-----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, WAMhcy61AddV5vjo6rY8Bx8UB+ooQFMKlN+ZxKPdd7Y3Ttu3kefVjcpSuh9P6+Xb fE6UFHZfkTQKG9rd3V9zUA== 0000889812-96-000415.txt : 19960503 0000889812-96-000415.hdr.sgml : 19960503 ACCESSION NUMBER: 0000889812-96-000415 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960502 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAL FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000811644 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 232455294 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 033-88966 FILM NUMBER: 96555516 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 N-30D 1 ANNUAL REPORT [LOGO] NAL Financial Group Inc. Strategically Positioned For Profitable Growth 1995 Annual Report Corporate Profile NAL Financial Group Inc. is a rapidly growing specialty finance company whose niche is financing non-prime auto consumers. Headquartered in Fort Lauderdale, Florida, NAL offers both loans and leases to non-prime customers through a network of qualified franchised new car dealerships in 10 states. The Company's Common Stock is traded on The NASDAQ National Market(Service Mark) under the symbol NALF. Table of Contents Chairman's Letter to Stockholders............................ 2 Senior Management and Operating Officers..................... 4 Company Overview............................................. 6 Management's Discussion and Analysis or Plan of Operations... 9 Consolidated Financial Statements............................ 18 Notes to Consolidated Financial Statements................... 22 Report of Independent Certified Public Accountants........... 30 Market for Common Equity and Related Stockholder Matters..... 31 Corporate Information........................................ 32 1995 Highlights o Net income up dramatically to $2.8 million, or $0.45 per share. o Increased warehouse credit facilities to $95 million. o Signed two-year marketing agreement with General Electric Capital Auto Lease, Inc. (GECAL) o Dealers under contract in excess of 900. o Completed sale of $40.1 million in auto-backed securities through Greenwich Capital Markets, Inc. This securitization was the first in the Company's history. Dealer Locations - -------------------------------------------------------------------------------- [MAP OF UNITED STATES SHOWING LOCATIONS OF NEW CAR DEALERSHIPS] States in which new car dealerships are located ----------------------------------------------- Alabama Georgia North Carolina Texas California Louisiana South Carolina Florida New York Tennessee - -------------------------------------------------------------------------------- [PHOTO OF NAL FINANCIAL GROUP INC. HEADQUARTERS BUILDING] NAL Financial Group Inc. headquarters - -------------------------------------------------------------------------------- Our non-prime receivables are originated through financially stable, franchised new car dealerships in 10 states. 1 DEAR STOCKHOLDERS: - -------------------------------------------------------------------------------- [PHOTO OF ROBERT R. BARTOLINI] Robert R. Bartolini, Chairman and Chief Executive Officer "Given our strong underwriting and collection practices, together with our in-depth knowledge of the consumer finance market, we believe NAL is well positioned for continued profitable growth in 1996 and beyond." - -------------------------------------------------------------------------------- We are pleased to present the first annual report for NAL Financial Group Inc. (NAL), which became a public company by virtue of a merger with an existing public company in November 1994. This past year was a truly challenging and exciting one for NAL. We took significant steps in implementing NAL's change in focus to the origination and servicing of non-prime automotive leases and loans through franchised new car dealers and making NAL a prominent company in the industry. Simply stated, with net income increasing sharply to $2.8 million, or $0.45 per share, we are extremely pleased with the progress NAL made in 1995. There were many other corporate highlights in 1995, including: o NAL's shares of common stock were listed on The NASDAQ National Market(Service Mark) with trading commencing on May 9, 1995 under the symbol NALF. o The Company obtained new low cost credit facilities aggregating $50 million for 1995, bringing NAL's total credit facilities to $95 million. o In December 1995, we completed the Company's first securitization, a $40.1 million sale of auto asset-backed securities. o NAL entered into a two-year agreement with GECAL following the completion of a successful test program. o The Company signed up 713 new dealers in 1995, bringing the total to 909. o New additions to our senior management team bring a wealth of industry experience to NAL, especially in our capital markets and collection areas. o NAL's loan and lease portfolio maintained its solid credit quality, reflecting our strict and consistent underwriting model. o The Company funded in excess of $160 million in automotive finance contracts. o NAL invested considerable resources in management information systems and a state-of-the-art phone system. 2 There are tremendous growth opportunities associated with financing non-prime loans and leases, and to effectively capitalize on them we will benchmark NAL against the best practices we can identify in the industry. This commitment to sound operating practices is underscored by a proven management team of professionals who each have 20 to 25 years of experience in the consumer finance industry. Record Financial Results For 1995, net income totalled $2.8 million, or $0.45 per share based on 6.2 million common and common equivalent shares. This compares with $394,000, or $0.07 per share based on 5.5 million common and common equivalent shares for 1994. Included in the results for 1995 was a non-cash, non-operating charge related to the release of escrowed shares of $280,000. Without the effect of this charge, operating income, after taxes, was $3.1 million, or $0.50 per share. Our Vision For Continued Success The non-prime auto market consists of customers who are typically unable to obtain financing through traditional sources, such as commercial banks, savings and loans and the captive finance arms of major automotive manufacturers. This is generally due to the manner in which these individuals have handled previous credit, the absence or limited extent of their prior credit history, or their limited financial resources. The non-prime auto market represents a significant growth market for two major reasons -- (1) the growing number of Americans subject to economic dislocation primarily due to a previous major event such as illness, divorce or loss of employment and (2) the affordability of used cars versus the increasing amount of annual family income required to purchase new cars. At the same time, the non-prime market is highly fragmented and primarily served by smaller finance companies generally lacking access to the capital markets. NAL is strategically positioned to capitalize on the significant growth anticipated in the non-prime auto market. First and foremost, our fundamental strengths and experience are in the consumer finance business, a critical factor given the lower credit quality borrowers we are servicing. Our ability to offer non-prime leases as well as loans clearly differentiates NAL from others in the industry. NAL's strict underwriting guidelines for maintaining credit quality and our proactive collection processes are allowing the Company to expand our credit facilities and significantly lower our cost of funding through securitization. We expect that our dealer network will continue to expand significantly in 1996. Our sales and marketing department is focusing on building quality relationships with dealers, and we continue to benefit from our agreement with