compared to $80,000 for the nine months ended September 30, 1995 for shares released from the escrow arrangement that was established in connection with the Merger. See 'Principal Stockholders.' Net Income. The Company reported net income of $6.1 million or $0.75 per fully diluted share for the nine months ended September 30, 1996 compared to net income of $1.1 million or $0.18 per fully diluted share for the nine months ended September 30, 1995. Net income, excluding the non-cash charge for releasing escrow shares, was $6.4 million or $.78 per share for the nine months ended September 30, 1996, in comparison to $1.2 million or $0.19 per fully diluted share for the nine months ended September 30, 1995. Years Ended December 31, 1995 and 1994. Net Interest Income. Net interest income for the year ended December 31, 1995 was $8.3 million compared to $3.4 million for the year ended December 31, 1994, representing a 143% increase. This increase was primarily a result of the growth in average Contracts held in portfolio and those awaiting securitization from $15.5 million for the year ended December 31, 1994 to $84.8 million for the year ended December 31, 1995. Gain on Sale of Loans. The Company completed a $40 million securitization during the fourth quarter of 1995 resulting in a $4.0 million gain. Total gain on sale for the year ended December 31, 1995 was $4.6 million compared to $2.3 million for the year ended December 31, 1994. Although no securitization transactions were completed during 1994, the Company recognized gains from selling loan portfolios through bulk sale arrangements. Servicing Fees and Other Income. During the period from December 31, 1994 to December 31, 1995, the Company completed a securitization transaction aggregating $40 million. As a result, servicing fee income was $104,000 for the year ended December 31, 1995 compared to $0 for the preceding year. Other income, consisting of insurance and other fees, increased from $332,000 for the year ended December 31, 1994 to $1.7 million for the year ended December 31, 1995. These increases were primarily due to an increase in the volume of Contracts purchased and the growth in the servicing portfolio to $153.8 million for the year ended December 31, 1995 from $44.4 million for the year ended December 31, 1994. Provision for Credit Losses. The Company's provision for credit losses for the year ended December 31, 1995 was $2.8 million compared to $573,000 for the year ended December 31, 1994. This increase related primarily to provisions recorded for an estimate of possible losses that may be incurred in connection with the acquisition of new Contracts during 1995 and the performance of previously purchased Contracts. 23 Operating Expenses. Operating expenses increased to $7.8 million for the year ended December 31, 1995 compared to $4.9 million for the year ended December 31, 1994, a 59% increase. This increase was attributable to the hiring of additional personnel in almost every area of the Company's operations to support its growth. As a percentage of average total servicing portfolio, operating expenses decreased to 8.41% in 1995 from 14.39% in 1994. Non-Cash Charge For Escrow Shares. The Company recorded a charge to earnings of $280,000 for the year ended December 31, 1995 for shares released from the escrow arrangement that was established in connection with the Merger. Net Income. The Company reported net income of $2.8 million or $0.45 per fully diluted share for the year ended December 31, 1995 compared to net income of $394,000 or $0.07 per fully diluted share for the year ended December 31, 1994. Net income, excluding the non-cash charge for releasing escrow shares, was $3.0 million, or $0.50 per share for the year ended December 31, 1995. DELINQUENCY AND CREDIT LOSS EXPERIENCE The Company's profitability depends largely upon its ability to effectively manage delinquency and credit losses. The Company maintains a reserve available to absorb future credit losses on Contracts that are held in portfolio and on Loan Contracts while they are awaiting securitization. The Company evaluates historical charge-off experience against the reserve and performs analyses of portfolio performance and delinquency trends to determine if the reserve is adequate to absorb estimated future losses. Collection and Charge-off Procedures. Typically within 24 hours of an account becoming delinquent, a collector establishes contact with the customer. If the delinquency is not promptly resolved, the collector pursues a resolution through additional telephone contacts with the customer followed by demand letters as appropriate. In the event that a delinquency cannot be resolved, the account is turned over for repossession of the vehicle by an outside agency, typically within 45 days. When a vehicle is repossessed and not redeemed by the customer within a period prescribed by statute, the vehicle is assigned for disposal. At the time of repossession, the vehicle is reviewed by management and its carrying value is written down, if necessary, to its net realizable value. Write-downs of carrying value, which include costs of disposition, are charged against the Company's reserve available for credit losses. Vehicles typically are disposed of at wholesale auctions, or remarketed through PCSF or through the JDBR Franchise. The Company may establish a dialogue with a delinquent borrower and formulate a short-term payment arrangement that would allow the borrower to retain the automobile beyond a delinquency of 45 days. Accounts that reach 90 days of delinquency are placed on non-accrual status and any previously accrued interest income is reversed. In the event that the Company is unable to locate the customer or the vehicle by the time an account reaches 150 days of delinquent status, the account is fully charged off against reserves available for credit losses. If the customer declares bankruptcy, the account is charged off to the lesser of any court-ordered settlement or the wholesale value of the vehicle. The Company's collection staff continues to pursue customers, to locate and repossess vehicles and to collect losses incurred. Any amount received after a Contract has been charged-off is recorded as a recovery and an increase in the reserves available for credit losses. Acquisition Discounts. The Company purchases Contracts from Dealers at discounts from their stated principal amount to provide for credit risk. The discounts typically range from 3% to 10%. The amount of the discount varies primarily based on the credit risk and the terms of the Contract and the quality of the collateral. See 'The Company -- Underwriting.' Any discount that management considers necessary to absorb future credit losses is allocated to the reserves available for credit losses. The remaining portion of the discount, if any, is recognized as income using the level-yield method of accretion. Currently, the Company allocates the entire discount to the reserve available for credit losses and expects to do so for the foreseeable future. However, the Company will continue to evaluate the ability to collect on its Contracts in conjunction with the allocation of discounts. Reserve Available for Credit Losses. In the event of a payment default, proceeds from the liquidation of the vehicle may not cover the outstanding Contract balance and costs of recovery. The Company maintains a reserve available for credit losses in an amount that management believes is 24 adequate to absorb future credit losses on Contracts. The reserve available for credit losses is comprised of the acquisition discounts, an allowance for credit losses and, in limited cases, dealer reserves. On a monthly basis, the Company evaluates the adequacy of the reserve available for credit losses by analyzing the Contract portfolios in their entirety using a 'static pool analysis' method in which the historical charge-offs are stratified according to the Contract origination date. These Contracts are grouped together by calendar month of origination, and the related historical charge-off experience on such Contracts is analyzed to evaluate the reasonableness and adequacy of the reserve available for credit losses. This analysis takes into consideration historical loss experience, current economic conditions, levels of repossessed assets, delinquency experience, seasoning of Contracts, and other relevant factors. Should management deem the level of acquisition discounts and dealer reserves, in limited cases, to be inadequate, an additional provision for credit losses will be recorded to increase the allowance for credit losses and, therefore, increase the overall level of the reserve available for credit losses. The Company has prepared analyses of its Contracts, based on its credit experience and available industry data, to identify the delinquency and default rates at the various stages of a Contract's repayment term. The results of the analyses suggest that the probability of a Contract becoming delinquent or going into default is highest during the 'seasoning period,' which begins 3 to 4 months, and ends 12 to 14 months, after the origination date. If the volume of Contracts purchased by the Company continues to grow, an increasingly greater portion of the Company's portfolio is expected to fall into the 'seasoning period' described above, causing a rise in the overall portfolio delinquency and default rates. Assuming no changes in any other factors that may affect delinquency and default rates, the Company's management believes that this trend should stabilize or reverse when the volume of mature Contracts (with lower delinquency and default rates) is sufficient to offset the delinquency and default rates on newer Contracts. The following table sets forth information regarding credit loss experience of the total servicing portfolio for the periods presented:
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED -------------------------------- ------------------ SEP. 30, SEP. 30, DEC. 31, CREDIT LOSSES:(1)(4) 1996 1995 1995 ------------- ------------- ------------------ (DOLLARS IN THOUSANDS) Loan Contracts serviced:.......................... $ 220,108 $ 68,543 $107,926 Gross charge-off percentage(2).................. 10.65% 1.07% 3.68% Net charge-off percentage(3).................... 7.69% 1.07% 3.68% Lease Contracts serviced:......................... $ 29,893 $ 19,699 $ 22,518 Gross charge-off percentage(2).................. 6.09% 0.91% 4.19% Net charge-off percentage(3).................... 4.09% 0.91% 4.19% Total Loan and Lease Contracts serviced:.......... $ 250,001 $ 88,242 $130,444 Gross charge-off percentage(2).................. 10.02% 1.02% 3.78% Net charge-off percentage(3).................... 7.20% 1.02% 3.78% Recourse Contracts serviced:...................... $ 24,412 $ 16,322 $ 18,129 Gross charge-off percentage(2).................. -- -- -- Net charge-off percentage(3).................... -- -- -- Total servicing portfolio:........................ $ 274,413 $ 104,564 $148,573 Gross charge-off percentage(2).................. 9.00% 0.79% 3.15% Net charge-off percentage(3).................... 6.46% 0.79% 3.15%
- ------------------ (1) This table excludes non-automobile bulk purchase contracts. (2) Gross charge-offs are computed as principal balance less liquidation proceeds received expressed as a percentage of average balance outstanding during the period. (3) Net charge-offs are computed as gross charge-offs less any recoveries expressed as a percentage of average balance outstanding during the period. (4) Percentages for the nine months ended September 30, 1996 and 1995 have been annualized. The increase in the level of credit losses is due primarily to the seasoning of the Company's servicing portfolio when comparing the net charge-off percentage for the nine months ended 25 September 30, 1996 to that for the nine months ended September 30, 1995 and the year ended December 31, 1995. Delinquency Experience. The following table reflects the Company's delinquency experience for the periods presented:
AS OF SEPTEMBER 30, AS OF DECEMBER 31, -------------------- -------------------- DELINQUENCY:(1) 1996 1995 1995 1994 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Loan Contracts serviced...................... $219,787 $ 67,484 $107,191 $ 8,175 Delinquencies: 31-60 days................................. 7.36% 6.42% 8.83% 2.17% 61-90 days................................. 2.62% 2.24% 2.99% 0.18% Greater than 90 days....................... 2.14% 1.53% 2.18% 0.13% -------- -------- -------- -------- Total.................................... 12.12% 10.19% 14.00% 2.48% Lease Contracts serviced..................... $ 29,098 $ 18,324 $ 21,361 $ 5,918 Delinquencies: 31-60 days................................. 4.69% 5.12% 7.51% 6.88% 61-90 days................................. 1.39% 1.19% 1.90% 1.21% Greater than 90 days....................... 2.65% 1.46% 1.83% 1.28% -------- -------- -------- -------- Total.................................... 8.73% 7.77% 11.24% 9.37% Total Loan and Lease Contracts serviced...... $248,885 $ 85,808 $128,552 $ 14,093 Delinquencies: 31-60 days................................. 7.04% 6.14% 8.61% 4.15% 61-90 days................................. 2.47% 2.01% 2.81% 0.61% Greater than 90 days....................... 2.20% 1.52% 2.12% 0.61% -------- -------- -------- -------- Total.................................... 11.71% 9.67% 13.54% 5.37% Recourse Contracts serviced.................. $ 24,412 $ 16,322 $ 18,129 $ 14,521 Delinquencies: 31-60 days................................. 11.52% 7.89% 16.99% 11.75% 61-90 days(2).............................. N/A N/A N/A N/A Greater than 90 days(2).................... N/A N/A N/A N/A -------- -------- -------- -------- Total.................................... 11.52% 7.89% 16.99% 11.75% Total Contracts serviced..................... $273,297 $102,130 $146,681 $ 28,614 Delinquencies: 31-60 days................................. 7.44% 6.42% 9.65% 8.01% 61-90 days................................. 2.25% 1.69% 2.46% 0.30% Greater than 90 days....................... 2.00% 1.28% 1.86% 0.30% -------- -------- -------- -------- Total.................................... 11.69% 9.39% 13.97% 8.61% -------- -------- -------- --------
- ------------------ (1) This table excludes non-automobile bulk purchase contracts. In addition, this table excludes two automobile bulk purchase portfolios which were non-performing at the time of purchase in 1994 and are accounted for on a cost recovery basis, whereby income is recognized only to the extent that the Company's investment in these portfolios has been fully recouped. As of September 30, 1996, the combined investment in these portfolios totaled $1,115,000. (2) Contracts delinquent 61 days or more are repurchased by the originator of the Contracts under the Recourse Program. Management believes that the increase in the overall delinquency from December 31, 1994 to December 31, 1995 is primarily the result of an increase in the percentage of Contracts falling in the 'seasoning period.' LIQUIDITY AND CAPITAL RESOURCES The Company's business requires substantial cash to support the growth in Contracts purchased. In general, the Company finances the purchase of Contracts through various credit facilities. The Company funds through these facilities between 80% and 90% of the principal balance of the Contracts. The Company funds the remainder of the purchase price through its capital. As the Company continues to increase the volume of Contracts purchased, it must secure additional capital to support its growth. The Company's growth has been facilitated by its ability to complete private placements of debt and equity securities and through securitization transactions. Through September 30, 1996, the Company had secured its principal sources of financing through senior indebtedness comprised of its warehouse facility, revolving credit facilities and its specialized 26 borrowing facility, as well as subordinated indebtedness consisting of unsecured subordinated debentures. In addition, the Company secures liquidity through the securitization of its Loan Contracts. During the last four quarters, the Company has completed an aggregate of approximately $200 million of securitization transactions.
AS OF AS OF SEPTEMBER 30, DECEMBER 31, ------------------ ------------------ SOURCES OF FINANCING: 1996 1995 1995 1994 ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Warehouse Facility: Available line............................. $50,000 $50,000 $50,000 $ -- Outstanding balance........................ 21,457 10,000 11,585 -- Revolving Credit Facilities: Available line............................. 45,000 45,000 45,000 30,000 Outstanding balance........................ 27,231 21,733 21,844 11,998 Revolving Line of Credit Facility: Available line............................. 3,500 -- -- -- Outstanding balance........................ 503 -- -- -- Specialized Borrowing Facility: Outstanding balance........................ 21,682 47,144 42,381 10,212 Subordinated Debentures: Issued -- cumulative....................... 38,825 15,400 21,325 -- Converted to Common Stock -- cumulative.... (12,825) (7,200) (8,260) -- ------- ------- ------- ------- Outstanding balance........................ 26,000 8,200 13,065 -- Unsecured notes.............................. -- 35 -- 230 Note due to stockholder...................... -- 854 2,919 62 ------- ------- ------- ------- Total outstanding borrowings................. $96,873 $87,966 $91,794 $22,502 ------- ------- ------- ------- ------- ------- ------- -------
Warehouse Facility. During September 1995, the Company entered into a $50 million warehouse facility (the 'Warehouse Facility') with Greenwich Capital Financial Products, Inc. ('Greenwich'). In November 1996, the Warehouse Facility was increased to $100 million. This facility is structured as a reverse repurchase agreement, which is characterized as a borrowing for financial reporting purposes. Under the terms of this facility, the Company receives an advance of approximately 90% of the outstanding principal balance of the Loan Contract at an interest rate of 2.25% over 30-day LIBOR. If, at any time during the financing period, 90% of the market value of the Contract is less than the amount advanced, Greenwich may require the Company to transfer funds or additional Contracts to Greenwich until the deficiency ('margin') amount is satisfied. Market value of Loan Contracts may be affected by such factors as changes in interest rates, delinquency rates and credit losses. Although management believes that this is unlikely to occur to any significant degree, a margin call could require an allocation of certain of the Company's liquidity and capital resources. The Warehouse Facility expires in September 1997 and is renewable for an additional year subject to certain conditions. At September 30, 1996, the Company had $21.5 million outstanding under this facility. The Warehouse Facility includes certain financial and operational covenants, including the maintenance of a minimum net worth of $30 million, the prohibition of a debt to equity ratio in excess of 8 to 1, and maintenance of certain loan portfolio performance criteria. For the purpose of the Warehouse Facility, net worth has been defined as total stockholders' equity plus subordinated indebtedness not due within 90 days. At September 30, 1996, the Company was in compliance with all relevant financial and operational covenants. Management continues to monitor closely the performance of its Loan portfolios in order to ensure compliance with all financial and operational covenants. An event of default is also deemed to occur under the Warehouse Facility in the event of the death of two of the Company's executive officers (or if both of these individuals cease serving as officers) or if the Company is unable to securitize at least $250 million of loans over a two-year period, with at least $100 million securitized in any 365-day period. 27 The Company uses the Warehouse Facility to purchase Loan Contracts with the objective of selling such Contracts through securitization transactions. Since the fourth quarter of 1995, the Company has completed in the aggregate the sale of approximately $200 million of Loan Contracts through privately-placed securitization transactions. The proceeds from the securitization transactions have been used to pay down the Warehouse Facility, thereby making the Warehouse Facility available to fund purchases of additional Contracts. Revolving Credit Facilities. In March 1993, the Company entered into a $20 million three-year revolving credit facility (the 'Congress Facility') with Congress Financial Corporation ('Congress'), which has been extended until March 1997. The Congress Facility bears interest at a floating rate of 2% over the prime rate of CoreStates Bank, N.A., with interest payable monthly, and the facility is secured by Loan and Lease Contracts. The facility can be utilized for the financing of additional Contract purchases that meet certain credit guidelines established by Congress, in its sole discretion. As of September 30, 1996, the Company had $3.5 million outstanding under this facility. During February 1994, the Company entered into a $5 million one-year revolving credit facility with GECC (the 'GECC Facility'). In September 1994 and March 1995, the GECC Facility was increased to $10 million and $25 million, respectively. The GECC Facility bears interest payable monthly at rates fixed at the time of financing and is secured by certain Lease Contracts. Principal is repaid monthly according to an agreed-upon schedule. At September 30, 1996, the Company had drawn down approximately $23.7 million under the facility. The GECC Facility is automatically renewed annually unless GECC provides the Company with notice of termination 90 days prior to such renewal date. The Congress Facility and the GECC Facility (collectively, the 'Revolving Credit Facilities') are also subject to certain financial and operational covenants that are similar to those imposed under the Warehouse Facility. Revolving Line of Credit Facility. During September 1996, the Company entered into a one-year $3.5 million revolving line of credit (the 'LOC Facility') with a private third party. The LOC Facility bears interest at a fixed rate of 13% with interest payable monthly. The LOC Facility is secured by certain Loan Contracts. As of September 30, 1996, the Company had drawn down approximately $503,000 under this facility. The LOC Facility is renewable at the lender's discretion for an additional one-year period, provided that the Company meets certain conditions. Specialized Borrowing Facility. The Company historically has secured a significant amount of its financing through borrowings classified as debt participation agreements, in which the Company has sold an undivided interest, typically 80% to 90%, in portfolios of receivables to financial institutions and individual lenders on a full recourse basis. As of September 30, 1996, the Company had an existing series of borrowings under a specialized borrowing facility (the 'Specialized Borrowing Facility') with Fairfax Savings, a Federal Savings Bank ('Fairfax') in the approximate amount of $21.7 million. Approximately $21 million of the Fairfax financing has been used to acquire Contracts. Borrowings under this facility are subject to interest at prime plus 2.5% fixed at the time of financing. Approximately $700,000 of the remaining advances under the Specialized Borrowing Facility were used to acquire bulk purchase portfolios prior to 1995. These amounts are subject to interest at fixed rates from 10% to 13.5%, respectively. In general, under the terms of the participation agreements, the lender's principal advance is repaid in proportion to the principal received from the underlying collateral. Interest on the outstanding principal balance of the advance is due monthly. Collections received in excess of the principal and interest due Fairfax are allocated to a restricted cash reserve account on deposit with Fairfax until certain specified balances are maintained, generally calculated as a percentage of the outstanding balance of the advance. Any remaining collections are paid to the Company. Short-term Financing. During the fourth quarter of 1996, Mr. Robert R. Bartolini, Chairman and Chief Executive Officer, made advances to the Company in an aggregate amount of $2,413,869, repayable on the earlier of February 18, 1997 and the completion of the Offering. These advances bear interest at a fixed rate of 11%. During December 1996, the Company entered into a $2.0 million secured short-term note with a private third party, repayable on the earlier of December 31, 1996 and 28 the completion of the Offering. This note bears interest at a fixed rate of 10% and is secured by certain Loan Contracts. See 'Use of Proceeds.' Private Placement of Convertible Subordinated Debentures, Warrants and Common Stock. The Company has secured a significant component of its capital through the private placement of equity and debt securities. During the period from April 1995 through September 1996, the Company issued: (i) 176,500 shares of its Common Stock, which yielded net proceeds of approximately $2.1 million; (ii) $38.8 million principal amount of convertible subordinated debentures (the 'Debentures'); and (iii) 2,913,625 common stock purchase warrants (the 'Warrants'). The Warrants were issued to Debenture holders in connection with the sale of the Debentures, to certain consultants and advisors in consideration for financial advisory services and to certain members of the Board of Directors in connection with joining the Board. In April and September 1996, the Company concluded institutional placements of $10 million principal amount of 9% Debentures with 675,000 Warrants, and $5 million principal amount of 10% Debentures with 62,500 Warrants, respectively. Through December 20, 1996, an aggregate of approximately $13.8 million principal amount of the Debentures was converted into 1,452,849 shares of Common Stock. The principal amount and accrued interest due under the remainder of the Debentures is convertible into shares of Common Stock (at the option of the holders thereof) at conversion prices ranging from $9 to $12. The conversion price of certain Debentures is subject to decrease by virtue of price protection and adjustment features contained in such Debentures. See 'Description of Securities -- Price Protection.' The following table provides a summary of the Company's outstanding Debentures.(1)
PRINCIPAL MATURITY INTEREST CONVERSION SHARES AMOUNT ISSUE DATE DATE RATE PRICE(2) ISSUABLE(3) - ----------- ---------- ---------- -------- ---------- ----------- $ 200,000 Dec. 1995 Dec. 1996 9% 11.00 19,814 2,000,000 Dec. 1995 May 1997 9% 11.00 206,364 2,300,000 Dec. 1995 Jun. 1997 9% 11.00 237,266 10,000,000 Apr. 1996 Oct. 1997 9% 12.00 945,833 2,000,000 Jul. 1995 Jul. 1998 9% 9.00 282,167 1,000,000 Aug. 1995 Aug. 1998 9% 9.00 141,083 5,000,000 Sep. 1996 Sep. 1998 (4) 10%(4) 12.00 416,667 2,500,000 Jan. 1996 Jan. 1999 9% 11.00 288,636 - ----------- ----------- $25,000,000 2,537,830 - ----------- ----------- - ----------- -----------
- ------------------ (1) Reflects information as of December 20, 1996. (2) These Debentures are convertible into shares of the Company's Common Stock at the lesser of the amount indicated and a discount to the market price of the Company's Common Stock, which ranges from 75% to 85% pursuant to the terms of the Debentures. (3) Represents shares of Common Stock issuable upon conversion of the Debentures (principal and interest at maturity). (4) These Debentures bear interest at a rate of 10% for 2 years and at a rate of 9% thereafter. Maturity is subject to extension by the holder. As of December 20, 1996 the Company had $25.0 million principal amount of Debentures outstanding with maturity dates as follows: (i) $0.20 million in December 1996; (ii) $2.0 million in May 1997; (iii) $2.3 million in June 1997; (iv) $10.0 million in October 1997; (v) $3.0 million in July/August 1998; (vi) $5.0 million in September 1998 (subject to extension by holder) and (vii) $2.5 million in January 1999. See 'Description of Securities -- Debentures.' If the Company's Common Stock achieves certain trading prices ranging from $18 to $25, the Company has the right to serve notice of redemption on the holders of approximately $15 million of the Debentures for the principal amount thereof (together with accrued interest). A notice to redeem would likely yield conversion of the Debentures (since the average trading price of the stock necessary to redeem would yield a greater profit to the Debenture holders upon conversion rather than redemption). Notwithstanding rights of redemption, management believes that a substantial number of the remaining Debentures will be subject to conversion prior to their maturity, however, a possibility exists that the Company could be required to allocate liquidity and capital resources to the retirement of these Debentures. 29 The Company may also secure certain amounts of capital in the future from the exercise of existing Warrants. The Company has issued 2,913,625 Warrants at exercise prices between $9 and $15. To date, none of the Warrants have been exercised. If exercised, the Company would receive aggregate gross proceeds of approximately $33.0 million. The exercise price of certain Warrants and the proceeds thereof are subject to decrease by virtue of price protection and adjustment features contained in such Warrants. See 'Description of Securities - -- Price Protection.' The following table provides a summary of outstanding Warrants.(1)
SHARES PROCEEDS TO ISSUE DATE EXPIRATION DATE EXERCISE PRICE ISSUABLE(2) THE COMPANY(3) - ------------------- ------------------- --------------- ----------- -------------- Apr.-Aug. 1995 Apr.-Aug. 1998 $ 9.00 1,360,000 $ 12,240,000 Nov. 1995-Dec. 1995 Nov. 1998-Dec. 1998 13.50 175,000 2,362,500 Dec. 1995-Feb. 1996 Dec. 1998-Feb. 1999 14.00 to 14.38 195,000 2,737,500 Jul.-Aug. 1995 Jul.-Aug. 1998 12.00 to 12.30 62,500 765,000 Jul.-Dec. 1995 Jul.-Dec. 1998 15.00 363,625 5,454,375 Mar. 1996 Mar. 1999 11.50 20,000 230,000 Apr. 1996 Apr. 1999 12.00 to 12.63 615,000 7,442,500 Apr. 1996 Apr. 2001 14.52 60,000 871,200 Sep. 1996 Sep. 2001 13.92 62,500 870,000 ----------- -------------- 2,913,625(4) $ 32,973,075(5) ----------- -------------- ----------- --------------
- ------------------ (1) Reflects information as of December 20, 1996. (2) Represents shares of Common Stock issuable upon exercise of the Warrants. (3) Represents proceeds to the Company upon the exercise of the Warrants. (4) Includes 40,000 Warrants in the aggregate issued to Mr. DeVoe and Mr. Jones in connection with joining the Board of Directors. (5) Includes proceeds of $517,500 from Warrants issued to Mr. DeVoe and Mr. Jones. See Footnote 4. Exercise of the Warrants is largely a function of the spread between the trading price of the Company's Common Stock and the exercise price of the Warrants. Thus, there can be no assurances that the future trading prices of the Company's Common Stock will be sufficient to encourage the exercise of a material number of the Warrants in the near term, if at all. Exercise of the Warrants is also a function of other factors such as the term of the Warrant and any associated rights of redemption. Substantially all of the outstanding Warrants remain outstanding until 1998 and 1999, and some remain outstanding until 2001. In addition, certain of the Warrants contain features that permit redemption (at $.001 per Warrant) based upon average trading prices of the Company's Common Stock between $15 and $25. Any call for redemption will have the likely effect of causing the exercise of these Warrants. The Company's liquidity and capital resources may continue to be affected by the trading price of the Company's Common Stock. Trading prices at levels consistently higher than the conversion prices of the Debentures will likely facilitate conversion of the Debentures in the near term. A conversion of the Debentures would positively affect the Company's liquidity by eliminating the need to repay the principal amount (and in certain instances, interest) due thereunder. Trading prices at levels consistently lower than the conversion prices of the Debentures, however, will make conversion of the Debentures less likely, thus requiring the Company to allocate certain of its capital resources towards the retirement of the Debentures at maturity. If all of such Debentures were converted, the Company would not be required to repay approximately $28.4 million of principal and interest as of December 20, 1996. In addition, an exercise of all of the Warrants would have the effect of securing approximately $33.0 million of additional working capital. However, there can be no assurances that the issuance of such shares would not have a depressive effect upon the market for the Company's Common Stock. See 'Risk Factors.' Securitization. Securitization of Loan Contracts is an integral part of the Company's continuing financing strategy. Securitization: (i) provides a lower cost of financing; (ii) allows the Company to increase its liquidity; (iii) provides for redeployment of capital; (iv) reduces risks associated with interest rate fluctuations; (v) reduces credit risk; and (vi) properly matches the duration of the financing to the assets financed. The Company uses the net proceeds from a securitization to repay the advances 30 outstanding under its Warehouse Facility, thereby creating availability to purchase additional Loan Contracts. Through September 30, 1996, the Company completed four securitization transactions totaling approximately $200 million. See 'Recent Developments.' The following is a summary of the basic structure of the Company's securitization transactions through September 30, 1996. There can be no assurances, however, that the Company will continue to use this structure for future securitization transactions. The Company transfers a pool of Loan Contracts to a trust (the 'Trust'), which simultaneously issues one or more classes of securities (the 'Securities') backed by the assets of the Trust. The assets of the Trust include the Loan Contracts and a reserve account. Initially, the Company makes a deposit into the reserve account; and thereafter, it maintains the reserve account at certain levels (the 'Maintenance Level') during the life of the securitization by depositing certain cash flows from the Trust that the Company would otherwise have received. The Company continues to service the Loan Contracts and earns a contractual servicing fee, currently equal to 3.0% per year (the 'Contractual Servicing Fee'). The Securities were rated 'A', 'BBB' and 'BB' in the first three securitization transactions and 'A' and 'BBB' in the last securitization by Duff & Phelps Credit Rating Co. and Fitch Investors Service, L.P., and are sold to investors in a private offering. These Securities carry fixed interest rate coupons, payable quarterly. Generally, all collections of interest and principal from Loan Contracts are used to pay interest due on the Securities and to reduce the principal balance of the Securities. Collections of interest in excess of that required to pay for (i) the interest due on the Securities, (ii) ongoing fees and expenses of the Trust, and (iii) the Contractual Servicing Fees (the 'Excess Servicing Cash Flows') are deposited into the reserve account only to the extent necessary to maintain it at the required Maintenance Level. The remaining Excess Servicing Cash Flows, if any, are paid to the Company. In the event that the collections of interest and principal from the Loan Contracts are not sufficient to cover the required distributions of interest and principal on the Securities, the trustee may withdraw funds from the reserve account to make up for the shortfall. The Company recognizes a gain on sale of the Loan Contracts from the securitization in an amount equal to (i) the Excess Servicing Receivable from the Trust during the life of the securitization, plus (ii) the net proceeds received from the securitization less the aggregate book value of the Loan Contracts transferred to the Trust. The Excess Servicing Receivable represents the present value of the Excess Servicing Cash Flows after taking into account the Company's estimates for the net credit loss and prepayment on the Loan Contracts in the Trust. The gain on sale through securitization has been a significant component of the Company's revenues in each of the quarters in which the securitization transactions have been completed. Management believes that such gain on sale will continue to represent a significant source of the Company's revenues in all financial reporting periods in which the Company completes a securitization. If, for any reason whatsoever, the Company is unable to complete a securitization during a quarter, the Company's revenues for such period would decline. Also, failure to complete a securitization of the Loan Contracts or delays in completing such securitization could further subject the Company to interest rate risk since the Company finances the Loan Contracts through a floating interest rate Warehouse Facility. The Company continues to explore alternative structures for the securitization of its Loan Contracts in order to achieve a lower cost of financing and to maximize the net proceeds from the securitization. Management believes that it would lower the cost of financing by structuring the securitization in a manner that results in the issuance of triple-A rated Securities backed by the assets of the Trust, and then by selling such Securities in a public offering. However, there can be no assurance that the Company will be able to achieve this in the near future. OTHER USES OF CAPITAL In June 1996, the Company purchased certain assets constituting the business of SFI pursuant to the exercise of an option agreement entered into on August 1, 1995 for the purchase price of $1,000,000, plus 125,000 shares of the Company's Common Stock and options to purchase 65,000 shares of Common Stock at $6.00 per share. The option price of $250,000 paid on August 1, 1995 was 31 credited against the purchase price. This acquisition was recorded utilizing the purchase method of accounting and the Company recognized goodwill in the amount of $3.8 million. In conjunction with the acquisition, the Company entered into a management agreement with the former principals of SFI and retained substantially all of its operating personnel. Since the acquisition, SFI has continued to generate Loan Contract volume comparable to historic levels. While management believes that such levels of Contract volume will continue, there can be no assurances to that effect. See 'Risk Factors.' During June 1996, the Company repaid an outstanding stockholder loan in the amount of approximately $3.0 million. See 'Certain Transactions -- Loan to the Company.' EFFECTS OF INFLATION Inflationary pressures may have an effect on the Company's internal operations and on its overall business. The Company's operating costs are subject to general economic and inflationary pressures. Operating costs have increased during the past years due primarily to the expansion of the Company's operations. The Company's business is subject to risk of inflation. Significant increases in interest rates that are normally associated with strong periods of inflation may have an impact upon the number of individuals that are likely or able to finance the purchase or lease of an automobile. RECENT DEVELOPMENTS On December 18, 1996, the Company completed the sale of approximately $88 million of Loan Contracts in a privately-placed securitization transaction, the terms of which are similar to the Company's four prior securitization transactions. The Securities issued in the securitization transaction were rated 'A' and 'BBB' by Duff & Phelps Credit Rating Co. and Fitch Investors Service, L.P. and carry a weighted average coupon rate of 7.03%. RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board ('FASB') issued Statement of Financial Accounting Standards No. 123 ('SFAS No. 123'), 'Accounting for Stock-Based Compensation.' SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. The statement defines a 'fair value based method' of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, SFAS No. 123 also allows an entity to continue to measure compensation costs for those plans using the 'intrinsic value based method' of accounting, which the Company currently uses. The accounting requirements of SFAS No. 123 are effective for transactions entered into during fiscal years beginning after December 15, 1995. The disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially adopted for recognizing compensation cost. Management has determined that the Company will continue to measure compensation costs using the 'intrinsic value based method' and will disclose the effect on net income and earnings per share using the 'fair value based method' in the footnotes to the Company's financial statements upon the adoption of SFAS No. 123. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125 ('SFAS No. 125'), 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.' SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on a financial-components approach that focuses on control. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be prospectively applied. However, a proposal has recently been developed to defer, for one year, certain provisions of SFAS No. 125. Management is currently assessing the impact of the adoption of SFAS No. 125 on the Company's financial position and results of operations. 32 THE COMPANY GENERAL NAL is a specialized automobile finance company engaged in the purchase and servicing of Contracts originated by franchised and select independent Dealers in connection with sales or leases of used and new automobiles to consumers with non-prime credit. Consumers with non-prime credit are perceived to be relatively high credit risks due to various factors, including the manner in which they have handled previous credit, the absence or limited extent of their prior credit history and their limited financial resources. The Company purchases Contracts relating principally to the 'C' credit segment of the automobile finance market. The Company is also engaged in providing insurance and related products to its Dealers and customers through its insurance subsidiary, NIS. The Company has a remarketing subsidiary, PCSF, with a JDBR Franchise, which provides a cost-effective means of disposing of some of the Company's repossessed and off-lease vehicles. The Company purchases Contracts directly from Dealers through its Dealer Program and through select third party entities that participate in the Company's Captive Program, Affinity Program, Correspondent Program, Recourse Program and Wholesale Program. Participants in these Origination Programs offer Contracts to the Company under a variety of arrangements and allow it to increase the volume of Contracts purchased from Dealers with whom the Company does not maintain a direct relationship. The Company's main sources of Contracts are its Dealer Program and its Captive Program. The Captive Program includes the Company's arrangements with SFI, which recently became a wholly-owned subsidiary of the Company. Under its Affinity Program, the Company has an agreement with GECAL to purchase non-prime Lease Contracts through GECAL's network of Dealers in the Southeast region of the United States. As of September 30, 1996, the Company's servicing portfolio consisted of Contracts purchased through its Dealer Program (32%), Captive Program (46%), Affinity Program (5%), Correspondent Program (2%), Recourse Program (9%) and Wholesale Program (6%). Each of these programs, other than the Recourse Program, is designed to purchase Contracts relating primarily to the 'C' credit segment of the market. The Recourse Program is designed to purchase Contracts relating to the 'D' credit segment. The Company has experienced significant growth in its portfolio of purchased and serviced Contracts since June 1994, when the acquisition of Contracts became the principal focus of its business. Total Contracts purchased, which includes both Loan Contracts and Lease Contracts, increased from approximately $28.1 million through December 31, 1994 and $165.7 million through December 31, 1995, to approximately $205.8 million through September 30, 1996. As a result, the Company's servicing portfolio increased from approximately $44.4 million at December 31, 1994 and $153.8 million at December 31, 1995, to approximately $283.9 million at September 30, 1996. The Company's overall growth during this period was attributable to an increase in the Company's Dealer relationships from 196 Dealers at December 31, 1994 to 1,594 Dealers at September 30, 1996, and an expansion of the sources and amounts of financing available to purchase Contracts. The Company currently purchases Contracts from Dealers in 23 states, with a major concentration in Florida. More than 90% of all Contracts acquired by the Company during the nine months ended September 30, 1996 were originated by franchised Dealers. The Company has historically funded the purchase of its Contracts with borrowings from banks and other lenders. Currently, the Company's primary financing sources include a $100 million Warehouse Facility, $45 million of Revolving Credit Facilities, including the $25 million GECC Facility, and a Specialized Borrowing Facility. Beginning in December 1995, the Company began securitizing the majority of its portfolio of Loan Contracts to increase the Company's liquidity, provide for the redeployment of capital, reduce risks associated with interest rate fluctuations and provide the Company with access to a cost-effective, diversified source of financing. During the last four fiscal quarters, the Company completed securitization transactions aggregating approximately $200 million. During this period, gains on sale from the securitization transactions have constituted the principal source of the Company's revenues. The Company plans to continue to employ its securitization program as an integral component of its funding strategy and anticipates that it will generally complete 33 securitization transactions on a quarterly basis. The Company also generates revenues from interest income and fees earned on Contracts held in portfolio, as well as servicing fees from Loan Contracts sold in securitization transactions. In addition, the Company receives revenues from the sale of insurance and related products through its insurance subsidiary, NIS. BACKGROUND NAL was founded in February 1991 as a specialized consumer finance company. It became publicly held by virtue of the Merger on November 30, 1994 with a previously inactive public company, which was incorporated in Delaware on November 14, 1986. Effective upon completion of the Merger, the Company assumed the historic operations of NAL and changed its name to 'NAL Financial Group Inc.' Because of the opportunities presented by the insolvency and reorganization of many financial institutions at the time, the Company's principal activities until the second quarter of 1994 involved the bulk purchase and servicing of seasoned and non-performing portfolios of consumer and mortgage loans and automobile lease receivables that had been administered by the Resolution Trust Corporation or the Federal Deposit Insurance Corporation. The principal focus of the Company's business since June 1994 has shifted to the purchase and servicing of automobile Loan and Lease Contracts originated by Dealers in connection with the sale or lease of automobiles to consumers with non-prime credit. INDUSTRY AND COMPETITION According to CNW Marketing/Research, an independent automobile finance market research firm, the automobile finance industry is the second largest consumer finance industry in the United States with over $410 billion in loan and lease originations in 1995. Management believes that captive finance companies, such as General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler Credit Corp., financed between 25% and 30% of automobile purchases and leases nationwide in 1995, while the balance of automobile financing was provided by banks, credit unions and other independent finance companies. The industry is generally segmented according to the type of car sold (new or used) and the credit characteristics of the borrower (prime or non-prime). Sales information for new and used vehicles indicates that the market for used cars increased at approximately three times the rate for new cars for the period from 1990 to 1995. According to industry analysts, sales of used automobiles, excluding private sales, increased from 24.9 million vehicles in 1990 to 29.8 million vehicles in 1995, an increase of 19.7%. In contrast, sales of new automobiles, excluding private sales, increased from 13.9 million vehicles in 1990 to 14.8 million vehicles in 1995, an increase of 6.5%. Industry analysts have concluded that the market for retail sales of used automobiles will expand further due to a combination of increases in the average useful life of automobiles, the number of late-model used automobiles in service and the number of late-model used automobiles available for sale (including off-lease and former rental cars). In the leasing market, according to CNW Marketing/Research, used-car leasing has followed the lead of new-car leasing and shown growth. According to their findings, this growth is likely to amount to more than one million used vehicles being leased by the year 2000. The reason for this growth is the same as for the growth in new car leasing, which is that customers can receive a higher quality vehicle for their budgeted amount, lower monthly payments and the ability to have a better secondary vehicle in the household. The vast majority of used cars being leased prior to 1994 were luxury models. However, there has recently been a growing number of non-luxury automobiles being leased. The Company primarily focuses on the 'C' credit segment of the automobile finance market and to a limited extent, on the 'D' credit segment through its Recourse Program. Management believes that the non-prime segment of the automobile finance market is in the range of $80 billion to $100 billion in annual loan and lease originations. Competition in the field of retail automobile finance is intense. The market is highly fragmented and historically has been serviced by a variety of financial entities, including the captive finance 34 affiliates of major automobile manufacturers, banks, savings associations, independent finance companies, credit unions and leasing companies. Many of these competitors have greater financial resources than the Company and may have significantly lower cost of funds. Many of these competitors also have long-standing relationships with automobile dealerships and may offer dealerships or their customers other forms of financing or services not provided by the Company. Furthermore, during the past two years, a number of automobile finance companies have completed public offerings of common stock, the proceeds from which are to be used, at least in part, to fund expansion. The Company's ability to compete successfully depends largely upon its relationships with its origination sources, particularly Dealers, and the ability and willingness of such origination sources to offer Contracts that meet the Company's underwriting criteria for purchase. Management believes that by diversifying its origination sources through its Affinity Program, Correspondent Program, Recourse Program and Wholesale Program, the Company increases the number of Contracts purchased without significantly increasing its marketing costs. Management believes that its multi-tier underwriting quidelines which balances the creditworthiness of the borrower with the value of the collateral, enables it to evaluate effectively and measure the risks associated with lending to consumers with non-prime credit. The Company also believes that its servicing and collection procedures, specialized servicing functions and asset disposition enable it to manage its portfolio of Contracts profitably and in a cost- effective manner. However, there can be no assurance that the Company will be able to continue to compete successfully in the markets that it serves. BUSINESS STRATEGY The Company's business is to purchase and service non-prime Loan and Lease Contracts through its Origination Programs. The Company's principal objectives are to sustain controlled growth of its business and to maximize its profit potential. To achieve these objectives, the Company is currently employing the following key strategies: Expanding and Strengthening Relationships with Origination Sources. The Company plans to achieve a greater volume of business by expanding its origination sources in existing markets, entering into new geographic markets and strengthening current relationships. The Company plans to expand its origination sources through strategic arrangements with independent entities and relationships with individual Dealers and networks of Dealers. The Company develops strong relationships with its Dealers and other origination sources by providing a high level of service specifically tailored to meet their needs. The Company typically responds to credit applications on the date received, and in most cases, within two to four hours, and generally pays the Dealer for Contracts purchased within twenty-four hours of receipt of a complete funding package. In addition, the Company provides training to Dealer personnel to effectively utilize the Company's credit underwriting and pricing guidelines. Among its origination sources, Dealers, including those with whom SFI has relationships, represent a principal source of business for the Company. To service the Dealers, the Company employs a value-added approach. Specifically, the Company's local representatives provide training on the Company's products and services to their respective Dealers. The Company's offices are open six days a week, and sales and marketing personnel attend Dealer-sponsored promotional sales events to provide 'on-site' financing approval. The Company's regional sales representatives and senior management maintain an ongoing dialogue with Dealers to enhance such relationships. In addition, the Company has sales and marketing resources dedicated to expanding its origination sources. Providing Diverse Products and Services to Dealers. In addition to providing prompt, flexible service and a reliable source of financing, the Company increases its volume of business from Dealers by offering a 'one-stop shop' service. This service includes purchasing both Loan and Lease Contracts on used and new automobiles from a broad range of credit profiles and offering insurance and related products. 35 Employing Detailed Underwriting Guidelines. In order to evaluate and measure the risks associated with lending to consumers with non-prime credit, the Company uses multi-tiered credit underwriting and pricing guidelines for purchasing both Loan and Lease Contracts. These guidelines balance, among other factors, the creditworthiness of the borrower with the adequacy of the vehicle as collateral. These guidelines are designed to enable Dealers to: (i) assess a borrower's credit risk category; (ii) determine the maximum term of the loan or lease for used and new automobiles; (iii) calculate the maximum payment affordable by the borrower; and (iv) estimate their profit from selling the Contracts to the Company. By providing a high degree of credit and pricing specificity to the Dealer, the Company's underwriting guidelines aid in the assessment of credit risk and the development of financing terms for a borrower. These guidelines not only enhance the rapid execution of the transaction for the Dealer, but enable the Dealer to provide improved service to its customers. Maintaining Effective Collection and Asset Disposition Systems. To minimize delinquencies and losses, the Company employs aggressive collection policies and procedures, which typically include contacting a borrower within 24 hours of a payment delinquency and managing accounts based on geographic regions. The Company also uses collection specialists to address certain servicing functions, such as insurance claims, deficiency collection, bankruptcy, skip tracing and asset management. In addition, the Company uses its subsidiary, PCSF and its JDBR Franchise, to maximize its recovery on some of its repossessed and off-lease vehicles by providing an alternate means of disposition. The Company currently has a servicing operation that utilizes both local area and wide area network systems for servicing its portfolio. In order to accommodate future growth, the Company plans to enhance its current systems, which will facilitate the decentralization of collection activities to regions based upon the concentration of business in those areas. As geographic expansion requires, the Company intends to establish full service regional centers. The Company expects to open regional centers in Orlando, Florida and Atlanta, Georgia. Diversifying its Financing Sources. The Company plans to continue to expand and diversify its financing sources, and to increase the amount of financing available. The Company intends to continue to securitize its Loan Contracts on a quarterly basis. Current financing sources include a $100 million Warehouse Facility, $45 million of Revolving Credit Facilities, including the $25 million GECC Facility, a securitization program and a Specialized Borrowing Facility. During each of the last four quarters, the Company has sold a significant portion of its Loan Contracts in securitization transactions to increase the Company's liquidity, to provide for redeployment of capital and to mitigate interest-rate risk. The Company has completed four private placement securitization transactions totaling approximately $200 million. When the quarterly volume of Loan Contracts reaches over $100 million, the Company intends to complete securitization transactions through the public market, which management believes will reduce its financing cost. The Company plans to complete securitization transactions of its Lease Contracts when the volume of Lease Contracts reaches a level that is cost-effective for securitization. Continuing the Growth of Related Businesses. The Company's related businesses complement the purchasing and servicing of Loan and Lease Contracts and enhance the Company's profitability. The Company's insurance subsidiary, NIS, offers insurance and related products. In 1995, NIS generated revenues of $548,000. For the nine months ended September 30, 1996, NIS generated revenues of $1.1 million. The Company plans to continue to market its insurance and related products to its Dealers and customers. The Company uses its subsidiary, PCSF (including its JDBR Franchise), as an efficient means of disposing of some of its repossessed and off-lease vehicles. For the nine months ended September 30, 1996, PCSF generated revenues of $971,000. As the volume of Contracts purchased increases, the Company plans to open additional PCSF sites with JDBR Franchises in 36 Florida and other markets. Currently, the Company expects to open a PCSF site with a JDBR Franchise in Orlando, Florida. Recruiting and Retaining Experienced Management. Members of the Company's management team have an average of over 20 years of experience in automobile finance, consumer finance or banking. Management believes that hiring experienced management personnel is critical to the formulation and implementation of its strategies, and the maintenance of its growth and profitability. The Company intends to continue to provide incentive compensation arrangements, including stock option plans, to retain members of the management team. BUSINESS The Company's lines of business include the purchase and servicing of Loan and Lease Contracts on used and new automobiles relating to consumers with non-prime credit from Dealers and other origination sources, and the sale of insurance and related products to its customers directly and through Dealers. Loan Contracts The following table provides certain material information relative to the Loan Contracts acquired by the Company during each of the last nine quarters.
FOR THE QUARTERS ENDED ----------------------------------------------------------------------------------------------- SEP. JUN. MAR. DEC. SEP. JUN. MAR. DEC. SEP. 30, 30, 31, 31, 30, 30, 31, 31, 30, LOANS:(1) 1996 1996 1996 1995 1995 1995 1995 1994 1994 ------- ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Contracts purchased...... $69,556 $50,971 $48,326 $46,593 $31,624 $21,364 $18,785 $12,088 $ 395 Weighted average Contract amount........ $ 12.3 $ 12.3 $ 12.1 $ 12.5 $ 12.0 $ 11.2 $ 12.2 $ 10.5 $ 7.3 Weighted average initial term (months).......... 54.4 53.6 56.1 53.0 51.1 48.0 42.8 43.0 44.5 Weighted average APR.................... 19.50% 19.33% 19.60% 19.35% 19.90% 20.56% 19.05% 20.73% 28.51% Weighted average discount............... 8.24% 4.21% 4.73% 5.53% 5.93% 5.26% 4.82% 2.04% 4.30% Percentage of Contracts secured by new vehicles........ 19.61% 29.72% 38.39% 34.62% 31.05% 21.30% 18.43% 8.17% 7.46% Percentage of Contracts secured by used vehicles....... 80.39% 70.28% 61.61% 65.38% 68.95% 78.70% 81.57% 91.83% 92.6%
- ------------------ (1) Excludes Loan Contracts purchased under the Company's Recourse Program. The Company purchases Loan Contracts, which are secured by used and new automobiles, from diverse sources through its Origination Programs. Loan Contracts relate to borrowers which, according to the Company's underwriting guidelines, fall within the 'C' credit segment of the automobile finance market, except in the case of its Recourse Program, which is designed for 'D' credit borrowers. Contracts generally have terms of 36 to 60 months and carry interest rates ranging from 16% to 30% per year. A majority of the loans are based on the Rule of 78's method; however, a small portion are simple interest loans and actuarial loans. The Company purchases Loan Contracts at discounts to the face amount of the Loans. The discounts are nonrefundable and vary depending upon the credit category of the borrower, as determined by the Company's underwriting guidelines, and any special arrangements between the Company and the origination source. In addition to the discount, the Company generally charges an administration fee. The purchase price of the Loan Contracts is, therefore, reduced from its face amount by both the discount and the administration fee. The purchase price of the Loan Contracts 37 generally ranges from 110% to 120% of the collateral value of the underlying vehicle, except in the case of the Recourse Program where it ranges from 60% to 75% of the principal amount of the Loan Contract, which approximates the value of the vehicle. The Company purchases Loan Contracts in 23 states with a concentration in Florida (50.0% of the Company's Loan portfolio as of September 30, 1996). The average size of the Loan Contract acquired for the nine months ended September 30, 1996 was $12,300. The Company finances Loan Contracts on both a floating and fixed rate basis through its credit facilities. The Company has sold, for the last four quarters, a substantial majority of its Loan Contracts through securitization transactions and services all Loan Contracts including those sold through securitization transactions. In the event of a default by a borrower, the Company repossesses the vehicle and remarkets the vehicle through one of the following four channels: (i) wholesale auctions; (ii) on a wholesale basis through the Company's subsidiary, PCSF; (iii) on a retail basis through the Company's subsidiary, PCSF; or (iv) on a retail basis through the JDBR Franchise, depending on, among other factors, the age and condition of the vehicle. To the extent that the net proceeds from remarketing a vehicle exceed the Company's book value of the Loan Contract, the Company recognizes a gain, and to the extent such net proceeds are less, the Company recognizes a loss. As a result, employing an efficient remarketing channel for repossessed vehicles is an important aspect of the Company's operations. Lease Contracts The following table provides certain material information relative to the Lease Contracts acquired by the Company during each of the last nine quarters.
FOR THE QUARTERS ENDED ----------------------------------------------------------------------------------------- SEP. JUN. MAR. DEC. SEP. JUN. MAR. DEC. SEP. 30, 30, 31, 31, 30, 30, 31, 31, 30, LEASES: 1996 1996 1996 1995 1995 1995 1995 1994 1994 ------- ------ ------- ------ ------ ------ ------- ------ ------ (DOLLARS IN THOUSANDS) Contracts purchased...... $6,776 $3,609 $3,686 $3,989 $4,085 $5,241 $6,733 $3,446 $1,237 Weighted average Contract amount........ $ 15.9 $15.9 $ 15.8 $16.8 $16.5 $17.2 $ 20.2 $17.9 $16.9 Weighted average initial term (months).......... 45.8 44.9 45.3 43.1 45.2 42.8 39.0 45.4 45.7 Weighted average yield... 17.93 % 18.03 % 18.36 % 17.5 % 18.09 % 17.62 % 14.49 % 16.82 % 15.87 % Percentage of Contracts secured by new vehicles........ 40.47 % 43.61 % 41.63 % 54.43 % 64.92 % 67.11 % 64.67 % 64.58 % 76.71 % Percentage of Contracts secured by used vehicles....... 59.53 % 56.39 % 58.37 % 45.57 % 35.08 % 32.89 % 35.33 % 35.42 % 23.29 %
The Company purchases substantially all of its Lease Contracts from its Dealer Program and Affinity Program. Generally, Lease Contracts involve customers with better credit than customers relating to Loan Contracts. Lease Contracts relate to many makes and models of both used and new vehicles. As of September 30, 1996, the Company's lease portfolio consisted of 55.5% new automobiles and 44.5% used automobiles. The Leases are closed-end leases and generally have terms of 24, 36 and 48 months, with 48 months as the most common term. A vast majority of the Lease Contracts are amortized according to the Rule of 78's method. The Lease Contracts also require that the lessee pay all fees and expenses relating to the use and maintenance of the vehicle. The Company purchases Lease Contracts from its origination sources at the implied principal amount of the Lease less an administration fee. The administration fee is nonrefundable and varies depending upon the credit category of the borrower, as determined by the Company's underwriting guidelines, and any special arrangements between the Company and the origination source. The purchase price of the Lease Contract ranges from 110% to 120% of the collateral value of the underlying vehicle. 38 The Company purchases Lease Contracts in 23 states with a concentration in Florida (78.3% of the Company's Lease portfolio as of September 30, 1996). The average size of Lease Contracts is $18,000 for new automobiles and $15,100 for used automobiles. The Company uses its GECC Facility to finance all of its Lease Contracts. Under this facility, GECC provides fixed-rate financing for the full term of the Lease Contract and generally advances 100% of the Company's investment in the Lease Contract. The Company currently holds all Lease Contracts on its books and services them for their full term. The Company purchases both direct finance leases and operating leases, with the vast majority of the Lease Contracts being direct finance leases. Generally, Lease Contracts having a term in excess of 48 months are classified as direct finance leases, and Lease Contracts having a term of less than 48 months are classified as operating leases. The Company's sources of revenues from Lease Contracts include: (i) an administration fee; (ii) interest income in the case of direct finance leases and rental revenue in the case of operating leases; and (iii) proceeds from the sale of the vehicle in excess of the Residual Value at the end of the lease term. In establishing the amount of the lease payments, the Company makes an estimate of the Residual Value of the vehicle at the end of the lease term. The Company's ability to realize proceeds approximating the Residual Value will be substantially determined by the accuracy of the Residual Value previously estimated and the Company's ability to effectively remarket its off-lease vehicles. The Company uses Automobile Leasing Guide guidelines in estimating the Residual Value, which are based on, among other things, the lease term, the vehicle's make and model, the vehicle's remarketing and mechanical history, new automobile price increases for the model and how the vehicle is equipped. Furthermore, the Company periodically reviews and updates the Residual Values as necessary throughout the lease term. The Company remarkets the vehicle at the end of the lease term by attempting to sell the vehicle to the lessee. In the event that the lessee does not purchase the vehicle, the Company remarkets the vehicle through the same channels it uses for the disposition of its repossessed vehicles under its loan program, which include wholesale auctions and the Company's subsidiary PCSF and its JDBR Franchise. To the extent the proceeds from remarketing a vehicle exceed the Residual Value of the vehicle, the Company recognizes a gain, and to the extent such proceeds are less than the Residual Value, the Company recognizes a loss. As a result, the estimation of the Residual Value at lease inception is an important aspect of the Company's operations. As of September 30, 1996, the Company had a Residual Value exposure of approximately $16.8 million, representing an average of 34% of the original aggregate gross Lease Contracts receivable. Management believes that it adequately reserves against exposure to risks associated with realizing the underlying Residual Value. See 'Risk Factors.' In the event of an early termination of the Lease or default by the lessee, the lessee is generally obligated to pay the remaining payments due under the Lease, plus the Residual Value, less any unearned lease income calculated using the Rule of 78's method, and less the proceeds received from the disposition of the vehicle. Sales and Marketing The Company focuses its sales and marketing efforts on developing strong relationships with Dealers and expanding and diversifying its other origination sources. Since Dealers represent the Company's primary source of Contracts through the Company's Dealer Program and through SFI, the Company's sales and marketing team focuses on increasing the number of Contracts purchased from existing Dealers and developing relationships with new Dealers. Management believes that it increases its Contract volume from Dealers by providing both Loan and Lease financing alternatives and insurance and related products. The Company develops strong relationships with its Dealers by providing a high level of service specifically tailored to meet their needs. The Company offers its Dealers fast turnaround of Contract approval and funding, consistent and detailed credit underwriting and pricing guidelines and feedback on the performance of their portfolios. The Company's offices are open six days a week and sales and marketing personnel attend Dealer-sponsored promotional sales 39 events to provide 'on-site' financing approval. In an effort to attract additional non-prime borrowers, the Company provides advertising subsidies to key Dealers. The Company's regional sales representatives and senior management maintain an ongoing dialogue with Dealers to enhance relationships. With respect to its other origination sources, the Company's special program manager, who has 30 years of experience in the automobile finance industry, focuses his sales and marketing efforts on developing and expanding the Captive Program, Affinity Program, Correspondent Program, Recourse Program and Wholesale Program. The Company solicits business from Dealers through its sales and marketing team, which principally consists of regional managers, area sales managers and dealer service representatives. As of September 30, 1996, the sales and marketing team had 70 members. Each regional sales manager manages approximately 6 area sales managers. The regional sales managers, in conjunction with area sales managers, are responsible for maintaining and expanding existing Dealer relationships and developing new Dealer relationships, including educating Dealer personnel in the area of non-prime automobile finance. The area sales managers are each assigned to a territory of approximately 75 to 100 franchised new car Dealers. The area sales managers are responsible for making initial contact with Dealers in their territory with the goal of establishing a minimum origination volume of 45 Contracts per month from a group of 5 to 8 Dealers. Once this volume goal is achieved, the primary responsibility for maintaining day-to-day contact with the newly-established Dealer group shifts from the area sales manager to a dealer service representative who is responsible for visiting the Dealers, coordinating the submission of the funding packages and assisting the Dealers in Contract closing. The sales and marketing team receives a daily list indicating the credit application approvals for the prior day designated by the submitting Dealer. In order to increase the likelihood that an approved application results in a completed Contract, a member of the team responsible for servicing the submitting Dealer visits that Dealer to request submission of the Contract to the Company and to assist in Contract closing. Members of the Company's sales and marketing staff are trained by the Company's training manager, who is also responsible for training the finance personnel of Dealers. The training manager periodically conducts formal two-day training sessions for Dealer personnel focusing on the Company's underwriting policies, procedures and documentation. The sales and marketing team of the Company's wholly-owned subsidiary, SFI, operates substantially as described above. As of September 30, 1996, the sales and marketing staff of SFI consisted of 61 persons, including regional managers, area sales managers and dealer service representatives. The sales and marketing team of SFI coordinates with the Dealer Program its activities in maintaining and expanding its network of Dealers in existing and new markets in order to maximize Dealer relationships and the volume of Contracts generated. Origination Sources The Company purchases Contracts directly from Dealers through its Dealer Program and through select third party entities that participate in its other Origination Programs. Although the Dealer Program and the Captive Program are the primary sources of Contracts, the other programs offer the Company the opportunity to purchase Contracts with a minimal increase in sales and marketing costs. Generally, under each program, the entity from which the Company purchases Contracts makes certain representations and warranties to the Company with respect to the Contracts purchased. Under the terms of the agreement between the Company and a Dealer in the Dealer Program, the Dealer agrees to repurchase any Contracts from the Company if certain conditions are not met. Under this program, the Dealer also indemnifies the Company for certain breaches of the dealer agreement. Dealer Program. In its Dealer Program, the Company enters into a non-exclusive agreement with a Dealer, under which the Company purchases Loan and Lease Contracts originated by the Dealer in accordance with the Company's underwriting guidelines and procedures. Under this program, a Dealer submits loan and lease applications that it believes would satisfy the Company's underwriting 40 guidelines. The Company applies its underwriting guidelines and procedures to determine whether to approve or decline the application. If the Company approves the application, it will seek to purchase the Contract. The Company's sales and marketing team establishes and maintains direct relationships with Dealers, and when necessary, a member of the team works with the Dealer throughout every stage of the application approval and the Contract purchase process. As of September 30, 1996, the Company purchased Contracts through its Dealer Program in 23 states with concentrations in Florida (54.0%), Georgia (14.4%), Louisiana (7.2%) and North Carolina (6.8%). For the nine-month period ended September 30, 1996, the Dealer Program generated a volume of 7,564 Contracts, which represented 29.5% of the Contracts purchased during the period. Captive Program. In its Captive Program, the Company enters into an exclusive agreement with an entity (the 'Captive') whereby the Captive originates, through its Dealer relationships, Loan and Lease Contracts in accordance with the Company's underwriting guidelines; and the Company has the right of first refusal to purchase such Contracts. Under this program, the Captive submits the Contracts and the Company verifies that each Contract meets its underwriting guidelines prior to the purchase of such Contracts. The Company currently has two Captive relationships, one with SFI and the other with First Financial Acceptance, Inc. ('FFA'), a company which originates Contracts exclusively from a network of Dealers who have ownership interests in FFA. SFI, a Florida-based finance business founded in 1987, is engaged in originating and selling non-prime automobile Loan Contracts. From September 1994 to August 1995, the Company purchased Loan Contracts originated by SFI with an aggregate volume of $41.7 million. In August 1995, the Company entered into an exclusive agreement with SFI under its Captive Program whereby SFI originated, through its Dealer relationships, Loan Contracts in accordance with the Company's underwriting guidelines and the Company had the right of first refusal to purchase such Contracts. In June 1996, the Company acquired the business of SFI by exercising its purchase option. SFI became a wholly-owned subsidiary of the Company without any material change in the operations of SFI. The Company entered into a management agreement with the former principals of SFI and retained substantially all of the operating personnel of SFI. SFI has continued its operations consistent with historic practice and the Company has continued to account for the origination of Loan Contracts by SFI as part of the Captive Program. SFI has continued to maintain its relationships with Dealers in coordination with the Company's own Dealer relationships. SFI has originated under the Captive Program increasing volume of Loan Contracts. During the period from October 1, 1994 to September 30, 1996, the Company purchased an aggregate volume of $165.9 million of Loan Contracts through SFI, representing approximately 47.0% of the total volume of Loan Contracts purchased by the Company during this period through all of its Origination Programs. For the nine-month period ended September 30, 1996, the Company's Captive Program generated a volume of 11,160 Contracts, which represents 45.1% of the Contracts purchased during the period. Affinity Program. In its Affinity Program, the Company enters into an agreement with an independent entity (the 'Affinity'), which typically lends to consumers with 'A' and 'B' credit. Under this program, the Affinity originates, through its Dealer relationships, Loan and Lease Contracts that do not meet its own underwriting guidelines but may satisfy the Company's underwriting guidelines. The Company has the right of first refusal to purchase such Contracts. The Affinity submits such Loan and Lease applications and the Company applies its underwriting guidelines and procedures to determine whether to approve or decline the application. Upon approval, the Company purchases the Contract. The purpose of this program is primarily to develop strategic relationships with third party financing sources that do not otherwise finance consumers with non-prime credit. The Company currently has three Affinity relationships. One of the relationships is with GECAL, an affiliate of GECC. In July 1995, the Company entered into a two-year agreement, automatically renewable for successive one-year periods thereafter, under which the Company is given the 41 opportunity to evaluate all applications that do not meet GECAL's underwriting criteria. The Company, utilizing its underwriting guidelines, then approves or declines the submissions. While not an exclusive arrangement, management believes that the Company continues to be the only non-prime company operating this program with GECAL in the Southeast. The program currently includes all of GECAL's dealers in Florida and the Company is in the process of initiating the program in North Carolina, South Carolina and Tennessee, with the long-term plan of establishing the program in the entire Southeast region during fiscal 1997. The Company anticipates that the relationship with GECAL will give it access to GECAL's network of 1,500 dealerships in 11 Southeastern states with minimal increases in sales and marketing costs. For the nine-month period ended September 30, 1996, theAffinity Program generated a volume of 903 Contracts, which represented 3.5% of the Contracts purchased during the period. Correspondent Program. In its Correspondent Program, the Company enters into an agreement with an independent entity (the 'Correspondent') whereby the Correspondent originates, through its Dealer relationships, Loan Contracts that the Correspondent believes would satisfy the Company's underwriting guidelines; but the Company does not have the right of first refusal to purchase such Contracts. Under this program, the Correspondent submits loan and lease applications which it believes would satisfy the Company's underwriting guidelines. The Company applies its underwriting guidelines and procedures to determine whether to approve or decline the application. Upon approval, the Company purchases the Contract. The Company currently has four Correspondent relationships. During the nine-month period ended September 30, 1996, the Correspondent Program generated a volume of 564 Contracts, which represented 2.2% of the Contracts purchased during the period. Recourse Program. In its Recourse Program, the Company enters into an arrangement with an independent entity (the 'Originating Entity') that originates, through its Dealer relationships, Loan Contracts that meet pre-established credit criteria; and the Company purchases such Contracts with full recourse to the Originating Entity. The Company accounts for the arrangement as a financing to the Originating Entity. Under this program, the Originating Entity submits the Contracts and the Company verifies that each Contract meets the pre-established credit criteria prior to the purchase of such Contract. The Company purchases the Contracts typically at 60% to 70% of the principal amount of the Contracts. The pre-established credit criteria generally relate to 'D' credit borrowers. The Company currently has two Recourse relationships, which include a finance company and a large used-car dealer. Management believes that the Recourse Program offers the Company the opportunity to purchase Contracts outside its 'C' credit target market and, at the same time, to mitigate the credit risk through a large discount and full recourse. The advance rate is determined based upon, among other factors, the credit of the Originating Entity and the value of the underlying collateral. For the nine-month period ended September 30, 1996, the Recourse Program generated a volume of 3,928 Contracts, which represented 15.2% of the Contracts purchased during the period. Wholesale Program. The Company engages in opportunistic purchases of portfolios of Loan Contracts that meet the Company's underwriting guidelines and Contract documentation requirements. The Company purchases such portfolios at a discount and subject to verification that: (i) a sample of the Contracts, typically 10% to 15% of the portfolio, complies with the Company's underwriting guidelines; and (ii) each Loan Contract in the portfolio satisfies the documentation requirements of the Company. For the nine-month period ended September 30, 1996, the Company purchased one $15 million portfolio of Contracts as part of its Wholesale Program. Underwriting The Company evaluates and purchases Loan and Lease Contracts in accordance with its underwriting guidelines and procedures. The underwriting guidelines focus on balancing the credit risk of the borrower or lessee with the adequacy of the vehicle as collateral, as well as the purchase price of 42 the Contract on a case by case basis. The underwriting procedure focuses upon ensuring the compliance of the Contract with the underwriting guidelines, the completeness of the documentation required for the Contract and the timely response of the Company's decision to the entity submitting the Contract (the 'Originator'). Underwriting Guidelines. The Company's basic criteria for assessing credit risk takes into account principally the following factors: (i) Stability: the applicant's history with regard to his or her residency, occupation and employment; (ii) Credit History: the applicant's history with regard to timely payments on his or her past and present obligations, defaults, bankruptcies and repossessions; (iii) Affordability: a monthly debt service-to-gross income ratio test not to exceed 50%, and monthly payment not to exceed 20% of the monthly gross income; (iv) Risk Exposure: the ratio of the principal amount of the Contract net of the purchase discount and the administration fee to the market value of the vehicle; and (v) Downpayment: the downpayment on the vehicle, which is generally a minimum of 10% of the vehicle's sale price. The Company's underwriting guidelines also incorporate certain criteria for the vehicle underlying the Loan or Lease Contract, the maximum term of the Loan or Lease Contract and the level of discount and administration fee required for the purchase of such Contract. Management believes that gradations exist with respect to the credit profiles of non-prime consumers in the automobile finance market according to the above generalized factors. The Company's underwriting guidelines provide for four tiers of credit profiles: Tier I, Tier II, Tier III and Tier IV (the 'Multi-tier Underwriting Guidelines'). Management believes that its Tier I and Tier II credits correspond to the 'B' credit segment and Tier III and Tier IV correspond to the 'C' credit segment of the automobile finance market. Consumers who do not meet the profile of a Tier IV credit are classified by the Company as consumers with 'D' credit. While such gradations are by nature inexact, the Company primarily focuses on the 'C' credit segment of the automobile finance market. Furthermore, the Company believes that its Multi-tier Underwriting Guidelines provide a greater degree of specificity to the Originator than its competition in assessing the credit risk of, and developing the financing terms for, the applicant, enhancing the rapid execution of the transaction for the Originator and enabling the Originator to provide improved service to its customers. As of September 30, 1996, the Company's servicing portfolio of Loan Contracts (excluding the Recourse Program) consisted of approximately 2% Tier I and Tier II combined, 18% Tier III and 80% Tier IV, and Lease Contracts consisted of approximately 6% Tier I and Tier II combined, 48% Tier III and 46% Tier IV. Underwriting Procedure. The Company has an underwriting department with an underwriting staff, which is organized into teams based upon geographic regions. Each team consists of a processor, credit analyst, funder and senior funder. Management believes that this regional team approach promotes efficient communication and expedites the underwriting process, giving the Company a competitive edge while maintaining consistent underwriting performance. As geographic expansion requires, the Company intends to establish full service regional centers, which will include an underwriting department. The underwriting procedure consists of three steps: Step I -- Application Processing, Step II -- Credit Review and Step III -- Contract Funding, as described below. STEP I -- Application Processing: Upon receipt of an application from an Originator, the processor enters the information into the Company's computer system, which automatically provides for the tracking and processing of the application. The application sets forth, among other things, the applicant's income, liabilities, credit and employment history, proposed downpayment and a description of the vehicle. Simultaneously with the processing of the application, the processor obtains credit reports from Equifax and TRW through its computer system, and immediately proceeds to: (i) verify the employment of the applicant and his or her spouse/co-signer, if applicable, with their respective employers; (ii) verify credit references, if applicable; (iii) verify current residence and duration of current and past residence; (iv) verify and evaluate the value of the vehicle as collateral through the use of the 'Black Book' or NADA Book, as appropriate; and (v) review a budget screen automatically produced by the computer system, which estimates funds the applicant will have 43 available for paying his or her monthly payment. Once this process is completed, the application is passed on-line to the team's credit analyst. STEP II -- Credit Review: The credit analyst reviews the application and evaluates the applicant's credit risk with respect to the Company's Multi-tier Underwriting Guidelines. Regardless of the decision on the application, the credit analyst will promptly respond to the Originator, typically within two to four hours of receipt of the application, indicating that the application is approved with or without stipulations, or declined. If the application is declined, the credit analyst will give a detailed explanation as to what circumstances dictated the rejection of the application and what, if any, changes could be made in order to make a subsequent application more likely to be approved. Typical items that the Company might require to be amended include proving additional income, requiring a co-applicant, amending the length of the proposed term, requiring additional downpayment, substantiating credit information and requiring proof of the resolution of certain credit deficiencies as noted on the customer's credit history. Approximately 44% of applications are approved or conditionally approved, of which approximately 25% are ultimately funded. Management believes that this direct contact between the credit analyst and the Originator and the development of a relationship over time results in a better understanding by the Originator of the underwriting guidelines and leads to more accurate pre-screening by the Originator of applicants and higher approval rates of Contracts. STEP III -- Contract Funding: If the credit analyst approves the application, the Originator provides a funding package to the Company, which includes legal documentation and the credit information. Upon receipt by the Company, the funding package is referred to the team's funder. At that time, all information concerning the funding package, including both legal documentation and credit are reverified by the funder. Any deficiencies are noted and the Originator is advised. The funder works directly with the Originator to complete the funding package. While the funding package is being processed, the team's interviewer conducts a customer telephone interview with the applicant to verify the information provided in the application and the funding package. The telephone interview with the applicant typically concentrates on verifying the downpayment, the monthly payment amount, the payment due date, the Dealer add-ons, and the make, model and mileage of the vehicle. If there are any discrepancies, the file is referred back to the credit analyst who then contacts the Originator and/or the applicant to see if the discrepancy is capable of being resolved. If the problem is not capable of being resolved, the application is terminated. Prior to final approval for funding the Contract, the computer system automatically verifies the Contract information, such as the APR, verifies the proceeds to be distributed to the Originator and alerts the funder to any discrepancies between the calculations automatically performed by the computer system and the information included in the funding package. Prior to issuance of a check to the Originator, the team's senior funder reviews the entire funding package including any discrepancies between the computer analysis and the funding package, verifies the completeness of the legal and credit documentation, confirms that the applicant has adequate insurance as verified by NIS (see 'NAL Insurance Services, Inc.') and that the telephone interview was successfully completed. After approval by the senior funder, the Contract is referred to the accounting department and the funds are delivered to the Originator by check or wire transfer. The Company typically funds within 24 hours of receipt of a properly completed funding package. Underwriting for Origination Programs. The Company applies the Mutli-tier Underwriting Guidelines to each of the Origination Programs, except in the case of the Recourse Program. The underwriting and pricing guidelines for the Recourse Program are pre-agreed upon between the Originator of the Contracts under this program and the Company. The terms of the Contract are based upon, among other factors, the credit history of the borrower or lessee and the value of the underlying collateral. The Company also applies its underwriting procedure to each of the Origination Programs as appropriate, except in the case of the Wholesale Program. The underwriting procedure for the Wholesale Program involves evaluating the overall quality of the portfolio for compliance with the Company's underwriting guidelines based upon a sample review of generally 10% to 15% of the Contracts in the portfolio prior to purchase. In addition, the Company conducts a documentation 44 review of each Contract in the portfolio for accuracy and completeness prior to purchasing the portfolio. SFI, a Captive Program participant, applies the Company's underwriting guidelines and procedures from application to the preparation of the funding package through its independent staff of 22 processors, credit analysts, funders and senior funders. Prior to purchase, the Company verifies that the Contract meets its underwriting guidelines and conducts the customer telephone interview. Quality Control The Company's quality control group conducts a post-funding credit review of its Contracts on a monthly basis. The staff reviews all of the Contract files for completeness of documentation. The staff also conducts a credit review of approximately 15% to 20% of the Contracts purchased each month to determine whether the Contracts comply with the Company's underwriting guidelines and procedures and records the nature and frequency of all exceptions that were approved. In the event that a Contract contains unapproved exceptions to the Company's underwriting guidelines, it is referred to management for resolution. The quality control group also performs a monthly trend analysis to determine whether any adjustments should be made to the Company's underwriting guidelines based upon recurring approved exceptions and the performance of Contracts with these exceptions. Asset Servicing and Collections The Company has a servicing and collections operation that utilizes experienced staff and computer technology and software tailored to the Company's specific needs. Servicing and collections functions are organized into departments, which consist principally of Customer Service, Collections, Repossession, Asset Management and Disposition, and Asset Recovery. To minimize losses and delinquencies, the Company: (i) employs pro-active collection policies and procedures based upon each collector managing the contract from origination to settlement; (ii) manages the accounts based upon geographic regions; (iii) employs experienced personnel with proven expertise whose performance is continuously evaluated and rewarded based upon performance of the Contracts serviced; and (iv) utilizes servicing and collection specialists to provide technical expertise as required to address specific circumstances. Customer Service. The Company's customer service department is responsible for resolving customer problems, quoting customer pay-off amounts, arranging substitutions of collateral, re-leasing vehicles at lease-end and processing customer payments. The Company also uses its customer service department to enhance the efficiency of its account management by routing all incoming calls through the collection department. Management believes that this procedure promotes efficient account management through continuous updating of information prior to the provision of other services to the customer. The Company facilitates collections from customers by using Western Union 'Quick Collect,' which allows a customer to make payments at numerous locations. The Company also accepts walk-in payments. However, any delinquent customer making a walk-in payment must be interviewed by a collector. Collections. The collectors are organized into five regions consisting of South Florida, North Florida, East Coast states, Central states and West Coast states. Within each region, the collectors are organized into teams of four, which include three collectors and a team leader. Management believes that this regional team approach enables the Company to identify and efficiently tailor its servicing and collection activities to each region, and permits accounts to be monitored more closely by management, thereby enhancing collector performance and minimizing delinquencies and losses. The collections staff has 54 persons, including collectors and collection specialists, and management. As the volume of Contracts increases, the Company continues to expand to maintain its collection and servicing staff at a level that provides for approximately one collector for every 500 Contracts serviced. As geographic expansion requires, the Company intends to establish full service regional centers, which will include asset servicing and collections departments. The Company is in the process of opening regional centers in Orlando, Florida and Atlanta, Georgia. See 'Facilities.' 45 Collection Procedures. The collections staff uses its management information systems to process and track the accounts in order to ensure that data is immediately available for continuous evaluation and collection of accounts. See 'Management Information Systems.' Within 24 hours of a delinquency, a collector will telephone the customer to resolve the delinquency. If the collector fails to reach the customer, the collector attempts to contact the customer by calling the customer's employers and credit references. If the delinquency is not resolved, the collector will send demand letters as appropriate. The Company's policy permits Contracts to be extended or revised payment schedules to be made no more than once a year on a case-by-case basis, as determined by its collection supervisors. In the event that the delinquency cannot be resolved, the collector typically recommends repossession within 45 days. Authorization for repossession typically requires the approval of the collector, the team leader and the team supervisor. Management believes that this team approach prevents premature repossession and prevents the collector from improving the delinquency experience of his or her accounts through repossession by terminating his or her responsibility for the account. Accounts that are approved for repossession are turned over to outside agencies for repossession. Repossession is typically accomplished within 72 hours of repossession approval and the vehicle is assigned to the Company's asset management staff. See 'Asset Management and Disposition.' Collector Training and Incentives. The Company's servicing and collection program emphasizes continuous evaluation and training of its collection staff; and a compensation system for collectors, supervisors and managers that rewards efficient management of the accounts through salary and bonuses. Management believes that this incentive compensation system motivates employees to effectively manage accounts by increasing collections and minimizing delinquencies and losses. Collectors, supervisors and collection managers are continuously trained and evaluated. Team leaders audit approximately 15 to 20 accounts of each collector on his or her team per month. Supervisors are required to review an additional 20 accounts of each collector resulting in each collector having approximately 40 accounts per month audited by management. Each account is audited for compliance with the Company's servicing and collection policies and performance in order to ensure that the accounts are in compliance with the Company's goals and objectives relating to delinquencies, repossessions and losses. All team members are required to attend classes held at the Company and outside seminars provided by credit bureaus and collection agencies. Each collector also participates in the Company's cross-training program which requires rotating through the Company's other departments to continually educate the collector on the Company's operations. In addition, the Company utilizes the experience of its collectors through a policy of promoting from within the Company whereby collectors have the opportunity to be promoted from the Collections Department to other areas of the Company's operations. The performance of each collector's accounts is available on a daily basis. The performance and compensation of the collector is evaluated on a monthly basis. The evaluations and the bonus program are based upon a rating system that encompasses individual delinquency rates, team delinquency rates, the delinquency mix, the repossession rate and the volume of calls handled. Management believes that the bonus program provides the collector with an incentive to manage his or her accounts more efficiently. Collection Specialists. The Company supports its collection teams by providing collection specialists in the areas of bankruptcy, insurance claims, skip-tracing and repossession. In the event that an account involves bankruptcy issues, insurance issues, skip-tracing or repossession, the account remains the responsibility of the collector, and a collection specialist in the relevant area works with the collector providing technical expertise in order to use efficiently the collectors' time, maximize collections and minimize delinquency and loss. The collector does not relinquish care, control or custody of the account until the account is terminated by payment in full, repossession or is charged-off and assigned to the asset recovery department. Management believes that the origination to settlement servicing approach provides continuity and enhances accountability of the collector for the performance of the accounts serviced, rather than a 'roll-up' approach that routes the account to different collectors as the account ages. 46 Repossession. The Company's repossession department is responsible for making a final attempt to collect the delinquent account, skip tracing and assigning the account to an approved repossession agent. The department is also responsible for following up on delivery of the repossessed vehicle, coordinating all customer redemptions of repossessed vehicles and maintaining files on repossession agents, including proof of licenses, bonding and insurance. Asset Management and Disposition. When a vehicle is repossessed and not redeemed by the customer in the prescribed time, or the vehicle is returned at the end of a lease, the vehicle is assigned to the asset management department for disposal. The vehicles are reviewed by management at the time of repossession or return and at that time written down to their net realizable value and a determination is made of the appropriate disposition channel. The vehicle is typically: (i) disposed of at wholesale auctions; (ii) remarketed on a wholesale basis through PCSF; (iii) remarketed on a retail basis through PCSF; or (iv) remarketed on a retail basis through the JDBR Franchise. See 'Related Businesses.' During 1996, the Company hired a staff of auction representatives to monitor the disposal of vehicles at the used car auctions. These representatives seek to maximize the amount realized on the vehicles through: (i) inspecting the vehicles for reimbursable insurance damage; (ii) setting auction price floors; and (iii) enforcing proper auction procedures. The Company's auction representatives have significantly improved sales prices on its vehicles. Asset Recovery. The asset recovery department uses collection specialists to collect on any loss the Company may incur on an account. Losses may occur in several ways, including: (i) proceeds received upon liquidation of the asset are less than the customer's balance on the account and liquidation costs; (ii) the amount of insurance pay-off or settlement is less than the customer's balance on the account, and (iii) delinquent accounts are charged-off upon 150-days delinquency. These balances are collected by various means, including: (i) lump-sum settlement with the customer; (ii) reduced payment plans; or (iii) referral to a collection agency or an attorney for action, including wage garnishment, judgment and asset searches. Any amount received after a contract has been charged off is recorded as a recovery. For the nine months ended September 30, 1996, the Company's recoveries resulted in an annualized net charge-off percentage of 6.46% in comparison to an annualized gross charge-off percentage of 9.00%. Management Information Systems The Company employs information systems, including computer software programs and a Voice Information Management System, which enable it to manage more effectively its business activities. The Company's software programs, which have been specifically modified for the Company, operate on a local area and wide area network. The Company's COIN system expedites elements of the contract purchase process, including entry and verification of credit application data, credit analysis, communication to Dealers of credit decisions, contract purchases, and contract-related cash disbursements. The Company's LeaseTek system facilitates elements of asset servicing and management, including monitoring account activities and maintaining customer contact, expediting collection and referring delinquent accounts for repossession. The Company's Voice Information Management System, through continuous routing of incoming calls, maximizes the efficiency of the Company's asset servicing and collections department. These systems also provide functions that increase productivity, such as computer faxing of credit decisions, automatic credit bureau retrieval, automatic retrieval of NADA and 'Black Book' values for financed vehicles, on-line inquiry for all Contract information to aid in collections, verification, processing, tracking and solicitation, as applicable, of insurance and related products. These systems provide for the prompt collection and retrieval of data concerning the composition of the receivables portfolio, the characteristics and performance status of the underlying receivables and other information necessary for management to increase Contract volume, maximize Contract performance, evaluate and manage personnel and minimize delinquency and losses. Management believes that it has adequate information systems in place to permit significant growth in the volume of Contracts processed without any near-term material additional investments. 47 To increase productivity through automation, the Company is currently evaluating enhancements to its systems. RELATED BUSINESSES The Company continues to develop its related businesses consisting of NIS, which offers insurance services and products, and PCSF, which principally remarkets repossessed and off-lease vehicles. Management believes that these businesses increase the efficiency of purchasing Loan and Lease Contracts and provide independent sources of revenue to the Company. NAL Insurance Services, Inc. The Company's wholly-owned subsidiary, NIS, is a full service insurance agency selling a variety of insurance and related products to the Dealers as well as to the Company's customers. The staff of NIS consists of 10 persons. The staff uses specialized computer software to verify insurance in connection with the Company's underwriting of Contracts, to track cancellation of existing insurance policies and to solicit insurance and related products. See 'Management Information Systems.' Management believes that these insurance and related products complement its core business, and enhance the Company's relationship with its Dealers by enabling the Dealers to better service their customers. Management believes that these products, which are as described below, enhance its ability to provide a 'one-stop shop' service to the Dealer and thereby increase the efficiency of the Company's purchase of Loan and Lease Contracts while establishing an additional revenue source. In 1995, NIS generated revenues of $548,000 and for the nine-month period ended September 30, 1996, NIS generated revenues of $1.1 million. GAP Plan. The Company offers its customers an opportunity to participate in the Company's guaranteed auto protection ('GAP') plan, a non-insurance product. In the event of an insurance loss, the GAP plan pays the Company the difference between the actual cash value protection afforded by the insurer and the customer balance due the Company. The Company's risk in these transactions is eliminated through reinsurance. The Company pays a flat premium per contract to unaffiliated major insurers to reinsure this risk. The Company also pays the Dealer a commission for each plan sold. Primary Auto Insurance. As part of the Company's underwriting procedures, NIS verifies the existence of insurance prior to funding of the Contracts and also assures that the customer maintains adequate primary auto insurance during the term of the Contract. The Company solicits sales of primary auto insurance policies through brochures distributed to Dealers, on-site training for Dealers and through Dealer personnel. However, the majority of the Company's sales of primary auto insurance policies result from the cancellation of a customer's existing insurance policy, which the Company tracks through its computer system. Collateral Protection Insurance. If a customer does not continue to carry primary auto insurance, the Company is authorized under the Loan or Lease Contract to provide Collateral Protection Insurance ('CPI') upon notice of cancellation of the existing insurance of the customer. CPI provides coverage for the actual cash value of the vehicle in the event of physical damages to the vehicle up to a total loss, which typically averages 84% of the loan balance. Payments are automatically included in the monthly car payment on the customer's contract for which the Company receives a 15% commission on each policy. Extended Warranty. NIS also offers an extended warranty policy to its customers directly or through Dealers. The extended warranty covers the customer for repairs on their used vehicle where the manufacturer's warranty has expired. Typically, an extended warranty covers the vehicle for an additional 12 months or 12,000 miles, or for 24 months or 24,000 miles. NIS receives a commission on all extended warranty policies sold. Company Insurance Services. NIS provides the Company with internal insurance services, such as workers compensation, employee dental and health insurance, contingent and excess liability 48 insurance coverage required in connection with the Company's leasing operation, key employee life insurance, and liability and casualty insurance. Management believes that by purchasing these insurance products through NIS, the Company meets its insurance needs and recoups commissions that would otherwise be paid in connection with such products. Performance Cars of South Florida, Inc. The Company conducts a vehicle remarketing operation through PCSF, a wholly-owned subsidiary, and its JDBR Franchise at a retail sales facility located in Palm Beach County, Florida. The staff of PCSF and the JDBR Franchise consists of 22 persons, including senior management with an average of over 40 years of experience in the retail automobile business. The Company commenced this remarketing operation principally as a means of providing a more cost-effective method of remarketing some of the Company's repossessed and off-lease vehicles. PCSF operates the JDBR Franchise, pursuant to which the Company licenses the J.D. Byrider name, trademarks and business system. This franchise provides national brand name recognition, national advertising, comprehensive operative systems, ongoing franchise support, as well as employee and management training in the JDBR system. Sales at the facility are conducted through either the JDBR Franchise or directly through PCSF based upon the model, condition, age and mileage of the vehicle. Some of the vehicles sold by the JDBR Franchise are financed through its affiliate, Car Now Acceptance Corporation. Typically, less than 10% of the vehicles sold by PCSF, independent of the JDBR Franchise, are financed through the Company. Management believes that remarketing vehicles through PCSF offers several advantages over wholesale auctions (which historically has been the Company's principal method of disposing of vehicles), including the following: (i) the vehicles receive an extended period of resale exposure, as the remarketing operation is open 7 days a week, as opposed to the limited period (typically 4 days) available at auctions; (ii) the vehicles are available for visible inspections for staff assessment rather than condition reports available from auctions; (iii) the vehicles may be resold at retail or wholesale instead of at wholesale through auctions; (iv) the staff has an opportunity to perform appearance and mechanical repairs at reduced prices; and (v) auction fees of approximately $300 per vehicle are not incurred. Management believes that PCSF provides a cost-effective alternative to wholesale disposition of vehicles at auction. The Company currently disposes of an average of 32% of its repossessed and off-lease vehicles through PCSF, including the JDBR Franchise. In addition to increasing the efficiency of the Company's Asset Management and Disposition Department, PCSF, and in particular the JDBR Franchise, has been an additional source of revenue to the Company. For the period commencing January 1996 and ending September 30, 1996, PCSF generated revenues of $971,000. As the Company's Contract volume increases, it plans to open additional PCSF sites with JDBR Franchises based on any resulting geographic concentration. Currently, the Company's management anticipates opening a PCSF site with a JDBR Franchise in Orlando, Florida. However, there can be no assurances to that effect. Management believes that the used car market is an expanding market and offers the Company an opportunity to further the growth of its JDBR Franchise, increase the recovery on its vehicles and obtain additional sources of revenue for the Company. GOVERNMENT REGULATION The Company and the origination sources are subject to regulation and licensing under various federal, state and local statutes, regulations and ordinances. Most states in which the Company operates: (i) require the Company and/or the origination sources to obtain and maintain certain licenses and qualifications; (ii) limit the interest rate and other charges that may be imposed by, or prescribe certain other terms of, the Contracts that the Company purchases; (iii) regulate the sale and type of insurance products offered by the Company and the insurers for which it acts as agent; (iv) require the Company and/or the origination sources to provide specified disclosures; and (v) define the Company's rights to repossess and sell collateral. The Company's agreement with its origination sources provides that the origination source must indemnify the Company with respect to any loss or expense the 49 Company incurs as a result of violations by the origination source of any federal, state or local consumer credit and insurance laws, regulations or ordinances. The Company is subject to numerous federal laws, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the rules and regulations promulgated thereunder, and certain rules of the Federal Trade Commission. These laws require the Company to provide certain disclosures to applicants, prohibit misleading advertising and protect against discriminatory financing or unfair credit practices. The Truth in Lending Act and Regulation Z promulgated thereunder require disclosure of, among other things, the terms of repayment, the final maturity, the amount financed, the total finance charge and the annual percentage rate charged on each retail installment contract. The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants (including retail installment contract obligors) on the basis of race, color, sex, age or marital status. Under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. The rules of the Federal Trade Commission limit the types of property a creditor may accept as collateral to secure a consumer loan and its holder-in-due-course rules provide for the preservation of the consumer's claims and defenses when a consumer obligation is assigned to a subject holder. With respect to used vehicles specifically, the Federal Trade Commission's Rule on Sale of Used Vehicles requires that all sellers of used vehicles prepare, complete and display a Buyer's Guide that explains any applicable warranty coverage for such vehicles. The Credit Practices Rule of the Federal Trade Commission imposes additional restrictions on loan provisions and credit practices. Certain of the states in which the Company operates prohibit Dealers from charging a finance charge in excess of statutory maximum rates. Finance charges include interest and any cash sale differential. The Company's agreements and other communications with Dealers stress the importance of the Dealers' compliance with all applicable laws and specifically prohibit the Dealer from agreeing to a cash sale differential. The Company's contractual agreements with Dealers obligate Dealers to comply with all applicable laws, and provide that each Dealer must indemnify the Company for any violation of law relating to a contract originated by the Dealer. Every borrower (as part of the standard financing documentation) currently is required to sign a written acknowledgment that (a) the borrower is aware, and approves, of the Dealer's intended sale of the contract at a discount to the Company, and (b) the borrower was not quoted a lower price for a cash purchase. Further, it is the Company's policy to terminate its relationship with any Dealer where the Company becomes aware of such incidents perpetrated either with the knowledge or tacit assent of the Dealer, or by more than one salesperson at a particular Dealer. Dealers are advised of this policy during the initial contacts with the Company's representatives before the first contract is purchased. As of September 30, 1996, no Dealer has been so terminated. To the knowledge of the Company, no action has been brought or is currently threatened or contemplated alleging that Dealers regularly charge cash sale differentials. Nevertheless, if it were determined that a material number of the Contracts involved violations of applicable lending laws by the Dealers, the Company's financial position could be materially adversely affected and a widespread pattern of violation by Dealers could have a material adverse effect on the Company's future prospects. In the event of default by a borrower on a contract, the Company is entitled to exercise the remedies of a secured party under the Uniform Commercial Code ('UCC'). The UCC remedies of a secured party include the right to repossession by self-help means, unless such means would constitute a breach of peace. Unless the borrower voluntarily surrenders a vehicle, self-help repossession by an independent repossession specialist engaged by the Company is usually employed by the Company when a borrower defaults. None of the states in which the Company presently does business has any law that would require the Company, in the absence of a probable breach of peace, to obtain a court order before it attempts to repossess a vehicle. In most jurisdictions, the UCC and other state laws require the secured party to provide the obligor with reasonable notice of the date, time and place of any public sale or the date after which any 50 private sale of collateral may be held. Unless the obligor waives his rights after default, the obligor has the right to redeem the collateral prior to actual sale by paying the secured party the unpaid installments (less any required discount for prepayment) of the receivable plus reasonable expenses for repossessing, holding, and preparing the collateral for disposition and arranging for its sale, plus in some jurisdictions, reasonable attorney's fees, or in some states, by payment of delinquent installments. Repossessed vehicles are generally resold by the Company through wholesale auctions or remarketed through PCSF or its JDBR Franchise. Management believes that it is in compliance with all applicable laws and regulations. The Company maintains an internal compliance staff to review and inform management of changes in applicable law and to act as liaison between the Company and the various attorneys it has retained in each of the states in which it conducts business. EMPLOYEES The Company employs personnel experienced in all areas of loan origination, documentation, collection, administration and securitization. As of September 30, 1996, the Company had 445 full-time employees. FACILITIES The Company's executive offices and operations occupy approximately 37,183 square feet of leased office space in The Uptown Office Park at 500 Cypress Creek Road West, Suite 590, Fort Lauderdale, Florida, for which the Company pays an aggregate of $72,200 of base rent and common area maintenance per month pursuant to four leases, with annual increases of approximately 5%. The leases expire in 2002. The Company's lease agreements offer rights of first refusal on available space adjacent to the original offices, which the Company has used to accommodate the staff required for continued growth. There can be no assurance that any additional space will be available on terms favorable to the Company. Management believes that the Company's facilities are appropriate for its needs. The Company leases approximately 8,825 square feet of office space in Orlando, Florida, which the Company intends to use as a regional office. The Company pays $5,661 per month pursuant to a fifteen-year lease that expires in October 2011. The Company leases approximately 800 square feet of office space in Atlanta, Georgia, which the Company intends to use as a temporary regional office. The Company pays $4,779 per month for a six-month lease that expires in February 1997. The Company through PCSF leases a used car lot in Palm Beach County, Florida at a base rent of $11,600 per month. The lease expires on December 31, 2000. See 'Related Businesses -- Performance Cars of South Florida, Inc.' LEGAL PROCEEDINGS The Company is currently not a party to any material litigation, although it is involved from time to time in routine litigation incident to its business. 51 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The present members of the Board of Directors and executive officers, their respective ages and positions with the Company are set forth below:
NAME AGE POSITIONS WITH THE COMPANY - ---- --- -------------------------- Robert R. Bartolini...... 52 Chairman of the Board, President and Chief Executive Officer of NAL; Chairman and Chief Executive Officer of NAC John T. Schaeffer........ 50 Director and Executive Vice President of NAL; Director, President and Chief Operating Officer of NAC Robert J. Carlson........ 41 Vice President and Principal Accounting Officer of NAL and NAC Dennis R. LaVigne........ 52 Vice President and Treasurer of NAL and NAC Ngaire E. Cuneo(1)(2).... 45 Director James F. DeVoe(1)(2)..... 52 Director David R. Jones(1)(2)..... 47 Director
- ------------------ (1) Member of Audit Committee. (2) Member of Compensation Committee. The Company's Certificate of Incorporation provides for the division of the Board of Directors into three classes, with each class to be as nearly equal in number of directors as possible. At each annual meeting of the stockholders, the successors to the class of directors whose term expires at the time are elected to hold office for a term of three years, and until their respective successors are elected and qualified, so that the term of one class of directors expires at each such annual meeting. The terms of office expire as follows: Ms. Cuneo and Mr. DeVoe, 1997; Mr. Jones and Mr. Schaeffer, 1998; and Mr. Bartolini, 1999. See 'Description Of Securities -- Certain Provisions of the Company's Certificate of Incorporation and Bylaws.' Officers are elected by, and serve at the discretion of, the Board of Directors. There are no family relationships among the directors or executive officers. In August 1995, the Company established an Audit Committee, and in May 1996, the Company established a Compensation Committee. The following is a summary of the business experience of the Company's directors and executive officers during the past five years and their directorships, if any, with companies with a class of securities registered with the Securities and Exchange Commission: Robert R. Bartolini. Mr. Bartolini has been Chairman and Chief Executive Officer of the Company since its inception in 1991 and became President in conjunction with the Merger in November 1994. Prior to founding NAL Financial Group Inc., he was President and Chief Operating Officer of Financial Federal Savings & Loan Association ('FinFed' -- Miami, Florida), a $1.8 billion mutual savings and loan. From 1984 to 1987, Mr. Bartolini was Executive Vice President at CenTrust Savings Bank, an $11 billion institution based in Miami, Florida, with 60 branches. Prior to 1984, Mr. Bartolini was with First Pennsylvania Bank, NA (assets of $6 billion; 75 branches), where he served as Senior Vice President. Mr. Bartolini serves as a member of the Board of Directors of J.D. Byrider Systems, Inc., from which the Company operates the JDBR Franchise. John T. Schaeffer. Mr. Schaeffer has been President and Chief Operating Officer of NAC since its inception. He became a director of the Company in conjunction with the Merger and became Executive Vice President in May 1996. Prior to joining the Company, Mr. Schaeffer was President and 52 Chief Operating Officer of FinancialFed Services, Inc., the automobile lease origination and servicing unit of FinFed. From 1986 through 1989, Mr. Schaeffer was Executive Vice President and Chief Operating Officer of CenTrust Leasing Corporation, the leasing unit of CenTrust Savings Bank, where he was responsible for the overall activities of the leasing subsidiary. Prior to 1986, he was with First Pennsylvania Bank, N.A., where he served as Vice President for 16 years. Robert J. Carlson. Mr. Carlson has been Vice President and Principal Accounting Officer of the Company since April 1992. Prior to joining the Company in 1992, Mr. Carlson served 4 years as Senior Vice President -- Controller of FinFed. Prior to 1992, he served as Senior Vice President and Chief Financial Officer of Miami Savings Bank, a $175 million asset savings institution in Miami, Florida. Mr. Carlson also served 3 years at CenTrust as Vice President -- Accounting Operations and Reporting, and 6 years as an auditor at Deloitte Haskins & Sells (now Deloitte & Touche LLP). He is a certified public accountant and holds a Bachelor of Science Degree in business administration from the University of Florida. Dennis R. LaVigne. Mr. LaVigne has been Vice President and Treasurer of the Company since August 1995. Mr. LaVigne has substantial experience in the automobile finance industry, having served as Senior Vice-President of Union Acceptance Corporation (an automobile finance company) from December 1993 to September 1994; an independent consultant to the industry from October 1994 to August 1995; and having previously served as Senior Vice President Asset/ Liability Manager of Union Federal Savings Bank of Indianapolis from 1989 to December 1993. Prior to joining Union Federal, Mr. LaVigne held positions with Columbia Savings, a federal savings and loan association, from 1981 to 1989, including Senior Vice President, Chief Investment Officer, Treasurer and Asset/ Liability Committee Chairman. Mr. LaVigne holds a Ph.D. in economics from the University of Illinois. Ngaire E. Cuneo. Ms. Cuneo has been a director of the Company since April 1996. She has been Executive Vice President, Corporate Development of Conseco, Inc., a financial services holding company, since 1992. From 1986 to 1992, Ms. Cuneo was Senior Vice President and Corporate Officer of General Electric Capital Corporation. Ms. Cuneo is also a director of Conseco, Inc., Bankers Life Holding Corporation, American Life Holdings, Inc., American Life Holding Company and Duke Realty Investments, Inc. See 'Material Stockholder Arrangements.' James F. DeVoe. Mr. DeVoe has been a director of the Company since March 1996. He is the founder, Chief Executive Officer and Chairman of the Board of Directors of J.D. Byrider Systems, Inc. ('J.D. Byrider'), a used vehicle-operation franchisor since 1989 with 86 franchised and 4 company-owned locations in 28 states. The Company operates the JDBR Franchise as a franchisee of J.D. Byrider. Mr. DeVoe has been President and Chairman of the Board of DeVoe Chevrolet Cadillac, Inc., an automobile dealership, since 1975. Mr. DeVoe holds a Bachelor of Science Degree and a Masters Degree in business from Indiana University. David R. Jones. Mr. Jones has been a director of the Company since February 1996. He has been President and Chief Executive Officer of DR Jones Financial, Inc., a privately-held consulting firm since its formation in September 1995. Prior to forming DR Jones Financial, Inc., Mr. Jones was Senior Vice President -- Asset Backed Finance of Greenwich Capital Markets, Inc. from 1989 to 1995. Mr. Jones served as a Managing Director of The First Boston Corporation, an investment banking firm, from 1982 to 1989 and as Manager -- Product Development of General Electric Credit Corp., an asset-based lender and financial services company, from 1981 to 1982. Mr. Jones is a graduate of Harvard College and has a Masters Degree in business administration from The Amos Tuck School of Business Administration. DIRECTORS' FEES The employee-directors of the Company receive no fees or other compensation in connection with their services as directors. Mr. Jones and Mr. DeVoe were each granted Warrants to purchase 20,000 shares of the Company's Common Stock in connection with joining the Board of Directors. See 53 'Stock Option Plans.' The non-employee directors each receive $1,000 for each meeting of the Board and any committee meeting attended in person and $500 for each meeting attended telephonically. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------------------------- ANNUAL COMPENSATION AWARDS (1) ---------------- PAYOUTS ---------------------- SECURITIES ------------ SALARY BONUS UNDERLYING ALL OTHER NAME AND POSITION YEAR ($) ($) OPTIONS/SARS (#) COMPENSATION - ----------------- ---- -------- ---------- ---------------- ------------ Robert R. Bartolini 1995 $300,000 $ 0 50,000(4) $ 30,900(6) Chairman of the Board, President and 1994 $281,916 $ 298,985 75,000(2) $ 30,900(6) Chief Executive Officer of NAL; 1993 $250,000 $1,248,100 0 $ 30,900(6) Chairman and Chief Executive Officer of NAC John T. Schaeffer 1995 $160,000 $ 0 25,000(4) $ 10,300(6) Director and Executive Vice President 1994 $160,000 $ 0 40,000(3) $ 10,300(6) of NAL; President and Chief Operating 1993 $160,000 $ 161,302 0 $ 10,300(6) Officer of NAC Robert J. Carlson 1995 $ 80,000 $ 0 15,000(4) $ 0 Vice President and Principal 1994 $ 74,231 $ 86,015 15,000(3) $ 0 Accounting Officer of NAL and NAC 1993 $ 72,500 $ 18,124 0 $ 0 Dennis R. LaVigne 1995 $ 48,461 $ 0 25,000(5) $ 0 Vice President and Treasurer of NAL and NAC
- ------------------ (1) Based upon the fiscal years ended December 31, 1995, 1994, and 1993. (2) Represents stock options granted as of December 15, 1994 pursuant to the Company's Amended and Restated 1994 Stock Option Plan (the '1994 Plan'), of which 66,666 options vest pro-rata over four years commencing January 1, 1996 and 8,334 options vest pro-rata over three years commencing January 1, 1996. (3) Represents stock options granted as of December 15, 1994 pursuant to the 1994 Plan, which vest pro-rata over three years commencing January 1, 1996. (4) Represents stock options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest pro-rata over three years commencing January 1, 1997. (5) Represents stock options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest on December 6, 1998. (6) Represents insurance premiums on whole life insurance policies paid by the Registrant for the benefit of the named executive officer. 54 OPTIONS/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS EXERCISE UNDERLYING GRANTED TO OR OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED (#) FISCAL YEAR(1) ($/SHARE) DATE - ---- ------------ --------------- ---------- ----------------- Robert R. Bartolini 50,000(2)(6) 15.22% $16.50(7) Dec. 6, 2005 Chairman of the Board, President and Chief Executive Officer of NAL; Chairman and Chief Executive Officer of NAC John T. Schaeffer 25,000(3)(6) 7.61% $15.00(7) Dec. 6, 2005 Director and Executive Vice President of NAL; President and Chief Operating Officer of NAC Robert J. Carlson 15,000(4)(6) 4.57% $15.00(7) Dec. 6, 2005 Vice President and Principal Accounting Officer of NAL and NAC Dennis R. LaVigne 25,000(5)(6) 7.61% $13.25(7) Dec. 6, 2005 Vice President and Treasurer of NAL and NAC
- ------------------ (1) Based upon the grant during the year ended December 31, 1995 of options to purchase an aggregate of 328,500 shares of Common Stock pursuant to the 1994 Plan. (2) Represents non-qualified stock options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest and become exercisable pro-rata over three years commencing January 1, 1997 and are subject, with respect to each one-third installment, to meeting a performance goal based on the Company's earnings. (3) Represents 9,332 incentive stock options and 15,668 non-qualified stock options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest and become exercisable pro-rata over three years commencing January 1, 1997 and are subject, with respect to each one-third installment, to meeting a performance goal based on the Company's earnings. (4) Represents 14,332 incentive stock options and 668 non-qualified stock options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest and become exercisable pro-rata over three years commencing January 1, 1997 and are subject, with respect to each one-third installment, to meeting a performance goal based on the Company's earnings. (5) Represents 7,547 incentive stock options and 17,453 non-qualified stock options granted as of December 6, 1995 pursuant to the 1994 Plan, which vest and become exercisable on December 6, 1998. (6) Each stock option includes tandem stock appreciation rights, which entitle the holder of the option to receive upon exercise shares of the Company's Common Stock with a fair market value on the date of exercise equal to the excess of the fair market value of the shares issuable upon exercise of the option as of the date of exercise over the exercise price. Exercise of a stock appreciation right results in the cancellation of the related option with respect to the same number of shares, and exercise of an option results in the cancellation of the related stock appreciation right with respect to the same number of shares. (7) The closing price of the Company's Common Stock as of December 6, 1995 was $13.25 per share as reported on the Nasdaq National Market. 55 AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
SHARES NUMBER OF SECURITIES ACQUIRED UNDERLYING UNEXERCISED VALUE IF UNEXERCISED IN-THE-MONEY ON VALUE OPTIONS/SARS AT FY-END (#) OPTIONS/SARS AT FY-END ($) NAME EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE (1) EXERCISABLE/UNEXERCISABLE (1) - ---- ------------ -------- ------------------------------ --------------------------------- Robert R. Bartolini -0- -0- 19,445(E)/105,555(U) $138,365(E)/$393,885(U) Chairman of the Board, President and Chief Executive Officer of NAL; Chairman and Chief Executive Officer of NAC John T. Schaeffer -0- -0- 13,333(E)/51,667(U) $101,731(E)/$203,469(U) Director and Executive Vice President of NAL; President and Chief Operating Officer of NAC Robert J. Carlson -0- -0- 5,000(E)/25,000(U) $38,150(E)/$76,300(U) Vice President and Principal Accounting Officer of NAL and NAC Dennis R. LaVigne -0- -0- 0(E)/25,000(U) $0(E)/$9,500(U) Vice President and Treasurer of NAL and NAC
- ------------------ (1) Based upon the closing price of the Company's Common Stock ($13.63 per share) as of December 29, 1995 on the Nasdaq National Market. EMPLOYMENT ARRANGEMENTS Effective November 30, 1994, the Company entered into an employment agreement with Mr. Robert R. Bartolini. Such agreement, as subsequently amended, provides for a base salary of $300,000 per year together with discretionary bonuses, if any, to be declared by the Board of Directors. The agreement also provides for certain benefits, including vacation, life and disability insurance, use of an automobile and certain related expenses, certain other expenses and stock option plan participation, as well as a confidentiality agreement and a two-year noncompetition agreement in favor of the Company. This agreement provides for an initial term of 3 years and is annually renewable for successive three-year periods unless either Mr. Bartolini or the Company provides at least 60 days' notice of an intent not to renew. The agreement provides that the Company may terminate Mr. Bartolini's employment at any time with or without cause and that Mr. Bartolini may terminate the agreement upon written notice on the earlier of one year from the date of such notice or 90 days after his replacement is hired by the Company. If Mr. Bartolini's employment were to be terminated by the Company without cause, he generally would receive his base salary and benefits for the remainder of the term of the agreement. If he were to be terminated because substantially all of the assets of the Company are sold or a controlling interest in the Company is sold, Mr. Bartolini would receive an additional payment of 299% of his base salary unless the agreement is assumed by the buyer or Mr. Bartolini is offered substantially identical duties and compensation with the buyer for at least the remaining term of the agreement. Mr. Bartolini may not cause the agreement to terminate prior to three years from the date of the agreement. 56 STOCK OPTION PLANS The Company's Amended and Restated 1994 Stock Option Plan (the '1994 Plan') covers 1,000,000 shares of the Company's Common Stock. Under its terms, officers, directors, key employees and consultants of the Company are eligible to receive incentive stock options within the meaning of Section 422 of the Internal Revenue Code, as well as non-qualified stock options and stock appreciation rights ('SARs'). The 1994 Plan is administered by the Board of Directors or a committee consisting of no less than three members designated by the Board of Directors. Incentive stock options granted under the 1994 Plan are exercisable for a period of up to 10 years from the date of grant and at an exercise price that is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the 1994 Plan to a stockholder owning more than 10% of the outstanding Common Stock may not exceed five years and the exercise price of an incentive stock option granted to such stockholder may not be less than 110% of the fair market value of the Common Stock on the date of the grant. Non-qualified stock options may be granted on terms determined by the Board of Directors or a committee designated by the Board of Directors. SARs, which give the holder the privilege of surrendering such rights for the appreciation in the Company's Common Stock between the time of grant and the surrender, may be granted on any terms determined by the Board of Directors or committee designated by the Board of Directors. Incentive stock options granted under the 1994 Plan are non-transferable, except upon death, by will or by operation of the laws of descent and distribution, and may be exercised during the employee's lifetime only by the optionee. There is no limit on the number of shares with respect to which options may be granted under the 1994 Plan to any participating employee. However, under the terms of the 1994 Plan, the aggregate fair market value (determined as of the date of grant) of the shares of Common Stock with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all such plans of the Company and any parent and subsidiary corporation of the Company) may not exceed $100,000. Options granted under the 1994 Plan may be exercised within 12 months after the date of an optionee's termination of employment by reason of his death or disability, or within three months after the date of termination by reason of retirement or voluntary termination approved by the Board of Directors, but only to the extent the option was otherwise exercisable at the date of termination. The 1994 Plan provides that, in general, the Board of Directors or the Administrative Committee of the 1994 Plan, shall, consistent with the Plan, determine the terms and conditions, including vesting provisions, of any option granted under the 1994 Plan, and may accelerate the exercisability of any option. The 1994 Plan will expire on November 1, 2004, unless terminated earlier by the Board of Directors. The 1994 Plan may be amended by the Board of Directors without stockholder approval, except that, in general, no amendment that increases the maximum aggregate number of shares that may be issued under the 1994 Plan, decreases the minimum exercise price of options provided under the Plan, or changes the class of employees who are eligible to participate in the 1994 Plan, shall be made without the approval of a majority of the stockholders of the Company. As of December 20, 1996, the Company had granted 579,500 options under the 1994 Plan, of which 524,166 options are outstanding. The outstanding options include 245,000 options granted to executive officers. See 'Options/SAR Grants in Last Fiscal Year Table'. The outstanding options do not include 65,000 options granted by the Company in connection with the exercise of the SFI purchase option. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' The Company's Directors' 1996 Stock Option Plan (the 'Directors' Plan') covers 250,000 shares of the Company's Common Stock and provides for the grant of non-qualified stock options and related SARs to the Company's non-employee directors. The Directors' Plan is administered by the Board of Directors or a committee appointed by the Board of Directors consisting of at least three of its members. 57 Options are granted at the discretion of and on such terms and conditions as are determined by the Board of Directors at the time the option is granted. Options granted under the Directors' Plan are exercisable at such prices, times and in such amounts as the Board of Directors will determine but, in no case will the exercise price be less than the fair market value of a share of Common Stock on the date of grant. The Board of Directors may accelerate the date or dates on which some or all of the options outstanding under the Directors' Plan may be exercised. Options granted under the Directors' Plan are non-transferable except upon death, by will, or by operation of the laws of descent and distribution, and may be exercised during the optionee's lifetime only by the optionee, or in the case of the legal incapacity of the optionee, the optionee's legal representative. In the event a person ceases to be a director of the Company by reason other than death, incapacity or for cause, options granted under the Directors' Plan are exercisable only if and to the extent that they were exercisable on the date of such termination, only within the 30-day period following such termination and, in no event, after the expiration of the exercise period of the particular option. If a director is terminated for cause, as determined by the Board of Directors in its sole discretion, options granted under the Directors' Plan shall be forfeited. Upon the death or legal incapacity of a director, options previously granted under the Directors' Plan and exercisable on the date of death or incapacity, as applicable, may be exercised within twelve months after the date of death or in capacity, as applicable. The Directors' Plan was approved by the Board of Directors of the Company on November 20, 1996 and expires on November 20, 2006. The Directors' Plan may be altered, suspended or terminated by the Board of Directors at any time, provided that no change which would have a material adverse effect upon any option previously granted will be made unless the consent of the optionee is obtained. As of December 20, 1996, the Company had granted 20,000 options to each of Messrs. DeVoe and Jones under the Directors' Plan. 58 CERTAIN TRANSACTIONS LOANS TO THE COMPANY Mr. Robert R. Bartolini, Chairman and Chief Executive Officer of the Company, has on occasion provided advances at market interest rates to the Company. In order to provide it with additional working capital, Mr. Bartolini advanced approximately $1.0 million to the Company on June 30, 1995 and later increased this amount to approximately $2.9 million during December 1995. The advance was repaid in full as of June 30, 1996. During November 1996, Mr. Bartolini provided advances totaling $2,413,869 to the Company, repayable on the earlier of February 18, 1997 and the completion of the Offering. These advances bear interest at a fixed rate of 11%. See 'Use of Proceeds.' SALE OF PORTFOLIO TO EXECUTIVE OFFICER As of November 30, 1994, the Company sold a portfolio of 14 unsecured installment loans with a total principal balance of $1,055,000 to Mr. Bartolini, Chairman and Chief Executive Officer of the Company, in consideration for $590,965. This portfolio was part of a larger portfolio purchased by the Company in March 1994 from the Federal Deposit Insurance Corporation at a purchase price equal to 22.5% of principal balance. The purchase price paid by Mr. Bartolini was equal to 56% of principal balance which, in management's opinion, was the approximate fair market value of the loans determined from a review of the expected collectability of the loans. This price, which reduced a previously established liability owed by the Company to Mr. Bartolini for bonuses and dividends, was considered by the Company to be equal to the fair market value and was based on the estimated cash flows anticipated for the portfolio. The method used for estimating the cash flows was the same used by the Company in evaluating the fair value of all of its portfolio acquisitions. TRANSACTION WITH AFFILIATE OF FORMER DIRECTOR Mr. Andrew Panzo was a member of the Company's Board of Directors from August 1995 until his resignation in March 1996. Following the Merger, American Maple Leaf Financial Corporation ('AMLF'), an affiliate of Mr. Panzo, rendered certain investment banking advisory services to the Company for which AMLF received 33,000 common stock purchase warrants. The Warrants permit the purchase of additional shares at an exercise price of $9.00 per share through the later of May 1996 or the registration of the underlying shares of Common Stock. During April 1995, AMLF purchased $1,200,000 principal amount of 9% Convertible Subordinated Debenture Units for an aggregate purchase price of $1,200,000. $810,000 principal amount of these Debenture Units, as well as the accrued interest due thereon, was converted into 95,692 shares of the Company's Common Stock during January 1996. The remaining principal amount of these Debenture Units ($390,000) was converted in April 1996. SALE OF BOAT TO EXECUTIVE OFFICER In October 1994, the Company sold a repossessed boat to Mr. John T. Schaeffer, a director of NAL and President and Chief Operating Officer of NAC, in consideration for a note in the amount of $89,000, which bore interest at 10% per annum for a period of one year, and the offset by the Company of $21,000 payable to Mr. Schaeffer. The note was repaid prior to June 30, 1995. In management's opinion, the sale was at the approximate fair market value of the boat. TRANSACTIONS WITH FORMER PRINCIPAL STOCKHOLDER In 1991, the Company entered into an agreement with FTM Holdings, Inc. ('FTM'), a former principal stockholder, to provide the Company with consulting and other business-related services. Under the agreement, the Company agreed to pay FTM $50,000 per month through March 1995. The payments for consulting services continued through May 1994, whereupon the Company made a lump 59 sum settlement with FTM through a final payment of $475,000 under the agreement. This amount reflects a $75,000 discount from the cumulative payments required under the agreement. Including the lump sum settlement, payments of $675,000 were made to FTM in 1994. Payments of $600,000 were made to FTM in 1993. During 1994, the Company paid FTM $428,000 as a commission on the sale of certain loan portfolios. The Company previously subleased a portion of the space occupied by its headquarters at 500 Cypress Creek Road West, Fort Lauderdale, Florida from FTM. However, in January 1995, the Company entered into a lease directly with the landlord for such space. Thereafter, the Company entered into a sublease agreement with FTM, under which FTM subleased from the Company certain space that it previously leased directly from the landlord. The sub-lease was terminated on October 31, 1996. PURCHASE OF SHARES OF COMMON STOCK In October 1993, Mr. Bartolini, Chairman and Chief Executive Officer of the Company, purchased 2,143 shares of the Company's Common Stock, representing all outstanding shares not previously owned by Mr. Bartolini or Mr. Schaeffer. Such purchase resulted in Mr. Bartolini owning 95% of the Company's Common Stock as of such date. Mr. Bartolini financed the entire purchase price of such shares through a loan from the Company, represented by a note in the amount of $2,034,638, which bore interest at 5% per annum and was reflected as a 'Note Receivable from a Stockholder' and as a reduction of Stockholders' equity on the Company's consolidated balance sheet as of December 31, 1993. In June 1994, the Company redeemed the 2,143 shares from Mr. Bartolini in consideration for canceling the note. GRANT OF OPTIONS AND WARRANTS In December 1994 and December 1995, the Company granted certain options to purchase shares of the Company's Common Stock to executive officers under the Company's 1994 Plan. See 'Summary Compensation Table.' In conjunction with the appointment of Mr. Jones to the Board of Directors on February 5, 1996, the Company granted to him 20,000 Common Stock purchase warrants with an exercise price of $14.38 per share. In conjunction with the appointment of Mr. DeVoe to the Board of Directors on March 11, 1996, the Company granted to him 20,000 Common Stock purchase warrants with an exercise price of $11.50 per share. The options held by Messrs. DeVoe and Jones are covered by the Directors' Plan. RELATIONSHIP WITH J.D. BYRIDER SYSTEMS, INC. Mr. Bartolini, Chairman and Chief Executive Officer of the Company, serves as a member of the Board of Directors of J.D. Byrider, from which the Company operates the JDBR Franchise. Mr. James F. DeVoe, a director of the Company, is the Chairman and Chief Executive Officer of J.D. Byrider. TRAVEL SERVICES IYS Travel, Inc. ('IYS'), a travel agency of which the spouse of Mr. Robert Bartolini is a principal stockholder, provides business and personal travel services to the Company and its employees at prevailing market prices. IYS receives customary industry commissions from airlines, hotels, and cruise agencies for services provided. During the years ended December 31, 1995 and 1994 and the nine months ended September 30, 1996, the Company paid IYS approximately $105,000, $84,000 and $133,000, respectively, for airline tickets booked by IYS for travel by the Company's employees at the prevailing prices charged by the airlines. During 1994, the Company advanced to IYS approximately $66,000 for payroll, which IYS subsequently repaid. 60 PRINCIPAL STOCKHOLDERS The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company's Common Stock as of December 20, 1996 and as adjusted to reflect the sale of the 2,500,000 shares of Common Stock being offered hereby by: (i) each person (or group of affiliated persons) who is known by the Company to own beneficially 5% or more of any class of the Company's Common Stock; (ii) each of the Company's directors; (iii) the Company's Chief Executive Officer and each of the named executive officers; and (iv) the Company's directors and executive officers as a group.
SHARE BENEFICIALLY SHARE BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING(1) OFFERING(1) ---------------------- ---------------------- NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT - ------------------------------------------- --------- ------- --------- ------- Robert R. Bartolini 2,228,643(2) 30.25% 2,228,643 22.59% 500 Cypress Creek Road West, Suite 590 Fort Lauderdale, FL 33309 John T. Schaeffer 302,913(3) 4.12% 302,913 3.07% 500 Cypress Creek Road West, Suite 590 Fort Lauderdale, FL 33309 Robert J. Carlson 65,196(4) * 65,196 * 500 Cypress Creek Road West, Suite 590 Fort Lauderdale, FL 33309 Dennis R. LaVigne --(5) * --(5) * 500 Cypress Creek Road West, Suite 590 Fort Lauderdale, FL 33309 Ngaire E. Cuneo --(6) * --(6) * 745 Fifth Avenue, Suite 2700 New York, NY 10151 James F. DeVoe --(7) * --(7) * 5780 West 71st Street Indianapolis, IN 46278 David R. Jones --(8) * --(8) * 2 Ocean Avenue Scituate, MA 02066-1624 Conseco, Inc.(9)(13) 1,460,936 16.59% 1,460,936 12.92% 11815 N. Pennsylvania Street P. O. Box 1911 Carmel, IN 46032 Florence Karp(10) 1,440,303(11) 16.39% 1,440,303 12.76% 3418 Sansom Street Philadelphia, PA 19104 Merrill Lynch Asset Management(13) 479,167(12) 6.12% 479,167 4.64% 800 Scudders Mill Road Plainsboro, NJ 08536 All Directors and Officers as a group (7 persons) 2,596,752 35.16% 2,596,752 26.27%
- ------------------ * Represents less than 1% (1) Except as otherwise indicated, includes total number of shares outstanding and the number of shares that each person has the right to acquire within 60 days through the exercise of options, warrants or debentures, pursuant to Item 403 of Regulation S-B and Rule 13d-3(d)(1), promulgated under the Exchange Act. Percentage of ownership is based on 7,347,367 shares of 61 Common Stock outstanding prior to the Offering and 9,847,367 shares of Common Stock outstanding after the Offering. (2) Includes 1,640,000 shares held by Robert R. Bartolini and Marcia G. Bartolini, Co-Trustees of the Robert R. Bartolini Revocable Trust dated July 27, 1992, 210,000 shares of which are subject to options granted by Mr. Bartolini during May 1995. Also includes 305,176 shares presently held by English, McCaughan & O'Bryan, P.A. pursuant to the terms of the Voting Trust Agreement. See 'Material Voting Arrangements.' Includes 264,022 shares held by Marcia G. Bartolini and Robert R. Bartolini, Co-Trustees of the Marcia G. Bartolini Revocable Trust dated July 27, 1992. Does not include 50,000 shares owned beneficially by Edward M. Bartolini, the adult brother of Robert R. Bartolini. Also does not include 264,022 shares held by George Schnabel, Trustee of the Robert R. Bartolini and Marcia G. Bartolini Irrevocable Trust dated July 27, 1992. Includes vested Incentive Stock Options to purchase 19,445 shares of Common Stock granted December 1994. Does not include Incentive Stock Options to purchase 105,555 shares of Common Stock granted December 1994 and December 1995, which have not vested. See 'Summary Compensation Table.' (3) Includes 34,628 shares held by English McCaughan & O'Bryan, P.A. for the benefit of Mr. Schaeffer pursuant to the terms of the Voting Trust Agreement. See 'Material Voting Arrangements.' Includes 13,333 vested Incentive Stock Options granted to Mr. Schaeffer in December 1994. Does not include 51,667 vested Incentive Stock Options granted to Mr. Schaeffer in December 1994 and December 1995, which remain subject to vesting. Includes 4,952 shares held by Mr. Schaeffer's spouse. See 'Summary Compensation Table.' (4) Includes 60,196 shares held by English, McCaughan & O'Bryan, P.A. for the benefit of Mr. Carlson pursuant to the terms of the Voting Trust Agreement. See 'Material Voting Arrangements.' Includes 5,000 vested Incentive Stock Options granted to Mr. Carlson in December 1994. Does not include 25,000 Incentive Stock Options granted to Mr. Carlson in December 1994 and December 1995, which remain subject to vesting. See 'Summary Compensation Table.' (5) Does not include 25,000 Incentive Stock Options granted to Mr. LaVigne in December 1995, which remain subject to vesting. See 'Summary Compensation Table.' (6) Ms. Cuneo joined the Board of Directors effective April 23, 1996 in conjunction with the sale by the Company of certain Debentures. See 'Material Stockholder Arrangements.' (7) Does not include Warrants to purchase 20,000 shares of Common Stock at an exercise price of $11.50 per share granted to Mr. DeVoe in connection with his appointment as a director on March 11, 1996, which have not vested. (8) Does not include Warrants to purchase 20,000 shares of Common Stock at an exercise price of $14.38 per share granted to Mr. Jones in connection with his appointment as a director on February 5, 1996, which have not vested. (9) Represents 515,000 shares issuable upon the exercise of Warrants held by Conseco, Inc. Also includes 472,968 shares of Common Stock (416,667 shares representing principal and 56,301 shares representing interest at maturity) issuable upon conversion, if at all, of $5 million principal amount of Debentures held by Great American Reserve Insurance Company ('GARCO') and 472,968 shares of Common Stock (416,667 shares representing principal and 56,301 shares representing interest at maturity) issuable upon the conversion, if at all, of $5 million principal amount of Debentures held by Beneficial Standard Life Insurance Company ('BSLIC'). GARCO and BSLIC are wholly-owned subsidiaries of Conseco, Inc. (the 'Conseco Subsidiaries'). This table has been prepared assuming a fixed $12.00 conversion price for the Debentures. Additional shares may be issued to the holder upon conversion based on a conversion price equal to the lesser of: (i) $12.00 per share; and (ii) 80% of the closing bid price of the Company's Common Stock on the date of conversion. (10) As custodian for Ms. Karp's minor grandchildren. (11) Includes 103,333 shares of Common Stock. Also includes 625,000 shares of Common Stock issuable upon the exercise, if at all, of Warrants. Includes 711,970 shares of Common Stock (560,606 shares representing principal and 151,364 shares representing interest at maturity) 62 issuable upon the conversion, if at all, of $5.5 million principal amount of Debentures. This table has been prepared assuming a fixed $9.00 conversion price for $3.0 million principal amount of the Debentures. Additional shares may be issued to the holder upon conversion based on a conversion price equal to the lesser of: (i) $9.00 per share; and (ii) 75% of the closing bid price of the Company's Common Stock on the date of conversion. (12) Represents 229,167 shares of Common Stock issuable upon conversion, if at all, of $2.75 million principal amount of Debentures and 34,375 shares of Common Stock issuable upon the exercise of Warrants held by Convertible Holdings, Inc. Also represents 187,500 shares of Common Stock issuable upon conversion, if at all, of $2.25 million principal amount of Debentures and 28,125 shares of Common Stock issuable upon the exercise of Warrants held by Merrill Lynch World Income Fund, Inc. Convertible Holdings, Inc. is advised by Merrill Lynch Asset Management, an investment adviser registered under the Investment Advisers Act of 1940 ('MLAM'). Merrill Lynch World Income Fund, Inc. is advised by Fund Asset Management, Inc., an investment adviser registered under the Investment Advisers Act of 1940 ('FAM'). FAM and MLAM are affiliates and both disclaim beneficial ownership of the Common Stock referred herein. This table has been prepared assuming a fixed $12.00 conversion price for the Debentures. Additional shares may be issued to the holder upon conversion based on a conversion price equal to the lesser of: (i) $12.00 per share; and (ii) 80% of the closing bid price of the Company's Common Stock on the date of conversion. (13) In connection with the issuance of these Debentures and Warrants, the Company granted price protection to the holder(s) such that in the event the Company issues securities during the term of the Debentures and Warrants at an issuance price of less than $12.00 per share (the 'Issuance Price'), the conversion price of such Debentures and the exercise price of such Warrants would be reduced to the Issuance Price. This provision may result in the issuance of a material number of additional shares of Common Stock upon the conversion of the Debentures and a material decrease in the proceeds to the Company upon the exercise of the Warrants. See 'Description of Securities -- Price Protection.' MATERIAL VOTING ARRANGEMENTS Concurrent with the completion of the Merger in November 30, 1994, Messrs. Bartolini, Schaeffer and Carlson entered into a Voting Trust Agreement (the 'Voting Trust Agreement') pursuant to which 400,000 shares were placed in a voting trust. The Voting Trust Agreement provides that, on any matter requiring stockholder vote, the trustee will vote such shares in the same percentage as the other then issued and outstanding shares of Common Stock are voted. Such shares may be released from the Voting Trust Agreement pursuant to an earn-out formula under which for the years 1995, 1996 and 1997, 10,000 trust shares will be released for each $150,000 of cumulative net income after taxes of the Company up to $3,000,000 and 5,000 shares will be released for each $150,000 of cumulative net income after taxes in excess of $3,000,000, less the number of trust shares previously transferred to the stockholders under this formula. The trust shares will be released pro rata in accordance with the number of trust shares beneficially owned by each stockholder. As of September 30, 1996, all of the shares had been earned. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' If the shares are not released pursuant to the earn-out formula within three years, such shares will be canceled. The trustee under the Voting Trust Agreement is English, McCaughan & O'Bryan, P.A., counsel to the Company. MATERIAL STOCKHOLDER ARRANGEMENTS In connection with the purchase of $10 million principal amount of Debentures in April 1996, the Conseco Subsidiaries are entitled to designate a nominee to the Company's Board of Directors and the Audit Committee of the Board of Directors pursuant to the terms of the agreements governing such Debentures. Ms. Ngaire E. Cuneo, an executive officer and director of Conseco and the Conseco Subsidiaries, is the designated nominee. Pursuant to these arrangements, Messrs. Bartolini and Schaeffer entered into a Stockholders' Agreement as of April 23, 1996 with the Company, pursuant to which they agreed to certain limitations upon the resale of their shares of Common Stock until October 1997. 63 DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue 50,000,000 shares of Common Stock, $.15 par value per share, of which 7,347,367 are outstanding as of the date of this Prospectus. Holders of Common Stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of Common Stock have one vote for each share held of record and do not have cumulative voting rights. Holders of Common Stock are entitled upon liquidation of the Company to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of Common Stock are not redeemable and have no preemptive or similar rights. All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK Within the limits and restrictions provided in the Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock (the 'Preferred Stock'), in one or more series, and to fix, as to any such series, the dividend rate, redemption prices, preferences on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications. There are presently no shares of Preferred Stock outstanding. Shares of Preferred Stock issued by the Board of Directors could be utilized, under certain circumstances, to make an attempt to gain control of the Company more difficult or time consuming. For example, shares of Preferred Stock could be issued with certain rights that might have the effect of diluting the percentage of Common Stock owned by a significant stockholder or issued to purchasers who might side with management in opposing a takeover bid that the Board of Directors determines is not in the best interest of the Company and its stockholders. This provision may be viewed as having possible anti-takeover effects. A takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. The Board of Directors has not authorized the issuance of any series of Preferred Stock. 64 CONVERTIBLE SECURITIES Debentures The following table provides a summary of the Company's outstanding Debentures.(1)
PRINCIPAL MATURITY INTEREST CONVERSION SHARES AMOUNT ISSUE DATE DATE RATE PRICE(2) ISSUABLE(3) - ----------- ---------- ---------- -------- ---------- ----------- $ 200,000 Dec. 1995 Dec. 1996 9% 11.00 19,814 2,000,000 Dec. 1995 May 1997 9% 11.00 206,364 2,300,000 Dec. 1995 Jun. 1997 9% 11.00 237,266 10,000,000 Apr. 1996 Oct. 1997 9% 12.00 945,833 2,000,000 Jul. 1995 Jul. 1998 9% 9.00 282,167 1,000,000 Aug. 1995 Aug. 1998 9% 9.00 141,083 5,000,000 Sep. 1996 Sep. 1998 (4) 10%(4) 12.00 416,667 2,500,000 Jan. 1996 Jan. 1999 9% 11.00 288,636 - ----------- --------- $25,000,000 2,537,830 - ----------- --------- - ----------- ---------
- ------------------ (1) Reflects information as of December 20, 1996. (2) These Debentures are convertible into shares of the Company's Common Stock at the lesser of the amount indicated and a discount to the market price of the Company's Common Stock, which ranges from 75% to 85% pursuant to the terms of the Debentures. (3) Represents shares of Common Stock issuable upon conversion of the Debentures (principal and interest at maturity). (4) These Debentures bear interest at a rate of 10% for 2 years and at a rate of 9% thereafter. Maturity is subject to extension by the holder. The Company has issued and sold in private placement transactions to accredited and institutional investors, an aggregate of $38,825,000 principal amount of convertible subordinated debentures (the 'Debentures'). Interest is payable monthly on $5.0 million principal amount, quarterly on $17.0 million principal amount and semi-annually on $3.0 million principal amount of Debentures. With the exception of the holder of $5.0 million principal amount of Debentures which require monthly interest payments, all of the holders of the outstanding Debentures have elected to accrue such interest payments. In conjunction with the sale of the Debentures, the Company issued Warrants to purchase 2,873,625 shares of the Company's Common Stock. The terms of the Debentures and the Warrants are described below and in the table above. The indebtedness evidenced by the Debentures is subordinated to the prior payment when due of the principal and interest on senior indebtedness of the Company. Therefore, upon any distribution of its assets in a liquidation or dissolution of the Company, or in bankruptcy, reorganization, insolvency, receivership or similar proceedings relating to the Company, the holders of the Debentures will not be entitled to receive payment until the holders of the Company's senior indebtedness are paid in full. Furthermore, upon the occurrence of any event of default with respect to any senior indebtedness of the Company, no payments may be made to the holders of the Debentures until the Company has cured such event of default. As of December 20, 1996, Debentures with principal balances in the aggregate of $13,825,000 had been converted into 1,452,849 shares of the Company's Common Stock with $25.0 million principal amount of Debentures remaining outstanding. Conversion Feature. At the option of the holders, the principal and accrued interest due under the Debentures is convertible into shares of Common Stock. Prior to such conversion, the holders thereof are not entitled to voting rights or other rights provided by law to stockholders. Of the outstanding Debentures: (i) $3.0 million principal amount are convertible into shares of the Company's Common Stock at a conversion price equal to the lesser of 75% of the average closing bid price of the Company's Common Stock as reported by the Nasdaq National Market for the 10 consecutive trading days immediately preceding the date of conversion; and $9.00 per share; (ii) $5.0 million are convertible into shares of Common Stock at a conversion price equal to the lesser of 85% of the average closing bid price of the Company's Common Stock as reported by the Nasdaq National 65 Market for the 10 consecutive trading days immediately preceding the date of conversion and $11.00 per share; (iii) $2.0 million are convertible into shares of Common Stock at a conversion price equal to the lesser of 80% of the average closing bid price of the Company's Common Stock as reported by the Nasdaq National Market for the 10 consecutive trading days immediately preceding the date of conversion and $11.00; and (iv) $15.0 million are convertible into shares of Common Stock at a conversion price equal to the lesser of 80% of the closing bid price on the conversion date as reported by the Nasdaq National Market and $12.00 per share. Redemption Feature. Certain Debentures are subject to redemption by the Company at the principal amount thereof, together with any accrued interest, on 30 days written notice upon the following conditions: (i) a registration statement covering the resale of the shares issuable upon conversion of the Debentures is effective as of that date; and (ii) the average of the closing bid prices of the Company's Common Stock as reported by the Nasdaq National Market exceeds a designated redemption price (the 'Debenture Redemption Price') for 10 consecutive trading days ending within 15 days of the notice of redemption. Of the redeemable outstanding Debentures: (i) $3.0 million principal amount bear a Debenture Redemption Price of $15.00, (ii) $2.5 million principal amount bear a Debenture Redemption Price of $18.00 and (iii) $9.5 million principal amount bear a Debenture Redemption Price of $25.00. Of the Debentures subject to redemption, $3.0 million principal amount of the Debentures provide the holder with the option to elect not to have the Debentures subject to redemption, however, from the point of such election and thereafter, the Debentures become non-interest bearing. $5.0 million principal amount of Debentures are redeemable after two years and bear a Debenture Redemption Price of $25.00, provided that the trading price of the Company's Common Stock as reported by the Nasdaq National Market equals or exceeds $25.00 per share for 60 consecutive trading days prior to redemption. Of the outstanding Debentures, $10.0 million principal amount are not redeemable by the Company. Warrants The following table provides a summary of the Company's outstanding Warrants.(1)
SHARES PROCEEDS TO ISSUE DATE EXPIRATION DATE EXERCISE PRICE ISSUABLE(2) THE COMPANY(3) - ------------------- ------------------- --------------- ----------- -------------- Apr.-Aug. 1995 Apr.-Aug. 1998 $ 9.00 1,360,000 $ 12,240,000 Nov. 1995-Dec. 1995 Nov. 1998-Dec. 1998 13.50 175,000 2,362,500 Dec. 1995-Feb. 1996 Dec.1998-Feb. 1999 14.00 to 14.38 195,000 2,737,500 Jul.-Aug. 1995 Jul.-Aug. 1998 12.00 to 12.30 62,500 765,000 Jul.-Dec. 1995 Jul.-Dec. 1998 15.00 363,625 5,454,375 Mar. 1996 Mar. 1999 11.50 20,000 230,000 Apr. 1996 Apr. 1999 12.00 to 12.63 615,000 7,442,500 Apr. 1996 Apr. 2001 14.52 60,000 871,200 Sep. 1996 Sep. 2001 13.92 62,500 870,000 --------- ------------- 2,913,625(4) $ 32,973,075(5) --------- ------------- --------- -------------
- ------------------ (1) Reflects information as of December 20, 1996. (2) Represents shares of Common Stock issuable upon exercise of the Warrants. (3) Represents proceeds to the Company upon the exercise of the Warrants. (4) Includes 40,000 Warrants in the aggregate issued to Mr. DeVoe and Mr. Jones in connection with joining the Board of Directors. (5) Includes proceeds of $517,500 from Warrants issued to Mr. DeVoe and Mr. Jones. See Footnote 4. The Company has issued 2,913,625 common stock purchase warrants (the 'Warrants'). Of the Warrants issued: (i) 2,873,625 of the Warrants were granted in connection with the sale of the Debentures, including 190,000 Warrants issued to certain consultants and advisers in consideration for financial advisory services and 160,000 Warrants issued as commission, and (ii) 40,000 Warrants were 66 issued by the Company to Board members in connection with joining the Board of Directors. See 'Certain Transactions.' To date, none of the Warrants have been exercised. Exercise. Of the outstanding Warrants, 737,500 of the Warrants permit the holder to purchase a share of the Company's Common Stock at a designated exercise price for a period of 5 years from the date of grant, while the remaining Warrants have a term of 3 years from the date of grant. Prior to exercise, holders of the Warrants are not entitled to voting rights or other rights provided by law to stockholders of the Company. A complete exercise of the Warrants, if at all, would yield to the Company proceeds of $32,973,075. There can be no assurances that all or a substantial percentage of the Warrants will be exercised. Redemption. Of the outstanding Warrants issued, 1,547,000 of the Warrants are subject to redemption by the Company commencing with the date of issuance and 489,125 are subject to redemption by the Company commencing two (2) years from the date of issuance, all at a price of $.001 per Warrant on 30-days written notice upon the following conditions: (i) a registration statement covering the resale of the shares issuable upon exercise of the Warrants is effective as of that date; and (ii) the average of the closing bid prices of the Company's Common Stock as reported by the Nasdaq National Market exceeds a designated price (the 'Warrant Redemption Price') for 10 consecutive trading days ending within 15 days of the notice of redemption. Of the outstanding Warrants, 877,500 Warrants are not subject to redemption. The present trading price of the Company's Common Stock (see 'Price Range For Common Stock') would not be sufficient to effectuate a redemption of any of the Warrants. There can be no assurances that the trading price of the Company's Common Stock will attain a level sufficiently high to effectuate a redemption. There also can be no assurances that even with a sufficiently high trading price the Company will elect to cause a redemption of the Warrants. Any call for redemption would have the likely effect of causing the exercise of these Warrants. PRICE PROTECTION The Company has granted price protection and adjustment features to the holders of certain Debentures and Warrants pursuant to which the Company has agreed that in the event that the Company issues securities at an Issuance Price of less than $12.00 per share, the conversion price of such Debentures and the exercise price of such Warrants would be reduced to the Issuance Price. See 'Principal Stockholders -- Footnote 13 to the Principal Stockholders' Table.' Assuming a public offering price of $8.00 per share, after the Offering the Company would be required to issue up to an additional 681,250 shares of Common Stock upon the conversion of such Debentures as a result of such price protection features. In addition, a reduction of the exercise price of certain Warrants to $8.00 per share would result in a reduction in the proceeds to the Company of $3,284,200 upon the exercise of 737,500 Warrants. REGISTRATION RIGHTS The Company has granted certain registration rights to the holders of the Debentures and the Warrants pursuant to which the Company has agreed to register for resale the shares of Common Stock issued or issuable upon the conversion of the Debentures and the exercise of the Warrants. The Company has granted registration rights in connection with the resale of up to 2,884,962 shares issuable or issued upon conversion of certain Debentures (principal and interest) and upon exercise of certain Warrants. Pursuant to such rights, the Company has agreed to use its best efforts to file with the Commission a registration statement covering the resale of such shares upon the earlier of January 31, 1997 and 120 days from completion of this Offering. The holders of such Warrants have also agreed not to effect the public sale of shares issuable or issued upon exercise of the Warrants for a period of 90 days from the effective date of a registration statement covering such shares. Substantially all of the holders of these Debentures and Warrants have agreed to defer their registration rights for a period of 120 days after the date of this Prospectus. 67 The Company has also granted certain demand and piggyback registration rights commencing January 1, 1997 in connection with the resale of up to 1,620,936 shares issuable upon conversion of certain Debentures (principal and interest) and upon the exercise of certain Warrants issued during April 1996. In the event that such shares are not otherwise included within a registration statement, the Company has agreed to use its best efforts to file with the Commission a registration statement(s) covering the resale of: (i) 1,460,936 of such shares upon the request of the holder(s) of such securities commencing at any time after October 23, 1997; and (ii) 160,000 of such shares upon request of the holder(s) of such securities commencing at any time after December 23, 1997. Substantially all of the holders of these Debentures and Warrants have agreed to defer their registration rights for a period of 180 days after the date of this Prospectus. The Company has also granted mandatory registration rights in connection with the resale of up to 479,167 shares issuable upon conversion of certain Debentures and upon the exercise of certain Warrants issued during September 1996. The Company has agreed to use its best efforts to file with the Commission a registration statement(s) covering such shares upon the earlier of: (i) 120 days after completion of this Offering; (ii) March 31, 1997; and (iii) the date upon which certain other institutional holders exercise their registration rights. Substantially all of the holders of these Debentures and Warrants have agreed to defer their registration rights for a period of 180 days after the date of this Prospectus. RESERVATION OF SHARES The Company has reserved a sufficient number of shares of Common Stock for issuance upon conversion of the Debentures and exercise of the Warrants. Such shares when issued will be fully paid and nonassessable. TRANSFER AGENT The transfer agent for the Company's securities is StockTrans, Inc., 7 East Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300. DELAWARE ANTI-TAKEOVER LAW The Company will be governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware (the 'GCL'), an anti-takeover law. In general, the law prohibits a public Delaware corporation from engaging in a 'business combination' with an 'interested stockholder' for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. 'Business combination' includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An 'interested stockholder' is a person who, together with its affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. The provisions regarding certain business combinations under the GCL could have the effect of delaying, deferring or preventing a change in control of the Company or the removal of existing management. A takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS General Certain provisions of the Company's Certificate of Incorporation and Bylaws may make more difficult the acquisition of control of the Company by a tender offer, open market purchases not approved by the Company's Board of Directors, a proxy contest or otherwise. The provisions are designed to reduce the vulnerability of the Company to an unsolicited proposal for a takeover that does not contemplate the acquisition of all outstanding shares of the Company or which is otherwise unfair to stockholders of the Company. 68 Set forth below is a description of such provisions of the Company's Certificate of Incorporation and Bylaws. Such description is intended as a summary only and is qualified in its entirety by reference to the Company's Certificate of Incorporation and Bylaws. Election of Directors; Amendment to Certificate of Incorporation The Company's Certificate of Incorporation provides that the Board of Directors is divided into three classes. One class of directors is elected at each annual meeting of stockholders for three-year terms. In addition, the Bylaws require advance notice to the Board of Directors of stockholder proposals or stockholder nominees for director to be considered at the next annual meeting of stockholders. The Bylaws provide that the number of directors shall be fixed by majority approval of the Board of Directors or by a vote of a majority of the stockholders of the Company. Currently, the number of directors is set at five. In addition, the Bylaws provide that such provision establishing the number of directors may only be amended by majority approval of the Board of Directors or by a vote of a majority of the stockholders of the Company. The Certificate of Incorporation also provides that a director can only be removed during his or her term for cause and upon the vote of two-thirds of the stockholders, and that amendments to the Certificate of Incorporation require the vote of two-thirds of the stockholders unless approved by 80% of the Board of Directors. Special Stockholder Meetings The Bylaws provide that special meetings of the stockholders, for any purpose or purposes, unless required by law, shall be called by the Chairman and Chief Executive Officer or President pursuant to a request in writing of the Chairman and Chief Executive Officer or the President, or a majority of the entire Board of Directors. A special meeting may not be held absent such a written request. The request shall state the purpose or purposes of the proposed meeting. The Bylaws also provide that stockholders may not take action by written consent. Such limitation on the right of stockholders to call a special meeting and to take action by written consent could make it more difficult for stockholders to initiate or to take action that is opposed by the Board of Directors. Preferred Stock The Certificate of Incorporation authorizes the Company's Board of Directors to establish series of Preferred Stock and to determine, with respect to any series of Preferred Stock, the rights, preferences, privileges and restrictions thereof. Management believes that the Preferred Stock will provide the Company with increased flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. Having such authorized shares available for issuance will allow the Company to issue shares of Preferred Stock without the expense and delay of a special stockholders' meeting. The authorized shares of Preferred Stock, as well as shares of the Company's Common Stock, will be available for issuance without further action by stockholders, unless such action is required by applicable law or the rules of any stock exchange on which the Company's securities may be listed. The Company's Board of Directors could issue Preferred Stock having terms that could discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then market price of such stock. 69 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 9,847,367 shares of Common Stock outstanding (10,222,367 shares if the Underwriters' over-allotment option is exercised in full). Of these shares, approximately 6,111,825 shares (6,486,825 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act. The remaining 3,735,542 shares of Common Stock outstanding are 'Restricted Securities' as that term is defined in Rule 144 under the Securities Act, of which approximately 2,596,752 are held by 'affiliates' (as defined in the Securities Act) of the Company. The Restricted Securities are subject to all of the limitations on resale imposed by Rule 144. In general, under Rule 144 as currently in effect, any affiliate of the Company or any person (or persons whose shares are aggregated in accordance with the Rule) who has beneficially owned Restricted Securities for at least two years would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1.0% of the outstanding shares of Common Stock (approximately 98,474 shares based upon the number of shares outstanding after the Offering) and the reported average weekly trading volume in the over-the-counter market for the four weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. Persons who have not been affiliates of the Company for at least three months and who have held their shares for more than three years are entitled to sell Restricted Securities without regard to the volume, manner of sale, notice and public information requirements of Rule 144. Substantially all of the Restricted Securities were issued in November 1994. Accordingly, under Rule 144 (and subject to the conditions thereof), the Restricted Securities are eligible for public resale. However, a majority of such shares are held by executive officers and directors of the Company who have agreed to certain restrictions upon the resale of such shares. The Company, its executive officers and directors, certain debenture holders and certain warrant holders have each agreed that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or sale or disposition) any shares of Common Stock or other capital stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock or other capital stock of the Company, for a period of 180 days after the date of this Prospectus, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, except for bona fide gifts or private transfers effected by such stockholders other than on any securities exchange or in the over-the-counter market to donees or transferees that agree to be bound by similar agreements. See 'The Company -- Underwriting.' The Company currently has outstanding $25.0 million principal amount of Debentures and 2,913,625 Warrants, which upon conversion or exercise as applicable, the Company may be caused to issue up to 5,451,455 shares of Common Stock, thus increasing the number of shares outstanding from 7,347,367 to 12,798,822. See 'Debentures' and 'Warrants.' Pursuant to certain registration rights granted by the Company in connection with the shares issuable upon the conversion of outstanding Debentures or upon exercise of such Warrants, the Company may have an obligation to register for resale up to 4,985,065 shares of such Common Stock. Substantially all of the holders of such shares have agreed to defer their registration rights for a period of 120 or 180 days after the date of this Prospectus. See 'Description of Securities -- Registration Rights.' 70 UNDERWRITING The Underwriters named below (the 'Underwriters'), for whom Prudential Securities Incorporated, Piper Jaffray Inc. and Sands Brothers & Co., Ltd. are acting as representatives (the 'Representatives'), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth below opposite their respective names: NUMBER UNDERWRITER OF SHARES -------------------------------------- ----------- Prudential Securities Incorporated .... Piper Jaffray Inc. .................... Sands Brothers & Co., Ltd ............. Total............................. 2,500,000 ----------- ----------- The Company is obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered hereby if any are purchased. The Underwriters, through their Representatives, have advised the Company that they propose to offer the Common Stock initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share; and that such dealers may reallow a concession of $ per share to certain other dealers. After the public offering, the offering price and the concession may be changed by the Representatives. The Company has granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock at the public offering price, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of the shares of Common Stock offered hereby. To the extent such option to purchase is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth opposite each Underwriter's name in the preceding table bears to . Pursuant to an investment banking agreement entered into between the Company and Sands Brothers & Co., Ltd. dated January 29, 1996, and as subsequently amended on April 24, 1996 and November 15, 1996, the Company has agreed to pay a facilitation fee ('Facilitation Fee') to Sands Brothers & Co., Ltd. in the amount of $300,000, less any underwriting fees and commissions, limited to $150,000, derived from their participation as an underwriter in this Offering. The Facilitation Fee is underwriting compensation in connection with this Offering. In connection with the private placement of $10,000,000 principal amount of Debentures by the Company in April 1996, Sands Brothers & Co., Ltd. received 160,000 Warrants, which the National Association of Securities Dealers, Inc. has deemed to be underwriting compensation in connection with the Offering. The Company, its executive officers and directors, certain debenture holders and certain warrant holders have each agreed that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) any shares of Common Stock or other capital stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock or other capital stock of the Company, for a period of 180 days after the date of this Prospectus, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, except for bona fide gifts or private transfers effected by such stockholders other than on any securities exchange or in the over-the-counter market to donees or transferees that agree to be bound by similar agreements. 71 The Company has agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act. In connection with this Offering, certain Underwriters and selling group members (if any) or their respective affiliates who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act during the two business day period before the commencement of offers of sales of the Common Stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. LEGAL MATTERS The validity of the Common Stock offered hereby has been passed upon for the Company by Buchanan Ingersoll Professional Corporation, Two Logan Square, 12th Floor, 18th & Arch Streets, Philadelphia, Pennsylvania 19103. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York 10006. STATEMENT OF INDEMNIFICATION The Company has adopted the provisions of Section 102(b)(7) of the GCL, which eliminate or limit the personal liability of a director to the Company or its stockholders for monetary damages for breach of fiduciary duty under certain circumstances. Furthermore, under Section 145 of the GCL, the Company may indemnify each of its directors and officers against his expenses (including reasonable costs, disbursements and counsel fees) in connection with any proceeding involving such person by reason of his having been an officer or director to the extent he acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The determination of whether indemnification is proper under the circumstances, unless made by a court, shall be determined by the Board of Directors. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in a successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issuer. EXPERTS The financial statements as of December 31, 1995 and for each of the two years in the period ended December 31, 1995 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent certified public accountants, given on the authority of said firm as experts in auditing and accounting. 72 ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form SB-2, including amendments thereto, with respect to the Common Stock being registered hereby. This Prospectus does not contain all of the information contained in such Registration Statement and the exhibits and schedules filed therewith, as permitted by the Rules and Regulations of the Commission. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge, and copies of all or any part thereof may be obtained from the Commission's principal office in Washington, D.C. at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained upon written request addressed to the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. For further information with respect to the Company, the Common Stock being registered hereby and the contents of any contract or document referred to herein, reference is made to the Registration Statement and the exhibits filed as a part thereof. 73 INDEX TO FINANCIAL STATEMENTS
PAGE REFERENCE --------- Report of Independent Certified Public Accountants................ F-2 Consolidated Balance Sheet as of December 31, 1995................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1995 and 1994...................................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995 and 1994.......................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and 1994...................................... F-6 Notes to Consolidated Financial Statements for the Years Ended December 31, 1995 and 1994...................................... F-7 Consolidated Balance Sheets as of September 30, 1996 (Unaudited) and December 31, 1995............................................... F-22 Consolidated Statements of Operations (Unaudited) for the Nine Months Ended September 30, 1996 and 1995........................ F-23 Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 1996 and 1995........................ F-24 Notes to Consolidated Financial Statements (Unaudited) for the Nine Month Period Ended September 30, 1996...................... F-25
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of NAL Financial Group Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of NAL Financial Group Inc. and its subsidiaries at December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Fort Lauderdale, Florida February 27, 1996, except as to Note 19, which is as of March 22, 1996 F-2 NAL FINANCIAL GROUP INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995
1995 ------------ ASSETS Finance receivables Automobile finance contracts, net...................... $ 99,790,636 Consumer finance contracts, net........................ 2,289,503 Mortgage finance contracts, net........................ 1,805,068 Less: reserves available for credit losses............. (2,671,001) ------------ Finance receivables, net............................... 101,214,206 ------------ Cash........................................................ 920,981 Restricted cash............................................. 1,031,734 Accrued interest receivable................................. 1,459,600 Investment in operating lease contracts, net................ 4,054,613 Automobile inventory........................................ 1,886,451 Property and equipment, net................................. 1,802,889 Excess servicing receivable................................. 4,999,165 Other assets................................................ 4,665,287 ------------ TOTAL ASSETS........................................... $122,034,926 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Debt participation interests........................... $42,380,522 Credit and warehouse facilities........................ 33,428,946 Convertible subordinated debt, net..................... 12,924,379 Stockholder loans...................................... 2,919,000 Drafts payable......................................... 2,593,098 Deferred taxes......................................... 1,603,587 Accounts payable and accrued expenses.................. 1,046,884 Other liabilities...................................... 1,278,594 ------------ TOTAL LIABILITIES...................................... 98,175,010 ------------ Commitments and contingencies (Notes 8 and 17).............. -- ------------ STOCKHOLDERS' EQUITY Preferred stock -- $1,000 par value: 10,000,000 shares authorized, no shares issued......... -- Common stock -- $.15 par value: 50,000,000 shares authorized 6,699,987 shares issued and outstanding...................................... 1,004,998 Paid in capital............................................. 18,524,706 Retained earnings........................................... 4,330,212 ------------ TOTAL STOCKHOLDERS' EQUITY............................. 23,859,916 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $122,034,926 ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 NAL FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ---------- INTEREST INCOME Finance charges and purchase discount accretion................................. $15,680,198 $5,387,291 Interest expense............................. (7,361,527) (1,957,420) ----------- ---------- Net interest income before provision for credit losses.......................... 8,318,671 3,429,871 Provision for credit losses.................. (2,762,273) (572,636) ----------- ---------- Net interest income after provision for credit losses.......................... 5,556,398 2,857,235 ----------- ---------- OTHER INCOME Gain on sale of contracts.................... 4,600,721 2,292,249 Fees and other............................... 2,651,497 453,660 ----------- ---------- Total other income........................ 7,252,218 2,745,909 ----------- ---------- OPERATING AND OTHER EXPENSES Salaries and employee benefits.................. 2,551,486 2,337,557 Depreciation and amortization................... 1,298,866 320,294 Occupancy expense............................... 448,625 200,377 Professional and consulting services............ 723,620 902,720 Other operating expense......................... 2,782,634 1,184,530 Non cash charge for the release of escrow shares....................................... 280,000 -- ----------- ---------- Total other expenses......................... 8,085,231 4,945,478 ----------- ---------- Income before income taxes........................ 4,723,385 657,666 Provision for income taxes........................ 1,926,321 263,343 ----------- ---------- NET INCOME........................................ $ 2,797,064 $ 394,323 ----------- ---------- Primary net income per common and common equivalent share................................ $ 0.45 $ 0.08 ----------- ---------- Fully diluted net income per common and common equivalent share................................ $ 0.45 $ 0.07 ----------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 NAL FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
PREFERRED STOCK LESS: ---------------- COMMON STOCK ----------- TOTAL PAR ----------------------- PAID IN NOTE RETAINED STOCKHOLDERS' SHARES VALUE SHARES PAR VALUE CAPITAL RECEIVABLE EARNINGS EQUITY ------ ------ --------- ---------- ----------- ----------- ----------- ------------- Balance, December 31, 1993.......... -- $ -- 4,286 $ 4,286 $ 3,195,325 $(2,034,638) $ 2,643,110 $ 3,808,083 Dividends........... -- -- -- -- -- -- (1,069,460) (1,069,460) Redemption of stock............. -- -- (2,143) (2,143) (1,597,670) 2,034,638 (434,825) -- Redemption of predecessor stock in connection with the merger........ -- -- (2,143) (2,143) (1,597,655) -- -- (1,599,798) Issuance of stock to predecessor stockholders in connection with the merger........ -- -- 3,160,000 474,000 1,125,798 -- -- 1,599,798 Issuance of stock to stockholders of merged entity..... -- -- 2,432,968 364,945 7,357,916 -- -- 7,722,861 Net income.......... -- -- -- -- -- -- 394,323 394,323 ------ ------ --------- ---------- ----------- ----------- ----------- ------------- Balance, December 31, 1994.......... -- -- 5,592,968 838,945 8,483,714 -- 1,533,148 10,855,807 Issuance of stock... -- -- 176,500 26,475 2,074,475 -- -- 2,100,950 Issuance of warrants.......... -- -- -- -- 397,167 -- -- 397,167 Conversion of subordinated debt.............. -- -- 930,519 139,578 7,289,350 -- -- 7,428,928 Release of escrow shares............ -- -- -- -- 280,000 -- -- 280,000 Net income.......... -- -- -- -- -- -- 2,797,064 2,797,064 ------ ------ --------- ---------- ----------- ----------- ----------- ------------- Balance, December 31, 1995.......... -- $ -- 6,699,987 $1,004,998 $18,524,706 $ -- $ 4,330,212 $23,859,916 ------ ------ --------- ---------- ----------- ----------- ----------- ------------- ------ ------ --------- ---------- ----------- ----------- ----------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 NAL FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ------------ ----------- Cash flows from operating activities: Net income.................................... $ 2,797,064 $ 394,323 Adjustments to reconcile net income to net cash used in operations...................... Accretion of discount....................... (654,124) (2,064,714) Provision for loan losses................... 2,762,273 572,636 Depreciation and amortization............... 1,445,149 320,294 Gain on sale of loan pools.................. (4,600,721) (2,292,249) Non-cash charge - voting trust.............. 280,000 -- Changes in assets and liabilities Increase in excess servicing receivable..... (4,999,165) -- Decrease in restricted cash................. 29,307 921,492 Increase in other assets.................... (3,514,607) (75,428) Decease in due from affiliates.............. -- 43,667 Increase in accrued interest receivable..... (1,291,908) -- Increase in drafts payable.................. 2,593,098 -- Increase in accounts payable and accrued expenses................................... 825,631 -- Increase in other liabilities............... 627,505 190,030 Increase (decrease) in accrued income taxes...................................... 1,493,127 (33,590) ------------ ----------- Net cash used in operating activities......... (2,207,371) (2,023,539) ------------ ----------- Cash flows from investing activities: Purchase of SFI option...................... (250,000) -- Proceeds from sale of loan pools............ 12,514,061 14,614,031 Purchase of operating lease vehicles........ (3,400,690) (1,283,300) Payments received on automobile finance contracts.................................. 22,042,555 7,417,861 Purchase of automobile finance contracts.... (154,866,844) (22,681,679) Payments received on consumer finance contracts.................................. 1,996,335 8,421,534 Purchase of consumer finance contracts...... (1,050,549) (14,795,381) Payments received on mortgage finance contracts.................................. 2,587,063 5,083,106 Purchase of mortgage finance contracts...... -- (221,713) Proceeds from sale of automobile inventory.................................. 8,845,103 -- Purchase of property and equipment.......... (1,535,671) (253,004) ------------ ----------- Net cash used by investing activities......... (113,118,637) (3,698,545) ------------ ----------- Cash flows from financing activities: Proceeds from issuance of common stock...... 2,100,950 7,722,861 Proceeds from securitization of loan contracts.................................. 37,511,237 -- Proceeds from issuance of subordinate debentures................................. 21,338,728 -- Proceeds from participations and credit facilities................................. 135,178,400 33,911,781 Repayments of participations and credit facilities................................. (81,870,973) (34,249,908) Payment of debt issue costs................. (1,532,707) (24,352) Note payable from stockholder............... 2,856,506 -- Dividends paid.............................. -- (1,069,459) ------------ ----------- Net cash provided by financing activities....... 115,582,141 6,290,923 ------------ ----------- Net increase in cash............................ 256,133 568,839 Cash, beginning of year......................... 664,848 96,009 ------------ ----------- Cash, end of year............................... $ 920,981 $ 664,848 ------------ ----------- ------------ ----------- Supplemental disclosures of cash flow information Cash paid during the year for interest............ $ 6,443,859 $ 1,859,353 ------------ ----------- ------------ ----------- Cash paid during the year for taxes............... $ 491,558 $ 320,501 ------------ ----------- ------------ ----------- Supplemental schedule of non-cash investing and financing activities Conversion of subordinated debt................... $ 8,260,000 $ -- ------------ ----------- ------------ ----------- Net transfers to automobile inventory............. $ 11,742,181 $ -- ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial statements. F-6 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS: NAL Financial Group Inc. (the 'Company') commenced operations in June 1991 as a specialized finance company for the purpose of engaging in consumer finance transactions involving the origination, purchase, remarketing and servicing of consumer loan and lease receivables. Since June 1994, the Company's principal business has been the acquisition and servicing of automobile finance contracts originated by dealers ('Dealers') in connection with sales ('Loan Contracts') or leases ('Lease Contracts') to individuals with sub-prime credit with the intent to pool and sell these contracts (the 'Contracts') through the Company's securitization programs. The Company completed its initial securitization during December 1995. In a securitization, the Company creates securities backed by Loan Contracts and sells these securities in privately placed transactions. Purchasers of the securities receive a pass-through rate of interest set at the time of sale and the Company receives a base servicing fee for its servicing efforts. In addition, the Company is entitled to certain excess servicing fees which represent collections on the Loan Contracts in excess of those required to pay investor principal and interest and the base servicing fee. On November 30, 1994, the Company merged with Corporate Financial Ventures, Inc. ('CFVI'), a public company (the 'Merger'). Under the terms of the Merger, the Company's stockholders received 3,160,000 shares of CFVI in exchange for all outstanding shares of stock of the Company. Stockholders of the Company received approximately 56% of the outstanding common stock of CFVI. Additionally, the Company raised net proceeds of approximately $7,700,000 in a private placement of 1,549,667 shares of its common stock in connection with the Merger. The Merger has been accounted for as a reverse acquisition by the Company. Upon completion of the Merger, CFVI assumed the historic operations of the Company and changed its name to NAL Financial Group Inc. As the Merger is not considered a business combination as defined in Accounting Principles Board Opinion No. 16, 'Business Combinations', pro forma information is not presented. The operations of CFVI prior to the Merger were not significant. The Company operates its business through six wholly-owned subsidiaries. The principal operations of the Company are conducted through NAL Acceptance Corporation ('NAC'). NAL Insurance Services, Inc. provides automobile and other forms of insurance services. NAL Mortgage Corporation presently is inactive. Performance Cars of South Florida, Inc. was incorporated in January 1995 to conduct the Company's used vehicle operations. Autorics, Inc. and Autorics II, Inc. were established during 1995 for the limited purpose of purchasing and the re-selling of the Company's Loan Contracts through the Company's securitization programs. NOTE 2 -- ACCOUNTING POLICIES: A summary of the significant accounting policies followed in the preparation of the accompanying financial statements is presented below: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. Revenue Recognition Interest income consists of both contractual interest and purchase discount accretion and is recognized over the contractual term of the Contracts using the interest method. Purchase discount represents the differential, if any, between the amount financed on a Loan Contract and the price paid by the Company to acquire the Loan Contract, net of any acquisition costs. Any discount on Loan Contracts which management considers necessary to absorb future credit losses is allocated to the reserves available for credit losses. The remaining portion of the discount, if any, is recognized as interest income as described above. F-7 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED) Revenue from operating Lease Contracts is recognized as rental revenue on a straight-line basis over the lease term. Accrual of interest income ceases the sooner of when a Contract becomes delinquent by 90 days or the underlying collateral is repossessed. At December 31, 1995 and 1994, the Company had approximately $2,800,000 and $236,000, respectively, in non-accrual Contracts. Had these Contracts been on full accrual, $236,000 and $26,000 would have been recognized to earnings for the years ended December 31, 1995 and 1994, respectively. Late charges and other miscellaneous fees are credited to income as earned. Fees from the resale of guaranteed asset protection ('GAP') insurance policies are non-rebatable and recognized as earnings in the current period. Reserves Available for Credit Losses The Company purchases Loan Contracts from Dealers at discounts pursuant to a financing program that bases the level of discount on, among other things, the credit risk of the borrower. As discussed above, the portion of the discount on Loan Contracts required to absorb future credit losses, based on management's assessment, is allocated to the reserves available for credit losses. As part of the Company's financing program with Dealers, agreements are entered into whereby holdbacks are established to protect the Company from potential losses. Pursuant to the agreements, when the Company acquires Loan Contracts, it withholds a portion of the proceeds from the Dealers to absorb credit losses. Holdback amounts are refunded to the Dealers if the Loan Contract performs throughout its term. In cases where the purchase discount and/or dealer holdbacks are not adequate to cover potential losses, the Company establishes an allowance for losses by charging a provision against earnings. The combined allowance, discount and dealer holdbacks available for credit losses are maintained at an amount considered by management to be adequate to absorb potential credit losses based upon an evaluation of known and inherent risks in the portfolios. Management's periodic evaluation is based upon an analysis of the portfolios, historical loss experience, current economic conditions, collateral value and other relevant factors. Future adjustments to the reserve may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The Company charges off delinquent automobile and consumer accounts no later than 150 days of delinquency. Recovery of charged off balances begin with the Company's collection specialists. If results are not obtained within a reasonable time frame, the account is either turned over to a collection agency or an attorney for action, including wage garnishment, judgment and asset search. Restricted Cash Restricted cash represents deposit accounts established pursuant to servicing agreements between the Company and various participants which represents collections from customers. The collection accounts are settled monthly by the Company with the participants. Net Investment in Operating Lease Contracts Operating Lease Contracts to third parties are originated by Dealers and acquired by the Company, which assumes ownership of the vehicle. Vehicles held under operating lease agreements are recorded at cost and depreciated on a straight-line basis over the lease term to the estimated residual value. F-8 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED) Automobile Inventory Vehicles acquired through repossession or termination of a Lease or Loan Contract are valued at the lower of the unpaid principal balance or market value at the date of repossession. Debt Issue Costs Debt issue costs are capitalized and amortized to operations on a straight-line basis over the life of the related debt, which currently approximates one to three years. Property and Equipment Property and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Excess Servicing Receivable Excess servicing receivable results from the sale of Loan Contracts on which the Company retains servicing rights and a portion of the excess cash flows. Excess servicing receivable is determined by computing the difference between the weighted average yield of the Loan Contracts sold and the yield to the purchaser, adjusted for the normal servicing fee based on the agreements between the Company and the purchaser. The resulting differential is recorded as a gain in the year of the sale equal to the present value of the estimated cash flows, net of any portion of the excess that may be due to the purchaser and adjusted for anticipated prepayments, repossessions, liquidations and other losses. The excess servicing cash flows over the estimated remaining life of the Loan Contracts have been calculated using estimates for prepayments, losses (charge-offs) and weighted average discount rates, which the Company expects market participants would use for similar instruments. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The Company utilizes an asset and liability approach to account for income taxes on a current and deferred basis using current income tax rates. Deferred income tax assets are recognized for temporary differences that will result in deductible amounts in future years. Deferred income tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Concentration of Credit Risk The Company considers its primary market area for automobile financing activities to be the Southeast United States. The properties collateralizing the other loan receivable portfolios are located primarily throughout the eastern United States, Texas and California. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' abilities to honor their obligations to the Company is dependant upon the economic stability of these areas. Interest Rate Risk Contract acquisitions are funded primarily through participations, credit and warehouse facilities. The participations and credit facilities bear interest at fixed rates tied to the prime rate and the durations are determined by the durations of the related Contracts since the proceeds of the obligor payments are applied to the repayment of the participations. The warehouse facility bears interest at a variable rate tied to LIBOR and the duration is determined by the timing of the Company's securitization transactions. Contract acquisitions financed by this facility are warehoused pending securitization. Upon completion of a securitization, any remaining amounts due associated with the Loan Contracts securitized are repaid along with unpaid interest. F-9 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 2 -- ACCOUNTING POLICIES: -- (CONTINUED) Earnings Per Share Earnings per common share are computed based on the weighted average number of common and common equivalent shares outstanding during the period. The weighted average number of shares of common and common equivalent shares outstanding used to compute primary and fully diluted earnings per share was 6,200,362 for the year ended December 31, 1995, and 5,192,968 and 5,592,968, respectively, for the year ended December 31, 1994. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near term are the adequacy of reserves available for credit losses, the present value of the estimated future cash flows utilized to calculate excess servicing receivable, the realization of estimated residual values on direct finance Lease Contracts and the realization of automobile inventory. Reclassification Certain 1994 amounts have been reclassified to conform with current year presentation. NOTE 3 -- AUTOMOBILE FINANCE CONTRACTS: Automobile finance contracts at December 31, 1995 consist of the following: Contracts held in portfolio: Direct finance Lease Contracts payments.............................. $16,361,733 Estimated residual values............... 9,170,719 ----------- Total direct finance Lease Contracts.......................... 25,532,452 Less: Unearned interest............... (7,069,448) ----------- Total direct finance Lease Contracts, net................................ 18,463,004 ----------- Loan Contracts.......................... 17,080,482 Loan Contracts with recourse............ 29,226,018 ----------- Total Loan Contracts.................. 46,306,500 ----------- Total Contracts held in portfolio....... 64,769,504 Less: Unearned fees................... (123,322) ----------- Total Contracts held in portfolio, net................................... 64,646,182 Contracts held for sale................. 21,685,000 Advances to Dealers..................... 13,459,454 ----------- Total automobile finance contracts, net................................... $99,790,636 ----------- -----------