GECAL. Lastly, given our demonstrated ability to successfully meet the challenges in one of the most competitive non-prime markets in the country, we are expanding from our headquarters in Florida into a number of other states. In summary, through the growth initiatives we are pursuing, NAL is on track and prepared operationally to capitalize on one of the fastest-growing niches of consumer lending. In Closing I would personally like to thank all of the people whose contributions have enabled the Company to achieve its record growth. Our success would not have been possible without the hard work, skills and loyalty of our employees. And, to all of our stockholders, we thank you for your support. Sincerely, /s/ Robert R. Bartolini Robert R. Bartolini Chairman and Chief Executive Officer April 15, 1996 3 SENIOR MANAGEMENT AND OPERATING OFFICERS - -------------------------------------------------------------------------------- [PHOTO OF ROBERT R. BARTOLINI AND JOHN T. SCHAEFFER] Robert R. Bartolini (left) and John T. Schaeffer "We obtained our volume through service, experience, rapport with dealers and innovation -- not through pricing or by reducing our credit quality." John T. ("Toby") Schaeffer, President and Chief Operating Officer, NAL Acceptance Corporation - -------------------------------------------------------------------------------- NAL's senior management and operating officers bring with them extensive knowledge of the consumer finance business, a wealth of operating experience at executive levels and a proven track record. Robert R. Bartolini, Chairman and Chief Executive Officer, has held these positions since NAL's inception in 1991 and was named to the additional post of President 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 association. From 1984 to 1987, Mr. Bartolini was Executive Vice President at CenTrust Savings Bank, an $11 billion institution based in Miami, Florida, with 60 branches. Prior to that, Mr. Bartolini was with First Pennsylvania Bank, NA, where he served as Senior Vice President. John T. Schaeffer, President and Chief Operating Officer, NAL Acceptance Corporation (NAL's operating subsidiary), has been with NAL since 1991. Prior to that, he was President and Chief Operating Officer of FinancialFed Services, Inc. (FFS), the automobile lease origination and servicing unit of FinFed. From 1986 through 1989, Mr. Schaeffer was Executive Vice President and Chief Operating Officer of CenTrust Leasing Corporation, the leasing unit of CenTrust Savings Bank, where he was responsible for the overall activities of the leasing subsidiary. Prior to that, he was with First Pennsylvania Bank, NA, where he served as Vice President for 16 years. 4 Robert J. Carlson, Vice President -- Finance and Principal Accounting Officer, joined NAL in April 1992. Previously, Mr. Carlson served four years as Senior Vice President -- Controller of FinFed. Prior to that, he served as Senior Vice President and Chief Financial Officer at Miami Savings Bank, a $175 million asset savings institution in Miami, Florida. Mr. Carlson also served three years at CenTrust Savings Bank, where he held the position of Vice President -- Accounting Operations and Reporting, two years at American Savings and Loan Association of Florida as Assistant Controller and six years as an auditor with Deloitte Haskins & Sells (now Deloitte & Touche LLP). Paul S. Gowar, Vice President -- Credit & Funding, has over 25 years of credit and finance experience. Prior to joining NAL in 1994, he worked at Bank of North America, AmeriFirst Bank and CenTrust Savings Bank, where he held various senior credit positions. Dennis R. LaVigne, Vice President and Treasurer, has been with NAL since August 1995. Mr. LaVigne has substantial experience in the automotive finance industry, having served as Senior Vice President of Union Acceptance Corporation, an automotive finance company, from December 1993 to September 1994; as an independent consultant to the industry from October 1994 to August 1995; and as Senior Vice President -- Asset/Liability Manager of Union Federal Savings Bank of Indianapolis from 1989 to December 1993. Mr. LaVigne also held several senior level financial positions with Columbia Savings, a federal savings and loan association, from 1981 to 1989. Paul J. Repecki, Vice President -- Corporate Services, joined NAL in 1995 and has over 25 years of experience in management information services. Previously, Mr. Repecki worked at CAP Industries, Inc., as a management consultant. He also worked for Southeast Bank, NA, CenTrust Savings Bank and Landmark Banking Corporation where he held various senior level management positions in data processing. Peter J. Wilden, Vice President -- Collections & Operations, has 28 years of experience in consumer finance. Prior to joining NAL in 1995, he served eight years as a Credit Underwriting Consultant, under an exclusive contract, to Baker & Associates of Grand Rapids, Michigan. In this capacity, Mr. Wilden conducted due diligence reviews of consumer finance companies' underwriting and collection processes related to the sale of asset-backed securities to the secondary market. Mr. Wilden also was Vice President of the Installment Loans and Dealer Departments at Wyoming National Bank of Casper in Casper, Wyoming. - -------------------------------------------------------------------------------- [PHOTO OF DENNIS R. LaVIGNE, PAUL S. GOWAR, PETER J. WILDEN AND ROBERT J. CARLSON] (left to right) Dennis R. LaVigne, Paul S. Gowar, Peter J. Wilden, Robert J. Carlson - -------------------------------------------------------------------------------- 5 COMPANY OVERVIEW - -------------------------------------------------------------------------------- [PHOTO OF PAUL J. REPECKI] Paul J. Repecki "NAL has the advanced information systems to effectively manage continuing strong growth." Paul J. Repecki, Vice President -- Corporate Services - -------------------------------------------------------------------------------- [PHOTO OF TWO UNDERWRITERS] - -------------------------------------------------------------------------------- Strategically Positioned For Profitable Growth For well-run and well-capitalized companies like NAL Financial Group Inc., the non-prime automotive market holds significant opportunities for profitable growth. It is a huge market, currently valued by industry experts at $75 to $100 billion. It also is an expanding one that is geographically segmented. Since shifting its focus to the highly fragmented non-prime auto market in mid 1994, NAL has quickly established a growing position in the southeastern part of the country. NAL's top management, seasoned veterans of the consumer finance business, have long known that there are many complexities involved in processing, underwriting and collecting loans and leases to non-prime borrowers. In fact, this market must be navigated with exceptional business controls, advanced systems and a sharply focused approach if a company is to achieve consistent profitable growth. Accordingly, NAL has established strict collateral assessment policies, conservative and consistent underwriting standards and proactive collection processes. At the same time, NAL's business goals are set by senior management in consultation with operating officers from underwriting, collections, finance and securitization. As a consequence of this disciplined process, the Company has been able to effectively manage the significant growth of its loan and lease portfolio while maintaining sound asset quality. Operating a rapidly growing, successful financial services company within a market demanding such specialized management requires a strong commitment to the development of a highly efficient and effective operating structure and proper staffing. NAL has devoted considerable resources to developing advanced information systems and building a strong, operating team made up of executives who have extensive experience at senior levels of the consumer finance business. 6 - -------------------------------------------------------------------------------- [PHOTO OF DEALER TRAINING MEETING] "Some companies view a non-prime customer as a "problem" credit. NAL gives a lot of consideration to where a customer is going to be financially in the future, not just to where they have been in the past." Paul S. Gowar, Vice President -- Credit and Funding - -------------------------------------------------------------------------------- Underwriting Unlike traditional banking companies, NAL does not rely upon credit scoring or profiles to determine repayment probability. Even the Company's advanced software is used solely as an aid to the application review process. Importantly, NAL credit analysts personally review each application, evaluating the individual's credit background against a backdrop of consistent criteria. Among the most important of NAL's standards is the non-prime auto borrower's ability to put down at least 10% in cash, and pay a monthly installment that is not larger than one week's net pay. Approximately 60% of all applications submitted to NAL are rejected. Collections Due to the fact that NAL's non-prime customers have troubled or non-existent credit histories, the Company's collection agents phone all new customers at the contract's origination reminding them that payment is due the same date each month and that there is never a grace period. With that first contact, NAL sets the tone -- proactive contact -- for keeping the account current. Further, the calls begin with a friendly "re-education" process during which borrowers are informed of the positive impact prompt payment will have on their credit records. They also are reminded that with the 10% down payment, they have made a considerable cash investment in the automobile. Of course, any non-prime portfolio will have defaults, but the objective is to keep the delinquencies low. Toward this end, NAL's collection agents monitor all accounts daily, phoning the customer at home or at work within 24 hours of delinquency. - -------------------------------------------------------------------------------- "We constantly remind our collection teams that their "re-educating" of the customer is essentially driving the profitability of the Company." Peter J. Wilden, Vice President -- Collections and Operations [PHOTO OF A COLLECTOR] - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- One-Stop Source for Non-Prime Auto Financing Needs [ILLUSTRATION OF CHART] NAL Financial Group Inc. New Auto _________ Auto Used Cars Leases | Loans Cars | | Insurance "Management has positioned the Company as a highly efficient acquirer and servicer of loans and leases, able to effectively manage our losses in order to provide a superior return to our stockholders." Robert J. Carlson, Vice President -- Finance and Principal Accounting Officer - -------------------------------------------------------------------------------- Dealer Network & GE Relationship The Company currently has over 900 dealers under contract and that network is expected to expand sharply, reaching approximately 2,000 by year-end 1996. With more new dealers understanding NAL's stringent underwriting criteria, both the volume and frequency of acceptable applicants should significantly increase as well. NAL's dealer network has grown as a result of the Company's marketing efforts focusing on responsiveness to dealer needs underscored by its relationship with General Electric Capital Auto Lease, Inc. (GECAL). Under a test program which began in September 1994 with 74 of GECAL's Florida dealers, NAL evaluated -- and then subsequently accepted or rejected -- applications which did not meet GECAL's prime underwriting criteria. In July 1995, NAL and GECAL signed a two-year agreement with the intent of rolling out this program to GECAL's 1500 dealers in the 11 southeastern states. In September 1995, the program was expanded to include all 400 dealers in the state of Florida, with expectations for continued expansion through 1996. Capital Markets Of particular importance, the Company completed its first securitization, the sale of $40.1 million of automobile receivables-backed securities, in December 1995, enhancing NAL's operating flexibility while significantly reducing its borrowing costs. With the creation of a turnkey system for securitizations, the Company completed a March 1996 sale of $41 million of automobile receivables-backed securities. - -------------------------------------------------------------------------------- "We are very pleased to be on track with implementing our plan of securitizing a pool of auto loans of approximately $40 to $50 million each quarter." Dennis R. LaVigne, Vice President and Treasurer - -------------------------------------------------------------------------------- 8 Management's Discussion and Analysis or Plan of Operations The following information should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Company included in this Report. Background NAL commenced operations during June 1991 as a specialized finance company for the purpose of engaging in consumer finance transactions involving the origination, purchase, remarketing and servicing of consumer and mortgage loans and auto lease receivables. Because of the opportunities presented by the insolvency and reorganization of many financial institutions at the time, from inception through the second quarter of 1994 the Company's principal activities involved the bulk purchase and servicing of seasoned portfolios of consumer and mortgage loans and auto lease receivables that had been administered by the Resolution Trust Corporation (RTC) or the Federal Deposit Insurance Corporation (FDIC). In response to the decreasing availability of seasoned portfolios, since the second quarter of 1994 the Company's principal focus has shifted to other segments of the consumer finance industry, particularly automobile finance. Al though opportunistic purchases of seasoned portfolios may still be considered by management, the Company's primary business since June 1994 has been the acquisition and servicing of automotive leases and loans originated by dealers in connection with sales or leases to persons with sub-prime credit. While certain of the Company's loans and leases may be held until maturity, the Company intends to periodically attempt the pooling and sale of portfolios of loans and leases through securitization transactions. See "Liquidity and Capital Resources -- Securitization of Loans." The Company became publicly held by virtue of the Merger with Corporate Financial Ventures, Inc. (COFVI) on November 30, 1994. COFVI had been an inactive public company at the time of the Merger. Since, as a result of the Merger, the historic stockholders of NAL acquired a controlling interest in COFVI, the Merger has been accounted for as a "reverse acquisition." According ly, for financial statement presentation purposes, NAL is viewed as the continuing entity and the related business combination is viewed as a recapitalization of NAL, rather than an acquisition by COFVI. In conjunction with the Merger, COFVI changed its name to "NAL Financial Group Inc." Results of Operations Year Ended December 31, 1995 compared to Year Ended December 31, 1994 The Company reported net income of $2,797,000, or $.45 per share, for the year ended December 31, 1995. This compares to net income of $394,000, or $.07 per share, for the year ended December 31, 1994. Net income for 1995 included a non-cash charge to income of $280,000 for the release of shares held in escrow pursuant to the Merger in November 1994. Operating income, excluding this charge, was $3,077,000, or $.50 per share. The increase in net income was due to the Company's success in significantly increasing its portfolio