The Company has entered into arrangements with certain of its Dealers and other origination sources by which the Company may require the reimbursement for credit losses sustained on Contracts purchased from these sources. The Company services Loan Contracts of approximately $48 million for others. Contracts are collateralized primarily by the related automobiles and the related security deposits on Lease Contracts. These Contracts are pledged as security under various debt agreements. F-10 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 3 -- AUTOMOBILE FINANCE CONTRACTS: -- (CONTINUED) Contracts held in portfolio are stated at cost as the Company has the ability and presently intends to hold the portfolio to maturity. Contracts held for sale are Loan Contracts pending securitization and are stated at the lower of cost or estimated fair value on an aggregate basis. Advances to Dealers represent amounts funded by the Company to automobile dealerships which are collateralized by Loan and Lease Contracts of the Dealers, totalling approximately $18,106,000 at December 31, 1995. The Company services Contracts amounting to $7,783,000 for two of the dealerships. These advances bear interest at fixed rates, or at variable rates subject to certain minimum percentages. The duration of these advances is determined by the duration of the related collateralized Loan and Lease Contracts. At December 31, 1995, contractual maturities of Contracts are as follows:
1996 1997 1998 1999 2000 THEREAFTER TOTAL ----------- ----------- ----------- ----------- ---------- ---------- ----------- Direct finance Lease Contracts............. $ 2,292,832 $ 7,172,485 $ 8,426,841 $ 6,305,136 $1,329,848 $ 5,310 $25,532,452 Loan Contracts.......... 10,207,017 11,795,493 12,254,748 8,805,294 3,185,518 58,430 46,306,500 Advances to Dealers..... 4,867,676 3,446,671 3,423,349 1,428,079 286,612 7,067 13,459,454 ----------- ----------- ----------- ----------- ---------- ---------- ----------- $17,367,525 $22,414,649 $24,104,938 $16,538,509 $4,801,978 $ 70,807 $85,298,406 ----------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ----------- ----------- ---------- ---------- -----------
It is the Company's experience that generally a portion of the portfolios are repaid before the contractual maturity dates. Accordingly, the above tabulation is not to be regarded as a forecast of the timing of future cash collections. Additionally, this tabulation assumes liquidation of the residual values upon expiration of the Lease Contracts. NOTE 4 -- CONSUMER FINANCE CONTRACTS:
DECEMBER 31, 1995 ------------ Mobile homes...................................... $ 221,434 Equipment leases (net of unearned interest of $285,730)....................................... 853,637 Other............................................. 1,407,601 ------------ Total........................................... 2,482,672 Less: Purchase discount........................... (193,169) ------------ Consumer loans receivable, net.................... $ 2,289,503 ------------ ------------
Included in the total above are fully matured loans totaling $270,491 that were purchased by the Company at a substantial discount and are considered non-performing at December 31, 1995. The Company has a net investment of approximately $77,322 in these loans at December 31, 1995. At December 31, 1995, contractual maturities of consumer finance contracts were: Fully matured...... $ 270,491 1996............. 711,666 1997............. 474,683 1998............. 396,539 1999............. 255,868 2000............. 101,976 Thereafter....... 271,449 ---------- $2,482,672 ---------- ----------
F-11 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 4 -- CONSUMER FINANCE CONTRACTS: -- (CONTINUED) It is the Company's experience that a portion of the portfolio is repaid before the contractual maturity date. Accordingly, the above tabulation is not to be regarded as a forecast of the timing of future cash collections. NOTE 5 -- MORTGAGE FINANCE CONTRACTS:
DECEMBER 31, 1995 ------------ Residential mortgages................... $2,064,043 Less: Purchase discount................. (258,975) ---------- Mortgage finance contracts, net......... $1,805,068 ---------- ----------
Included in the total above are fully matured loans totaling $351,221 that were purchased by the Company at a substantial discount and are considered non-performing at December 31, 1995. The Company has a net investment of $92,246 in these loans at December 31, 1995. At December 31, 1995, contractual maturities of mortgage finance contracts were: Fully matured...... $ 351,221 1996............. 441,815 1997............. 270,965 1998............. 190,060 1999............. 74,722 2000............. 131,197 Thereafter....... 604,063 ---------- $2,064,043 ---------- ----------
It is the Company's experience that generally a portion of the portfolio is repaid before the contractual maturity dates. Accordingly, the above tabulation is not to be regarded as a forecast of the timing of future cash collections. These loans are pledged as security for the participations. F-12 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 6 -- RESERVES AVAILABLE FOR CREDIT LOSSES: Changes in reserves available for credit losses for the years ended December 31, 1995 and 1994 consisted of the following:
1995 ---------------------------------------------------- 1994 NON- REFUNDABLE ---------- ALLOWANCE REFUNDABLE DEALER ALLOWANCE FOR LOSSES DISCOUNT RESERVES TOTAL FOR LOSSES ---------- ---------- ---------- ---------- ---------- Balance at beginning of period...................... $ 305,000 $ -- $ -- $ 305,000 $ 277,316 Additions: Provision charged to income................... 2,762,273 -- -- 2,762,273 572,636 Other additions............. -- 4,159,048 817,122 4,976,170 -- Reductions: Charge-offs, net of recoveries............... (2,414,275) (584,767) (162,864) (3,161,906) (544,952) Release of reserves upon securitization of Loan Contracts................ -- (2,061,280) (127,000) (2,188,280) -- Refund of dealer reserve.... -- -- (22,256) (22,256) -- ---------- ---------- ---------- ---------- ---------- Balance at end of period...... $ 652,998 $1,513,001 $ 505,002 $2,671,001 $ 305,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The Company allocated approximately $4.2 million to the reserves available for credit losses during 1995, which represents management's estimate of the purchase discount on Loan Contracts necessary to absorb future credit losses. Management periodically reviews the adequacy of the reserves available for credit losses and considers whether the level of reserve is sufficient to cover any losses of the carrying value based on the collateral pledged for the Contracts, an analysis of the equity invested in the collateral by the borrowers, delinquency data and historical loss experience, and any recourse arrangements the Company has with Dealers or other sellers of Contracts. NOTE 7 -- NET INVESTMENT IN OPERATING LEASE CONTRACTS:
DECEMBER 31, 1995 ------------- Vehicles held under operating Lease Contracts, at cost......................... $4,449,451 Less: Accumulated depreciation............... (394,838) ---------- $4,054,613 ---------- ----------
At December 31, 1995, future minimum rental revenue on operating Lease Contracts are as follows: 1996.... $1,078,762 1997.... 937,021 1998.... 430,164 1999.... 24,876 ---------- $2,470,823 ---------- ----------
F-13 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 8 -- PROPERTY AND EQUIPMENT: Property and equipment at December 31, 1995 consists of the following:
ESTIMATED USEFUL LIFE ----------- Furniture, fixtures, and office equipment............................. $2,158,928 5-7 years Less: Accumulated depreciation.......... (356,039) ---------- $1,802,889 ---------- ----------
The Company leases office space under agreements which expire December 31, 2002. The future minimum non-cancelable lease payments are as follows: 1996......... $ 598,872 1997......... 617,570 1998......... 644,583 1999......... 672,408 2000......... 701,095 Thereafter... 1,019,322 ---------- $4,253,850 ---------- ----------
NOTE 9 -- EXCESS SERVICING RECEIVABLE: The Company's excess servicing receivable at December 31, 1995 consists of the following: Servicing cash flows on Loan Contracts sold, net of estimated prepayments........................ $9,607,000 Less: Discount to present value.................... (834,000) Reserve for loan losses...................... (1,705,000) Deferred servicing income.................... (2,069,000) ---------- Excess servicing receivable....................... $4,999,000 ---------- ----------
NOTE 10 -- DEBT PARTICIPATION INTERESTS: Debt participation interests at December 31, 1995 consists of the following: Participation with Fairfax Savings, a Federal Savings Bank ('Fairfax'), interest at fixed rates ranging from 10% to 13.5%; principal and interest due monthly, secured by undivided interest in automobile finance contracts, consumer finance contracts, and mortgage finance contracts...................... $41,845,372 Participations with investors, secured by undivided interest in automobile finance contracts, consumer finance contracts and mortgage finance contracts; interest at a fixed rate of 18%.... 470,432 Participations with a stockholder, secured by undivided interest in certain automobile finance contracts and mortgage finance contracts; interest at fixed rates of 11.5%-18%................ 64,718 ----------- $42,380,522 ----------- -----------
F-14 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 10 -- DEBT PARTICIPATION INTERESTS: -- (CONTINUED) In general, under the terms of the participation agreements, principal payments on the agreements are tied to the payments received from the Contracts which secure the borrowings. Interest is due monthly. Proceeds received from contracts financed by Fairfax are first paid to Fairfax to the extent of any unpaid principal and interest due on participations. Thereafter, proceeds are allocated to a reserve account until certain balances are achieved and the remainder is paid to the Company. Under the Company's participation agreements, collections received from Contracts securing the participations are deposited into restricted, trust bank accounts pending distributions to participation holders. Distributions generally are disbursed to participants once each month for the previous month's collections. The Company services the Loan and Lease Contracts collateralizing the participation arrangements, including payment collection and posting, contact with customers, and repossession and disposal of collateral on defaulted Contracts. Scheduled maturities of debt participation interests at December 31, 1995 are as follows: 1996......... $11,971,194 1997......... 10,532,585 1998......... 10,832,758 1999......... 6,699,261 2000......... 2,127,517 Thereafter... 217,207 ----------- $42,380,522 ----------- -----------
NOTE 11 -- CREDIT AND WAREHOUSE FACILITIES: Credit and warehouse facilities at December 31, 1995 consists of the following: Note payable under a $25 million automobile loan and lease financing facility, interest due monthly at 5.5% over LIBOR established and fixed at time of funding (weighted average rate of 9.3% at December 31, 1995) with General Electric Capital Corporation, secured by certain automobile finance contracts... $21,844,149 Note payable under a $50 million repurchase financing facility with Greenwich Capital secured by automobile finance contracts. Interest due monthly at 2.25% over LIBOR (weighted average rate of 8.1% at December 31, 1995).................................. 11,584,797 Note payable under a $20 million restricted financing facility with Congress Financial Corporation, interest due monthly at 2% over prime rate (10.75% at December 31, 1995), secured by automobile finance contracts, consumer finance contracts, and mortgage finance contracts..................................... -- ----------- $33,428,946 ----------- -----------
The repurchase facility is used to warehouse Loan Contracts pending securitization. Under the terms of the repurchase facility, the Company has agreed to engage the lender as investment underwriter on these securitization transactions until such time that the Company has securitized a cumulative $250 million in Loan Contracts. F-15 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 11 -- CREDIT AND WAREHOUSE FACILITIES: -- (CONTINUED) Scheduled maturities of credit and warehouse facilities at December 31, 1995 are as follows: Upon securitization.... $11,584,797 1996................... 5,071,529 1997................... 5,459,096 1998................... 6,081,862 1999................... 4,441,201 2000................... 765,133 Thereafter............. 25,328 ----------- $33,428,946 ----------- -----------
Since the repayment of the above debt is directly related to the timing of the future cash collections of the related Contracts, the above schedule of maturities may not be representative of the actual repayments. The above schedule of maturities excludes the balances held in the reserve accounts. Scheduled maturities under the repurchase financing facility are structured to coincide with the securitization of the underlying Loan Contracts collateralizing the facility. The Company must maintain certain net worth and liquidity ratios based on covenants within its debt agreements. NOTE 12 -- CONVERTIBLE SUBORDINATED DEBT: Convertible subordinated debt at December 31, 1995 consists of the following: Principal outstanding....................................... $13,065,000 Value assigned to warrants on outstanding debt.............. (140,621) ----------- Convertible subordinated debt, net.......................... $12,924,379 ----------- -----------
During 1995, the Company completed the offering and sale in private placement transactions of 9% Convertible Subordinated Debt (the 'Debentures') along with detachable common stock purchase warrants. The principal amount and accrued interest due under the Debentures is convertible into shares of common stock at the option of the holders at conversion prices ranging from $9.00 to $12.50. In addition, the Company may redeem the debt together with accrued interest, at redemption prices ranges from $15 to $25, provided that the stock price of the Company's common stock trades at the redemption price for twenty consecutive trading days. Through December 31, 1995, an aggregate of $8,260,000 of Debentures was converted into 930,519 shares of common stock. Scheduled maturities of convertible subordinated debt at December 31, 1995 are as follows: 1996.... $10,065,000 1997.... -- 1998.... 3,000,000 ----------- $13,065,000 ----------- -----------
NOTE 13 -- STOCKHOLDERS' EQUITY: In October 1993, the president and chief executive officer of the Company, who is also a stockholder, purchased all outstanding shares not previously owned by him to give him 95% ownership in the Company. The president of NAC owned the remaining 5%. In connection with this transaction, F-16 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 13 -- STOCKHOLDERS' EQUITY: -- (CONTINUED) the stockholder executed a note in favor of the Company; the note bore interest at 5% and was due September 30, 1995. In June 1994, the Company redeemed 2,143 shares of its common stock from this stockholder by cancelling the note. Merger In accordance with the terms of the Merger, of the 3,160,000 shares of common stock issued to the Company's stockholders, 400,000 shares issued to certain directors and officers were placed in a Voting Trust under the terms of a Voting Trust Agreement. The Voting Trust provides that, on any matter requiring stockholder vote, the trustee will vote the shares in the same percentage as the other then issued and outstanding shares of common stock are voted. Such shares may be released from the Voting Trust pursuant to the following formula. Based upon the Company's audited financial statements for the years ending December 31, 1995, 1996, and 1997, 10,000 shares will be released for each $150,000 of cumulative net income after taxes the Company earns up to $3,000,000, and 5,000 shares will be released for each $150,000 of cumulative net income after taxes in excess of $3,000,000, less the number of shares previously released under this formula. Any shares not released within three years will be cancelled. Originally, the Company intended to account for the release of all shares held in the Voting Trust as compensation expense. In 1995, the Company reassessed the accounting for shares after further consideration of the relevant facts and circumstances and has determined that the release of 340,000 of the 400,000 shares placed into the Voting Trust will be considered additional consideration of the Merger and not result in compensation expense. The remaining 60,000 shares will still be considered compensatory in nature resulting in a charge to earnings for the fair market value at the date of release. As of December 31, 1995, 200,000 of the 400,000 shares have been earned and are eligible for release of which $280,000 has been reflected as a non-cash charge to operations for the portion of the 60,000 shares eligible for release. Concurrent with the completion of the Merger, certain stockholders entered into a Shareholders' Agreement whereby the stockholders agreed, among other provisions, for the election of eight directors, two of which will be independent directors. The Shareholders' Agreement also provides certain limitations on transactions involving the stockholders' shares. Stock Option Plan The Company has adopted a 1994 stock option plan (the '1994 Plan') which covers 600,000 shares of the Company's common stock. Under the terms of the 1994 Plan, officers, directors, key employees and consultants of the Company are eligible to receive incentive as well as non-qualified stock options and stock appreciation rights. Incentive stock options granted under the 1994 Plan are exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Company's common stock on the date of the grant. For any stockholder owning more than 10% of the outstanding common stock, incentive stock options are exercisable for a period of up to five years from the date of grant at an exercise price which is not less than 110% of the fair market value of the Company's common stock on the date of the grant. Non-qualified stock options and stock appreciation rights ('SARs') may be granted on terms determined by the Company's Board of Directors. SARs give the holder the privilege of surrendering such rights for the appreciation in the Company's common stock between the time of grant and surrender. F-17 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 13 -- STOCKHOLDERS' EQUITY: -- (CONTINUED) The following table presents activity for the 1994 Plan for the years ended December 31, 1995 and 1994:
NUMBE OF SHARES PRICE PER SHARE --------- --------------- Options Outstanding, December 31, 1993... -- -- Options granted.......................... 215,000 $6.00 -- $ 6.60 Options exercised........................ -- -- Options cancelled........................ -- -- --------- Options Outstanding, December 31, 1994... 215,000 $6.00 -- $ 6.60 Options granted.......................... 328,500 $13.25 -- $16.50 Options exercised........................ -- -- Options cancelled........................ -- -- --------- Options Outstanding, December 31, 1995... 543,500 $6.00 -- $16.50 --------- ---------
Aggregate proceeds from the exercise of all options outstanding approximate $6 million at December 31, 1995. No options were exercisable at December 31, 1995. Purchase Option During August 1995, the Company acquired an option to purchase (the 'Purchase Option') the assets of Special Finance, Inc. ('SFI'). SFI is a Florida based auto finance broker that at December 31, 1995 provided approximately 35% of the Company's acquired Loan Contracts. The Purchase Option expires August 1, 2000 and gives the Company the right to purchase the business of SFI for the purchase price of $1,000,000, plus 125,000 shares of the Company's Common Stock and options to purchase 65,000 shares of Common Stock at $6.00 per share. A Purchase Option price of $250,000 paid to SFI on August 1, 1995 is to be credited against the purchase price. In the event the Company decides to exercise the Purchase Option, the Company has agreed to register the shares of Common Stock to be distributed in the transaction, and pending such registration, the Company has agreed to lend up to $900,000 to the sole stockholder of SFI at then prevailing market rates of interest, with such loan being secured by a security interest in up to 120,000 shares until such time as the shares are registered. Management is currently evaluating the economic benefits of exercising the Purchase Option and to date, has made no determination on the likelihood of whether or when such a purchase may occur, if at all. In the interim, the Purchase Option provides the Company with a right of first refusal to purchase all of the Loan Contracts acquired or originated by SFI. Stock Purchase Warrants The Company has issued detachable stock purchase warrants (the 'warrants') in connection with the private placement of convertible subordinated debt. At December 31, 1995, the Company had 1,961,125 in warrants outstanding at exercise prices ranging from $9 to $15. The warrants contain features that permit redemption at $.001 per warrant based on the average trading prices of the Company's common stock. F-18 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 14 -- INCOME TAXES: The components of the provision for income taxes for the years ended December 31, 1995 and 1994, consist of the following:
1995 1994 ---------- -------- Current tax expense: Federal.......................... $ 360,243 $231,591 State............................ 72,951 43,981 ---------- -------- 433,194 275,572 ---------- -------- Deferred tax expense (benefit): Federal.......................... 1,349,092 (10,390) State............................ 144,035 (1,839) ---------- -------- 1,493,127 (12,229) ---------- -------- Total provision for income taxes... $1,926,321 $263,343 ---------- -------- ---------- --------
The income tax provision differs from the amount determined by multiplying pre-tax income by the statutory federal income tax rate. The reconciliation between the expected tax provision and the actual tax provision for the years ended December 31, 1995 and 1994 is as follows:
1995 1994 ---------- -------- Income taxes at statutory rate..... $1,653,185 $223,606 State taxes........................ 141,721 27,814 Other.............................. 131,415 11,923 ---------- -------- Provision for income taxes......... $1,926,321 $263,343 ---------- -------- ---------- --------
The net deferred income tax liability as of December 31, 1995 is comprised of the following temporary differences: Deductible Temporary Differences Depreciation................................. $ 5,850,659 Bad debt reserves............................ 362,441 Other........................................ -- ----------- Deferred income tax asset.................... 6,213,100 ----------- Taxable Temporary Differences Direct financing Lease Contracts............. (6,685,591) Book over tax gain on sale of contracts...... (1,131,096) Capitalized loan costs....................... -- ----------- Deferred income tax liability................ (7,816,687) ----------- Net deferred income tax liability............ $(1,603,587) ----------- -----------
NOTE 15 -- RELATED PARTY TRANSACTIONS: In October 1994, the Company sold a repossessed boat to an officer of the Company in consideration for a note in the amount of $89,000 and the offset by the Company of $21,000 payable to the officer. The note bore interest at an annual rate of 10% and was repaid in 1995. On November 30, 1994, the Company sold a portfolio of 14 loans with a total principal balance of $1.1 million to the president and chief executive officer of the Company for a price of $591,000. These loans were included in a portfolio purchased during 1994 at a significant discount. The portion of the F-19 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 15 -- RELATED PARTY TRANSACTIONS: -- (CONTINUED) purchase price allocated to the loans sold approximated the sales price to the officer; therefore, no gain or loss was recognized on the sale. The Company sold these loans at a purchase price based on the estimated discounted cash flows anticipated on the specific loans purchased. This is the same method the Company uses to value its bulk portfolio acquisitions. The sales price of the loans reduced a previously established liability owed by the Company to the officer for bonuses and dividends. The Company continues to service the loans for the officer. An affiliate provided executive and financial services to the Company during 1994. The Company reimbursed the affiliate $675,000 for these services under a consulting agreement. The consulting agreement includes providing advice on the purchase and sale of consumer loan and lease portfolios and financing arrangements. Under the terms of the agreement, the Company pays the affiliate a fee of $50,000 per month through March 1995. During 1994, the Company prepaid the remaining amounts due under the contract at a $75,000 discount. Upon completion of the Merger, the Company entered into an employment agreement (the 'Agreement') with the president and chief executive officer of the Company. The Agreement provides for a base salary of $275,000 per year plus discretionary bonuses, as approved by the Board of Directors, in addition to certain benefits. The Agreement is renewable annually for successive three year periods; however, the president may terminate the Agreement upon written notice the earlier of one year from the date of such notice or 90 days after his replacement has been hired by the Company. The president may not terminate the Agreement prior to three years from the date of the Agreement. During 1995, the Board of Directors approved an increase in base salary to $300,000 per year. At December 31, 1995, the Company had a stockholder loan payable in the amount of $2,919,000, interest at 9%, which is due on March 31, 1996. However, this loan may be extended at the discretion of the chief executive officer for 30 day periods. NOTE 16 -- EMPLOYEE BENEFITS: The Company sponsors a 401(k) savings plan covering most employees. Contributions made by the Company to the 401(k) plan are based on a specified percentage of employee contributions. Total Company contributions were $48,355 and $22,787 for the years ended December 31, 1995 and 1994, respectively. NOTE 17 -- LITIGATION: The Company is involved in various litigation matters arising in the normal course of business. Legal counsel's and management's assessment are that none of these matters are anticipated to have a material adverse impact on the financial position or results of operations of the Company. NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Fair value estimates are made at a specific point in time using estimates of rates of return that the Company believes would be required by independent third party investors. Accordingly, these estimates may not be indicative of rates that would be required if actual sales had taken place. F-20 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1994 NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (CONTINUED) Finance Receivables The fair value of finance receivables is computed by using estimated market rates of return desired by bulk purchasers. Excess Servicing Receivable Excess servicing cash flows over the estimated remaining life of the Loan Contracts have been calculated using estimates for prepayments, losses and weighted average discount rates, which the Company expects market participants would use for similar instruments. Accordingly, the carrying amount approximates the fair value. Debt Participation Interests; Credit and Warehouse Facilities The fair value of existing debt is computed based on rates currently available to the Company for debt with similar terms and maturities. Other Financial Liabilities The fair value of other financial liabilities closely approximates carrying amount. The estimated fair values of the Company's financial instruments at December 31, 1995 were as follows:
DECEMBER 31, 1995 ----------------------------- CARRYING FAIR AMOUNT VALUE ------------ ------------ Financial Assets: Cash......................................... $ 920,981 $ 920,981 Restricted cash.............................. 1,031,734 1,031,734 Finance receivables: Automobile finance contracts............... 97,119,635 97,323,178 Consumer finance contracts................. 2,289,503 2,383,365 Mortgage finance contracts................. 1,805,068 1,981,481 Excess servicing receivable.................. 4,999,165 4,999,165 ------------ ------------ Total................................... $108,166,086 $108,639,904 ------------ ------------ ------------ ------------ Financial Liabilities: Debt participation interests................. $ 42,380,522 $ 42,305,963 Credit and warehouse facilities.............. 33,428,946 33,017,076 Convertible subordinated debt................ 12,924,379 12,924,379 Stockholder loans............................ 2,919,000 2,919,000 ------------ ------------ Total................................... $ 91,652,847 $ 91,166,418 ------------ ------------ ------------ ------------
NOTE 19 -- SUBSEQUENT EVENTS: In January 1996, the Company completed the sale of $2.5 million of additional subordinated debentures with terms similar to previously issued convertible subordinated debt. On March 22, 1996, the Company completed a securitization of Loan Contracts of approximately $40.8 million. F-21 NAL FINANCIAL GROUP INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------- ASSETS: Cash and cash equivalents....................... $ 3,090 $ 921 Restricted cash................................. 1,482 1,032 Finance receivables, net........................ 87,739 101,214 Investment in operating Lease Contracts......... 8,905 4,055 Automobile inventory............................ 2,384 1,886 Excess servicing receivable..................... 22,898 4,999 Premises and equipment, net..................... 2,685 1,803 Accrued interest receivable..................... 2,875 1,460 Debt issue costs................................ 2,336 857 Goodwill........................................ 3,671 -- Other assets.................................... 6,768 3,808 --------- --------- TOTAL ASSETS $ 144,833 $ 122,035 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Credit and warehouse facilities................. $ 49,191 $ 33,429 Debt participation interests.................... 21,682 42,380 Convertible subordinated debt................... 25,843 12,924 Accounts payable and accrued expenses........... 2,233 1,047 Income taxes payable............................ 4,713 1,604 Stockholder loan................................ -- 2,919 Other liabilities............................... 3,913 3,872 --------- --------- TOTAL LIABILITIES 107,575 98,175 --------- --------- STOCKHOLDERS' EQUITY: Preferred Stock - $1,000 par value: 10,000,000 shares authorized, no shares issued Common Stock - $.15 par value: 50,000,000 shares authorized, 7,252,935 shares outstanding at September 30, 1996 and 6,699,987 shares outstanding at December 31, 1995.......................... 1,088 1,005 Paid in capital................................. 25,698 18,525 Retained earnings............................... 10,472 4,330 --------- --------- TOTAL STOCKHOLDERS' EQUITY 37,258 23,860 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,833 $ 122,035 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-22 NAL FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------ 1996 1995 ------- ------- INTEREST INCOME: Finance charges and discount accretion............... $17,154 $10,999 Interest expense..................................... (8,218) (4,636) ------- ------- Net interest income............................... 8,936 6,363 Provision for credit losses.......................... (2,801) (1,412) ------- ------- Net interest income after provision for credit losses.............................. 6,135 4,951 ------- ------- OTHER INCOME: Gain on sale of contracts............................ 13,427 128 Fees and other....................................... 4,670 1,241 ------- ------- Total other income............................. 18,097 1,369 ------- ------- OTHER EXPENSES: Salaries and employee benefits....................... 6,060 1,373 Depreciation and amortization........................ 1,250 691 Occupancy expense.................................... 773 289 Professional services................................ 1,401 488 Other operating expense.............................. 4,360 1,673 Non cash charge for the release of escrow shares..................................... 301 80 ------- ------- Total other expenses........................... 14,145 4,594 ------- ------- Income before income taxes........................... 10,087 1,726 Provision for income taxes........................... (3,945) (656) ------- ------- NET INCOME............................................. $ 6,142 $ 1,070 ------- ------- ------- ------- Primary Earnings Per Share: Net income available to common and common equivalent shares.................................... $ 6,900 $ 1,070 Weighted average number of common and common equivalent shares............................. 8,484 5,875 Net income per share................................... $ 0.81 $ 0.18 Fully Diluted Earnings Per Share: Net income available to common and common equivalent shares.................................... $ 7,827 $ 1,070 Weighted average number of common and common equivalent shares............................. 10,369 6,013 Net income per share................................... $ 0.75 $ 0.18
The accompanying notes are an integral part of these consolidated financial statements. F-23 NAL FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1996 1995 -------- -------- Cash flows from operating activities: Net Income........................................... $ 6,142 $ 1,070 Adjustments to reconcile net income to net cash provided by operations: Accretion of discount.......................... -- (599) Provision for credit losses.................... 2,801 1,412 Depreciation and amortization.................. 3,101 691 Gain on sale of loan pools..................... (13,427) (128) Non-cash charge - escrow shares................ 301 80 Return of excess servicing cashflows........... 1,949 -- Changes in assets and liabilities: Other, net..................................... (760) 362 -------- -------- Net cash provided by operating activities:............. 107 2,888 -------- -------- Cash flows from investing activities: Purchase of receivables........................... (197,445) (108,876) Payments received on receivables.................. 42,427 31,788 Purchase of property and equipment................ (1,066) (689) Proceeds from sale of loan pools.................. -- 1,623 Purchase of Special Finance, Inc.................. (750) (250) -------- -------- Net cash used in investing activities:................. (156,834) (76,404) -------- -------- Cash flows from financing activities: Net proceeds from financings...................... 196,152 111,094 Repayments of financings.......................... (201,088) (40,662) (Repayments) proceeds of stockholder loan......... (2,919) 791 Net proceeds from securitization of Loan Contracts....................................... 149,251 -- Proceeds from subordinated debentures............. 17,500 -- Issuance of common stock.......................... -- 2,101 -------- -------- Net cash provided by financing activities:............. 158,896 73,324 -------- -------- Net increase (decrease) in cash and cash equivalents... 2,169 (192) Cash and cash equivalents, beginning of period 921 665 -------- -------- Cash and cash equivalents, end of period............... $ 3,090 $ 473 -------- -------- -------- -------- Supplemental disclosures of cash flows information: Cash paid during the period for interest............... $ 4,724 $ 3,965 -------- -------- -------- -------- Cash paid during the period for taxes.................. $ 1,465 $ 346 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. F-24 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION: The interim financial information of NAL Financial Group Inc. (the 'Company'), which is included herein, is unaudited and has been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. In the opinion of management, these interim financial statements include all the adjustments necessary to fairly present the results of the interim periods and all such adjustments which are of a normal recurring nature. The interim financial statements presented herein include the accounts of the Company and its wholly-owned subsidiaries and should be read in conjunction with the audited financial statements, and the footnotes thereto, for the year ended December 31, 1995. Certain 1995 amounts have been reclassified to conform with the current year presentation. Operating results for the nine month period ended September 30, 1996 are not necessarily indicative of the results which may be expected for the year ending December 31, 1996. NOTE 2 -- FINANCE RECEIVABLES: Finance receivables as of September 30, 1996 and December 31, 1995 consist of the following:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- (IN THOUSANDS) Automobile finance contracts Gross contracts receivable...................... $ 97,454 $ 106,983 Less: Unearned interest...................... (8,154) (7,069) Deferred acquisition fees............... (382) (123) -------- --------- 88,918 99,791 -------- --------- Consumer contracts receivable Gross contracts receivable...................... 2,056 2,768 Less: Unearned interest...................... (160) (286) Purchase discount....................... (102) (193) -------- --------- 1,794 2,289 -------- --------- Mortgage loans receivable Gross loans receivable.......................... 1,559 2,064 Less: Purchase discount...................... (285) (259) -------- --------- 1,274 1,805 -------- --------- Total finance receivables......................... 91,986 103,885 Reserve available for credit losses............... (4,247) (2,671) -------- --------- Total finance receivables, net.................... $ 87,739 $ 101,214 -------- --------- -------- ---------
The reserve available for credit losses consists of an allowance for losses established through a provision from earnings, non-refundable purchase discount on Loan Contracts purchased from Dealers, and refundable reserves such as dealer holdback. Purchase discount represents the differential, if any, between the amount financed on a Loan Contract and the price paid by the Company to acquire the Loan Contract, net of any acquisition costs. Any discount on Loan Contracts which management considers necessary to absorb future credit losses is allocated to the reserve available for credit losses. The remaining portion of the discount, if any, is recognized as interest income over the life of the Loan Contracts. F-25 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- EXCESS SERVICING RECEIVABLE: Excess servicing receivable results from the sale of Loan Contracts on which the Company retains servicing rights and a portion of the excess cash flows. Excess servicing receivable is determined by computing the difference between the weighted average yield of the Loan Contracts sold and the yield to the purchaser of the asset-backed security, adjusted for the contractual servicing fee based on the agreements between the Company and the purchaser. The resulting differential is recorded as a gain in the year of the sale equal to the present value of the estimated future cash flows, net of any portion of the excess that may be due to the purchaser and adjusted for anticipated prepayments, repossessions, liquidations and other losses. The excess servicing cash flows over the estimated remaining life of the Loan Contracts have been calculated using estimates for prepayments, losses (charge-offs) and weighted average discount rates, which the Company expects market participants would use for similar instruments. The Company updates its cash flows on a quarterly basis using actual rates of prepayments and losses to assess the remaining value of the excess servicing receivable in the aggregate. NOTE 4 -- VOTING TRUST AGREEMENT: On November 30, 1994, the Company became publicly held by virtue of the Merger with an existing, yet inactive, public company. Of the 3,160,000 shares of the Company's common stock received by certain stockholders in conjunction with the Merger, 400,000 shares were placed into the Voting Trust Agreement by which shares may be released on an annual basis pursuant to a formula tied to net income earned by the Company. Any shares not released from the Voting Trust Agreement at the end of three years will be canceled. Management has evaluated the accounting treatment relating to the potential release of the shares under the Voting Trust Agreement using recent accounting guidance and the relevant facts and circumstances, and has determined that the potential release of approximately 340,000 shares of the total amount of shares held under the Voting Trust Agreement is not compensatory. The potential release of the remaining approximately 60,000 shares is considered compensatory based on the relevant facts and circumstances and, accordingly, an expense has been reflected for financial reporting purposes as these shares became eligible for release. This expense was a non-cash charge and did not affect working capital or total stockholders' equity. Compensation expense of $301,000 and $80,000 has been recorded for the nine months ended September 30, 1996 and 1995, respectively, for the portion of the 60,000 shares that has become eligible for release under the Voting Trust Agreement. As of September 30, 1996, all of the 400,000 shares under the Voting Trust Agreement have become eligible for release. NOTE 5 -- BUSINESS COMBINATION: As of June 28, 1996, the Company purchased certain assets of SFI, a Florida based automobile finance company pursuant to a Purchase Option for a purchase price of $1 million, plus 125,000 shares of the Company's Common Stock and options to purchase 65,000 shares of Common Stock at an exercise price of $6.00 per share. A Purchase Option price of $250,000 paid to SFI on August 1, 1995 was credited against the purchase price. As a result of this purchase, the Company recorded goodwill in the amount of $3.8 million. NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS: In October 1995, the Financial Accounting Standards Board ('FASB') issued Statement of Financial Accounting Standards No. 123 ('SFAS No. 123'), 'Accounting for Stock-Based Compensation.' SFAS No. 123 establishes financial accounting and reporting standards for stock- F-26 NAL FINANCIAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS: -- (CONTINUED) based employee compensation plans. The statement defines a 'fair value based method' of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, SFAS No. 123 also allows an entity to continue to measure compensation costs for those plans using the 'intrinsic value based method' of accounting, which the Company currently uses. The accounting requirements of SFAS No. 123 are effective for transactions entered into during fiscal years beginning after December 15, 1995. The disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially adopted for recognizing compensation cost. Management has determined that the Company will continue to measure compensation costs using the 'intrinsic value based method' and will disclose the effect on net income and earnings per share using the 'fair value based method' in the footnotes to the Company's financial statements upon the adoption of SFAS No. 123. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125 ('SFAS No. 125'), 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.' SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on a financial-components approach that focuses on control. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be prospectively applied. However, a proposal has recently been developed to defer, for one year, certain provisions of SFAS No. 125. Management is currently evaluating the impact of adoption of SFAS No. 125 on its financial position and results of operations. NOTE 7 -- SUBSEQUENT EVENTS: On November 8, 1996, the Company filed a Registration Statement on Form SB-2 (No. 333-15787), as amended on November 22, 1996 by Pre-Effective Amendment No. 1 to the Registration Statement, with the Securities and Exchange Commission relating to a proposed public offering of 2,500,000 shares of Common Stock. Net proceeds of the offering will be used to support growth and for general corporate purposes, including working capital, future acquisitions, the repayment of certain advances totaling $2,413,869 to the Chief Executive Officer and the repayment of short-term indebtedness of $2,000,000. Pending such use, the net proceeds will be used to repay indebtedness under the Company's warehouse and other credit facilities. F-27 - ---------------------------------------------------------- - ---------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Available Information....................................... 2 Prospectus Summary.......................................... 3 Summary Financial Information............................... 7 Risk Factors................................................ 8 Use of Proceeds............................................. 15 Price Range of Common Stock................................. 16 Dividend Policy............................................. 16 Capitalization.............................................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 The Company................................................. 33 Management.................................................. 52 Certain Transactions........................................ 59 Principal Stockholders...................................... 61 Description of Securities................................... 64 Shares Eligible for Future Sale............................. 70 Underwriting................................................ 71 Legal Matters............................................... 72 Statement of Indemnification................................ 72 Experts..................................................... 72 Additional Information...................................... 73 Index to Financial Statements............................... F-1
- ---------------------------------------------------------- - ---------------------------------------------------------- 2,500,000 Shares [LOGO] NAL FINANCIAL GROUP INC. Common Stock ------------------------ PROSPECTUS ------------------------ PRUDENTIAL SECURITIES INCORPORATED PIPER JAFFRAY INC. SANDS BROTHERS & CO., LTD. December , 1996 - ---------------------------------------------------------- - ---------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers The Company has adopted the provisions of Section 102(b)(7) of the Delaware General Corporation Law (the "Delaware Act") which eliminate or limit the personal liability of a director to the Company or its stockholders for monetary damages for breach of fiduciary duty under certain circumstances. Furthermore, under Section 145 of the Delaware Act, the Company may indemnify each of its directors and officers against his expenses (including reasonable costs, disbursements and counsel fees) in connection with any proceeding involving such person by reason of his having been an officer or director to the extent he acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The determination of whether indemnification is proper under the circumstances, unless made by a court, shall be determined by the Board of Directors. Reference is made to Item 28 for the undertakings of the Registrant with respect to indemnification of liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Item 25. Other Expenses of Issuance and Distribution The following is a list of the estimated expenses to be incurred by the Registrant in connection with the preparation and filing of this Registration Statement. SEC Registration Fee........................................$ 11,217 Printing and Engraving.......................................125,000 Accountants' Fees and Expenses...............................100,000 Blue Sky Filing Fees and Expenses.............................20,000 NASD Filing Fee................................................4,202 Listing Fees..................................................17,500 Legal Fees and Expenses......................................272,081 Other Offering Expenses......................................200,000 -------- TOTAL....................$750,000 ======== Item 26. Recent Sales of Unregistered Securities 1. In December 1993, the Company sold 143,333 post-split shares of Common Stock to Discretionary Investment Trust dated July 7, 1993 in consideration for the purchase price of $100,000 plus certain valuable services rendered. This sale was made in reliance on the exemption from registration requirements provided by Section 4(2) of the Securities Act. II-1 2. During October 1994, the Company sold 714,999 shares of Common Stock, $.15 par value, in private placement transactions exempt from registration requirements under Section 4(2) of the Securities Act. Number of Shares Name of Common Stock Consideration ---- ---------------- ------------- Audley International Investments Limited 300,000 $48,600 American Maple Leaf Financial 333,333 $19,999 Corporation Ernest and Kathy Bartlett 19,166 $ 3,105 Kenneth A. Rosen 43,334 $ 7,020 SPH Investments P/S Plan f/b/o Stephen P. Harrington 19,166 $ 3,105 3. During November and December 1994, the Company sold 1,549,667 shares of Common Stock, $.15 par value, to accredited and sophisticated investors in a private placement transaction exempt from registration pursuant to Rule 506 of Regulation D. In connection with this transaction, brokerage commissions of $539,370 (6.5%) were paid. The following individuals purchased shares at $6.00: Number of Shares Name of Common Stock ---- ---------------- Allen, Alvin 10,000 Alperin, David 3,375 Alperin, Judith 2,500 Alu, James M. 9,000 Angiuli, Nick 154,696 Apothaker, Jonathan 875 Beckerman, Sam 3,500 Bellino, Michael/Supnick, Richard 2,500 Steven R. Blecker TTEE for Athanacia Bell Trust 4,000 Steven R. Blecker TTEE for Elizabeth Bell Trust 4,000 Block, Charles 2,500 Borenstein, Howard 2,500 Brennan, Quinn 3,375 The Bridge Fund 8,500 Brown Valet, Inc. 5,250 Button, Richard 7,000 Buck, Paul 5,000 Cantor, Michael 30,000 Chaiken, Carl 875 Cohen, Bernard 6,000 Cohen, Susan 2,500 Colon, Jose F. 13,000 Costa, Neil and Ahrens, Lynne JTWROS 14,500 Cox, J. Douglas 3,500 Cox, Kathryn Retirement Trust 3,500 Diamond Import Group 3,500 II-2 Diversified Securities Fund I, L.P. 3,500 Eugene M. Eisner MD PA Pension Trust 5,000 Fabrikant, Martin 2,500 Feldman, Joel & Shirley, JTWROS 1,750 Flam, Robert M. 5,000 Foreman, Michael 3,000 Frankel, Richard 10,000 Garnick, Michael 100,000 Garnick, Richard 1,250 Gates, Andrew and Gloria 1,750 Genack, Menachem 875 GiroCredit Bank (Switzerland) A.G. 17,500 Goldberg, Paul 3,500 Goldberg, Robert Theodore 3,500 Goldberg, Sheldon E. & Toni A. 2,500 GOP Partners 17,000 Henderson, Marilyn 7,000 Hess, Julie 5,000 Hollander, Bernard 3,500 Interbanc Mortgage Services, Inc. 33,000 Jackenthal, Herb 875 Jeddi Limited 25,000 Joseph, Gerson 5,000 Josephart, Herbert Employee Defined 5,000 Benefit Pension Plan dtd 1/1/91 Herbert and Marcia Josephart TTEES JRJ, Inc. 13,000 Kaplan, Charles 875 Kaplan, Susan 2,500 Karp, Florence c/f Penelope Karp and Athena Karp 12,500 Kaufman, Richard and Adrienne JTWROS 1,500 Lambert, Terrence 2,500 Lilly, Richard M. 2,000 Linsker, Rita 3,500 Love, Douglas 5,000 Lucas, Russell 2,500 Luongo, Michael 875 Manheimer, Marvin 2,500 Marks, Mitchell 12,500 Masucci, Robert N., II 875 McCabe, William Dennis III 2,500 Miller, Alan I. 50,000 Miller, Marc 5,000 Moorman, Jeffrey 3,500 Moriuchi, Takashi B. 875 Morgenstern, Richard 4,000 Mousaieff, Yoram 7,000 MRS Investments 37,500 Najmy, Joseph 3,500 Nedwick, Robert & Barbara JTWROS 6,000 Pacht, Harvey & Joan 3,500 Prevor Marketing International Inc. 4,000 Rabin, Jeffrey 50,000 Rachenbach, Jack L. 3,500 Rauseo, Mark 2,500 Rehcam Investments, LP 4,500 Rehcam Investments, NV 4,500 Reiff, Geraldine ttee, Carol Reiff Gottlieb 5,000 Co-ttee f/b/o Geraldine Reiff UAD 1/2/91 Rice, Howard T. Revocable Trust 3/10/76 3,500 Howard T. Rice TTEE II-3 Rice, Irving & Elaine, JTWROS 3,500 Rogoff, Ellen 1,750 Rogoff, Les 7,000 Rosen, Joseph 3,334 Rosen, Kenneth A. 16,666 Rosen, Kenneth A. Pension Plan 20,000 Rosner, Anita 2,500 Sato, Ken 4,500 Schoenbaum, Jeff 10,000 Schnell, David 5,000 Schraub, Howard 10,658 Scinicariello, M. 3,500 Serota, Marvin & Marsha 3,500 SGA Trading Corp. 4,000 Shapiro, Allan 10,000 Shotz, Steven & Barbara 3,500 Shrem, Bella 7,000 Sibco Partners 3,500 Silverman, Eugene 7,000 Slovin, Gilbert 438 Slovin, Joel 875 Smolen, Eric 6,000 Sorrentino, Andrew 5,250 Staller, Jerome 15,000 Stanley, Michael 5,000 Strassberg, David 5,000 Tupper, Ronald W. 25,000 Van Brunt, Dwight S. 5,000 Ward, Dean 4,250 Wray, Paul & Herron, Diane JTWROS 16,000 Yanni, Louis 2,500 The following individuals purchased shares at $4.00: Jeffrey I. Binder & Rosalie Binder 250,000 George A. Levin & Gayla Sue Levin 250,000 II-4 4. As of November 30, 1994, the Company issued a total of 3,160,000 shares of Common Stock, $.15 par value, to the stockholders set forth in the table below in consideration for the exchange of 100% of the stock of NAL Financial Group Inc., a Florida corporation. Shares of Name Common Stock - ---- ------------ Edward M. Bartolini 50,000 Marcia G. Bartolini and Robert R. Bartolini as co-trustees of the Marcia G. Bartolini Revocable Trust dated July 27, 1992 264,022 Robert R. Bartolini and Marcia G. Bartolini as co-trustees of the Robert R. Bartolini Revocable Trust dated July 27, 1992 2,212,180 Robert J. Carlson 60,196 George Schnabel as trustee of the Robert R. Bartolini and Marcia G. Bartolini Irrevocable Trust dated July 27, 1992 264,022 John T. Schaeffer 309,580 The issuance of such shares was made in reliance on the exemption from registration requirements provided by Section 4(2) of the Securities Act. 5. During the period from April 1995 through January 1996, the Company sold $23,825,000 of 9% Convertible Subordinated Debenture Units in a private placement transaction exempt from the registration requirements under Section 506 of Regulation D and Section 4(2) of the Securities Act, as set forth below. Each Unit consists of a 9% Convertible Subordinated Debenture and common stock purchase warrants as set forth below. In connection with this transaction, brokerage commissions of $1,229,000 were paid. Amount of Number of Name Debenture Warrants ---- --------- --------- American Maple Leaf $1,200,000 120,000 Financial Corporation Gerald Appel $25,000 1,250 Myles Bass $925,000 64,750 $575,000 40,250 S. Beckerman $100,000 4,500 R. Button $100,000 4,500 Capital Growth Investment $50,000 5,000 Trust Centaur Financial Corp. $100,000 10,000 Doug Cox $125,000 5,625 K. Cox $100,000 4,500 Discretionary Investment $900,000 90,000 Trust dated July 7, 1993 Diversified Securities Fund I, L.P. $100,000 5,000 Equity Associates Corp. $50,000 5,000 FAC Enterprises $750,000 75,000 Bruce Ginsburg $250,000 25,000 GRA Investments, Corp. $1,550,000 155,000 II-5 Michael Garnick $300,000 12,000 Norton Herrick $1,250,000 87,500 HMA Investments, Inc. $600,000 60,000 Profit Sharing f/b/o Howard Appel Interbanc Mortgage $200,000 9,000 Florence Karp as c/f $750,000 75,000 Penelope Karp, Athena Karp, Justine Karp, and Ulysses Karp Florence Karp $5,500,000 550,000 as c/f Penelope and Athena Karp Provence Holdings $625,000 56,250 Steven B. Rosner $250,000 25,000 Steven B. Rosner $150,000 15,000 Money Purchase Pension Plan Rozel International $1,750,000 175,000 Holdings Limited $1,300,000 58,500 Martin Solomon $2,000,000 80,000 TGP Associates Limited Partnership $1,000,000 40,000 Westminster Capital, Inc. $1,250,000 87,500 6. During May 1995 and September 1995, the Company issued 190,000 common stock purchase warrants in connection with certain financial advisory services provided, as follows: Number of Name Warrants Date of Grant ---- --------- ------------- American Maple Leaf Financial Corporation 33,000 May 4, 1995 Ernest & Kathy Bartlett 15,000 May 4, 1995 Centaur Financial Corporation 33,000 May 4, 1995 FAC Enterprises, Inc. 50,000 August 28, 1995 25,000 September 14, 1995 34,000 May 4, 1995 7. During August 1995, the Company sold 176,500 shares of Common Stock in an offshore offering at a purchase price of $12.30 per share, for an aggregate purchase price of $2,160,000, as set forth below. In connection with this transaction, brokerage commissions of $70,000 were paid. Name Shares of Common Stock ---- ---------------------- Everest Capital Investment, Ltd. 78,295 Everest Capital International, Ltd. 98,205 The issuance of such shares was exempt from registration pursuant to Regulation S promulgated under the Act. 8. Effective as of April 23, 1996, the Company sold to Great American Reserve Insurance Company and Beneficial Standard Life Insurance Company, as wholly-owned subsidiaries of Conseco, Inc., $10,000,000 principal amount of 9% Convertible Subordinated II-6 Debentures and issued 515,000 common stock purchase warrants in a private placement transaction exempt from registration requirements under Section 506 of Regulation D and Section 4(2) of the Securities Act. In connection with this transaction, brokerage commissions and investment banking fees of $550,000 and 160,000 common stock purchase warrants were paid. 9. Effective as of September 12, 1996, the Company sold to Convertible Holdings, Inc. and Merrill Lynch World Income Fund, Inc. $5,000,000 principal amount of 10% Convertible Subordinated Debentures and issued 62,500 common stock purchase warrants in a private placement transaction exempt from registration requirements under Section 506 of Regulation D and Section 4(2) of the Securities Act. In connection with this transaction, brokerage commissions of $300,000 were paid. Item 27. Exhibits The following Exhibits are filed as part of this Report:
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 1.1 Form of Underwriting Agreement between the Incorporated by reference to Exhibit 1.1 to Registrant and Prudential Securities the Registrant's Pre-effective Amendment Incorporated, Piper Jaffray Inc. and Sands No. 1 to the Registration Statement on Form Brothers & Co., Ltd. SB-2 filed under the Securities Act on November 22, 1996, Registration No. 333-15787 ("Pre-effective Amendment No. 1 to the November 1996 Registration Statement") - ------------------------------------------------------------------------------------------------------------------- 2.1 Merger Agreement between the shareholders Incorporated by reference to Exhibit 2.1 to of NAL Financial Group Inc., NAL Financial the Registrant's Form 8-K filed under the Group Inc., and the Registrant dated Exchange Act on December 8, 1994 (the "Form October 4, 1994 and as amended, November 8-K") 30, 1994 - ------------------------------------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit 3.1 to Registrant, as amended December 1, 1994 the Registrant's Registration Statement on Form SB-2 filed under the Securities Act on January 31, 1995, Registration No. 33-88966 (the "January 1995 Registration Statement") - ------------------------------------------------------------------------------------------------------------------- 3.2 Certificate of Amendment to Certificate of Incorporated by reference to Exhibit 3.3 to Incorporation of the Registrant dated May the Registrant's Quarterly Report on Form 31, 1996 10-QSB for the period ended June 30, 1996 ("June 1996 10-QSB") - ------------------------------------------------------------------------------------------------------------------- 3.3 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.4 to Registrant dated May 31, 1996 the June 1996 10-QSB - -------------------------------------------------------------------------------------------------------------------
II-7
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 4.1 Copy of Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1 to the January 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 4.2 Form of 9% Subordinated Convertible Incorporated by reference to Exhibit 4.2 to Debenture the Registration Statement on Form SB-2, Registration No. 33-97948, filed on October 25, 1995 (the "October 1995 Registration Statement") ------------------------------------------------------------------------------------------------------------------- 4.3 Form of Common Stock Incorporated by reference to Exhibit 4.3 to Purchase Warrant the October 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 4.4 Form of Common Stock Purchase Warrant Incorporated by reference to Exhibit 4.4 of the October 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 4.5 Securities Purchase Agreement between NAL Incorporated by reference to Exhibit 4.5 to Financial Group Inc., Beneficial Standard the Registrant's Quarterly Report on Form Life Insurance Company and Great American 10-QSB for the period ended March 31, 1996 Reserve Insurance Company dated as of ("March 1996 10-QSB") April 23, 1996 - ------------------------------------------------------------------------------------------------------------------- 4.6 9% Subordinated Convertible Debenture in Incorporated by reference to Exhibit 4.12 the principal amount of $5,000,000 payable to the March 1996 10-QSB to Great American Reserve Insurance Company - ------------------------------------------------------------------------------------------------------------------- 4.7 9% Subordinated Convertible Debenture in Incorporated by reference to Exhibit 4.7 to the principal amount of $5,000,000 payable the March 1996 10-QSB to Beneficial Standard Life Insurance Company - ------------------------------------------------------------------------------------------------------------------- 4.8 Common Stock Purchase Warrant granted to Incorporated by reference to Exhibit 4.8 to Conseco, Inc. ($12.625) the March 1996 10-QSB - ------------------------------------------------------------------------------------------------------------------- 4.9 Common Stock Purchase Warrant granted to Incorporated by reference to Exhibit 4.9 to Conseco, Inc. ($14.52) the March 1996 10-QSB - -------------------------------------------------------------------------------------------------------------------
II-8
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 4.10 Stockholders' Agreement entered into as of Incorporated by reference to Exhibit 4.10 April 23, 1996 among NAL Financial Group to the March 1996 10-QSB Inc., Beneficial Standard Life Insurance Company and Great American Reserve Insurance Company - ------------------------------------------------------------------------------------------------------------------- 4.11 Registration Rights Agreement between NAL Incorporated by reference to Exhibit 4.11 Financial Group Inc. and Conseco, Inc. to the March 1996 10-QSB - ------------------------------------------------------------------------------------------------------------------- 4.12 Registration Rights Agreement between NAL Incorporated by reference to Exhibit 4.12 Financial Group Inc., Beneficial Standard to the March 1996 10-QSB Life Insurance Company and Great American Reserve Life Insurance Company - ------------------------------------------------------------------------------------------------------------------- 4.13 Form of Amended and Restated Registration Incorporated by reference to Exhibit 4.13 Rights Agreement to the June 1996 10-QSB ------------------------------------------------------------------------------------------------------------------- 4.14 Securities Purchase Agreement between NAL Incorporated by reference to Exhibit 4.14 Financial Group Inc. and Merrill Lynch to the Registrant's Quarterly Report on World Income Fund, Inc. and Convertible Form 10-QSB for the period ended September Holdings, Inc. dated September 12, 1996 30, 1996 ("September 1996 10-QSB") - ------------------------------------------------------------------------------------------------------------------- 4.15 10% Subordinated Convertible Debenture in Incorporated by reference to Exhibit 4.15 the principal amount of $2,250,000 payable to the September 1996 10-QSB to Bridge Rope & Co. - ------------------------------------------------------------------------------------------------------------------- 4.16 10% Subordinated Convertible Debenture in Incorporated by reference to Exhibit 4.16 the principal amount of $2,750,000 payable to the September 1996 10-QSB to Kane & Co. - ------------------------------------------------------------------------------------------------------------------- 4.17 Common Stock Purchase Warrant granted to Incorporated by reference to Exhibit 4.17 Bridge Rope & Co. ($13.92) to the September 1996 10-QSB - ------------------------------------------------------------------------------------------------------------------- 4.18 Common Stock Purchase Warrant granted to Incorporated by reference to Exhibit 4.18 Kane & Co. ($13.92) to the September 1996 10-QSB - -------------------------------------------------------------------------------------------------------------------
II-9
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 4.19 Registration Rights Agreement between NAL Incorporated by reference to Exhibit 4.19 Financial Group Inc. and Merrill Lynch to the September 1996 10-QSB World Income Fund, Inc. and Convertible Holdings, Inc. dated September 12, 1996 - ------------------------------------------------------------------------------------------------------------------- 5.1 Opinion of Buchanan Ingersoll Professional Incorporated by reference to Exhibit 5.1 to Corporation Pre-effective Amendment No. 1 to the November 1996 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 9.1 Voting Trust Agreement by and among Incorporated by reference to Exhibit 2.2 to English, McCaughan & O'Bryan, P.A., John the Form 8-K T. Schaeffer, Robert J. Carlson and The Robert R. Bartolini Trust, dated November 30, 1994 ------------------------------------------------------------------------------------------------------------------- 10.1 Loan and Security Agreement between Incorporated by reference to Exhibit 10.2 Congress Financial Corporation and the to the Jahuary 1995 Registration Statement Registrant dated March 16, 1993 - ------------------------------------------------------------------------------------------------------------------- 10.2 Program Agreement between NAL Acceptance Incorporated by reference to Exhibit 10.3 Corporation and General Electric Capital to the October 1995 Registration Statement Auto Lease, Inc. dated July 1, 1995 - ------------------------------------------------------------------------------------------------------------------- 10.3 Amended and Restated Loan and Security Incorporated by reference to Exhibit 10.4 Agreement between General Electric Capital to the January 1995 Registration Statement Corporation and NAL Acceptance Corporation dated September 28, 1994 - ------------------------------------------------------------------------------------------------------------------- 10.4 Loan Purchase Agreement between Fairfax Incorporated by reference to Exhibit 10.5 Savings Bank and the Registrant dated to the January 1995 Registration Statement October 6, 1994 - ------------------------------------------------------------------------------------------------------------------- 10.5 Participation Agreement between Fairfax Incorporated by reference to Exhibit 10.6 Savings, FSB and NAL Acceptance to the January 1995 Registration Statement Corporation dated December 14, 1993 - --------------------------------------------------------------------------------------------------------------------
II-10
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.6 Employment Agreement by and between the Incorporated by reference to Exhibit 10.7 Registrant and Robert R. Bartolini dated to the October 1995 Registration Statement November 30, 1994 ------------------------------------------------------------------------------------------------------------------- 10.7 Lease Agreement by and between NAL Incorporated by reference to Exhibit 10.8 Acceptance Corporation and The to the October 1995 Registration Statement Northwestern Mutual Life Insurance Company dated October 2, 1991, as modified by Lease Modification Agreement #1 dated February 18, 1994 and Lease Modification Agreement #2 dated January 20, 1995 - ------------------------------------------------------------------------------------------------------------------- 10.8 Lease Agreement by and between NAL Incorporated by reference to Exhibit 10.9 Acceptance Corporation and The to the October 1995 Registration Statement Northwestern Mutual Life Insurance Company dated June 7, 1994 as modified by Lease Modification Agreement #1 dated June 28, 1994, Lease Modification Agreement #2 dated December 1, 1994 and Lease Modification Agreement #3 dated January 20, 1995 - ------------------------------------------------------------------------------------------------------------------- 10.9 Modification Agreement #4 dated July 1, Incorporated by reference to Exhibit 10.10 1995 to Lease Agreement by and between NAL to the October 1995 Registration Statement Acceptance Corporation and The Northwestern Mutual Life Insurance Company dated June 7, 1994 - ------------------------------------------------------------------------------------------------------------------- 10.10 Master Repurchase Agreement between Incorporated by reference to Exhibit 10.13 Greenwich Capital Financial Products, Inc. to the October 1995 Registration Statement and Autorics, Inc. dated September 5, 1995 - ------------------------------------------------------------------------------------------------------------------- 10.11 Option to Purchase Assets of Special Incorporated by reference to Exhibit 10.14 Finance, Inc. dated August 1, 1995 to the October 1995 Registration Statement -------------------------------------------------------------------------------------------------------------------
II-11
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.12 Receivables Purchase Agreement among NAL Incorporated by reference to Exhibit 10.15 Acceptance Corporation, Autorics II, Inc. to Post-effective Amendment No. 1 to the and Autorics, Inc. dated December 1, 1995 October 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 10.13 Sale and Servicing Agreement among NAL Incorporated by reference to Exhibit 10.16 Auto Trust 1995-1 and Autorics II, Inc., to Post-effective Amendment No. 1 to the NAL Acceptance Corporation and Bankers October 1995 Registration Statement Trust Company dated December 1, 1995 - ------------------------------------------------------------------------------------------------------------------- 10.14 Indenture between NAL Auto Trust 1995-1 Incorporated by reference to Exhibit 10.17 and Bankers Trust Company dated December to Post-effective Amendment No. 1 to the 1, 1995 October 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 10.15 Administration Agreement among NAL Auto Incorporated by reference to Exhibit 10.18 Trust 1995-1, NAL Acceptance Corporation, to Post-Effective Amendment No. 1 to the and Bankers Trust Company dated December October 1995 Registration Statement 1, 1995 - ------------------------------------------------------------------------------------------------------------------- 10.16 Trust Agreement between Autorics II, Inc. Incorporated by reference to Exhibit 10.19 and Wilmington Trust dated December 1, 1995 to Post-effective Amendment No. 1 to the October 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 10.17 Certificate Purchase Agreement between Incorporated by reference to Exhibit 10.20 Autorics II, Inc. and NAL Acceptance to Post-effective Amendment No. 1 to the Corporation dated December 20, 1995 October 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 10.18 Note Purchase Agreement between Autorics Incorporated by reference to Exhibit 10.21 II, Inc. and NAL Acceptance Corporation to Post-effective Amendment No. 1 to the dated December 20, 1995 October 1995 Registration Statement - ------------------------------------------------------------------------------------------------------------------- 10.19 Receivables Purchase Agreement among NAL Incorporated by reference to Exhibit 10.25 Acceptance Corporation, Autorics, Inc. and to the March 1996 10-QSB Autorics II, Inc. dated as of March 8, 1996 - -------------------------------------------------------------------------------------------------------------------
II-12
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.20 Sales and Servicing Agreement among NAL Incorporated by reference to Exhibit 10.26 Auto Trust 1996-1, Autorics II, Inc., NAL to the March 1996 10-QSB Acceptance Corporation and Bankers Trust Company dated as of March 8, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.21 Indenture between NAL Auto Trust 1996-1 Incorporated by reference to Exhibit 10.27 and Bankers Trust Company dated as of to the March 1996 10-QSB March 8, 1996 ------------------------------------------------------------------------------------------------------------------- 10.22 Trust Agreement between Autorics II, Inc. Incorporated by reference to Exhibit 10.28 and Wilmington Trust Company dated as of to the March 1996 10-QSB March 8, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.23 Administration Agreement among NAL Auto Incorporated by reference to Exhibit Trust 1996-2, NAL Acceptance Corporation, 10.29 to the June 1996 10-QSB and Bankers Trust Company dated June 17, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.24 Receivables Purchase Agreement among NAL Incorporated by reference to Exhibit 10.30 Acceptance Corporation, Autorics, Inc. and to the June 1996 10-QSB Autorics II, Inc. dated as of June 17, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.25 Sales and Servicing Agreement among NAL Incorporated by reference to Exhibit 10.31 Auto Trust 1996-2, Autorics II, Inc., NAL to the June 1996 10-QSB Acceptance Corporation and Bankers Trust Company dated as of June 17, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.26 Indenture between NAL Auto Trust 1996-2 Incorporated by reference to Exhibit 10.32 and Bankers Trust Company dated as of June to the June 1996 10-QSB 17, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.27 Trust Agreement between Autorics II, Inc. Incorporated by reference to Exhibit 10.33 and Wilmington Trust Company dated as of to the June 1996 10-QSB June 17, 1996 - -------------------------------------------------------------------------------------------------------------------
II-13
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.28 Amended and Restated 1994 Stock Option Incorporated by reference to Exhibit 3 to Plan of the Registrant the Registrant's Proxy Statement filed under the Exchange Act on May 2, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.29 Administration Agreement among NAL Auto Incorporated by reference to Exhibit 10.32 Trust 1996-3, NAL Acceptance Corporation to the September 1996 10-QSB and Bankers Trust Company dated as of September 11, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.30 Receivables Purchase Agreement among NAL Incorporated by reference to Exhibit 10.33 Acceptance Corporation, Autorics, Inc. and to the September 1996 10-QSB Autorics II, Inc. dated as of September 11, 1996 ------------------------------------------------------------------------------------------------------------------- 10.31 Sale and Servicing Agreement among NAL Incorporated by reference to Exhibit 10.34 Auto Trust 1996-3, Autorics II, Inc., NAL to the September 1996 10-QSB Acceptance Corporation and Bankers Trust Company dated as of September 11, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.32 Indenture between NAL Auto Trust 1996-3 Incorporated by reference to Exhibit 10.35 and Bankers Trust Company dated as of to the September 1996 10-QSB September 11, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.33 Trust Agreement between Autorics II, Inc. Incorporated by reference to Exhibit 10.36 and Wilmington Trust Company dated as of to the September 1996 10-QSB September 11, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.34 Form of Custody Agreement and Power of Incorporated by reference to Exhibit 10.34 Attorney between each Selling Stockholder, to Pre-effective Amendment No. 1 to the Robert R. Bartolini as Attorney-in-Fact November 1996 Registration Statement and Stock Trans, Inc. as Custodian - -------------------------------------------------------------------------------------------------------------------
II-14
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.35 Form of Lock-Up Agreement between certain Incorporated by reference to Exhibit 10.35 Debenture holders and certain Warrant to Pre-effective Amendment No. 1 to the holders and Prudential Securities November 1996 Registration Statement Incorporated, Piper Jaffray Inc. and Sands Brothers & Co., Ltd. - ------------------------------------------------------------------------------------------------------------------- 10.36 Directors' 1996 Stock Option Plan of the Filed herewith Registrant - ------------------------------------------------------------------------------------------------------------------- 10.37 Administration Agreement among NAL Auto Filed herewith Trust 1996-4, NAL Acceptance Corporation and Bankers Trust Company dated as of December 9, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.38 Receivables Purchase Agreement among NAL Filed herewith Acceptance Corporation, Autorics, Inc. and Autorics II, Inc. dated as of December 9, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.39 Sale and Servicing Agreement among NAL Filed herewith Auto Trust 1996-4, Autorics II, Inc., NAL Acceptance Corporation and Bankers Trust Company dated as of December 9, 1996 ------------------------------------------------------------------------------------------------------------------- 10.40 Indenture between NAL Auto Trust 1996-4 Filed herewith and Bankers Trust Company dated as of December 9, 1996 - ------------------------------------------------------------------------------------------------------------------- 10.41 Trust Agreement between Autorics II, Inc. Filed herewith and Wilmington Trust Company dated as of December 9, 1996 - ------------------------------------------------------------------------------------------------------------------- 11 Statement re: computation of Incorporated by reference to per share earnings Exhibit 11 to the September 1996 10-QSB - ------------------------------------------------------------------------------------------------------------------- 21 Subsidiaries of the Registrant Incorporated by reference to Exhibit 21 to the November 1996 Registration Statement. - ------------------------------------------------------------------------------------------------------------------- 23.1 Consent to Buchanan Ingersoll Included within Exhibit 5.1 hereto Professional Corporation - ------------------------------------------------------------------------------------------------------------------- 23.2 Consent of Price Waterhouse LLP Filed herewith - -------------------------------------------------------------------------------------------------------------------
Item 28. Undertakings The undersigned Registrant hereby undertakes: 1. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and II-15 Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in a successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 2. For determining any liability under the Securities Act, the Registrant will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. 3. For determining any liability under the Securities Act, the Registrant will treat each post-effective amendment that contains a form of prospectus as a new registration statement for II-16 the securities offered in the Registration Statement, and that offering of securities at that time as the initial bona fide offering of those securities. II-17 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and has duly caused this Pre-effective Amendment No. 2 to the Registrant's Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto authorized on December 20, 1996. NAL FINANCIAL GROUP INC. By: /s/ Robert R. Bartolini ------------------------------- Robert R. Bartolini Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below under the heading "Signatures" constitutes and appoints ROBERT R. BARTOLINI his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any or all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Pre-effective Amendment No. 2 to the Registrant's Registration Statement on Form SB-2 was signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Robert R. Bartolini Chairman of the Board, December 20, 1996 - -------------------------------------- President and Chief Executive Robert R. Bartolini Officer (Principal Executive Officer) * Vice President (Principal December 20, 1996 - -------------------------------------- Accounting Officer) Robert J. Carlson II-18 * Director December 20, 1996 - -------------------------------------- John T. Schaeffer * Director December 20, 1996 - -------------------------------------- Ngaire E. Cuneo * Director December 20, 1996 - -------------------------------------- James F. DeVoe * Director December 20, 1996 - -------------------------------------- David R. Jones *By: /s/ Robert R. Bartolini - ------------------------------------- Robert R. Bartolini Attorney-in-Fact
II-19 Registration No. 333-15787 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- EXHIBITS Filed with PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------------- NAL FINANCIAL GROUP INC. EXHIBIT INDEX Exhibit No. Description Page - ---------- ----------- ---- 10.36 Directors' 1996 Stock Option Plan of the Registrant 10.37 Administration Agreement among NAL Auto Trust 1996-4, NAL Acceptance Corporation and Bankers Trust Company dated as of December 9, 1996 10.38 Receivables Purchase Agreement among NAL Acceptance Corporation, Autorics, Inc. and Autorics II, Inc. dated as of December 9, 1996 10.39 Sale and Servicing Agreement among NAL Auto Trust 1996-4, Autorics II, Inc., NAL Acceptance Corporation and Bankers Trust Company dated as of December 9, 1996 10.40 Indenture between NAL Auto Trust 1996-4 and Bankers Trust Company dated as of December 9, 1996 10.41 Trust Agreement between Autorics II, Inc. and Wilmington Trust Company dated as of December 9, 1996 23.2 Consent of Price Waterhouse LLP
EX-10.36 2 DIRECTORS' 1996 STOCK OPTION PLAN NAL FINANCIAL GROUP INC. DIRECTORS' 1996 STOCK OPTION PLAN This NAL Financial Group Inc. Directors' 1996 Stock Option Plan (the "Plan") is adopted effective as of November 20, 1996. The Plan provides for the grant, to certain members of the Board of Directors of NAL Financial Group Inc. (the "Company") and its subsidiaries who are not at the time of such grant employees of the Company or any subsidiary thereof, of Options to purchase ("Options") shares of common stock of the Company and related stock appreciation rights and for the issuance, transfer or sale of such stock upon the exercise of such Options. 1. Purpose. The purpose of the Plan is to provide additional incentive to the non-employee directors of the Company and its subsidiaries, who are responsible for the management and growth of the Company or otherwise materially contribute to the conduct and direction of its business, operations and affairs, in order to strengthen their desire to remain as directors of the Company or its subsidiaries, to strengthen their bond to the Company, to stimulate their efforts on behalf of the Company and to retain and attract persons of competence, and, by encouraging ownership of a stock interest in the Company, to gain for the organization the advantages inherent in directors having a sense of proprietorship. 2. The Stock. The aggregate number of shares of stock which may be issued, transferred or sold upon the exercise of Options granted under the Plan shall not, except as such number may be adjusted in accordance with Paragraph (g) of Article 5 hereof, exceed 250,000 shares of Common Stock of NAL ("Common Stock"), which may be either authorized and unissued shares or issued shares reacquired by the Company. Notwithstanding the above limitation, if any Option granted under the Plan shall expire, terminate or be canceled for any reason without having been exercised in full, the corresponding number of unexercised shares shall again be available for the purposes of the Plan. 3. Eligibility. Options and related stock appreciation rights shall be granted only to members of the Board of Directors of the Company or a subsidiary thereof who, at the time of the grant of the Option, are not employees of the Company or any subsidiary thereof. A person to whom the Option is granted hereunder is hereinafter sometimes referred to as an "Optionee." The Board of Directors of the Company will determine the directors who are to be granted Options under the Plan and the number of shares subject to each Option. Notwithstanding anything herein to the contrary, no otherwise eligible person serving upon the Board of Directors (if administering the Plan) or the committee appointed by its Board of Directors and constituted as provided in Article 7 hereof (the "Committee") shall be prohibited from receiving Options during any period, provided, however, such person must abstain from voting upon the grant of such Options. 1 4. Grant of Stock Appreciation Rights. (a) The Board of Directors may, in connection with all or any part of an Option granted to a director under the Plan, grant to such director (or to any person or persons having the right to exercise such Option upon the death or incapacity of the director as provided in Paragraph (d) of Article 6 hereof) a related stock appreciation right, either at the time the related Option is granted or at any time thereafter prior to the exercise, termination or cancellation of such Option, on such terms and conditions as the Board of Directors shall from time to time determine. The grantee of a related stock appreciation right shall have the right to surrender to the Company for cancellation all or a portion of the related Option granted under the Plan, but only to the extent that such Option is then exercisable, and to be paid therefor an amount equal to the excess (if any) of: (i) the aggregate fair market value of the shares of Common Stock subject to the Option or portion thereof surrendered (determined as of the date of exercise of such stock appreciation right); over (ii) the aggregate exercise price of the shares of Common Stock subject to the portion thereof surrendered. (b) Payment due upon exercise of a stock appreciation right shall be made (i) in cash, (ii) in Common Stock (valued at the fair market value thereof as of the date of exercise), or (iii) partly in cash and partly in Common Stock (valued at the fair market value thereof as of the date of exercise), all as determined by the Board of Directors in its sole discretion. If the Board of Directors shall determine to make all of such payment in Common Stock, no fractional shares of Common Stock shall be issued and no payments shall be made in lieu of fractional shares. (c) The grant of a stock appreciation right shall be subject to execution, by the recipient thereof, of an instrument in writing in a form approved by the Board of Directors, which shall contain further terms and conditions, as deemed appropriate by the Board of Directors, relative to, among others, the grant, exercise or disposition of such stock appreciation rights. The terms of such instrument need not be identical for all grantees of such stock appreciation rights. 5. General Terms of Options. (a) Consideration. Subject to the terms of Paragraph (a) of Article 6 hereof, the Board of Directors shall determine the consideration to the Company, if any, for the granting of Options under the Plan, as well as the conditions, if any, which it may deem appropriate to ensure that such consideration will be received by, or will accrue to, the Company, and in the discretion of the Board of Directors, such consideration need not be the same, but may vary for Options granted under the Plan at the same time or from time to time. 2 (b) Number of Options which may be Granted to, and Number of Shares which may be Acquired by, Optionees. The Board of Directors may grant more than one Option to an individual during the life of the Plan and, such Option may be in addition to, in tandem with, or in substitution for, Options previously granted under the Plan or of another corporation and assumed by the Company. The Board of Directors may permit the voluntary surrender of all or a portion of any Option granted under the Plan to be conditioned upon the granting to the director of a new Option for the same or a different number of shares as the Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such director. Such new Option shall be exercisable at the price, during the period, and in accordance with any other terms or conditions specified by the Board of Directors at the time the new Option is granted, all determined in accordance with the provisions of the Plan without regard to the price, period of exercise, or any other terms or conditions of the Option surrendered (except as otherwise provided in Paragraph (f) below). (c) Period of Grant of Options. Options under the Plan may be granted at any time after the Plan has become effective and has been approved by the Board of Directors of the Company. However, no Options shall be granted under the Plan after November 20, 2006. (d) Option Agreement. The Company shall effect the grant of Options under the Plan, in accordance with determinations made by the Board of Directors or the Committee, by execution of instruments in writing in a form approved by the Board of Directors or the Committee ("Option Agreement"). Each Option Agreement shall contain such terms and conditions (which need not be the same for all Options, whether granted at the same time or at different times) as the Board of Directors shall deem to be appropriate and not inconsistent with the provisions of the Plan, and such terms and conditions shall be agreed to in writing by the Optionee. The Board of Directors may, in its sole discretion, and subject to such terms and conditions as it may adopt, accelerate the date or dates on which some or all outstanding Options may be exercised. Options shall be exercised by submitting to the Company a signed copy of a notice of exercise in a form to be supplied by the Company. The exercise of an Option shall be effective on the date on which the Company receives such notice at its principal corporate offices. (e) Non-Transferability of Option, No Option granted under the Plan shall be transferable by the holder thereof otherwise than by will or by the laws of descent and distribution, and such Option shall be exercisable, during the holder's lifetime, only by such holder, or in case of the legal incapacity of a holder, by such holder's legal representative. (f) Reorganization, Merger or Sale of Assets. If at any time while an Option, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (iii) a sale or transfer of substantially all of the Company's 3 properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of an Option, subject to Paragraph (h) below, shall upon such reorganization, merger, consolidation, sale or transfer thereafter be entitled to receive upon payment of the exercise price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of the Option would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if the Option had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Paragraph (f) shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Option. If the per-share consideration payable to the Optionee hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Committee. (g) Capital Adjustments. The maximum number of shares as to which Options or stock appreciation rights may be granted under the Plan shall be proportionately adjusted, and the terms of outstanding Options or stock appreciation rights shall be adjusted, as the Board of Directors or the Committee shall determine to be equitably required, in the event that the Company effects one or more stock dividends, stock split-ups or reverse stock splits, recapitalization, combinations, reclassifications, subdivisions, consolidations of shares or like change in the capital structure of the Company. Any determination made under this Paragraph (g) by the Board of Directors or the Committee shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding awards of Options or stock appreciation rights. The Board of Directors may grant Options or stock appreciation rights in substitution for stock options, stock appreciation rights, or similar awards in connection with a transaction described in the first paragraph of this Paragraph (g). Notwithstanding any provision of the Plan (other than the limitation of Article 2), the terms of such substituted Option grant shall be as the Board of Directors, in its discretion, determines is appropriate; provided, however, that no such action by the Committee shall deprive any person, without such person's consent, of any rights previously granted pursuant to the Plan. (h) Termination of Options and Rights. The Board of Directors, in its sole discretion, may terminate all or less than all of the outstanding Options and stock appreciation rights in the event of the liquidation of the Company or in the event that the Company is party to a corporate transaction described in Paragraph (f) above. In the event of such termination, the Committee shall give each Participant written notice of the termination and a period of fourteen days in which to exercise his Options and stock appreciation rights, to the extent they are 4 otherwise exercisable. The Board of Directors, in its sole discretion, may accelerate the exercisability of an Option or stock appreciation rights to allow for its exercise during such fourteen day period. (i) Optionees not Stockholders, An Optionee or a legal representative thereof shall have none of the rights of a stockholder with respect to shares subject to Options until such shares shall be issued, transferred or sold upon exercise of the Option. (j) Fair Market Value. As used in the Plan, the term "fair market value" shall: (i) if the Common Stock of the Company is traded in the over-the-counter market, be the mean between the closing bid and asked sales prices for Common Stock of the Company as reported by the National Quotations Bureau, Inc. (or similar quotation agency) on the date the calculation thereof shall be made; or the NASDAQ Small-Cap Index or National Market System; or (ii) if the Common Stock of the Company is listed on a national securities exchange, be the mean between the high and low sales prices for Common Stock of the Company on such exchange on the date the calculation thereof shall be made, in each case with such adjustments, if any, as shall be made in accordance with Paragraph (f) of this Article 5. In the event the date of calculation shall be a date on which there shall not have been reported a closing bid and asked price for Common Stock of the Company, or a date which shall not be a trading date on such national securities exchange, as the case may be, determination of fair market value shall be made as of the first date prior thereto on which there shall have been reported a closing bid and asked price for Common Stock of the Company or the first date prior thereto which shall have been a trading date on such national securities exchange, as the case may be. (k) Type of Option. Options granted under the Plan shall be in a form of Options not qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. It is intended that the Options and stock appreciation rights granted hereunder shall be exempt from Section 16(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Whenever possible, each provision of the Plan or each Option Agreement shall be interpreted in such a manner as to cause such Option or stock appreciation right to be so exempt from Section 16(b) of the Exchange Act. If a provision of this Plan or the Option Agreement shall cause such Option or stock appreciation right not to be exempt under Section 16(b) of the Exchange Act, such provision at the discretion of the Committee shall be deemed ineffective to the extent it shall cause such failure to be exempt without invalidating the remainder of such provision, the Plan or the Option Agreement. 6. Specific Terms of Options. (a) Option Price. The price or prices per share for shares of Common Stock to be sold pursuant to an Option shall be fixed by the Board of Directors, but not less, in any case, than the fair market value per share of such stock on the date of the granting of the Option. For the purposes of this Article 6, the date of the granting of an Option under the Plan shall be the date fixed by the Board of Directors as the date for such Option. (b) Period of Option. 5 (i) Notwithstanding any other provisions contained in this Plan, each Option granted under the Plan shall be exercisable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Board of Directors shall specify in the Option Agreement. (ii) Options will be exercisable thereafter over the Option Period, which shall be for that period fixed by the Board of Directors, and shall be exercisable at such times and in such amounts as determined by the Board of Directors at the time each Option is granted. Notwithstanding any other provision contained in this Plan, no Option shall be exercisable after the expiration of the Option Period. Except as provided in Paragraphs (c) and (d) of this Article 6, no Option may be exercised unless the Optionee is then a director of the Company or a subsidiary thereof. (c) Termination of Status as Director. (i) Except as may otherwise be provided in an Option Agreement, an Optionee whose status as a director of the Company or a subsidiary thereof terminates by reason other than death, incapacity or for cause shall be entitled to exercise such Option (A) only if and to the extent that the Optionee was entitled to exercise the Option at the date of the termination of his status as a director, (B) only within the 30 day period next succeeding such termination and (C) in no event after the expiration of the Option Period. (ii) An Optionee whose status as a director of the Company or a subsidiary thereof is terminated for cause, as determined by the Board of Directors in its sole discretion, shall not be entitled to exercise any Option following such termination and any such Option which the director was otherwise entitled to exercise immediately prior to such termination shall be forfeited upon such termination. (d) Death or Incapacity of Optionee. If an Optionee should die while a director of the Company or a subsidiary thereof, an Option theretofore granted shall be exercisable by the estate of the Optionee, or by a person who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the Optionee, but then only if and to the extent that the Optionee was entitled to exercise the Option at the date of death and only within the twelve-month period next succeeding the death of the Optionee and in no event after the expiration of the Option Period. Upon the legal incapacity of an Optionee, any Option held by the Optionee shall be exercisable by the Optionee's legal representative pursuant to the terms of this Paragraph (d) of Article 6. Notwithstanding any other provision of this Plan, the exercise of an Option or a related stock appreciation right following the death or legal incapacity of an Optionee shall be subject to the terms, conditions and limitations imposed by the Board of Directors in connection with the Option grant and/or in the Option Agreement. (e) Payment for Shares. Payment for shares of Common Stock purchased shall be made in full at the time of exercise of the Option by check made payable to the Company. 7. Administration of the Plan. The Plan shall be administered under the supervision of the Board of Directors of the Company or by a Committee, which the Board of Directors may 6 appoint at any time, consisting of at least three members of the Board of Directors, who shall be appointed by, and shall serve at the pleasure of, the Board of Directors. A majority of the Committee shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be acts of the Committee. In addition to the discretionary authority of the Board of Directors or of the Committee set forth in other Articles hereof, the Board of Directors or the Committee is authorized to establish such rules and regulations for the proper administration of the Plan as it may deem advisable and not inconsistent with provisions of the Plan. Unless otherwise determined by the Board of Directors, all questions arising under the Plan or under any rule or regulation with respect to the Plan adopted by the Board of Directors or the Committee, whether such questions involve an interpretation of the Plan or otherwise, shall be decided by the Board of Directors or the Committee, and its decisions shall be conclusive and binding in all cases. The Board of Directors shall determine the directors to whom Options under the Plan are to be granted and the number of shares to be covered by each Option granted. In selecting the individuals to whom Options shall be granted, as well as in determining the number of shares subject to each Option, the Board of Directors shall consider the positions and responsibilities of the individuals being considered, the nature of the services and accomplishments of each, the value to the Company of their services, their present and potential contribution to the success of the Company, the anticipated number of years of service remaining, and such other factors as the Board of Directors may deem relevant. 8. Amendment and Discontinuance of the Plan. (a) The Board of Directors of the Company may at any time alter, suspend or terminate the Plan, but, except in accordance with the provisions of Paragraph (f) of Article 5 and this Article 8, no change shall be made which will have a material adverse effect upon any Option previously granted unless the consent of the Optionee is obtained. (b) The Company intends that Options granted hereunder shall comply with the provisions of applicable law. Should any of the foregoing provisions not be necessary in order to so comply or should any additional provisions be required, the Board of Directors may in its complete and total discretion amend the Plan in the manner it deems appropriate. (c) Notwithstanding the foregoing provisions of this Article 8, no person may be divested of the ownership of Common Stock previously issued, sold or transferred under the Plan. 9. Other Conditions. If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Option granted under the Plan is or may in the circumstances be unlawful under the statutes, rules or regulations of the United States, or any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or 7 registration under the Securities Act of 1933 or otherwise with respect to shares of stock or Options under the Plan, until the right to exercise any such Option shall be lawful. Upon the termination or suspension of any period set forth herein, any Option affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available upon exercise of the Option before such suspension and to shares which would otherwise have become available for purchase during the period of such suspension, but no such suspension shall extend any Option Period. At the time of any grant or exercise of any Option, the Company may, if it shall deem it necessary or desirable for any reason connected with any law or regulation of any governmental authority relative to the regulation of securities, condition the grant and/or exercise of such Option by the Optionee upon requiring the Optionee to make certain representations to the Company to the satisfaction of the Company as to correctness of such representations. 