of auto-motive finance contracts during 1995. Contracts acquired during the year ended December 31, 1995 totalled $165,697,000 compared to $31,319,000 for the year ended December 31, 1994. This increase positively affected the Company's earnings and was reflective of the Company's success in the establishment and continuous expansion of its network of automobile dealerships participating in the Company's financing programs. As a result, the Company's results of operations for the year ended December 31, 1995 principally reflected net interest income, rental income and fees earned on its expanded portfolio of sub-prime automotive finance contracts. The results of operations for the year ended December 31, 1994 principally reflected interest income and purchase discount accretion earned on bulk purchased portfolios and gains from the sale of these portfolios. Purchase discount accretion reflected the increase in the value of the Company's portfolios of consumer and mortgage loans as they approached maturity. The following table presents the principal components of the Company's net income for the years ended December 31, 1995 and 1994: 1995 1994 Change ----- ---- ------ ($000's) Net Interest Income $ 8,318 $ 3,430 $ 4,888 Provisions for Credit Losses (2,762) (573) (2,189) Gains on Sales of Contracts and Other Income 7,252 2,745 4,507 Operating and Other Expenses (8,085) (4,945) (3,140) ------- ------- ------- Income Before Income Taxes 4,723 657 4,066 Provision for Income Taxes (1,926) (263) (1,663) ------- ------- ------- Net Income $ 2,797 $ 394 $ 2,403 ======= ======= ======= Net Interest Income During 1995, the Company's net interest spread rate, or the difference between the effective rate earned on interest-earning assets and the effective rate paid on interest-bearing borrowings, decreased 3.20%, from 12.80% to 9.60%, when compared to the same period of the preceding year. This decrease was due primarily to a 1.89% decrease in the effective rate earned on interest-earning assets, from 22.53% to 20.64%, accompanied by an increase in the Company's effective cost rate from 9.73% to 11.04%, or 1.31%. The decrease in the net interest spread rate in 1995 was primarily attributable to, among other things, a decrease in purchase discount accretion from $2,065,000 in 1994 9 to $654,000 in 1995 and an increase in the average effective cost rate associated with the Company's outstanding indebtedness which can be attributed to the increased cost of borrowing associated with the subordinated debentures issued by the Company during 1995. Although the net interest spread rate earned in the current period on automotive finance contracts is less than the net interest spread rate earned in prior periods on bulk purchased portfolios, the increase in volume of automotive finance contracts originated during 1995 more than offset the decrease in net interest spread rate and resulted in a positive contribution to earnings when comparing 1995 to 1994. The effects of these factors upon the Company's net interest income are reflected within the following table:
Effective Yield Earned/ Interest Income/ Rate Paid Average Balance Interest Expense Change Due to ---------------------- --------------------------- --------------------------- ----------------------------- 1995 1994 Change 1995 1994 Change 1995 1994 Change Rate Volume Total Finance Contracts 20.64% 22.53% -1.89% $ 75,957 $ 23,917 $ 52,040 $ 15,680 $ 5,387 $ 10,293 $ (1,436) $ 11,729 $ 10,293 Borrowings 11.04% 9.73% 1.31% 66,668 20,109 46,559 7,361 1,957 5,404 873 4,530 5,404 -------- -------- -------- -------- -------- -------- Net Interest Spread 9.60% 12.80% -3.20% $ 8,319 $ 3,430 $ 4,889 $ (2,309) $ 7,198 $ 4,889 ===== ===== ===== ======== ======== ======== ======== ======== ======== Net Interest Margin 10.95% 14.34% -3.39% ===== ===== =====
Given existing market rates of interest, management expects that the effective yields earned on automotive finance contracts will remain relatively stable within the short term. Net interest income in the future will be dependent upon, among other things, the effective rate paid on the Company's borrowings as well as the volume of originated finance contracts. To a large extent, the Company's ability to support its growth in the rate of the acquisition and origination of automotive finance contracts in the future will depend upon, among other things: (i) continued expansion of the Company's program with dealers and other sources of auto loans and leases; (ii) maintaining and enforcing the implementation of underwriting guidelines relative to credit decisions which are intended to result in reduction in delinquency experience and credit losses; and (iii) the availability of adequate sources of capital (on terms and at rates that provide an acceptable interest spread) from which to finance the growth of the Company's business. Provision for Possible Credit Losses The provision for possible credit losses which totalled $2,762,000 for the year ended December 31, 1995, reflects an increase of $2,189,000 over the amount of $573,000 reported for 1994. This increase related primarily to provisions recorded for an estimate of possible losses which may be incurred in connection with the acquisition of new automotive finance contracts during 1995. See "Net Credit Loss Experience." During the fourth quarter of 1995, management elected to discontinue the accretion to earnings of the purchase discount considered necessary to absorb future credit losses and instead allocate this amount to the Company's reserve available for credit losses. Management believes that this decision, although not totally eliminating the need for future provisions, will ultimately result in lower provisions for credit losses on purchased contracts. Management periodically reviews the adequacy of the reserve for credit losses and considers whether the level of reserve is sufficient to cover any losses of the carrying value of the collateral pledged for the finance contracts, an analysis of the equity invested in the collateral by the borrowers, delinquency data and historical loss experience, and any recourse arrangements the Company has with dealers or other sellers of contracts and portfolios. Gains on Sales of Contracts and Other Income Gains on sales of loans totalled $2,292,000 during the year ended December 31, 1994 compared to $4,601,000 for the year ended December 31, 1995. Sales during 1994 consisted primarily of loan pools which had been purchased at discounts and sold within a short period after purchase. During 1995, the Company completed its first securitization transaction whereby the Company pooled approximately $40 million of its portfolio of originated automobile loans for sale in a privately-placed transaction. This sale resulted in a gain of approximately $4.1 million during the fourth quarter. The Company completed its second securitization transaction during the first quarter of 1996 and expects that a significant portion of its net income for that quarter will be attributable to that transaction. Gains from the sale of loans in securitization transactions have provided a significant portion of the net income of the Company during the fourth quarter of 1995 and the first quarter of 1996, and are likely to continue to represent a significant portion of the Company's net income during all periods in which securitization transactions are undertaken. Fee and other income increased $2,197,000 from $454,000 during the year ended December 31, 1994 to $2,651,000 during the year ended December 31, 1995, due primarily to the commissions earned by the Company's insurance brokerage services from placing insurance policies and late fees charged on the portfolio of automotive loans and leases. Other income also includes approximately $400,000 of gross profit on the sale of vehicles through the Company's retail sales facility for the year ended December 31, 1995. Operating and Other Expenses Operating and other expenses increased $3,140,000 to $8,085,000 during the year ended December 31, 1995 from $4,945,000 during the year ended December 31, 1994, due primarily to increased overhead and costs associated 10 with the Company's automotive contract financing business. This increase was attributable to, among other things, an increase in compensation and employee benefits paid due to an expansion of the Company's work force. Additional personnel were hired to assist with underwriting, collecting and servicing of the Company's expanding portfolio of automotive contracts. This increase was also attributable to an increase in depreciation and amortization as the Company continued to build its infrastructure in order to meet the needs of a growing organization and asset base. As a percentage of average total portfolio being serviced by the Company during the year, operating and other expenses decreased to 8.16% in 1995 from 14.33% in 1994. Management expects that operating expenses will continue to increase as the size of its portfolio of automotive finance contracts increases. However, management does not expect that the rate of growth of these expenses will be proportionate with the rate of growth of the Company's revenues or the increase in its automotive finance contracts. Year Ended December 31, 1994 compared to Year Ended December 31, 1993 The Company reported net income of $394,000, or $.07 per share, for the year ended December 31, 1994. This compares to net income of $471,000, or $.08 per share, for the year ended December 31, 1993. The results of operations for the year ended December 31, 1994 and December 31, 1993 principally reflected interest income and purchase discount accretion earned on bulk purchased portfolios and gains from the sales of these portfolios. The following table presents the principal components of the Company's net income for the years ended December 31, 1994 and 1993: 1994 1993 Change ---- ---- ------ ($000's) Net Interest Income $ 3,430 $ 4,365 $ (935) Provisions for Credit Losses (573) -- (573) Gains on Sales of Contracts and Other Income 2,745 1,956 789 Operating and Other Expenses (4,945) (5,516) 571 ------- ------- ------- Income Before Income Taxes 657 805 (148) Provisions for Income Taxes (263) (334) 71 ------- ------- ------- Net Income $ 394 $ 471 $ (77) ======= ======= ======= Net Interest Income During the year ended December 31, 1994, the Company's net interest spread rate decreased 2.64%, from 15.44% to 12.80%, when compared to the preceding year. This decrease was primarily due to a 4.53% decrease in the effective rate earned on interest-earning assets from 27.06% to 22.53%. The decrease in the earnings rate was offset by a decrease in the Company's effective cost rate from 11.62% to 9.73%, or 1.89%. The decrease in the effective earnings rate was attributable to a decrease in interest income and purchase discount accretion. Interest income from loans and direct finance leases decreased $1,049,000, or approximately 24%, from $4,371,000 in 1993 to $3,322,000 in 1994. Although total loans and leases outstanding at December 31, 1994 of $29,984,000 exceeded that outstanding at December 31, 1993 of $24,038,000, the average balance outstanding during 1994 was less than that for 1993. During 1994, the average balance of total loans and leases decreased approximately 12%, from $27,093,000 in 1993 to $23,917,000 in 1994. Although the Company acquired $41,027,000 of new leases and loans during 1994, these acquisitions occurred primarily in the last two quarters of the year. During 1994, the Company received principal payments on its portfolios totalling $23,640,000, and sold loans with a total book value of $11,963,000. The decrease in purchase discount accretion, from $2,959,000 in 1993 to $2,065,000 in 1994, reflected the maturing during 1994 of discounted portfolios previously purchased by the Company, which were replaced in 1994 wi th acquisitions of bulk-purchase portfolios and loan and lease originations which did not have as large an amount of purchase discount as realized in the past, and with the purchase of the two under-performing portfolios which were partially accounted for using the cost recovery method. Interest expense decreased from $2,966,000 in 1993 to $1,957,000 in 1994. This decrease corresponded to a decrease in the average balance of participations and notes payable, from $25,522,000 in 1993 to $20,109,000 in 1994, consistent with the decrease in the average balance of loan and lease receivables outstanding during the year. In addition, during 1994, the Company realized a full year's benefit of the refinancing of its participations in 1993, together with benefits of obtaining less expensive financing for new loan purchases and originations. The effects of these factors upon the Company's net interest income are reflected within the following table:
Effective Yield Earned/ Interest Income/ Rate Paid Average Balance Interest Expense Change Due to ---------------------- --------------------------- --------------------------- ----------------------------- 1995 1994 Change 1995 1994 Change 1995 1994 Change Rate Volume Total Finance Contracts 22.53% 27.06% -4.53% $23,917 $27,093 $(3,176) $ 5,387 $ 7,331 $(1,944) $(1,083) $ (860) $(1,943) Borrowing 9.73% 11.62% -1.89% 20,109 25,522 (5,413) 1,957 2,966 (1,009) (380) (628) (1,008) ------- ------- ------- ------- ------- -------- Net Interest Spread 12.80% 15.44% -2.64% $ 3,430 $ 4,365 $ (935) $ (703) $ (232) $ (935) ===== ===== ===== ======= ======= ======= ======= ======= ======== Net Interest Margin 14.34% 16.11% -1.77% ===== ===== =====
11 Provision for Possible Credit Losses During 1994, the Company recorded a provision for loan losses of $573,000. This provision was due primarily to two factors: the settlement during the year of several delinquent loans previously purchased as part of performing loan packages, and the determination during the year of the portion of the purchase price of two underperforming portfolios acquired during 1994 deemed not collectible. Management periodically reviews the adequacy of the reserve for loan losses and considers whether the level of the reserve is sufficient to cover any losses of the carrying value of its existing portfolios. This review includes an evaluation of the value of the collateral pledged for the loans and leases receivable, an analysis of the equity invested in the collateral by borrowers, delinquency data and historical loss experience, and any recourse arrangements the Company has with the sellers of portfolios. Prior to 1994, the Company's portfolio acquisitions consisted primarily of performing loans and leases which were acquired at discounted prices. The Company's experience with these portfolios was that, in general, it recovered its discounted investment in the portfolios through diligent collection efforts. Accordingly, based on management's review, no additional provision for losses was considered necessary for 1993. During the last quarter of 1994, management was able to fully evaluate the collectibility of the two underperforming portfolios acquired during the earlier part of 1994. This evaluation determined that the purchase cost of several of the loans would not be fully collectible, and, under generally accepted accounting principles, the portion deemed uncollectible was charged off. However, management expects that the collections from each of the two portfolios taken as a whole will exceed their respective total purchase costs. These portfolios are being amortized on a cost recovery basis. Gains on Sales of Loans and Other Income Gains on sales of loans increased from $1,925,000 in 1993 to $2,292,000 in 1994. During 1994, the Company sold loan portfolios with a book value of $11,963,000, which compares to sales during 1993 of loans with a book value of $6,527,000. Gains on mortgage loan sales to correspondents decreased from $206,000 in 1993 to none in 1994, reflecting the decision by the Company to cease operatio ns of its mortgage origination business in order to concentrate on the automobile finance business. Other income increased $410,000, due primarily to an increase in late fee income of $177,000, due to fees collected primarily from the underperforming portfolios, and commission income of $47,000 from the Company's insurance brokerage activities. Operating and Other Expenses Operating and other expenses decreased $55,000, from $5,000,000 during the year ended December 31, 1993 to $4,945,000 during the year ended December 31, 1994, due primarily to a decrease in servicing expense. Servicing expense decreased from $320,000 in 1993 to $80,000 in 1994, resulting from the Company's decision to transfer the data processing function for servicing its portfolios from an outside service bureau to an in-house system. This transfer was made to enhance the efficiency of the Company's operations and to reduce its operating expenses. This transfer did not have a material effect on the liquidity and capital resources of the Company, nor did it have a material effect on the results of operations. Other operating expense categories increased $297,000, due primarily to increased overhead and sales costs incurred in establishing the Company in its new business focus. Delinquency Experience The following table summarizes delinquency experience on total finance contracts owned by the Company, as well as automotive finance contracts serviced for others, at December 31, 1995 and 1994:
1995 1994 --------------------------- --------------------------- Dollars Contracts Dollars Contracts ------- --------- ------- --------- Total finance contracts serviced $145,936,162 13,337 $ 33,165,177 3,560 ============ ====== ============ ===== Delinquencies: 60-89 days delinquent: Automotive finance contracts 3,916,286 395 111,515 13 Other finance contracts 202,097 9 103,451 6 ------------ ------ ------------ ----- Total finance contracts serviced 4,118,383 404 214,966 19 ============ ====== ============ ===== 90 days or more delinquent: Automotive finance contracts 2,789,773 272 106,377 13 Other finance contracts 948,031 25 316,881 14 ------------ ------ ------------ ----- Total finance contracts 3,737,804 297 423,258 27 ============ ====== ============ ===== Total 60 days or more delinquent: Automotive finance contracts 6,706,059 667 217,892 26 Other finance contracts 1,150,128 34 420,332 20 ------------ ------ ------------ ----- Total finance contracts $ 7,856,187 701 $ 638,224 46 ============ ====== ============ =====
The following table summarizes delinquency experience on total finance contracts as a percent of gross servicing portfolio outstanding at December 31, 1995 and 1994: 1995 1994 ------------------ ------------------ Dollars Contracts Dollars Contracts ------- --------- ------- --------- 60-89 day delinquencies as a percent of: Automotive finance contracts 2.68% 2.96% 0.34% 0.37% Other finance contracts 0.14% 0.07% 0.31% 0.16% ---- ---- ---- ---- Total finance contracts 2.82% 3.03% 0.65% 0.53% ==== ==== ==== ==== 90 day or more delinquencies as a percent of: Automotive finance contracts 1.91% 2.04% 0.32% 0.37% Other finance contracts 0.65% 0.19% 0.96% 0.39% ---- ---- ---- ---- Total finance contracts 2.56% 2.23% 1.28% 0.76% ==== ==== ==== ==== Total delinquencies over 60 days as a percent of: Automotive finance contracts 4.60% 5.00% 0.66% 0.73% Other finance contracts 0.78% 0.26% 1.27% 0.56% ---- ---- ---- ---- Total finance contracts 5.38% 5.26% 1.93% 1.29% ==== ==== ==== ==== 12 Delinquency for 1995 excludes four under-performing, bulk-purchase portfolios acquired during 1994 and accounted for using a cost recovery method whereby income is recognized only for the excess of collections received over the purchase price basis of the loans. At December 31, 1995, principal balance and book balance of these portfolios amounted to $3,326,933 and $1,954,979, respectively. Delinquency for 1994 excludes two under-performing, bulk-purchase portfolios acquired during the year with principal balance and book balance amounting to $2,270,556 and $897,150, respectively, at December 31, 1994. The historic delinquency experience of the Company identified in the chart provided above through December 31, 1994 was accumulated during periods in which the Company's business focused principally upon the bulk purchase and servicing of portfolios of mortgage, lease and consumer receivables. In view of its recent shift to the automotive finance business, the Company's past delinquency experience may not be indicative of future results. At December 31, 1994, the dollar amount of the Company's portfolios consisted of approximately 76% of new contracts originated through its sub-prime credit program and 24% of previously acquired bulk purchase portfolios. At December 31, 1995, the Company's portfolios consisted of 95% of new contracts originated and 5% of previously acquired bulk purchase portfolios. Management expects that future delinquency rates for sub-prime automobile leases and loans will differ from that experienced for bulk-purchase portfolios. The Company has prepared analyses of its automotive finance contracts, based on its own credit experience and available industry data, to identify the relationship between contract delinquency and default rates at the various stages of a contract's repayment term. The results of these analyses suggest that the probability of a contract becoming delinquent or going into default is highest during the "seasoning period" which begins 3 to 4 months, and ends 12 to 14 months, after the origination date. The Company believes that the increase in the over 60 days delinquency percentage of number of contracts from 1.29% at December 31, 1994 to 5.26% at December 31, 1995 is primarily the result of an increase in the percentage of automotive finance contracts in the "seasoning period," rather than any change in the underlying average credit characteristics of the Company's portfolio. If the rate of the Company's volume continues to escalate, an increasingly greater portion of the Company's portfolio is expected to fall into the "seasoning period" described above, causing a rise in the overall portfolio delinquency and default rates, without regard to underwriting performance. Assuming no changes in any other factors that may affect delinquency and default rates, the Company believes this trend should stabilize or reverse when the volume of mature contracts (with lower delinquency and default rates) is sufficient to offset the total portfolio delinquency and default rates. The Company's collections staff monitors the contracts and typically takes action within 24 hours of delinquency if the first payment on a contract is missed, and within 48 hours if the second or subsequent payment is missed, and generally repossesses the automobile within 20 days of any uncured delinquency. While average periods of delinquency may decrease, actual results of operations will only be enhanced provided the Company's net credit loss experience does not deteriorate. See "Net Credit Loss Experience." Net Credit Loss Experience A reserve for credit losses has been maintained at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks in the portfolios. Management's periodic evaluation is based upon an analysis of the portfolios, historical loss experience, current economic conditions and other relevant factors. Future adjustments to the reserve may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The following table summarizes charge-off experience, net of recoveries from carrying value, on total finance contracts owned by the Company, as well as automotive finance contracts serviced for others by the Company, for the years ended December 31, 1995 and 1994.