10. Approval; Effective Date. The Plan was adopted by the Board of Directors of the Company and became effective as of November 20, 1996 ("Effective Date"); however, Options granted to otherwise eligible directors in 1996 prior to the Effective Date shall be deemed to be granted under the Plan and the Plan shall be deemed to be effective as of the dates of such grants for such purpose. NAL FINANCIAL GROUP INC. By: /s/ Robert R. Bartolini ------------------------- Robert R. Bartolini Chief Executive Officer 8 EX-10.37 3 ADMINISTRATION AGREEMENT EXECUTION COPY This ADMINISTRATION AGREEMENT dated as of December 9, 1996, among NAL AUTO TRUST 1996-4, a Delaware business trust (the "Issuer"), NAL ACCEPTANCE CORPORATION, a Florida corporation, as administrator (the "Administrator"), and BANKERS TRUST COMPANY, a New York banking corporation, not in its individual capacity but solely as Indenture Trustee (the "Indenture Trustee"), W I T N E S S E T H : WHEREAS, the Issuer is issuing the 6.90% Asset Backed Notes (the "Notes") pursuant to the Indenture dated as of December 9, 1996 (as amended and supplemented from time to time, the "Indenture"), between the Issuer and the Indenture Trustee (capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in the Indenture); WHEREAS, the Issuer has entered into certain agreements in connection with the issuance of the Notes and of certain beneficial ownership interests in the Issuer, including (i) a Sale and Servicing Agreement dated as of December 9, 1996 (as amended and supplemented from time to time, the "Sale and Servicing Agreement"), among the Issuer, NAL Acceptance Corporation, as servicer, Bankers Trust Company, as back-up servicer, and Autorics II, Inc., as depositor (the "Depositor"), and (ii) the Indenture (the Sale and Servicing Agreement and the Indenture being referred to hereinafter collectively as the "Related Agreements"); WHEREAS, pursuant to the Related Agreements, the Issuer and the Owner Trustee are required to perform certain duties in connection with (a) the Notes and the collateral therefor pledged pursuant to the Indenture (the "Collateral") and (b) the beneficial ownership interests in the Issuer (the registered holders of such interests being referred to herein as the "Owners"); WHEREAS, the Issuer and the Owner Trustee desire to have the Administrator perform certain of the duties of the Issuer and the Owner Trustee referred to in the preceding clause and to provide such additional services consistent with the terms of this Agreement and the Related Agreements as the Issuer and the Owner Trustee may from time to time request; and WHEREAS, the Administrator has the capacity to provide the services required hereby and is willing to perform such services for the Issuer and the Owner Trustee on the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. Duties of the Administrator. (a) Duties with Respect to the Indenture. (i) The Administrator agrees to perform all its duties as Administrator. In addition, the Administrator shall consult with the Owner Trustee regarding the duties of the Issuer or the Owner Trustee under the Indenture. The Administrator shall monitor the performance of the Issuer and shall advise the Owner Trustee when action is necessary to comply with the Issuer's or the Owner Trustee's duties under the Indenture. The Administrator shall prepare for execution by the Issuer, or shall cause the preparation by other appropriate persons of, all such documents, reports, filings, instruments, certificates and opinions that it shall be the duty of the Issuer or the Owner Trustee to prepare, file or deliver pursuant to the Indenture. In furtherance of the foregoing, the Administrator shall take all appropriate action that is the duty of the Issuer or the Owner Trustee to take pursuant to the Indenture including, without limitation, such of the foregoing as are required with respect to the following matters under the Indenture (references are to sections of the Indenture): (A) the duty to cause the Note Register to be kept and to give the Indenture Trustee notice of any appointment of a new Note Registrar and the location, or change in location, of the Note Register (Section 2.05); (B) the notification of Noteholders of the final principal payment on their Notes (Section 2.08(b)); (C) the fixing or causing to be fixed of any special record date and the notification of the Noteholders with respect to special payment dates, if any (Section 2.08(c)); (D) the preparation of or obtaining of the documents and instruments required for authentication of the Notes and delivery of the same to the Indenture Trustee (Section 2.02); (E) the maintenance of an office in the Borough of Manhattan, City of New York, for registration of transfer or exchange of Notes (Section 3.02); (F) the duty to cause newly appointed Paying Agents, if any, to deliver to the Indenture Trustee the instrument specified in the Indenture regarding funds held in trust (Section 3.03); (G) the direction to the Indenture Trustee to deposit moneys with Paying Agents, if any, other than the Indenture Trustee (Section 3.03); (H) the obtaining and preservation of the Issuer's qualification to do business in each jurisdiction in which such 2 qualification is or shall be necessary to protect the validity and enforceability of the Indenture, the Notes, the Collateral and each other instrument and agreement included in the Trust Estate (Section 3.04); (I) the preparation of all supplements and amendments to the Indenture and all financing statements, continuation statements, instruments of further assurance and other instruments and the taking of such other action as is necessary or advisable to protect the Trust Estate (Section 3.05); (J) the delivery of the Opinion of Counsel on the Closing Date and the annual delivery of Opinions of Counsel as to the Trust Estate, and the annual delivery of the Officer's Certificate and certain other statements as to compliance with the Indenture (Sections 3.06 and 3.09); (K) the identification to the Indenture Trustee in an Officer's Certificate of a Person with whom the Issuer has contracted to perform its duties under the Indenture (Section 3.07(b)); (L) the notification of the Indenture Trustee and the Rating Agencies of a Servicer Default under the Sale and Servicing Agreement and, if such Servicer Default arises from the failure of the Servicer to perform any of its duties under the Sale and Servicing Agreement with respect to the Receivables, the taking of all reasonable steps available to remedy such failure (Section 3.07(d)); (M) the duty to cause the Servicer to comply with Sections 4.09, 4.10, 4.11 and Article IX of the Sale and Servicing Agreement (Section 3.14); (N) the preparation and obtaining of documents and instruments required for the release of the Issuer from its obligations under the Indenture (Section 3.11(b)); (O) the delivery of written notice to the Indenture Trustee and the Rating Agencies of each Event of Default under the Indenture and each default by the Servicer or the Depositor under the Sale and Servicing Agreement (Section 3.19); (P) the monitoring of the Issuer's obligations as to the satisfaction and discharge of the Indenture and the preparation of an Officer's Certificate and the obtaining of the Opinion of Counsel and the Independent Certificate relating thereto (Section 4.01); (Q) the compliance with any written directive of the Indenture Trustee with respect to the sale of the Trust Estate in a commercially reasonable manner if an Event of Default shall have occurred and be continuing (Section 5.04); 3 (R) the preparation and delivery of notice to Noteholders of the removal of the Indenture Trustee and the appointment of a successor Indenture Trustee (Section 6.08); (S) the preparation of any written instruments required to confirm more fully the authority of any co-trustee or separate trustee and any written instruments necessary in connection with the resignation or removal of any co-trustee or separate trustee (Sections 6.08 and 6.10); (T) the furnishing of the Indenture Trustee with the names and addresses of Noteholders during any period when the Indenture Trustee is not the Note Registrar (Section 7.01); (U) the opening of one or more accounts in the Issuer's name, the preparation and delivery of Issuer Orders, Officer's Certificates and Opinions of Counsel and all other actions necessary with respect to investment and reinvestment of funds in the Trust Accounts (Sections 8.02 and 8.03); (V) the preparation of an Issuer Request and Officer's Certificate and the obtaining of an Opinion of Counsel and Independent Certificates, if necessary, for the release of the Trust Estate (Sections 8.04 and 8.05); (W) the preparation of Issuer Orders and the obtaining of Opinions of Counsel with respect to the execution of supplemental indentures and the mailing to the Noteholders of notices with respect to such supplemental indentures (Sections 9.01, 9.02 and 9.03); (X) the execution and delivery of new Notes conforming to any supplemental indenture (Section 9.05); (Y) the duty to notify Noteholders of redemption of the Notes or to cause the Indenture Trustee to provide such notification (Section 10.02); (Z) the preparation and delivery of all Officer's Certificates and Opinions of Counsel with respect to any requests by the Issuer to the Indenture Trustee to take any action under the Indenture (Section 11.01); (AA) the notification of the Rating Agencies, upon the failure of the Indenture Trustee to give such notification, of the information required pursuant to Section 11.04 of the Indenture (Section 11.04); (BB) the preparation and delivery to Noteholders and the Indenture Trustee of any agreements with respect to alternate payment and notice provisions (Section 11.06); (CC) the recording of the Indenture, if applicable (Section 11.15); and 4 (DD) the delivery to each Noteholder of such information as may be required to enable such holder to prepare its federal and state tax returns (Section 6.06). (ii) The Administrator will: (A) pay the Indenture Trustee (and any separate trustee or co-trustee appointed pursuant to Section 6.10 of the Indenture (a "Separate Trustee")) from time to time reasonable compensation for all services rendered by the Indenture Trustee or Separate Trustee, as the case may be, under the Indenture (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (B) except as otherwise expressly provided in the Indenture, reimburse the Indenture Trustee or any Separate Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Indenture Trustee or Separate Trustee, as the case may be, in accordance with any provision of the Indenture (including the reasonable compensation, expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; (C) indemnify the Indenture Trustee and its officers, directors, agents and employees and any Separate Trustee and their respective agents for, and hold them harmless against, any losses, liability or expense (including attorney's fees and expenses) incurred by it in connection with the administration of the trust created by the Indenture and the performance of its duties under the Indenture; provided, that, the Administrator need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Indenture Trustee through the Indenture Trustee's own willful misconduct, negligence or bad faith; and (D) pay the Owner Trustee (and any Indemnified Party, as defined in Section 8.02 of the Trust Agreement) any amounts owed to it under Section 8.01 or 8.02 of the Trust Agreement. (b) Additional Duties. (i) In addition to the duties of the Administrator set forth above, the Administrator shall perform such calculations and shall prepare or shall cause the preparation by other appropriate persons of, and shall execute on behalf of the Issuer or the Owner Trustee, all such documents, reports, filings, instruments, certificates and opinions that it shall be the duty of the Issuer or the Owner Trustee to prepare, file or deliver pursuant to the Related Agreements or Section 5.05(a), (b), (c) or (d) of the Trust Agreement, and at the request of the Owner Trustee shall take all appropriate action that it is the duty of the Issuer or the Owner Trustee to take pursuant to the Related Agreements. In furtherance thereof, the Owner Trustee shall, on behalf of itself and of the Issuer, execute and deliver to the Administrator and to each successor Administrator appointed pursuant to the terms hereof, one or more 5 powers of attorney substantially in the form of Exhibit A hereto, appointing the Administrator the attorney-in-fact of the Owner Trustee and the Issuer for the purpose of executing on behalf of the Owner Trustee and the Issuer all such documents, reports, filings, instruments, certificates and opinions. Subject to Section 5 of this Agreement, and in accordance with the directions of the Owner Trustee, the Administrator shall administer, perform or supervise the performance of such other activities in connection with the Collateral (including the Related Agreements) as are not covered by any of the foregoing provisions and as are expressly requested by the Owner Trustee and are reasonably within the capability of the Administrator. (ii) Notwithstanding anything in this Agreement or the Related Agreements to the contrary, the Administrator shall be responsible for promptly notifying the Owner Trustee in the event that any withholding tax is imposed on the Trust's payments (or allocations of income) to an Owner as contemplated in Section 5.02(c) of the Trust Agreement. Any such notice shall specify the amount of any withholding tax required to be withheld by the Owner Trustee pursuant to such provision. (iii) Notwithstanding anything in this Agreement or the Related Agreements to the contrary, the Administrator shall be responsible for performance of the duties of the Owner Trustee set forth in Section 5.05(a), (b), (c) and (d), the penultimate sentence of Section 5.05 and Section 5.06(a) of the Trust Agreement with respect to, among other things, accounting and reports to Owners; provided, however, that the Owner Trustee shall retain responsibility for the distribution of the Schedule K-1s necessary to enable each Owner to prepare its federal and state income tax returns. (iv) The Administrator shall satisfy its obligations with respect to clauses (ii) and (iii) above by retaining, at the expense of the Trust payable by the Administrator, a firm of independent public accountants (the "Accountants") acceptable to the Owner Trustee, which shall perform the obligations of the Administrator thereunder. In connection with paragraph (ii) above, the Accountants will provide prior to December 31, 1996, a letter in form and substance satisfactory to the Owner Trustee as to whether any tax withholding is then required and, if required, the procedures to be followed with respect thereto to comply with the requirements of the Code. The Accountants shall be required to update the letter in each instance that any additional tax withholding is subsequently required or any previously required tax withholding shall no longer be required. (v) The Administrator shall perform the duties of the Administrator specified in Section 10.02 of the Trust Agreement required to be performed in connection with the resignation or removal of the Owner Trustee, and any other duties expressly required to be performed by the Administrator under the Trust Agreement. 6 (vi) In carrying out the foregoing duties or any of its other obligations under this Agreement, the Administrator may enter into transactions or otherwise deal with any of its affiliates; provided, however, that the terms of any such transactions or dealings shall be in accordance with any directions received from the Issuer and shall be, in the Administrator's opinion, no less favorable to the Issuer than would be available from unaffiliated parties. (c) Non-Ministerial Matters. (i) With respect to matters that in the reasonable judgment of the Administrator are non-ministerial, the Administrator shall not take any action unless within a reasonable time before the taking of such action, the Administrator shall have notified the Owner Trustee of the proposed action and the Owner Trustee shall not have withheld consent or provided an alternative direction. For the purpose of the preceding sentence, "non-ministerial matters" shall include, without limitation: (A) the amendment of or any supplement to the Indenture; (B) the initiation of any claim or lawsuit by the Issuer and the compromise of any action, claim or lawsuit brought by or against the Issuer (other than in connection with the collection of the Receivables); (C) the amendment, change or modification of the Related Agreements; (D) the appointment of successor Note Registrars, successor Paying Agents and successor Indenture Trustees pursuant to the Indenture or the appointment of successor Administrators or Successor Servicers, or the consent to the assignment by the Note Registrar, Paying Agent or Indenture Trustee of its obligations under the Indenture; and (E) the removal of the Indenture Trustee. (ii) Notwithstanding anything to the contrary in this Agreement, the Administrator shall not be obligated to, and shall not, (x) make any payments to the Noteholders under the Related Agreements, (y) sell the Trust Estate pursuant to Section 5.04 of the Indenture or (z) take any other action that the Issuer directs the Administrator not to take on its behalf. 2. Records. The Administrator shall maintain appropriate books of account and records relating to services performed hereunder, which books of account and records shall be accessible for inspection by the Issuer at any time during normal business hours. 3. Compensation. As compensation for the performance of the Administrator's obligations under this Agreement and as reimbursement for its expenses related thereto, the Administrator 7 shall be entitled to $1,000 per annum which shall be solely an obligation of the Servicer. 4. Additional Information To Be Furnished to the Issuer. The Administrator shall furnish to the Issuer from time to time such additional information regarding the Collateral as the Issuer shall reasonably request. 5. Independence of the Administrator. For all purposes of this Agreement, the Administrator shall be an independent contractor and shall not be subject to the supervision of the Issuer or the Owner Trustee with respect to the manner in which it accomplishes the performance of its obligations hereunder. Unless expressly authorized by the Issuer, the Administrator shall have no authority to act for or represent the Issuer or the Owner Trustee in any way and shall not otherwise be deemed an agent of the Issuer or the Owner Trustee. 6. No Joint Venture. Nothing contained in this Agreement (i) shall constitute the Administrator and either of the Issuer or the Owner Trustee as members of any partnership, joint venture, association, syndicate, unincorporated business or other separate entity, (ii) shall be construed to impose any liability as such on any of them or (iii) shall be deemed to confer on any of them any express, implied or apparent authority to incur any obligation or liability on behalf of the others. 7. Other Activities of Administrator. Nothing herein shall prevent the Administrator or its Affiliates from engaging in other businesses or, in its sole discretion, from acting in a similar capacity as an administrator for any other person or entity even though such person or entity may engage in business activities similar to those of the Issuer, the Owner Trustee or the Indenture Trustee. 8. Term of Agreement; Resignation and Removal of Administrator. (a) This Agreement shall continue in force until the dissolution of the Issuer, upon which event this Agreement shall automatically terminate. (b) Subject to Section 8(e), the Administrator may resign its duties hereunder by providing the Issuer with at least 60 days' prior written notice. (c) Subject to Section 8(e), the Issuer may remove the Administrator without cause by providing the Administrator with at least 60 days' prior written notice. (d) Subject to Section 8(e), at the sole option of the Issuer, the Administrator may be removed immediately upon written notice of termination from the Issuer to the Administrator if any of the following events shall occur: (i) the Administrator shall default in the performance of any of its duties under this Agreement and, after notice of such 8 default, shall not cure such default within ten days (or, if such default cannot be cured in such time, shall not give within ten days such assurance of cure as shall be reasonably satisfactory to the Issuer); (ii) a court having jurisdiction in the premises shall enter a decree or order for relief, and such decree or order shall not have been vacated within 60 days, in respect of the Administrator in any involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for the Administrator or any substantial part of its property or order the winding-up or liquidation of its affairs; or (iii) the Administrator shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, shall consent to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Administrator or any substantial part of its property, shall consent to the taking of possession by any such official of any substantial part of its property, shall make any general assignment for the benefit of creditors or shall fail generally to pay its debts as they become due. The Administrator agrees that if any of the events specified in clauses (ii) or (iii) of this Section shall occur, it shall give written notice thereof to the Issuer and the Indenture Trustee within seven days after the happening of such event. (e) No resignation or removal of the Administrator pursuant to this Section shall be effective until (i) a successor Administrator shall have been appointed by the Issuer and (ii) such successor Administrator shall have agreed in writing to be bound by the terms of this Agreement in the same manner as the Administrator is bound hereunder. (f) The appointment of any successor Administrator shall be effective only after satisfaction of the Rating Agency Condition with respect to the proposed appointment. (g) Subject to Section 8(e) and 8(f), the Administrator acknowledges that upon the appointment of a Successor Servicer pursuant to the Sale and Servicing Agreement, the Administrator shall immediately resign and such Successor Servicer shall automatically become the Administrator under this Agreement. 9. Action upon Termination, Resignation or Removal. Promptly upon the effective date of termination of this Agreement pursuant to Section 8(a) or the resignation or removal of the Administrator pursuant to Section 8(b) or (c), respectively, the Administrator shall be entitled to be paid all fees and reimbursable expenses accruing to it to the date of such 9 termination, resignation or removal. The Administrator shall forthwith upon such termination pursuant to Section 8(a) deliver to the Issuer all property and documents of or relating to the Collateral then in the custody of the Administrator. In the event of the resignation or removal of the Administrator pursuant to Section 8(b) or (c), respectively, the Administrator shall cooperate with the Issuer and take all reasonable steps requested to assist the Issuer in making an orderly transfer of the duties of the Administrator. 10. Notices. Any notice, report or other communication given hereunder shall be in writing and addressed as follows: (a) if to the Issuer or the Owner Trustee, to: NAL Auto Trust 1996-4 In care of Wilmington Trust Company Rodney Square North 1100 Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration (b) if to the Administrator, to: NAL Acceptance Corporation 500 Cypress Creek Road West Suite 590 Fort Lauderdale, FL 33309 Attention: Dennis LaVigne (c) if to the Indenture Trustee, to: Bankers Trust Company Four Albany Street New York, New York 10006 Attention: Corporate Trust and Agency Group, Structured Finance Team or to such other address as any party shall have provided to the other parties in writing. Any notice required to be in writing hereunder shall be deemed given if such notice is mailed by certified mail, postage prepaid, or hand-delivered to the address of such party as provided above. 11. Amendments. This Agreement may be amended from time to time by a written amendment duly executed and delivered by the Issuer, the Administrator and the Indenture Trustee, with the written consent of the Owner Trustee, without the consent of the Noteholders and the Certificateholders, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders or Certificateholders; provided that such amendment will not, in the Opinion of Counsel satisfactory to the Indenture Trustee and each Rating Agency, 10 materially and adversely affect the interest of any Noteholder or Certificateholder. This Agreement may also be amended by the Issuer, the Administrator and the Indenture Trustee with the written consent of the Owner Trustee and the holders of Notes evidencing at least a majority of the Outstanding Amount of the Notes and the holders of Certificates evidencing at least a majority of the Certificate Balance for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of Noteholders or the Certificateholders; provided, however, that no such amendment may (i)increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on Receivables or distributions that are required to be made for the benefit of the Noteholders or Certificateholders or (ii)reduce the aforesaid percentage of the holders of Notes and Certificates which are required to consent to any such amendment, without the consent of the holders of all the outstanding Notes and Certificates. Notwithstanding the foregoing, the Administrator may not amend this Agreement without the permission of the Depositor, which permission shall not be unreasonably withheld. 12. Successors and Assigns. This Agreement may not be assigned by the Administrator unless such assignment is previously consented to in writing by the Issuer and the Owner Trustee and subject to the satisfaction of the Rating Agency Condition in respect thereof. An assignment with such consent and satisfaction, if accepted by the assignee, shall bind the assignee hereunder in the same manner as the Administrator is bound hereunder. Notwithstanding the foregoing, this Agreement may be assigned by the Administrator without the consent of the Issuer or the Owner Trustee to a corporation or other organization that is a successor (by merger, consolidation or purchase of assets) to the Administrator; provided that such successor organization executes and delivers to the Issuer, the Owner Trustee and the Indenture Trustee an agreement in which such corporation or other organization agrees to be bound hereunder by the terms of said assignment in the same manner as the Administrator is bound hereunder. Subject to the foregoing, this Agreement shall bind any successors or assigns of the parties hereto. 13. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. 14. Headings. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. 15. Counterparts. This Agreement may be executed in counterparts, each of which when so executed shall be an 11 original, but all of which together shall constitute but one and the same agreement. 16. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 17. Not Applicable to NAL Acceptance Corporation in Other Capacities. Nothing in this Agreement shall affect any obligation NAL Acceptance Corporation may have in any other capacity. 18. Limitation of Liability of Owner Trustee and Indenture Trustee. (a) Notwithstanding anything contained herein to the contrary, this instrument has been countersigned by Wilmington Trust Company not in its individual capacity but solely in its capacity as Owner Trustee of the Issuer and in no event shall Wilmington Trust Company in its individual capacity or any beneficial owner of the Issuer have any liability for the representations, warranties, covenants, agreements or other obligations of the Issuer hereunder, as to all of which recourse shall be had solely to the assets of the Issuer. For all purposes of this Agreement, in the performance of any duties or obligations of the Issuer hereunder, the Owner Trustee shall be subject to, and entitled to the benefits of, the terms and provisions of Articles VI, VII and VIII of the Trust Agreement. (b) Notwithstanding anything contained herein to the contrary, this Agreement has been countersigned by Bankers Trust Company not in its individual capacity but solely as Indenture Trustee and in no event shall Bankers Trust Company have any liability for the representations, warranties, covenants, agreements or other obligations of the Issuer hereunder or in any of the certificates, notices or agreements delivered pursuant hereto, as to all of which recourse shall be had solely to the assets of the Issuer. 19. Third-Party Beneficiary. The Owner Trustee is a third-party beneficiary to this Agreement and is entitled to the rights and benefits hereunder and may enforce the provisions hereof as if it were a party hereto. 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. NAL AUTO TRUST 1996-4 By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: _____________________________ Name: Emmett R. Harmon Title: Vice President BANKERS TRUST COMPANY, not in its individual capacity but solely as Indenture Trustee By: __________________________________ Name: Title: NAL ACCEPTANCE CORPORATION, as Administrator By: ___________________________________ Name: Robert Carlson Title: Vice President/Finance EXHIBIT A POWER OF ATTORNEY STATE OF NEW YORK } } COUNTY OF NEW YORK } KNOW ALL MEN BY THESE PRESENTS, that Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as owner trustee (the "Owner Trustee") for NAL Auto Trust 1996-4 (the "Trust"), does hereby make, constitute and appoint NAL Acceptance Corporation, as administrator under the Administration Agreement dated as of December 9, 1996 (the "Administration Agreement"), among the Trust, NAL Acceptance Corporation and Bankers Trust Company, as Indenture Trustee, as the same may be amended from time to time, and its agents and attorneys, as Attorneys-in-Fact to execute on behalf of the Owner Trustee or the Trust all such documents, reports, filings, instruments, certificates and opinions as it should be the duty of the Owner Trustee or the Trust to prepare, file or deliver pursuant to the Related Agreements, or pursuant to Section 5.05(a), (b), (c) or (d) of the Trust Agreement dated as of December 9, 1996, between Autorics II, Inc. and Wilmington Trust Company, as Owner Trustee, including, without limitation, to appear for and represent the Owner Trustee and the Trust in connection with the preparation, filing and audit of federal, state and local tax returns pertaining to the Trust, and with full power to perform any and all acts associated with such returns and audits that the Owner Trustee could perform, including without limitation, the right to distribute and receive confidential information, defend and assert positions in response to audits, initiate and defend litigation, and to execute waivers of restrictions on assessments of deficiencies, consents to the extension of any statutory or regulatory time limit, and settlements. All powers of attorney for this purpose heretofore filed or executed by the Owner Trustee are hereby revoked. Capitalized terms that are used and not otherwise defined herein shall have the meanings ascribed thereto in the Administration Agreement. EXECUTED this 16th day of December, 1996. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee ------------------------------- Name: Emmett R. Harmon Title: Vice President A-1 STATE OF NEW YORK } } COUNTY OF NEW YORK } Before me, the undersigned authority, on this day personally appeared Emmett R. Harmon, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he signed the same for the purposes and considerations therein expressed. Sworn to before me this 16th day of December, 1996. - ----------------------------------------------------------------------- Notary Public - State of New York A-2 EX-10.38 4 RECEIVABLES PURCHASE AGREEMENT Execution Copy RECEIVABLES PURCHASE AGREEMENT dated as of December 9, 1996, among NAL ACCEPTANCE CORPORATION, a Florida corporation ("NAL"), AUTORICS, INC., a Delaware Corporation (the "Seller"), and AUTORICS II, INC., a Delaware corporation (the "Purchaser"). WHEREAS in the regular course of its business, the Seller has purchased certain motor vehicle retail installment sale contracts secured by new and used automobiles, light-duty trucks and vans from NAL which, in turn purchased such contracts from motor vehicle dealers and 3 others; and WHEREAS the Purchaser wishes to purchase the Receivables (as hereinafter defined) and to transfer the Receivables to NAL Auto Trust 1996-4 (the "Trust"), which will issue the 6.90% Asset Backed Notes (the "Notes"), payment of which will be secured by the Receivables, and the 8.15% Asset Backed Certificates representing fractional undivided interests in the property of the Trust including the Receivables, subject to the rights of the Indenture Trustee on behalf of the Noteholders; WHEREAS the Seller and Purchaser are wholly owned subsidiaries of NAL and NAL wishes to facilitate the transfer of the Receivables and, to that end, has agreed to make certain representations and warranties relating to the Receivables and to pay certain expenses and amounts with respect hereto; and WHEREAS NAL, the Seller and the Purchaser wish to set forth the terms pursuant to which the Seller will sell the Receivables to the Purchaser; NOW, THEREFORE, in consideration of the foregoing, other good and valuable consideration and the mutual terms and covenants contained herein, the parties hereto agree as follows: ARTICLE I Certain Definitions Terms not defined in this Agreement shall have the meaning set forth in the Sale and Servicing Agreement or the Indenture, as applicable. As used in this Agreement, the following terms shall, unless the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms of the terms defined): "Agreement" shall mean this Receivables Purchase Agreement, as the same may be amended and supplemented from time to time. "Assignment" shall mean the document of assignment substantially in the form of Exhibit A. "Certificates" shall mean the Trust Certificates (as defined in the Trust Agreement). "Certificateholders" shall mean the holders of Certificates. "Closing Date" shall mean December 18, 1996. "Collections" shall mean all amounts collected by the Servicer (from whatever source) on or with respect to the Receivables. "Cutoff Date" means December 9, 1996. "Indenture" shall mean the Indenture dated as of December 9, 1996 between the Trust and Bankers Trust Company, as trustee (the "Indenture Trustee"), as the same may be amended and supplemented from time to time. "NAL" shall mean NAL Acceptance Corporation, a Florida corporation, its successors and assigns. "Noteholders" shall mean the holders of the Notes. "Private Placement Memorandum" shall mean the Private Placement Memorandum dated December 16, 1996, relating to the Notes and the Certificates. "Purchaser" shall mean AUTORICS II, Inc., a Delaware corporation, its successors and assigns. "Receivable" shall mean any Contract listed on Schedule I hereto (which Schedule may be in the form of microfiche). "Repurchase Event" shall have the meaning specified in Section 6.02. "Sale and Servicing Agreement" shall mean the Sale and Servicing Agreement dated as of December 9, 1996, among the Trust, the Purchaser, Bankers Trust Company, as Back- up Servicer, and the Seller, as the same may be amended and supplemented from time to time. "Schedule of Receivables" shall mean the list of Receivables annexed hereto as Schedule I. "Seller" shall mean Autorics, Inc., a Delaware corporation, its successors and assigns. "Trust Agreement" shall mean the Trust Agreement dated as of December 9, 1996, between the Purchaser and Wilmington Trust Company, as the owner trustee (the "Owner Trustee"), as the same may be amended and supplemented from time to time. ARTICLE II Conveyance of Receivables SECTION 2.01. Conveyance of Receivables. In consideration of the Purchaser's delivery to or upon the order of the Seller of $83,232,671.28, the Seller does hereby sell, transfer, assign, set over and otherwise convey to the Purchaser, without recourse (subject 2 to the obligations of the Seller and NAL herein), all right, title and interest of the Seller in and to (but none of the obligations of the Seller with respect to): (a) the Receivables, and all moneys received thereon on and after the Cutoff Date plus all Payaheads as of the Cutoff Date; (b) the security interests in the Financed Vehicles granted by Obligors pursuant to the Receivables, any other right to realize upon property securing a Receivable and any other interest of the Seller in such Financed Vehicles including the Seller's right, title and interest in the lien on the Financed Vehicles in the name of Autorics, Inc. or the Seller's agents, NAL or SFI; (c) any proceeds with respect to the Receivables from claims on any Insurance Policies relating to the Financed Vehicles or Obligors; (d) proceeds of any recourse (but none of the obligations) to Dealers on Receivables; (e) any Financed Vehicle that shall have secured a Receivable and shall have been acquired by or on behalf of the Seller, the Purchaser, or, upon the assignment contemplated by the Sale and Servicing Agreement, the Servicer or the Trust; (f) the Receivables Files; (g) the obligations, duties and responsibilities of NAL to the Seller made hereunder, including without limitation, the representations and warranties made by NAL pursuant to Section 3.02(b) of this Agreement and the representations and warranties on the Receivables made by NAL pursuant to Section 3.02(c) of this Agreement and the right of the Seller to cause NAL to purchase the Receivables under certain circumstances; and (h) the proceeds of any and all of the foregoing. SECTION 2.02. The Closing. The sale and purchase of the Receivables shall take place at a closing (the "Closing") at the offices of Brown & Wood LLP, One World Trade Center, New York, New York 10048 on the Closing Date, simultaneously with the closings under (a) the Sale and Servicing Agreement and (b) the Indenture. ARTICLE III Representations and Warranties SECTION 3.01. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Seller as of the Closing Date: (a) Organization and Good Standing. The Purchaser has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with the power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the power, authority and legal right to acquire and own the Receivables. 3 (b) Due Qualification. The Purchaser is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of its property or the conduct of its business shall require such qualifications. (c) Power and Authority. The Purchaser has the power and authority to execute and deliver this Agreement and to carry out its terms, and the execution, delivery and performance of this Agreement has been duly authorized by the Purchaser by all necessary corporate action. (d) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Purchaser, or any indenture, agreement or other instrument to which the Purchaser is a party or by which it is bound; or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than the Sale and Servicing Agreement, the Indenture and the Trust Agreement); or violate any law or, to the best of the Purchaser's knowledge, any order, rule or regulation applicable to the Purchaser of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Purchaser or its properties. (e) No Proceedings. There are no proceedings or investigations pending or, to the Purchaser's best knowledge, threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Purchaser or its properties: (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Purchaser of its obligations under, or the validity or enforceability of, this Agreement. SECTION 3.02. Representations and Warranties of the Seller and NAL. (a) The Seller hereby represents and warrants to the Purchaser as of the Closing Date: (i) Organization and Good Standing. The Seller has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with the power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the power, authority and legal right to acquire and own the Receivables. (ii) Due Qualification. The Seller is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of its property or the conduct of its business shall require such qualifications. (iii) Power and Authority. The Seller has the power and authority to execute and deliver this Agreement and to carry out its terms; the Seller has full power and authority to sell and assign the property sold and assigned to the Purchaser hereby and has duly authorized such sale and assignment to the Purchaser by all necessary corporate action; and the execution, delivery and performance of this Agreement has been duly authorized by the Seller by all necessary corporate action. 4 (iv) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the articles of incorporation or bylaws of the Seller, or any indenture, agreement or other instrument to which the Seller is a party or by which it is bound; or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than this Agreement); or violate any law or, to the best of the Seller's knowledge, any order, rule or regulation applicable to the Seller of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties. (v) No Proceedings. There are no proceedings or investigations pending or, to the Seller's best knowledge, threatened before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties: (A) asserting the invalidity of this Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (C) seeking any determination or ruling that might materially and adversely affect the performance by the Seller of its obligations under or the validity or enforceability of, this Agreement. (vi) Principal Place of Business. The principal place of business and chief executive office of the Seller are located at the place set forth in Section 6.08(a) and such location has not changed since the date the Seller was incorporated. (vii) Use of Names. The legal name of the Seller is the name used by it in this Agreement and the Seller has not changed its name since the date of its incorporation and does not have trade names, fictitious names, assumed names or "doing business" names. (viii) Solvency. The Seller is solvent and will not become insolvent after giving effect to the transactions contemplated in this Agreement; the Seller is paying its debts, if any, as they become due; the Seller, after giving effect to the transactions contemplated in this Agreement, will have adequate capital to conduct its business. (b) NAL hereby represents and warrants to the Seller as of the Closing Date: (i) Organization and Good Standing. NAL has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Florida, with the power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the power, authority and legal right to acquire and own the Receivables. (ii) Due Qualification. NAL is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of its property or the conduct of its business shall require such qualifications. (iii) Power and Authority. NAL has the power and authority to execute and deliver this Agreement and to carry out its terms; NAL has full power and authority to 5 perform its obligations under this Agreement; and the execution, delivery and performance of this Agreement has been duly authorized by NAL by all necessary corporate action. (iv) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the articles of incorporation or bylaws of NAL, or any indenture, agreement or other instrument to which NAL is a party or by which it is bound; or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than this Agreement); or violate any law or, to the best of NAL's knowledge, any order, rule or regulation applicable to NAL of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over NAL or its properties. (v) No Proceedings. There are no proceedings or investigations pending or, to NAL's best knowledge, threatened before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over NAL or its properties: (A) asserting the invalidity of this Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (C) seeking any determination or ruling that might materially and adversely affect the performance by NAL of its obligations under or the validity or enforceability of, this Agreement. NAL agrees that such representations and warranties shall be conveyed hereunder by the Seller to the Purchaser, by the Purchaser to the Issuer under the Sale and Servicing Agreement, and pledged by the Issuer to the Indenture Trustee. NAL further agrees that any such Person to whom such rights are conveyed may enforce any and all remedies for the breach thereof directly against NAL. NAL agrees that the Purchaser shall rely on such representations and warranties in accepting the Receivables. (c) NAL makes the following representations and warranties to the Seller in respect of the Receivables. NAL agrees that such representations and warranties shall be conveyed hereunder by the Seller to the Purchaser, by the Purchaser to the Issuer under the Sale and Servicing Agreement, and pledged by the Issuer to the Indenture Trustee. NAL further agrees that any such Person to whom such rights are conveyed may enforce any and all remedies for the breach thereof directly against NAL. NAL agrees that the Purchaser shall rely on such representations and warranties in accepting the Receivables. Such representations and warranties speak as of the execution and delivery of this Agreement, but shall survive the sale, transfer and assignment of the Receivables to the Purchaser and the subsequent sale, assignment and transfer of the Receivables pursuant to the Sale and Servicing Agreement and the Grant thereof pursuant to the Indenture: (i) Characteristics of Receivables. Each Receivable (A) was originated in the United States of America by a Dealer for the retail sale of a Financed Vehicle in the ordinary course of such Dealer's business, was fully and properly executed by the parties thereto, was purchased by NAL from such Dealer under an existing dealer agreement, and was validly assigned by such Dealer to NAL in accordance with the terms of such dealer agreement and from NAL to the Seller pursuant to the Contract Purchase Agreement dated September 5, 1995 between NAL and the Seller, (B) has 6 created a valid, subsisting and enforceable first priority security interest in favor of the Seller in the Financed Vehicle, which security interest is assignable by the Seller to the Purchaser, by the Purchaser to the Trust and by the Trust to the Indenture Trustee, (C) contains customary and enforceable provisions such that the rights and remedies of the holder thereof are adequate for realization against the collateral of the benefits of the security, (D) provides for level monthly payments (provided that the payment in the first or last month in the life of the Receivable may be different from the level payments) that fully amortize the Amount Financed by maturity and yield interest at the Annual Percentage Rate, and (E) provides, in the event that such Contract is prepaid, for a prepayment that fully pays the Principal Balance of the Receivable and includes a full month's interest in the month of prepayment at the Annual Percentage Rate. (ii) Schedule of Receivables. The information set forth in Schedule I to this Agreement is true and correct in all material respects as of the opening of business on the Cutoff Date, and no selection procedures believed to be adverse to the Noteholders or the Certificateholders were utilized in selecting the Receivables. The computer tape regarding the Receivables made available to the Purchaser and its assigns is true and correct in all respects. (iii) Compliance with Law. Each Receivable and the sale of the related Financed Vehicle complied at the time it was originated or made, and at the execution of this Agreement complies, in all material respects with all requirements of applicable federal, state and local laws and regulations thereunder, including usury laws, the Federal Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and S and state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, and other consumer credit laws and equal credit opportunity and disclosure laws. (iv) Binding Obligation. Each Receivable represents the genuine, legal, valid and binding payment obligation in writing of the Obligor, enforceable by the holder thereof in accordance with its terms. (v) No Government Obligor. None of the Receivables is due from the United States of America or any state or from any agency, department or instrumentality of the United States of America or any state. (vi) Security Interest in Financed Vehicle. Immediately prior to the sale, assignment and transfer thereof, each Receivable shall be secured by a validly perfected first security interest in the Financed Vehicle in favor of the Seller as secured party or all necessary and appropriate actions have been commenced that would result in the perfection of a first security interest in the Financed Vehicle in favor of the Seller as secured party. (vii) Receivables in Force. No Receivable has been satisfied, subordinated or rescinded, nor has any Financed Vehicle been released from the lien granted by the related Receivable in whole or in part. 7 (viii) No Waiver. No provision of a Receivable has been waived except by a writing constituting an amendment to the applicable Contract. (ix) No Amendments. No Receivable has been amended such that the amount of the Obligor's scheduled payments has been increased. (x) No Defenses. No right of rescission, setoff, counterclaim or defense has been asserted or threatened with respect to any Receivable. (xi) No Liens. To the best of the Seller's knowledge, no liens or claims have been filed for work, labor or materials relating to a Financed Vehicle that are liens prior to, or equal or coordinate with, the security interest in the Financed Vehicle created by any Receivable. (xii) No Default. No Receivable has a payment that is more than 30 days overdue as of the Cutoff Date and no default, breach, violation or event permitting acceleration under the terms of any Receivable has occurred; no continuing condition that with notice or the lapse of time would constitute a default, breach, violation or event permitting acceleration under the terms of any Receivable has arisen; and the Seller has not waived any of its rights regarding the occurrence of any of the foregoing. (xiii) Insurance. The Seller, in accordance with its customary procedures, has determined that each Obligor has obtained physical damage insurance covering the Financed Vehicle and under the terms of the Receivable the Obligor is required to maintain such insurance. (xiv) Title. It is the intention of the parties hereto that the transfer and assignment herein contemplated constitute a sale of the Receivables from the Seller to the Purchaser, and that the beneficial interest in and title to the Receivables not be part of the debtor's estate in the event of the filing of a bankruptcy petition by or against the Seller under any bankruptcy law. Immediately prior to the transfer and assignment herein contemplated, the Seller had good and marketable title to each Receivable free and clear of all Liens and, immediately upon the transfer thereof, the Purchaser shall have good and marketable title to each Receivable, free and clear of all Liens; and the transfer has been perfected under the UCC. (xv) Lawful Assignment. No Receivable was originated in, or is subject to the laws of, any jurisdiction under which the sale, transfer and assignment of such Receivable or any Receivable under this Agreement, the Sale and Servicing Agreement or the Indenture is unlawful, void or voidable. (xvi) All Filings Made. All filings (including UCC filings) necessary in any jurisdiction to give the Purchaser a first perfected ownership interest in the Receivables have been made. (xvii) One Original. There is only one executed original of each Receivable. (xviii) Maturity of Receivables. Each Receivable has an original maturity of not more than 60 months; the weighted average remaining term of the Receivables is 50.03 months as of the Cutoff Date. 8 (xix) Scheduled Payments. (A) Each Receivable has a first Scheduled Payment due, in the case of Precomputed Receivables, or a scheduled due date, in the case of Simple Interest Receivables, on or prior to January 17, 1997 and (B) no Receivable has a final scheduled payment date later than the Final Scheduled Maturity Date. (xx) Location of Receivable Files. The Receivable Files are kept at one or more of the locations listed in Schedule II hereto. (xxi) Outstanding Principal Balance. The Amount Financed pursuant to each Receivable is at least $1,000. (xxii) Financing. Approximately 78.32% of the aggregate principal balance of the Receivables, constituting 82.83% of the number of Receivables as of the Cutoff Date, represent financing of used vehicles; the remainder of the Receivables represent financing of new vehicles; approximately 88.54% of the aggregate principal balance of the Receivables as of the Cut-off Date represent Precomputed Receivables; and the remainder of the Receivables represent Simple Interest Receivables. The aggregate Principal Balance of the Receivables as of the Cutoff Date is $88,044,150.40. (xxiii) No Bankruptcies. As of the Cutoff Date, no Obligor on any Receivable was noted in the related Receivable File as having filed for bankruptcy. (xxiv) No Repossessions. No Financed Vehicle securing any Receivable is in repossession status. (xxv) Chattel Paper. Each Receivable constitutes "chattel paper" as defined in the UCC. (xxvi) Underwriting Guidelines. Each Receivable was originated by the Dealer and purchased by NAL in accordance with the underwriting guidelines described in the Private Placement Memorandum. (xxvii) Servicing. As of the Cutoff Date each Receivable was being serviced by the Servicer and no other person had a right to service such Receivable. (xxviii) Full Amount Advanced. The full principal amount of each Receivable has been advanced to each Obligor, and there is no requirement for future advances thereunder. The Obligor with respect to the Receivable does not have any option under the Receivables to borrow from any person additional funds secured by the Financed Vehicle. (xxix) Obligation to Dealers or Others. The Purchaser and its assignees will assume no obligations to Dealers or other originators of prior holders of the Receivables (including, but not limited to obligations under dealer reserves) as a result of its purchase of the Receivables. (xxx) Collection Practices. The Collection practices utilized by any person servicing a Receivable in seeking payment under the documentation evidencing such Receivable have been in all respects legal, proper and customary in the automobile loan servicing business. 9 (xxxi) First Payment. The first payment on each Receivable with respect to which the first payment was not yet due as of the Cutoff Date will be made in full no later than the 45th day after its due date. (xxxii) Private Placement Memorandum. The Private Placement Memorandum does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading. (xxxiii) Subsequent Transfer. The representations and warranties of the Depositor in Section 3.01 of the Sale and Servicing Agreement are true and correct. ARTICLE IV Conditions SECTION 4.01. Conditions to Obligation of the Purchaser. The obligation of the Purchaser to purchase the Receivables is subject to the satisfaction of the following conditions: (a) Representations and Warranties True. The representations and warranties of the Seller and NAL hereunder shall be true and correct on the Closing Date with the same effect as if then made, and each of the Seller and NAL shall have performed all obligations to be performed by it hereunder on or prior to the Closing Date. (b) Computer Files Marked. The Seller shall, at its own expense, on or prior to the Closing Date indicate in its computer files that the Receivables have been sold to the Purchaser pursuant to this Agreement, and deliver to the Purchaser the Schedule of Receivables certified by the Chairman, the President, a Vice President or the Treasurer to be true, correct and complete. (c) Documents To Be Delivered by the Seller at the Closing. (i) The Assignment. At the Closing, the Seller will execute and deliver an Assignment in the form of Exhibit A hereto. (ii) Evidence of UCC Filing. On or prior to the Closing Date, the Seller shall record and file, at its own expense, a UCC-1 financing statement in each jurisdiction in which required by applicable law, executed by the Seller, as seller or debtor, and naming the Purchaser as purchaser or secured party, describing the Receivables and the other property included in the Owner Trust Estate, meeting the requirements of the laws of each such jurisdiction and in such manner as is necessary to perfect the sale, transfer, assignment and conveyance of such Receivables to the Purchaser. The Seller shall deliver a file-stamped copy or other evidence satisfactory to the Purchaser of such filing to the Purchaser on or prior to the Closing Date. (iii) Other Documents. Such other documents as the Purchaser may reasonably request. 10 (d) Other Transactions. The transactions contemplated by the Sale and Servicing Agreement, the Indenture and the Trust Agreement to be consummated on the Closing Date shall be consummated on such date. SECTION 4.02. Conditions to Obligation of the Seller. The obligation of the Seller to sell the Receivables to the Purchaser is subject to the satisfaction of the following conditions: (a) Representations and Warranties True. The representations and warranties of the Purchaser hereunder shall be true and correct on the Closing Date with the same effect as if then made, and the Seller shall have performed all obligations to be performed by it hereunder on or prior to the Closing Date. (b) Receivables Purchase Price. On the Closing Date, the Purchaser shall have delivered to the Seller the purchase price specified in Section 2.01. ARTICLE V Covenants of the Seller and NAL The Seller and NAL agree with the Purchaser as follows: SECTION 5.01. Protection of Right, Title and Interest. (a) Filings. NAL and the Seller shall cause all financing statements and continuation statements and any other necessary documents covering the right, title and interest of the Seller and the Purchaser, respectively, in and to the Receivables and the other property included in the Owner Trust Estate to be promptly filed and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve and protect the right, title and interest of the Purchaser hereunder in and to the Receivables and the other property included in the Owner Trust Estate. NAL and the Seller shall deliver to the Purchaser file stamped copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available following such recordation, registration or filing. The Purchaser shall cooperate fully with NAL and the Seller (and the Seller will cooperate with NAL) in connection with the obligations set forth above and will execute any and all documents reasonably required to fulfill the intent of this paragraph. (b) Name Change. Within 15 days after the Seller makes any change in its name, identity or corporate structure that would make any financing statement or continuation statement filed in accordance with paragraph (a) above seriously misleading within the applicable provisions of the UCC or any title statute, the Seller shall give the Purchaser notice of any such change and, no later than 5 days after the effective date thereof, shall file such financing statements or amendments as may be necessary to continue the perfection of the Purchaser's interest in the property included in the Owner Trust Estate. (c) Resolution. The Seller shall have an obligation to give the Purchaser at least 60 days' prior written notice of any relocation of its principal executive office if, as a result of such relocation, the applicable provisions of the UCC would require the filing of any amendment of any previously filed financing or continuation statement or of any new financing statement and shall promptly file any such amendment or new financing statement. The 11 Servicer shall at all times maintain each office from which it shall service Receivables, and its principal executive office, within the United States of America. (d) Notice. If at any time the Seller shall propose to sell, grant a security interest in, or otherwise transfer any interest in automotive receivables to any prospective purchaser, lender or other transferee, the Seller shall give to such prospective purchaser, lender or other transferee computer tapes, records or printouts (including any restored from backup archives) that, if they shall refer in any manner whatsoever to any Receivable, shall indicate clearly that such Receivable has been sold and is owned by the Purchaser. Should any third party inquire of the Seller as to the Receivables, the Seller will promptly indicate to such party that the Receivables have been sold to the Purchaser pursuant to this Agreement. SECTION 5.02. Other Liens or Interests. Except for the conveyances hereunder and under the Sale and Servicing Agreement, the Indenture, the Trust Agreement and the other Basic Documents, the Seller will not sell, pledge, assign or transfer to any Person, or grant, create, incur, assume or suffer to exist any Lien on, or any interest in, to or under the Receivables, and the Seller shall defend the right, title and interest of the Purchaser in, to and under the Receivables against all claims of third parties claiming through or under the Seller; provided, however, that the Seller's obligations under this Section shall terminate upon the termination of the Trust pursuant to the Trust Agreement. SECTION 5.03. Costs and Expenses. NAL agrees to pay all reasonable costs and disbursements in connection with the perfection, as against all third parties, of the Seller's or any of its assignees right, title and interest in and to the Receivables. SECTION 5.04. Indemnification. NAL shall indemnify the Purchaser for any liability resulting from the failure of a Receivable to be originated in compliance with all requirements of law and for any breach of any of its or the Seller's representations and warranties contained herein and for any failure by the Seller to comply with its obligations under Sections 5.01 and 5.02 hereof. These indemnity obligations shall be in addition to any obligation that NAL or the Seller may otherwise have. ARTICLE VI Miscellaneous Provisions SECTION 6.01. Obligations of Seller and NAL. The obligations of the Seller and NAL under this Agreement shall not be affected by reason of any invalidity, illegality or irregularity of any Receivable. SECTION 6.02. Repurchase Events. NAL hereby covenants and agrees with the Seller for the benefit of the Seller and its assignees or their respective assignees the occurrence of a breach of any of NAL's representations and warranties contained in Section 3.02(c), unless any such breach shall have been cured by the last day of the Collection Period following the discovery thereof by NAL, or receipt by NAL of written notice from the Owner Trustee, the Indenture Trustee, the Depositor, the Servicer, or the Back-up Servicer, shall constitute an event obligating NAL to purchase as of such last day any Receivable hereunder with respect to which such breach occurred if such breach has had a material and adverse effect on the interests of the Purchaser or the Trust in and to such Receivable (each, a "Repurchase Event"), at the Purchase Amount from the Purchaser or, upon the assignment 12 contemplated by the Sale and Servicing Agreement, from the Trust. The repurchase obligation of NAL shall constitute the sole remedy (other than that provided by Section 5.04) of the Purchaser, the Trust, the Indenture Trustee, the Noteholders, the Owner Trustee or the Certificateholders against NAL with respect to any Repurchase Event. SECTION 6.03. Purchaser Assignment of Repurchased Receivables. With respect to all Receivables purchased by NAL pursuant to this Agreement, the Purchaser shall assign, without recourse, representation or warranty, to NAL all the Purchaser's right, title and interest in and to such Receivables and all security and documents relating thereto. SECTION 6.04. The Trust. The Seller and NAL acknowledge and agree that (a) the Purchaser will, pursuant to the Sale and Servicing Agreement, sell the Receivables to the Trust and assign its rights under this Agreement to the Trust, (b) the Trust will, pursuant to the Indenture, Grant the Receivables and its rights under this Agreement and the Sale and Servicing Agreement to the Indenture Trustee on behalf of the Noteholders and (c) the representations and warranties contained in this Agreement and the rights of the Purchaser under this Agreement, including under Section 6.02 are intended to benefit the Trust, the Certificateholders and the Noteholders. The Seller and NAL hereby consent to all such sales and assignments and agree that the Owner Trustee or, if pursuant to the Indenture, the Indenture Trustee may exercise the rights of the Purchaser and enforce the obligations of the Seller and NAL hereunder directly and without the consent of the Purchaser. SECTION 6.05. Amendment. This Agreement may be amended from time to time, with prior written notice to each Rating Agency, by a written amendment duly executed and delivered by NAL, the Seller and the Purchaser, to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to add any other provision with respect to matters or questions arising under this Agreement which shall not be inconsistent with the provisions of this Agreement or the Sale and Servicing Agreement, the Trust Agreement or the Indenture; provided that such amendment shall not, in the Opinion of Counsel satisfactory to the Owner Trustee and the Indenture Trustee, materially and adversely affect the interest of any Noteholder or Certificateholder in the Trust or the Receivables. This Agreement may also be amended by NAL, the Seller and the Purchaser, with prior written notice to each Rating Agency, with the consent of the holders of Notes evidencing at least a majority of the Outstanding Amount of the Notes and the holders of Certificates evidencing at least a majority of the Certificate Balance for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders in the Trust or Receivables; provided, however, that no such amendment may (i) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on Receivables or distributions that are required to be made for the benefit of Noteholders or Certificateholders or (ii) reduce the aforesaid percentage of the Notes and Certificates that is required to consent to any such amendment, without the consent of the holders of all the outstanding Notes and Certificates. SECTION 6.06. Accountants' Letters. (a) Price Waterhouse LLP will review the characteristics of the Receivables and will compare those characteristics to the information with respect to the Receivables contained in the Private Placement Memorandum; (b) the Seller will cooperate with the Purchaser and Price Waterhouse LLP in making available all information and taking all steps reasonably necessary to permit such accountants to complete the review set forth in clause (a) above and to deliver the letters required of them under the Private Placement Memorandum; (c) Price Waterhouse LLP will deliver to the Purchaser a letter, dated 13 the date of the Private Placement Memorandum, in the form previously agreed to by the Seller and the Purchaser, with respect to the financial and statistical information contained in the Private Placement Memorandum and with respect to such other information as may be agreed in the form of letter. SECTION 6.07. Waivers. No failure or delay on the part of the Purchaser, or any assignee of the Purchaser, in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. SECTION 6.08. Notices. All demands, notices and communications under this Agreement shall be in writing, personally delivered or mailed by certified mail, return receipt requested, or recognized overnight courier or by facsimile confirmed by delivery or mail as described above, and shall be deemed to have been duly given upon receipt (a) in the case of the Seller, to AUTORICS, Inc., 500 Cypress Creek Road West, Suite 590, Fort Lauderdale, Florida 33309, Telephone: 954-958-3590: Fax: 954-938-8209, Attention: Dennis LaVigne; (b) in the case of the Purchaser, to AUTORICS II, Inc., 500 Cypress Creek Road West, Suite 590, Fort Lauderdale, Florida 33309, Telephone: 954-958-3591; Fax: 954-938-8209, Attention: Dennis LaVigne; (c) in the case of NAL, to NAL ACCEPTANCE CORPORATION, 500 Cypress Creek Road West, Suite 590, Fort Lauderdale, Florida 33309, Telephone: 305-938- 8200; Fax: 305-938-8209, Attention: Dennis LaVigne; and (d) in the case of each Rating Agency, to Duff & Phelps Credit Rating Co., 55 East Monroe Street, Chicago, Ill. 60603; Tel: 312-263-2610; Fax: 312-263-2852; Attn: Asset-Backed Research and Monitoring and to Fitch Investors Service, L.P., One State Street Plaza, 32nd Floor, New York, N.Y. 10004 Tel: (212) 908-0637; Fax: (212) 480-4438; Attn: Michael N. Babick; or as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. SECTION 6.09. Costs and Expenses. The Seller shall pay all expenses incident to the performance of its obligations under this Agreement and NAL agrees to pay all reasonable out-of-pocket costs and expenses of the Purchaser, excluding fees and expenses of counsel, in connection with the perfection as against third parties of the Purchaser's right, title and interest in and to the Receivables and the enforcement of any obligation of the Seller hereunder. SECTION 6.10. Representations of the Seller and the Purchaser. The respective agreements, representations, warranties and other statements by NAL, the Seller and the Purchaser set forth in or made pursuant to this Agreement shall remain in full force and effect and will survive the sales and assignments referred to in Section 6.04. SECTION 6.11. Confidential Information. The Purchaser agrees that it will neither use nor disclose to any Person the names and addresses of the Obligors, except in connection with the enforcement of the Purchaser's rights hereunder, under the Receivables, under the Sale and Servicing Agreement, the Indenture, the Trust Agreement or any other Basic Document or as required by any of the foregoing or by law. SECTION 6.12. Headings and Cross-References. The various headings in this Agreement are included for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. References in this Agreement to Section names or numbers are to such Sections of this Agreement. 14 SECTION 6.13. GOVERNING LAW. THIS AGREEMENT AND THE ASSIGNMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER OR THEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 6.14. Counterparts. This Agreement may be executed in two or more counterparts and by different parties on separate counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers duly authorized as of the date and year first above written. AUTORICS, INC., by ____________________________________ Name: Robert Carlson Title: Vice President/Finance NAL ACCEPTANCE CORPORATION, by ____________________________________ Name: Robert Carlson Title: Vice President/Finance AUTORICS II, INC., by __________________________________ Name: Robert Carlson Title: Vice President/Finance 16 ASSIGNMENT For value received, in accordance with the Receivables Purchase Agreement dated as of December 9, 1996, among AUTORICS, INC. (the "Seller"), NAL ACCEPTANCE CORPORATION and AUTORICS II, INC. (the "Purchaser"), the Seller does hereby sell, assign, transfer and otherwise convey unto the Purchaser, without recourse (subject to the obligations of the Seller and NAL in the Receivables Purchase Agreement), all right, title and interest of the Seller in and to (but none of the obligations of the Seller with respect to) (i) the Receivables, and all moneys received thereon on and after the Cutoff Date plus all Payaheads as of the Cutoff Date; (ii) the security interests in the Financed Vehicles granted by Obligors pursuant to the Receivables, any other right to realize upon property securing a Receivable and any other interest of the Seller in such Financed Vehicles including the Seller's right, title and interest in the lien on the Financed Vehicles in the name of Autorics, Inc. or the Seller's agents, NAL or SFI; (iii) any proceeds with respect to the Receivables from claims on any Insurance Policies relating to the Financed Vehicles or Obligors; (iv) proceeds of any recourse (but none of the obligations) to Dealers on Receivables; (v) any Financed Vehicle that shall have secured a Receivable and shall have been acquired by or on behalf of the Purchaser, or, upon the assignment contemplated by the Sale and Servicing Agreement, the Servicer or the Trust; (vi) the Receivables Files; (vii) the obligations, duties and responsibilities of NAL to the Seller made under the Receivables Purchase Agreement, including without limitation, the representations and warranties on the Receivables made by NAL pursuant to Section 3.02(b) of the Receivables Purchase Agreement and the representations and warranties on the Receivables made by NAL pursuant to Section 3.02(c) of the Receivables Purchase Agreement and the right of the Seller to cause NAL to purchase the Receivables under certain circumstances; and (viii) the proceeds of any and all of the foregoing. The foregoing sale does not constitute and is not intended to result in any assumption by the Purchaser of any obligation of the undersigned to the Obligors, insurers, Dealers or any other person in connection with the Receivables, Receivable Files, any insurance policies or any agreement or instrument relating to any of them. This Assignment is made pursuant to and upon the representations, warranties and agreements on the part of the undersigned contained in the Receivables Purchase Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Receivables Purchase Agreement. IN WITNESS WHEREOF, the undersigned has caused this Assignment to be duly executed as of December 9, 1996. AUTORICS, INC. by ________________________ Name: Title: SCHEDULE I Schedule of Receivables [To Be Delivered at Closing] I-1 SCHEDULE II Location of Receivable Files Bankers Trust Company Four Albany Street New York, NY 10006 II-1 EX-10.39 5 SALE AND SERVICING AGREEMENT Execution Copy ================================================================================ SALE AND SERVICING AGREEMENT among NAL AUTO TRUST 1996-4, Issuer, and AUTORICS II, INC., Depositor, and NAL ACCEPTANCE CORPORATION, Servicer and BANKERS TRUST COMPANY, Backup Servicer Dated as of December 9, 1996 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I Definitions SECTION 1.01. Definitions ................................................. 1 SECTION 1.02. Other Definitional Provisions ............................... 16 ARTICLE II Conveyance of Receivables SECTION 2.01. Conveyance of Receivables ................................... 17 ARTICLE III The Receivables SECTION 3.01. Representations and Warranties of the Depositor with Respect to the Receivables ................................................. 18 SECTION 3.02. Repurchase upon Breach ...................................... 18 SECTION 3.03. Custody of Receivable Files ................................. 19 ARTICLE IV Administration and Servicing of Receivables SECTION 4.01. Duties of Servicer .......................................... 20 SECTION 4.02. Collection and Allocation of Receivable Payments .................................................... 21 SECTION 4.03. Realization upon Receivables ................................ 21 SECTION 4.04. Insurance ................................................... 22 SECTION 4.05. Maintenance of Security Interests in Financed Vehicles ........................................... 22 SECTION 4.06. Covenants of Servicer ....................................... 22 SECTION 4.07. Purchase of Receivables upon Breach ......................... 23 SECTION 4.08. Servicing Fee ............................................... 23 SECTION 4.09. Servicer's Certificate ...................................... 23 SECTION 4.10. Annual Statement as to Compliance; Notice of Default ........................................... 24 SECTION 4.11. Annual Independent Certified Public Accountants' Report ......................................... 24 SECTION 4.12. Servicer Expenses ........................................... 25 SECTION 4.13. Appointment of Subservicer .................................. 25 SECTION 4.14. Oversight of Servicing ...................................... 25 SECTION 4.15. Duties of Backup Servicer ................................... 26 i ARTICLE V Trust Accounts; Distributions; Reserve Account; Statements to Certificateholders and Noteholders SECTION 5.01. Establishment of Trust Accounts ............................. 27 SECTION 5.02. Collections ................................................. 30 SECTION 5.03. Application of Collections .................................. 30 SECTION 5.04. Additional Deposits ......................................... 30 SECTION 5.05. Distributions ............................................... 30 SECTION 5.06. Reserve Account ............................................. 31 SECTION 5.07. Statements to Certificateholders and Noteholders ................................................. 33 SECTION 5.08. Transfer of the Notes ....................................... 35 SECTION 5.09. Dealer Reserve Account ...................................... 35 ARTICLE VI The Depositor SECTION 6.01. Representations of Depositor ................................ 35 SECTION 6.02. Corporate Existence ......................................... 37 SECTION 6.03. Liability of Depositor; Indemnities ......................... 38 SECTION 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Depositor ................. 38 SECTION 6.05. Limitation on Liability of Depositor and Others ...................................................... 39 SECTION 6.06. Depositor May Own Certificates or Notes ..................... 39 SECTION 6.07. Sale of Receivables ......................................... 40 ARTICLE VII The Servicer; Backup Servicer SECTION 7.01. Representations of Servicer ................................. 40 SECTION 7.02. Indemnities of Servicer ..................................... 41 SECTION 7.03. Merger or Consolidation of, or Assumption of the Obligations of, Servicer .................. 43 SECTION 7.04. Limitation on Liability of Servicer and Others ...................................................... 43 SECTION 7.05. NAL Not To Resign as Servicer ............................... 44 SECTION 7.06. Representations of Backup Servicer .......................... 44 SECTION 7.07. Merger or Consolidation of, or Assumption of the Obligations of, Backup Servicer .................................................... 45 SECTION 7.08. Resignation as Backup Servicer .............................. 45 ARTICLE VIII Default SECTION 8.01. Servicer Default ............................................ 46 SECTION 8.02. Appointment of Successor .................................... 47 SECTION 8.03. Notification to Noteholders and ii Certificateholders Waiver of Past Defaults .................. 49 SECTION 8.04. Waiver of Past Defaults ..................................... 49 ARTICLE IX Termination SECTION 9.01. Optional Purchase of All Receivables ........................ 49 ARTICLE X Miscellaneous SECTION 10.01. Amendment ................................................... 51 SECTION 10.02. Protection of Title to Trust ................................ 52 SECTION 10.03. Notices ..................................................... 54 SECTION 10.04. Assignment by the Depositor or the Servicer .................................................... 55 SECTION 10.05. Limitations on Rights of Others ............................. 55 SECTION 10.06. Severability ................................................ 55 SECTION 10.07. Separate Counterparts ....................................... 55 SECTION 10.08. Headings .................................................... 55 SECTION 10.09. Governing Law ............................................... 55 SECTION 10.10. Assignment by Issuer ........................................ 55 SECTION 10.11. Nonpetition Covenants ....................................... 56 SECTION 10.12. Limitation of Liability of Owner Trustee and Indenture Trustee ............................... 56 SCHEDULE A Schedule of Receivables EXHIBIT A Form of Distribution Date Statement to Noteholders EXHIBIT B Form of Distribution Date Statement to Certificateholders EXHIBIT C Form of Servicer's Certificate EXHIBIT D Form of Receivables Checklist EXHIBIT E Form of Receivables Assignment iii SALE AND SERVICING AGREEMENT dated as of December 9, 1996, among NAL AUTO TRUST 1996-4, a Delaware business trust (the "Issuer"), AUTORICS II, INC., a Delaware corporation (the "Depositor"), NAL ACCEPTANCE CORPORATION, a Florida corporation (the "Servicer") and BANKERS TRUST COMPANY, a New York banking corporation (the "Backup Servicer"). WHEREAS the Issuer desires to purchase a portfolio of receivables arising in connection with automobile retail installment sale contracts generated by NAL Acceptance Corporation in the ordinary course of business which were sold by NAL Acceptance Corporation to the Seller and by the Seller to the Depositor; WHEREAS the Depositor is willing to sell such receivables to the Issuer; and WHEREAS NAL Acceptance Corporation is willing to service such receivables; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: "AA" means Auto Analyst, Inc., a Georgia corporation, and any successor in interest. "Amount Financed" means, with respect to any Receivable, the amount advanced under the Receivable toward the purchase price of the Financed Vehicle and any related costs, exclusive of any amount allocable to the premium of "dual interest" insurance covering the Financed Vehicle. "Annual Percentage Rate" or "APR" of a Receivable means the annual rate of finance charges stated in the related Contract. "Backup Servicer" means, Bankers Trust Company, a New York banking corporation, and its successors or assigns, when acting in its capacity as Backup Servicer under this Agreement. "Certificate Balance" equals, as of the Closing Date, the Initial Certificate Balance and, thereafter, will equal the Initial Certificate Balance reduced by all amounts allocable to principal previously distributed to Certificateholders. "Certificate Distribution Account" has the meaning assigned to such term in the Trust Agreement. "Certificate Pool Factor" means, as of the close of business on the last day of a Collection Period, a seven-digit decimal figure equal to the Certificate Balance (after giving effect to any reductions therein to be made on the immediately following Distribution Date) divided by the Initial Certificate Balance. The Certificate Pool Factor will be 1.0000000 as of the Closing Date; thereafter, the Certificate Pool Factor will decline to reflect reductions in the Certificate Balance. "Certificateholders' or "Holders" (when used in the context of the Holders of Certificates) has the meaning assigned to such term in the Trust Agreement. "Certificateholders' Distributable Amount" means, with respect to any Distribution Date, the sum of the Certificateholders' Principal Distributable Amount and the Certificateholders' Interest Distributable Amount for such date. "Certificateholders' Interest Carryover Shortfall" means, with respect to any Distribution Date, (i) the excess of the Certificateholders' Interest Distributable Amount for the preceding Distribution Date, over the amount in respect of interest that is actually deposited in the Certificate Distribution Account on such preceding Distribution Date, plus (ii) 90 days of interest on the amount of such excess for such preceding Distribution Date, to the extent permitted by law, at the Pass-Through Rate. "Certificateholders' Interest Distributable Amount" means, with respect to any Distribution Date, the sum of the Certificateholders' Quarterly Interest Distributable Amount for such Distribution Date and the Certificateholders' Interest Carryover Shortfall for such Distribution Date. Interest with respect to the Certificates shall be computed on the basis of a 360-day year consisting of twelve 30-day months for all purposes of this Agreement and the Basic Documents. "Certificateholders' Quarterly Interest Distributable Amount" means, with respect to any Distribution Date, 90 days of interest at the Pass-Through Rate on the Certificate Balance on the immediately preceding Distribution Date (or, in the case of the first Distribution Date, on the Closing Date) after giving effect to all payments of principal to Certificateholders on such immediately preceding Distribution Date. "Certificateholders' Quarterly Principal Distributable Amount" means, with respect to any Distribution Date prior to the Distribution Date on which the Notes are paid in full, zero; and with respect to any Distribution Date on or after the Distribution Date on which the Notes are paid in full, 100% of the Principal Distribution Amount for such Distribution Date 2 (less, on the Distribution Date on which the Notes are paid in full, the portion thereof payable as principal of the Notes). "Certificateholders' Principal Carryover Shortfall" means, as of the close of a particular Distribution Date, the excess of the Certificateholders' Quarterly Principal Distributable Amount and any outstanding Certificateholders' Principal Carryover Shortfall from the preceding Distribution Date, over the amount in respect of principal that is actually deposited in the Certificate Distribution Account on such particular Distribution Date. "Certificateholders' Principal Distributable Amount" means, with respect to any Distribution Date, the sum of the Certificateholders' Quarterly Principal Distributable Amount for such Distribution Date and the Certificateholders' Principal Carryover Shortfall as of the close of the preceding Distribution Date; provided, however, that the Certificateholders' Principal Distributable Amount shall not exceed the Certificate Balance. In addition, on the Final Scheduled Distribution Date, the principal required to be included in the Certificateholders' Principal Distributable Amount will include the lesser of (a) (i) any Scheduled Payments of principal due and remaining unpaid on each Precomputed Receivable and (ii) any principal due and remaining unpaid on each Simple Interest Receivable, in each case, in the Trust as of the Final Scheduled Distribution Date or (b) the amount that is necessary (after giving effect to the other amounts to be deposited in the Certificate Distribution Account on such Distribution Date and allocable to principal) to reduce the Certificate Balance to zero. "Certificates" means the Trust Certificates (as defined in the Trust Agreement). "Closing Date" means December 18, 1996. "Collection Account" means the account designated as such, established and maintained pursuant to Section 5.01(a)(i). "Collection Period" means the three calendar-month period ending on the last day of the month preceding the month of each Distribution Date. Any amount or balance stated as of the last day of a Collection Period shall give effect to the following calculations as determined as of the close of business on such last day: (1) all applications of collections, (2) all current and previous Payaheads, (3) all applications of Payahead Balances and (4) all distributions to be made on the following Distribution Date. "Computer Tape" means a computer tape generated by the Servicer which provides information relating to the Receivables. "Contract" means a motor vehicle retail installment sale contract. 3 "Corporate Trust Office" means the principal office of the Indenture Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of the execution of this Agreement is located at Four Albany Street, New York, New York, Corporate Trust and Agency Group, Structured Finance Team; or at such other address as the Indenture Trustee may designate from time to time by notice to the Noteholders and the Depositor, or the principal corporate trust office of any successor Indenture Trustee (of which address such successor Indenture Trustee will notify the Noteholders and the Depositor). "Custodial Agreement" means the Custodial Agreement dated as of December 9, 1996, among the Issuer, Bankers Trust Company, as Indenture Trustee and Custodian, and the Servicer. "Custodian" means Bankers Trust Company, as Custodian under the Custodial Agreement and any successor Custodian pursuant to the Custodial Agreement. "Cutoff Date" means December 9, 1996. "Dealer" means the dealer, SF1, AA or other entity who sold a Financed Vehicle and who originated the related Contract or who acquired a Contract and in either case assigned the related Receivable to NAL under an existing agreement between it and NAL. "Dealer Reserve Account" means the account designated as such, established and maintained pursuant to Section 5.01. "Delinquency Trigger Event" means, as to any Collection Period, that the Average Three Month Delinquency Ratio as of the last day of such Collection Period is greater than 6%. "Average Three Month Delinquency Ratio" means, as of any date, the ratio of the average aggregate Principal Balances of Receivables that are 60 days or more delinquent for each of the three prior calendar months prior to such date to the average of the Pool Balances as of the end of such periods. "Delivery" when used with respect to Trust Account Property means: (a) with respect to bankers' acceptances, commercial paper, negotiable certificates of deposit and other obligations that constitute "instruments" within the meaning of Section 9-105(1)(i) of the UCC and are susceptible of physical delivery, transfer thereof to the Indenture Trustee or its nominee or custodian by physical delivery to the Indenture Trustee or its nominee or custodian endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank, and, with respect to a "certificated security" (as defined in Section 8-102(1) (a) of the UCC) transfer thereof (i) by delivery of such certificated security endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank to a financial 4 intermediary (as defined in Section 8-313 of the UCC) and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian and the sending by such financial intermediary of a confirmation of the purchase of such certificated security by the Indenture Trustee or its nominee or custodian, or (ii) by delivery thereof to a "clearing corporation" (as defined in Section 8-102(3) of the UCC) and the making by such clearing corporation of appropriate entries on its books reducing the appropriate securities account of the transferor and increasing the appropriate securities account of a financial intermediary by the amount of such certificated security, the identification by the clearing corporation of the certificated securities for the sole and exclusive account of the financial intermediary, the maintenance of such certificated securities by such clearing corporation or a "custodian bank" (as defined in Section 8-102(4) of the UCC) or the nominee of either subject to the clearing corporation's exclusive control, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such securities and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian (all of the foregoing, "Physical Property"), and, in any event, any such Physical Property in registered form shall be in the name of the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect the complete transfer of ownership of any such Trust Account Property (as defined herein) to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; (b) with respect to any security issued by the U.S. Treasury, the Federal Home Loan Mortgage Corporation or by the Federal National Mortgage Association that is a book-entry security held through the Federal Reserve System pursuant to Federal book-entry regulations, the following procedures, all in accordance with applicable law, including applicable Federal regulations and Articles 8 and 9 of the UCC: book-entry registration of such Trust Account Property to an appropriate book-entry account maintained with a Federal Reserve Bank by a financial intermediary which is also a "depository" pursuant to applicable Federal regulations and issuance by such financial intermediary of a deposit advice or other written confirmation of such book-entry registration to the Indenture Trustee or its nominee or custodian of the purchase by the Indenture Trustee or its nominee or custodian of such book-entry security; the making by such financial intermediary of entries in its books and records identifying such book-entry security held through the Federal Reserve System pursuant to Federal book-entry regulations as belonging to the Indenture Trustee or its 5 nominee or custodian and indicating that such custodian holds such Trust Account Property solely as agent for the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect complete transfer of ownership of any such Trust Account Property to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; and (c) with respect to any item of Trust Account Property that is an uncertificated security under Article 8 of the UCC and that is not governed by clause (b) above, registration on the books and records of the issuer thereof in the name of the financial intermediary, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such uncertificated security, and the making by such financial intermediary of entries on its books and records identifying such uncertificated certificates as belonging to the Indenture Trustee or its nominee or custodian. "Depositor" means AUTORICS II, Inc., a Delaware corporation and any successor in interest. "Distribution Date" means March 15, June 15, September 15 and December 15 of each year or, if such day is not a Business Day, the immediately following Business Day, commencing on March 17, 1997. "Eligible Deposit Account" means either (a) a segregated account with an Eligible Institution or (b) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, so long as any of the securities of such depository institution shall have a credit rating from each Rating Agency in one of its generic rating categories that signifies investment grade. "Eligible Institution" means (a) the corporate trust department of the Indenture Trustee or the Owner Trustee or (b) a depository institution organized under the laws of the United States of America or any one of the states thereof or the District of Columbia (or any domestic branch of a foreign bank), which (i) has either (A) a long-term unsecured debt rating of A or better by each Rating Agency, or if not rated by each Rating Agency, of A or better by Standard & Poor's, A1 or better by Moody's and, if rated by one of the Rating Agencies, A or better by such agency and (ii) whose deposits are insured by the FDIC. If so qualified, the Indenture Trustee or the Owner Trustee may be considered an Eligible Institution for the purposes of clause (b) of this definition. 6 "Eligible Investments" means book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form which evidence: (a) direct obligations of, and obligations fully guaranteed as to the full and timely payment by, the United States of America; (b) demand deposits, time deposits or certificates of deposit of any depository institution or trust company incorporated under the laws of the United States of America or any state thereof (or any domestic branch of a foreign bank) and subject to supervision and examination by federal or state banking or depository institution authorities; provided, however, that at the time of the investment or contractual commitment to invest therein, the commercial paper or other short-term unsecured debt obligations thereof (other than such obligations the rating of which is based on the credit of a Person other than such depository institution or trust company) shall have a short-term credit rating from each Rating Agency in the highest investment category granted thereby; (c) commercial paper having, at the time of the investment or contractual commitment to invest therein, a rating from each Rating Agency in the highest investment category granted thereby; (d) investments in money market mutual funds having a rating from Standard & Poor's and Moody's and, if any Rating Agency rates such fund, from such agency in the highest investment category granted by each Rating Agency so rating such fund (including funds for which the Indenture Trustee or the Owner Trustee or any of their respective Affiliates is investment manager or advisor); (e) bankers' acceptances issued by any depository institution or trust company referred to in clause (b) above; (f) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States of America or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States of America, in either case entered into with a depository institution or trust company (acting as principal) described in clause (b); and (g) any other investment with respect to which the Issuer or the Servicer has received written notification from each Rating Agency that the acquisition of such investment as an Eligible Investment will not result in a withdrawal or downgrading of the ratings on the Notes or Certificates. 7 "Excess Spread" shall have the meaning set forth in Section 5.06(a)(ii). "FDIC" means the Federal Deposit Insurance Corporation. "Final Scheduled Distribution Date" means the March, 2002 Distribution Date. "Final Scheduled Maturity Date" means December 17, 2001. "Financed Vehicle" means an automobile, light-duty truck or van, together with all accessions thereto, securing an Obligor's indebtedness under the related Receivable. "Indenture" means the Indenture dated as of December 9, 1996, between the Issuer and the Indenture Trustee. "Indenture Trustee" means the Person acting as Indenture Trustee under the Indenture, its successors in interest and any successor trustee under the Indenture. "Initial Certificate Balance" shall have the meaning set forth in the Trust Agreement. "Insolvency Event" means, with respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing. "Insolvency Proceeds" shall have the meaning set forth in Section 9.01. "Insurance Policies" means any physical damage, credit life, disability, theft, mechanical breakdown, dual interest or guaranteed auto-protection insurance policies or coverage relating to the Financed Vehicles or Obligors. 8 "Investment Earnings" means, with respect to any Payment Determination Date, the investment earnings (net of losses and investment expenses) on amounts on deposit in the Trust Accounts (other than the Dealer Reserve Account) to be deposited into the Collection Account and to be deemed to constitute a portion of the Total Distribution Amount for the related Distribution Date pursuant to Section 5.01(b). "Issuer" means NAL Auto Trust 1996-4. "Lien" means a security interest, lien, charge, pledge, equity or encumbrance of any kind, other than tax liens, mechanics' liens and any liens that attach to a Receivable by operation of law as a result of any act or omission by the related Obligor. "Liquidated Receivable" means any defaulted Receivable as to which the Servicer has determined that all amounts which it expects to recover from or on account of such Receivables have been recovered or with respect to which the related Financed Vehicle has been realized upon and disposed of and the proceeds of such disposition have been received; provided that any Receivable which is 120 days or more past due shall be deemed to be a Liquidated Receivable. "Liquidation Proceeds" means, with respect to any Liquidated Receivable, the moneys collected in respect thereof, from whatever source, including Insurance Policy proceeds, net of the sum of any amounts expended by the Servicer in connection with such liquidation and any amounts required by law to be remitted to the Obligor on such Liquidated Receivable. "Loss Trigger Event" means, as to any Collection Period, that the Average Six Month Realized Loss Ratio as of the last day of such Collection Period is greater than 5%. The "Average Six Month Realized Loss Ratio" as of any date is the ratio, expressed on an annualized basis, of the average of the aggregate Realized Losses in respect of Liquidated Receivables for each of the six calendar month periods (or lesser number of calendar months from the Cutoff Date) prior to such date to the average of the Pool Balance as of the beginning of such periods. "Moody's" means Moody's Investors Service, Inc., and any successors in interest. "NAL" means NAL Acceptance Corporation, a Florida corporation and any successor in interest. "Note Distribution Account" means the account designated as such, established and maintained pursuant to Section 5.01. "Note Final Scheduled Distribution Date" means the December, 2000 Distribution Date. 9 "Note Pool Factor" means, as of the close of business on the last day of a Collection Period, a seven-digit decimal figure equal to the Outstanding Amount of the Notes divided by the original Outstanding Amount of the Notes. The Note Pool Factor will be 1.0000000 as of the Closing Date; thereafter, the Note Pool Factor will decline to reflect reductions in the Outstanding Amount of the Notes. "Noteholder" means the Person in whose name a Note is registered in the Note Register. "Noteholders' Distributable Amount" means, with respect to any Distribution Date, the sum of the Noteholders' Principal Distributable Amount and the Noteholders' Interest Distributable Amount for such Distribution Date. "Noteholders' Interest Carryover Shortfall" means, with respect to any Distribution Date, (i) the excess of the Noteholders' Interest Distributable Amount for the preceding Distribution Date, over the amount in respect of interest that is actually deposited in the Note Distribution Account on such preceding Distribution Date, plus (ii) 90 days of interest on the amount of such excess for such preceding Distribution Date, to the extent permitted by law, at the Note Rate. "Noteholders' Interest Distributable Amount" means, with respect to any Distribution Date, the sum of the Noteholders' Quarterly Interest Distributable Amount for such Distribution Date and the Noteholders' Interest Carryover Shortfall for such Distribution Date. For all purposes of this Agreement and the Basic Documents, interest with respect to the Notes shall be computed on the basis of a 360-day year consisting of twelve 30-day months. "Noteholders' Quarterly Interest Distributable Amount" means, with respect to any Distribution Date, 90 days of interest on the Notes at the Note Rate on the Outstanding Amount of the Notes on the immediately preceding Distribution Date (or, in the case of the first Distribution Date, the Closing Date) after giving effect to all payments of principal to the Noteholders on such immediately preceding Distribution Date. "Noteholders' Quarterly Principal Distributable Amount" means, with respect to any Distribution Date, for so long as the Notes are outstanding, 100% of the Principal Distribution Amount; provided, however, that on the Distribution Date on which the Outstanding Amount of the Notes is reduced to zero, the portion, if any, of the Principal Distribution Amount that is not applied to the Notes will be applied to the principal of the Certificates. "Noteholders' Principal Carryover Shortfall" means, as of the close of business on a particular Distribution Date, the excess of the Noteholders' Quarterly Principal Distributable Amount and any outstanding Noteholders' Principal Carryover Shortfall from 10 the preceding Distribution Date, over the amount in respect of principal that is actually deposited in the Note Distribution Account on such particular Distribution Date. "Noteholders' Principal Distributable Amount" means, with respect to any Distribution Date, the sum of the Noteholders' Quarterly Principal Distributable Amount for such Distribution Date and the Noteholders' Principal Carryover Shortfall as of the close of the preceding Distribution Date; provided1 however, that the Noteholders' Principal Distributable Amount shall not exceed the Outstanding Amount of the Notes. In addition, on the Note Final Scheduled Distribution Date, the Noteholders' Principal Distributable Amount will not be less than the amount that is necessary (after giving effect to all other amounts to be deposited in the Note Distribution Account on such Distribution Date and allocable to principal) to reduce the Outstanding Amount of the Notes to zero. "Obligor" on a Receivable means the purchaser or co-purchasers of the Financed Vehicle and any other Person who owes payments under the Receivable. "Officers' Certificate" means a certificate signed by (a) the chairman of the board, the president or any vice president and (b) a treasurer, assistant treasurer, the controller or any assistant controller, secretary or assistant secretary of the Seller, the Depositor, the Servicer or the Backup Servicer, as appropriate. "Opinion of Counsel" means one or more written opinions of counsel, who may be an employee of or counsel to the Seller, the Depositor, Servicer or the Backup Servicer, which counsel shall be acceptable to the Indenture Trustee, the Owner Trustee or each Rating Agency, as applicable. "Original Pool Balance" means the Pool Balance as of the Cutoff Date. "Owner Trust Estate" has the meaning assigned to such term in the Trust Agreement. "Owner Trustee" means the Person acting as Owner Trustee under the Trust Agreement, its successors in interest and any successor owner trustee under the Trust Agreement. "Pass-Through Rate" means 8.15% per annum. "Payahead" on a Receivable that is a Precomputed Receivable means the amount, as of the close of business on the last day of a Collection Period, computed in accordance with Section 5.03 with respect to such Receivable. "Payahead Account" means the account designated as such, established and maintained pursuant to Section 5.01. 11 "Payahead Balance" on a Receivable that is a Precomputed Receivable means the sum, as of the close of business on the last day of a Collection Period, of all Payaheads made by or on behalf of the Obligor with respect to such Precomputed Receivable, as reduced by applications of previous Payaheads with respect to such Precomputed Receivable pursuant to Section 5.03. "Payment Determination Date" means, with respect to any Distribution Date, the 10th day of the month (or if such day is not a Business Day, the next succeeding Business Day) of such Distribution Date. "Physical Property" has the meaning assigned to such term in the definition of "Delivery" above. "Pool Balance" means, as of the close of business on the last day of a Collection Period or any other date of determination, the aggregate Principal Balance of the Receivables as of such day (excluding Purchased Receivables and Liquidated Receivables). "Precomputed Receivable" means any Receivable under which the portion of a payment allocable to earned interest (which may be referred to in the related Contract as an add-on finance charge) and the portion allocable to the Amount Financed is determined according to the sum of periodic balances or the sum of monthly balances or any equivalent method or are monthly actuarial receivables. "Principal Balance" means (a) with respect to any Precomputed Receivable as of the close of business on the last day of a Collection Period, the Amount Financed minus the sum of (i) that portion of all Scheduled Payments due on or prior to such day allocable to principal using the actuarial or constant yield method, (ii) any payment of the Purchase Amount with respect to the Precomputed Receivable allocable to principal and (iii) any prepayment in full applied to reduce the Principal Balance of the Precomputed Receivable and (b) with respect to any Simple Interest Receivable as of the close of business on the last day of a Collection Period, the Amount Financed minus the sum of (i) the portion of all payments made by or on behalf of the related Obligor on or prior to such day and allocable to principal using the Simple Interest Method and (ii) any payment of the Purchase Amount with respect to the Simple Interest Receivable allocable to principal. "Principal Distribution Amount" means, with respect to any Distribution Date, an amount equal to the sum of the following amounts with respect to the related Collection Period (i) with respect to Precomputed Receivables, the principal component of all monthly payments scheduled to be received with respect to such Receivables and all prepayments in full of such Receivables (including amounts with respect thereto withdrawn from the Payahead Account); (ii) with respect to Simple Interest Receivables, that portion of all collections on such Receivables allocable to principal; (iii) the Principal Balance of all 12 Precomputed Receivables that became Liquidated Receivables during such Collection Period; (iv) all Liquidation Proceeds attributable to the principal amount of Simple Interest Receivables that became Liquidated Receivables during such Collection Period, plus all Realized Losses with respect to such Liquidated Receivables; and (v) to the extent attributable to principal, the Purchase Amount of each Receivable that was purchased by NAL or by the Servicer during the related Collection Period. "Purchase Amount" means the amount, as of the close of business on the last day of a Collection Period, required to prepay in full a Receivable under the terms thereof including interest to the end of the month of purchase. "Purchased Receivable" means a Receivable purchased as of the close of business on the last day of a Collection Period by the Servicer pursuant to Section 4.07 or by NAL pursuant to Section 3.02. "Rating Agency" means each of Fitch Investors Service, L.P. and Duff & helps Credit Rating Co. and their successors in interest. "Rating Agency Condition" means, with respect to any action, that each Rating Agency shall have been given 10 days' (or such shorter period as shall be acceptable to such Rating Agency) prior notice thereof and that each Rating Agency shall have notified the Depositor, the Servicer, the Owner Trustee and the Indenture Trustee in writing that such action will not result in a reduction or withdrawal of the then current rating of the Notes or the Certificates. "Realized Losses" means, with respect to any Receivable that becomes a Liquidated Receivable, the excess of the Principal Balance of such Liquidated Receivable over Liquidation Proceeds to the extent allocable to principal. "Receivable" means any Contract listed on Schedule A (which Schedule may be in the form of microfiche). "Receivable Files" means the documents specified in Section 3.03. "Receivables Purchase Agreement" means the Receivables Purchase Agreement dated as of December 9, 1996, among NAL, Autorics, Inc., as seller, and the Depositor, as purchaser. "Recoveries" means, with respect to any Receivable that becomes a Liquidated Receivable, monies collected in respect thereof, from whatever source, during any Collection Period following the Collection Period in which such Receivable became a Liquidated Receivable, net of the sum of any amounts expended by the Servicer for the account of the Obligor and any amounts required by law to be remitted to the Obligor. 