1995 1994 ---- ---- Principal Outstanding $148,449,537 $35,435,733 Average principal outstanding 91,942,635 32,645,108 Net losses: Automotive finance contracts $ 2,730,072 $ -- Other finance contracts 431,834 544,952 ------------ ----------- Total net losses $ 3,161,906 $ 544,952 ============ =========== Net losses as a percent of ending finance contracts serviced: Automotive finance contracts 1.84% -- Other finance contracts 0.29% 1.54% ------------ ----------- Total net losses 2.13% 1.54% ============ =========== Net losses as a percent of average finance contracts serviced: Automotive finance contracts 2.97% -- Other finance contracts 0.47% 1.67% ------------ ----------- Total net losses 3.44% 1.67% ============ ===========
Due to the limited historical experience reflecting results of the Company's program of auto loan and lease acquisitions, management is continuously assessing the level or extent of future credit losses. Credit losses in the future will be dependent on the Company's credit criteria, advance rates in relation to the value of the secured automobiles, and the value received from the disposition of any repossessed automobiles in relation to the outstanding balance of the lease or loan. However, management believes that its policy of underwriting contracts on an individual basis, the effectiveness of its collection efforts, and its knowledge of collateral values and of the industry will contribute positively to the Company's charge-off experience. Management also anticipates that the operation of the Company's sales lot will improve charge-off experience by reducing the losses realized upon the disposition of repossessed automobiles. 13 Liquidity and Capital Resources Current Operations The Company's business requires substantial cash to support its growth in the rate of acquisition and origination of automotive finance contracts. The following chart presents the growth in both the number and dollar amount of contracts acquired since June 1994.
Quarter Ended --------------------------------------------------------- June Sept. Dec. March June Sept. Dec. 1994 1994 1994 1995 1995 1995 1995 ---- ----- ---- ----- ---- ----- ---- ($ in millions) Contracts Acquired $ 3.26 $ 7.12 $ 14.76 $ 29.66 $ 34.79 $ 43.97 $ 50.61 ------ ------ ------- ------- ------- ------- ------- Number 423 848 1,490 2,657 2,889 3,524 3,965 ====== ====== ======= ======= ======= ======= =======
As a general matter, the Company finances the acquisition of its automotive finance contracts by drawing against its available lines of credit and warehouse facilities. Under the terms of these facilities, funding is provided for between 80% to 90% of the acquisition price of the contracts. Accordingly, the Company must secure the remainder of the acquisition price from equity or other funding sources. As the rate of growth of contract acquisition continues to increase, the Company must secure additional equity or other sources to fund these requirements. The Company's growth, therefore, is governed by its ability to gain access to additional financing sources. The Company's growth during the year ended December 31, 1995 has been facilitated by its ability to successfully complete private placements of debt and equity securities and gain access to increasing sources of financing. During 1995, the Company had secured its principal sources of working capital through senior indebtedness comprised of a series of debt participation interests, revolving lines of credit, and a repurchase facility, as well as subordinated junior indebtedness consisting of unsecured subordinated debentures and advances from an officer, and the proceeds from the sale of shares of common stock in a private placement transaction. As of December 31, 1995, the respective balances due under the Company's outstanding indebtedness were as follows: Senior Indebtedness: Lines of Credit and Warehouse Facility $ 33,429,000 Debt Participation Interests 42,381,000 Subordinated Indebtedness: Private Placement of Convertible Subordinated Debentures Issued: $ 21,325,000 Less: Converted to Common Stock (8,260,000) 13,065,000 Unsecured Advances $ 2,919,000 Lines of Credit, Warehouse Facilities and Debt Participations In March 1993, the Company entered into a $20,000,000 three-year revolving credit facility with Congress Financial Corporation (the "Congress Credit Facility") which has recently been extended until March 1997. The Congress Credit Facility bears interest at 2% over the prime rate of CoreStates Bank, N.A. (10.75% at December 31, 1995), payable monthly, and is secured by certain lease contracts receivable and consumer and mortgage loans receivable. As of December 31, 1995, the Company had no advances outstanding and had an available borrowing base of $20,000,000 under the Congress Credit Facility for the financing of additional loan and lease portfolio purchases which meet certain credit guidelines established by Congress, in its sole discretion. During February 1994, the Company entered into a $5,000,000 one-year revolving credit facility with GECC (the "GECC Credit Facility"). In September 1994, the GECC Credit Facility was increased to $10,000,000. The GECC Credit Facility bears interest payable monthly at rates fixed at the time of financing and is secured by certain lease contracts receivable and consumer and mortgage loans receivable. In March 1995, the GECC Credit Facility available line was increased to $25,000,000 and at December 31, 1995, the Company had drawn down approximately $21,844,000 under the facility. The GECC Credit Facility is automatically renewed annually unless GECC provides the Company with notice of termination 90 days prior to such renewal. During September 1995, the Company entered into a $50 million repurchase facility (the "Repurchase Facility") with an additional lending institution (the "Lender"). Under the terms of the Repurchase Facility, the Lender purchases loan and lease contracts receivable from the Company at approximately 90% of the outstanding principal balance. These advances are accounted for as financing transactions characterized as borrowings. The Company repurchases the receivables from the Lender at approximately 90% of the outstanding principal balance at the time of repurchase plus a premium for accrued interest at a rate of 2.25% over 30 day LIBOR. The Repurchase Facility also provides that if the market value of contracts sold to the Lender (market value being determined by an independent third party) is less than the Lender's margin amount (market value multiplied by the advance rate), the Lender may require the Company to transfer money or additional contracts to the Lender until the margin amount is satisfied. Market value may be affected by, among other things, sudden changes in interest rates, delinquency rates and credit losses. Although management believes that this is unlikely to occur to any significant degree, a margin call could require an allocation of certain of the Company's liquidity and capital resources. The term of the Repurchase Facility is for one year, automatically renewable for an additional year. At December 31, 1995, the Company had $11,585,000 outstanding under the Repurchase Facility. 