13 "Repossession Trigger Event" means, as to any Collection Period, that the Average Six Month Repossession Ratio as of the last day of such Collection Period is greater than 12%. "Average Six Month Repossession Ratio" as of any date is the ratio (expressed on an annualized basis) of the average of the aggregate Principal Balances of Receivables with respect to which the related Financed Vehicle has been repossessed by the Servicer for each of the six calendar months (or lesser number of calendar months since the Cutoff Date) prior to such date to the average Pool Balances as of the beginning of such periods. "Reserve Account" means the account designated as such, established and maintained pursuant to Section 5.01. "Reserve Account Initial Deposit" means $4,842,428.27. "Scheduled Payment" on a Precomputed Receivable means that portion of the payment required to be made by the Obligor during a calendar month sufficient to amortize the Principal Balance under the actuarial method over the term of the Receivable and to provide interest at the APR. "Seller" means AUTORICS, Inc., a Delaware corporation, and any successor in interest. "Servicer" means NAL, in its capacity as the servicer of the Receivables, and each successor to NAL (in the same capacity) pursuant to Section 7.03 or 8.02. "Servicer Default" means an event specified in Section 8.01. "Servicer's Certificate" means an Officers' Certificate of the Servicer delivered pursuant to Section 4.09, substantially in the form of Exhibit C. "Servicing Fee" means the fee payable to the Servicer for services rendered during a Collection Period, determined pursuant to Section 4.08. "Servicing Fee Rate" means 3.00% per annum. "SFI" means Special Finance, Inc., a Florida corporation, and any successor in interest. "Simple Interest Method" means the method of allocating a fixed level payment to principal and interest, pursuant to which the portion of such payment that is allocated to interest is equal to the product of the fixed rate of interest multiplied by the unpaid principal balance multiplied by the period of time elapsed since the preceding payment of interest was made, and the remainder of such payment is allocable to principal. "Simple Interest Receivable" means any Receivable under which the portion of a payment allocable to interest and the portion 14 allocable to principal is determined in accordance with the Simple Interest Method. "Specified Reserve Account Balance" means, with respect to any Distribution Date, the greater of 9% of the Pool Balance on the close of business on the last day of the related Collection Period and $1,760,883.01 until the first Distribution Date on which the Pool Balance on the close of business on the last day of the preceding Collection Period is less than or equal to $1,760,883.01. On such Distribution Date and thereafter the Specified Reserve Account Balance shall equal 100% of the Pool Balance on the close of business on the last day of the related Collection Period. In no event, however, shall the Specified Reserve Account Balance exceed the aggregate outstanding principal balance of the Notes and the Certificates. "Standard & Poor's" means Standard & Poor's Rating Services, a division of the McGraw-Hill Companies and any successor in interest. "Total Distribution Amount" means, with respect to a Distribution Date, the sum of the following amounts with respect to the related Collection Period: (i) that portion of all collections on the Receivables (including amounts withdrawn from the Payahead Account but excluding amounts deposited into the Payahead Account) allocable to principal and interest; (ii) all Liquidation Proceeds, and all Recoveries in respect of Liquidated Receivables that were written off in prior Collection Periods; (iii) the Purchase Amount of each Receivable that was purchased by NAL or by the Servicer during the related Collection Period; and (iv) Investment Earnings. "Trigger Event" means any Distribution Date on which one or more of a Delinquency Trigger Event, a Repossession Trigger Event or a Loss Trigger Event has occurred with respect to the previously ended Collection Period. A Trigger Event will be deemed to have terminated as to any Distribution Date (subject to the reoccurrence of such event) if neither a Delinquency Trigger Event, a Loss Trigger Event or a Repossession Trigger Event shall have occurred during the related Collection Period. "Trigger Event Reserve Account Balance" means, with respect to any Distribution Date after a Trigger Event has occurred and not terminated, 13.5% of the Pool Balance on the close of business on the last day of the related Collection Period. "Trust" means the Issuer. "Trust Account Property" means the Trust Accounts, all amounts and investments held from time to time in any Trust Account (whether in the form of deposit accounts, Physical Property, book-entry securities, uncertificated securities or otherwise), including the Reserve Account Initial Deposit, and all proceeds of the foregoing. 15 "Trust Accounts" has the meaning assigned thereto in Section 5.01. "Trust Agreement" means the Trust Agreement dated as of December 9, 1996, between the Depositor and the Owner Trustee. "Trust Officer" means, in the case of the Indenture Trustee, any Officer within the Corporate Trust Office of the Indenture Trustee, including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Indenture Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject and, with respect to the Owner Trustee, any officer in the Corporate Trust Administration Department of the Owner Trustee with direct responsibility for the administration of the Trust Agreement and the Basic Documents on behalf of the Owner Trustee. SECTION 1.02. Other Definitional Provisions. (a) Capitalized terms used and not otherwise defined herein have the meanings assigned to them in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof," "herein," "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Article, Section, Schedule and Exhibit references contained in this Agreement are references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such 16 terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. ARTICLE II Conveyance of Receivables SECTION 2.01. Conveyance of Receivables. (a) In consideration of the Issuer's delivery on the Closing Date to or upon the order of the Depositor of (i) Certificates with a Certificate Balance of $90,150.45 and (ii) $87,984,949.15, the Depositor does hereby sell, transfer, assign, set over and otherwise convey to the Issuer, without recourse (subject to the obligations herein), all right, title and interest of the Depositor in and to (but none of the Depositor's obligations with respect to): (1) the Receivables and all moneys received thereon on and after the Cutoff Date plus all Payaheads as of the Cutoff Date; (2) the security interests in the Financed Vehicles granted by Obligors pursuant to the Receivables, any other right to realize upon property securing a Receivable and any other interest of the Depositor in such Financed Vehicles including the Depositor's right, title and interest in the lien on the Financed Vehicles in the name of the Depositor's agent, Autorics, Inc., NAL or SFI; (3) any proceeds with respect to the Receivables from claims on any Insurance Policies relating to Financed Vehicles or Obligors; (4) proceeds of any recourse (but none of the obligations) to Dealers on Receivables; (5) any Financed Vehicle that shall have secured a Receivable and shall have been acquired by or on behalf of the Seller, the Depositor, the Servicer, or the Trust; (6) the Receivables Files; (7) all right, title and interest of the Depositor under the Receivables Purchase Agreement, including, without 17 limitation, the right of the Depositor to cause NAL to purchase Receivables under certain circumstances; (8) the Trust Accounts; and (9) the proceeds of any and all of the foregoing. ARTICLE III The Receivables SECTION 3.01. Representations and Warranties of the Depositor with Respect to the Receivables. The Depositor makes the following representations and warranties with respect to the Receivables on which the Issuer relies in acquiring the Receivables and issuing the Notes and Certificates. Such representations and warranties speak as of the execution and delivery of this Agreement and as of the Closing Date, but shall survive the sale, transfer and assignment of the Receivables to the Issuer and the pledge thereof to the Indenture Trustee pursuant to the Indenture. (a) Title. It is the intention of the Depositor that the transfer and assignment herein contemplated constitute a sale of the Receivables from the Depositor to the Issuer and that the beneficial interest in and title to the Receivables not be part of the debtor's estate in the event of the filing of a bankruptcy petition by or against the Depositor under any bankruptcy law. No Receivable has been sold, transferred, assigned or pledged by the Depositor to any Person other than the Issuer. Immediately prior to the transfer and assignment herein contemplated, the Depositor had good and marketable title to each Receivable, free and clear of all Liens and rights of others and, immediately upon the transfer thereof, the Issuer shall have good and marketable title to each Receivable, free and clear of all Liens and rights of others; and the transfer has been perfected under the UCC. (b) All Filings Made. All filings (including UCC filings) necessary in any jurisdiction to give (i) the Issuer a first perfected ownership interest in the Receivables and (ii) the Indenture Trustee a first perfected security interest in the Receivables shall have been made. SECTION 3.02. Repurchase upon Breach. The Depositor, the Servicer, the Backup Servicer and the Issuer, as the case may be, shall inform the other parties to this Agreement, NAL and the Indenture Trustee promptly, in writing, upon the discovery of any breach of the Depositor's representations and warranties made pursuant to Section 3.01 or of NAL's representations and warranties made pursuant to Section 3.02(c) of the Receivables Purchase Agreement. Unless any such breach shall have been cured by the last day of the Collection Period following the discovery thereof by NAL or the receipt by NAL of written notice thereof from the Owner Trustee, the Indenture Trustee, the Depositor, the 18 Servicer or the Backup Servicer, the Depositor, the Issuer or the Owner Trustee shall enforce the obligation of NAL under the Receivables Purchase Agreement, to purchase as of such last day any Receivable with respect to which such a breach had occurred if such breach has a material and adverse effect on the interests of the Depositor or the Trust in and to such Receivable. In consideration for the purchased Receivable, NAL shall remit the Purchase Amount in the manner specified in Section 6.02 of the Receivables Purchase Agreement. Subject to the provisions of Section 6.03, the sole remedy of the Issuer, the Owner Trustee, the Indenture Trustee, the Noteholders or the Certificateholders with respect to a breach of representations and warranties pursuant to Section 3.01 and the agreement contained in this Section shall be to require NAL to purchase Receivables pursuant to this Section and the Receivables Purchase Agreement. SECTION 3.03. Custody of Receivable Files. (a) In connection with the sale and transfer of the Receivables pursuant to this Agreement, the Issuer, simultaneously with the execution and delivery of this Agreement, is entering into the Custodial Agreement with the Custodian pursuant to which the Issuer appoints the Custodian, and the Custodian accepts such appointment, to act as the agent and bailee of the Issuer (initially), the Indenture Trustee (until all amounts in respect of the Notes have been paid) and thereafter the Issuer,, all in accordance with the terms of the Custody Agreement, for all purposes of Article 9 of the UCC, as Custodian of the following documents or instruments, which are hereby constructively delivered to the Issuer or Indenture Trustee, as pledgee of the Issuer, as the case may be, with respect to each Receivable: (i) a list of Receivables in the form of Schedule A hereto, identifying such Receivable together with the Computer Tape identifying such Receivable and a completed checklist in the form of Exhibit D hereto (it being expressly understood and agreed that the Custodian and Indenture Trustee have no duties or responsibilities for checking or verifying the accuracy or completeness of such checklist); (ii) the fully executed original Receivable with manual signatures and Dealer endorsements, together with executed assignments thereof by NAL, the Seller and the Depositor in blank, which assignments shall be substantially in the form of Exhibit E hereto; (iii) a written confirmation from the Servicer certifying as to the Insurance Policies covering the Receivable and stating that they are in full force and effect; (iv) the original certificate of title relating to the Financed Vehicle or (a) a copy of the application for a certificate of title and (b) a copy of the existing title, lien entry form or receipt of registration or (c) a copy of the related letter guarantee, in each case noting the lien of 19 NAL, the Seller or SFI; provided, however, that at any time during the term hereof the Owner Trustee may request and require that the Depositor cause the party in whose name the lien is noted to transfer such lien to the Depositor; (v) an original or copy of the credit application of the Obligor; and (vi) financing statements on Form UCC-l listing the Owner Trustee as the secured party with respect to each Receivable and the other items conveyed pursuant to Section 2.01 and stamped to indicate filing with the Office of the Secretary of State of the State of Florida and with the Office of the Secretary of State of Delaware. (b) Access to Records. The Servicer or the Custodian, as the case may be, shall provide to (or in the case of the Custodian shall be required pursuant to the Custodial Agreement to provide to) the Indenture Trustee, the Issuer, the Backup Servicer, Noteholders and Certificateholders and their duly authorized representatives, attorneys or auditors access to the Receivable Files in such cases where the Indenture Trustee, the Issuer, a Noteholder or a Certificateholder is required by applicable statutes or regulations to review the related accounts, records and computer systems maintained by the Servicer or the Custodian, as the case may be, such access being afforded without charge but only upon reasonable request and during normal business hours at offices of the Servicer or the Custodian, as the case may be, designated by the Servicer or the Custodian. Nothing in this Section shall derogate from the obligation of the Servicer or the Custodian to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Servicer or the Custodian to provide access as provided in this Section as the result of such obligation shall not constitute a breach of this Section. ARTICLE IV Administration and Servicing of Receivables SECTION 4.01. Duties of Servicer. The Servicer, for the benefit of the Issuer (to the extent provided herein), shall manage, service, administer and make collections on the Receivables (other than Purchased Receivables) with reasonable care, acting prudently and in accordance with customary and usual servicing procedures for other institutional servicers of receivables of the type subject to this Agreement and applicable law, and to the degree not inconsistent with the foregoing, using that degree of skill and attention that the Servicer exercises with respect to all comparable automotive receivables that it services for itself or others. The Servicer's duties shall include collection and posting of all payments, responding to inquiries of Obligors on such Receivables, investigating delinquencies, sending billing statements to Obligors, reporting 20 tax information to Obligors, accounting for collections, and furnishing monthly, and annual statements to the Owner Trustee and the Indenture Trustee with respect to distributions. Subject to the provisions of Section 4.02, the Servicer shall follow its customary standards, policies and procedures in performing its duties as Servicer. Without limiting the generality of the foregoing, the Servicer is authorized and empowered to execute and deliver, on behalf of itself, the Issuer, the Owner Trustee, the Indenture Trustee, the Certificateholders and the Noteholders or any of them, any and all instruments of satisfaction or cancellation, or partial or full release or discharge, and all other comparable instruments, with respect to such Receivables or to the Financed Vehicles securing such Receivables. If the Servicer shall commence a legal proceeding to enforce a Receivable, the Issuer (in the case of a Receivable other than a Purchased Receivable) shall thereupon be deemed to have automatically assigned, solely for the purpose of collection, such Receivable to the Servicer. If in any enforcement suit or legal proceeding it shall be held that the Servicer may not enforce a Receivable on the ground that it shall not be a real party in interest or a holder entitled to enforce such Receivable, the Owner Trustee shall, at the Servicer's expense and direction, take steps to enforce such Receivable, including bringing suit in its name or the name of the Owner Trustee, the Indenture Trustee, the Certificateholders or the Noteholders. The Owner Trustee shall (and the Custodian pursuant to the Custodial Agreement shall be required) upon the written request of the Servicer furnish the Servicer with any powers of attorney and other documents reasonably necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder. SECTION 4.02. Collection and Allocation of Receivable Payments. The Servicer shall make reasonable efforts to collect all payments called for under the terms and provisions of the Receivables as and when the same shall become due and shall follow such collection procedures as it follows with respect to all comparable automotive receivables that it services for itself or others. The Servicer may grant extensions, rebates or adjustments on a Receivable or arrange with the Obligor to extend or modify the payment schedule, which actions shall not, for the purposes of this Agreement, modify the original due dates or amounts of the Scheduled Payments on a Precomputed Receivable or the original due dates or amounts of the originally scheduled payments of interest on Simple Interest Receivables; provided, however, that if the Servicer extends the date for final payment by the Obligor of any Receivable beyond the Final Scheduled Maturity Date, it shall promptly repurchase the Receivable from the Issuer in accordance with the terms of Section 4.07. The Servicer may in its discretion waive any late payment charge or any other fees that may be collected in the ordinary course of servicing a Receivable. The Servicer shall not agree to any alteration of the interest rate on any Receivable or of the amount of any Scheduled Payment on Precomputed Receivables or the originally scheduled payments on Simple Interest Receivables. 21 SECTION 4.03. Realization upon Receivables. On behalf of the Issuer, the Servicer shall use its best efforts, consistent with its customary servicing procedures, to repossess or otherwise convert the ownership of and liquidate the Financed Vehicle securing any Receivable as to which the Servicer shall have determined eventual payment in full is unlikely. The Servicer shall follow such customary and usual practices and procedures as it shall deem necessary or advisable in its servicing of automotive receivables, which may include reasonable efforts to realize upon any recourse to Dealers and selling the Financed Vehicle at public or private sale. The foregoing shall be subject to the provision that, in any case in which the Financed Vehicle shall have suffered damage, the Servicer shall not expend funds in connection with the repair or the repossession of such Financed Vehicle unless it shall determine in its discretion that such repair and/or repossession will increase the Liquidation Proceeds by an amount greater than the amount of such expenses. The Servicer may not sell any Financed Vehicles to J.D. Byrider Systems, Inc. for less than 100% of such Financed Vehicles' wholesale value, determined from the "Black Book". SECTION 4.04. Insurance. The Servicer shall, in accordance with its customary servicing procedures, require that each Obligor shall have obtained physical damage and theft insurance covering the Financed Vehicle as of the execution of the Receivable. The Servicer shall notify each insurer providing a "guaranteed auto protection" insurance policy with respect to the Receivables to include the Indenture Trustee as an additional insured and its payee on each such policy. Upon receipt of notification that the insurance required pursuant to the terms of any Receivable is not in place, the Servicer shall obtain "dual interest" insurance chargeable to the Obligor in accordance with its customary servicing procedures. SECTION 4.05. Maintenance of Security Interests in Financed Vehicles. The Servicer shall, in accordance with its customary servicing procedures, take such steps as are necessary to maintain perfection of the security interest created by each Receivable in the related Financed Vehicle. The Servicer is hereby authorized to take such steps as are necessary to re-perfect such security interest on behalf of the Issuer and the Indenture Trustee in the event of the relocation of a Financed Vehicle or for any other reason. SECTION 4.06. Covenants of Servicer. The Servicer shall not release the Financed Vehicle securing any Receivable from the security interest granted by such Receivable in whole or in part except in the event of payment in full by the Obligor thereunder or repossession, nor shall the Servicer impair the rights of the Issuer, the Indenture Trustee, the Certificateholders or the Noteholders in such Receivable, nor shall the Servicer (except in the case of an extension permitted pursuant to Section 4.02) increase the number of scheduled payments due under a Receivable. 22 Neither NAL nor any Affiliate thereof shall incur liabilities of any kind to SunTrust Bank, South Florida, National Association ("SunTrust"), if the total amount of such liabilities outstanding at any time exceeds $10,000 except for liabilities with respect to which SunTrust has expressly agreed to irrevocably and unconditionally waive all right of set-off or other claims that it may have under contract, applicable law or otherwise with respect to any funds or monies SunTrust may hold from time to time pursuant to the Lock-box Agreement dated November 27, 1995 between NAL, SunTrust and General Electric Capital Corporation, or any other agreement related to the holding of any proceeds of the Receivables or the other property conveyed pursuant to Section 2.01. SECTION 4.07. Purchase of Receivables upon Breach. The Servicer or the Owner Trustee shall inform the other party and the Indenture Trustee and the Depositor promptly, in writing, upon the discovery of any breach pursuant to Section 4.02, 4.05 or 4.06. Unless the breach shall have been cured by the last day of the Collection Period following such discovery, the Servicer shall purchase as of such last day any Receivable with respect to which such breach had occurred if such breach has a material and adverse effect on the interests of the Depositor or the Trust in and to such Receivable. If the Servicer takes any action during any Collection Period pursuant to Section 4.02 that impairs the rights of the Issuer, the Indenture Trustee, the Certificateholders or the Noteholders in any Receivable or as otherwise provided in Section 4.02, the Servicer shall purchase such Receivable as of the last day of such Collection Period. In consideration of the purchase of any such Receivable pursuant to either of the two preceding sentences, the Servicer shall remit the Purchase Amount in the manner specified in Section 5.04. Subject to Section 7.02, the sole remedy of the Issuer, the Owner Trustee, the Indenture Trustee, the Certificateholders or the Noteholders with respect to a breach pursuant to Section 4.02, 4.05 or 4.06 shall be to require the Servicer to purchase Receivables pursuant to this Section. The Owner Trustee shall have no duty to conduct any affirmative investigation as to the occurrence of any condition requiring the repurchase of any Receivable pursuant to this Section. SECTION 4.08. Servicing Fee. The Servicing Fee for a Distribution Date shall equal the product of (a) one-fourth, (b) the Servicing Fee Rate and (c) the Pool Balance as of the first day of the preceding Collection Period. The Servicer shall also be entitled to all late fees, prepayment charges (including, in the case of a Receivable that provides for payments according to the "Rule of 78s" and that is prepaid in full, the difference between the Principal Balance of such Receivable (plus accrued interest to the date of prepayment) and the principal balance of such Receivable computed according to the "Rule of 78s") , and other administrative fees or similar charges allowed by applicable law with respect to the Receivables, collected (from whatever source) on the Receivables, plus any reimbursement pursuant to the last paragraph of Section 7.02. 23 SECTION 4.09. Servicer's Certificate. Not later than 11:00 a.m. (New York time) on the 10th day of each month, or if such lath day is not a Business Day, the next succeeding Business Day, the Servicer shall deliver to the Owner Trustee, each Paying Agent, the Indenture Trustee, the Backup Servicer (in electronic media form acceptable to the Backup Servicer) and the Depositor, with a copy to the Rating Agencies, a Servicer's Certificate substantially in the form attached hereto as Exhibit C setting forth the applicable information for each of the items set forth therein. Receivables to be purchased by the Servicer or by NAL shall be identified by the Servicer by account number with respect to such Receivable (as specified in Schedule A). SECTION 4.10. Annual Statement as to Compliance; Notice of Default. (a) The Servicer shall deliver to the Owner Trustee and the Indenture Trustee, on or before February 28 of each year beginning February 28, 1997, an Officers' Certificate, dated as of December 31 of the preceding year, stating that (i) a review of the activities of the Servicer during the preceding 12-month period (or such shorter period as shall have elapsed since the Closing Date) and of its performance under this Agreement has been made under such officers' supervision and (ii) to the best of such officers' knowledge, based on such review, the Servicer has fulfilled all its obligations under this Agreement throughout such year or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof. The Indenture Trustee shall send a copy of such certificate and the report referred to in Section 4.11 to each Rating Agency. A copy of such certificate and the report referred to in Section 4.11 may be obtained by any Certificateholder or Noteholder by a request in writing to the Owner Trustee addressed to the Corporate Trust Office. Upon the telephone request of the Owner Trustee, the Indenture Trustee will promptly furnish the Owner Trustee with a list of Noteholders as of the date specified by the Owner Trustee. (b) The Servicer shall deliver to the Owner Trustee, the Indenture Trustee, the Backup Servicer and each Rating Agency, promptly after having obtained knowledge thereof, but in no event later than five (5) Business Days thereafter, written notice in an Officers' Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Default under Section 8.01. SECTION 4.11. Annual Independent Certified Public Accounts' Report. The Servicer shall cause a firm of independent certified public accountants, which may also render other services to the Servicer, the Depositor or their Affiliates, to deliver to the Owner Trustee and the Indenture Trustee on or before February 28 of each year beginning February 28, 1997, a report addressed to the Board of Directors of the Servicer, to the effect that such firm has examined the financial statements of the Servicer for the preceding twelve months or, in the case of the first such report, during such longer period that 24 shall have elapsed since the Closing Date) and issued its report thereon and that such examination (a) was made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as such firm considered necessary in the circumstances; (b) included tests relating to automotive loans serviced for others in accordance with the requirements of the Uniform Single Audit Program for Mortgage Bankers (the "Program"), to the extent the procedures in such Program are applicable to the servicing obligations set forth in this Agreement; and (c) except as described in the report, disclosed no exceptions or errors in the records relating to automobile, light-duty truck and van loans serviced for others that, in the firm's opinion, paragraph four of such Program requires such firm to report. Such report will also indicate that the firm is independent of the Servicer within the meaning of the Code of professional Ethics of the American Institute of Certified Public Accountants. SECTION 4.12. Servicer Expenses. The Servicer shall be required to pay all expenses incurred by it in connection with its activities hereunder, including fees and disbursements of independent accountants, taxes imposed on the Servicer and expenses incurred in connection with distributions and reports to Certificateholders and Noteholders. SECTION 4.13. Appointment of Subservicer. The Servicer may at any time appoint a subservicer to perform all or any portion of its obligations as Servicer hereunder; provided, however, that the Rating Agency Condition shall have been satisfied in connection therewith; and provided, further, that the Servicer shall remain obligated and be liable to the Issuer, the Owner Trustee, the Indenture Trustee, the Certificateholders and the Noteholders for the servicing and administering of the Receivables in accordance with the provisions hereof without diminution of such obligation and liability by virtue of the appointment of such subservicer and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the Receivables. The fees and expenses of the subservicer shall be as agreed between the Servicer and its subservicer from time to time, and none of the Issuer, the Owner Trustee, the Indenture Trustee, the Certificateholders or the Noteholders shall have any responsibility therefor. SECTION 4.14. Oversight of Servicing. (a) Commencing on the date of execution of this Agreement and continuing until the earlier of (i) the termination of the Trust created by the Trust Agreement and (ii) the appointment of the Backup Servicer as Servicer under this Agreement, the Servicer shall, on the last day of each calendar month, deliver 25 to the Backup Servicer in the Computer Tape format acceptable to the Backup Servicer, such information as is necessary to permit the Backup Servicer to service the Receivables in accordance with the provisions of this Agreement. The Backup Servicer shall accept and store, but shall not be required to examine, such information. Upon notice that the Servicer has resigned or upon the removal of the Servicer under this Agreement, the Backup Servicer shall assume all responsibilities of the Servicer (or of Indenture Trustee or any other Person then acting as successor to such Servicer in accordance with Sections 8.01 and 8.02) under this Agreement within thirty days of such notice or removal. The Backup Servicer shall service the Receivables in accordance with provisions of this Agreement. (b) On the date that each Servicer's Certificate is delivered by the Servicer to the Owner Trustee and Indenture Trustee, the Servicer shall also deliver a Computer Tape containing detailed information with respect to the Receivables for the related Collection Period. The Backup Servicer shall determine that (i) the Servicer's Certificate appears on its face to be complete and (ii) that amounts credited to and withdrawn from the Trust Accounts and the balance of such Trust Accounts are the same as the amount set forth in such Servicer's Certificate. To the extent verifiable using the information contained in the Servicer's Certificate, the Backup Servicer shall calculate and check that the calculations made by the Servicer in the Servicer's Certificate are mathematically accurate. (c) In the event of any discrepancies or exceptions noted by the Backup Servicer in the Servicer's Certificate, the Backup Servicer shall, within three Business Days of its receipt of the Servicer's Certificate, notify the Servicer of such discrepancies or exceptions. The Servicer shall consult with the Backup Servicer and use its best efforts to ensure that such Servicer's Certificate is corrected, and that subsequent Servicer's Certificates are accurate. If such discrepancies or exceptions cannot be reconciled within 30 days, the Backup Servicer's interpretation shall prevail for all subsequent Distribution Dates. (d) The Backup Servicer will not be responsible for delays attributable to the Servicer's failure to deliver information, defects in the information supplied by Servicer or other circumstances beyond the control of the Backup Servicer. SECTION 4.15. Duties of Backup Servicer. (a) The Backup Servicer shall perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Backup Servicer. 26 (b) In the absence of bad faith or negligence on its part, the Backup Servicer may conclusively rely as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Backup Servicer and conforming to the requirements of this Agreement. (c) The Backup Servicer shall not be required to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if the repayment of such funds or adequate written indemnity against such risk or liability is not reasonably assured to it in writing prior to the expenditure or risk of such funds or incurrence of financial liability. (d) The Servicer shall indemnify, defend and hold harmless the Backup Servicer, its agents, officers, directors or employees from and against any claim, action, loss, damage, penalty, fine, cost, expense, or other liability, including court costs and reasonable attorney's fees and expenses, incurred as a result of its acts or omissions or its breach of its own representations made in this Agreement or the Backup Servicer's performance of its duties under this Agreement. The right of indemnification provided hereby shall survive the termination of this Agreement. The Servicer shall not be liable to the Backup Servicer, under this Section 4.15 or otherwise, for the improper acts, negligence or bad faith of the Backup Servicer. ARTICLE V Trust Accounts; Distributions; Reserve Account; Statements to Certificateholders and Noteholders SECTION 5.01. Establishment of Trust Accounts. (a) (i) The Servicer, for the benefit of the Noteholders and the Certificateholders, shall establish and maintain in the name of the Indenture Trustee an Eligible Deposit Account (the "Collection Account"), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Noteholders and the Certificateholders. (ii) The Servicer, for the benefit of the Noteholders, shall establish and maintain in the name of the Indenture Trustee an Eligible Deposit Account (the "Note Distribution Account"), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Noteholders. (iii) The Servicer, for the benefit of the Noteholders and the Certificateholders, shall establish and maintain in the name of the Indenture Trustee an Eligible Deposit Account (the "Reserve Account"), bearing a designation clearly 27 indicating that the funds deposited therein are held for the benefit of the Noteholders and the Certificateholders. (iv) The Servicer, for the benefit of the Noteholders and the Certificateholders, shall establish and maintain in the name of the Indenture Trustee an Eligible Deposit Account (the "Payahead Account"), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Noteholders and the Certificateholders. (v) The Servicer, for the benefit of the Noteholders, the Certificateholders and NAL, shall establish and maintain in the name of the Indenture Trustee an Eligible Deposit Account (the "Dealer Reserve Account") bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Noteholders, the Certificateholders, the Depositor and NAL. (b) With respect to the Collection Account, the Note Distribution Account, the Reserve Account, the Payahead Account and the Dealer Reserve Amount (collectively the "Trust Accounts") funds on deposit in such Trust Accounts (other than the Note Distribution Account) shall be invested by the Indenture Trustee in Eligible Investments. All such Eligible Investments of the Trust Fund shall be held by the Indenture Trustee for the benefit of the beneficiaries of such accounts; provided, that on each Payment Determination Date all interest and other investment income (net of losses and investment expenses) on funds on deposit in the Trust Accounts (other than the Dealer Reserve Account) shall be deposited into the Collection Account and shall be deemed to constitute a portion of the Total Distribution Amount for the related Distribution Date. Investment income (net of losses and investment expenses) on the Dealer Reserve Account will be payable on each Distribution Date to the Depositor. Other than as permitted by each Rating Agency, funds on deposit in the Trust Accounts shall be invested in Eligible Investments that will mature not later than the Business Day immediately preceding the next Distribution Date. Funds deposited in a Trust Account on a day which immediately precedes a Distribution Date are not required to be invested overnight. (c) (i) The Indenture Trustee shall possess all right, title and interest in all funds on deposit from time to time in the Trust Accounts and in all proceeds thereof (including all income thereon) and all such funds, investments, proceeds and income shall be part of the Trust Estate. The Trust Accounts shall be under the sole dominion and control of the Indenture Trustee for the benefit of the Noteholders and the Certificateholders (and in the case of the Dealer Reserve Account, NAL), as the case may be. If, at any time, any of the Trust Accounts ceases to be an Eligible Deposit Account, the Indenture Trustee (or the Servicer on its behalf) shall within 10 Business Days (or such longer period, not to exceed 28 30 calendar days, as to which each Rating Agency may consent) establish a new Trust Account as an Eligible Deposit Account and shall transfer any cash and/or any investments to such new Trust Account. (ii) With respect to the Trust Account Property, the Indenture Trustee agrees, by its acceptance hereof, that: (A) any Trust Account Property that is held in deposit accounts shall be held solely in the Eligible Deposit Accounts, subject to the last sentence of Section 5.01(c) (i); and each such Eligible Deposit Account shall be subject to the exclusive custody and control of the Indenture Trustee, and the Indenture Trustee shall have sole signature authority with respect thereto; (B) any Trust Account Property that constitutes Physical Property shall be delivered to the Indenture Trustee in accordance with paragraph (a) of the definition of "Delivery" and shall be held, pending maturity or disposition, solely by the Indenture Trustee or a financial intermediary (as such term is defined in Section 8-313(4) of the UCC) acting solely for the Indenture Trustee; (C) any Trust Account Property that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations shall be delivered in accordance with paragraph (b) of the definition of "Delivery" and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued book-entry registration of such Trust Account Property as described in such paragraph; and (D) any Trust Account Property that is an "uncertificated security" under Article VIII of the UCC and that is not governed by clause (C) above shall be delivered to the Indenture Trustee in accordance with paragraph (c) of the definition of "Delivery" and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued registration of the Indenture Trustee's (or its nominee's) ownership of such security. (iii) The Servicer shall have the power, revocable by the Indenture Trustee or by the Owner Trustee with the consent of the Indenture Trustee, to instruct the Indenture Trustee to make withdrawals and payments from the Trust Accounts for the purpose of permitting the Servicer or the Owner Trustee to carry out its respective duties hereunder or permitting the Indenture Trustee to carry out its duties under the Indenture. 29 (d) The Servicer shall on or prior to each Distribution Date (and prior to deposits to the Note Distribution Account or the Certificate Distribution Account) transfer from the Collection Account to the Payahead Account an amount equal to the increase in the Payahead Balance as described in Section 5.03 received by the Servicer during the related Collection Period or, if the Payahead Balance decreased during such Collection Period, shall transfer an amount equal to the amount of such decrease from the Payahead Account to the Collection Account. SECTION 5.02. Collections. The Servicer shall remit within two Business Days of receipt thereof to the Collection Account all payments by or on behalf of the Obligors with respect to the Receivables (other than Purchased Receivables) and all Liquidation Proceeds and Recoveries, both as collected during the Collection Period. SECTION 5.03. Application of Collections. All collections for the Collection Period shall be applied by the Servicer as follows: With respect to each Receivable (other than a Purchased Receivable), payments by or on behalf of the Obligor shall be applied first, in the case of Precomputed Receivables, to the Scheduled Payment and, in the case of Simple Interest Receivables, to interest and principal in accordance with the Simple Interest Method. With respect to Precomputed Receivables, any remaining excess shall be added to the Payahead Balance, and shall be applied to prepay the Precomputed Receivable (in reduction of the Payahead Balance as evidenced by a transfer of the net amount of such reduction from the Payahead Account to the Collection Account), but only if the sum of such excess and the previous Payahead Balance shall be sufficient to prepay the Receivable in full. Otherwise, any such remaining excess payments shall constitute a Payahead (as shall the accumulated amount of such excess on the Receivables as of the Cut-off Date) and shall increase the Payahead Balance. With respect to a Precomputed Receivable the related payment on behalf of which is less than the Scheduled Payment, amounts (to the extent of the related Payahead Balance) in respect of such deficiency will be transferred from the Payahead Account to the Collection Account in accordance with Section 5.01(d). SECTION 5.04. Additional Deposits. The Servicer and the Depositor shall deposit or cause to be deposited in the Collection Account the aggregate Purchase Amount with respect to Purchased Receivables, and the Servicer shall deposit therein all amounts to be paid under Section 9.01. The Servicer will deposit the aggregate Purchase Amount with respect to Purchased Receivables in the Collection Account when such obligations are due. 30 SECTION 5.05. Distributions. (a) On each Payment Determination Date, the Servicer shall calculate all amounts required to be deposited in the Note Distribution Account and the Certificate Distribution Account. (b) On each Distribution Date, the Servicer shall instruct the Indenture Trustee (based on the information contained in the Servicer's Certificate delivered on the related Payment Determination Date pursuant to Section 4.09) to make the following deposits and distributions for receipt by the Servicer or deposit in the applicable account by 1:00 p.m. (New York time), to the extent of the Total Distribution Amount, in the following order of priority: (i) only in the event NAL is not the Servicer, to the Servicer, the Servicing Fee (and all unpaid Servicing Fees from prior Collection Periods); (ii) to the Note Distribution Account, from the Total Distribution Amount remaining after the application of clause (i), the Noteholders' Interest Distributable Amount; (iii) to the Certificate Distribution Account, from the Total Distribution Amount remaining after the application of clauses (i) and (ii), the Certificateholders' Interest Distributable Amount; (iv) to the Note Distribution Account, from the Total Distribution Amount remaining after the application of clauses (i) through (iii), the Noteholders' Principal Distributable Amount; (v) to the Certificate Distribution Account, from the Total Distribution Amount remaining after the application of clauses (i) through (iv), the Certificateholders' Principal Distributable Amount; (vi) to the Reserve Account, the Total Distribution Amount remaining after application of clauses (i) through (v), as and to the extent provided in Section 5.06; (vii) for so long as NAL is the Servicer, to the Servicer, from the Total Distribution Amount remaining after the application of clauses (i) through (vi), the Servicing Fee and all unpaid Servicing Fees from prior Collection Periods; and (viii) to the Depositor, any remaining amount. Notwithstanding that the Notes have been paid in full, the Indenture Trustee shall continue to maintain the Collection Account hereunder until the Certificate Balance is reduced to zero. 31 SECTION 5.06. Reserve Account. (a) (i) On the Closing Date, the Owner Trustee will deposit, on behalf of the Depositor, the Reserve Account Initial Deposit into the Reserve Account from the net proceeds of the sale of the Notes and the Certificates. (ii) If on a Distribution Date (i) the amount on deposit in the Reserve Account, after any withdrawals therefrom on or prior to such Distribution Date, is less than the Specified Reserve Account Balance, there shall be deposited into the Reserve Account on such Distribution Date pursuant to Section 5.05(b)(vi) the portion of the Total Distribution Amount on such Distribution Date remaining after payment of the Servicing Fee (but only in the event NAL is not the Servicer), the Noteholders' Interest Distributable Amount, the Certificateholders' Interest Distributable Amount, the Noteholders' Principal Distributable Amount and the Certificateholders' Principal Distributable Amount (such amount, the "Excess Spread") until the amount on deposit in the Reserve Account equals the Specified Reserve Account Balance for such Distribution Date or (ii) the amount on deposit in the Reserve Account, after any withdrawals therefrom on or prior to such Distribution Date, is less than the Trigger Event Reserve Account Balance and a Trigger Event has occurred and not terminated, there shall be deposited into the Reserve Account on such Distribution Date pursuant to Section 5.05(b)(vi) the Excess Spread, if any, for such Distribution Date until the amount on deposit in the Reserve Account equals the Trigger Event Reserve Account Balance. (b) Unless a Trigger Event has occurred and has not terminated, if the amount on deposit in the Reserve Account on any Distribution Date (after giving effect to all deposits thereto or withdrawals therefrom on such Distribution Date) is greater than the Specified Reserve Account Balance for such Distribution Date, the Servicer shall instruct the Indenture Trustee to distribute the amount of such excess to the Depositor. If a Trigger Event has occurred and has not terminated, if the amount on deposit in the Reserve Account on any Distribution Date (after giving effect to all deposits thereto or withdrawals therefrom on such Distribution Date) is greater than the Trigger Event Reserve Account Balance for such Distribution date, the Servicer shall instruct the Indenture Trustee to distribute the amount of such excess to the Depositor. (c) In the event that the Noteholders' Interest Distributable Amount for a Distribution Date exceeds the amount deposited into the Note 'Distribution Account pursuant to Section 5.05(b)(ii) on such Distribution Date, the Servicer shall instruct the Indenture Trustee to withdraw from the Reserve Account on such Distribution Date an amount equal to such excess, to the extent of funds available therein, and deposit such amount into the Note Distribution Account on such Distribution Date. 32 (d) In the event that the Certificateholders' Interest Distributable Amount for a Distribution Date exceeds the amount deposited into the Certificate Distribution Account pursuant to Section 5.05(b) (iii) on such Distribution Date, the Servicer shall instruct the Indenture Trustee to withdraw from the Reserve Account on such Distribution Date an amount equal to such excess, to the extent of funds available therein after giving effect to paragraph (c) above, and deposit such amount into the Certificate Distribution Account on such Distribution Date. (e) In the event that the Noteholders' Principal Distributable Amount for a Distribution Date exceeds the amount deposited into the Note Distribution Account pursuant to Section 5.05(b)(iv) on such Distribution Date, the Servicer shall instruct the Indenture Trustee to withdraw from the Reserve Account on such Distribution Date an amount equal to such excess, to the extent of funds available therein after giving effect to paragraphs (c) and (d) above, and deposit such amount into the Note Distribution Account on such Distribution Date. (f) In the event that the Certificateholders' Principal Distributable Amount for a Distribution Date exceeds the amount deposited into the Certificate Distribution Account pursuant to Section 5.05(b)(v) on such Distribution Date, the Servicer shall instruct the Indenture Trustee to withdraw from the Reserve Account on such Distribution Date an amount equal to such excess, to the extent of funds available therein after giving effect to paragraphs (c), (d) and (e) above, and deposit such amount into the Certificate Distribution Account on such Distribution Date. (g) Following the payment in full of the aggregate Outstanding Amount of the Notes and the Certificate Balance and of all other amounts owing or to be distributed hereunder or under the Indenture or the Trust Agreement to Noteholders and Certificateholders and the termination of the Trust, any amount remaining on deposit in the Reserve Account shall be distributed to the Depositor. (h) Upon any distribution to the Depositor of amounts from the Reserve Fund in accordance with the terms hereof, neither the Noteholders nor the Certificateholders will have any rights in, or claims to, such amounts. SECTION 5.07. Statements to Certificateholders and Noteholders. (a) On or prior to each Distribution Date, the Servicer shall provide to the Indenture Trustee (with a copy to each Rating Agency and each Paying Agent) for the Indenture Trustee to forward to each Noteholder of record as of the most recent Record Date and to the Owner Trustee (with a copy to each Paying Agent) for the Owner Trustee to forward to each Certificateholder of record as of the most recent Record Date a statement substantially in the form of Exhibits A and B, 33 respectively, setting forth at least the following information as to the Notes and the Certificates to the extent applicable: (i) the amount of such distribution allocable to principal allocable to the Notes and to the Certificates; (ii) the amount of such distribution allocable to interest allocable to the Notes and to the Certificates; (iii) the Pool Balance as of the close of business on the last day of the preceding Collection Period; (iv) the Outstanding Amount of the Notes, the Note Pool Factor, the Certificate Balance and the Certificate Pool Factor as of the close of business on the last day of the preceding Collection Period, after giving effect to payments allocated to principal reported under clause (i) above; (v) the amount of the Servicing Fee paid to the Servicer with respect to the related Collection Period; (vi) the amount of aggregate Realized Losses, if any, with respect to the related Collection Period; (vii) the aggregate Principal Balance of Receivables that are 30 to 59 days, 60 to 89 days and 90 days or more delinquent; (viii) the Average Three Month Delinquency Ratio, the Average Six Month Repossession Ratio and the Average Six Month Realized Loss Ratio as of the last day of the related Collection Period; (ix) the Noteholders' Interest Carryover Shortfall, the Noteholders' Principal Carryover Shortfall, the Certificateholders' Interest Carryover Shortfall and the Certificateholders' Principal Carryover Shortfall, if any, after giving effect to payments on such Distribution Date, and the changes in such amounts from the preceding statement; (x) the aggregate Purchase Amounts for Receivables, if any, that were purchased by NAL or the Servicer during the related Collection Period; (xi) the balance, if any, of the Reserve Account after giving effect to deposits and withdrawals to be made on such Distribution Date, and the change in such balance from the preceding statement; and (xii) the aggregate Payahead Balance. Each amount set forth under clauses (i), (ii), (v) and (ix) above shall be expressed as a dollar amount per $1,000 of 34 original principal balance of a Certificate or Note, as applicable. (b) On or prior to the 15th day of each month that is not a month in which a Distribution Date occurs and on or prior to each Distribution Date, the Indenture Trustee shall forward to each Noteholder of record and the Owner Trustee shall forward to each Certificateholder of record the Servicer's Certificate provided to it pursuant to Section 4.09 (except that on any Distribution Date information otherwise provided to such holder pursuant to clause (a) of this Section 5.08 need not have been included in such certificate). SECTION 5.08. Transfer of the Notes. In the event any Holder of the Notes shall wish to transfer such Note, the Servicer shall provide to such Holder and any prospective transferee designated by such Holder information regarding the Notes and the Receivables and such other information as shall be necessary to satisfy the condition to eligibility set forth in Rule 144A(d)(4) for transfer of any such Note without registration thereof under the Securities Act of 1933, as amended, pursuant to the exemption from registration provided by Rule 144A. SECTION 5.09. Dealer Reserve Account. (a) On the Closing Date, the Owner Trustee will deposit, on behalf of the Depositor, an amount equal to $173,150.76 into the Dealer Reserve Account. (b) On each Distribution Date, the Servicer shall be entitled to withdraw from the Dealer Reserve Account for payment to NAL, an amount equal to the amount payable or paid by NAL to Dealers (other than SF1 and AA) during the related Collection Period in respect of dealer reserves on the Receivables and amounts to which NAL may be entitled from such dealer reserves under NAL's agreements with such Dealers. After payment in full, or the provision for such payment, of all amounts payable to Dealers (other than SF1 and AA) in respect of dealer reserves on the Receivables, any funds remaining on deposit in the Dealer Reserve Account will be paid to the Depositor. Amounts on deposit in the Dealer Reserve Account will not be available to make payments on the Securities or for any other purpose other than that set forth above in this clause (b). 35 ARTICLE VI The Depositor SECTION 6.01. Representations of Depositor. The Depositor makes the following representations on which the Issuer relies in acquiring the Receivables and issuing the Notes and the Certificates. The representations speak as of the execution and delivery of this Agreement and as of the Closing Date and shall survive the sale of the Receivables to the Issuer and the pledge thereof to the Indenture Trustee pursuant to the Indenture. (a) Organization and Good Standing. The Depositor is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware, with the corporate power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the corporate power, authority and legal right to acquire and own the Receivables. (b) Due Qualification. The Depositor is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of its property or the conduct of its business shall require such qualifications. (c) Power and Authority. The Depositor has the corporate power and authority to execute and deliver this Agreement and to carry out its terms; the Depositor has full power and authority to sell and assign the property to be sold and assigned to and deposited with the Issuer, and the Depositor shall have duly authorized such sale and assignment to the Issuer by all necessary corporate action; and the execution, delivery and performance of this Agreement has been duly authorized by the Depositor by all necessary corporate action. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Depositor enforceable in accordance with its terms. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Depositor, or any indenture, agreement or other instrument to which the Depositor is a party or by which it is bound; or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than pursuant to the Basic Documents); or violate any law or, to the best of the Depositor's knowledge, any order, rule or regulation applicable 36 to the Depositor of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Depositor or its properties. (f) No Proceedings. There are no proceedings or investigations pending, or to the Depositor's best knowledge, threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Depositor or its properties: (i) asserting the invalidity of this Agreement, the Receivables Purchase Agreement, the Indenture or any of the other Basic Documents, the Notes or the Certificates, (ii) seeking to prevent the issuance of the Notes or the Certificates or the consummation of any of the transactions contemplated by this Agreement, the Receivables Purchase Agreement, the Indenture or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Depositor of its obligations under, or the validity or enforceability of, this Agreement, the Receivables Purchase Agreement, the Indenture, any of the other Basic Documents, the Notes or the Certificates or (iv) which might adversely affect the federal or state income tax attributes of the Notes or the Certificates. (g) Principal Place of Business. The principal. place of business and chief executive office of the Depositor are located at the place set forth in Section 10.03(a) and such location has not changed since the date the Depositor was incorporated. (h) Use of Names. The legal name of the Depositor is the name used by it in this Agreement and the Depositor has not changed its name since the date of its incorporation and does not have trade names, fictitious names, assumed names or "doing business" names. (i) Solvency. The Depositor is solvent and will not become insolvent after giving effect to the transactions contemplated in this Agreement; the Depositor is paying its debts, if any, as they become due; the Depositor, after giving effect to the transactions contemplated in this Agreement, will have adequate capital to conduct its business. SECTION 6.02. Corporate Existence. (a) During the term of this Agreement, the Depositor will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its incorporation and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Basic Documents and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. 37 (b) During the term of this Agreement, the Depositor shall observe the applicable legal requirements for the recognition of the Depositor as a legal entity separate and apart from its Affiliates, including the following: (i) the Depositor shall maintain corporate records and books of account separate from those of its Affiliates; (ii) except as otherwise provided in this Agreement, the Depositor shall not commingle its assets and funds with those of its Affiliates; (iii) the Depositor shall hold such appropriate meetings of its board of directors as are necessary to authorize all the Depositor's corporate actions required by law to be authorized by the board of directors, shall keep minutes of such meetings and of meetings of its stockholder(s) and observe all other customary corporate formalities (and any successor Depositor not a corporation shall observe similar procedures in accordance with its governing documents and applicable law); (iv) the Depositor shall at all times hold itself out to the public under the Depositor's own name as a legal entity separate and distinct from its Affiliates; (v) all transactions and dealings between the Depositor and its Affiliates will be conducted on an arm's-length basis; (vi) except as provided for by the Basic Documents, the Depositor shall not utilize NAL as its agent and shall not agree to act as the agent of any other Person; and (vii) the Depositor shall at all times have at least one director that is an "Independent Director" as such term is defined in the certificate of incorporation. SECTION 6.03. Liability of Depositor; Indemnities. (a) The Depositor shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Depositor under this Agreement. (b) The Depositor shall indemnify, defend and hold harmless the Issuer, the Owner Trustee, the Indenture Trustee, the Certificateholders and the Noteholders and any of the officers, directors, employees and agents of the Issuer, the Owner Trustee and the Indenture Trustee from and against any loss, liability or expense incurred by reason of (i) the Depositor's willful misfeasance, bad faith or negligence in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement and (ii) the Depositor's or the Issuer's violation of 38 federal or state securities laws in connection with the offering and sale of the Notes and the Certificates. Indemnification under this Section shall survive the resignation or removal of the Owner Trustee or the Indenture Trustee and the termination of this Agreement and shall include reasonable fees and expenses of counsel and expenses of litigation. If the Depositor shall have made any indemnity payments pursuant to this Section and the Person to or on behalf of whom such payments are made thereafter shall collect any of such amounts from others, such Person shall promptly repay such amounts to the Depositor, without interest. SECTION 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Depositor. Any Person (a) into which the Depositor may be merged or consolidated, (b) which may result from any merger or consolidation to which the Depositor shall be a party or (c) which may succeed to the properties and assets of the Depositor substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Depositor under this Agreement, shall be the successor to the Depositor hereunder without the execution or filing of any document or any further act by any of the parties to this Agreement; provided, however, that (i) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 3.dl shall have been breached and no Servicer Default, and no event that, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Depositor shall have delivered to the Owner Trustee and the Indenture Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction and (iv) the Depositor shall have delivered to the Owner Trustee and the Indenture Trustee an Opinion of Counsel stating that, in the opinion of such counsel, either (A) all financing statements and continuation statements and amendments thereto have been executed and filed that are necessary fully to preserve and protect the interest of the Owner Trustee and Indenture Trustee, respectively, in the Receivables and reciting the details of such filings, or (B) no such action shall be necessary to preserve and protect such interests. Notwithstanding anything herein to the contrary, the execution of the foregoing agreement of assumption and compliance with clauses (i), (ii), (iii) and (iv) above shall be conditions to the consummation of the transactions referred to in clause (a), (b) or (c) above. 39 SECTION 6.05. Limitation on Liability of Depositor and Others. The Depositor and any director, officer, employee or agent of the Depositor may rely in good faith on the advice of counsel or on any document of any kind, prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Depositor shall not be under any obligation to appear in, prosecute or defend any legal action that shall not be incidental to its obligations under this Agreement and that in its opinion may involve it in any expense or liability. SECTION 6.06. Depositor May Own Certificates or Notes. The Depositor and any Affiliate thereof may in its individual or any other capacity become the owner or pledgee of Certificates or Notes with the same rights as it would have if it were not the Depositor or an Affiliate thereof, except as expressly provided herein or in any Basic Document. SECTION 6.07. Sale of Receivables. The Depositor shall take no actions inconsistent with the Trust's ownership of the Receivables. The Depositor shall promptly respond to any third-party inquiries regarding the Receivables by indicating that ownership thereof has been transferred to the Trust. ARTICLE VII The Servicer; Backup Servicer SECTION 7.01. Representations of Servicer. The Servicer makes the following representations on which the Issuer relies in acquiring the Receivables and issuing the Notes and the Certificates. The representations speak as of the execution and delivery of this Agreement and as of the Closing Date and shall survive the sale of the Receivables to the Issuer and the pledge thereof to the Indenture Trustee pursuant to the Indenture. (a) Organization and Good Standing. The Servicer is duly organized and validly existing as a corporation in good standing under the laws of the state of its incorporation, with the corporate power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the corporate power, authority and legal right to acquire, own, sell and service the Receivables. (b) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the Receivables as required by this Agreement) shall require such qualifications. 40 (c) Power and Authority. The Servicer has the corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by the Servicer by all necessary corporate action. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Servicer enforceable in accordance with its terms. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the articles of incorporation or bylaws of the Servicer, or any indenture, agreement or other instrument to which the Servicer is a party or by which it is bound; or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than this Agreement); or violate any law or any order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties. (f) No Proceedings. There are no proceedings or investigations pending or, to the Servicer's best knowledge, threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties: (i) asserting the invalidity of this Agreement, the Receivables Purchase Agreement, the Indenture, any of the other Basic Documents, the Notes or the Certificates, (ii) seeking to prevent the issuance of the Notes or the Certificates or the consummation of any of the transactions contemplated by this Agreement, the Receivables Purchase Agreement, the Indenture or any of the other Basic Documents, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement, the Receivables Purchase Agreement, the Indenture, any of the other Basic Documents, the Notes or the Certificates or (iv) relating to the Servicer and which might adversely affect the federal or state income tax attributes of the Notes or the Certificates. (g) No Insolvent Obligors. As of the Cutoff Date, no Obligor on a Receivable is shown on the Receivable Files as the subject of a bankruptcy proceeding. 41 SECTION 7.02. Indemnities of Servicer. The Servicer shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Servicer under this Agreement: (a) The Servicer shall indemnify, defend and hold harmless the Issuer, the Owner Trustee, the Indenture Trustee, the Backup Servicer, the Noteholders, the Certificateholders, and the Depositor, their respective officers, directors, employees and agents from and against any and all costs, expenses, losses, damages, claims and liabilities, arising out of or resulting from the use, ownership or operation by the Servicer or any Affiliate thereof of a Financed Vehicle. (b) The Servicer shall indemnify, defend and hold harmless the Issuer, the Owner Trustee, the Indenture Trustee, the Backup Servicer and the Depositor and their respective officers, directors, employees and agents from and against any taxes that may at any time be asserted against any such Person with respect to the transactions contemplated herein and in the Basic Documents, including any sales, gross receipts, general corporation, tangible personal property, privilege or license taxes (but, in the case of the Issuer, not including any taxes asserted with respect to, and as of the date of, the sale of the Receivables to the Issuer or the issuance and original sale of the Certificates and the Notes, or asserted with respect to ownership of the Receivables, or federal or other income taxes arising out of distributions on or transfers of the Certificates or the Notes) and costs and expenses in defending against the same. (c) The Servicer shall indemnify, defend and hold harmless the Issuer, the Owner Trustee, the Indenture Trustee, the Backup Servicer, the Depositor, the Certificateholders and the Noteholders and their respective officers, directors, employees and agents from and against any and all costs, expenses, losses, claims, damages and liabilities to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon any such Person through, the negligence, willful misfeasance or bad faith of the Servicer in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement. (d) The Servicer shall indemnify, defend and hold harmless the Owner Trustee and the Indenture Trustee and their respective officers, directors, employees and agents from and against all costs, expenses, losses, claims, damages and liabilities arising out of or incurred in connection with the acceptance or performance of the trusts and duties herein and in the Trust Agreement contained, in the case of the Owner Trustee, and in the Indenture contained, in the case of the Indenture Trustee, except to the extent that such cost, expense, loss, 42 claim, damage or liability: (i) in the case of the Owner Trustee, shall be due to the willful misfeasance, bad faith or negligence (except for errors in judgment) of the Owner Trustee or, in the case of the Indenture Trustee, shall be due to the willful misfeasance, bad faith or negligence (except for errors in judgment) of the Indenture Trustee; or (ii) in the case of the Owner Trustee, shall arise from the breach by the Owner Trustee of any of its representations or warranties set forth in Section 7.03 of the Trust Agreement. (e) The Servicer shall pay any and all taxes levied or assessed upon all or any part of the Owner Trust Estate. For purposes of this Section, in the event of the termination of the rights and obligations of NAL (or any successor thereto pursuant to Section 7.03) as Servicer pursuant to Section 8.01, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer (other than the Indenture Trustee) pursuant to Section 8.02. Indemnification under this Section shall survive the resignation or removal of the Owner Trustee or the Indenture Trustee or the termination of this Agreement and shall include reasonable fees and expenses of counsel and expenses of litigation. If the Servicer shall have made any indemnity payments pursuant to this Section and the Person to or on behalf of whom such payments are made thereafter collects any of such amounts from others, such Person shall promptly repay such amounts to the Servicer, without interest. SECTION 7.03. Merger or Consolidation of, or Assumption of the Obligations of, Servicer. Any Person (a) into which the Servicer may be merged or consolidated, (b) which may result from any merger or consolidation to which the Servicer shall be a party, (c) which may succeed to the properties and assets of the Servicer substantially as a whole or (d) with respect to the Servicer's obligations hereunder, which is a corporation 50% or more of the voting stock of which is owned, directly or indirectly, by NAL, which Person executed an agreement of assumption to perform every obligation of the Servicer hereunder, shall be the successor to the Servicer under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (i) immediately after giving effect to such transaction, no Servicer Default and no event which, after notice or lapse of time, or both, would become a Servicer Default shall have occurred and be continuing, (ii) the Servicer shall have delivered to the Owner Trustee and the Indenture Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with, 43 (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction, (iv) immediately after giving effect to such transaction, the successor to the Servicer shall become the Administrator under the Administration Agreement in accordance with Section 8 of such Agreement and (v) the Servicer shall have delivered to the Owner Trustee and the Indenture Trustee an Opinion of Counsel stating that, in the opinion of such counsel, either (A) all financing statements and continuation statements and amendments thereto have been executed and filed that are necessary fully to preserve and protect the interest of the Owner Trustee and the Indenture Trustee, respectively, in the Receivables and reciting the details of such filings or (B) no such action shall be necessary to preserve and protect such interests. Notwithstanding anything herein to the contrary, the execution of the foregoing agreement of assumption and compliance with clauses (i), (ii), (iii), (iv) and (v) above shall be conditions to the consummation of the transactions referred to in clause (a), (b) or (c) above. SECTION 7.04. Limitation on Liability of Servicer and Others. Neither the Servicer nor any of the directors, officers, employees or agents of the Servicer shall be under any liability to the Issuer, the Noteholders or the Certificateholders, except as provided under this Agreement, for any action taken or for refraining from the taking of any action pursuant to this Agreement or for errors in judgment; provided, however, that this provision shall not protect the Servicer or any such person against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties or by reason of reckless disregard of obligations and duties under this Agreement. The Servicer and any director, officer, employee or agent of the Servicer may rely in good faith on any document of any kind prima facie properly executed and submitted by any person respecting any matters arising under this Agreement. Except as provided in this Agreement, the Servicer shall not be under any obligation to appear in, prosecute or defend any legal action that shall not be incidental to its duties to service the Receivables in accordance with this Agreement and that in its opinion may involve it in any expense or liability; provided, however, that the Servicer may undertake any reasonable action that it may deem necessary or desirable in respect of this Agreement and the Basic Documents and the rights and duties of the parties to this Agreement and the Basic Documents and the interests of the Certificateholders under the Trust Agreement and the Noteholders under the Indenture. SECTION 7.05. NAL Not To Resign as Servicer. Subject to the provisions of Section 7.03, NAL shall not resign from the obligations and duties hereby imposed on it as Servicer under this Agreement except upon a determination that the performance of its duties under this Agreement shall no longer be permissible 44 under applicable law. Notice of any such determination permitting the resignation of NAL shall be communicated to the Owner Trustee and the Indenture Trustee at the earliest practicable time (and, if such communication is not in writing, shall be confirmed in writing at the earliest practicable time) and any such determination shall be evidenced by an Opinion of Counsel to such effect delivered to the Owner Trustee and the Indenture Trustee concurrently with or promptly after such notice. No such resignation shall become effective until the Indenture Trustee or a successor Servicer shall (i) have assumed the responsibilities and obligations of NAL in accordance with Section 8.02 and (ii) have become the Administrator under the Administration Agreement in accordance with Section 8 of such Agreement. SECTION 7.06. Representations of Backup Servicer. The Backup Servicer makes the following representations on which the Issuer relies in acquiring the Receivables and issuing the Notes and the Certificates. The representations speak as of the execution and delivery of this Agreement and as of the Closing Date and shall survive the sale of the Receivables to the Issuer and the pledge thereof to the Indenture Trustee pursuant to the Indenture. (a) Organization and Good Standing. The Backup Servicer is duly organized and validly existing as a New York banking corporation in good standing under the laws of the state of its incorporation, with the corporate power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the corporate power, authority and legal right to acquire, own, sell and service the Receivables. (b) Due Qualification. The Backup Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the Receivables as required by this Agreement) shall require such qualifications. (c) Power and Authority. The Backup Servicer has the corporate power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by the Backup Servicer by all necessary corporate action. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Backup Servicer enforceable in accordance with its terms. 45 SECTION 7.07. Merger or Consolidation of, or Assumption of the Obligations of, Backup Servicer. Any Person (a) into which the Backup Servicer may be merged or consolidated, (b) which may result from any merger or consolidation to which the Backup Servicer shall be a party, (c) which may succeed to the properties and assets of the Backup Servicer substantially as a whole or (d) with respect to the Backup Servicer's obligations hereunder, shall be the successor to the Backup Servicer under this Agreement without further act on the part of any of the parties to this Agreement. SECTION 7.08. Resignation as Backup Servicer. Subject to the provisions of Section 7.07, the Backup Servicer may resign upon 30 days' written notice to the Indenture Trustee and the Owner Trustee; provided, however, that no such resignation shall become effective unless and until a successor reasonably acceptable to the Indenture Trustee and the Owner Trustee shall have assumed the responsibilities and obligations of the Backup Servicer and the Rating Agency Condition shall have been satisfied in connection therewith; provided, further, that if the Backup Servicer shall have resigned after its determination that the performance of its duties under this Agreement shall no longer be permissible under applicable law as evidenced by an Opinion of Counsel to such effect delivered to the Owner Trustee and the Indenture Trustee, then, in the event a successor Backup Servicer is not appointed within 30 days after such a resignation, the Backup Servicer may petition a court for its removal. ARTICLE VIII Default SECTION 8.01. Servicer Default. If any one of the following events (a "Servicer Default") shall occur and be continuing: (a) any failure by the Servicer to deliver or cause to be delivered to the Owner Trustee or the Indenture Trustee, as applicable, for deposit in any of the Trust Accounts or the Certificate Distribution Account any required payment or to direct the Owner Trustee or the Indenture Trustee, as applicable, to make any required distributions therefrom, which failure continues unremedied for a period of five Business Days after discovery of such failure by an officer of the Servicer, or after the date on which written notice of such failure shall have been given (A) to the Servicer by the Owner Trustee or the Indenture Trustee, as applicable, or (B) to the Servicer, and to the Owner Trustee and the Indenture Trustee, as applicable, by the Holders of Notes, evidencing not less than 25% of the Outstanding Amount of the Notes or, if the Notes have been paid in full, by Holders of Certificates evidencing not less than 25% of the outstanding Certificate Balance; or 46 (b) failure by the Servicer duly to observe or to perform in any material respect any other covenants or agreements of the Servicer set forth in this Agreement or any other Basic Document, which failure shall (i) materially and adversely affect the rights of Certificateholders or Noteholders and (ii) continue unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given (A) to the Servicer by the Owner Trustee or the Indenture Trustee or (B) to the Servicer, and to the Owner Trustee and the Indenture Trustee by the Holders of Notes or Certificates, as applicable, evidencing not less than 25% of the Outstanding Amount of the Notes or 25% of the outstanding Certificate Balance; or (c) the occurrence of an Insolvency Event with respect to the Servicer; then, and in each and every case, so long as the Servicer Default shall not have been remedied, either the Indenture Trustee or the Holders of Notes evidencing not less than 25% of the Outstanding Amount of the Notes, by notice then given in writing to the Servicer (and to the Indenture Trustee and the Owner Trustee if given by the Noteholders) may terminate all the rights and obligations (other than the obligations set forth in Section 7.02 hereof) of the Servicer under this Agreement. On or after the receipt by the Servicer of such written notice, all authority and power of the Servicer under this Agreement, whether with respect to the Notes, the Certificates or the Receivables or otherwise, shall, without further action, pass to and be vested in the Indenture Trustee or such successor Servicer as may be appointed under Section 8.02; and, without limitation, the Indenture Trustee and the Owner Trustee are hereby authorized and empowered to execute and deliver, for the benefit of the predecessor Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement of the Receivables and related documents, or otherwise. The predecessor Servicer shall cooperate with the successor Servicer, the Indenture Trustee and the Owner Trustee in effecting the termination of the responsibilities and rights of the predecessor Servicer under this Agreement, including the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the predecessor Servicer for deposit, or shall thereafter be received by it with respect to any Receivable. All reasonable costs and expenses (including, without limitation, attorneys' fees and any expenses relating to the conversion of computer files) incurred in connection with transferring the Receivable Files to the successor Servicer and amending this Agreement to reflect such succession as Servicer pursuant to this Section shall be paid by the predecessor Servicer upon presentation of reasonable documentation of such costs and expenses. Upon receipt of notice 47 of the occurrence of a Servicer Default, the Owner Trustee shall give notice thereof to each Rating Agency. SECTION 8.02. Appointment of Successor. (a) Upon the Servicer's receipt of notice of termination pursuant to Section 8.01 or the Servicer's resignation in accordance with the terms of this Agreement, the predecessor Servicer shall continue to perform its functions as Servicer under this Agreement, in the case of termination, only until the date specified in such termination notice or, if no such date is specified in a notice of termination, until receipt of such notice and, in the case of resignation, until the later of (i) the date 45 days from the delivery to the Owner Trustee, the Indenture Trustee and the Backup Servicer of written notice of such resignation (or written confirmation of such notice) in accordance with the terms of this Agreement and (ii) the date upon which the predecessor Servicer shall become unable to act as Servicer, as specified in the notice of resignation and accompanying Opinion of Counsel. In the event of the Servicer's termination hereunder, the Indenture Trustee shall appoint a successor Servicer, and the successor Servicer shall accept its appointment (including its appointment as Administrator under the Administration Agreement as set forth in Section 8.02(b)) by a written assumption in form acceptable to the Owner Trustee and the Indenture Trustee. If the Indenture Trustee appoints the Backup Servicer as successor Servicer in accordance with Section 7.03 or 8.01 (after confirmation from each Rating Agency that such appointment will not result in the withdrawal or downgrade of the then current ratings of the Notes and the Certificates), the Backup Servicer shall be the successor in all respects to the Servicer in its capacity as Servicer under this Agreement and the transactions set forth or provided for herein and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof; provided, however, that the Backup Servicer shall not be liable for any acts or omissions of the Servicer occurring prior to such succession or for any breach by the Servicer of any of its representations and warranties contained herein or in any related document or agreement. Notwithstanding the above, if the Backup Servicer is legally unable or unwilling to act as Servicer, the Indenture Trustee will appoint a successor Servicer to act as Servicer, the effectiveness of which appointment shall be subject to confirmation from each Rating Agency that such appointment will not result in the withdrawal or downgrade of the then current ratings of the Notes and the Certificates. As compensation for acting as successor Servicer, the Backup Servicer shall be entitled to receive the Servicing Fee. In the event that a successor Servicer has not been appointed at the time when the predecessor Servicer has ceased to act as Servicer in accordance with this Section, the Indenture Trustee without further action shall automatically be appointed the successor Servicer and the Indenture Trustee shall be entitled to the Servicing Fee. Notwithstanding the above, the Indenture Trustee shall, if it 48 shall be legally unable so to act, appoint or petition a court of competent jurisdiction to appoint any established institution, having a net worth of not less than $50,000,000 and whose regular business shall include the servicing of automotive receivables, as the successor to the Servicer under this Agreement. (b) Upon appointment, the successor Servicer (including the Indenture Trustee acting as successor Servicer) shall (i) be the successor in all respects to the predecessor Servicer and shall be subject to all the responsibilities, duties and liabilities arising thereafter relating thereto placed on the predecessor Servicer and shall be entitled to the Servicing Fee and all the rights granted to the predecessor Servicer by the terms and provisions of this Agreement and (ii) become the Administrator under the Administration Agreement in accordance with Section 8 of such Agreement. (c) The Servicer may not resign unless it is prohibited from serving as such by law. SECTION 8.03. Notification to Noteholders and Certificateholders. Upon any termination of, or appointment of a successor to the Servicer pursuant to this Article VIII, the Owner Trustee shall give prompt written notice thereof to Certificateholders, and the Indenture Trustee shall give prompt written notice thereof to Noteholders and each Rating Agency. SECTION 8.04. Waiver of Past Defaults. The Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes or the Holders of Certificates evidencing not less than a majority of the outstanding Certificate Balance (in the case of any default which does not adversely affect the Indenture Trustee or the Noteholders) may, on behalf of all Noteholders and Certificateholders, waive in writing any default by the Servicer in the performance of its obligations hereunder and its consequences, except a default in making any required deposits to or payments from any of the Trust Accounts in accordance with this Agreement or in respect of a covenant or the Servicer or provision herein that cannot be waived without the consent of each Securityholder (which event the related waiver will require the approval of the Holders of all Securities). Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto. 49 ARTICLE IX Termination SECTION 9.01. Optional Purchase of All Receivables. (a) As of the last day of any Collection Period immediately preceding a Distribution Date as of which the then outstanding Pool Balance is 5% or less of the Original Pool Balance, the Servicer shall have the option to purchase the Owner Trust Estate, other than the Trust Accounts and the Certificate Distribution Account. To exercise such option, the Servicer shall deposit pursuant to Section 5.04 in the Collection Account an amount equal to the aggregate Purchase Amount for the Receivables (including defaulted Receivables), plus the appraised value of any such other property held by the Trust other than the Trust Accounts and the Certificate Distribution Account, such value to be determined by an appraiser mutually agreed upon by the Servicer, the Owner Trustee and the Indenture Trustee, and shall succeed to all interests in and to the Trust. Notwithstanding the foregoing, the Servicer shall not be permitted to exercise such option unless the amount to be deposited in the Collection Account pursuant to the preceding sentence is greater than or equal to the sum of the Outstanding Amount of the Notes and the Certificate Balance and all accrued but unpaid interest (including any overdue interest) thereon to and including the last day of the Collection Period immediately preceding the redemption date. (b) Upon any sale of the assets of the Trust pursuant to Section 9.02 of the Trust Agreement, the Servicer shall instruct the Indenture Trustee to deposit the proceeds from such sale after all payments and reserves therefrom have been made (the "Insolvency Proceeds") in the Collection Account. On the Distribution Date on which the Insolvency Proceeds are deposited in the Collection Account (or, if such proceeds are not so deposited on a Distribution Date, on the Distribution Date immediately following such deposit), the Servicer shall instruct the Indenture Trustee to make the following deposits (after the application on such Distribution Date of the Total Distribution Amount and funds on deposit in the Reserve Account pursuant to Sections 5.05 and 5.06) from the Insolvency Proceeds and any funds remaining on deposit in the Reserve Account (including the proceeds of any sale of investments therein as described in the following sentence) (i) to the Note Distribution Account, any portion of the Noteholders' Interest Distributable Amount not otherwise deposited into the Note Distribution Account on such Distribution Date; (ii) to the Certificate Distribution Account, any portion of the Certificateholders' Interest Distributable 50 Amount not otherwise deposited into the Certificate Distribution Account on such Distribution Date; (iii) to the Note Distribution Account, the Outstanding Amount of the Notes (after giving effect to the reduction in the Outstanding Amount of the Notes to result from the deposits made in the Note Distribution Account on such Distribution Date and on prior Distribution Dates); and (iv) to the Certificate Distribution Account, the Certificate Balance (after giving effect to the reduction in the Certificate Balance to result from the deposits made in the Certificate Distribution Account on such Distribution Date and on prior Distribution Dates). Any investments on deposit in the Reserve Account or Note Distribution Account which will not mature on or before such Distribution Date shall be sold by the Indenture Trustee at such time as will result in the Indenture Trustee receiving the proceeds from such sale not later than the Payment Determination Date preceding such Distribution Date. Any Insolvency Proceeds remaining after the deposits described above shall be paid to the Depositor. (c) As described in Article 9 of the Trust Agreement, notice of any termination of the Trust shall be given by the Servicer to the Owner Trustee and the Indenture Trustee as soon as practicable after the Servicer has received notice thereof. (d) Following the satisfaction and discharge of the Indenture and the payment in full of the principal of and interest on the Notes, the Certificateholders will succeed to the rights of the Noteholders hereunder and the Owner Trustee will succeed to the rights of, and assume the obligations of, the Indenture Trustee pursuant to this Agreement. ARTICLE X Miscellaneous SECTION 10.01. Amendment. This Agreement may be amended by the Depositor, the Servicer and the Issuer, with the consent of the Indenture Trustee, but without the consent of any of the Noteholders or the Certificateholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that such action shall not, as evidenced by an Opinion of Counsel delivered to the Owner Trustee and the Indenture Trustee, adversely affect in any 51 material respect the interests of any Noteholder or Certificateholder. This Agreement may also be amended from time to time by the Depositor, the Servicer and the Issuer, with the consent of the Indenture Trustee, the consent of the Holders of Notes evidencing not less than a majority of the Outstanding Amount of the Notes and the consent of the Holders (as defined in the Trust Agreement) of outstanding Certificates evidencing not less than a majority of the outstanding Certificate Balance, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that no such amendment shall (a) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on Receivables or distributions that shall be required to be made for the benefit of the Noteholders or the Certificateholders or (b) reduce the aforesaid percentage of the Outstanding Amount of the Notes and the Certificate Balance, the Holders of which are required to consent to any such amendment, without the consent of the Holders of all the outstanding Notes and the Holders (as defined in the Trust Agreement) of all the outstanding Certificates. Promptly after the execution of any such amendment or consent, the Owner Trustee shall furnish written notification of the substance of such amendment or consent to each Certificateholder, the Indenture Trustee and each Rating Agency. It shall not be necessary for the consent of Certificateholders or Noteholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Owner Trustee and the Indenture Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement and the Opinion of Counsel referred to in Section 10.02(i) (1). The Owner Trustee and the Indenture Trustee may, but shall not be obligated to, enter into any such amendment which affects the Owner Trustee's or the Indenture Trustee's, as applicable, own rights, duties or immunities under this Agreement or otherwise. No amendment to this Agreement will have any effect on the rights and obligations of the Backup Servicer hereunder unless the Backup Servicer shall consent thereto in writing. SECTION 10.02. Protection of Title to Trust. (a) The Depositor shall execute and file such financing statements and cause to be executed and filed such continuation statements, all 52 in such manner and in such places as may be required by law fully to preserve, maintain and protect the interest of the Issuer and of the Indenture Trustee in the Receivables and in the proceeds thereof. The Depositor shall deliver (or cause to be delivered) to the Owner Trustee and the Indenture Trustee file-stamped copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. (b) Neither the Depositor nor the Servicer shall change its name, identity or corporate structure in any manner that would, could or might make any financing statement or continuation statement filed in accordance with paragraph (a) above seriously misleading within the meaning of ss. 9-402(7) of the UCC, unless it shall have given the Owner Trustee and the Indenture Trustee at least five days' prior written notice thereof and shall have promptly filed appropriate amendments to all previously filed financing statements or continuation statements. (c) Each of the Depositor and the Servicer shall have an obligation to give the Owner Trustee and the Indenture Trustee at least 60 days' prior written notice of any relocation of its principal executive office if, as a result of such relocation, the applicable provisions of the UCC would require the filing of any amendment of any previously filed financing or continuation statement or of any new financing statement and shall promptly file any such amendment or new financing statement. The Servicer shall at all times maintain each office from which it shall service Receivables, and its principal executive office, within the United States of America. (d) The Servicer shall maintain accounts and records as to each Receivable accurately and in sufficient detail to permit (i) the reader thereof to know at any time the status of such Receivable, including payments and recoveries made and payments owing (and the nature of each) and (ii) reconciliation between payments or recoveries on (or with respect to) each Receivable and the amounts from time to time deposited in the Collection Account and the Payahead Account in respect of such Receivable. (e) The Servicer shall maintain its computer systems so that, from and after the time of sale under this Agreement of the Receivables, the Servicer's master computer records (including any backup archives) that refer to a Receivable shall indicate clearly the interest of the Issuer and the Indenture Trustee in such Receivable and that such Receivable is owned by the Issuer and has been pledged to the Indenture Trustee. Indication of the Issuer's and the Indenture Trustee's interest in a Receivable shall be deleted from or modified on the Servicer's computer systems when, and only when, the related Receivable shall have been paid in full or repurchased. 53 (f) If at any time the Depositor or the Servicer shall propose to sell, grant a security interest in, or otherwise transfer any interest in automotive receivables to any prospective purchaser, lender or other transferee, the Servicer shall give to such prospective purchaser, lender or other transferee computer tapes, records or printouts (including any restored from backup archives) that, if they shall refer in any manner whatsoever to any Receivable, shall indicate clearly that such Receivable has been sold and is owned by the Issuer and has been pledged to the Indenture Trustee. (g) The Servicer shall permit the Indenture Trustee, the Backup Servicer and their agents at any time during normal business hours to inspect, audit and make copies of and abstracts from the Servicer's records regarding any Receivable. (h) Upon request, the Servicer shall furnish to the Owner Trustee or to the Indenture Trustee, within five Business Days, a list of all Receivables (by contract number and name of Obligor) then held as part of the Trust, together with a reconciliation of such list to the Schedule of Receivables and to each of the Servicer's Certificates furnished before such request indicating removal of Receivables from the Trust. (i) The Servicer shall deliver to the Owner Trustee and the Indenture Trustee: (1) promptly after the execution and delivery of this Agreement and of each amendment hereto, an Opinion of Counsel stating that, in the opinion of such counsel, either (A) all financing statements and continuation statements have been executed and filed that are necessary fully to preserve and protect the interest of the Owner Trustee and the Indenture Trustee in the Receivables, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (B) no such action shall be necessary to preserve and protect such interest; and (2) within 90 days after the beginning of each calendar year beginning with the first calendar year beginning more than three months after the Closing Date, an Opinion of Counsel, dated as of a date during such 90-day period, stating that, in the opinion of such counsel, either (A) all financing statements and continuation statements have been executed and filed that are necessary fully to preserve and protect the interest of the Owner Trustee and the Indenture Trustee in the Receivables, and reciting the details of such filings or referring to prior Opinions of Counsel in which such details are given, or (B) no such action shall be necessary to preserve and protect such interest. 54 Each Opinion of Counsel referred to in clause (1) or (2) above shall specify any action necessary (as of the date of such opinion) to be taken in the following year to preserve and protect such interest. SECTION 10.03. Notices. All demands, notices, communications and instructions upon or to the Depositor, the Servicer, the Owner Trustee, the Indenture Trustee or each Rating Agency under this Agreement shall be in writing, personally delivered or mailed by certified mail, return receipt requested, and shall be deemed to have been duly given upon receipt (a) in the case of the Depositor, to NAL Acceptance Corporation, 500 Cypress Creek Road West, Suite 590, Fort Lauderdale, Florida 33309, Telephone: 954-958-3591; Fax: 954-938-8209, Attention: Dennis La Vigne, (b) in the case of the Servicer, to NAL Acceptance Corporation, 500 Cypress Road West, Suite 590, Fort Lauderdale, Florida 33309, (c) in the case of the Issuer or the Owner Trustee, at the Corporate Trust Office (as defined in the Trust Agreement), (d) in the case of the Indenture Trustee or Backup Servicer, at the Corporate Trust Office, (e) in the case of the Rating Agencies, to Fitch Investors Service, L.P., One State Street Plaza, New York, New York 10004 and Duff & Phelps Credit Rating Co., 55 E. Monroe Street, Chicago, Illinois 60603, Telephone: 312-263-2610, Fax: 312-263-2852, Attention: Asset-Backed Research and Monitoring; or, as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. SECTION 10.04. Assignment by the Depositor or the Servicer. Notwithstanding anything to the contrary contained herein, except as provided in the remainder of this Section, as provided in Sections 6.04 and 7.03 herein and as provided in the provisions of this Agreement concerning the resignation of the Servicer, this Agreement may not be assigned by the Depositor or the Servicer. SECTION 10.05. Limitations on Rights of Others. The provisions of this Agreement are solely for the benefit of the Depositor, the Servicer, the Backup Servicer, the Issuer, the Owner Trustee, the Certificateholders, the Indenture Trustee and the Noteholders, and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. SECTION 10.06. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 55 SECTION 10.07. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 10.08. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 10.09. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. SECTION 10.10. Assignment by Issuer. The Depositor and the Servicer hereby acknowledge and consent to any mortgage, pledge, assignment and grant of a security interest by the Issuer to the Indenture Trustee pursuant to the Indenture for the benefit of the Noteholders of all right, title and interest of the Issuer in, to and under the Receivables and the assignment of any or all of the Issuer's rights and obligations hereunder to the Indenture Trustee. SECTION 10.11. Nonpetition Covenants. (a) Notwithstanding any prior termination of this Agreement, the Servicer, the Backup Servicer and the Depositor shall not, prior to the date which is one year and one day after the termination of this Agreement with respect to the Issuer or the Depositor, acquiesce, petition or otherwise invoke or cause the Issuer or the Depositor to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Issuer or the Depositor under any federal or state bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or the Depositor or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Issuer or the Depositor. SECTION 10.12. Limitation of Liability of Owner Trustee and Indenture Trustee. (a) Notwithstanding anything contained herein to the contrary, this Agreement has been countersigned by Wilmington Trust Company not in its individual capacity but solely in its capacity as Owner Trustee of the Issuer and in no event shall Wilmington Trust Company in its individual capacity or, except as expressly provided in the Trust Agreement, as beneficial owner of the Issuer have any liability for the representations, warranties, covenants, agreements or other obligations of the Issuer hereunder or in any of the certificates, notices or agreements delivered pursuant hereto, as to all of which recourse shall be had solely to the assets of the 56 Issuer. For all purposes of this Agreement, in the performance of its duties or obligations hereunder or in the performance of any duties or obligations of the Issuer hereunder, the Owner Trustee shall be subject to, and entitled to the benefits of, the terms and provisions of Articles VI, VII and VIII of the Trust Agreement. (b) Notwithstanding anything contained herein to the contrary, this Agreement has been accepted by Bankers Trust Company, not in its individual capacity but solely as Indenture Trustee and in no event shall Bankers Trust Company have any liability for the representations, warranties, covenants, agreements or other obligations of the Issuer hereunder or in any of the certificates, notices or agreements delivered pursuant hereto, as to all of which recourse shall be had solely to the assets of the Issuer. 57 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. NAL AUTO TRUST 1996-4 By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee on behalf of the Trust By: ________________________________ Name: Emmett R. Harmon Title: Vice President AUTORICS II, Inc., Depositor By: ________________________________ Name: Robert Carlson Title: Vice President/Finance NAL ACCEPTANCE CORPORATION, Servicer By: ________________________________ Name: Robert Carlson Title: Vice President/Finance BANKERS TRUST COMPANY, Backup Servicer By: ________________________________ Name: Title: Acknowledged and accepted as of the day and year first above written: BANKERS TRUST COMPANY, not in its individual capacity but solely as Indenture Trustee By: ________________________________ Name: Title: SCHEDULE A Schedule of Receivables EXHIBIT A NAL Acceptance Corporation NAL Auto Trust 1996-4 Distribution Date Statement to Noteholders - -------------------------------------------------------------------------------- Principal Distribution Amount ($ per $1,000 original principal amount) Interest Distribution Amount ($ per $1,000 original principal amount) Pool Balance Note Balance Note Pool Factor Certificate Balance Servicing Fee Servicing Fee Per $1,000 original principal amount Realized Losses Noteholders' Interest Carryover Shortfall per $1,000 original principal amount Noteholders' Principal Carryover Shortfall per $1,000 original principal amount Purchase Amounts Reserve Account Balance Payahead Balance Average Three Month Delinquency Ratio Average Six Month Realized Loss Ratio Average Six Month Repossession Ratio Delinquency Trigger Event [YES] [NO] Repossession Trigger Event [YES] [NO] Loss Trigger Event [YES] [NO] Delinquent Receivables 30 days 60 days 90 days A-1 EXHIBIT B NAL Acceptance Corporation NAL Auto Trust 1996-4 Distribution Date Statement to Certificateholders - -------------------------------------------------------------------------------- Principal Distribution Amount Principal Per $1,000 Initial Certificate Balance Interest Distribution Amount Interest Per $1,000 Initial Certificate Balance Pool Balance Note Balance Note Pool Factor Certificate Balance Certificate Pool Factor Servicing Fee Servicing Fee Per $1,000 Initial Certificate Balance Realized Losses Noteholders' Interest Carryover Shortfall per $1,000 original Note principal amount Noteholders' Principal Carryover Shortfall per $1,000 original Note principal amount Certificateholders' Interest Carryover Shortfall per $1,000 Initial Certificate Balance Certificateholders' Principal Carryover Shortfall per $1,000 Initial Certificate Balance Purchase Amounts Reserve Account Balance Payahead Balance Average Three Month Delinquency Ratio Average Six Month Realized Loss Ratio Average Six Month Repossession Ratio Delinquency Trigger Event [YES] [NO] Repossession Trigger Event [YES] [NO] Loss Trigger Event [YES] [NO] B-1 Delinquent Receivables 30 days 60 days 90 days - -------------------------------------------------------------------------------- B-2 EXHIBIT C Form of Servicer's Certificate NAL Acceptance Corporation NAL Auto Trust 1996-4 Monthly Servicer's Certificate (1) [___________________, 199__] Dates Covered: From & Incl. ___________ To & Incl. ___________ I. Collections Principal Payments Received ............................. $ Interest Payments Received .............................. $ Liquidation Proceeds .................................... $ Recoveries on Previously Liquidated Receivables ......... $ Aggregate Purchase Amount for Purchased Receivables ..... $ Amount Attributable to Interest ....................... $ Amount Attributable to Principal ...................... $ Investment Earnings ..................................... $ Total Collections ....................................... $ II. Distributions* Total Required Principal Reduction of the Securities $ Principal Distribution Amount Notes ($________ per $1,000 original principal amount) Certificates ($____ per $1,000 original principal amount) Interest Distribution Amount Notes ($________ per $1,000 original principal amount) Certificates ($________ per $1,000 original principal amount) Total Distributable Amount Notes ($________ per $1,000 original principal amount) Certificates ($________ per $1,000 original principal amount) - ---------- (1) Items that are marked with an * will be delivered quarterly. C-1 Additional Required Distributions Servicing Fee ......................................... $ Deposit to the Reserve Account ........................ $ Reserve Account Withdrawals for this Distribution Date ................ $ Cumulative Withdrawals ................................ $ III. Payahead Account Information Beginning Period Balance .............................. $ Amounts Deposited into Payahead Account ............... $ Amounts Withdrawn from Payahead Account ............... $ Ending Balance ........................................ $ IV. Pool Balance and Portfolio Information Beginning End of Period of Period Pool Balance .................. $ $ Note Balance* ................. $ $ Note Pool Factor .............. Certificate Balance* .......... $ $ Certificate Pool Factor* Remaining Number of Receivables Weighted Average A/R .......... Weighted Average Remaining Term V. Reconciliation of the Reserve Account Beginning Balance ..................................... $ Withdrawals from Reserve Account ...................... $ Amounts Available for Deposit to Reserve Account .................................. $ Specified Reserve Account Balance ..................... $ Amounts Deposited to Reserve Account .................. $ Ending Balance ........................................ $ VI. Loss and Delinquency Report Activity Realized Losses for Collection Period ................. $ Liquidated Receivables $ Aggregate Principal Balance ......................... $ Liquidation Proceeds ................................ $ Recoveries on Previously Liquidated Receivables ............................ $ Cumulative Realized Losses .......................... $ Delinquency 30-59 days Principal Amount .................................... $ Number of Receivables ............................... $ C-2 60-89 days Principal Amount .................................... $ Number of Receivables ............................... 90 days or more Principal Amount .................................... $ Number of Receivables ............................... Total Amount Principal Amount .................................... $ Number of Receivables ............................... VII. Original Deal Parameter Inputs Aggregate Principal Balance of the Receivables as of the Cutoff Date ..................... $ Weighted Average APR of the Receivables as of the Cutoff Date ................................. % Weighted Average Remaining Term of the Receivables as of the Cutoff Date ..................... months Number of Receivables ................................... Initial Reserve Account Balance ......................... $ C-3 EXHIBIT D NAL ACCEPTANCE CORPORATION CREDIT FILE CONTENTS LOAN AND LEASE (RIGHT SIDE OF FILE) RISK NAME: ___________________ CODE: ______________________ ACCOUNT #: ______________ ================================================================================ (X) (X) UNDER EXCEPTIONS INT DOCUMENTATION AUDIT COMMENTS - -------------------------------------------------------------------------------- Application - -------------------------------------------------------------------------------- Credit Report - -------------------------------------------------------------------------------- Explanation Derogatory Credit - -------------------------------------------------------------------------------- Credit Decision Notification - -------------------------------------------------------------------------------- Investigation Work A) Home Address Verified B) Employment Verified - -------------------------------------------------------------------------------- 1040's/W-2/Paystubs - -------------------------------------------------------------------------------- Current Telephone Bill in Applicant's Name and Address - -------------------------------------------------------------------------------- Reference Sheet (5 included) - -------------------------------------------------------------------------------- Other Stips - Specify - -------------------------------------------------------------------------------- Insurance Confirmation by NAL Insurance Dept. - -------------------------------------------------------------------------------- Loan/Lease Worksheet - -------------------------------------------------------------------------------- Copy of Funding Check - -------------------------------------------------------------------------------- Collections/Other Correspondence - -------------------------------------------------------------------------------- Approved Dealer - -------------------------------------------------------------------------------- GE Approval ================================================================================ _______________________________ __________________________________ Signature - Funder Date _______________________________ __________________________________ Signature - Auditor Date D-1 NAL ACCEPTANCE CORPORATION CREDIT FILE CONTENTS LOAN AND LEASE (RIGHT SIDE OF FILE) RISK NAME: ___________________ CODE: ______________________ ACCOUNT #: ______________ ================================================================================ (X) (X) UNDER EXCEPTIONS INT DOCUMENTATION AUDIT COMMENTS - -------------------------------------------------------------------------------- Contract: A) Trade-In/Down Payment B) Note Rate C) Term D) Monthly Payment E) Add's Approved F) Dealer Advance Per Approval - -------------------------------------------------------------------------------- Original Assignment - -------------------------------------------------------------------------------- Copy of Application for Certificate of Title - -------------------------------------------------------------------------------- Certificate of Origin (MSO)(New) Copy of Title (Used) - -------------------------------------------------------------------------------- Lien Guarantee/ Lien Registration - -------------------------------------------------------------------------------- Bill of Sale / Buyer's Order Signed - -------------------------------------------------------------------------------- Manufacturers Invoice (New) - -------------------------------------------------------------------------------- Copy Black Book / NADA Valuation - -------------------------------------------------------------------------------- Odometer Statement (Used) - -------------------------------------------------------------------------------- Photocopy of Driver's License - -------------------------------------------------------------------------------- Add's Documentation - -------------------------------------------------------------------------------- Notice to Cosigner - -------------------------------------------------------------------------------- Signed Disclosure Form for A & H Insurance (if applicable) - -------------------------------------------------------------------------------- Customer Phone Interview Correspondence ================================================================================ _______________________________ __________________________________ Signature - Funder Date _______________________________ __________________________________ Signature - Auditor Date D-2 EXHIBIT E Form of Assignment Reference is made to the Sale and Servicing Agreement dated as of December 9, 1996 (the "Sale and Servicing Agreement") among NAL Auto Trust 1996-4, Autorics II, Inc. ("Autorics II"), NAL Acceptance Corporation ("NAL") and Bankers Trust Company. All capitalized terms used herein without definition shall have the respective meanings specified in the Sale and Servicing Agreement. [NAL] [Autorics, Inc.] [Autorics II] hereby assigns to _____________ for which the Custodian is acting as custodian and bailee under the terms of the Custodial Agreement all right, title and interest of [NAL] [Autorics, Inc.] [Autorics II] in and to (but none of [NAL] [Autorics, Inc.] [Autorics II]'s obligations with respect to) (1) the Receivables and all moneys received thereon on and after the Cutoff Date plus all Payaheads as of the Cutoff Date; (2) the security interests in the Financed Vehicles granted by Obligors pursuant to the Receivables, any other right to realize upon property securing a Receivable and any other interest of [NAL] [Autorics, Inc.] [Autorics II] in such Financed Vehicles including [NAL] [Autorics, Inc.] [Autorics II]'s right, title and interest in the lien on the Financed Vehicles in the name of the Depositor's agent, Autorics, Inc., NAL or SF1; (3) any proceeds with respect to the Receivables from claims on any Insurance Policies relating to Financed Vehicles or Obligors; (4) proceeds of any recourse (but none of the obligations) to Dealers on Receivables; (5) any Financed Vehicle that shall have secured a Receivable and shall have been acquired by or on behalf of the Seller, the Depositor, the Servicer, or the Trust; (6) the Receivables Files; (7) all right, title and interest of [Autorics, Inc.] [Autorics II] under the Receivables Purchase Agreement, including, without limitation, the right of [Autorics, Inc.] [Autorics II] to cause NAL to purchase Receivables under certain circumstances; E-1 (8) the Trust Accounts; and (9) the proceeds of any and all of the foregoing. [NAL] [AUTORICS, INC.] [AUTORICS II, INC.] By: ________________________________ Name: Title: E-2 EX-10.40 6 INDENTURE EXECUTION COPY ================================================================================ INDENTURE between NAL AUTO TRUST 1996-4, as Issuer and BANKERS TRUST COMPANY, as Indenture Trustee Dated as of December 9, 1996 ================================================================================ TABLE OF CONTENTS
Page ARTICLE I Definitions and Incorporation by Reference SECTION 1.01. Definitions............................................................................. 2 SECTION 1.02. Rules of Construction................................................................... 9 ARTICLE II The Notes SECTION 2.01. Form.................................................................................... 9 SECTION 2.02. Execution, Authentication and Delivery.................................................. 9 SECTION 2.03. Temporary Notes......................................................................... 10 SECTION 2.04. Limitations on Transfer of the Notes.................................................... 10 SECTION 2.05. Registration; Registration of Transfer and Exchange.............................................................. 13 SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Notes..................................................................... 15 SECTION 2.07. Persons Deemed Owner.................................................................... 16 SECTION 2.08. Payment of Principal and Interest; Defaulted Interest........................................................ 16 SECTION 2.09. Cancellation............................................................................ 17 SECTION 2.10. Tax Treatment........................................................................... 18 ARTICLE III Covenants SECTION 3.01. Payment of Principal and Interest....................................................... 18 SECTION 3.02. Maintenance of Office or Agency......................................................... 18 SECTION 3.03. Money for Payments To Be Held in Trust.................................................. 19 SECTION 3.04. Existence............................................................................... 20 SECTION 3.05. Protection of Trust Estate.............................................................. 21 SECTION 3.06. Opinions as to Trust Estate............................................................. 21 SECTION 3.07. Performance of Obligations; Servicing of Receivables............................................................... 22 SECTION 3.08. Negative Covenants...................................................................... 24 SECTION 3.09. Annual Statement as to Compliance....................................................... 24 SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms............................................................. 25 SECTION 3.11. Successor or Transferee................................................................. 26 SECTION 3.12. No Other Business....................................................................... 27 SECTION 3.13. No Borrowing............................................................................ 27 SECTION 3.14. Servicer's Obligations.................................................................. 27 SECTION 3.15. Guarantees, Loans, Advances and Other Liabilities............................................................... 27 SECTION 3.16. Capital Expenditures.................................................................... 27 SECTION 3.17. Removal of Administrator................................................................ 27 SECTION 3.18. Restricted Payments..................................................................... 27 SECTION 3.19. Notice of Events of Default............................................................. 28 SECTION 3.20. Further Instruments and Acts............................................................ 28
i ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture................................................. 28 SECTION 4.02. Application of Trust Money.............................................................. 29 SECTION 4.03. Repayment of Moneys Held by Paying Agent..................................................................... 29 ARTICLE V Remedies SECTION 5.01. Events of Default....................................................................... 30 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment................................................................. 31 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Indenture Trustee.......................................... 32 SECTION 5.04. Remedies; Priorities.................................................................... 34 SECTION 5.05. Optional Preservation of the Receivables............................................................... 35 SECTION 5.06. Limitation of Suits..................................................................... 36 SECTION 5.07. Unconditional Rights of Noteholders To Receive Principal and Interest............................................ 36 SECTION 5.08. Restoration of Rights and Remedies...................................................... 37 SECTION 5.09. Rights and Remedies Cumulative.......................................................... 37 SECTION 5.10. Delay or Omission Not a Waiver.......................................................... 37 SECTION 5.11. Control by Noteholders.................................................................. 37 SECTION 5.12. Waiver of Past Defaults................................................................. 38 SECTION 5.13. Undertaking for Costs................................................................... 38 SECTION 5.14. Waiver of Stay or Extension Laws........................................................ 39 SECTION 5.15. Action on Notes......................................................................... 39 SECTION 5.16. Performance and Enforcement of Certain Obligations............................................................... 39 ARTICLE VI The Indenture Trustee SECTION 6.01. Duties of Indenture Trustee............................................................. 40 SECTION 6.02. Rights of Indenture Trustee............................................................. 41 SECTION 6.03. Individual Rights of Indenture Trustee.................................................. 42 SECTION 6.04. Indenture Trustee's Disclaimer.......................................................... 42 SECTION 6.05. Notice of Defaults...................................................................... 42 SECTION 6.06. Reports by Indenture Trustee to Holders................................................. 42 SECTION 6.07. Compensation and Indemnity.............................................................. 43 SECTION 6.08. Replacement of Indenture Trustee........................................................ 43 SECTION 6.09. Successor Indenture Trustee by Merger................................................... 44 SECTION 6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee................................................ 45 SECTION 6.11. Eligibility; Disqualification........................................................... 46
ii ARTICLE VII Noteholders' Lists and Reports SECTION 7.01. Issuer To Furnish Indenture Trustee Names and Addresses of Noteholders........................................ 47 SECTION 7.02. Preservation of Information; Communications to Noteholders............................................. 47 ARTICLE VIII Accounts, Disbursements and Releases SECTION 8.01. Collection of Money..................................................................... 47 SECTION 8.02. Trust Accounts.......................................................................... 48 SECTION 8.03. General Provisions Regarding Accounts................................................... 48 SECTION 8.04. Release of Trust Estate................................................................. 49 SECTION 8.05. Opinion of Counsel...................................................................... 49 ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Noteholders.............................................................50 SECTION 9.02. Supplemental Indentures with Consent of Noteholders............................................................... 51 SECTION 9.03. Execution of Supplemental Indentures.................................................... 53 SECTION 9.04. Effect of Supplemental Indenture........................................................ 53 SECTION 9.05. Reference in Notes to Supplemental Indentures................................................................ 53 ARTICLE X Redemption of Notes SECTION 10.01. Redemption............................................................................. 54 SECTION 10.02. Form of Redemption Notice.............................................................. 54 SECTION 10.03. Notes Payable on Redemption Date....................................................... 55 ARTICLE XI Miscellaneous SECTION 11.01. Compliance Certificates and Opinions, etc...................................................................... 55 SECTION 11.02. Form of Documents Delivered to Indenture Trustee........................................................ 56 SECTION 11.03. Acts of Noteholders.................................................................... 56 SECTION 11.04. Notices, etc., to Indenture Trustee, Issuer and Rating Agencies............................................... 57 SECTION 11.05. Notices to Noteholders; Waiver......................................................... 58 SECTION 11.06. Alternate Payment and Notice Provisions............................................................... 58 SECTION 11.07. [Reserved]............................................................................. 59
iii SECTION 11.08. Effect of Headings and Table of Contents................................................................. 59 SECTION 11.09. Successors and Assigns................................................................. 59 SECTION 11.10. Separability........................................................................... 59 SECTION 11.11. Benefits of Indenture.................................................................. 59 SECTION 11.12. Legal Holidays......................................................................... 59 SECTION 11.13. Governing Law.......................................................................... 59 SECTION 11.14. Counterparts........................................................................... 59 SECTION 11.15. Recording of Indenture................................................................. 59 SECTION 11.16. Trust Obligation....................................................................... 60 SECTION 11.17. No Petition............................................................................ 60 SECTION 11.18. Inspection............................................................................. 60
SCHEDULE I Schedule of Receivables EXHIBIT A Form of Note EXHIBIT B [Reserved] EXHIBIT C Form of Transferor Certificate EXHIBIT D Form of Investment Letter EXHIBIT E Form of Depository Agreement iv INDENTURE dated as of December 9, 1996, between NAL AUTO TRUST 1996-4, a Delaware business trust (the "Issuer"), and BANKERS TRUST COMPANY, a New York banking corporation, solely as trustee and not in its individual capacity (the "Indenture Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Issuer's 6.90% Asset Backed Notes (the "Notes"): GRANTING CLAUSE The Issuer hereby Grants to the Indenture Trustee at the Closing Date, as Indenture Trustee for the benefit of the Holders of the Notes, all of the Issuer's right, title and interest in and to (but none of the obligations with respect to) (a) the Receivables and all moneys received thereon on and after the Cutoff Date plus all Payaheads as of the Cutoff Date; (b) the security interests in the Financed Vehicles granted by Obligors pursuant to the Receivables, any other right to realize upon property securing a Receivable, and any other interest of the Issuer in such Financed Vehicles including the Issuer's right, title and interest in the lien on the Financed Vehicles held in the name of the Depositor's agents, Autorics, Inc., NAL or SFI; (c) any proceeds with respect to the Receivables from claims on any Insurance Policies relating to Financed Vehicles or Obligors; (d) proceeds of any recourse (but none of the obligations) to Dealers on Receivables; (e) any Financed Vehicle that shall have secured a Receivable and that shall have been acquired by or on behalf of the Seller, the Depositor, the Servicer, or the Issuer; (f) the Receivables Files; (g) the Trust Accounts; (h) the Sale and Servicing Agreement and the Receivables Purchase Agreement, including the right of the Issuer to cause NAL to purchase Receivables under certain circumstances; and (i) all present and future claims, demands, causes of action and choses in action in respect of any or all of the foregoing, and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all of the foregoing, including all proceeds of the conversion thereof, voluntary or involuntary, into cash or other liquid property, all cash proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance proceeds, condemnation awards, rights to payment of any and every kind, and other forms of obligations, and receivables, instruments and other property that at any time constitute all or part of, or are included in the proceeds of, any of the foregoing (collectively, the "Collateral"). The foregoing Grant is made in trust to secure the payment of principal of and interest on, and any other amounts owing in respect of, the Notes, equally and ratably without prejudice, priority or distinction, and to secure compliance with the provisions of this Indenture, all as provided in this Indenture. The Indenture Trustee, as Indenture Trustee on behalf of the Holders of the Notes, acknowledges such Grant, accepts the trusts under this Indenture in accordance with the provisions of this Indenture and agrees to perform its duties required in this Indenture to the best of its ability to the end that the interests of the Holders of the Notes may be adequately and effectively protected. ARTICLE I Definitions and Incorporation by Reference SECTION 1.01. Definitions. (a) Except as otherwise specified herein or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of this Indenture. "Act" has the meaning specified in Section 11.03(a). "Account Agreement" means the Account Agreement, dated December 16, 1996 by and between SunTrust Bank, South Florida, National Association and Servicer, with the Issuer and the Indenture Trustee as third party beneficiaries. "Administration Agreement" means the Administration Agreement dated as of December 9, 1996, among the Administrator, the Issuer and the Indenture Trustee. "Administrator" means NAL Acceptance Corporation, a Florida corporation, or any successor Administrator under the Administration Agreement. "Affiliate" means, with respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authorized Officer" means, with respect to the Issuer, any officer of the Owner Trustee who is authorized to act for the Owner Trustee in matters relating to the Issuer and who is identified on the list of Authorized Officers delivered by the Owner Trustee to the Indenture Trustee on the Closing Date (as such list may be modified or supplemented from time to time thereafter) and, so long as the Administration Agreement is in effect, any Vice President or more senior officer of the Administrator who is authorized to act for the Administrator in matters relating to the Issuer and to be acted upon by the Administrator pursuant to the Administration Agreement and who is identified on the list of Authorized Officers delivered by the Administrator to the Indenture Trustee on the Closing Date (as such list may be modified or supplemented from time to time thereafter). 2 "AUTORICS II" means AUTORICS II, Inc., a Delaware corporation, and any successor in interest. "Basic Documents" means the Certificate of Trust, the Trust Agreement, the Sale and Servicing Agreement, the Receivables Purchase Agreement, the Administration Agreement, and other documents and certificates delivered in connection therewith. "Book-Entry Note" means the Note that (i) evidences all or part of the Notes, (ii) the beneficial ownership of which is evidenced by book entries on the ledger or accounts of the Depository where such Note is held and (iii) bears the legend set forth in Exhibit A. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in the cities of New York, New York, Wilmington, Delaware or Ft. Lauderdale, Florida are authorized or obligated by law, regulation or executive order to remain closed. "Certificate of Trust" means the certificate of trust of the Issuer substantially in the form of Exhibit B to the Trust Agreement. "Clearing Agency" means an organization registered as a "clearing agency" pursuant to Section 17A of the Exchange Act. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means December 18, 1996. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and Treasury Regulations promulgated thereunder. "Collateral" has the meaning specified in the Granting Clause of this Indenture. "Corporate Trust Office" means the principal office of the Indenture Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Agreement is located at Four Albany Street, New York, New York 10006; Attention: Corporate Trust and Agency Group, Structured Finance Team, or at such other address as the Indenture Trustee may designate from time to time by notice to the Noteholders and the Issuer, or the principal corporate trust office of any successor Indenture Trustee at the address designated by such successor Indenture Trustee by notice to the Noteholders and the Issuer. "Default" means any occurrence that is, or with notice or the lapse of time or both would become, an Event of Default. 3 "Depositor" means AUTORICS II, Inc., a Delaware corporation, and any successor in interest. "Depository Agreement" means the agreement dated December 16, 1996, among the Issuer, the Trustee, and The Depository Trust Company, as the initial Clearing Agency, substantially in the form of Exhibit E. "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Executive Officer" means, with respect to any corporation, the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President, Executive Vice President, any Vice President, the Secretary, or the Treasurer of such corporation; and with respect to any partnership, any general partner thereof. "Grant" means mortgage, pledge, bargain, sell, warrant, alienate, remise, release, convey, assign, transfer, create, and grant a lien upon and a security interest in and a right of set- off against, deposit, set over, and confirm pursuant to this Indenture. A Grant of the Collateral or of any other agreement or instrument shall include all rights, powers and options (but none of the obligations) of the granting party thereunder, including the immediate and continuing right to claim for, collect, receive and give receipt for principal and interest payments in respect of the Collateral and all other moneys payable thereunder, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring Proceedings in the name of the granting party or otherwise, and generally to do and receive anything that the granting party is or may be entitled to do or receive thereunder or with respect thereto. "Holder" or "Noteholder" means the Person in whose name a Note is registered on the Note Register. "Indenture Trustee" means Bankers Trust Company, a New York banking corporation, solely as trustee under this Indenture and not in its individual capacity, or any successor Indenture Trustee under this Indenture. "Independent" means, when used with respect to any specified Person, that the Person (a) is in fact independent of the Issuer, any other obligor on the Notes, the Depositor and any Affiliate of any of the foregoing Persons, (b) does not have any direct financial interest or any material indirect financial interest in the Issuer, any such other obligor, the Depositor or any Affiliate of any of the foregoing Persons and (c) is not connected with the Issuer, any such other obligor, the Depositor or any Affiliate of any of the foregoing Persons as an officer, employee, promoter, underwriter, trustee, partner, director, or person performing similar functions. 4 "Independent Certificate" means a certificate or opinion to be delivered to the Indenture Trustee under the circumstances described in, and otherwise complying with, the applicable requirements of Section 11.01, made by an Independent appraiser or other expert appointed by an Issuer Order and approved by the Indenture Trustee in the exercise of reasonable care, and such opinion or certificate shall state that the signer has read the definition of "Independent" in this Indenture and that the signer is Independent within the meaning thereof. "Issuer" means NAL Auto Trust 1996-4 until a successor replaces it and, thereafter, means the successor and, for purposes of any provision contained herein, each other obligor on the Notes. "Issuer Order" or "Issuer Request" means a written order or request signed in the name of the Issuer by any one of its Authorized Officers and delivered to the Indenture Trustee. "NAL" means NAL Acceptance Corporation, a Florida corporation, and any successor in interest. "Note Owner" means, with respect to any Note held in book- entry form, the Person who is the beneficial owner of such Note, as reflected on the books of the Clearing Agency (directly as a Clearing Agency participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency. "Note Rate" means 6.90% per annum (computed on the basis of a 360-day year consisting of twelve 30-day months). "Note Register" and "Note Registrar" have the respective meanings specified in Section 2.05. "Notes" means the 6.90% Asset Backed Notes, substantially in the form of Exhibit A. "Officer's Certificate" means a certificate signed by any Authorized Officer of the Issuer, under the circumstances described in, and otherwise complying with, the applicable requirements of Section 11.01, and delivered to the Indenture Trustee. Unless otherwise specified, any reference in this Indenture to an Officer's Certificate shall be to an Officer's Certificate of any Authorized Officer of the Issuer. "Opinion of Counsel" means one or more written opinions of counsel who may, except as otherwise expressly provided in this Indenture, be an employee of or counsel to the Issuer and who shall be satisfactory to the Indenture Trustee, which opinion or opinions shall be addressed to the Indenture Trustee as Indenture Trustee, shall comply with any applicable requirements of Section 11.01 and shall be in form and substance satisfactory to the Indenture Trustee. 5 "Outstanding" means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture except: (i) Notes theretofore cancelled by the Note Registrar or delivered to the Note Registrar for cancellation; (ii) Notes or portions thereof the payment for which money in the necessary amount has been theretofore deposited with the Indenture Trustee or any Paying Agent in trust for the Holders of such Notes (provided, however, that if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision for such notice has been made, satisfactory to the Indenture Trustee); and (iii) Notes in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture unless proof satisfactory to the Indenture Trustee is presented that any such Notes are held by a bona fide purchaser; provided, that in determining whether the Holders of the requisite Outstanding Amount of the Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder or under any Basic Document, Notes owned by the Issuer, any other obligor upon the Notes, the Depositor or any Affiliate of any of the foregoing Persons shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Indenture Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, or waiver, only Notes that a Responsible Officer of the Indenture Trustee actually knows to be so owned shall be so disregarded. Notes so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Indenture Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Issuer, any other obligor upon the Notes, the Depositor or any Affiliate of any of the foregoing Persons. "Outstanding Amount" means the aggregate principal amount of all Notes Outstanding at the date of determination. "Owner Trustee" means Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Trust Agreement, or any successor Owner Trustee under the Trust Agreement. "Paying Agent" means the Indenture Trustee or any other Person that meets the eligibility standards for the Indenture Trustee specified in Section 6.11 and is authorized by the Issuer to make payments to and distributions from the Collection Account and the Note Distribution Account, including payments of principal of or interest on the Notes on behalf of the Issuer. 6 "Payment Date" means a Distribution Date. "Person" means any individual, corporation, estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization, or government or any agency or political subdivision thereof. "Predecessor Note" means, with respect to any particular Note, every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purpose of this definition, any Note authenticated and delivered under Section 2.06 in lieu of a mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Proceeding" means any suit in equity, action at law or other judicial or administrative proceeding. "Rating Agency Condition" means, with respect to any action, that the Rating Agency shall have been given 10 days (or such shorter period as is acceptable to the Rating Agency) prior notice thereof and that the Rating Agency shall have notified the Depositor, the Servicer and the Issuer in writing that such action will not result in a reduction or withdrawal of the then current rating of the Notes. "Receivables Purchase Agreement" means the Receivables Purchase Agreement dated as of December 9, 1996, among Autorics, Inc., as seller, NAL, and Autorics II, as purchaser. "Record Date" means, with respect to a Distribution Date or Redemption Date, the close of business on the last day of the preceding month. "Redemption Date" means in the case of a redemption of the Notes pursuant to Section 10.01(a) or a payment to Noteholders pursuant to Section 10.01(b), the Distribution Date specified by the Servicer or the Issuer pursuant to Section 10.01(a) or (b), as applicable. "Redemption Price" means in the case of a redemption of the Notes pursuant to Section 10.01(a), an amount equal to the unpaid principal amount of the Notes redeemed plus accrued and unpaid interest thereon to and including the last day of the month preceding the month of such Redemption Date at the Note Rate or (b) in the case of a payment made to Noteholders pursuant to Section 10.01(b), the amount on deposit in the Note Distribution Account, but not in excess of the amount specified in clause (a) above. "Registered Holder" means the Person in whose name a Note is registered on the Note Register on the applicable Record Date. 7 "Responsible Officer" means, with respect to the Indenture Trustee, any officer within the Corporate Trust Office of the Indenture Trustee, including any Vice President, Assistant Vice President, Assistant Treasurer, Assistant Secretary, Managing Director or any other officer of the Indenture Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. "Sale and Servicing Agreement" means the Sale and Servicing Agreement dated as of December 9, 1996, among the Issuer, AUTORICS II, the Back-up Servicer and NAL. "Schedule of Receivables" means the list of the Receivables set forth in Schedule I (which Schedule may be in the form of microfiche). "Securities Act" means the Securities Act of 1933, as amended. "Seller" means AUTORICS, Inc., in its capacity as seller under the Receivables Purchase Agreement, and its successor in interest. "Servicer" means NAL in its capacity as servicer under the Sale and Servicing Agreement, and any Successor Servicer thereunder. "State" means any one of the 50 States of the United States of America or the District of Columbia. "Successor Servicer" has the meaning specified in Section 3.07(e). "TIA" means the Trust Indenture Act of 1939, as amended. "Trust Estate" means all money, instruments, chattel paper, general intangibles, rights and other property that are subject or intended to be subject to the lien and security interest of this Indenture for the benefit of the Noteholders (including, without limitation, all property and interests Granted to the Indenture Trustee), including all proceeds thereof. "UCC" means, unless the context otherwise requires, the Uniform Commercial Code, as in effect in the relevant jurisdiction, as amended from time to time. (b) Except as otherwise specified herein or as the context may otherwise require, capitalized terms used but not otherwise defined herein have the respective meanings set forth in the Sale and Servicing Agreement for all purposes of this Indenture. 8 SECTION 1.02. Rules of Construction. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as in effect from time to time; (iii) "or" is not exclusive; (iv) "including" means including without limitation; (v) words in the singular include the plural and words in the plural include the singular; and (vi) any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. ARTICLE II The Notes SECTION 2.01. Form. The Notes, together with the Indenture Trustee's certificate of authentication, shall be in substantially the form set forth in Exhibit A, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may, consistently herewith, be determined by the officers executing such Notes, as evidenced by their execution of the Notes. Any portion of the text of any Note may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Note. Each Note shall be dated the date of its authentication. The terms of the Notes set forth in Exhibit A are part of the terms of this Indenture. SECTION 2.02. Execution, Authentication and Delivery. The Notes shall be executed on behalf of the Issuer by any of its Authorized Officers. The signature of any such Authorized Officer on the Notes may be manual or facsimile. Notes bearing the manual or facsimile signature of individuals who were at any time Authorized Officers of the Issuer shall bind the Issuer, notwithstanding that such 9 individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes. The Indenture Trustee shall upon its receipt of an Issuer Order authenticate and deliver Notes for original issue in an aggregate principal amount of $79,239,000.00. Each Note shall be dated the date of its authentication. The Notes shall be issuable as registered Notes in the minimum denomination of $100,000 and in integral multiples of $1,000 in excess thereof. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Note a certificate of authentication substantially in the form provided for herein executed by the Indenture Trustee by the manual signature of one of its authorized signatories, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. SECTION 2.03. Temporary Notes. Pending the preparation of definitive Notes, the Issuer may execute, and upon receipt of an Issuer Order the Indenture Trustee shall authenticate and deliver, temporary Notes that are printed, lithographed, typewritten, mimeographed, or otherwise produced, of the tenor of the definitive Notes in lieu of which they are issued and with such variations not inconsistent with the terms of this Indenture as the officers executing such Notes may determine, as evidenced by their execution of such Notes. If temporary Notes are issued, the Issuer shall cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Issuer to be maintained as provided in Section 3.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Issuer shall execute, and the Indenture Trustee shall authenticate and deliver in exchange therefor, a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.04. Limitations on Transfer of the Notes. The Notes have not been and will not be registered under the Securities Act and will not be listed on any exchange. No transfer of a Note shall be made unless such transfer is made pursuant to an effective registration statement under the Securities Act and any applicable state securities laws or is exempt from the registration requirements under said Act and such state securities laws. In the event that a transfer is to be made in reliance upon an exemption from the Securities Act and state securities laws, in order to assure compliance with the 10 Securities Act and such laws, the Holder desiring to effect such transfer and such Holder's prospective transferee shall each certify to the Indenture Trustee and the Issuer in writing the facts surrounding the transfer in substantially the forms set forth in Exhibit C (the "Transferor Certificate") and Exhibit D (the "Investment Letter"). Except in the case of a transfer as to which the proposed transferee has confirmed that it is a "qualified institutional buyer" as provided in Section 2(b) of the Investment Letter, there shall also be delivered to the Indenture Trustee an opinion of counsel that such transfer may be made pursuant to an exemption from the Securities Act and state securities laws, which opinion of counsel shall not be an expense of the Trust, the Owner Trustee or the Indenture Trustee (unless it is the transferee from whom such opinion is to be obtained) or of the Depositor or NAL; provided that such opinion of counsel in respect of the applicable state securities laws may be a memorandum of law rather than an opinion if such counsel is not licensed in the applicable jurisdiction. The Depositor shall cause the Servicer to provide to any Holder of a Note and any prospective transferee designated by any such Holder information regarding the Notes and the Receivables and such other information as shall be necessary to satisfy the condition to eligibility set forth in Rule 144A(d)(4) for transfer of any such Note without registration thereof under the Securities Act pursuant to the registration exemption provided by Rule 144A. Each Holder of a Note desiring to effect such a transfer shall, and does hereby agree to, indemnify the Issuer, the Owner Trustee, the Indenture Trustee and the Depositor against any liability that may result if the transfer is not so exempt or is not made in accordance with federal and state securities laws. If an election is made to hold a Note in book-entry form, the Note shall be registered in the name of a nominee designated by the Clearing Agency (and may be aggregated as to denominations with other Notes held by the Clearing Agency). With respect to Notes held in book-entry form: (i) the Note Registrar and the Trustee will be entitled to deal with the Clearing Agency for all purposes of this Indenture (including the payment of principal of and interest on the Notes and the giving of instructions or directions hereunder) as the sole holder of the Notes, and shall have no obligation to the Note Owners; (ii) to the extent that the provisions of this Section conflict with any other provisions of this Indenture, the provisions of this Section shall control; (iii) the rights of Note Owners will be exercised only through the Clearing Agency and will be limited to those established by law and agreements between such Note Owners and the Clearing Agency and/or the Clearing Agency Participants pursuant to the Depository Agreement; 11 (vi) whenever this Indenture requires or permits actions to be taken based upon instructions or directions of Holders of Notes evidencing a specified percentage of the Outstanding Amount of the Notes, the Clearing Agency will be deemed to represent such percentage only to the extent that it has received instructions to such effect from Note Owners and/or Clearing Agency Participants owning or representing, respectively, such required percentage of the beneficial interest in the Notes and has delivered such instructions to the Trustee; and (iv) without the consent of the Issuer and the Trustee, no such Note may be transferred by the Depository except to a successor Depository that agrees to hold such Note for the account of the Owners or except upon the election of the Owner thereof or a subsequent transferee to hold such Note in physical form. Neither the Trustee nor the Registrar shall have any responsibility to monitor or restrict the transfer of beneficial ownership in any Note an interest in which is transferable through the facilities of the Depository. If (i) the Administrator advises the Indenture Trustee in writing that the Clearing Agency is no longer willing or able to properly discharge its responsibilities with respect to the Notes held in book-entry form and the Administrator is unable to locate a qualified successor, (ii) the Administrator at its option advises the Indenture Trustee in writing that it elects to terminate the book-entry system through the Clearing Agency or (iii) after the occurrence of an Event of Default or a Servicer Default, Note Owners representing beneficial interests aggregating at least a majority of the Outstanding Amount of such Notes advise the Clearing Agency in writing that the continuation of a book-entry system through the Clearing Agency is no longer in the best interests of such Note Owners, then the Clearing Agency shall notify all Note Owners and the Indenture Trustee of the occurrence of any such event and of the availability of definitive Notes to Note Owners requesting the same. Upon surrender to the Indenture Trustee of the typewritten Notes representing the Notes held in book-entry form by the Clearing Agency, accompanied by registration instructions, the Issuer shall execute and the Indenture Trustee shall authenticate the definitive Notes in accordance with the instructions of the Clearing Agency. None of the Issuer, the Note Registrar or the Indenture Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of definitive Notes, the Indenture Trustee shall recognize the Holders of the definitive Notes as Noteholders. The Issuer shall cause each Note to contain a legend stating that transfer of the Notes is subject to certain restrictions and referring prospective purchasers of the Notes to this Section 2.4 with respect to such restrictions. 12 SECTION 2.05. Registration; Registration of Transfer and Exchange. (a) The Issuer shall cause to be kept a register (the "Note Register") in which, subject to such reasonable regulations as it may prescribe and the restrictions on transfers of the Notes set forth herein, the Issuer shall provide for the registration of Notes and the registration of transfers of Notes. The Indenture Trustee initially shall be the "Note Registrar" for the purpose of registering Notes and transfers of Notes as herein provided. Upon any resignation of any Note Registrar, the Issuer shall promptly appoint a successor or, if it elects not to make such an appointment, assume the duties of Note Registrar. If a Person other than the Indenture Trustee is appointed by the Issuer as Note Registrar, the Issuer will give the Indenture Trustee prompt written notice of the appointment of such Note Registrar and of the location, and any change in the location, of the Note Register, and the Indenture Trustee shall have the right to inspect the Note Register at all reasonable times and to obtain copies thereof, and the Indenture Trustee shall have the right to rely upon a certificate executed on behalf of the Note Registrar by an Executive Officer thereof as to the names and addresses of the Holders of the Notes and the principal amounts and number of such Notes. (b) Subject to the limitations on transfer set forth herein, upon surrender for registration of transfer of any Note at the office or agency of the Issuer to be maintained as provided in Section 3.02, if the requirements of Section 8-401(1) of the UCC are met, the Issuer shall execute, and the Indenture Trustee shall authenticate and the Noteholder shall obtain from the Indenture Trustee, in the name of the designated transferee or transferees, one or more new Notes in any authorized denominations, of a like aggregate principal amount. (c) Notes may be exchanged for other Notes in any authorized denominations, of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange, if the requirements of Section 8-401(1) of the UCC are met, the Issuer shall execute, and the Indenture Trustee shall authenticate and the Noteholder shall obtain from the Indenture Trustee, the Notes which the Noteholder making the exchange is entitled to receive. (d) All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. (e) Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed by, or be accompanied by a written instrument of transfer in form satisfactory to the Indenture Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing, with such signature guaranteed by an "eligible guarantor institution" meeting the 13 requirements of the Note Registrar, which requirements include membership or participation in the Securities Transfer Agent's Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Note Registrar in addition to, or in substitution for, STAMP, all in accordance with the Exchange Act. (f) Any and all transfers from a Book-Entry Note to a transferee wishing to take delivery in the form of a definitive Note will require the transferee to take delivery subject to the restrictions on the transfer of such definitive Note described in the legend set forth on the face of the Note substantially in the form of Exhibit A as attached hereto (the "Legend"), and such transferee agrees that it will transfer such a Note only as provided therein and herein. No such transfer shall be made and the Trustee shall not register any such transfer unless such transfer is made in accordance with this Section 2.05. Upon acceptance for exchange or transfer of a beneficial interest in a Book-Entry Note for a definitive Note, as provided herein, the Trustee shall endorse on the schedule affixed to the related Book-Entry Note (or on a continuation of such schedule affixed to the such Book-Entry Note and made a part thereof) an appropriate notation evidencing the date of such exchange or transfer and a decrease in the principal balance of such Book-Entry Note equal to the principal balance of such definitive Note issued in exchange therefor or upon transfer thereof. Unless determined otherwise by the Trustee in accordance with applicable law, a definitive Note issued upon transfer of or exchange for a beneficial interest in the Book-Entry Note shall bear the Legend. (g) If a Holder of a definitive Note wishes at any time to transfer such definitive Note to a Person who wishes to take delivery thereof in the form of a beneficial interest in the Book-Entry Note, such transfer may be effected only in accordance with the applicable procedures of the Depository and this Section 2.05 (g). Upon receipt by the Trustee at the Corporate Trust Office of (1) the definitive Note to be transferred with an assignment and transfer, (2) written instructions given in accordance with the applicable procedures from a participant directing the Trustee to credit or cause to be credited to another specified participant's account a beneficial interest in the Book-Entry Note, in an amount equal to the principal balance of the definitive Note to be so transferred, (3) a written order given in accordance with the applicable procedures containing information regarding the account of the participant to be credited with such beneficial interest, and (4) representations from the transferee to the effect that it is a "qualified institutional buyer" as provided in Section 2(b) of the Investment Letter, the Trustee shall cancel such definitive Note, execute and deliver a new definitive Note for the principal balance of the definitive Note not so transferred, registered in the name of the Holder or the Holder's transferee (as instructed by the Holder), and the Trustee shall instruct the Depository to increase the principal balance of the Book-Entry Note, by the 14 principal balance of the definitive Note to be so transferred, and to credit or cause to be credited to the account of the Person specified in such instructions a corresponding principal balance of the Book-Entry Note. Under no circumstances may an institutional "accredited investor" within Regulation D of the Securities Act take delivery in the form of a beneficial interest in a Book-Entry Note if such purchaser is not a "qualified institutional buyer" as defined under Rule 144A under the Securities Act. (h) An exchange of a beneficial interest in a Book-Entry Note for a definitive Note or Notes, an exchange of a definitive Note or Notes for a beneficial interest in the Book-Entry Note and exchange of a definitive Note or Notes for another definitive Note or Notes (in each case, whether or not such exchange is made in anticipation of subsequent transfer, and in the case of the Book-Entry Note, so long as the Book-Entry Note remains outstanding and is held by or on behalf of the Depository), may be made only in accordance with this Section 2.05 and in accordance with the rules of the Depository. (i) No service charge shall be made to a Holder for any registration of transfer or exchange of Notes, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 2.03 or 9.05 not involving any transfer. (j) The preceding provisions of this Section notwithstanding, the Issuer shall not be required to make, and the Note Registrar need not register, transfers or exchanges of Notes selected for redemption or of any Note for a period of 15 days preceding the due date for any payment with respect to the Note. SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Notes. If (i) any mutilated Note is surrendered to the Indenture Trustee, or the Indenture Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, and (ii) there is delivered to the Indenture Trustee such security or indemnity as may be required by it to hold the Issuer and the Indenture Trustee harmless, then, in the absence of written notice to the Issuer, the Note Registrar or the Indenture Trustee that such Note has been acquired by a bona fide purchaser, and provided that the requirements of Section 8-405 of the UCC are met, the Issuer shall execute, and upon its written request the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a replacement Note; provided, however, that if any such destroyed, lost or stolen Note, but not a mutilated Note, shall have become or within seven days shall be due and payable, or shall have been called for redemption, instead of issuing a replacement Note, the Issuer may pay such destroyed, lost or stolen Note when so due or payable or upon the Redemption Date without surrender thereof. If, after the delivery of such replacement Note or payment of a destroyed, lost or 15 stolen Note pursuant to the proviso to the preceding sentence, a bona fide purchaser of the original Note in lieu of which such replacement Note was issued presents for payment such original Note, the Issuer and the Indenture Trustee shall be entitled to recover such replacement Note (or such payment) from the Person to whom it was delivered or any Person taking such replacement Note from such Person to whom such replacement Note was delivered or any assignee of such Person, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Issuer or the Indenture Trustee in connection therewith. Upon the issuance of any replacement Note under this Section, the Issuer may require the payment by the Holder of such Note of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other reasonable expenses (including the fees and expenses of the Indenture Trustee) connected therewith. Every replacement Note issued pursuant to this Section in replacement of any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Issuer, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 2.07. Persons Deemed Owner. Prior to due presentment for registration of transfer of any Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name any Note is registered (as of the day of determination) as the owner of such Note for the purpose of receiving payments of principal of and interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and none of the Issuer, the Indenture Trustee or any agent of the Issuer or the Indenture Trustee shall be affected by notice to the contrary. SECTION 2.08. Payment of Principal and Interest; Defaulted Interest. (a) The Notes shall accrue interest at the Note Rate, as set forth in Exhibit A, and such interest shall be payable on each Distribution Date as specified therein, subject to Section 3.01. Any installment of interest or principal payable on a Note that is punctually paid or duly provided for by the Issuer on the applicable Distribution Date shall be paid to the 16 Person in whose name such Note (or one or more Predecessor Notes) is registered on the Record Date by check mailed first-class postage prepaid to such Person's address as it appears on the Note Register on such Record Date, except that (i) upon written request of a Noteholder to the Paying Agent not later than the Record Date prior to the related Distribution Date or (ii) if the registered Noteholder is the nominee of the Clearing Agency, payment will be made by wire transfer in immediately available funds to the account designated by such Holder and except for the final installment of principal payable with respect to such Note on a Distribution Date or on the Note Final Scheduled Distribution Date, which shall be payable as provided below. The funds represented by any such checks returned undelivered shall be held in accordance with Section 3.03. (b) The principal of each Note shall be payable in installments on each Distribution Date as provided in the form of the Note set forth in Exhibit A. Notwithstanding the foregoing, the entire unpaid principal amount of the Notes shall be due and payable, if not previously paid, on the date on which an Event of Default shall have occurred and be continuing, if the Indenture Trustee or Holders of the Notes representing not less than a majority of the Outstanding Amount of the Notes have declared the Notes to be immediately due and payable in the manner provided in Section 5.02. All principal payments on the Notes shall be made pro rata to the Noteholders entitled thereto. The Indenture Trustee shall notify the Person in whose name a Note is registered at the close of business on the Record Date preceding the Distribution Date on which the Issuer expects that the final installment of principal of and interest on such Note will be paid. Such notice shall be mailed or transmitted by facsimile prior to such final Distribution Date and shall specify that such final installment will be payable only upon presentation and surrender of such Note and shall specify the place where such Note may be presented and surrendered for payment of such installment. Notices in connection with redemptions of Notes shall be mailed to Noteholders as provided in Section 10.02. (c) If the Issuer defaults in a payment of interest on the Notes, the Issuer shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) at the Note Rate in any lawful manner. The Issuer may pay such defaulted interest to the persons who are Noteholders on a subsequent special record date, which date shall be at least five Business Days prior to the payment date. The Issuer shall fix or cause to be fixed any such special record date and payment date and, at least 15 days before any such special record date, the Issuer shall mail to each Noteholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.09. Cancellation. All Notes surrendered for payment, registration of transfer, exchange or redemption shall, if surrendered to any Person other than the Indenture Trustee, be delivered to the Indenture Trustee and shall be promptly cancelled by the Indenture Trustee. The Issuer may at any time 17 deliver to the Indenture Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly cancelled by the Indenture Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Notes may be held or disposed of by the Indenture Trustee in accordance with its standard retention or disposal policy as in effect at the time unless the Issuer shall direct by an Issuer Order that they be destroyed or returned to it and such Issuer Order is timely and the Notes have not been previously disposed of by the Indenture Trustee. SECTION 2.10. Tax Treatment. The Issuer has entered into this Indenture, and the Notes will be issued, with the intention that, for federal, state and local income, single business and franchise tax purposes, the Notes will qualify as indebtedness of the Issuer secured by the Trust Estate. The Issuer, by entering into this Indenture, and each Noteholder, by its acceptance of a Note (and each Note Owner by its acceptance of a beneficial interest in a Note held in book-entry form), agree to treat the Notes for federal, state and local income, single business and franchise tax purposes as indebtedness of the Issuer. ARTICLE III Covenants SECTION 3.01. Payment of Principal and Interest. The Issuer will duly and punctually pay the principal of and interest, if any, on the Notes in accordance with the terms of the Notes and this Indenture. Without limiting the foregoing, subject to Section 8.02(c), the Issuer will cause to be distributed all amounts on deposit in the Note Distribution Account on a Distribution Date deposited therein pursuant to the Sale and Servicing Agreement for the benefit of the Notes, to the Noteholders. Amounts properly withheld under the Code by any Person from a payment to any Noteholder of interest and/or principal shall be considered as having been paid by the Issuer to such Noteholder for all purposes of this Indenture. SECTION 3.02. Maintenance of Office or Agency. The Issuer will maintain in the Borough of Manhattan, The City of New York, an office or agency where Notes may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served. The Issuer hereby initially appoints the Indenture Trustee to serve as its agent for the foregoing purposes. The Issuer will give prompt written notice to the Indenture Trustee of the location, and of any change in the location, of any such office or agency. If at any time the Issuer shall fail to maintain any such office or agency or shall fail to furnish the Indenture Trustee with the address thereof, such surrenders, notices and demands may be made or served at the 18 Corporate Trust Office, and the Issuer hereby appoints the Indenture Trustee as its agent to receive all such surrenders, notices and demands. SECTION 3.03. Money for Payments To Be Held in Trust. As provided in Section 8.02(a) and (b), all payments of amounts due and payable with respect to any Notes that are to be made from amounts withdrawn from the Collection Account and the Note Distribution Account pursuant to Section 8.02(c) shall be made on behalf of the Issuer by the Indenture Trustee or by another Paying Agent, and no amounts so withdrawn from the Collection Account and the Note Distribution Account for payments of Notes shall be paid over to the Issuer except as provided in this Section. On or before the Business Day preceding each Distribution Date and Redemption Date, the Issuer shall deposit or cause to be deposited in the Note Distribution Account an aggregate sum sufficient to pay the amounts then becoming due under the Notes, such sum to be held in trust for the benefit of the Persons entitled thereto, and (unless the Paying Agent is the Indenture Trustee) shall promptly notify the Indenture Trustee of its action or failure so to act. The Issuer will cause each Paying Agent other than the Indenture Trustee to execute and deliver to the Indenture Trustee an instrument in which such Paying Agent shall agree with the Indenture Trustee (and if the Indenture Trustee acts as Paying Agent, it hereby so agrees), subject to the provisions of this Section, that such Paying Agent will: (i) hold all sums held by it for the payment of amounts due with respect to the Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided and pay such sums to such Persons as herein provided; (ii) give the Indenture Trustee written notice of any default by the Issuer (or any other obligor upon the Notes) of which it has actual knowledge in the making of any payment required to be made with respect to the Notes; (iii) at any time during the continuance of any such default, upon the written request of the Indenture Trustee, forthwith pay to the Indenture Trustee all sums so held in trust by such Paying Agent; (iv) immediately resign as a Paying Agent and forthwith pay to the Indenture Trustee all sums held by it in trust for the payment of Notes if at any time it ceases to meet the standards required to be met by a Paying Agent at the time of its appointment; and (v) comply with all requirements of the Code with respect to the withholding from any payments made by it on 19 any Notes of any applicable withholding taxes imposed thereon and with respect to any applicable reporting requirements in connection therewith. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, by Issuer Order direct any Paying Agent to pay to the Indenture Trustee all sums held in trust by such Paying Agent, such sums to be held by the Indenture Trustee upon the same trusts as those upon which the sums were held by such Paying Agent; and upon such payment by any Paying Agent to the Indenture Trustee, such Paying Agent shall be released from all further liability with respect to such money. Subject to applicable laws with respect to escheat of funds, any money held by the Indenture Trustee or any Paying Agent in trust for the payment of any amount due with respect to any Note and remaining unclaimed for two years after such amount has become due and payable shall be discharged from such trust and be paid to the Issuer on Issuer Request; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Issuer for payment thereof (but only to the extent of the amounts so paid to the Issuer), and all liability of the Indenture Trustee or such Paying Agent with respect to such trust money shall thereupon cease; provided, however, that the Indenture Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense and written direction of the Issuer cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. The Indenture Trustee shall also adopt and employ, at the expense and written direction of the Issuer, any other reasonable means of notification of such repayment (including, but not limited to, mailing notice of such repayment to Holders whose Notes have been called but have not been surrendered for redemption or whose right to or interest in moneys due and payable but not claimed is determinable from the records of the Indenture Trustee or of any Paying Agent, at the last address of record for each such Holder). SECTION 3.04. Existence. The Issuer will keep in full effect its existence, rights and franchises as a business trust under the laws of the State of Delaware (unless it becomes, or any successor Issuer hereunder is or becomes, organized under the laws of any other State or of the United States of America, in which case the Issuer will keep in full effect its existence, rights and franchises under the laws of such other jurisdiction) and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this 20 Indenture, the Notes, the Collateral and each other instrument or agreement included in the Trust Estate. SECTION 3.05. Protection of Trust Estate. The Issuer will from time to time execute and deliver all such supplements and amendments hereto and all such financing statements, continuation statements, instruments of further assurance and other instruments, and will take such other action necessary or advisable to: (i) maintain or preserve the lien and security interest (and the priority thereof) of this Indenture or carry out more effectively the purposes hereof; (ii) perfect, publish notice of or protect the validity of any Grant made or to be made by this Indenture; (iii) enforce any of the Collateral; or (iv) preserve and defend title to the Trust Estate and the rights of the Indenture Trustee and the Noteholders in such Trust Estate against the claims of all persons and parties. The Issuer hereby designates the Indenture Trustee its agent and attorney-in-fact to execute any financing statement, continuation statement or other instrument required to be executed pursuant to this Section 3.05. SECTION 3.06. Opinions as to Trust Estate. (a) On the Closing Date, the Issuer shall furnish to the Indenture Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording and filing of this Indenture, any indentures supplemental hereto, and any other requisite documents, and with respect to the execution and filing of any financing statements and continuation statements, as are necessary to perfect and make effective the lien and security interest of this Indenture and reciting the details of such action, or stating that, in the opinion of such counsel, no such action is necessary to make such lien and security interest effective. (b) On or before December 31, in each calendar year, beginning in 1997, the Issuer shall furnish to the Indenture Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording, filing, re-recording and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and with respect to the execution and filing of any financing statements and continuation statements as is necessary to maintain the lien and security interest created by this Indenture and reciting the details of such action, or stating that in the opinion of such counsel no such action is necessary to maintain such lien and security interest. Such Opinion of Counsel shall also describe the recording, filing, re-recording 21 and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and the execution and filing of any financing statements and continuation statements that will, in the opinion of such counsel, be required to maintain the lien and security interest of this Indenture until December 31 in the following calendar year. SECTION 3.07. Performance of Obligations; Servicing of Receivables. (a) The Issuer will not take any action and will use its best efforts not to permit any action to be taken by others that would release any Person from any of such Person's material covenants or obligations under any instrument or agreement included in the Trust Estate or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any such instrument or agreement, except as expressly provided in this Indenture, the Sale and Servicing Agreement or such other instrument or agreement. (b) The Issuer may contract with other Persons to assist it in performing its duties under this Indenture, and any performance of such duties by a Person identified to the Indenture Trustee in an Officer's Certificate of the Issuer shall be deemed to be action taken by the Issuer. Initially, the Issuer has contracted with the Servicer and the Administrator to assist the Issuer in performing its duties under this Indenture. (c) The Issuer will punctually perform and observe all of its obligations and agreements contained in this Indenture, the Basic Documents and in the instruments and agreements included in the Trust Estate, including but not limited to filing or causing to be filed all UCC financing statements and continuation statements required to be filed by the terms of this Indenture and the Sale and Servicing Agreement in accordance with and within the time periods provided for herein and therein. Except as otherwise expressly provided therein, the Issuer shall not waive, amend, modify, supplement or terminate any Basic Document or any provision thereof without the consent of the Indenture Trustee or the Holders of at least a majority of the Outstanding Amount of the Notes. (d) If the Issuer shall have knowledge of the occurrence of a Servicer Default under the Sale and Servicing Agreement, the Issuer shall promptly notify the Indenture Trustee and the Rating Agencies thereof, and shall specify in such notice the action, if any, the Issuer is taking with respect to such default. If a Servicer Default shall arise from the failure of the Servicer to perform any of its duties or obligations under the Sale and Servicing Agreement with respect to the Receivables, the Issuer shall take all reasonable steps available to it to remedy such failure. (e) In the event of the Servicer's termination under the Sale and Servicing Agreement, the Indenture Trustee shall appoint a successor Servicer, and the successor Servicer shall accept its appointment (including its 22 appointment as Administrator under the Administration Agreement as set forth in Section 8.02(b) of the Sale and Servicing Agreement) by a written assumption in form acceptable to the Owner Trustee and the Indenture Trustee. If the Indenture Trustee appoints the Backup Servicer as successor Servicer in accordance with Sections 7.03 or 8.01 of the Sale and Servicing Agreement (after confirmation from each Rating Agency that such appointment will not result in the withdrawal or downgrade of the then current ratings of the Notes and the Certificates), the Backup Servicer shall be the successor in all respects to the Servicer in its capacity as Servicer under the Sale and Servicing Agreement and the transactions set forth or provided for therein and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions thereof; provided, however, that the Backup Servicer shall not be liable for any acts or omissions of the Servicer occurring prior to such succession or for any breach by the Servicer of any of its representations and warranties contained therein or in any related document or agreement. Notwithstanding the above, if the Backup Servicer is legally unable or unwilling to act as Servicer, the Indenture Trustee will appoint a successor Servicer to act as Servicer. As compensation for acting as successor Servicer, the Backup Servicer shall be entitled to receive the Servicing Fee. In the event that a successor Servicer has not been appointed at the time when the predecessor Servicer has ceased to act as Servicer in accordance with this Section, the Indenture Trustee without further action shall automatically be appointed the successor Servicer and the Indenture Trustee shall be entitled to the Servicing Fee. Notwithstanding the above, the Indenture Trustee shall, if it shall be legally unable or unwilling so to act, appoint or petition a court of competent jurisdiction to appoint any established institution, having a net worth of not less than $50,000,000 and whose regular business shall include the servicing of automotive receivables, as the successor to the Servicer under the Sale and Servicing Agreement. (f) Upon any termination of the Servicer's rights and powers pursuant to the Sale and Servicing Agreement, the Issuer shall promptly notify the Indenture Trustee in writing. As soon as a Successor Servicer is appointed, the Issuer shall notify the Indenture Trustee of such appointment, specifying in such notice the name and address of such Successor Servicer. (g) Without derogating from the absolute nature of the assignment granted to the Indenture Trustee under this Indenture or the rights of the Indenture Trustee hereunder, the Issuer agrees (i) that it will not, without the prior written consent of the Indenture Trustee or the Holders of at least a majority in Outstanding Amount of the Notes, amend, modify, waive, supplement, terminate or surrender, or agree to any amendment, modification, supplement, termination, waiver or surrender of, the terms of any Collateral (except to the extent otherwise provided in the Sale and Servicing Agreement) or the Basic Documents, or waive timely performance or observance by the 23 Servicer or the Depositor under the Sale and Servicing Agreement; and (ii) that any such amendment shall not (A) increase or reduce in any manner the amount of, or accelerate or delay the timing of, distributions that are required to be made for the benefit of the Noteholders or (B) reduce the aforesaid percentage of the Notes that is required to consent to any such amendment, without the consent of the Holders of all the Outstanding Notes. If any such amendment, modification, supplement or waiver shall be so consented to by the Indenture Trustee or such Holders, the Issuer agrees, promptly following a request by the Indenture Trustee to do so, to execute and deliver, in its own name and at its own expense, such agreements, instruments, consents and other documents as the Indenture Trustee may deem necessary or appropriate in the circumstances. SECTION 3.08. Negative Covenants. So long as any Notes are Outstanding, the Issuer shall not: (i) except as expressly permitted by this Indenture or the Sale and Servicing Agreement, sell, transfer, exchange or otherwise dispose of any of the properties or assets of the Issuer, including those included in the Trust Estate, unless directed to do so by the Indenture Trustee; (ii) claim any credit on, or make any deduction from the principal or interest payable in respect of, the Notes (other than amounts properly withheld from such payments under the Code) or assert any claim against any present or former Noteholder by reason of the payment of the taxes levied or assessed upon any part of the Trust Estate; or (iii) (A) permit the validity or effectiveness of this Indenture to be impaired, or permit the lien of this Indenture to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations with respect to the Notes under this Indenture except as may be expressly permitted hereby, (B) permit any lien, charge, excise, claim, security interest, mortgage or other encumbrance (other than the lien of this Indenture) to be created on or extend to or otherwise arise upon or burden the Trust Estate or any part thereof or any interest therein or the proceeds thereof (other than tax liens, mechanics' liens and other liens that arise by operation of law, in each case on any of the Financed Vehicles and arising solely as a result of an action or omission of the related Obligor) or (C) permit the lien of this Indenture not to constitute a valid first priority (other than with respect to any such tax, mechanics' or other lien) security interest in the Trust Estate. SECTION 3.09. Annual Statement as to Compliance. The Issuer will deliver to the Indenture Trustee, within 120 days after the end of each fiscal year of the Issuer (commencing with the fiscal 24 year 1996), an Officer's Certificate stating, as to the Authorized Officer signing such Officer's Certificate, that: (i) a review of the activities of the Issuer during such year and of its performance under this Indenture has been made under such Authorized Officer's supervision; and (ii) to the best of such Authorized Officer's knowledge, based on such review, the Issuer has complied with all conditions and covenants under this Indenture throughout such year, or, if there has been a default in its compliance with any such condition or covenant, specifying each such default known to such Authorized Officer and the nature and status thereof. SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms. (a) The Issuer shall not consolidate or merge with or into any other Person, unless: (i) the Person (if other than the Issuer) formed by or surviving such consolidation or merger shall be a Person organized and existing under the laws of the United States of America or any State and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Indenture Trustee, in form satisfactory to the Indenture Trustee, the due and punctual payment of the principal of and interest on all Notes and the performance or observance of every agreement and covenant of this Indenture on the part of the Issuer to be performed or observed, all as provided herein; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction; (iv) the Issuer shall have received an Opinion of Counsel (and shall have delivered copies thereof to the Indenture Trustee) to the effect that such transaction will not have any material adverse tax consequence to the Issuer, any Noteholder or any Certificateholder; (v) any action that is necessary to maintain the lien and security interest created by this Indenture shall have been taken; and (vi) the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate and an Opinion of Counsel each stating that such consolidation or merger and such supplemental indenture comply with this Article III and that all conditions precedent herein provided for relating to such transaction have been complied with (including any filing required by the Exchange Act). 25 (b) The Issuer shall not convey or transfer any of its properties or assets, including those included in the Trust Estate, to any Person, unless: (i) the Person that acquires by conveyance or transfer the properties and assets of the Issuer the conveyance or transfer of which is hereby restricted (A) shall be a United States citizen or a Person organized and existing under the laws of the United States of America or any State, (B) expressly assumes, by an indenture supplemental hereto, executed and delivered to the Indenture Trustee, in form satisfactory to the Indenture Trustee, the due and punctual payment of the principal of and interest on all Notes and the performance or observance of every agreement and covenant of this Indenture on the part of the Issuer to be performed or observed, all as provided herein, (C) expressly agrees by means of such supplemental indenture that all right, title and interest so conveyed or transferred shall be subject and subordinate to the rights of Holders of the Notes, and (D) unless otherwise provided in such supplemental indenture, expressly agrees to indemnify, defend and hold harmless the Issuer against and from any loss, liability or expense arising under or related to this Indenture and the Notes; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction; (iv) the Issuer shall have received an Opinion of Counsel (and shall have delivered copies thereof to the Indenture Trustee) to the effect that such transaction will not have any material adverse tax consequence to the Issuer, any Noteholder or any Certificateholder; (v) any action that is necessary to maintain the lien and security interest created by this Indenture shall have been taken; and (vi) the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate and an Opinion of Counsel each stating that such conveyance or transfer and such supplemental indenture comply with this Article III and that all conditions precedent herein provided for relating to such transaction have been complied with (including any filing required by the Exchange Act). SECTION 3.11. Successor or Transferee. (a) Upon any consolidation or merger of the Issuer in accordance with Section 3.10(a), the Person formed by or surviving such consolidation or merger (if other than the Issuer) shall succeed to, and be substituted for, and may exercise every right and 26 power of, the Issuer under this Indenture with the same effect as if such Person had been named as the Issuer herein. (b) Upon a conveyance or transfer of all the assets and properties of the Issuer pursuant to Section 3.10(b), NAL Auto Trust 1996-4 will be released from every covenant and agreement of this Indenture to be observed or performed on the part of the Issuer with respect to the Notes immediately upon the delivery of written notice to the Indenture Trustee stating that NAL Auto Trust 1996-4 is to be so released. SECTION 3.12. No Other Business. The Issuer shall not engage in any business other than financing, purchasing, owning, selling and managing the Receivables in the manner contemplated by this Indenture and the Basic Documents and activities incidental thereto. SECTION 3.13. No Borrowing. The Issuer shall not issue, incur, assume, guarantee or otherwise become liable, directly or indirectly, for any indebtedness except for the Notes. SECTION 3.14. Servicer's Obligations. The Issuer shall cause the Servicer to comply with Sections 4.09, 4.10, 4.11 and Article IX of the Sale and Servicing Agreement. SECTION 3.15. Guarantees, Loans, Advances and Other Liabilities. Except as contemplated by the Sale and Servicing Agreement or this Indenture, the Issuer shall not make any loan or advance or credit to, or guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance on any obligation or capability of so doing or otherwise), endorse or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stocks or dividends of, or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations, assets or securities of, or any other interest in, or make any capital contribution to, any other Person. SECTION 3.16. Capital Expenditures. The Issuer shall not make any expenditure (by long-term or operating lease or otherwise) for capital assets (either realty or personalty). SECTION 3.17. Removal of Administrator. So long as any Notes are Outstanding, the Issuer shall not remove the Administrator without cause unless the Rating Agency Condition shall have been satisfied in connection with such removal. SECTION 3.18. Restricted Payments. The Issuer shall not, directly or indirectly, (i) pay any dividend or make any distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, to the Owner Trustee or any owner of a beneficial interest in the Issuer or otherwise with respect to any ownership or equity interest or security in or of the Issuer or to the Servicer, (ii) redeem, purchase, retire or otherwise acquire for value any such 27 ownership or equity interest or security or (iii) set aside or otherwise segregate any amounts for any such purpose; provided, however, that the Issuer may make, or cause to be made, (x) distributions to the Servicer, the Owner Trustee and the Certificateholders as contemplated by, and to the extent funds are available for such purpose under, the Sale and Servicing Agreement or the Trust Agreement and (y) payments to the Indenture Trustee pursuant to Section 1(a)(ii) of the Administration Agreement. The Issuer will not, directly or indirectly, make payments to or distributions from the Collection Account except in accordance with this Indenture and the Basic Documents. SECTION 3.19. Notice of Events of Default. The Issuer shall give the Indenture Trustee and the Rating Agencies prompt written notice of each Event of Default hereunder and each default on the part of the Servicer of its obligations under the Sale and Servicing Agreement. SECTION 3.20. Further Instruments and Acts. Upon request of the Indenture Trustee, the Issuer will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect with respect to the Notes except as to (i) rights of registration of transfer and exchange, (ii) substitution of mutilated, destroyed, lost or stolen Notes, (iii) rights of Noteholders to receive payments of principal thereof and interest thereon, (iv) Sections 3.03, 3.04, 3.05, 3.08, 3.10, 3.12 and 3.13, (v) the rights, obligations and immunities of the Indenture Trustee hereunder (including the rights of the Indenture Trustee under Section 6.07 and the obligations of the Indenture Trustee under Section 4.02) and (vi) the rights of Noteholders as beneficiaries hereof with respect to the property so deposited with the Indenture Trustee payable to all or any of them, and the Indenture Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to the Notes, when (A) either (1) all Notes theretofore authenticated and delivered (other than (i) Notes that have been destroyed, lost or stolen and that have been replaced or paid as provided in Section 2.06 and (ii) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or 28 discharged from such trust, as provided in Section 3.03) have been delivered to the Indenture Trustee for cancellation; or (2) all Notes not theretofore delivered to the Indenture Trustee for cancellation a. have become due and payable, b. are to be called for redemption within one year under arrangements satisfactory to the Indenture Trustee for the giving of notice of redemption by the Indenture Trustee in the name, and at the expense, of the Issuer, and the Issuer, in the case of a. or b. above, has irrevocably deposited or caused to be irrevocably deposited with the Indenture Trustee cash or direct obligations of or obligations guaranteed by the United States of America (which will mature prior to the date such amounts are payable), in trust for such purpose, in an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Indenture Trustee for cancellation when due to the applicable final scheduled Distribution Date or Redemption Date, as the case may be; (B) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; and (C) the Issuer has delivered to the Indenture Trustee an Officer's Certificate, an Opinion of Counsel and (if required by the Indenture Trustee) an Independent Certificate from a firm of certified public accountants, each meeting the applicable requirements of Section 11.01(a) and, subject to Section 11.02, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. SECTION 4.02. Application of Trust Money. All moneys deposited with the Indenture Trustee pursuant to Section 4.01 hereof shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent, as the Indenture Trustee may determine, to the Holders of the particular Notes for the payment or redemption of which such moneys have been deposited with the Indenture Trustee, of all sums due and to become due thereon for principal and interest; but such moneys need not be segregated from other funds except to the extent required herein or in the Sale and Servicing Agreement or required by law. SECTION 4.03. Repayment of Moneys Held by Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to the Notes, all moneys then held by any Paying Agent other than the Indenture Trustee under the provisions of this Indenture with respect to such Notes shall, upon demand of the Issuer, be paid to the Indenture Trustee to be held and 29 applied according to Section 3.03 and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. ARTICLE V Remedies SECTION 5.01. Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) default in the payment of any interest on any Note when the same becomes due and payable, and such default shall continue for a period of five days; or (ii) default in the payment of the principal of or any installment of the principal of any Note when the same becomes due and payable; or (iii) default in the observance or performance of any covenant or agreement of the Issuer made in this Indenture (other than a covenant or agreement, a default in the observance or performance of which is elsewhere in this Section specifically dealt with), or any representation or warranty of the Issuer made in this Indenture or in any certificate or other writing delivered pursuant hereto or in connection herewith proving to have been incorrect in any material respect as of the time when the same shall have been made, and such default shall continue or not be cured, or the circumstance or condition in respect of which such misrepresentation or warranty was incorrect shall not have been eliminated or otherwise cured, for a period of 30 days after there shall have been given, by registered or certified mail, to the Issuer by the Indenture Trustee or to the Issuer and the Indenture Trustee by the Holders of at least 25% of the Outstanding Amount of the Notes, a written notice specifying such default or incorrect representation or warranty and requiring it to be remedied and stating that such notice is a notice of Default hereunder; or (iv) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of the Issuer or any substantial part of the Trust Estate in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or for any substantial part of the Trust Estate, or ordering the winding-up or liquidation of the Issuer's 30 affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (v) the commencement by the Issuer of a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by the Issuer to the entry of an order for relief in an involuntary case under any such law, or the consent by the Issuer to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or for any substantial part of the Trust Estate, or the making by the Issuer of any general assignment for the benefit of creditors, or the failure by the Issuer generally to pay its debts as such debts become due, or the taking of any action by the Issuer in furtherance of any of the foregoing. The Issuer shall deliver to the Indenture Trustee, within five days after the occurrence thereof, written notice in the form of an Officer's Certificate of any event which with the giving of notice and the lapse of time would become an Event of Default under clause (iii), its status and what action the Issuer is taking or proposes to take with respect thereto. SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of Default should occur and be continuing, then and in every such case the Indenture Trustee or the Holders of Notes representing not less than a majority of the Outstanding Amount of the Notes may declare all the Notes to be immediately due and payable, by a notice in writing to the Issuer (and to the Indenture Trustee if given by Noteholders), and upon any such declaration the unpaid principal amount of such Notes, together with accrued and unpaid interest thereon through the date of acceleration, shall become immediately due and payable. At any time after such declaration of acceleration of maturity has been made and before a judgment or decree for payment of the money due has been obtained by the Indenture Trustee as hereinafter in this Article V provided, the Holders of Notes representing a majority of the Outstanding Amount of the Notes, by written notice to the Issuer and the Indenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Issuer has paid or deposited with the Indenture Trustee a sum sufficient to pay: (A) all payments of principal of and interest on all Notes and all other amounts that would then be due hereunder or upon such Notes if the Event of Default giving rise to such acceleration had not occurred; and (B) all sums paid or advanced by the Indenture Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and its agents and counsel; and 31 (ii) all Events of Default, other than the nonpayment of the principal of the Notes that has become due solely by such acceleration, have been cured or waived as provided in Section 5.12. No such rescission shall affect any subsequent default or impair any right consequent thereto. SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Indenture Trustee. (a) The Issuer covenants that if (i) default is made in the payment of any interest on any Note when the same becomes due and payable, and such default continues for a period of five days, or (ii) default is made in the payment of the principal of or any installment of the principal of any Note when the same becomes due and payable, the Issuer will, upon demand of the Indenture Trustee, pay to it, for the benefit of the Holders of the Notes, the whole amount then due and payable on such Notes for principal and interest, with interest on the overdue principal, and, to the extent payment at such rate of interest shall be legally enforceable, on overdue installments of interest, at the rate borne by the Notes and in addition thereto such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and its agents and counsel. (b) In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Indenture Trustee, in its own name and as trustee of an express trust, may institute a Proceeding for the collection of the sums so due and unpaid, and may prosecute such Proceeding to judgment or final decree, and may enforce the same against the Issuer or other obligor upon such Notes and collect in the manner provided by law out of the property of the Issuer or other obligor upon such Notes, wherever situated, the moneys adjudged or decreed to be payable. (c) If an Event of Default occurs and is continuing, the Indenture Trustee may, as more particularly provided in Section 5.04, in its discretion, proceed to protect and enforce its rights and the rights of the Noteholders, by such appropriate Proceedings as the Indenture Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy or legal or equitable right vested in the Indenture Trustee by this Indenture or by law. (d) In case there shall be pending, relative to the Issuer or any other obligor upon the Notes or any Person having or claiming an ownership interest in the Trust Estate, Proceedings under Title 11 of the United States Code or any other applicable federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, or liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer 32 or its property or such other obligor or Person, or in case of any other comparable judicial Proceedings relative to the Issuer or other obligor upon the Notes, or to the creditors or property of the Issuer or such other obligor, the Indenture Trustee, irrespective of whether the principal of any Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Indenture Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such Proceedings or otherwise: (i) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee (including any claim for reasonable compensation to the Indenture Trustee and each predecessor Indenture Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Indenture Trustee and each predecessor Indenture Trustee, except as a result of negligence or bad faith) and of the Noteholders allowed in such Proceedings; (ii) unless prohibited by applicable law and regulations, to vote on behalf of the Holders of Notes in any election of a trustee, a standby trustee or Person performing similar functions in any such Proceedings; (iii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute all amounts received with respect to the claims of the Noteholders and of the Indenture Trustee on their behalf; and (iv) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee or the Holders of Notes allowed in any Proceedings relative to the Issuer, its creditors and its property; and any trustee, receiver, liquidator, custodian or other similar official in any such Proceeding is hereby authorized by each of such Noteholders to make payments to the Indenture Trustee and, in the event that the Indenture Trustee shall consent to the making of payments directly to such Noteholders, to pay to the Indenture Trustee such amounts as shall be sufficient to cover reasonable compensation to the Indenture Trustee, each predecessor Indenture Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Indenture Trustee and each predecessor Indenture Trustee except as a result of negligence or bad faith. (e) Nothing herein contained shall be deemed to authorize the Indenture Trustee to authorize or consent to or vote for or 33 accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof or to authorize the Indenture Trustee to vote in respect of the claim of any Noteholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar Person. (f) All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Indenture Trustee without the possession of any of the Notes or the production thereof in any trial or other Proceedings relative thereto, and any such action or Proceedings instituted by the Indenture Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Indenture Trustee, each predecessor Indenture Trustee and their respective agents and attorneys, shall be for the ratable benefit of the Holders of the Notes. (g) In any Proceedings brought by the Indenture Trustee (and also any Proceedings involving the interpretation of any provision of this Indenture to which the Indenture Trustee shall be a party), the Indenture Trustee shall be held to represent all the Holders of the Notes, and it shall not be necessary to make any Noteholder a party to any such Proceedings. SECTION 5.04. Remedies; Priorities. (a) If an Event of Default shall have occurred and be continuing, the Indenture Trustee may do one or more of the following (subject to Section 5.05): (i) institute Proceedings in its own name and as trustee of an express trust for the collection of all amounts then payable on the Notes or under this Indenture with respect thereto, whether by declaration or otherwise, enforce any judgment obtained and collect from the Issuer and any other obligor upon such Notes moneys adjudged due; (ii) institute Proceedings from time to time for the complete or partial foreclosure of this Indenture with respect to the Trust Estate; (iii) exercise any remedies of a secured party under the UCC and take any other appropriate action to protect and enforce the rights and remedies of the Indenture Trustee and the Holders of the Notes; and (iv) sell the Trust Estate or any portion thereof or rights or interest therein, at one or more public or private sales called and conducted in any manner permitted by law; provided, however, that the Indenture Trustee may not sell or otherwise liquidate the Trust Estate following an Event of Default, other than an Event of Default described in Section 5.01(i) or (ii), unless (A) the Holders of 100% of the 34 Outstanding Amount of the Notes consent thereto, (B) the proceeds of such sale or liquidation distributable to the Noteholders are sufficient to discharge in full all amounts then due and unpaid upon such Notes for principal and interest or (C) the Indenture Trustee determines that the Trust Estate will not continue to provide sufficient funds for the payment of principal of and interest on the Notes as they would have become due if the Notes had not been declared due and payable, and the Indenture Trustee obtains the consent of Holders of not less than 66-2/3% of the Outstanding Amount of the Notes. In determining such sufficiency or insufficiency with respect to clause (B) and (C), the Indenture Trustee may, but need not, obtain and rely upon an opinion of an Independent investment banking or accounting firm of national reputation as to the feasibility of such proposed action and as to the sufficiency of the Trust Estate for such purpose, which opinion shall be conclusive evidence as to such feasibility or sufficiency. (b) If the Indenture Trustee collects any money or property pursuant to this Article V, it shall pay out the money or property in the following order: FIRST: to the Indenture Trustee for amounts due under Section 6.07; SECOND: to Holders of the Notes for amounts due and unpaid on the Notes for interest (including any premium), ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for interest (including any premium); THIRD: to the Issuer for amounts required to be distributed to the Certificateholders in respect of interest pursuant to the Trust Agreement; FOURTH: to Holders of the Notes for amounts due and unpaid on the Notes for principal, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, until the Outstanding Amount of the Notes is reduced to zero; FIFTH: to the Issuer for amounts required to be distributed to the Certificateholders in respect of principal pursuant to the Trust Agreement. The Indenture Trustee may fix a record date and payment date for any payment to Noteholders pursuant to this Section. At least 15 days before such record date, the Issuer shall mail to each Noteholder and the Indenture Trustee a notice that states the record date, the payment date and the amount to be paid. SECTION 5.05. Optional Preservation of the Receivables. If the Notes have been declared to be due and payable under Section 5.02 following an Event of Default and such declaration and its consequences have not been rescinded and annulled, the Indenture 35 Trustee may, but need not, elect to maintain possession of the Trust Estate. It is the desire of the parties hereto and the Noteholders that there be at all times sufficient funds for the payment of principal of and interest on the Notes, and the Indenture Trustee shall take such desire into account when determining whether or not to maintain possession of the Trust Estate. In determining whether to maintain possession of the Trust Estate, the Indenture Trustee may, but need not, obtain and rely upon an opinion of an Independent investment banking or accounting firm of national reputation as to the feasibility of such proposed action and as to the sufficiency of the Trust Estate for such purpose, which opinion shall be conclusive evidence as to such sufficiency. SECTION 5.06. Limitation of Suits. No Holder of any Note shall have any right to institute any Proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Holder has previously given written notice to the Indenture Trustee of a continuing Event of Default; (ii) the Holders of not less than 25% of the Outstanding Amount of the Notes have made written request to the Indenture Trustee to institute such Proceeding in respect of such Event of Default in its own name as Indenture Trustee hereunder; (iii) such Holder or Holders have offered to the Indenture Trustee indemnity reasonably satisfactory to it against the costs, expenses and liabilities to be incurred in complying with such request; (iv) the Indenture Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute such Proceedings; and (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 60-day period by the Holders of a majority of the Outstanding Amount of the Notes. It is understood and intended that no one or more Holders of Notes shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Notes or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided. In the event the Indenture Trustee shall receive conflicting or inconsistent requests and indemnity from two or more groups of Holders of Notes, each representing less than a majority of the Outstanding Amount of the Notes, the Indenture Trustee in its 36 sole discretion may determine what action, if any, shall be taken, notwithstanding any other provisions of this Indenture. SECTION 5.07. Unconditional Rights of Noteholders To Receive Principal and Interest. Notwithstanding any other provisions in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest, if any, on such Note on or after the respective due dates thereof expressed in such Note or in this Indenture (or, in the case of redemption, on or after the Redemption Date) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. SECTION 5.08. Restoration of Rights and Remedies. If the Indenture Trustee or any Noteholder has instituted any Proceeding to enforce any right or remedy under this Indenture and such Proceeding has been discontinued or abandoned for any reason or has been determined adversely to the Indenture Trustee or to such Noteholder, then and in every such case the Issuer, the Indenture Trustee and the Noteholders shall, subject to any determination in such Proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Indenture Trustee and the Noteholders shall continue as though no such Proceeding had been instituted. SECTION 5.09. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Indenture Trustee or to the Noteholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.10. Delay or Omission Not a Waiver. No delay or omission of the Indenture Trustee or any Holder of any Note to exercise any right or remedy accruing upon any Default or Event of Default shall impair any such right or remedy or constitute a waiver of any such Default or Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Indenture Trustee or to the Noteholders may be exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee or by the Noteholders, as the case may be. SECTION 5.11. Control by Noteholders. The Holders of a majority of the Outstanding Amount of the Notes shall have the right to direct the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee with respect to the Notes or exercising any trust or power conferred on the Indenture Trustee; provided that: 37 (i) such direction shall not be in conflict with any rule of law or with this Indenture; (ii) subject to the express terms of Section 5.04, any direction to the Indenture Trustee to sell or liquidate the Trust Estate shall be by Holders of Notes representing not less than 100% of the Outstanding Amount of the Notes; (iii) if the conditions set forth in Section 5.05 have been satisfied and the Indenture Trustee elects to retain the Trust Estate pursuant to such Section, then any direction to the Indenture Trustee by Holders of Notes representing less than 100% of the Outstanding Amount of the Notes to sell or liquidate the Trust Estate shall be of no force and effect; and (iv) the Indenture Trustee may take any other action deemed proper by the Indenture Trustee that is not inconsistent with such direction. Notwithstanding the rights of Noteholders set forth in this Section, subject to Section 6.01, the Indenture Trustee need not take any action that it determines might involve it in liability or might materially adversely affect the rights of any Noteholders not consenting to such action. SECTION 5.12. Waiver of Past Defaults. Prior to the declaration of the acceleration of the maturity of the Notes as provided in Section 5.02, the Holders of Notes of not less than a majority of the Outstanding Amount of the Notes may waive any past Default or Event of Default and its consequences except a Default (a) in payment of principal of or interest on any of the Notes or (b) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Note. In the case of any such waiver, the Issuer, the Indenture Trustee and the Holders of the Notes shall be restored to their former positions and rights hereunder, respectively, but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereto. Upon any such waiver, such Default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured and not to have occurred, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 5.13. Undertaking for Costs. All parties to this Indenture agree, and each Holder of a Note by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Indenture Trustee for any action taken, suffered or omitted by it as Indenture Trustee, the filing by any party litigant in 38 such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to (a) any suit instituted by the Indenture Trustee, (b) any suit instituted by any Noteholder, or group of Noteholders, in each case holding in the aggregate more than 10% of the Outstanding Amount of the Notes or (c) any suit instituted by any Noteholder for the enforcement of the payment of principal of or interest on any Note on or after the respective due dates expressed in such Note and in this Indenture (or, in the case of redemption, on or after the Redemption Date). SECTION 5.14. Waiver of Stay or Extension Laws. The Issuer covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Indenture Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.15. Action on Notes. The Indenture Trustee's right to seek and recover judgment on the Notes or under this Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to this Indenture. Neither the lien of this Indenture nor any rights or remedies of the Indenture Trustee or the Noteholders shall be impaired by the recovery of any judgment by the Indenture Trustee against the Issuer or by the levy of any execution under such judgment upon any portion of the Trust Estate or upon any of the assets of the Issuer. Any money or property collected by the Indenture Trustee shall be applied in accordance with Section 5.04(b). SECTION 5.16. Performance and Enforcement of Certain Obligations. (a) Promptly following a request from the Indenture Trustee to do so and at the Administrator's expense, the Issuer shall take all such lawful action as the Indenture Trustee may request to compel or secure the performance and observance by the Depositor, the Servicer or NAL, as applicable, of each of their obligations to the Issuer under or in connection with the Sale and Servicing Agreement and the Receivable Purchase Agreement and to exercise any and all rights, remedies, powers and privileges lawfully available to the Issuer under or in connection with the Sale and Servicing Agreement or the Receivables Purchase Agreement to the extent and in the manner directed by the Indenture Trustee, including the transmission of notices of default on the part of the Depositor, the Servicer, or NAL thereunder and the institution of legal or administrative 39 actions or proceedings to compel or secure performance by the Depositor or the Servicer of each of their obligations under the Sale and Servicing Agreement or the Receivables Purchase Agreement. (b) If an Event of Default has occurred and is continuing, the Indenture Trustee may, and at the direction (which direction shall be in writing or by telephone (confirmed in writing promptly thereafter)) of the Holders of not less than 66-2/3% of the Outstanding Amount of the Notes shall, exercise all rights, remedies, powers, privileges and claims of the Issuer against the Depositor or the Servicer under or in connection with the Sale and Servicing Agreement and the Receivables Purchase Agreement including the right or power to take any action to compel or secure performance or observance by the Depositor, the Servicer or NAL, as the case may be, of each of their obligations to the Issuer thereunder and to give any consent, request, notice, direction, approval, extension or waiver under the Sale and Servicing Agreement and the Receivables Purchase Agreement, as the case may be, and any right of the Issuer to take such action shall be suspended. ARTICLE VI The Indenture Trustee SECTION 6.01. Duties of Indenture Trustee. (a) If an Event of Default has occurred and is continuing of which a Responsible Officer of the Indenture Trustee shall have actual knowledge, the Indenture Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Indenture Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Indenture Trustee; and (ii) in the absence of bad faith on its part, the Indenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of this Indenture; however, the Indenture Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Indenture Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: 40 (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Indenture Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; and (iii) the Indenture Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 5.11. (d) Every provision of this Indenture that in any way relates to the Indenture Trustee is subject to paragraphs (a), (b), (c) and (g) of this Section. (e) The Indenture Trustee shall not be liable for interest on any money received by it except as the Indenture Trustee may agree in writing with the Issuer. (f) Money held in trust by the Indenture Trustee need not be segregated from other funds except to the extent required by law or the terms of this Indenture or the Sale and Servicing Agreement. (g) No provision of this Indenture shall require the Indenture Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or indemnity reasonably satisfactory to it against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Indenture Trustee shall be subject to the provisions of this Section. SECTION 6.02. Rights of Indenture Trustee. (a) The Indenture Trustee may conclusively rely, as to the truth of the statements or the correctness of the opinions expressed therein, on any document believed by it to be genuine and to have been signed or presented by the proper person. The Indenture Trustee need not investigate any fact or matter stated in the document. (b) Before the Indenture Trustee acts or refrains from acting, it may require an Officer's Certificate or an Opinion of Counsel. The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on an Officer's Certificate or Opinion of Counsel. (c) The Indenture Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys or a custodian or nominee, 41 and the Indenture Trustee shall not be responsible for any misconduct or negligence on the part of, or for the supervision of, any such agent, attorney, custodian or nominee appointed with due care by it hereunder. (d) The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Indenture Trustee's conduct does not constitute willful misconduct, negligence or bad faith. (e) The Indenture Trustee may consult with counsel, including Issuer's counsel, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Notes shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. SECTION 6.03. Individual Rights of Indenture Trustee. The Indenture Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Indenture Trustee. Any Paying Agent, Note Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Indenture Trustee must comply with Section 6.11. SECTION 6.04. Indenture Trustee's Disclaimer. The Indenture Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Issuer's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Issuer in the Indenture or in any document issued in connection with the sale of the Notes or in the Notes other than the Indenture Trustee's certificate of authentication. SECTION 6.05. Notice of Defaults. If a Default occurs and is continuing and if it is either actually known or written notice of the existence thereof has been delivered to a Responsible Officer of the Indenture Trustee, the Indenture Trustee shall promptly mail to each Noteholder and each Rating Agency notice of the Default. Except in the case of a Default in payment of principal of or interest on any Note (including payments pursuant to the mandatory redemption provisions of such Note), the Indenture Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Noteholders. To the extent that a Responsible Officer has actual knowledge thereof or receives written notice thereof, the Indenture Trustee shall provide each Rating Agency promptly with notice in the event that any Event of Default is cured or waived, including a description of the nature and extent of such Event of Default and the actions taken to cure or waive it. 42 SECTION 6.06. Reports by Indenture Trustee to Holders. The Indenture Trustee shall deliver to each Noteholder such information as may be required to enable such holder to prepare its federal and state income tax returns. SECTION 6.07. Compensation and Indemnity. The Issuer shall, or shall cause the Administrator to, pay to the Indenture Trustee from time to time reasonable compensation for its services. The Indenture Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall, or shall cause the Administrator to, reimburse the Indenture Trustee for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Indenture Trustee's agents, counsel, accountants and experts. The Issuer shall, or shall cause the Administrator to, indemnify the Indenture Trustee against any and all loss, liability or expense (including attorneys' fees and expenses) incurred by it in connection with the administration of this trust and the performance of its duties hereunder and under the Account Agreement. The Indenture Trustee shall notify the Issuer and the Administrator promptly of any claim for which it may seek indemnity. Failure by the Indenture Trustee to so notify the Issuer and the Administrator shall not relieve the Issuer or the Administrator of its obligations hereunder. The Issuer shall, or shall cause the Administrator to, defend any such claim, and the Indenture Trustee may have separate counsel and the Issuer shall, or shall cause the Administrator to, pay the fees and expenses of such counsel. Neither the Issuer nor the Administrator need reimburse any expense or indemnify against any loss, liability or expense incurred by the Indenture Trustee through the Indenture Trustee's own willful misconduct, negligence or bad faith. The Issuer's obligations to the Indenture Trustee pursuant to this Section shall survive the discharge of this Indenture, the maturity of the Notes and the resignation or removal of the Indenture Trustee. When the Indenture Trustee incurs expenses after the occurrence of a Default specified in Section 5.01(iv) or (v) with respect to the Issuer, the expenses are intended to constitute expenses of administration under Title 11 of the United States Code or any other applicable federal or state bankruptcy, insolvency or similar law. SECTION 6.08. Replacement of Indenture Trustee. No resignation or removal of the Indenture Trustee and no appointment of a successor Indenture Trustee shall become effective until the acceptance of appointment by the successor Indenture Trustee pursuant to this Section 6.08. The Indenture Trustee may resign at any time by so notifying the Issuer. The Holders of a majority in Outstanding Amount of the Notes may remove the Indenture Trustee by so notifying the Indenture Trustee and may appoint a successor Indenture Trustee. The Issuer shall remove the Indenture Trustee if: 43 (i) the Indenture Trustee fails to comply with Section 6.11; (ii) the Indenture Trustee is adjudged a bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Indenture Trustee or its property; or (iv) the Indenture Trustee otherwise becomes incapable of acting. If the Indenture Trustee resigns or is removed or if a vacancy exists in the office of Indenture Trustee for any reason (the Indenture Trustee in such event being referred to herein as the retiring Indenture Trustee), the Issuer shall promptly appoint a successor Indenture Trustee. A successor Indenture Trustee shall deliver a written acceptance of its appointment to the retiring Indenture Trustee and to the Issuer. Thereupon the resignation or removal of the retiring Indenture Trustee shall become effective, and the successor Indenture Trustee shall have all the rights, powers and duties of the Indenture Trustee under this Indenture. The successor Indenture Trustee shall mail a notice of its succession to Noteholders. The retiring Indenture Trustee shall promptly transfer all property of the Issuer, including all property in the Trust Estate, held by it as Indenture Trustee to the successor Indenture Trustee. If a successor Indenture Trustee does not take office within 60 days after the retiring Indenture Trustee resigns or is removed, the retiring Indenture Trustee, the Issuer or the Holders of a majority in Outstanding Amount of the Notes may petition any court of competent jurisdiction for the appointment of a successor Indenture Trustee. If the Indenture Trustee fails to comply with Section 6.11, any Noteholder may petition any court of competent jurisdiction for the removal of the Indenture Trustee and the appointment of a successor Indenture Trustee. Notwithstanding the replacement of the Indenture Trustee pursuant to this Section, the Issuer's and the Administrator's obligations under Section 6.07 shall continue for the benefit of the retiring Indenture Trustee. The Indenture Trustee shall not be liable for the acts or omissions of any successor Indenture Trustee. SECTION 6.09. Successor Indenture Trustee by Merger. If the Indenture Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Indenture Trustee; provided, 44 that such corporation or banking association shall be otherwise qualified and eligible under Section 6.11. The Indenture Trustee shall provide the Rating Agencies prior written notice of any such transaction. In case at the time such successor or successors by merger, conversion or consolidation to the Indenture Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Indenture Trustee may adopt the certificate of authentication of any predecessor trustee and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Indenture Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Indenture Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Indenture Trustee shall have. SECTION 6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee. (a) Notwithstanding any other provisions of this Indenture, at any time, for the purpose of meeting any legal requirement of any jurisdiction in which any part of the Trust Estate may at the time be located, the Indenture Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Noteholders, such title to the Trust Estate, or any part hereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Indenture Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 6.11 and no notice to Noteholders of the appointment of any co-trustee or separate trustee shall be required under Section 6.08 hereof. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Indenture Trustee shall be conferred or imposed upon and exercised or performed by the Indenture Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Indenture Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed the Indenture Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust Estate or any portion thereof in any 45 such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Indenture Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Indenture Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Indenture Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article VI. Each separate trustee and co- trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Indenture Trustee or separately, as may be provided therein, subject to all the provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection to, the Indenture Trustee. Every such instrument shall be filed with the Indenture Trustee. (d) Any separate trustee or co-trustee may at any time constitute the Indenture Trustee its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Agreement on its behalf and in its name. If any separate trustee or co- trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Indenture Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. SECTION 6.11. Eligibility; Disqualification. The Indenture Trustee shall at all times be a financial institution organized and doing business under the laws of the United States of America or any state, be authorized under such laws to exercise corporate trust powers, be subject to supervision and examination by Federal or state authority, and have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. SECTION 6.12. Authorization Concerning the Account Agreement. The Indenture Trustee is hereby authorized to enter into the Account Agreement. 46 ARTICLE VII Noteholders' Lists and Reports SECTION 7.01. Issuer To Furnish Indenture Trustee Names and Addresses of Noteholders. The Issuer will furnish or cause to be furnished to the Indenture Trustee (a) not more than five days after the earlier of (i) each Record Date and (ii) three months after the last Record Date, a list, in such form as the Indenture Trustee may reasonably require, of the names and addresses of the Holders of Notes as of such Record Date, and (b) at such other times as the Indenture Trustee may request in writing, within 30 days after receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 10 days prior to the time such list is furnished; provided, however, that so long as the Indenture Trustee is the Note Registrar, no such list shall be required to be furnished. SECTION 7.02. Preservation of Information; Communications to Noteholders. (a) The Indenture Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of the Holders of Notes contained in the most recent list furnished to the Indenture Trustee as provided in Section 7.01 and the names and addresses of Holders of Notes received by the Indenture Trustee in its capacity as Note Registrar. The Indenture Trustee may destroy any list furnished to it as provided in such Section 7.01 upon receipt of a new list so furnished. (b) Noteholders may communicate pursuant to TIA ss. 312(b) with other Noteholders with respect to their rights under this Indenture or under the Notes. (c) The Issuer, the Indenture Trustee and the Note Registrar shall have the protection of TIA ss. 312(c). ARTICLE VIII Accounts, Disbursements and Releases SECTION 8.01. Collection of Money. Except as otherwise expressly provided herein, the Indenture Trustee may demand payment or delivery of, and shall receive and collect, directly and without intervention or assistance of any fiscal agent or other intermediary, all money and other property payable to or receivable by the Indenture Trustee pursuant to this Indenture. The Indenture Trustee shall apply all such money received by it as provided in this Indenture. Except as otherwise expressly provided in this Indenture, if any default occurs in the making of any payment or performance under any agreement or instrument that is part of the Trust Estate, the Indenture Trustee may take such action as may be appropriate to enforce such payment or performance, including the institution and prosecution of appropriate Proceedings. Any such action shall be without 47 prejudice to any right to claim a Default or Event of Default under this Indenture and any right to proceed thereafter as provided in Article V. SECTION 8.02. Trust Accounts. (a) On or prior to the Closing Date, the Issuer shall cause the Servicer to establish and maintain, in the name of the Indenture Trustee, for the benefit of the Noteholders and the Certificateholders, the Trust Accounts as provided in Section 5.01 of the Sale and Servicing Agreement. (b) On or before each Distribution Date, all amounts required to be deposited in the Note Distribution Account with respect to the preceding Collection Period pursuant to Sections 5.05 and 5.06 of the Sale and Servicing Agreement will be transferred from the Collection Account and/or the Reserve Account to the Note Distribution Account. (c) On each Distribution Date and Redemption Date, the Indenture Trustee shall distribute all amounts on deposit in the Note Distribution Account to Noteholders in respect of the Notes to the extent of amounts due and unpaid on the Notes for principal and interest (including any premium) in the following amounts and in the following order of priority (except as otherwise provided in Section 5.04(b)): (i) to the Holders of the Notes, accrued and unpaid interest on the Notes; (ii) to the Holders of the Notes on account of principal until the Outstanding Amount of the Notes is reduced to zero. SECTION 8.03. General Provisions Regarding Accounts. (a) So long as no Default or Event of Default shall have occurred and be continuing, all or a portion of the funds in the Trust Accounts (other than the Note Distribution Account) shall be invested in Eligible Investments and reinvested by the Indenture Trustee upon Issuer Order, subject to the provisions of Section 5.01(b) of the Sale and Servicing Agreement. All income or other gain from investments of moneys deposited in the Trust Accounts (other than the Dealer Reserve Account) shall be deposited by the Indenture Trustee in the Collection Account, and any loss resulting from such investments shall be charged to such account. All income and other gain from investment of monies in the Dealer Reserve Account (net of any losses and investment expenses) will be payable on each Distribution Date to the Depositor. The Issuer will not direct the Indenture Trustee to make any investment of any funds or to sell any investment held in any of the Trust Accounts unless the security interest Granted and perfected in such account will continue to be perfected in such investment or the proceeds of such sale, in either case without any further action by any Person, and, in connection with any direction to the Indenture Trustee to make any such investment or sale, if requested by the Indenture Trustee, the Issuer shall deliver to 48 the Indenture Trustee an Opinion of Counsel, acceptable to the Indenture Trustee, to such effect. (b) Subject to Section 6.01(c), the Indenture Trustee shall not in any way be held liable by reason of any insufficiency in any of the Trust Accounts resulting from any loss on any Eligible Investment included therein except for losses attributable to the Indenture Trustee's failure to make payments on such Eligible Investments issued by the Indenture Trustee, in its commercial capacity as principal obligor and not as trustee, in accordance with their terms. (c) If (i) the Issuer (or the Servicer) shall have failed to give investment directions for any funds on deposit in the Trust Accounts to the Indenture Trustee by 10:00 a.m. Eastern Time (or such other time as may be agreed by the Issuer and Indenture Trustee) on any Business Day or (ii) a Default or Event of Default shall have occurred and be continuing with respect to the Notes but the Notes shall not have been declared due and payable pursuant to Section 5.02 or (iii) if such Notes shall have been declared due and payable following an Event of Default and amounts collected or received from the Trust Estate are being applied in accordance with Section 5.05 as if there had not been such a declaration, then the Indenture Trustee shall, to the fullest extent practicable, invest and reinvest funds in the Trust Accounts in one or more Eligible Investments. SECTION 8.04. Release of Trust Estate. (a) Subject to the payment of its fees and expenses pursuant to Section 6.07, the Indenture Trustee may, and when required by the provisions of this Indenture shall, execute instruments to release property from the lien of this Indenture, or convey the Indenture Trustee's interest in the same, in a manner and under circumstances that are not inconsistent with the provisions of this Indenture. No party relying upon an instrument executed by the Indenture Trustee as provided in this Article VIII shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any moneys. (b) The Indenture Trustee shall, at such time as there are no Notes Outstanding and all sums due the Indenture Trustee pursuant to Section 6.07 have been paid, release any remaining portion of the Trust Estate that secured the Notes from the lien of this Indenture and release to the Issuer or any other Person entitled thereto any funds then on deposit in the Trust Accounts. The Indenture Trustee shall release property from the lien of this Indenture pursuant to this Section 8.04(b) only upon receipt of an Issuer Request accompanied by an Officer's Certificate and an Opinion of Counsel meeting the applicable requirements of Section 11.01. SECTION 8.05. Opinion of Counsel. The Indenture Trustee shall receive at least seven days notice when requested by the Issuer to take any action pursuant to Section 8.04(a), 49 accompanied by copies of any instruments involved, and the Indenture Trustee shall also require, as a condition to such action, an Opinion of Counsel, in form and substance satisfactory to the Indenture Trustee, stating the legal effect of any such action, outlining the steps required to complete the same, and concluding that all conditions precedent to the taking of such action have been complied with and such action will not materially and adversely impair the security for the Notes or the rights of the Noteholders in contravention of the provisions of this Indenture; provided, however, that such Opinion of Counsel shall not be required to express an opinion as to the fair value of the Trust Estate. Counsel rendering any such opinion may rely, without independent investigation, on the accuracy and validity of any certificate or other instrument delivered to the Indenture Trustee in connection with any such action. ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Noteholders. (a) Without the consent of the Holders of any Notes but with prior notice to the Rating Agencies, the Issuer and the Indenture Trustee, when authorized by an Issuer Order, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Indenture Trustee, for any of the following purposes: (i) to correct or amplify the description of any property at any time subject to the lien of this Indenture, or better to assure, convey and confirm unto the Indenture Trustee any property subject or required to be subjected to the lien of this Indenture, or to subject to the lien of this Indenture additional property; (ii) to evidence the succession, in compliance with the applicable provisions hereof, of another person to the Issuer, and the assumption by any such successor of the covenants of the Issuer herein and in the Notes contained; (iii) to add to the covenants of the Issuer, for the benefit of the Holders of the Notes, or to surrender any right or power herein conferred upon the Issuer; (iv) to convey, transfer, assign, mortgage or pledge any property to or with the Indenture Trustee; (v) to cure any ambiguity, to correct or supplement any provision herein or in any supplemental indenture that may be inconsistent with any other provision herein or in any supplemental indenture or to make any other provisions with respect to matters or questions arising under this Indenture or in any supplemental indenture; provided, that such action 50 shall not adversely affect the interests of the Holders of the Notes; (vi) to evidence and provide for the acceptance of the appointment hereunder by a successor trustee with respect to the Notes and to add to or change any of the provisions of this Indenture as shall be necessary to facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Article VI; or (vii) if required by law, to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the TIA or under any similar federal statute hereafter enacted and to add to this Indenture such other provisions as may be expressly required by the TIA. The Indenture Trustee is hereby authorized to join in the execution of any such supplemental indenture and to make any further appropriate agreements and stipulations that may be therein contained. (b) The Issuer and the Indenture Trustee, when authorized by an Issuer Order, may, also without the consent of any of the Holders of the Notes but with prior notice to the Rating Agencies, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in any manner the rights of the Holders of the Notes under this Indenture; provided, however, that such action shall not, as evidenced by an Opinion of Counsel, adversely affect in any material respect the interests of any Noteholder. SECTION 9.02. Supplemental Indentures with Consent of Noteholders. The Issuer and the Indenture Trustee, when authorized by an Issuer Order, also may, with prior notice to the Rating Agencies and with the consent of the Holders of not less than a majority of the Outstanding Amount of the Notes, by Act of such Holders delivered to the Issuer and the Indenture Trustee, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in any manner the rights of the Holders of the Notes under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Note affected thereby: (i) change the date of payment of any installment of principal of or interest on any Note, or reduce the principal amount thereof, the interest rate thereon or the Redemption Price with respect thereto, change the provisions of this Indenture relating to the application of collections on, or the proceeds of the sale of, the Trust Estate to payment of principal of or interest on the Notes, or change any place of 51 payment where, or the coin or currency in which, any Note or the interest thereon is payable, or impair the right to institute suit for the enforcement of the provisions of this Indenture requiring the application of funds available therefor, as provided in Article V, to the payment of any such amount due on the Notes on or after the respective due dates thereof (or, in the case of redemption, on or after the Redemption Date); (ii) reduce the percentage of the Outstanding Amount of the Notes, the consent of the Holders of which is required for any such supplemental indenture, or the consent of the Holders of which is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; (iii) modify or alter the provisions of the proviso to the definition of the term "Outstanding"; (iv) reduce the percentage of the Outstanding Amount of the Notes required to direct the Indenture Trustee to direct the Issuer to sell or liquidate the Trust Estate pursuant to Section 5.04; (v) modify any provision of this Section except to increase any percentage specified herein or to provide that certain additional provisions of this Indenture or the Basic Documents cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby; (vi) modify any of the provisions of this Indenture in such manner as to affect the calculation of the amount of any payment of interest or principal due on any Note on any Distribution Date (including the calculation of any of the individual components of such calculation) or to affect the rights of the Holders of Notes to the benefit of any provisions for the mandatory redemption of the Notes contained herein; or (vii) permit the creation of any lien ranking prior to or on a parity with the lien of this Indenture with respect to any part of the Trust Estate or, except as otherwise permitted or contemplated herein, terminate the lien of this Indenture on any property at any time subject hereto or deprive the Holder of any Note of the security provided by the lien of this Indenture. The Indenture Trustee may, but shall in no way be obligated to, in its sole discretion determine whether or not any Notes would be affected by any supplemental indenture and any such determination shall be conclusive upon the Holders of all Notes, whether theretofore or thereafter authenticated and delivered hereunder. The Indenture Trustee shall not be liable for any such determination made in good faith. 52 It shall not be necessary for any Act of Noteholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Promptly after the execution by the Issuer and the Indenture Trustee of any supplemental indenture pursuant to this Section, the Indenture Trustee shall mail to the Holders of the Notes to which such amendment or supplemental indenture relates a notice setting forth in general terms the substance of such supplemental indenture. Any failure of the Indenture Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.03. Execution of Supplemental Indentures. In executing, or permitting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modification thereby of the trusts created by this Indenture, the Indenture Trustee shall be entitled to receive, and subject to Sections 6.01 and 6.02, shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture, which opinion shall be conclusive evidence as to such authorization or permission. The Indenture Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Indenture Trustee's own rights, duties, liabilities or immunities under this Indenture or otherwise. SECTION 9.04. Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and shall be deemed to be modified and amended in accordance therewith with respect to the Notes affected thereby, and the respective rights, limitations of rights, obligations, duties, liabilities and immunities under this Indenture of the Indenture Trustee, the Issuer and the Holders of the Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.05. Reference in Notes to Supplemental Indentures. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article IX may, and if required by the Indenture Trustee shall, bear a notation in form approved by the Indenture Trustee as to any matter provided for in such supplemental indenture. If the Issuer or the Indenture Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Indenture Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for Outstanding Notes. 53 ARTICLE X Redemption of Notes SECTION 10.01. Redemption. (a) The Notes are subject to redemption in whole, but not in part, at the direction of the Servicer pursuant to Section 9.01(a) of the Sale and Servicing Agreement, on any Distribution Date on which the Servicer exercises its option to purchase the Trust Estate pursuant to said Section 9.01(a), for a purchase price equal to the Redemption Price; provided, that the Issuer has available funds sufficient to pay the Redemption Price. The Servicer or the Issuer shall furnish the Rating Agencies notice of such redemption. If the Notes are to be redeemed pursuant to this Section 10.01(a), the Servicer or the Issuer shall furnish notice of such election to the Indenture Trustee not later than 20 days prior to the Redemption Date, and the Issuer shall deposit by 10:00 A.M. New York City time on the Redemption Date with the Indenture Trustee in the Note Distribution Account the Redemption Price of the Notes to be redeemed, whereupon all such Notes shall be due and payable on the Redemption Date upon the furnishing of a notice complying with Section 10.02 to each Holder of the Notes. (b) In the event that the assets of the Trust are sold pursuant to Section 9.02 of the Trust Agreement, all amounts on deposit in the Note Distribution Account shall be paid to the Noteholders up to the Outstanding Amount of the Notes and all accrued and unpaid interest thereon. If amounts are to be paid to Noteholders pursuant to this Section 10.01(b), the Servicer or the Issuer shall, to the extent practicable, furnish notice of such event to the Indenture Trustee not later than 20 days prior to the Redemption Date, whereupon all such amounts shall be payable on the Redemption Date. SECTION 10.02. Form of Redemption Notice. (a) Notice of redemption under Section 10.01(a) shall be given by the Indenture Trustee by first-class mail, postage prepaid, or by facsimile mailed or transmitted not later than 10 days prior to the applicable Redemption Date to each Holder of Notes as of the close of business on the Record Date preceding the applicable Redemption Date, at such Holder's address or facsimile number appearing in the Note Register. All notices of redemption shall state: (i) the Redemption Date; (ii) the Redemption Price; and (iii) the place where such Notes are to be surrendered for payment of the Redemption Price. Notice of redemption of the Notes shall be given by the Indenture Trustee in the name and at the expense of the Issuer. Failure to give notice of redemption, or any defect therein, to any Holder of any Note shall not impair or affect the validity of the redemption of any other Note. (b) Prior notice of redemption under Section 10.01(b) is not required to be given to Noteholders. SECTION 10.03. Notes Payable on Redemption Date. The Notes or portions thereof to be redeemed shall, following notice of redemption as required by Section 10.02 (in the case of redemption pursuant to Section 10.01(a)), become due and payable at the Redemption Price on the Redemption Date and (unless the Issuer shall default in the payment of the Redemption Price) no interest shall accrue on the Redemption Price for any period after the date to which accrued interest is calculated for purposes of calculating the Redemption Price. ARTICLE XI Miscellaneous SECTION 11.01. Compliance Certificates and Opinions, etc. Upon any application or request by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Indenture Trustee (i) an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and (ii) an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each signatory of such certificate or opinion has read or has caused to be read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such signatory, such signatory has made such examination or investigation as is necessary to enable such signatory to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such signatory, such condition or covenant has been complied with. 55 SECTION 11.02. Form of Documents Delivered to Indenture Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Authorized Officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which such officer's certificate or opinion is based are erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Servicer, the Depositor, the Issuer or the Administrator, stating that the information with respect to such factual matters is in the possession of the Servicer, the Depositor, the Issuer or the Administrator, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Whenever in this Indenture, in connection with any application or certificate or report to the Indenture Trustee, it is provided that the Issuer shall deliver any document as a condition of the granting of such application, or as evidence of the Issuer's compliance with any term hereof, it is intended that the truth and accuracy, at the time of the granting of such application or at the effective date of such certificate or report (as the case may be), of the facts and opinions stated in such document shall in such case be conditions precedent to the right of the Issuer to have such application granted or to the sufficiency of such certificate or report. The foregoing shall not, however, be construed to affect the Indenture Trustee's right to rely upon the truth and accuracy of any statement or opinion contained in any such document as provided in Article VI. SECTION 11.03. Acts of Noteholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall 56 become effective when such instrument or instruments are delivered to the Indenture Trustee and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Noteholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner that the Indenture Trustee deems sufficient. (c) The ownership of Notes shall be proved by the Note Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Notes shall bind the Holder of every Note issued upon the registration thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 11.04. Notices, etc., to Indenture Trustee, Issuer and Rating Agencies. Any request, demand, authorization, direction, notice, consent, waiver or Act of Noteholders or other documents provided or permitted by this Indenture shall be in writing and if such request, demand, authorization, direction, notice, consent, waiver or act of Noteholders is to be made upon, given or furnished to or filed with: (i) the Indenture Trustee by any Noteholder or by the Issuer shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Indenture Trustee at its Corporate Trust Office, or (ii) the Issuer by the Indenture Trustee or by any Noteholder shall be sufficient for every purpose hereunder if in writing and personally delivered or mailed postage prepaid or by recognized overnight courier or by facsimile confirmed by delivery or mail as described above to the Issuer addressed to: NAL Auto Trust 1996-4, in care of Wilmington Trust Company, as Owner Trustee, 1100 N. Market Street, Rodney Square North, Wilmington, Delaware 19801; facsimile: 302-651- 8882; Attention of Corporate Trust Administration, or at any other address previously furnished in writing to the Indenture Trustee by the Issuer or the Administrator. The Issuer shall promptly transmit any notice received by it from the Noteholders to the Indenture Trustee. 57 Notices required to be given to the Rating Agencies by the Issuer, the Indenture Trustee or the Owner Trustee shall be in writing, personally delivered or mailed by certified mail, return receipt requested, to (i) in the case of Fitch Investors Service, L.P., at the following address: One State Street Plaza, New York, N.Y. 10004, and (ii) in the case of Duff & Phelps Credit Rating Co. at the following address: 55 E. Monroe Street (35th Floor), Chicago, Illinois 60603; or as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. SECTION 11.05. Notices to Noteholders; Waiver. Where this Indenture provides for notice to Noteholders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class, postage prepaid to each Noteholder affected by such event, at such Holder's address as it appears on the Note Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Noteholders is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any particular Noteholder shall affect the sufficiency of such notice with respect to other Noteholders, and any notice that is mailed in the manner herein provided shall conclusively be presumed to have been duly given. Where this Indenture provides for notice in any manner, such notice may be waived in writing by any Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Noteholders shall be filed with the Indenture Trustee but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such a waiver. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or similar activity, it shall be impractical to mail notice of any event to Noteholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a sufficient giving of such notice. Where this Indenture provides for notice to the Rating Agencies, failure to give such notice shall not affect any other rights or obligations created hereunder, and shall not under any circumstance constitute a Default or Event of Default. SECTION 11.06. Alternate Payment and Notice Provisions. Notwithstanding any provision of this Indenture or any of the Notes to the contrary, the Issuer may enter into any agreement with any Holder of a Note providing for a method of payment, or notice by the Indenture Trustee or any Paying Agent to such Holder, that is different from the methods provided for in this Indenture for such payments or notices. The Issuer will furnish to the Indenture Trustee a copy of each such agreement and the 58 Indenture Trustee will cause payments to be made and notices to be given in accordance with such agreements. SECTION 11.07. [Reserved] SECTION 11.08. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 11.09. Successors and Assigns. All covenants and agreements in this Indenture and the Notes by the Issuer shall bind its successors and assigns, whether so expressed or not. All agreements of the Indenture Trustee in this Indenture shall bind its successors, co-trustees and agents. SECTION 11.10. Separability. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.11. Benefits of Indenture. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, and the Noteholders, and any other party secured hereunder, and any other Person with an ownership interest in any part of the Trust Estate, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 11.12. Legal Holidays. In any case where the date on which any payment is due shall not be a Business Day, then (notwithstanding any other provision of the Notes or this Indenture) payment need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date on which nominally due, and no interest shall accrue for the period from and after any such nominal date. SECTION 11.13. Governing Law. THIS INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 11.14. Counterparts. This Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 11.15. Recording of Indenture. If this Indenture is subject to recording in any appropriate public recording offices, such recording is to be effected by the Issuer and at its expense accompanied by an Opinion of Counsel (which may be counsel to the Indenture Trustee or any other counsel reasonably acceptable to 59 the Indenture Trustee) to the effect that such recording is necessary either for the protection of the Noteholders or any other Person secured hereunder or for the enforcement of any right or remedy granted to the Indenture Trustee under this Indenture. SECTION 11.16. Trust Obligation. No recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on the Notes or under this Indenture or any certificate or other writing delivered in connection herewith or therewith, against (i) the Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer or (iii) any partner, owner, beneficiary, agent, officer, director, employee or agent of the Indenture Trustee or the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the Owner Trustee or the Indenture Trustee or of any successor or assign of the Indenture Trustee or the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed in writing (it being understood that the Indenture Trustee and the Owner Trustee have no such obligations in their individual capacity) and except that any such partner, owner or beneficiary shall be fully liable, to the extent provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or failure to pay any installment or call owing to such entity. For all purposes of this Indenture, in the performance of any duties or obligations of the Issuer hereunder, the Owner Trustee shall be subject to, and entitled to the benefits of, the terms and provisions of Article VI, VII and VIII of the Trust Agreement. SECTION 11.17. No Petition. The Indenture Trustee, by entering into this Indenture, and each Noteholder, by accepting a Note, hereby covenant and agree that they will not at any time institute against the Depositor or the Issuer, or join in any institution against the Depositor or the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Notes, this Indenture or any of the Basic Documents. SECTION 11.18. Inspection. The Issuer agrees that, on reasonable prior notice, it will permit any representative of the Indenture Trustee, during the Issuer's normal business hours, to examine all the books of account, records, reports and other papers of the Issuer, to make copies and extracts therefrom, to cause such books to be audited by Independent certified public accountants, and to discuss the Issuer's affairs, finances and accounts with the Issuer's officers, employees and Independent certified public accountants, all at such reasonable times and as often as may be reasonably requested. The Indenture Trustee shall, and shall cause its representatives to, hold in confidence all such information provided, however, that the foregoing shall not be construed to prohibit (i) disclosure of any and all information that is or becomes publicly known, or information obtained by the Indenture Trustee from sources other than the Issuer, Administrator, Seller or Servicer, (ii) disclosure of any and all 60 information (A) if required to do so by any applicable statute, law, rule or regulation, (B) to any government agency or regulatory or self-regulatory body having or claiming authority to regulate or oversee any aspects of the Indenture Trustee's business or that of its Affiliates, (C) pursuant to any subpoena, civil investigative demand or similar demand or request of any court, regulatory authority, arbitrator or arbitration to which the Indenture Trustee or an Affiliate or an officer, director, employer or shareholder thereof is a party, (D) in any preliminary or final offering circular, registration statement or contract or other document pertaining to the transactions contemplated by this Agreement approved in advance by the Issuer or (E) to any Affiliate, independent or internal auditor, agent, employee or attorney of the Indenture Trustee having a need to know the same, provided that the Indenture Trustee advises such recipient of the confidential nature of the information being disclosed, (iii) any other disclosure authorized by the Seller, Administrator, Issuer or Servicer or (iv) disclosure to the other parties to the transactions contemplated by this Agreement. 61 IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused this Indenture to be duly executed by their respective officers, thereunto duly authorized and duly attested, all as of the day and year first above written. NAL AUTO TRUST 1996-4, by: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee, by: ------------------------------------ Name: Emmett R. Harmon Title: Vice President BANKERS TRUST COMPANY, not in its individual capacity but solely as Indenture Trustee, by: ------------------------------------ Name: Title: 62 STATE OF NEW YORK } } ss.: COUNTY OF NEW YORK } BEFORE ME, the undersigned authority, a Notary Public in and for said county and state, on this day personally appeared Emmett R. Harmon, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said NAL AUTO TRUST 1996-4, a Delaware business trust, and that he executed the same as the act of said business trust for the purpose and consideration therein expressed, and in the capacities therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 16th day of December, 1996. - -------------------------------------------------------------------------------- Notary Public in and for the State of New York. My commission expires: - ------------------------------------ STATE OF NEW YORK } } ss.: COUNTY OF NEW YORK } BEFORE ME, the undersigned authority, a Notary Public in and for said county and state, on this day personally appeared Lara Graff, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of BANKERS TRUST COMPANY, a New York banking corporation, and that she executed the same as the act of said corporation for the purpose and consideration therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 16th day of December, 1996. - -------------------------------------------------------------------------------- Notary Public in and for the State of New York. My commission expires: - ------------------------------------ SCHEDULE 1 EXHIBIT A [FORM OF NOTE] THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE IN THE UNITED STATES OR ANY FOREIGN SECURITIES LAWS. BY ITS ACCEPTANCE OF THIS NOTE THE HOLDER HEREOF IS DEEMED TO REPRESENT TO THE DEPOSITOR AND THE INDENTURE TRUSTEE (i) THAT IT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D PROMULGATED UNDER THE 1933 ACT (AN "ACCREDITED INVESTOR") AND THAT IT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE ACCREDITED INVESTORS UNLESS THE HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, THE PUBLIC DISTRIBUTION HEREOF OR (ii) THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE 1933 ACT AND IS ACQUIRING SUCH NOTE FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE QUALIFIED INSTITUTIONAL BUYERS). NO SALE, PLEDGE OR OTHER TRANSFER OF THIS NOTE MAY BE MADE BY ANY PERSON UNLESS EITHER (i) SUCH SALE, PLEDGE OR OTHER TRANSFER IS MADE TO THE DEPOSITOR, (ii) SUCH SALE, PLEDGE OR OTHER TRANSFER IS MADE TO AN ACCREDITED INVESTOR THAT EXECUTES A CERTIFICATE, SUBSTANTIALLY IN THE FORM SPECIFIED IN THE INDENTURE, TO THE EFFECT THAT IT IS AN ACCREDITED INVESTOR ACTING FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE ACCREDITED INVESTORS UNLESS THE HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY), (iii) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE 1933 ACT, SUCH SALE, PLEDGE OR OTHER TRANSFER IS MADE TO A PERSON WHO THE PROSPECTIVE TRANSFEROR REASONABLY BELIEVES AFTER DUE INQUIRY IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A), ACTING FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE QUALIFIED INSTITUTIONAL BUYERS) TO WHOM NOTICE IS GIVEN THAT THE SALE, PLEDGE OR TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR (iv) SUCH SALE, PLEDGE OR OTHER TRANSFER IS OTHERWISE MADE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT, IN WHICH CASE THE INDENTURE TRUSTEE SHALL REQUIRE THAT BOTH THE PROSPECTIVE TRANSFEROR AND THE PROSPECTIVE TRANSFEREE CERTIFY TO THE INDENTURE TRUSTEE AND THE DEPOSITOR IN WRITING THE FACTS SURROUNDING SUCH TRANSFER, WHICH CERTIFICATION SHALL BE IN FORM AND SUBSTANCE SATISFACTORY TO THE INDENTURE TRUSTEE AND THE DEPOSITOR. EXCEPT IN THE CASE OF A TRANSFER DESCRIBED IN CLAUSES (i) OR (iii) ABOVE, THE INDENTURE TRUSTEE SHALL REQUIRE A WRITTEN OPINION OF COUNSEL (WHICH SHALL NOT BE AT THE EXPENSE OF THE DEPOSITOR, ANY AFFILIATE OF THE DEPOSITOR OR THE INDENTURE TRUSTEE) SATISFACTORY TO THE DEPOSITOR AND THE INDENTURE TRUSTEE TO THE EFFECT THAT SUCH TRANSFER WILL NOT VIOLATE THE 1933 ACT. A-1 NO SALE, PLEDGE OR OTHER TRANSFER MAY BE MADE TO ANY ONE PERSON FOR SECURITIES WITH A FACE AMOUNT OF LESS THAN $100,000 AND, IN THE CASE OF ANY PERSON ACTING ON BEHALF OF ONE OR MORE THIRD PARTIES (OTHER THAN A BANK (AS DEFINED IN SECTION 3(a)(2) OF THE 1933 ACT) ACTING IN ITS FIDUCIARY CAPACITY), FOR SECURITIES WITH A FACE AMOUNT OF LESS THAN $100,000 FOR EACH SUCH THIRD PARTY. SECTION 2.04 OF THE INDENTURE CONTAINS FURTHER RESTRICTIONS ON THE TRANSFER AND RESALE OF THIS NOTE. EACH TRANSFEREE OF THIS NOTE, BY ACCEPTANCE HEREOF, IS DEEMED TO HAVE ACCEPTED THIS NOTE SUBJECT TO THE FOREGOING RESTRICTIONS ON TRANSFERABILITY. EACH NOTEHOLDER OR NOTE OWNER, BY ITS ACCEPTANCE OF THIS SECURITY, COVENANTS AND AGREES THAT SUCH NOTEHOLDER OR NOTE OWNER SHALL NOT, PRIOR TO THE DATE THAT IS ONE YEAR AND ONE DAY AFTER THE TERMINATION OF THE TRUST AGREEMENT, ACQUIESCE, PETITION OR OTHERWISE INVOKE OR CAUSE THE TRUST, THE DEPOSITOR OR THE SELLER TO INVOKE THE PROCESS OF ANY COURT OR GOVERNMENTAL AUTHORITY FOR THE PURPOSE OF COMMENCING OR SUSTAINING A CASE AGAINST THE TRUST, THE DEPOSITOR OR THE SELLER UNDER ANY FEDERAL OR STATE BANKRUPTCY, INSOLVENCY, REORGANIZATION OR SIMILAR LAW, OR APPOINTING A RECEIVER, LIQUIDATOR, ASSIGNEE, TRUSTEE, CUSTODIAN, SEQUESTRATOR OR OTHER SIMILAR OFFICIAL OF THE TRUST, THE DEPOSITOR OR THE SELLER OR ANY SUBSTANTIAL PART OF ITS PROPERTY, OR ORDERING THE WINDING UP OR LIQUIDATION OF THE AFFAIRS OF THE TRUST, THE DEPOSITOR OR THE SELLER. THE PRINCIPAL OF THIS NOTE IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. [UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] REGISTERED $________________ No. R- CUSIP NO. 628948 AK 7 NAL AUTO TRUST 1996-4 6.90% ASSET BACKED NOTES NAL Auto Trust 1996-4, a business trust organized and existing under the laws of the State of Delaware (herein referred A-2 to as the "Issuer"), for value received, hereby promises to pay to _______________________________, or registered assigns, the principal sum of _______________________ DOLLARS payable on each Distribution Date in an amount equal to the result obtained by multiplying (i) a fraction the numerator of which is $__________ and the denominator of which is $79,239,000.00 by (ii) the aggregate amount, if any, payable from the Note Distribution Account in respect of principal on the Notes pursuant to Section 3.01 of the Indenture dated as of December 9, 1996 (the "Indenture"), between the Issuer and Bankers Trust Company, a New York banking corporation, as Indenture Trustee (the "Indenture Trustee"); provided, however, that the entire unpaid principal amount of this Note shall be due and payable on the earlier of the December 15, 2000 Distribution Date (the "Note Final Scheduled Distribution Date") and the Redemption Date, if any, pursuant to Section 10.01 of the Indenture. Capitalized terms used but not defined herein are defined in Article I of the Indenture, which also contains rules as to construction that shall be applicable herein. The Issuer will pay interest on this Note at the rate per annum shown above on each Distribution Date until the principal of this Note is paid or made available for payment, on the principal amount of this Note outstanding on the preceding Distribution Date (or, in the case of the first Distribution Date, the Closing Date) after giving effect to all payments of principal made on the preceding Distribution Date, subject to certain limitations contained in Section 3.01 of the Indenture. Interest on this Note for each Distribution Date will accrue from and including the first day of the preceding Collection Period (or, in the case of the first Distribution Date, from and including the Cutoff Date). Interest will be computed on the basis of a 360-day year of twelve 30-day months. Such principal of and interest on this Note shall be paid in the manner specified on the reverse hereof. The principal of and interest on this Note are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments made by the Issuer with respect to this Note shall be applied first to interest due and payable on this Note as provided above and then to the unpaid principal of this Note. Reference is made to the further provisions of this Note set forth on the reverse hereof, which shall have the same effect as though fully set forth on the face of this Note. Unless the certificate of authentication hereon has been executed by the Indenture Trustee whose name appears below by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. A-3 IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed, manually or in facsimile, by its Authorized Officer, as of the date set forth below. Date: _________________ NAL AUTO TRUST 1996-4, by: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee under the Trust Agreement, by: ------------------------------ Authorized Signatory TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes designated above and referred to in the within-mentioned Indenture. Date: _________________ BANKERS TRUST COMPANY, not in its individual capacity but solely as Indenture Trustee, by: ----------------------------------- Authorized Signatory A-4 Reverse This Note is one of a duly authorized issue of Notes of the Issuer, designated as its 6.90% Asset Backed Notes (herein called the "Notes"), all issued under the Indenture, to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights and obligations thereunder of the Issuer, the Indenture Trustee and the Holders of the Notes. The Notes are subject to all terms of the Indenture. The Notes are and will be equally and ratably secured by the collateral pledged as security therefor as provided in the Indenture. Principal of the Notes will be payable on each Distribution Date in an amount described on the face hereof. "Distribution Date" means the 15th day of each March, June, September and December or, if any such date is not a Business Day, the next succeeding Business Day, commencing March 1997. As described above, the entire unpaid principal amount of this Note shall be due and payable on the earlier of the Note Final Scheduled Distribution Date and the Redemption Date, if any, pursuant to Section 10.01 of the Indenture. Notwithstanding the foregoing, the entire unpaid principal amount of the Notes shall be due and payable on the date on which an Event of Default shall have occurred and be continuing and the Indenture Trustee or the Holders of Notes representing not less than a majority of the Outstanding Amount of the Notes have declared the Notes to be immediately due and payable in the manner provided in Section 5.02 of the Indenture. All principal payments on the Notes shall be made pro rata to the Noteholders entitled thereto. Payments of interest on this Note due and payable on each Distribution Date, together with the installment of principal, if any, to the extent not in full payment of this Note, shall be made by check mailed to the Person whose name appears as the Registered Holder of this Note (or one or more Predecessor Notes) on the Note Register as of the close of business on each Record Date, unless either (i) such Person notifies the Paying Agent in writing not later than the Record Date prior to a Distribution Date or (ii) the Registered Holder of this Note is the nominee of the Clearing Agency, in which case, payments are to be made by wire transfer in immediately available funds to the account designated by such Person. Payments by check shall be mailed to the Person entitled thereto at the address of such Person as it appears on the Note Register as of the applicable Record Date without requiring that this Note be submitted for notation of payment. Any reduction in the principal amount of this Note (or any one or more Predecessor Notes) effected by any payments made on any Distribution Date shall be binding upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not noted hereon. If funds are expected to be available, as A-5 provided in the Indenture, for payment in full of the then remaining unpaid principal amount of this Note on a Distribution Date, then the Indenture Trustee, in the name of and on behalf of the Issuer, will notify the Person who was the Registered Holder hereof as of the Record Date preceding such Distribution Date by notice mailed or transmitted by facsimile prior to such Distribution Date, and the amount then due and payable shall be payable only upon presentation and surrender of this Note at the Indenture Trustee's principal Corporate Trust Office or at the office of the Indenture Trustee's agent appointed for such purposes located in The City of New York. The Issuer shall pay interest on overdue installments of interest at the Note Rate to the extent lawful. As provided in the Indenture and subject to the limitations set forth therein and on the face hereof, the transfer of this Note may be registered on the Note Register upon surrender of this Note for registration of transfer at the office or agency designated by the Issuer pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Indenture Trustee duly executed by, the Holder hereof or such Holder's attorney duly authorized in writing, with such signature guaranteed by an "eligible guarantor institution" meeting the requirements of the Note Registrar, which requirements include membership or participation in the Securities Transfer Agent's Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Note Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended, and thereupon one or more new Notes of authorized denominations and in the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be charged for any registration of transfer or exchange of this Note, but the transferor may be required to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any such registration of transfer or exchange. Each Noteholder or Note Owner, by acceptance of a Note, covenants and agrees that no recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on the Notes or under the Indenture or any certificate or other writing delivered in connection therewith, against (i) the Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer or (iii) any partner, owner, beneficiary, agent, officer, director or employee of the Indenture Trustee or the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the Owner Trustee or the Indenture Trustee or of any successor or assign of the Indenture Trustee or the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed and except that any such partner, owner or beneficiary shall be fully liable, to the extent provided by applicable law, A-6 for any unpaid consideration for stock, unpaid capital contribution or failure to pay any installment or call owing to such entity. Each Noteholder or Note Owner, by acceptance of a Note covenants and agrees by accepting the benefits of the Indenture that such Noteholder will not at any time institute against the Depositor, the Seller or the Issuer, or join in any institution against the Depositor, the Seller or the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Notes, the Indenture or the Basic Documents. The Issuer has entered into the Indenture and this Note is issued with the intention that, for federal, state and local income, single business and franchise tax purposes, the Notes will qualify as indebtedness of the Issuer secured by the Trust Estate. Each Noteholder or Note Owner, by acceptance of a Note, agrees to treat the Notes for federal, state and local income, single business and franchise tax purposes as indebtedness of the Issuer. Prior to the due presentment for registration of transfer of this Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name this Note (as of the day of determination or as of such other date as may be specified in the Indenture) is registered as the owner hereof for all purposes, whether or not this Note be overdue, and none of the Issuer, the Indenture Trustee or any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of the Notes under the Indenture at any time by the Issuer with the consent of the Holders of Notes representing a majority of the Outstanding Amount of all Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of Notes representing specified percentages of the Outstanding Amount of the Notes, on behalf of the Holders of all the Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note (or any one or more Predecessor Notes) shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The Indenture also permits the Indenture Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of Holders of the Notes issued thereunder. A-7 The term "Issuer" as used in this Note includes any successor to the Issuer under the Indenture. The Issuer is permitted by the Indenture, under certain circumstances, to merge or consolidate, subject to the rights of the Indenture Trustee and the Holders of Notes under the Indenture. The Notes are issuable only in registered form in denominations as provided in the Indenture, subject to certain limitations therein set forth. This Note and the Indenture shall be construed in accordance with the laws of the State of New York, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder and thereunder shall be determined in accordance with such laws. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note at the times, place and rate, and in the coin or currency herein prescribed. Anything herein to the contrary notwithstanding, except as expressly provided in the Basic Documents, none of Wilmington Trust Company in its individual capacity, Bankers Trust Company in its individual capacity, any owner of a beneficial interest in the Issuer, or any of their respective partners, beneficiaries, agents, officers, directors, employees or successors or assigns shall be personally liable for, nor shall recourse be had to any of them for, the payment of principal of or interest on this Note or performance of, or failure to perform, any of the covenants, obligations or indemnifications contained in the Indenture. The Holder of this Note by its acceptance hereof agrees that, except as expressly provided in the Basic Documents, in the case of an Event of Default under the Indenture, the Holder shall have no claim against any of the foregoing for any deficiency, loss or claim therefrom; provided, however, that nothing contained herein shall be taken to prevent recourse to, and enforcement against, the assets of the Issuer for any and all liabilities, obligations and undertakings contained in the Indenture or in this Note. A-8 ASSIGNMENT Social Security or taxpayer I.D. or other identifying number of assignee: - -------------------------------------------------------------------------------- FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (name and address of assignee) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints _____________________________ , attorney, to transfer said Note on the books kept for registration thereof, with full power of substitution in the premises. Dated: */ ---------------- ------------------------------- Signature Guaranteed: */ ------------------------------- - ------------------------ */ NOTICE: The signature to this assignment must correspond with the name of the registered owner as it appears on the face of the within Note in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Note Registrar, which requirements include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Note Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-9 EXHIBIT B [RESERVED] B-1 EXHIBIT C FORM OF TRANSFEROR CERTIFICATE [DATE] [Depositor] [Depositor Address] [Owner Trustee] [Owner Trustee Address] [Indenture Trustee] [Indenture Trustee Address] Re: NAL Auto Trust 1996-4 6.90% Asset Backed Notes ------------------------ Ladies and Gentlemen: In connection with our disposition of the above-referenced 6.90% Asset Backed Notes (the "Notes") we certify that (a) we understand that the Notes have not been registered under the Securities Act of 1933, as amended (the "Act"), and are being transferred by us in a transaction that is exempt from the registration requirements of the Act and (b) we have not offered or sold any Notes to, or solicited offers to buy any Notes from, any person, or otherwise approached or negotiated with any person with respect thereto, in a manner that would be deemed, or taken any other action which would result in, a violation of Section 5 of the Act. Very truly yours, [NAME OF TRANSFEROR] By: --------------------------- Authorized Officer C-1 EXHIBIT D FORM OF INVESTMENT LETTER Autorics II, Inc. 500 Cypress Creek Road West Suite 590 Fort Lauderdale, Florida 33309 Wilmington Trust Company, as Owner Trustee Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Bankers Trust Company 4 Albany Street New York, New York 10006 Ladies and Gentlemen: In connection with our proposed purchase of $ aggregate principal amount of 6.90% Asset Backed Notes (the "Securities") of NAL Auto Trust 1996-4 (the "Issuer"), we confirm that: 1. We understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and may not be sold except as permitted in the following sentence. We understand and agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, (x) that such Securities are being offered only in a transaction not involving any public offering within the meaning of the 1933 Act and (y) that such Securities may be resold, pledged or transferred only (i) to the Depositor, (ii) to an "accredited investor" as defined in Rule 501(a)(1),(2),(3) or (7) (an "Accredited Investor") under the 1933 Act acting for its own account (and not for the account of others) or as a fiduciary or agent for others (which others also are Accredited Investors unless the holder is a bank acting in its fiduciary capacity) that executes a certificate substantially in the form hereof, (iii) so long as such Security is eligible for resale pursuant to Rule 144A under the 1933 Act ("Rule 144A"), to a person whom we reasonably believe after due inquiry is a "qualified institutional buyer" as defined in Rule 144A, acting for its own account (and not for the account of others) or as a fiduciary or agent for others (which others also are "qualified institutional buyers") to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A or (iv) in a sale, pledge or other transfer made in a transaction otherwise exempt from the registration requirements of the 1933 Act, in which case, the Indenture Trustee shall require that both the prospective transferor and the prospective transferee D-1 certify to the Indenture Trustee and the Depositor in writing the facts surrounding such transfer, which certification shall be in form and substance satisfactory to the Indenture Trustee and the Depositor. Except in the case of (i) or (iii), the Indenture Trustee shall require a written opinion of counsel (which will not be at the expense of the Depositor, any affiliate of the Depositor or the Indenture Trustee) which is satisfactory to the Depositor and the Indenture Trustee be delivered to the Indenture Trustee and the Depositor to the effect that such transfer will not violate the 1933 Act, in each case in accordance with any applicable securities laws of any state of the United States. We will notify any purchaser of the Security from us of the above resale restrictions, if then applicable. We further understand that in connection with any transfer of the Security by us that the Depositor and the Indenture Trustee may request, and if so requested we will furnish such certificates and other information as they may reasonably require to confirm that any such transfer complies with the foregoing restrictions. We understand that no sale, pledge or other transfer may be made to any one person of Securities with a face amount of less than $100,000 and, in the case of any person acting on behalf of one or more third parties (other than a bank (as defined in Section 3(a)((2) of the 1933 Act) acting in its fiduciary capacity), of Securities with a face amount of less than $100,000 for each such third party. 2. [CHECK ONE] |_| (a) We are an "accredited investor" (as defined in Rule 501(a)(1),(2),(3) or (7) of Regulation D under the Securities Act) acting for our own account (and not for the account of others) or as a fiduciary or agent for others (which others also are Accredited Investors unless we are a bank acting in its fiduciary capacity). We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Security, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment for an indefinite period of time. We are acquiring the Security for investment and not with a view to, or for offer and sale in connection with, a public distribution. |_| (b) We are a "qualified institutional buyer" as defined under Rule 144A under the 1933 Act and are acquiring the Security for our own account (and not for the account of others) or as a fiduciary or agent for others (which others also are "qualified institutional buyers"). We are familiar with Rule 144A under the 1933 Act and are aware that the seller of the Security and other parties intend to rely on the statements made D-2 herein and the exemption from the registration requirements of the 1933 Act provided by Rule 144A. 3. We understand that the Depositor, the Trust, Greenwich Capital Markets, Inc. ("Greenwich") and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements, and we agree that if any of the acknowledgments, representations and warranties deemed to have been made by us by our purchase of the Securities, for our own account or for one or more accounts as to each of which we exercise sole investment discretion, are no longer accurate, we shall promptly notify the Depositor and Greenwich. 4. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [NAME OF PURCHASER] By: --------------------------- Name: Title: Date: -------------------- D-3 EXHIBIT E FORM OF DEPOSITORY AGREEMENT E-1
EX-10.41 7 TRUST AGREEMENT EXECUTION COPY ================================================================================ TRUST AGREEMENT between AUTORICS II, INC., as Depositor, and WILMINGTON TRUST COMPANY, as Owner Trustee Dated as of December 9, 1996 ================================================================================ TABLE OF CONTENTS Page ARTICLE I Definitions SECTION 1.01. Capitalized Terms............................................ 1 SECTION 1.02. Other Definitional Provisions................................ 3 ARTICLE II Organization SECTION 2.01. Name......................................................... 4 SECTION 2.02. Office....................................................... 4 SECTION 2.03. Purposes and Powers.......................................... 4 SECTION 2.04. Appointment of Owner Trustee................................. 5 SECTION 2.05. Initial Capital Contribution of Owner Trust Estate.................................................... 5 SECTION 2.06. Declaration of Trust......................................... 5 SECTION 2.07. Liability of the Owners...................................... 6 SECTION 2.08. Title to Trust Property...................................... 7 SECTION 2.09. Situs of Trust............................................... 7 SECTION 2.10. Representations and Warranties of the Depositor................................................. 7 SECTION 2.11. Maintenance of the Demand Note............................... 8 SECTION 2.12. Federal Income Tax Provisions................................ 8 ARTICLE III Trust Certificates and Transfer of Interests SECTION 3.01. Initial Ownership............................................ 8 SECTION 3.02. The Trust Certificates....................................... 8 SECTION 3.03. Authentication of Trust Certificates......................... 9 SECTION 3.04. Registration of Transfer and Exchange of Trust Certificates........................................ 9 SECTION 3.05. Mutilated, Destroyed, Lost or Stolen Trust Certificates.............................................. 11 SECTION 3.06. Persons Deemed Owners........................................ 12 SECTION 3.07. Access to List of Certificateholders' Names and Addresses............................................. 12 SECTION 3.08. Maintenance of Office or Agency.............................. 12 SECTION 3.09. Appointment of Paying Agent.................................. 13 SECTION 3.10. Ownership by Depositor of Trust Certificates.............................................. 13 i ARTICLE IV Actions by Owner Trustee SECTION 4.01. Prior Notice to Owners with Respect to Certain Matters........................................... 14 SECTION 4.02. Action by Owners with Respect to Certain Matters................................................... 14 SECTION 4.03. Action by Owners with Respect to Bankruptcy.................. 15 SECTION 4.04. Restrictions on Owners' Power................................ 15 SECTION 4.05. Majority Control............................................. 15 ARTICLE V Application of Trust Funds; Certain Duties SECTION 5.01. Establishment of Trust Account............................... 15 SECTION 5.02. Application of Trust Funds................................... 16 SECTION 5.03. Method of Payment............................................ 16 SECTION 5.04. No Segregation of Moneys; No Interest........................ 16 SECTION 5.05. Accounting and Reports to the Noteholders, Owners, the Internal Revenue Service and Others.................................................... 16 SECTION 5.06. Signature on Returns......................................... 17 ARTICLE VI Authority and Duties of Owner Trustee SECTION 6.01. General Authority............................................ 17 SECTION 6.02. General Duties............................................... 17 SECTION 6.03. Action upon Instruction...................................... 18 SECTION 6.04. No Duties Except as Specified in this Agreement or in Instructions.............................. 19 SECTION 6.05. No Action Except Under Specified Documents or Instructions........................................... 19 SECTION 6.06. Restrictions................................................. 19 ARTICLE VII Concerning the Owner Trustee SECTION 7.01. Acceptance of Trusts and Duties.............................. 19 SECTION 7.02. Furnishing of Documents...................................... 21 SECTION 7.03. Representations and Warranties............................... 21 SECTION 7.04. Reliance; Advice of Counsel.................................. 21 SECTION 7.05. Not Acting in Individual Capacity............................ 22 SECTION 7.06. Owner Trustee Not Liable for Trust Certificates or Receivables............................... 22 SECTION 7.07. Owner Trustee May Own Trust Certificates and Notes..................................................... 23 ii ARTICLE VIII Compensation of Owner Trustee SECTION 8.01. Owner Trustee's Fees and Expenses............................ 23 SECTION 8.02. Indemnification.............................................. 23 SECTION 8.03. Payments to the Owner Trustee................................ 24 ARTICLE IX Termination of Trust Agreement SECTION 9.01. Termination of Trust Agreement............................... 24 SECTION 9.02. Dissolution upon Bankruptcy of the Depositor................................................. 25 ARTICLE X Successor Owner Trustees and Additional Owner Trustees SECTION 10.01. Eligibility Requirements for Owner Trustee................... 26 SECTION 10.02. Resignation or Removal of Owner Trustee...................... 26 SECTION 10.03. Successor Owner Trustee...................................... 27 SECTION 10.04. Merger or Consolidation of Owner Trustee..................... 28 SECTION 10.05. Appointment of Co-Trustee or Separate Trustee................................................... 28 ARTICLE XI Miscellaneous SECTION 11.01. Supplements and Amendments................................... 29 SECTION 11.02. No Legal Title to Owner Trust Estate in Owners.................................................... 31 SECTION 11.03. Limitations on Rights of Others.............................. 31 SECTION 11.04. Notices...................................................... 31 SECTION 11.05. Severability................................................. 32 SECTION 11.06. Separate Counterparts........................................ 32 SECTION 11.07. Successors and Assigns....................................... 32 SECTION 11.08. Covenants of the Depositor................................... 32 SECTION 11.09. No Petition.................................................. 32 SECTION 11.10. No Recourse.................................................. 33 SECTION 11.11. Headings..................................................... 33 SECTION 11.12. GOVERNING LAW................................................ 33 SECTION 11.13. [Reserved.].................................................. 33 SECTION 11.14. Depositor Payment Obligation................................. 33 EXHIBIT A Form of Trust Certificate EXHIBIT B Form of Certificate of Trust EXHIBIT C Form of Transferor Certificate EXHIBIT D Form of Investment Letter ANNEX A Tax Partnership Provisions iii TRUST AGREEMENT dated as of December 9, 1996, between AUTORICS II, INC., a Delaware corporation, as depositor (the "Depositor") and WILMINGTON TRUST COMPANY, a Delaware banking corporation, as owner trustee (the "Owner Trustee"). ARTICLE I Definitions SECTION 1.01. Capitalized Terms. For all purposes of this Agreement, the following terms shall have the meanings set forth below: "Administration Agreement" shall mean the Administration Agreement dated as of December 9, 1996, among the Trust, the Indenture Trustee and NAL Acceptance Corporation, as Administrator. "Agreement" shall mean this Trust Agreement, as the same may be amended and supplemented from time to time. "Basic Documents" shall mean the Sale and Servicing Agreement, the Indenture, the Administration Agreement, the Custodial Agreement and the other documents, instruments and certificates delivered in connection therewith. "Benefit Plan" shall have the meaning assigned to such term in Section 3.04. "Business Trust Statute" shall mean Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code ss. 3801 et seq., as the same may be amended from time to time. "Certificate Distribution Account" shall have the meaning assigned to such term in Section 5.01. "Certificate of Trust" shall mean the Certificate of Trust in the form of Exhibit B filed for the Trust pursuant to Section 3810(a) of the Business Trust Statute. "Certificate Register" and "Certificate Registrar" shall mean the register mentioned in and the registrar appointed pursuant to Section 3.04. "Certificateholder" or "Holder" shall mean a Person in whose name a Trust Certificate is registered. "Code" shall mean the Internal Revenue Code of 1986, as amended, and Treasury Regulations promulgated thereunder. "Corporate Trust Office" shall mean, with respect to the Owner Trustee, the principal corporate trust office of the Owner Trustee located at 1100 N. Market Street, Rodney Square North, Wilmington, DE 19890, Attn: Corporate Trust Administration, or at such other 1 address as the Owner Trustee may designate by notice to the Owners and the Depositor, or the principal corporate trust office of any successor Owner Trustee at the address designated by such successor Owner Trustee by notice to the Owners and the Depositor. "Custodial Agreement" shall mean the Custodial Agreement dated as of December 9, 1996, between the Trust and Bankers Trust Company, as Custodian. "Demand Note" shall mean, in the case of the Depositor, the Demand Note dated December 16, 1996, from NAL to the Depositor. "Depositor" shall mean AUTORICS II, Inc. in its capacity as depositor hereunder. "Depositor's Interest" shall mean the Trust Certificate owned by the Depositor evidencing (i) a not less than 1% undivided interest in the Certificate Balance and interest at the Pass- Through Rate and (ii) all other amounts in respect of the Trust property to which the Depositor is entitled hereunder. "ERISA" shall have the meaning assigned thereto in Section 3.04. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Expenses" shall have the meaning assigned to such term in Section 8.02. "Indemnified Parties" shall have the meaning assigned to such term in Section 8.02. "Indenture" shall mean the Indenture dated as of December 9, 1996 between the Trust and Bankers Trust Company, as Indenture Trustee. "Initial Certificate Balance" shall mean $8,805,150.40. "NAL" shall mean NAL Acceptance Corporation, a Florida Corporation, and any successor in interest. "Owner" shall mean each Holder of a Trust Certificate. "Owner Trust Estate" shall mean all right, title and interest of the Trust in and to the property and rights assigned to the Trust pursuant to Article II of the Sale and Servicing Agreement, all funds on deposit from time to time in the Trust Accounts and the Certificate Distribution Account and all other property of the Trust from time to time, including any rights of the Owner Trustee and the Trust pursuant to the Sale and Servicing Agreement and the Administration Agreement. 2 "Owner Trustee" shall mean Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as owner trustee under this Agreement, and any successor Owner Trustee hereunder. "Paying Agent" shall mean any paying agent or co-paying agent appointed pursuant to Section 3.09 and shall initially be Wilmington Trust Company. "Person" shall mean any individual, corporation, estate, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization, or government or any agency or political subdivision thereof. "Record Date" shall mean, with respect to any Distribution Date, the close of business on the last day of the month immediately preceding such Distribution Date. "Sale and Servicing Agreement" shall mean the Sale and Servicing Agreement dated as of December 9, 1996, among the Trust, as issuer, the Depositor, as seller, NAL Acceptance Corporation, as servicer and Bankers Trust Company, as Backup Servicer as the same may be amended or supplemented from time to time. "Secretary of State" shall mean the Secretary of State of the State of Delaware. "Treasury Regulations" shall mean regulations, including proposed or temporary Regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. "Trust" shall mean the trust established by this Agreement. "Trust Certificate" shall mean a certificate evidencing the beneficial interest of an Owner in the Trust, substantially in the form attached hereto as Exhibit A. SECTION 1.02. Other Definitional Provisions. (a) Capi- talized terms used and not otherwise defined herein have the meanings assigned to them in the Sale and Servicing Agreement or, if not defined therein, in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the 3 extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof," "herein," "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Section and Exhibit references contained in this Agreement are references to Sections and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. ARTICLE II Organization SECTION 2.01. Name. The Trust created hereby shall be known as "NAL Auto Trust 1996-4" in which name the Owner Trustee may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. SECTION 2.02. Office. The office of the Trust shall be in care of the Owner Trustee at the Corporate Trust Office or at such other address in Delaware as the Owner Trustee may designate by written notice to the Owners and the Depositor. SECTION 2.03. Purposes and Powers. (a) The purpose of the Trust is to engage in the following activities: (i) to issue the Notes pursuant to the Indenture and the Trust Certificates pursuant to this Agreement and to sell the Notes and the Trust Certificates; 4 (ii) with the proceeds of the sale of the Notes and the Trust Certificates, to purchase the Receivables, to fund the Reserve Account and to pay the organizational, start-up and transactional expenses of the Trust; (iii) to assign, grant, transfer, pledge, mortgage and convey the Trust Estate pursuant to the Indenture and to hold, manage and distribute to the Owners pursuant to the terms of the Sale and Servicing Agreement any portion of the Trust Estate released from the Lien of, and remitted to the Trust pursuant to, the Indenture; (iv) to enter into and perform its obligations under the Basic Documents to which it is to be a party; (v) to engage in those activities, including entering into agreements, that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith; and (vi) subject to compliance with the Basic Documents, to engage in such other activities as may be required in connection with conservation of the Owner Trust Estate and the making of distributions to the Owners and the Noteholders. The Trust is hereby authorized to engage in the foregoing activities. The Trust shall not engage in any activity other than in connection with the foregoing or other than as required or authorized by the terms of this Agreement or the Basic Documents. SECTION 2.04. Appointment of Owner Trustee. The Depositor hereby appoints the Owner Trustee as trustee of the Trust effective as of the date hereof, to have all the rights, powers and duties set forth herein. SECTION 2.05. Initial Capital Contribution of Owner Trust Estate. The Depositor hereby sells, assigns, transfers, conveys and sets over to the Owner Trustee, as of the date hereof, the sum of $1. The Owner Trustee hereby acknowledges receipt in trust from the Depositor, as of the date hereof, of the foregoing contribution, which shall constitute the initial Owner Trust Estate and shall be deposited in the Certificate Distribution Account. The Depositor shall pay organizational expenses of the Trust as they may arise or shall, upon the request of the Owner Trustee, promptly reimburse the Owner Trustee for any such expenses paid by the Owner Trustee. SECTION 2.06. Declaration of Trust. The Owner Trustee hereby declares that it will hold the Owner Trust Estate in trust upon and subject to the conditions set forth herein for the use and benefit of the Owners, subject to the obligations of the Trust under the Basic Documents. It is the intention of the parties hereto that the Trust constitute a business trust under the Business Trust 5 Statute and that this Agreement constitute the governing instrument of such business trust. It is the intention of the parties hereto that, solely for income and franchise tax purposes, the Trust shall be treated as a partnership, with the assets of the partnership being the Receivables and other assets held by the Trust, the partners of the partnership being the Certificateholders (including the Depositor, in its capacity as recipient of distributions from the Reserve Account), and the Notes being debt of the partnership. The parties agree that, unless otherwise required by appropriate tax authorities, the Trust will file or cause to be filed annual or other necessary returns, reports and other forms consistent with the characterization of the Trust as a partnership for such tax purposes. Effective as of the date hereof, the Owner Trustee shall have all rights, powers and duties set forth herein and in the Business Trust Statute with respect to accomplishing the purposes of the Trust. SECTION 2.07. Liability of the Owners. (a) The Depositor shall be liable directly to and will indemnify any injured party for all losses, claims, damages, liabilities and expenses of the Trust (including Expenses, to the extent not paid out of the Owner Trust Estate) to the extent that the Depositor would be liable if the Trust were a partnership under the Delaware Revised Uniform Limited Partnership Act in which the Depositor were a general partner; provided, however, that the Depositor shall not be liable for any losses incurred by a Certificateholder in the capacity of an investor in the Trust Certificates, or by a Noteholder in the capacity of an investor in the Notes. In addition, any third party creditors of the Trust (other than in connection with the obligations described in the preceding sentence for which the Depositor shall not be liable) shall be deemed third party beneficiaries of this paragraph and paragraph (c) below. The obligations of the Depositor under this paragraph and paragraph (c) below shall be evidenced by the Trust Certificates described in Section 3.10, which for purposes of the Business Trust Statute shall be deemed to be a separate class of Trust Certificates from all other Trust Certificates issued by the Trust; provided that the rights and obligations evidenced by all Trust Certificates, regardless of class, shall, except as provided in this Section, be identical. (b) No Owner, other than to the extent set forth in paragraphs (a) and (c), shall have any personal liability for any liability or obligation of the Trust. (c) The Depositor agrees to be liable directly to and will indemnify any injured party for all losses, claims, damages, liabilities and expenses (other than those incurred by a Certificateholder in the capacity of an investor in the Trust Certificates and a Noteholder in the capacity of an investor in the Notes) as though such arrangements were a partnership under the Delaware Revised Uniform Limited Partnership Act in which the Depositor were a general partner. 6 SECTION 2.08. Title to Trust Property. Legal title to all the Owner Trust Estate shall be vested at all times in the Trust as a separate legal entity except where applicable law in any jurisdiction requires title to any part of the Owner Trust Estate to be vested in a trustee or trustees, in which case title shall be deemed to be vested in the Owner Trustee, a co-trustee and/or a separate trustee, as the case may be. SECTION 2.09. Situs of Trust. The Trust will be located and administered in the State of Delaware. All bank accounts maintained by the Owner Trustee on behalf of the Trust shall be located in the State of Delaware or the State of New York. The Trust shall not have any employees in any state other than Delaware; provided, however, that nothing herein shall restrict or prohibit the Owner Trustee from having employees within or without the State of Delaware. Payments will be received by the Trust only in Delaware or New York, and payments will be made by the Trust only from Delaware or New York. The only office of the Trust will be at the Corporate Trust Office in Delaware. SECTION 2.10. Representations and Warranties of the Depositor. The Depositor hereby represents and warrants to the Owner Trustee that: (a) The Depositor is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted. (b) The Depositor is duly qualified to do business as a foreign corporation in good standing and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of its property or the conduct of its business shall require such qualifications. (c) The Depositor has the power and authority to execute and deliver this Agreement and to carry out its terms; the Depositor has full power and authority to sell and assign the property to be sold and assigned to and deposited with the Trust and the Depositor has duly authorized such sale and assignment and deposit to the Trust by all necessary corporate action; and the execution, delivery and performance of this Agreement have been duly authorized by the Depositor by all necessary corporate action. (d) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Depositor, or any indenture, agreement or other instrument to which the Depositor is a party or by which it is 7 bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than pursuant to the Basic Documents); nor violate any law or, to the best of the Depositor's knowledge, any order, rule or regulation applicable to the Depositor of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Depositor or its properties. (e) There are no proceedings or investigations pending or, to the Depositor's best knowledge, threatened before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Depositor or its properties: (A) asserting the invalidity of this Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (C) seeking any determination or ruling that might materially and adversely affect the performance by the Depositor of its obligations under, or the validity or enforceability of, this Agreement. SECTION 2.11. Maintenance of the Demand Note. To the fullest extent permitted by applicable law, the Depositor agrees that it shall not sell, convey, pledge, transfer or otherwise dispose of the Demand Note. SECTION 2.12. Federal Income Tax Provisions. Annex A to this Agreement sets forth the tax accounting and administration of the Trust in a manner consistent with its treatment as a partnership for federal, state and local tax purposes. ARTICLE III Trust Certificates and Transfer of Interests SECTION 3.01. Initial Ownership. Upon the formation of the Trust by the contribution by the Depositor pursuant to Section 2.05 and until the issuance of the Trust Certificates, the Depositor shall be the sole beneficiary of the Trust. SECTION 3.02. The Trust Certificates. The Trust Certificates shall be issued in minimum denominations of $100,000 and in integral multiples of $1,000 in excess thereof; provided, however, that the Trust Certificates issued to the Depositor pursuant to Section 3.10 may be issued in such denomination as required to include any residual amount. The Trust Certificates shall be executed on behalf of the Trust by manual or facsimile signature of an authorized officer of the Owner Trustee. Trust Certificates bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be validly issued 8 and entitled to the benefit of this Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of such Trust Certificates or did not hold such offices at the date of authentication and delivery of such Trust Certificates. A transferee of a Trust Certificate shall become a Certificateholder and shall be entitled to the rights and subject to the obligations of a Certificateholder hereunder upon such transferee's acceptance of a Trust Certificate duly registered in such transferee's name pursuant to Section 3.04. SECTION 3.03. Authentication of Trust Certificates. On the Closing Date, the Owner Trustee shall cause the Trust Certificates in an aggregate principal amount equal to the Initial Certificate Balance to be executed on behalf of the Trust, authenticated and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president, any vice president, secretary or any assistant treasurer, without further corporate action by the Depositor, in authorized denominations. No Trust Certificate shall entitle its Holder to any benefit under this Agreement or be valid for any purpose unless there shall appear on such Trust Certificate a certificate of authentication substantially in the form set forth in Exhibit A, executed by the Owner Trustee, by manual signature; such authentication shall constitute conclusive evidence that such Trust Certificate shall have been duly authenticated and delivered hereunder. All Trust Certificates shall be dated the date of their authentication. SECTION 3.04. Registration of Transfer and Exchange of Trust Certificates. The Certificate Registrar shall keep or cause to be kept, at the office or agency maintained pursuant to Section 3.08, a Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Owner Trustee shall provide for the registration of Trust Certificates and of transfers and exchanges of Trust Certificates as herein provided. Wilmington Trust Company shall be the initial Certificate Registrar. The Certificates have not been and will not be registered under the Securities Act and will not be listed on any exchange. No transfer of a Certificate shall be made unless such transfer is made pursuant to an effective registration statement under the Securities Act and any applicable state securities laws or is exempt from the registration requirements under said Act and such state securities laws. In the event that a transfer is to be made in reliance upon an exemption from the Securities Act and state securities laws, in order to assure compliance with the Securities Act and such laws, the Holder desiring to effect such transfer and such Holder's prospective transferee shall each certify to the Owner Trustee and the Depositor in writing the facts surrounding the transfer in substantially the forms set forth in Exhibit C (the "Transferor Certificate") and Exhibit D (the "Investment Letter"). Except in the case of a transfer as to which the proposed 9 transferee has provided an Investment Letter with respect to a Rule 144A transaction, there shall also be delivered to the Owner Trustee an opinion of counsel that such transfer may be made pursuant to an exemption from the Securities Act and state securities laws, which opinion of counsel shall not be an expense of the Trust, the Owner Trustee or the Indenture Trustee (unless it is the transferee from whom such opinion is to be obtained) or of the Depositor or NAL; provided that such opinion of counsel in respect of the applicable state securities laws may be a memorandum of law rather than an opinion if such counsel is not licensed in the applicable jurisdiction. The Depositor shall provide to any Holder of a Certificate and any prospective transferee designated by any such Holder information regarding the Certificates and the Receivables and such other information as shall be necessary to satisfy the condition to eligibility set forth in Rule 144A(d)(4) for transfer of any such Certificate without registration thereof under the Securities Act pursuant to the registration exemption provided by Rule 144A. Each Holder of a Certificate desiring to effect such a transfer shall, and does hereby agree to, indemnify the Issuer, the Owner Trustee, the Indenture Trustee and the Depositor against any liability that may result if the transfer is not so exempt or is not made in accordance with federal and state securities laws. No transfer of a Trust Certificate shall be made to any Person unless the Owner Trustee has received (A) a certificate in the form of paragraph 3 to the Investment Letter attached hereto as Exhibit D from such Person to the effect that such Person is not (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code or (iii) any entity whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "Benefit Plan"), (B) an opinion of counsel satisfactory to the Owner Trustee and the Depositor to the effect that the purchase and holding of such Trust Certificate will not constitute or result in the assets of the Issuer being deemed to be "plan assets" subject to the prohibited transactions provisions of ERISA or Section 4975 of the Code and will not subject the Owner Trustee, the Indenture Trustee or the Depositor to any obligation in addition to those undertaken in the Basic Documents or (C) if such Person is an insurance company, a representation that such Person is an insurance company that is purchasing such Certificates with funds contained in an "insurance company general account" (as such term is defined in section v(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and holding of such Certificates and any deemed extension of credit from a Certificateholder which is a party in interest to a Plan, the assets of which are held by such "Insurance Company" are covered under PTCE 95-60; provided, however, that the Owner Trustee will not require such certificate or opinion in the event that, as a result of a change of law or otherwise, counsel satisfactory to the Owner Trustee has rendered an opinion to the 10 effect that the purchase and holding of a Trust Certificate by a Benefit Plan or a Person that is purchasing or holding such a Trust Certificate with the assets of a Benefit Plan will not constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code. The preparation and delivery of the certificate and opinions referred to above shall not be an expense of the Issuer, the Owner Trustee, the Indenture Trustee, the Servicer or the Depositor. The Owner Trustee shall cause each Certificate to contain a legend stating that transfer of the Certificates is subject to certain restrictions and referring prospective purchasers of the Certificates to the terms of this Agreement with respect to such restrictions. Upon surrender for registration of transfer of any Trust Certificate at the office or agency maintained pursuant to Section 3.08, the Owner Trustee shall execute, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Trust Certificates in authorized denominations of a like aggregate amount dated the date of authentication by the Owner Trustee or any authenticating agent. At the option of a Holder, Trust Certificates may be exchanged for other Trust Certificates of authorized denominations of a like aggregate amount upon surrender of the Trust Certificates to be exchanged at the office or agency maintained pursuant to Section 3.08. Every Trust Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Owner Trustee and the Certificate Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Trust Certificate surrendered for registration of transfer or exchange shall be cancelled and subsequently disposed of by the Owner Trustee in accordance with its customary practice. No service charge shall be made for any registration of transfer or exchange of Trust Certificates, but the Owner Trustee or the Certificate Registrar may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Trust Certificates. The preceding provisions of this Section notwithstanding, the Owner Trustee shall not make, and the Certificate Registrar shall not register transfers or exchanges of, Trust Certificates for a period of 15 days preceding the due date for any payment with respect to the Trust Certificates. SECTION 3.05. Mutilated, Destroyed, Lost or Stolen Trust Certificates. If (a) any mutilated Trust Certificate shall be surrendered to the Certificate Registrar, or if the Certificate Registrar shall receive evidence to its satisfaction of the 11 destruction, loss or theft of any Trust Certificate and (b) there shall be delivered to the Certificate Registrar and the Owner Trustee such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Certificate has been acquired by a bona fide purchaser, the Owner Trustee on behalf of the Trust shall execute and the Owner Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Certificate, a new Trust Certificate of like tenor and denomination. In connection with the issuance of any new Trust Certificate under this Section, the Owner Trustee or the Certificate Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Certificate issued pursuant to this Section shall constitute conclusive evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Certificate shall be found at any time. SECTION 3.06. Persons Deemed Owners. Prior to due presentation of a Trust Certificate for registration of transfer, the Owner Trustee, the Certificate Registrar or any Paying Agent may treat the Person in whose name any Trust Certificate is registered in the Certificate Register as the owner of such Trust Certificate for the purpose of receiving distributions pursuant to Section 5.02 and for all other purposes whatsoever, and none of the Owner Trustee, the Certificate Registrar or any Paying Agent shall be bound by any notice to the contrary. SECTION 3.07. Access to List of Certificateholders' Names and Addresses. The Owner Trustee shall furnish or cause to be furnished to the Servicer and the Depositor, within 15 days after receipt by the Owner Trustee of a written request therefor from the Servicer or the Depositor, a list, in such form as the Servicer or the Depositor may reasonably require, of the names and addresses of the Certificateholders as of the most recent Record Date. If three or more Certificateholders or one or more Holders of Trust Certificates evidencing not less than 25% of the Certificate Balance apply in writing to the Owner Trustee, and such application states that the applicants desire to communicate with other Certificateholders with respect to their rights under this Agreement or under the Trust Certificates and such application is accompanied by a copy of the communication that such applicants propose to transmit, then the Owner Trustee shall, within five Business Days after the receipt of such application, afford such applicants access during normal business hours to the current list of Certificateholders. Each Holder, by receiving and holding a Trust Certificate, shall be deemed to have agreed not to hold any of the Depositor, the Certificate Registrar or the Owner Trustee accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. SECTION 3.08. Maintenance of Office or Agency. The Owner Trustee shall maintain in the Borough of Manhattan, The City of New 12 York, an office or offices or agency or agencies where Trust Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Owner Trustee in respect of the Trust Certificates and the Basic Documents may be served. The Owner Trustee initially designates Harris Trust Company of New York, 77 Water Street, 4th Floor, New York, New York 10005, Attention: Wilbert Myles, as its office for such purposes. The Owner Trustee shall give prompt written notice to the Depositor and to the Certificateholders of any change in the location of the Certificate Register or any such office or agency. SECTION 3.09. Appointment of Paying Agent. The Paying Agent shall make distributions to Certificateholders from the Certificate Distribution Account pursuant to Section 5.02 and shall report the amounts of such distributions to the Owner Trustee. Any Paying Agent shall have the revocable power to withdraw funds from the Certificate Distribution Account for the purpose of making the distributions referred to above. The Owner Trustee may revoke such power and remove the Paying Agent if the Owner Trustee determines in its sole discretion that the Paying Agent shall have failed to perform its obligations under this Agreement in any material respect. The Owner Trustee will be the initial Paying Agent. In the event that the Owner Trustee shall no longer be the Paying Agent, the Owner Trustee shall appoint a successor to act as Paying Agent (which shall be a bank or trust company). The Owner Trustee shall cause such successor Paying Agent or any additional Paying Agent appointed by the Owner Trustee to execute and deliver to the Owner Trustee an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Owner Trustee that, as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Certificateholders in trust for the benefit of the Certificateholders entitled thereto until such sums shall be paid to such Certificateholders. The Paying Agent shall return all unclaimed funds to the Owner Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Owner Trustee. The provisions of Sections 7.01, 7.03, 7.04 and 8.01 shall apply to the Owner Trustee also in its role as Paying Agent, for so long as the Owner Trustee shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. SECTION 3.10. Ownership by Depositor of Trust Certificates. The Depositor shall on the Closing Date retain Trust Certificates representing at least 1% of the Initial Certificate Balance and shall thereafter retain beneficial and record ownership of Trust Certificates representing at least 1% of the Certificate Balance. Any attempted transfer of the Depositor's Trust Certificate that would reduce such interest of the Depositor below 1% of the Certificate Balance shall be void. The Owner Trustee shall cause 13 the Depositor's Trust Certificate to contain a legend stating "THIS CERTIFICATE IS NON-TRANSFERABLE". ARTICLE IV Actions by Owner Trustee SECTION 4.01. Prior Notice to Owners with Respect to Certain Matters. With respect to the following matters, the Owner Trustee shall not take action unless at least 30 days before the taking of such action, the Owner Trustee shall have notified the Certificateholders in writing of the proposed action and the Owners shall not have notified the Owner Trustee in writing prior to the 30th day after such notice is given that such Owners have withheld consent or provided alternative direction: (a) the initiation of any claim or lawsuit by the Trust (except claims or lawsuits brought in connection with the collection of the Receivables) and the compromise of any action, claim or lawsuit brought by or against the Trust (except with respect to the aforementioned claims or lawsuits for collection of the Receivables); (b) the election by the Trust to file an amendment to the Certificate of Trust (unless such amendment is required to be filed under the Business Trust Statute); (c) the amendment of the Indenture by a supplemental indenture in circumstances where the consent of any Noteholder is required; (d) the amendment of the Indenture by a supplemental indenture in circumstances where the consent of any Noteholder is not required and such amendment would materially adversely affect the interests of the Owners; (e) the amendment, change or modification of the Administration Agreement, except to cure any ambiguity or to amend or supplement any provision in a manner or add any provision that would not materially adversely affect the interests of the Owners; or (f) the appointment pursuant to the Indenture of a successor Note Registrar, Paying Agent or Indenture Trustee or pursuant to this Agreement of a successor Certificate Registrar, or the consent to the assignment by the Note Registrar, Paying Agent or Indenture Trustee or Certificate Registrar of its obligations under the Indenture or this Agreement, as applicable. SECTION 4.02. Action by Owners with Respect to Certain Matters. The Owner Trustee shall not have the power, except upon the written direction of the Owners, to (a) remove the 14 Administrator under the Administration Agreement pursuant to Section 8 thereof, (b) appoint a successor Administrator under the Administration Agreement pursuant to Section 8 thereof, (c) remove the Servicer under the Sale and Servicing Agreement pursuant to Section 8.01 thereof or (d) except as expressly provided in the Basic Documents, sell the Receivables after the termination of the Indenture. The Owner Trustee shall take the actions referred to in the preceding sentence only upon written instructions signed by the Owners. SECTION 4.03. Action by Owners with Respect to Bankruptcy. The Owner Trustee shall not have the power to commence a voluntary proceeding in bankruptcy relating to the Trust without the unanimous prior approval of all Owners and the delivery to the Owner Trustee by each such Owner of a certificate certifying that such Owner reasonably believes that the Trust is insolvent. SECTION 4.04. Restrictions on Owners' Power. The Owners shall not direct the Owner Trustee to take or to refrain from taking any action if such action or inaction would be contrary to any obligation of the Trust or the Owner Trustee under this Agreement or any of the Basic Documents or would be contrary to Section 2.03 or contrary to applicable law, nor shall the Owner Trustee be obligated to follow any such direction, if given. SECTION 4.05. Majority Control. Except as expressly provided herein, any action that may be taken by the Owners under this Agreement may be taken by the Holders of Trust Certificates evidencing not less than a majority of the Certificate Balance. Except as expressly provided herein, any written notice of the Owners delivered pursuant to this Agreement shall be effective if signed by Holders of Trust Certificates evidencing not less than a majority of the Certificate Balance at the time of the delivery of such notice. ARTICLE V Application of Trust Funds; Certain Duties SECTION 5.01. Establishment of Trust Account. The Owner Trustee, for the benefit of the Certificateholders, shall establish and maintain in the name of the Trust an Eligible Deposit Account (the "Certificate Distribution Account"), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Certificateholders. The Owner Trustee shall possess all right, title and interest in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof. Except as otherwise expressly provided herein, the Certificate Distribution Account shall be under the sole dominion and control of the Owner Trustee for the benefit of the Certificateholders. If, at any 15 time, the Certificate Distribution Account ceases to be an Eligible Deposit Account, the Owner Trustee (or the Depositor on behalf of the Owner Trustee, if the Certificate Distribution Account is not then held by the Owner Trustee or an affiliate thereof) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) establish a new Certificate Distribution Account as an Eligible Deposit Account and shall transfer any cash and/or any investments to such new Certificate Distribution Account. SECTION 5.02. Application of Trust Funds. (a) On each Distribution Date, the Owner Trustee will distribute to Certificateholders, on a pro rata basis, amounts deposited in the Certificate Distribution Account pursuant to Sections 5.05 and 5.06 of the Sale and Servicing Agreement with respect to such Distribution Date. (b) On each Distribution Date, the Owner Trustee shall send to each Certificateholder the statement or statements provided to the Owner Trustee by the Servicer pursuant to Section 5.07 of the Sale and Servicing Agreement with respect to such Distribution Date. SECTION 5.03. Method of Payment. Subject to Section 9.01(c), distributions required to be made to Certificateholders on any Distribution Date shall be made to each Certificateholder of record on the preceding Record Date either (x) by wire transfer, in immediately available funds, to the account of such Holder at a bank or other entity having appropriate facilities therefor, if such Certificateholder shall have provided to the Certificate Registrar appropriate written instructions no later than the Record Date prior to such Distribution Date, or (y) if such Holder does not qualify under clause (x), by check mailed to such Certificateholder at the address of such holder appearing in the Certificate Register. SECTION 5.04. No Segregation of Moneys; No Interest. Subject to Sections 5.01 and 5.02, moneys received by the Owner Trustee hereunder need not be segregated in any manner except to the extent required by law or the Sale and Servicing Agreement and may be deposited under such general conditions as may be prescribed by law, and the Owner Trustee shall not be liable for any interest thereon. SECTION 5.05. Accounting and Reports to the Noteholders, Owners, the Internal Revenue Service and Others. In accordance with Annex A hereto, the Owner Trustee shall (a) maintain (or cause to be maintained) the books of the Trust on a calendar year basis and the accrual method of accounting, in a manner consistent with its treatment as a partnership for federal and applicable state and local tax purposes, (b) deliver to each Owner, as may be required by the Code and applicable Treasury Regulations, such information as may be required (including Schedule K-1) to enable each Owner to 16 prepare its federal and state income tax returns, (c) file such tax returns relating to the Trust (including a partnership information return, IRS Form 1065) and make such elections as from time to time may be required or appropriate under any applicable state or federal statute or any rule or regulation thereunder so as to maintain the Trust's characterization as a partnership for federal income tax purposes, (d) cause such tax returns to be signed in the manner required by law and (e) collect or cause to be collected any withholding tax as described in and in accordance with Section 5.02(c) with respect to income or distributions to Owners. The Owner Trustee shall elect under Section 1278 of the Code to include in income currently any market discount that accrues with respect to the Receivables. The Owner Trustee shall not make the election provided under Section 754 of the Code. SECTION 5.06. Signature on Returns. The Owner Trustee shall sign on behalf of the Trust the tax returns of the Trust, unless applicable law requires an Owner to sign such documents, in which case such documents shall be signed by the Depositor. ARTICLE VI Authority and Duties of Owner Trustee SECTION 6.01. General Authority. The Owner Trustee is authorized and directed to execute and deliver the Basic Documents to which the Trust is to be a party and each certificate or other document attached as an exhibit to or contemplated by the Basic Documents to which the Trust is to be a party and, in each case, in such form as the Depositor shall approve, as evidenced conclusively by the Owner Trustee's execution thereof. In addition to the foregoing, the Owner Trustee is authorized, but shall not be obligated, to take all actions required of the Trust pursuant to the Basic Documents. The Owner Trustee is further authorized from time to time to take such action as the Administrator recommends with respect to the Basic Documents. SECTION 6.02. General Duties. It shall be the duty of the Owner Trustee to discharge (or cause to be discharged) all of its responsibilities pursuant to the terms of this Agreement and the Basic Documents to which the Trust is a party and to administer the Trust in the interest of the Owners, subject to the Basic Documents and in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the Owner Trustee shall be deemed to have discharged its duties and responsibilities hereunder and under the Basic Documents to the extent the Administrator has agreed in the Administration Agreement to perform any act or to discharge any duty of the Owner Trustee hereunder or under any Basic Document, and the Owner Trustee shall not be held liable for the default or failure of the Administrator to carry out its obligations under the Administration Agreement. 17 SECTION 6.03. Action upon Instruction. (a) Subject to Article IV and in accordance with the terms of the Basic Documents, the Owners may by written instruction direct the Owner Trustee in the management of the Trust. Such direction may be exercised at any time by written instruction of the Owners pursuant to Article IV. (b) The Owner Trustee shall not be required to take any action hereunder or under any Basic Document if the Owner Trustee shall have reasonably determined, or shall have been advised by counsel, that such action is likely to result in liability on the part of the Owner Trustee or is contrary to the terms hereof or of any Basic Document or is otherwise contrary to law. (c) Whenever the Owner Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Agreement or under any Basic Document, the Owner Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction as to the course of action to be adopted, and to the extent the Owner Trustee acts in good faith in accordance with any written instruction of the Owners received, the Owner Trustee shall not be liable on account of such action to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Agreement or the Basic Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. (d) In the event that the Owner Trustee is unsure as to the application of any provision of this Agreement or any Basic Document or any such provision is ambiguous as to its application, or is, or appears to be, in conflict with any other applicable provision, or in the event that this Agreement permits any determination by the Owner Trustee or is silent or is incomplete as to the course of action that the Owner Trustee is required to take with respect to a particular set of facts, the Owner Trustee may give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction and, to the extent that the Owner Trustee acts or refrains from acting in good faith in accordance with any such instruction received, the Owner Trustee shall not be liable, on account of such action or inaction, to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Agreement or the Basic Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. 18 SECTION 6.04. No Duties Except as Specified in this Agreement or in Instructions. The Owner Trustee shall not have any duty or obligation to manage, make any payment with respect to, register, record, sell, dispose of, or otherwise deal with the Owner Trust Estate, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which the Owner Trustee is a party, except as expressly provided by the terms of this Agreement or in any document or written instruction received by the Owner Trustee pursuant to Section 6.03; and no implied duties or obligations shall be read into this Agreement or any Basic Document against the Owner Trustee. The Owner Trustee shall have no responsibility for filing any financing or continuation statement in any public office at any time or to otherwise perfect or maintain the perfection of any security interest or lien granted to it hereunder or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Agreement or any Basic Document. The Owner Trustee nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any liens on any part of the Owner Trust Estate that result from actions by, or claims against, the Owner Trustee that are not related to the ownership or the administration of the Owner Trust Estate. SECTION 6.05. No Action Except Under Specified Documents or Instructions. The Owner Trustee shall not manage, control, use, sell, dispose of or otherwise deal with any part of the Owner Trust Estate except (i) in accordance with the powers granted to and the authority conferred upon the Owner Trustee pursuant to this Agreement, (ii) in accordance with the Basic Documents and (iii) in accordance with any document or instruction delivered to the Owner Trustee pursuant to Section 6.03. SECTION 6.06. Restrictions. The Owner Trustee shall not take any action (a) that is inconsistent with the purposes of the Trust set forth in Section 2.03 or (b) that, to the actual knowledge of the Owner Trustee, would result in the Trust's becoming taxable as a corporation for federal income tax purposes. The Owners shall not direct the Owner Trustee to take action that would violate the provisions of this Section. ARTICLE VII Concerning the Owner Trustee SECTION 7.01. Acceptance of Trusts and Duties. The Owner Trustee accepts the trusts hereby created and agrees to perform its duties hereunder with respect to such trusts, but only upon the terms of this Agreement. The Owner Trustee also agrees to disburse all moneys actually received by it constituting part of the Owner Trust Estate upon the terms of the Basic Documents and this Agreement. The Owner Trustee shall not be answerable or accountable hereunder or under any Basic Document under any 19 circumstances, except (i) for its own willful misconduct or gross negligence (or negligence in the case of handling funds), (ii) for liabilities arising from the failure by the Owner Trustee to perform obligations expressly undertaken by it in the last sentence of Section 6.04 hereof, (iii) for any investments made by the Owner Trustee with Wilmington Trust Company (in its individual capacity) in its commercial capacity, (iv) in the case of the inaccuracy of any representation or warranty contained in Section 7.03 expressly made by the Owner Trustee or (v) for federal or Delaware taxes, fees or other charges, based on or measured by any fees, commissions or compensation received by the Owner Trustee in connection with any of the transactions contemplated by this Agreement or any of the Basic Documents. In particular, but not by way of limitation (and subject to the exceptions set forth in the preceding sentence): (a) The Owner Trustee shall not be liable for any error of judgment made by a Trust Officer of the Owner Trustee; (b) The Owner Trustee shall not be liable with respect to any action taken or omitted to be taken by it in accordance with the instructions of the Administrator or any Owner; (c) No provision of this Agreement or any Basic Document shall require the Owner Trustee to expend or risk funds or otherwise incur any financial liability in the performance of any of its rights or powers hereunder or under any Basic Document if the Owner Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; (d) Under no circumstances shall the Owner Trustee be liable for indebtedness evidenced by or arising under any of the Basic Documents, including the principal of and interest on the Notes; (e) The Owner Trustee shall not be responsible for or in respect of the validity or sufficiency of this Agreement or for the due execution hereof by the Depositor or for the form, character, genuineness, sufficiency, value or validity of any of the Owner Trust Estate, or for or in respect of the validity or sufficiency of the Basic Documents, other than the certificate of authentication on the Trust Certificates, and the Owner Trustee shall in no event assume or incur any liability, duty or obligation to any Noteholder or to any Owner, other than as expressly provided for herein or expressly agreed to in the Basic Documents; (f) The Owner Trustee shall not be liable for the default or misconduct of the Administrator, the Depositor, the Indenture Trustee, the Servicer or the Backup Servicer under any of the Basic Documents or otherwise, and the Owner Trustee shall have no obligation or liability to perform the obligations of the Trust under this Agreement or the Basic Documents that are required to be performed by the Administrator under the Administration Agreement, 20 the Indenture Trustee under the Indenture or the Servicer or AUTORICS II, Inc., as Depositor under the Sale and Servicing Agreement; and (g) The Owner Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement, or to institute, conduct or defend any litigation under this Agreement or otherwise or in relation to this Agreement or any Basic Document, at the request, order or direction of any of the Owners, unless such Owners have offered to the Owner Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that may be incurred by the Owner Trustee therein or thereby. The right of the Owner Trustee to perform any discretionary act enumerated in this Agreement or in any Basic Document shall not be construed as a duty, and the Owner Trustee shall not be answerable for other than its negligence or willful misconduct in the performance of any such act. SECTION 7.02. Furnishing of Documents. The Owner Trustee shall furnish to the Owners promptly upon receipt of a written request therefor, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Owner Trustee under the Basic Documents. SECTION 7.03. Representations and Warranties. The Owner Trustee hereby represents and warrants to the Depositor, for the benefit of the Owners, that: (a) It is a banking corporation duly organized and validly existing in good standing under the laws of the State of Delaware. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (b) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, and this Agreement will be executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement on its behalf. (c) Neither the execution or the delivery by it of this Agreement, nor the consummation by it of the transactions contemplated hereby, nor compliance by it with any of the terms or provisions hereof will contravene any federal or Delaware law, governmental rule or regulation governing the banking or trust powers of the Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or bylaws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. SECTION 7.04. Reliance; Advice of Counsel. (a) The Owner Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, 21 certificate, report, opinion, bond, or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Owner Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the method of determination of which is not specifically prescribed herein, the Owner Trustee may for all purposes hereof rely on a certificate, signed by the president or any vice president or by the treasurer or other authorized officers of the relevant party, as to such fact or matter, and such certificate shall constitute full protection to the Owner Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. (b) In the exercise or administration of the trusts hereunder and in the performance of its duties and obligations under this Agreement or the Basic Documents, the Owner Trustee (i) may act directly or through its agents or attorneys pursuant to agreements entered into with any of them, and the Owner Trustee shall not be liable for the conduct or misconduct of such agents or attorneys if such agents or attorneys shall have been selected by the Owner Trustee with reasonable care, and (ii) may consult with counsel, accountants and other skilled Persons to be selected with reasonable care and employed by it. The Owner Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the written opinion or advice of any such counsel, accountants or other such Persons and not contrary to this Agreement or any Basic Document. SECTION 7.05. Not Acting in Individual Capacity. Except as provided in this Article VII, in accepting the trusts hereby created Wilmington Trust Company acts solely as Owner Trustee hereunder and not in its individual capacity, and all Persons having any claim against the Owner Trustee by reason of the transactions contemplated by this Agreement or any Basic Document shall look only to the Owner Trust Estate for payment or satisfaction thereof. SECTION 7.06. Owner Trustee Not Liable for Trust Certificates or Receivables. The Owner Trustee makes no representations as to the validity or sufficiency of this Agreement, of any Basic Document or of the Trust Certificates (other than the signature and countersignature of the Owner Trustee on the Trust Certificates) or the Notes, or of any Receivable or related documents. The Owner Trustee shall at no time have any responsibility or liability for or with respect to the legality, validity and enforceability of any Receivable, or the perfection and priority of any security interest created by any Receivable in any Financed Vehicle or the maintenance of any such perfection and priority, or for or with respect to the sufficiency of the Owner Trust Estate or its ability to generate the payments to be distributed to Certificateholders under this Agreement or the Noteholders under the Indenture, 22 including, without limitation: the existence, condition and ownership of any Financed Vehicle; the existence and enforceability of any insurance thereon; the existence and contents of any Receivable on any computer or other record thereof; the validity of the assignment of any Receivable to the Trust or of any intervening assignment; the completeness of any Receivable; the performance or enforcement of any Receivable; the compliance by the Depositor or the Servicer with any warranty or representation made under any Basic Document or in any related document or the accuracy of any such warranty or representation, or any action of the Administrator, the Indenture Trustee or the Servicer or any subservicer taken in the name of the Owner Trustee. SECTION 7.07. Owner Trustee May Own Trust Certificates and Notes. The Owner Trustee in its individual or any other capacity may become the owner or pledgee of Trust Certificates or Notes and may deal with the Depositor, the Administrator, the Indenture Trustee and the Servicer in banking transactions with the same rights as it would have if it were not Owner Trustee. ARTICLE VIII Compensation of Owner Trustee SECTION 8.01. Owner Trustee's Fees and Expenses. The Owner Trustee shall receive as compensation for its services hereunder such fees as have been separately agreed upon before the date hereof between the Depositor and the Owner Trustee, and the Owner Trustee shall be entitled to be reimbursed by the Administrator pursuant to the Administration Agreement for its other reasonable expenses hereunder, including the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Owner Trustee may employ in connection with the exercise and performance of its rights and its duties hereunder. SECTION 8.02. Indemnification. Pursuant to the Administration Agreement, the Administrator shall be liable as primary obligor for, and shall indemnify the Owner Trustee and its successors, assigns, agents and servants (collectively, the "Indemnified Parties") from and against, any and all liabilities, obligations, losses, damages, taxes, claims, actions and suits, and any and all reasonable costs, expenses and disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may at any time be imposed on, incurred by, or asserted against the Owner Trustee or any Indemnified Party in any way relating to or arising out of this Agreement, the Basic Documents, the Owner Trust Estate, the administration of the Owner Trust Estate or the action or inaction of the Owner Trustee hereunder, except only that the Administrator shall not be liable for or required to indemnify an Indemnified Party from and against Expenses arising or resulting from any of the matters described in the third sentence of Section 7.01. The 23 indemnities contained in this Section shall survive the resignation or termination of the Owner Trustee or the termination of this Agreement. In any event of any claim, action or proceeding for which indemnity will be sought pursuant to this Section, the Owner Trustee's choice of legal counsel shall be subject to the approval of the Administrator, which approval shall not be unreasonably withheld. SECTION 8.03. Payments to the Owner Trustee. Any amounts paid to the Owner Trustee pursuant to this Article VIII shall be deemed not to be a part of the Owner Trust Estate immediately after such payment. ARTICLE IX Termination of Trust Agreement SECTION 9.01. Termination of Trust Agreement. (a) This Agreement (other than Article VIII) and the Trust shall terminate and be of no further force or effect (i) upon the final distribution by the Owner Trustee of all moneys or other property or proceeds of the Owner Trust Estate in accordance with the terms of the Indenture, the Sale and Servicing Agreement and Article V or (ii) at the time provided in Section 9.02. The bankruptcy, liquidation, dissolution, death or incapacity of any Owner, other than the Depositor as described in Section 9.02, shall not (x) operate to terminate this Agreement or the Trust or (y) entitle such Owner's legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of all or any part of the Trust or Owner Trust Estate or (z) otherwise affect the rights, obligations and liabilities of the parties hereto. (b) Except as provided in Section 9.01(a), neither the Depositor nor any Owner shall be entitled to revoke or terminate the Trust. (c) Notice of any termination of the Trust, specifying the Distribution Date upon which Certificateholders shall surrender their Trust Certificates to the Paying Agent for payment of the final distribution and cancellation, shall be given by the Owner Trustee by letter to Certificateholders mailed within five Business Days of receipt of notice of such termination from the Servicer given pursuant to Section 9.01(c) of the Sale and Servicing Agreement, stating (i) the Distribution Date upon or with respect to which final payment of the Trust Certificates shall be made upon presentation and surrender of the Trust Certificates at the office of the Paying Agent therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, payments being made only upon presentation and surrender of the Trust Certificates at the office of the Paying Agent therein specified. The Owner 24 Trustee shall give such notice to the Certificate Registrar (if other than the Owner Trustee) and the Paying Agent at the time such notice is given to Certificateholders. Upon presentation and surrender of the Trust Certificates, the Paying Agent shall cause to be distributed to Certificateholders amounts distributable on such Distribution Date pursuant to Section 5.02. In the event that all of the Certificateholders shall not surrender their Trust Certificates for cancellation within six months after the date specified in the above mentioned written notice, the Owner Trustee shall give a second written notice to the remaining Certificateholders to surrender their Trust Certificates for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all the Trust Certificates shall not have been surrendered for cancellation, the Owner Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Certificateholders concerning surrender of their Trust Certificates, and the cost thereof shall be paid out of the funds and other assets that shall remain subject to this Agreement. Any funds remaining in the Trust after exhaustion of such remedies shall be distributed by the Owner Trustee to the Depositor. (d) Upon the winding up of the Trust and its termination, the Owner Trustee shall cause the Certificate of Trust to be cancelled by filing a certificate of cancellation with the Secretary of State in accordance with the provisions of Section 3810 of the Business Trust Statute. SECTION 9.02. Dissolution upon Bankruptcy of the Depositor. In the event that an Insolvency Event shall occur with respect to the Depositor, this Agreement shall be terminated in accordance with Section 9.01 90 days after the date of such Insolvency Event, unless, before the end of such 90-day period, the Owner Trustee shall have received written instructions from (a) Holders of Certificates (other than the Depositor) representing more than 50% of the Certificate Balance (not including the Certificate Balance of the Trust Certificates held by the Depositor) and (b) Holders (as defined in the Indenture) of Notes representing more than 50% of the Outstanding Amount of the Notes, to the effect that each such party disapproves of the liquidation of the Receivables and termination of the Trust. Promptly after the occurrence of any Insolvency Event with respect to the Depositor, (A) the Depositor shall give the Indenture Trustee and the Owner Trustee written notice of such Insolvency Event, (B) the Owner Trustee shall, upon the receipt of such written notice from the Depositor, give prompt written notice to the Certificateholders and the Indenture Trustee, of the occurrence of such event and (C) the Indenture Trustee shall, upon receipt of written notice of such Insolvency Event from the Owner Trustee or the Depositor, give prompt written notice to the Noteholders of the occurrence of such event; provided, however, that any failure to give a notice required by this sentence shall not prevent or delay, in any manner, a termination of the Trust 25 pursuant to the first sentence of this Section 9.02. Upon a termination pursuant to this Section, the Owner Trustee shall direct the Indenture Trustee promptly to sell the assets of the Trust (other than the Trust Accounts and the Certificate Distribution Account), in a commercially reasonable manner and on commercially reasonable terms. The proceeds of such a sale of the assets of the Trust shall be treated as collections under the Sale and Servicing Agreement. ARTICLE X Successor Owner Trustees and Additional Owner Trustees SECTION 10.01. Eligibility Requirements for Owner Trustee. The Owner Trustee shall at all times be a corporation satisfying the provisions of Section 3807(a) of the Business Trust Statute; authorized to exercise corporate trust powers; having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal or state authorities. If such corporation shall publish reports of condition at least annually pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purpose of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of this Section, the Owner Trustee shall resign immediately in the manner and with the effect specified in Section 10.02. SECTION 10.02. Resignation or Removal of Owner Trustee. The Owner Trustee may at any time resign and be discharged from the trusts hereby created by giving written notice thereof to the Administrator. Upon receiving such notice of resignation, the Administrator shall promptly appoint a successor Owner Trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Owner Trustee and one copy to the successor Owner Trustee. If no successor Owner Trustee shall have been so appointed and have accepted appointment within 30 days after the giving of such notice of resignation, the resigning Owner Trustee may petition any court of competent jurisdiction for the appointment of a successor Owner Trustee. If at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of Section 10.01 and shall fail to resign after written request therefor by the Administrator, or if at any time the Owner Trustee shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or a receiver of the Owner Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Owner Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Administrator may remove the Owner 26 Trustee. If the Administrator shall remove the Owner Trustee under the authority of the immediately preceding sentence, the Administrator shall promptly appoint a successor Owner Trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the outgoing Owner Trustee so removed and one copy to the successor Owner Trustee, and shall pay all fees owed to the outgoing Owner Trustee. Any resignation or removal of the Owner Trustee and appointment of a successor Owner Trustee pursuant to any of the provisions of this Section shall not become effective until acceptance of appointment by the successor Owner Trustee pursuant to Section 10.03 and payment of all fees and expenses owed to the outgoing Owner Trustee. The Administrator shall provide notice of such resignation or removal of the Owner Trustee to each Rating Agency. SECTION 10.03. Successor Owner Trustee. Any successor Owner Trustee appointed pursuant to Section 10.02 shall execute, acknowledge and deliver to the Administrator and to its predecessor Owner Trustee an instrument accepting such appointment under this Agreement, and thereupon the resignation or removal of the predecessor Owner Trustee shall become effective, and such successor Owner Trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor under this Agreement, with like effect as if originally named as Owner Trustee. The predecessor Owner Trustee shall upon payment of its fees and expenses deliver to the successor Owner Trustee all documents and statements and monies held by it under this Agreement; and the Administrator and the predecessor Owner Trustee shall execute and deliver such instruments and do such other things as may reasonably be required for fully and certainly vesting and confirming in the successor Owner Trustee all such rights, powers, duties and obligations. No successor Owner Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Owner Trustee shall be eligible pursuant to Section 10.01. Upon acceptance of appointment by a successor Owner Trustee pursuant to this Section, the Administrator shall mail notice thereof to all Certificateholders, the Indenture Trustee, the Noteholders and the Rating Agencies. If the Administrator shall fail to mail such notice within 10 days after acceptance of such appointment by the successor Owner Trustee, the successor Owner Trustee shall cause such notice to be mailed at the expense of the Administrator. SECTION 10.04. Merger or Consolidation of Owner Trustee. Any corporation into which the Owner Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting 27 from any merger, conversion or consolidation to which the Owner Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Owner Trustee, shall be the successor of the Owner Trustee hereunder, without the execution or filing of any instrument or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided, that such corporation shall be eligible pursuant to Section 10.01 and, provided, further, that the Owner Trustee shall mail notice of such merger or consolidation to each Rating Agency. SECTION 10.05. Appointment of Co-Trustee or Separate Trustee. Notwithstanding any other provisions of this Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Owner Trust Estate or any Financed Vehicle may at the time be located, the Administrator and the Owner Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Administrator and Owner Trustee to act as co- trustee, jointly with the Owner Trustee, or as separate trustee or separate trustees, of all or any part of the Owner Trust Estate, and to vest in such Person, in such capacity, such title to the Trust or any part thereof and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Administrator and the Owner Trustee may consider necessary or desirable. If the Administrator shall not have joined in such appointment within 15 days after the receipt by it of a request so to do, the Owner Trustee alone shall have the power to make such appointment. No co-trustee or separate trustee under this Agreement shall be required to meet the terms of eligibility as a successor Owner Trustee pursuant to Section 10.01 and no notice of the appointment of any co-trustee or separate trustee shall be required pursuant to Section 10.03. Each separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (a) All rights, powers, duties and obligations conferred or imposed upon the Owner Trustee shall be conferred upon and exercised or performed by the Owner Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Owner Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, the Owner Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Owner Trust Estate or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Owner Trustee; 28 (b) No trustee under this Agreement shall be personally liable by reason of any act or omission of any other trustee under this Agreement; and (c) The Administrator and the Owner Trustee acting jointly may at any time accept the resignation of or remove any separate trustee or co-trustee. Any notice, request or other writing given to the Owner Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Owner Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Owner Trustee. Each such instrument shall be filed with the Owner Trustee and a copy thereof given to the Administrator. Any separate trustee or co-trustee may at any time appoint the Owner Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Owner Trustee, to the extent permitted by law, without the appointment of a new or successor co-trustee or separate trustee. ARTICLE XI Miscellaneous SECTION 11.01. Supplements and Amendments. This Agreement may be amended by the Depositor and the Owner Trustee, with prior written notice to each Rating Agency, without the consent of any of the Noteholders or the Certificateholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that such action shall not, as evidenced by an Opinion of Counsel, adversely affect in any material respect the interests of any Noteholder or Certificateholder. 29 This Agreement may also be amended from time to time by the Depositor and the Owner Trustee, with prior written notice to each Rating Agency, with the consent of the Holders (as defined in the Indenture) of Notes evidencing not less than a majority of the Outstanding Amount of the Notes and the consent of the Holders of Certificates evidencing not less than a majority of the Certificate Balance, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Noteholders or the Certificateholders; provided, however, that no such amendment shall (a) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on Receivables or distributions that shall be required to be made for the benefit of the Noteholders or the Certificateholders or (b) reduce the aforesaid percentage of the Outstanding Amount of the Notes and the Certificate Balance required to consent to any such amendment, without the consent of the holders of all the outstanding Notes and Certificates. Section 2.07, Section 2.111 and Section 9.02 may be deleted or amended pursuant to the first paragraph of this Section 11.01 if the Depositor shall have provided to the Trustee, at the Depositor's expense, an Opinion of Counsel to the effect that the Trustee has complied with any applicable temporary or final Treasury Regulation or Notice of the Internal Revenue Service providing for a "check-the-box" partnership classification for federal income tax purposes; and such amendment shall further provide that Section 2 of Annex A hereto shall be amended by adding the following sentence immediately following the last sentence thereof: "If the Treasury Department or Internal Revenue Service shall promulgate a temporary or final regulation notice or other rule adopting a 'check-the-box' classification system for unincorporated organizations and which shall be applicable to the Trust, the Servicer, on behalf of the Tax Partners, shall elect in such manner as may be provided in such regulation, notice or other rule, to treat the Trust as a partnership for federal income tax purposes, and each Tax Partner irrevocably agrees to be bound by such election." Moreover, no amendment to this Agreement shall be recognized or be effective without the written consent of the Trustee and receipt by the Trustee of an Opinion of Counsel to the effect that such amendment will not (i) cause the Trust to be treated as an association taxable as a corporation or as a publicly-traded partnership for federal income tax purposes or (ii) cause the Trust to be subject to an entity-level tax for state tax purposes. Promptly after the execution of any such amendment or consent, the Owner Trustee shall furnish written notification of the substance of such amendment or consent to each Certificateholder, the Indenture Trustee and each Rating Agency. It shall not be necessary for the consent of Certificateholders, Noteholders or the Indenture Trustee pursuant 30 to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents (and any other consents of Certificateholders provided for in this Agreement or in any other Basic Document) and of evidencing the authorization of the execution thereof by Certificateholders shall be subject to such reasonable requirements as the Owner Trustee may prescribe. Promptly after the execution of any amendment to the Certificate of Trust, the Owner Trustee shall cause the filing of such amendment with the Secretary of State. Prior to the execution of any amendment to this Agreement or the Certificate of Trust, the Owner Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Owner Trustee may, but shall not be obligated to, enter into any such amendment that affects the Owner Trustee's own rights, duties or immunities under this Agreement or otherwise. In connection with the execution of any amendment to this Trust Agreement or any amendment of any other agreement to which the Issuer is a party, the Owner Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel to the effect that such amendment is authorized or permitted by the Basic Documents and that all conditions precedent in the Basic Documents for the execution and delivery thereof by the Issuer or the Owner Trustee, as the case may be, have been satisfied. SECTION 11.02. No Legal Title to Owner Trust Estate in Owners. The Owners shall not have legal title to any part of the Owner Trust Estate. The Owners shall be entitled to receive distributions with respect to their undivided ownership interest therein only in accordance with Articles V and IX. No transfer, by operation of law or otherwise, of any right, title or interest of the Owners to and in their ownership interest in the Owner Trust Estate shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of legal title to any part of the Owner Trust Estate. SECTION 11.03. Limitations on Rights of Others. Except for Section 2.07, the provisions of this Agreement are solely for the benefit of the Owner Trustee, the Depositor, the Owners, the Administrator and, to the extent expressly provided herein, the Indenture Trustee and the Noteholders, and nothing in this Agreement (other than Section 2.07 hereof), whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. 31 SECTION 11.04. Notices. (a) Unless otherwise expressly specified or permitted by the terms hereof, all notices shall be in writing and shall be deemed given upon receipt by the intended recipient or three Business Days after mailing if personally delivered or mailed by certified mail, return receipt requested and postage prepaid or by recognized overnight courier or by facsimile confirmed by delivery or mail as described above (except that notice to the Owner Trustee shall be deemed given only upon actual receipt by the Owner Trustee), if to the Owner Trustee, addressed to the Corporate Trust Office; if to the Depositor, addressed to AUTORICS II, Inc., 500 Cypress Creek Road West, Suite 590, Fort Lauderdale, FL 33309; tel.: 954-958-3591; facsimile: 954-938-8209, Attention: Dennis LaVigne; or, as to each party, at such other address as shall be designated by such party in a written notice to each other party. (b) Any notice required or permitted to be given to a Certificateholder shall be given by first-class mail, postage prepaid, at the address of such Holder as shown in the Certificate Register. Any notice so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given, whether or not the Certificateholder receives such notice. SECTION 11.05. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 11.06. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 11.07. Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, each of the Depositor and its permitted assignees, the Owner Trustee and its successors and each Owner and its successors and permitted assigns, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by an Owner shall bind the successors and assigns of such Owner. SECTION 11.08. Covenants of the Depositor. In the event that (a) Certificateholders' Principal Carryover Shortfalls shall occur or (b) any litigation with claims in excess of $1,000,000 to which the Depositor is a party which shall be reasonably likely to result in a material judgment against the Depositor that the Depositor will not be able to satisfy shall be commenced by an Owner, during the period beginning nine months following the commencement of such litigation and continuing until such litigation is dismissed or 32 otherwise terminated (and, if such litigation has resulted in a final judgment against the Depositor, such judgment has been satisfied), the Depositor shall not pay any dividend to NAL, or make any distribution on or in respect of its capital stock to NAL, or repay the principal amount of any indebtedness of the Depositor held by NAL, unless (i) after giving effect to such payment, distribution or repayment, the Depositor's liquid assets shall not be less than the amount of actual damages claimed in such litigation or (ii) the Rating Agency Condition shall have been satisfied with respect to any such payment, distribution or repayment. The Depositor will not at any time institute against the Trust any bankruptcy proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Certificates, the Notes, the Trust Agreement or any of the Basic Documents. SECTION 11.09. No Petition. The Owner Trustee, by entering into this Agreement, each Certificateholder, by accepting a Trust Certificate, and the Indenture Trustee and each Noteholder, by accepting the benefits of this Agreement, hereby covenant and agree that they will not at any time institute against the Depositor or the Trust, or join in any institution against the Depositor or the Trust of, any bankruptcy proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Certificates, the Notes, this Agreement or any of the Basic Documents. SECTION 11.10. No Recourse. Each Certificateholder by accepting a Trust Certificate acknowledges that such Certificateholder's Trust Certificates represent beneficial interests in the Trust only and do not represent interests in or obligations of the Depositor, the Servicer, the Administrator, the Owner Trustee, the Indenture Trustee or any Affiliate thereof and no recourse may be had against such parties or their assets, except as may be expressly set forth or contemplated in this Agreement, the Trust Certificates or the Basic Documents. SECTION 11.11. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 11.12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 11.13. [Reserved.] SECTION 11.14. Depositor Payment Obligation. The Depositor shall be responsible for payment of the Administrator's fees under the Administration Agreement and shall reimburse the Administrator for all expenses and liabilities of the Administrator incurred 33 thereunder. In addition, the Depositor shall be responsible for the payment of all fees and expenses of the Trust, the Owner Trustee and the Indenture Trustee paid by any of them in connection with any of their obligations under the Basic Documents to obtain or maintain any required license under the Motor Vehicle Sales Finance Act. * * * * * * 34 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed by their respective officers hereunto duly authorized, as of the day and year first above written. AUTORICS II, INC., as Depositor, by: ----------------------------------- Name: Robert Carlson Title: Vice President/Finance WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee, by: ----------------------------------- Name: Emmett R. Harmon Title: Vice President EXHIBIT A FORM OF TRUST CERTIFICATE THIS CERTIFICATE IS SUBORDINATED TO THE NOTES, AS AND TO THE EXTENT SET FORTH IN THE SALE AND SERVICING AGREEMENT. THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE IN THE UNITED STATES OR ANY FOREIGN SECURITIES LAWS. BY ITS ACCEPTANCE OF THIS CERTIFICATE THE HOLDER HEREOF IS DEEMED TO REPRESENT TO THE DEPOSITOR AND THE OWNER TRUSTEE (i) THAT IT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D PROMULGATED UNDER THE 1933 ACT (AN "ACCREDITED INVESTOR") AND THAT IT IS ACQUIRING THIS CERTIFICATE FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE ACCREDITED INVESTORS UNLESS THE HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, THE PUBLIC DISTRIBUTION HEREOF, (ii) THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE 1933 ACT AND IS ACQUIRING SUCH CERTIFICATE FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE QUALIFIED INSTITUTIONAL BUYERS) OR (iii) THAT IT IS AN INVESTOR THAT IS OTHERWISE PERMITTED TO ACQUIRE THIS CERTIFICATE UNDER THE TRUST AGREEMENT. NO SALE, PLEDGE OR OTHER TRANSFER OF THIS CERTIFICATE MAY BE MADE BY ANY PERSON UNLESS EITHER (i) SUCH SALE, PLEDGE OR OTHER TRANSFER IS MADE TO THE DEPOSITOR, (ii) SUCH SALE, PLEDGE OR OTHER TRANSFER IS MADE TO AN ACCREDITED INVESTOR THAT EXECUTES A CERTIFICATE, SUBSTANTIALLY IN THE FORM SPECIFIED IN THE TRUST AGREEMENT, TO THE EFFECT THAT IT IS AN ACCREDITED INVESTOR ACTING FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE ACCREDITED INVESTORS UNLESS THE HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY), (iii) SO LONG AS THIS CERTIFICATE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE 1933 ACT, SUCH SALE, PLEDGE OR OTHER TRANSFER IS MADE TO A PERSON WHO THE PROSPECTIVE TRANSFEROR REASONABLY BELIEVES AFTER DUE INQUIRY IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A), ACTING FOR ITS OWN ACCOUNT (AND NOT FOR THE ACCOUNT OF OTHERS) OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS ALSO ARE QUALIFIED INSTITUTIONAL BUYERS) TO WHOM NOTICE IS GIVEN THAT THE SALE, PLEDGE OR TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR (iv) SUCH SALE, PLEDGE OR OTHER TRANSFER IS OTHERWISE MADE IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT, IN WHICH CASE THE OWNER TRUSTEE SHALL REQUIRE THAT BOTH THE PROSPECTIVE TRANSFEROR AND THE PROSPECTIVE TRANSFEREE CERTIFY TO THE OWNER TRUSTEE AND THE A-1 DEPOSITOR IN WRITING THE FACTS SURROUNDING SUCH TRANSFER, WHICH CERTIFICATION SHALL BE IN FORM AND SUBSTANCE SATISFACTORY TO THE OWNER TRUSTEE AND THE DEPOSITOR. EXCEPT IN THE CASE OF A TRANSFER DESCRIBED IN CLAUSES (i) OR (iii) ABOVE, THE OWNER TRUSTEE SHALL REQUIRE A WRITTEN OPINION OF COUNSEL (WHICH SHALL NOT BE AT THE EXPENSE OF THE DEPOSITOR, ANY AFFILIATE OF THE DEPOSITOR OR THE OWNER TRUSTEE) SATISFACTORY TO THE DEPOSITOR AND THE OWNER TRUSTEE TO THE EFFECT THAT SUCH TRANSFER WILL NOT VIOLATE THE 1933 ACT. NO SALE, PLEDGE OR OTHER TRANSFER MAY BE MADE TO ANY ONE PERSON FOR SECURITIES WITH A FACE AMOUNT OF LESS THAN $100,000 AND, IN THE CASE OF ANY PERSON ACTING ON BEHALF OF ONE OR MORE THIRD PARTIES (OTHER THAN A BANK (AS DEFINED IN SECTION 3(a)(2) OF THE 1933 ACT) ACTING IN ITS FIDUCIARY CAPACITY), FOR SECURITIES WITH A FACE AMOUNT OF LESS THAN $100,000 FOR EACH SUCH THIRD PARTY. EACH SECURITYHOLDER, BY ITS ACCEPTANCE OF THIS SECURITY, COVENANTS AND AGREES THAT SUCH SECURITYHOLDER, SHALL NOT, PRIOR TO THE DATE THAT IS ONE YEAR AND ONE DAY AFTER THE TERMINATION OF THE TRUST AGREEMENT, ACQUIESCE, PETITION OR OTHERWISE INVOKE OR CAUSE THE TRUST, THE DEPOSITOR OR THE SELLER TO INVOKE THE PROCESS OF ANY COURT OR GOVERNMENTAL AUTHORITY FOR THE PURPOSE OF COMMENCING OR SUSTAINING A CASE AGAINST THE TRUST, THE DEPOSITOR OR THE SELLER UNDER ANY FEDERAL OR STATE BANKRUPTCY, INSOLVENCY, REORGANIZATION OR SIMILAR LAW, OR APPOINTING A RECEIVER, LIQUIDATOR, ASSIGNEE, TRUSTEE, CUSTODIAN, SEQUESTRATOR OR OTHER SIMILAR OFFICIAL OF THE TRUST, THE DEPOSITOR OR THE SELLER OR ANY SUBSTANTIAL PART OF ITS PROPERTY, OR ORDERING THE WINDING UP OR LIQUIDATION OF THE AFFAIRS OF THE TRUST, THE DEPOSITOR OR THE SELLER. THIS CERTIFICATE WILL NOT BE REGISTERED FOR TRANSFER UNLESS THE OWNER TRUSTEE RECEIVES EITHER (1) A REPRESENTATION FROM THE TRANSFEREE OF SUCH CERTIFICATE TO THE EFFECT THAT SUCH TRANSFEREE NEITHER IS NOR IS ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT SECURITY ACT OF 1974, AS AMENDED ("ERISA"), SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") OR GOVERNMENTAL PLANS (AS DEFINED IN SECTION 3(32) OF ERISA) SUBJECT TO ANY FEDERAL, STATE OR LOCAL LAW ("SIMILAR LAW") WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE FOREGOING PROVISIONS OF ERISA OR THE CODE (COLLECTIVELY, A "PLAN") AND IS NOT USING THE ASSETS OF A PLAN SUBJECT TO ERISA OR THE CODE TO INVEST IN THE CERTIFICATES, (2) IF THE TRANSFEREE IS A PLAN, OR IS ACTING ON BEHALF OF A PLAN, OR IS USING THE ASSETS OF A PLAN, AN OPINION OF COUNSEL SATISFACTORY TO THE OWNER TRUSTEE TO THE EFFECT THAT SUCH TRANSFER WILL NOT RESULT IN THE ASSETS OF THE TRUST BEING DEEMED TO BE "PLAN ASSETS" OR SUBJECT THE DEPOSITOR, THE SELLER, THE SERVICER, THE BACKUP SERVICER, THE OWNER TRUSTEE, OR THE INDENTURE TRUSTEE TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE TRUST AGREEMENT, THE SALE AND SERVICING AGREEMENT AND THE ADMINISTRATION AGREEMENT, INCLUDING ANY LIABILITIES ASSESSED FOR "PROHIBITED TRANSACTIONS" UNDER ERISA, THE CODE OR SIMILAR LAW (3) IF THE TRANSFEREE IS AN INSURANCE COMPANY, A REPRESENTATION THAT THE TRANSFEREE IS AN INSURANCE COMPANY THAT IS ACQUIRING SUCH CERTIFICATES WITH FUNDS CONTAINED A-2 IN AN "INSURANCE COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(e) OF PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE PURCHASE AND HOLDING OF SUCH CERTIFICATES AND ANY DEEMED EXTENSION OF CREDIT FROM A CERTIFICATEHOLDER WHICH IS A PARTY IN INTEREST TO A PLAN, THE ASSETS OF WHICH ARE HELD BY SUCH "INSURANCE COMPANY" ARE COVERED UNDER PTCE 95-60. ANY PURPORTED TRANSFER OF A CERTIFICATE TO OR ON BEHALF OF A PLAN WITHOUT THE DELIVERY OF AN OPINION OF COUNSEL REFERRED TO IN CLAUSE (2) ABOVE OR THE REPRESENTATION REFERRED TO IN CLAUSE (3) ABOVE SHALL BE VOID AND OF NO EFFECT. [THIS CERTIFICATE IS NONTRANSFERABLE.](1) - -------- (1) To be included only on the Certificates representing the 1% minimum required to be retained by the Depositor and any Certificates issued in exchange therefor. A-3 NUMBER $_________ R- CUSIP NO. 628948 AL 5 NAL AUTO TRUST 1996-4 8.15% ASSET BACKED CERTIFICATE evidencing a fractional undivided interest in the Trust, as defined below, the property of which consists of retail installment sale contracts for new and used automobiles and light duty trucks (collectively, the "Receivables"), all monies received on or after the related Cutoff Date, security interests in the vehicles financed thereby, certain bank accounts and the proceeds thereof, proceeds from claims on certain insurance policies and certain other rights under the Trust Agreement and the Sale and Servicing Agreement and all proceeds of the foregoing. THIS TRUST CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF AUTORICS II, INC., NAL ACCEPTANCE CORPORATION OR ANY OF THEIR RESPECTIVE AFFILIATES. THIS CERTIFIES THAT ________________ is the registered owner of ____________________________________________ DOLLARS nonassessable, fully-paid, fractional undivided interest in NAL Auto Trust 1996-4 (the "Trust"), formed by AUTORICS II, Inc., a Delaware corporation (the "Depositor"). OWNER TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Trust Certificates referred to in the within-mentioned Trust Agreement. WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee by: ________________________ Authorized Signatory A-4 The Trust was created pursuant to a Trust Agreement dated as of December 9, 1996, (as amended or supplemented from time to time, the "Trust Agreement"), between the Depositor and Wilmington Trust Company, as owner trustee (the "Owner Trustee"), a summary of certain of the pertinent provisions of which is set forth below. To the extent not otherwise defined herein, the capitalized terms used herein have the meanings assigned to them in the Trust Agreement or the Sale and Servicing Agreement dated as of December 9, 1996 (as amended and supplemented from time to time, the "Sale and Servicing Agreement"), among the Trust, the Depositor, NAL Acceptance Corporation, as servicer (the "Servicer"), and Bankers Trust Company, as backup servicer, as applicable. This Certificate is one of the duly authorized Certificates designated as "8.15% Asset Backed Certificates" (herein called the "Trust Certificates"). Also issued under an Indenture dated as of December 9, 1996 (the "Indenture"), between the Trust and Bankers Trust Company, as indenture trustee, are the Notes designated as "6.90% Asset Backed Notes" (the "Notes"). This Trust Certificate is issued under and is subject to the terms, provisions and conditions of the Trust Agreement, to which Trust Agreement the Holder of this Trust Certificate by virtue of its acceptance hereof assents and by which such Holder is bound. The property of the Trust consists of retail installment sale contracts for new and used automobiles, light duty trucks and vans (collectively, the "Receivables"), all monies received on or after the Cutoff Date plus all Payaheads as of the Cutoff Date; any proceeds with respect to the Receivables from claims on any physical damage, credit life or disability, theft, mechanical breakdown or "guaranteed auto protection" insurance policies relating to Financed Vehicles or Obligors; proceeds of any recourse (but none of the obligations) to Dealers on Receivables; any Financed Vehicle that shall have secured a Receivable and shall have been acquired by or on behalf of the Depositor, the Servicer, or the Trust; the Receivables Files; the Receivables Purchase Agreement, including the right of the Depositor to cause NAL to purchase Receivables under certain circumstances; the Trust Accounts; and certain other rights under the Trust Agreement and the Sale and Servicing Agreement and all proceeds of the foregoing. The rights of the Holders of the Trust Certificates are subordinated to the rights of the Holders of the Notes, as and to the extent set forth in the Sale and Servicing Agreement. [The Depositor's Interest shall also entitle the Depositor to the distributions specified in Sections 5.05 and 5.06 of the Sale and Servicing Agreement.] Under the Trust Agreement, there will be distributed March 15, June 15, September 15 and December 15 of each year or, if such day is not a Business Day, the immediately following Business Day (each, a "Distribution Date"), commencing on March 17, 1997, to the Person in whose name this Trust Certificate is registered at the close of business on the last day of the month A-5 immediately preceding such Distribution Date (the "Record Date"), such Certificateholder's fractional undivided interest in the amount to be distributed to Certificateholders on such Distribution Date. No distributions of principal will be made on any Certificate until all of the Notes have been paid in full. The Holder of this Trust Certificate acknowledges and agrees that its rights to receive distributions in respect of this Trust Certificate are subordinated to the rights of the Noteholders as described in the Sale and Servicing Agreement and the Indenture. It is the intent of the Depositor, the Servicer and the Certificateholders that, for purposes of federal income, state and local income and single business tax and any other income taxes, the Trust will be treated as a partnership and the Certificateholders (including the Depositor) will be treated as partners in that partnership. The Depositor and the other Certificateholders, by acceptance of a Trust Certificate, agree to treat, and to take no action inconsistent with the treatment of, the Trust Certificates for such tax purposes as partnership interests in the Trust. Each Certificateholder, by its acceptance of a Trust Certificate, covenants and agrees that such Certificateholder will not at any time institute against the Depositor, or join in any institution against the Depositor of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Certificates, the Notes, the Trust Agreement or any of the Basic Documents. Distributions on this Trust Certificate will be made as provided in the Trust Agreement by the Owner Trustee by wire transfer or check mailed to the Certificateholder of record in the Certificate Register without the presentation or surrender of this Trust Certificate or the making of any notation hereon. Except as otherwise provided in the Trust Agreement and notwithstanding the above, the final distribution on this Trust Certificate will be made after due notice by the Owner Trustee of the pendency of such distribution and only upon presentation and surrender of this Trust Certificate at the office or agency maintained for that purpose by the Owner Trustee in the Borough of Manhattan, The City of New York. Reference is hereby made to the further provisions of this Trust Certificate set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon shall have been executed by an authorized officer of the Owner Trustee, by manual signature, this Trust Certificate shall not entitle the A-6 Holder hereof to any benefit under the Trust Agreement or the Sale and Servicing Agreement or be valid for any purpose. THIS TRUST CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Trust Certificate to be duly executed. NAL AUTO TRUST 1996-4 by: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee Dated: _____________ by: ________________________ Authorized Signatory A-7 [REVERSE OF TRUST CERTIFICATE] The Trust Certificates do not represent an obligation of, or an interest in, the Depositor, the Servicer, the Seller, the Owner Trustee or any affiliates of any of them and no recourse may be had against such parties or their assets, except as expressly set forth or contemplated herein or in the Trust Agreement or the Basic Documents. In addition, this Trust Certificate is not guaranteed by any governmental agency or instrumentality and is limited in right of payment to certain collections and recoveries with respect to the Receivables (and certain other amounts), all as more specifically set forth herein and in the Sale and Servicing Agreement. A copy of each of the Sale and Servicing Agreement and the Trust Agreement may be examined by any Certificateholder upon written request during normal business hours at the principal office of the Depositor and at such other places, if any, designated by the Depositor. The Trust Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Depositor and the rights of the Certificateholders under the Trust Agreement at any time by the Depositor and the Owner Trustee with the consent of the Holders of the Trust Certificates and the Notes, each voting as a class, evidencing not less than a majority of the Certificate Balance and the outstanding principal balance of the Notes. Any such consent by the Holder of this Trust Certificate shall be conclusive and binding on such Holder and on all future Holders of this Trust Certificate and of any Trust Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent is made upon this Trust Certificate. The Trust Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the Holders of any of the Trust Certificates. As provided in the Trust Agreement and subject to certain limitations therein set forth, the transfer of this Trust Certificate is registerable in the Certificate Register upon surrender of this Trust Certificate for registration of transfer at the offices or agencies of the Certificate Registrar maintained by the Owner Trustee in the Borough of Manhattan, The City of New York, accompanied by a written instrument of transfer in form satisfactory to the Owner Trustee and the Certificate Registrar duly executed by the Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Trust Certificates of authorized denominations evidencing the same aggregate interest in the Trust will be issued to the designated transferee. The initial Certificate Registrar appointed under the Trust Agreement is the Owner Trustee. Except as provided in the Trust Agreement, the Trust Certificates are issuable only as registered Trust Certificates A-8 without coupons in denominations of $100,000 and in integral multiples of $1,000 in excess thereof. As provided in the Trust Agreement and subject to certain limitations therein set forth, Trust Certificates are exchangeable for new Trust Certificates of authorized denominations evidencing the same aggregate denomination, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange, but the Owner Trustee or the Certificate Registrar may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The Owner Trustee, the Certificate Registrar and any agent of the Owner Trustee or the Certificate Registrar may treat the Person in whose name this Certificate is registered as the owner hereof for all purposes, and none of the Owner Trustee, the Certificate Registrar or any such agent shall be affected by any notice to the contrary. The obligations and responsibilities created by the Trust Agreement and the Trust created thereby shall terminate upon the payment to Certificateholders of all amounts required to be paid to them pursuant to the Trust Agreement and the Sale and Servicing Agreement and the disposition of all property held as part of the Owner Trust Estate. The Servicer of the Receivables may at its option purchase the Owner Trust Estate at a price specified in the Sale and Servicing Agreement, and such purchase of the Receivables and other property of the Trust will effect early retirement of the Trust Certificates; however, such right of purchase is exercisable only as of the last day of any Collection Period as of which the Pool Balance is less than or equal to 5% of the Original Pool Balance. A-9 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (Please print or type name and address, including postal zip code, of assignee) the within Trust Certificate, and all rights thereunder, and hereby irrevocably constitutes and appoints , attorney, to transfer said Trust Certificate on the books of the Certificate Registrar, with full power of substitution in the premises. Dated: ____________________________*/ Signature Guaranteed: ____________________________*/ - ----------------- * NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Trust Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. A-10 EXHIBIT B CERTIFICATE OF TRUST OF NAL AUTO TRUST 1996-4 THIS Certificate of Trust of NAL AUTO TRUST 1996-4 (the "Trust"), dated September [ ], 1996, is being duly executed and filed by Wilmington Trust Company, a Delaware banking corporation, as trustee, to form a business trust under the Delaware Business Trust Act (12 Del. C. ss. 3801 et seq.). 1. Name. The name of the business trust formed hereby is NAL Auto Trust 1996-4. 2. Delaware Trustee. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attn: Corporate Trust Administration. 3. Effective Date. This Certificate of Trust shall be effective upon filing with the Secretary of State. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first-above written. WILMINGTON TRUST COMPANY, as trustee By: --------------------------------- Name: Title: B-1 EXHIBIT C FORM OF TRANSFEROR CERTIFICATE [DATE] Autorics II, Inc. 500 Cypress Creek Road West Suite 590 Fort Lauderdale, FL 33309 Wilmington Trust Company, as Owner Trustee Rodney Square North 1100 N. Market Street Wilmington, DE 19890 Re: NAL Auto Trust 1996-4 8.15% Asset Backed Certificates ------------------------------- Ladies and Gentlemen: In connection with our disposition of the above-referenced 8.15% Asset Backed Certificates (the "Certificates") we certify that (a) we understand that the Certificates have not been registered under the Securities Act of 1933, as amended (the "Act"), and are being transferred by us in a transaction that is exempt from the registration requirements of the Act and (b) we have not offered or sold any Certificates to, or solicited offers to buy any Certificates from, any person, or otherwise approached or negotiated with any person with respect thereto, in a manner that would be deemed, or taken any other action which would result in, a violation of Section 5 of the Act. Very truly yours, [NAME OF TRANSFEROR] By: ------------------------------------ Authorized Officer C-1 EXHIBIT D FORM OF INVESTMENT LETTER Autorics II, Inc. 500 Cypress Creek Road West Suite 590 Fort Lauderdale, FL 33309 Wilmington Trust Company, as Owner Trustee Rodney Square North 1100 N. Market Street Wilmington, DE 19890 Ladies and Gentlemen: In connection with our proposed purchase of $ aggregate principal amount of 8.15% Asset Backed Certificates (the "Certificates") of NAL Auto Trust 1996-4 (the "Issuer"), we confirm that: 1. We understand that the Certificates have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and may not be sold except as permitted in the following sentence. We understand and agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, (x) that such Certificates are being offered only in a transaction not involving any public offering within the meaning of the 1933 Act and (y) that such Certificates may be resold, pledged or transferred only (i) to the Depositor, (ii) to an "accredited investor" as defined in Rule 501(a)(1),(2),(3) or (7) (an "Accredited Investor") under the 1933 Act acting for its own account (and not for the account of others) or as a fiduciary or agent for others (which others also are Accredited Investors unless the holder is a bank acting in its fiduciary capacity) that executes a certificate substantially in the form hereof, (iii) so long as such Certificate is eligible for resale pursuant to Rule 144A under the 1933 Act ("Rule 144A"), to a person whom we reasonably believe after due inquiry is a "qualified institutional buyer" as defined in Rule 144A, acting for its own account (and not for the account of others) or as a fiduciary or agent for others (which others also are "qualified institutional buyers") to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A or (iv) in a sale, pledge or other transfer made in a transaction otherwise exempt from the registration requirements of the 1933 Act, in which case the Owner Trustee shall require that both the prospective transferor and the prospective transferee certify to the Owner Trustee and the Depositor in writing the facts surrounding such transfer, which certification shall be in form and substance D-1 satisfactory to the Owner Trustee and the Depositor. Except in the case of a transfer described in clauses (i) or (iii) above, the Owner Trustee shall require a written opinion of counsel (which will not be at the expense of the Depositor, any affiliate of the Depositor or the Owner Trustee) satisfactory to the Depositor and the Owner Trustee be delivered to the Depositor and the Owner Trustee to the effect that such transfer will not violate the 1933 Act, in each case in accordance with any applicable securities laws of any state of the United States. We will notify any purchaser of the Certificates from us of the above resale restrictions, if then applicable. We further understand that in connection with any transfer of the Certificates by us that the Depositor and the Owner Trustee may request, and if so requested we will furnish such certificates and other information as they may reasonably require to confirm that any such transfer complies with the foregoing restrictions. We understand that no sale, pledge or other transfer may be made to any one person of Certificates with a face amount of less than $100,000 and, in the case of any person acting on behalf of one or more third parties (other than a bank (as defined in Section 3(a)((2) of the 1933 Act) acting in its fiduciary capacity), of Certificates with a face amount of less than $100,000 for each such third party. 2. [CHECK ONE] / / (a) We are an "accredited investor" (as defined in Rule 501(a)(1),(2),(3) or (7) of Regulation D under the Certificates Act) acting for our own account (and not for the account of others) or as a fiduciary or agent for others (which others also are Accredited Investors unless we are a bank acting in its fiduciary capacity). We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Certificates, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment for an indefinite period of time. We are acquiring the Certificates for investment and not with a view to, or for offer and sale in connection with, a public distribution. / / (b) We are a "qualified institutional buyer" as defined under Rule 144A under the 1933 Act and are acquiring the Certificates for our own account (and not for the account of others) or as a fiduciary or agent for others (which others also are "qualified institutional buyers"). We are familiar with Rule 144A under the 1933 Act and are aware that the seller of the Certificates and other parties intend to rely on the statements made herein and the exemption from the registration requirements of the 1933 Act provided by Rule 144A. D-2 3. We are not (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code or (iii) any entity whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "Benefit Plan"). We hereby acknowledge that no transfer of any Certificate shall be permitted to be made to any person unless the Trustee has received (i) a certificate from such transferee to the effect of the preceding sentence, (ii) an opinion of counsel satisfactory to the Trustee to the effect that the purchase and holding of any such Certificate will not constitute or result in the assets of the Issuer being deemed to be "plan assets" and subject to the prohibited transaction provisions of ERISA or Section 4975 of the Code and will not subject the Owner Trustee, the Indenture Trustee or the Depositor to any obligation in addition to those undertaken in the Basic Documents with respect to the Certificates (provided, however, that the Owner Trustee will not require such certificate or opinion in the event that, as a result of change of law or otherwise, counsel satisfactory to the Owner Trustee has rendered an opinion to the effect that the purchase and holding of any such Certificate by a Benefit Plan or a Person that is purchasing or holding any such Certificate with the assets of a Benefit Plan will not constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code) or (iii) if the transferee is an insurance company, a representation that the transferee is an insurance company that is acquiring such Certificates with funds contained in an "Insurance Company General Account" (as such term is defined in Section V(e) of Prohibited Transaction Class Exemption 95- 60 ("PTCE 95-60)) and that the purchase and holding of such Certificates and any deemed extension of credit from a Certificateholder which is a party in interest to a Plan, the assets of which are held by such "Insurance Company" are covered under PTCE 95-60. 4. We understand that the Depositor, the Trust, Greenwich Capital Financial Products, Inc. ("Greenwich") and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements, and we agree that if any of the acknowledgments, representations and warranties deemed to have been made by us by our purchase of the Certificates, for our own account or for one or more accounts as to each of which we exercise sole investment discretion, are no longer accurate, we shall promptly notify the Depositor and Greenwich. D-3 5. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [NAME OF PURCHASER] By: -------------------------------- Name: Title: Date: ------------------------------ D-4 ANNEX A TAX PARTNERSHIP PROVISIONS 1. Characterization for Tax Purposes. For United States federal and applicable state and local income tax purposes, the Depositor's contribution of the Receivables to the Trust in exchange for interests in the Trust, and the sale by the Depositor of the Certificates (other than the retention by the Depositor of the Depositor's Trust Certificate) is intended to constitute the formation of a partnership (the "Tax Partnership") whose partners are the Certificateholders (which are hereinafter collectively referred to as the "Tax Partners"). 2. Election with Respect to Subchapter K. Notwithstanding anything to the contrary, each Tax Partner agrees: (a) not to elect to be excluded from the application of Subchapter K of Chapter 1 of Subtitle A of the Code, or any comparable provisions of applicable state laws; and (b) to join in the execution of such additional documents and elections as may be required in order to effectuate the foregoing. 3. Capital Contributions and Capital Accounts. (a) The value of the interests contributed by the Certificateholders (other than the Depositor) shall equal the amount paid by such Certificateholders, respectively, for their Certificates and such amounts shall constitute the opening balance in their Capital Accounts (as hereinafter defined). The value of the interests contributed by the Depositor shall equal the fair market value of the Depositor's Interest, which the Tax Partners agree shall be based on the sum, without duplication, of (i) the Reserve Account Initial Deposit and (ii) the value of the Depositor's Interest based on (A) as to the Certificate Balance and interest at the Pass- Through Rate of the Depositor's Trust Certificate, the average price of the Certificates to investors and (B) as to all other amounts due the Depositor, the present value of the cash flow to the Depositor of the amounts to which the Depositor is entitled to receive pursuant to Sections 5.05(b)(viii) and 5.06(b) and (e) of the Sale and Servicing Agreement at each Distribution Date or upon termination of the Trust using a discount rate that reflects an appropriate arm's-length equity rate of return and a prepayment assumption of 1.75 ABS, and such total shall be submitted to the Owner Trustee in writing within ten (10) Business Days after the Closing Date. Such amount shall constitute the opening balance in the Depositor's Capital Account. (b) An individual capital account (a "Capital Account") shall be maintained for each Tax Partner in compliance with Treasury Regulation Sections 1.704-1(b)(2)(iv) and 1.704-2 and accordingly, except as otherwise provided herein: (i) The Capital Account of each Tax Partner shall be credited by (A) the amount of cash and the fair market value of property other than cash contributed (or deemed contributed pursuant to Code Section 708) by such Tax Partner to the Tax Partnership (net of any liabilities assumed by the Tax Partnership upon such contribution or to which such property is subject at the time of such contribution); and (B) the amount of any item of taxable income or gain and the amount of any item of income or gain exempt from tax allocated to such Tax Partner. (ii) The Capital Account of each Tax Partner shall be debited by (A) the amount of any item of tax deduction or loss allocated to such Tax Partner; (B) such Tax Partner's allocable share of expenditures not deductible in computing taxable income and not properly chargeable as capital expenditures; and (C) the amount of cash and the fair market value of any property other than cash (net of any liabilities assumed by such Tax Partner or to which such property is subject at the time of distribution) distributed to such Tax Partner. (iii) Immediately prior to any distribution of property in kind, the Tax Partners' Capital Accounts shall be adjusted by assuming that the distributed properties were sold for cash at their respective fair market values as of the date of distribution and crediting or debiting each Tax Partner's Capital Account with its respective share of the hypothetical gains or losses resulting from such assumed sales in the same manner as gains or losses on actual sales of such properties would be allocated under Paragraph 6 below. 5. Federal and State Income Tax Returns and Elections. (a) The Tax Partners agree that the Depositor shall serve as the "tax matters partner" (as such term is defined in Code Section 6231(a)(7) (the "Tax Matters Partner") of the Tax Partnership. The Tax Matters Partner shall (i) apply to the Internal Revenue Service for a taxpayer identification number for the Tax Partnership, (ii) elect to adopt the accrual method of accounting and the calendar year as the Tax Partnership's fiscal year (the "Fiscal Year"), (iv) make such other elections as it deems proper, (v) prepare, execute and file the necessary federal and state partnership income tax returns for the Tax Partnership and (vi) keep the other Tax Partners informed of all material matters that may come to its attention in its capacity as Tax Matters Partner. Each Tax Partner agrees to furnish the Tax Matters Partner with all pertinent information relating to activities under this Agreement which is necessary for the Tax Matters Partner to prepare and file federal and state partnership returns. In acting as Tax Matters Partner, the Tax Matters Partner shall use its best efforts, but shall incur no liability to the other Tax Partners. 2 (b) Within 60 days after the end of each of the Tax Partnership's taxable years, the Tax Matters Partner shall send to each Tax Partner who has been a Tax Partner at any time during the taxable year then ended such tax information as shall be necessary for the preparation by such Tax Partner of its Federal income tax return and state income and other tax returns, if any, in states where the Tax Partnership is organized or is qualified to do business. 6. Allocations. (a)(i) "Net Income" and "Net Loss" respectively, for any period, means the income or losses of the Tax Partnership as determined in accordance with the method of accounting followed by the Tax Partnership for Federal income tax purposes, including, for all purposes, any income exempt from tax and any expenditures of the Tax Partnership described in Code Section 705(a)(2)(B); provided, however, (i) that any item allocated under Paragraph 6(c) shall be excluded from the computation of Net Loss and (ii) that if, as a result of the contribution of an asset whose fair market value differs from its adjusted basis for Federal income tax purposes or as a result of the revaluation of the Tax Partnership's assets, the book value of any Tax Partnership asset differs from its adjusted basis for Federal income tax purposes, gain, loss, depreciation and amortization with respect to such assets shall be computed using the asset's book value consistently with the requirements of Treasury Regulation Section 1.704- 1(b)(2)(iv)(g). (ii) "Period" shall mean the period ending on each Distribution Date; provided that as to the month in which the Closing Date occurs, Period shall mean the period commencing on the Closing Date and ending on the first Distribution Date and as to the period in which the Tax Partnership terminates, Period shall mean the period beginning on the first day of such period and ending on the date of the Tax Partnership's termination. (b) The Tax Partners agree that the Tax Partnership's Net Income and Net Loss and each item of income, gain, loss, or deduction entering into the computation thereof for any Fiscal Year shall be allocated by first allocating the Tax Partnership's Net Income and Net Loss (and each item of income, gain, loss, or deduction entering into the computation thereof) for each Period or portion thereof within such Fiscal Year (as if such Period (or portion) were a complete fiscal year), dividing the amount of such allocations for the Period ending March 15 on a daily basis between calendar years and then aggregating the allocations for the portion of such Period within each Fiscal Year; provided, that the Tax Partnership's Net Income or Net Loss for the period commencing December 18 and ending December 31 may be determined on an estimated basis to permit timely preparation of the Partnership's tax returns and reporting to the Tax Partners. 3 In the case of the transfer of any interest in the Tax Partnership, the items of Net Income and Net Loss allocated for any Period with respect to the transferred interest shall be allocated between the transferor and transferee of such interest on a daily basis within such Period. The Tax Partnership's Net Income and Net Loss for each Period within a Fiscal Year shall be allocated as follows: (i) Net Income for such Period shall be allocated as follows: (A) An amount of Net Income equal to the excess of (x) the sum for such Period and each preceding Period up to the Period beginning with the Closing Date, of (1) the product of the Pass- Through Rate and (2) the Certificate Balance amount for such Period (and each such preceding Period) over (y) all amounts allocated to the Certificateholders pursuant to this Paragraph 6(b)(i)(A) shall be allocated 100% to the Certificateholders (including the Depositor), in proportion to their holdings of Trust Certificates; provided that the product of (1) and (2) in clause (x) shall be computed on the basis of a 360 day year consisting of twelve 30 day months. (B) An amount of Net Income equal to the excess of (x) the sum for such Period and each preceding Period up to the Period beginning with the Closing Date, of that portion of any excess of the principal amount of the Trust Certificates over their initial issue price (disregarding accrued interest) that would have accrued with respect to such Periods if the Trust Certificates were indebtedness and such excess were original issue discount over (y) all amounts previously allocated to the Certificateholders pursuant to this Paragraph 6(b)(i)(B) shall be allocated 100% to the Certificateholders (including the Depositor), in proportion to their holdings of Trust Certificates. (C) Any remaining Net Income shall be allocated 100% to the Depositor. (ii) Net Losses for such Period shall be allocated as follows: (A) 100% to the Depositor until the excess of the Adjusted Capital Account (as hereinafter defined) balance of the Depositor over the amount specified in Paragraph 3(a)(i)(A) (as adjusted for all prior distributions of principal and accruals of market discount income allocable to the Depositor) equals zero. 4 (B) 100% to the Certificateholders (including the Depositor) in proportion to their holdings of Trust Certificates, until the Adjusted Capital Account balances of the Certificateholders equal zero; and (C) Any remaining Net Losses shall be allocated 100% to the Depositor. (c)(i) Any deductions attributable to (w) the amortization of premium on the Receivables, (x) payments to the Owner Trustee, (y) payments to the Servicer and (z) payments of any other expenses, claims and losses of the Trust shall be specially allocated to the Depositor. (ii) If there is a net decrease in "partnership minimum gain" (within the meaning of Treasury Regulation Section 1.704-2(d)) for a Fiscal year, then there shall be allocated to each Tax Partner items of income and gain for that year equal to that Tax Partner's share of the net decrease in partnership minimum gain (within the meaning of Treasury Regulation Section 1.704-2(g)(2)), subject to the exceptions set forth in Treasury Regulation Sections 1.704-2(f)(2), (3) and (5), provided, that if the Tax Partnership has any discretion as to an exception set forth pursuant to Treasury Regulation Section 1.704-2(f)(5), the Tax Matters Partner may exercise such discretion on behalf of the Tax Partnership. In the event the application of the minimum gain chargeback requirement would cause a distortion in the economic arrangement among the Tax Partners, the Tax Matters Partner shall request the Commissioner to waive the minimum gain chargeback requirement pursuant to Treasury Regulation Section 1.704-2(f)(4). The foregoing is intended to be a "minimum gain chargeback" provision as described in Treasury Regulation Section 1.704-2(f) and shall be interpreted and applied in all respects in accordance with that Treasury Regulation. If during a Fiscal Year there is a net decrease in partner nonrecourse debt minimum gain (as determined in accordance with Treasury Regulation Section 1.704- 2(i)(3)), then, in addition to the amounts, if any, allocated pursuant to the preceding paragraph, any Tax Partner with a share of that partner nonrecourse debt minimum gain (determined in accordance with Treasury Regulation Section 1.704-2(i)(5)) as of the beginning of the Fiscal Year shall, subject to the exceptions set forth in Treasury Regulation Section 1.704-2(i)(4), including exceptions analogous to those provided pursuant to Treasury Regulation Sections 1.704-2(f)(2), (3) and (5) (provided, that if the Tax Partnership has any discretion as to an exception set forth pursuant to Treasury Regulation Section 1.704-2(f)(5) as made applicable by Treasury Regulation Section 1.704-2(i)(4), 5 the Tax Matters Partner may exercise such discretion on behalf of the Tax Partnership) be allocated items of income and gain for the year (and, if necessary, for succeeding years) equal to that Tax Partner's share of the net decrease in the partner nonrecourse minimum gain. In the event the application of the minimum gain chargeback requirement would cause a distortion in the economic arrangement among the Tax Partners, the Tax Matters Partner shall request the Commissioner to waive the minimum gain chargeback requirement pursuant to Treasury Regulation Sections 1.704-2(i)(4) and 1.704- 2(f)(4). The foregoing is intended to be the "chargeback of partner nonrecourse debt minimum gain" required by Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted and applied in all respects in accordance with that Treasury Regulation. (iii) If during any Fiscal year of the Tax Partnership a Tax Partner unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which causes or increases a deficit balance in the Tax Partner's Adjusted Capital Account (as defined below), there shall be allocated to the Tax Partner items of income and gain (consisting of a pro rata portion of each item of Tax Partnership income, including gross income, and gain for such year) in an amount and manner sufficient to eliminate such deficit as quickly as possible. The foregoing is intended to be a "qualified income offset" provision as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted and applied in all respects in accordance with the Treasury Regulation. A Tax Partner's "Adjusted Capital Account", at any time, shall equal the Tax Partner's Capital Account at such time (x) increased by the sum of (A) the amount of the Tax Partner's share of partnership minimum gain (as defined in Treasury Regulation Section 1.704-2(g)(1) and (3)), (B) the amount of the Tax Partner's share of partner nonrecourse debt minimum gain (as defined in Treasury Regulation Section 1.704-2(i)(5)), and (C) any amount of the deficit balance in its Capital Account and Tax Partner is obligated to restore on liquidation of the Tax Partnership and (y) decreased by reasonably expected adjustments, allocations and distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). (iv) Notwithstanding anything to the contrary in this Paragraph 6, Tax Partnership losses, deductions, or Code Section 705(a)(2)(B) expenditures that are attributable to a particular partner nonrecourse liability shall be allocated to the Tax Partner that bears the economic risk of loss for the liability in 6 accordance with the rules of Treasury Regulation Section 1.704-2(i). (v) Notwithstanding any provision of Paragraphs 6(b) and 6(c)(i), no allocation of items of loss or deduction shall be made to a Tax Partner if it would cause the Tax Partner to have a negative balance in its Adjusted Capital Account. Allocations of items of loss or deduction that would be made to a Tax Partner but for this Paragraph 6(c)(v) shall instead be made first to the Depositor to the extent not inconsistent with this Paragraph 6(c)(v), and second, to the Certificateholders in proportion to the amounts distributable for the related Period pursuant to Sections 5.05(b)(iv) or (v) of the Sale and Servicing Agreement, to the extent distributions under either such Section were reduced. To the extent allocations of items of loss or deduction cannot be made to any Tax Partner because of this Paragraph 6(c)(v), such allocations shall be made to the Tax Partners in accordance with Paragraphs 6(b) and 6(c)(i) notwithstanding this Paragraph 6(c)(v). (vi) To the extent that any item of income, gain, loss or deduction has been specially allocated pursuant to Paragraphs 6(c)(iii) and (v) and such allocation is inconsistent with the way in which the same amount otherwise would have been allocated under Paragraphs 6(b) and 6(c)(i), subsequent allocations under Paragraph 6(b) and 6(c)(i) shall be made, to the extent possible and without duplication, in a manner consistent with Paragraphs 6(c)(ii), (iii), (iv) and (v) which negate as rapidly as possible the effect of all such inconsistent allocations. (vii) Any allocations made pursuant to this Paragraph 6 shall be made in the following order: (i) Paragraph 6(c)(ii) (ii) Paragraph 6(c)(iii) (iii) Paragraph 6(c)(iv) (iv) Paragraph 6(c)(vi) (v) Paragraph 6(c)(i) (vi) Paragraph 6(b)(i) and (ii) These provisions shall be applied as if all distributions and allocations were made at the end of the Fiscal Year. Where any provision depends on the Capital Account of any Tax Partner, that Capital Account shall be determined after the operation of all preceding provisions for the year. These allocations shall be made consistently with 7 the requirements of Treasury Regulation Section 1.704- 2(j). (d) The income, gains, losses, deductions and credits of the Tax Partnership for Federal, state and local income tax purposes shall be allocated in the same manner as the corresponding items entering into the computation of Net Income and Net Losses were allocated pursuant to Paragraphs 6(b) and (c) provided that solely for Federal, local and state income and franchise tax purposes and not for book or Capital Account purposes, income, gain, loss and deduction with respect to property properly carried on the Tax Partnership's books at a value other than its tax basis shall be allocated (i) in the case of property contributed in kind, in accordance with the requirements of Code Section 704(c) and such Treasury Regulations as may be promulgated thereunder from time to time, and (ii) in the case of other property, in accordance with the principles of Code Section 704(c) and the Treasury Regulations thereunder as incorporated among the requirements of the relevant provisions of the Treasury Regulations under Code Section 704(b). (e) The Tax Partnership shall comply with all withholding requirements under Federal, state and local law and shall remit amounts withheld to and file required forms with the applicable jurisdictions. To the extent the Tax Partnership is required to withhold and pay over any amounts with respect to distributions or allocations to any Tax Partner, the amount withheld shall be treated as a distribution to that Tax Partner. In the event of any claimed overwithholding, Tax Partners shall have no claim for recovery against the Tax Partnership or other Tax Partners. If the amount withheld was not withheld from actual distributions, the Tax Partnership, may at its option, (i) require the Tax Partner to reimburse the Tax Partnership for such withholding (and each Tax Partner agrees to reimburse the Tax Partnership promptly following such request) or (ii) reduce any subsequent distributions by the amount of such withholding. If there is a possibility that withholding tax is payable with respect to a distribution (such as a distribution to a non-U.S. Tax Partner), the Tax Partnership may in its sole discretion withhold such amounts in accordance with this Partnership may in its sole discretion withhold such amounts in accordance with this Paragraph 6(e). Each Tax Partner agrees to furnish the Tax Partnership with any representations and forms as shall reasonably be requested by the Tax Partnership to assist it in determining the extent of, and in fulfilling, its withholding obligations. If a Tax Partner wishes to apply for a refund of any such withholding tax, the Owner Trustee shall reasonably cooperate with such Tax Partner in making such claim as long as the Tax Partner agrees to reimburse the Tax Partnership for any out-of-pocket expenses incurred. 7. Sale of Interests. The Tax Partners agree that any sale by a Tax Partner of any ownership interest in a Trust Certificate 8 shall be deemed to be a sale of all or a portion of such Tax Partner's interest in the Tax Partnership. 8. Termination of a Tax Partner's Interest. Any distribution by the Tax Partnership in termination of any Tax Partner's interest in the Tax Partnership other than pursuant to Paragraph 9 below shall be in an amount of cash or property other than cash having a net fair market value equal to the positive Capital Account balance of such Tax Partner at the time such interest is terminated, after such Capital Account balance has been adjusted in accordance with Paragraphs 4 and 6 above for all operations preceding such distribution and the applicable Treasury Regulations under Code Section 704(b), and shall be made by the later of: (a) the end of the Tax Partnership's taxable year in which such termination occurs; or (b) within 90 days after the date of such termination. 9. Distributions upon Termination. Upon termination of the Agreement pursuant to its terms, the activities of the Tax Partners under this Annex A shall be concluded and the assets subject to the Agreement and this Annex A shall be distributed to the Tax Partners in the manner and in the order set forth below: (a) Debts of the Tax Partnership created pursuant to the Indenture on the Trust Agreement, other than to Tax Partners, shall be paid. (b) All cash on hand representing unexpended contributions by any Tax Partner shall be returned to the contributor. (c) The Tax Partners' Capital Accounts shall be adjusted by: (i) assuming the sale of all remaining assets at their fair market values as of the date of termination of the Trust Agreement; and (ii) debiting or crediting each Tax Partner's Capital Account with the Tax Partner's respective share of the hypothetical gains or losses resulting from such assumed sales in the same manner as such Tax Partner's Capital Account would be debited or credited under Paragraph 6 above for gains or losses on actual sales of such properties. (d) All Tax Partnership assets shall be distributed to the Tax Partners in accordance with their respective Capital Account balances as so adjusted by the later of: (i) the end of the Tax Partnership's taxable year in which the termination occurs; or (ii) within 90 days after the date of such termination. If property subject to the Agreement is distributed pursuant to this paragraph, the amount of the distribution shall be equal to the net fair market value of the distributed property. 9 EX-23.2 8 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUTANTS Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUTANTS We hereby consent to the use in the Prospectus constituting part of this Pre-Effective Amendment No. 2 to the Registration Statement on Form SB-2 of our report dated February 27, 1996, except as to Note 19, which is as of March 22, 1996, relating to the financial statements of NAL Financial Group Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Fort Lauderdale, Florida December 20, 1996
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