14 The Company intends to use the Repurchase Facility to fund additional growth in loan and lease receivables with the intent to eventually pool and securitize these receivables. Towards that end, during the fourth quarter of 1995, the Company completed the sale of approximately $40 million of automotive loans in a privately-placed securitization transaction. The proceeds from the transaction were used to pay down the Repurchase Facility, thereby making the Repurchase Facility available to fund acquisitions of additional automotive contracts. See "Securitization of Loans." The Repurchase Facility includes certain financial and operational covenants including, among other things, the required maintenance of a minimum net worth of $30 million dollars, prohibition upon debt to equity ratio in excess of 8 to 1, and the maintenance of certain loan portfolio performance criteria. For the purpose of the Repurchase Facility, net worth has been defined as total stockholders' equity plus subordinated indebtedness not due within 90 days. At December 31, 1995, the Company was in compliance with all relevant financial and operational covenants. Management continues to closely monitor the performance of its loan portfolios in order to insure compliance with all financial and operational covenants. An event of default is also deemed to occur under the Repurchase Facility in the event of the death of two of the Company's executive officers (or if both of these individuals cease serving as officers) or if the Company is unable to securitize at least $250 million of loans over a two-year period, with at least $100 million securitized in any 365-day period. The Congress Credit Facility and the GECC Credit Facility are also subject to certain financial and operational covenants that are not inconsistent with those imposed under the Repurchase Facility. Since inception, the Company has secured a significant amount of its working capital through debt participation interests. As of December 31, 1995, the Company had an existing series of borrowings under participation arrangements outstanding with Fairfax Savings, a Federal Savings Bank ("Fairfax") in the approximate amount of $41,845,000. Approximately $40.6 million of the Fairfax financing has been utilized to acquire automotive finance contracts. These amounts are subject to interest at prime plus 2.5% fixed at the time of the financing. The remaining approximately $1.2 million of the Fairfax financing has been utilized to acquire bulk-purchase portfolios prior to 1995. These amounts are subject to interest at fixed rates from 10% to 13.5%. In general, under the terms of the participation agreements, principal payments on the agreements are tied to the payments received from the secured contracts and loans receivable. Interest is due monthly. Proceeds received from contracts financed by Fairfax are first paid to Fairfax to the extent of any unpaid principal and interest due on the participations. Thereafter, proceeds are allocated to a reserve account until certain balances are achieved and the remainder is paid to the Company. Under the Company's participation agreements, collections received from loans securing the participations are deposited into restricted, trust bank accounts pending distributions to participation holders. Distributions generally are disbursed to participants once each month for the previous month's collections. Distributions under some participation agreements with Fairfax include deposits of a portion of the collections into segregated, interest-bearing reserve accounts held for the benefit of the Company at Fairfax. These reserve accounts are returned to the Company once the principal balances under the participation agreements are reduced to certain levels. The balances of the trust account pending settlement with participants and the balance of the reserve accounts on deposit with Fairfax are reflected on the Company's balance sheet as Restricted Cash. Private Placement of Convertible Subordinated Debentures, Warrants and Common Stock The Company has secured a significant component of its working capital through the private placement of debt and equity securities. During the fourth quarter of 1994, the Company raised approximately $8,298,000 (net proceeds of $7,723,000), in a private placement transaction of 1,549,667 shares of its Common Stock in conjunction with the Merger. Also during the period from April 1995 through December 31, 1995, the Company completed the offering and sale in private placement transactions of $21,325,000 of 9% Convertible Subordinated Debentures (the "Debentures") and 1,961,125 Common Stock Purchase Warrants (the "Warrants"), as well as 176,500 shares of its common stock which yielded net proceeds of $2,100,950. During January 1996, the Company completed the sale of $2.5 million of additional Debentures and 175,000 Warrants. Through December 31, 1995, an aggregate of $8,260,000 principal amount of the Debentures was converted into 930,519 shares of Common Stock. The principal amount and accrued interest due under the remainder of the Debenture s is convertible into shares of Common Stock (at the option of the holders thereof) in accordance with the following table: Principal Amount(1) Conversion Price - ------------------- ---------------- $ 4,140,000 Lower of: (i) $9.00; or (ii) 75% of average closing bid price upon conversion. 8,425,000 Lower of: (i) $11.00; or (ii) 85% of average closing bid price upon conversion. 3,000,000 $12.50 ----------- $15,565,000 ============ (1) As of March 29, 1996. Should the stock achieve the trading prices identified in the table provided below, the Company has the right to serve notice of the redemption of the Debentures for the 15 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 a conversion rather than a redemption). Principal Amount(1) Redemption Price - ------------------- ---------------- $ 4,140,000(2) $ 15 6,425,000 $ 18 5,000,000 $ 25 - ----------- $15,565,000 =========== (1) As of March 29, 1996. (2) $3,750,000 of the Debentures are not subject to a call for redemption, in which event, however, the Debentures become non-interest bearing. The respective maturity dates of the Debentures are identified in the following table: Principal Amount(1) Maturity Date - ------------------- ------------- $ 1,140,000 April 1996 3,000,000 September 1996 2,500,000 November 1996 3,425,000 December 1996 3,000,000 July/August 1998 2,500,000 January 1999 - ------------ $ 15,565,000 ============ (1) As of March 29, 1996. Although management is optimistic that a substantial number of the remaining Debentures will be subject to conversion prior to their maturity, a possibility exists that the Company could be required to allocate liquidity and capital resources to the retirement of these Debentures. The Warrants entitle the holders thereof for a period of three (3) years to purchase shares of Common Stock at exercise prices identified in the table provided below. Exercise Price ---------------------- Warrants(1) Per Share/Aggregate - ----------- ---------------------- 1,360,000 $ 9.00/$12,240,000 12,500 12.00/ 150,000 50,000 12.30/ 615,000 350,000 14.00/ 4,900,000 363,625 15.00/ 5,454,375 --------- ------------------- 2,136,125 $23,359,375 ========= =================== (1) As of March 29, 1996. The Warrants also contain features that permit redemption (at $.001 per Warrant) based upon average trading prices of the Company's Common Stock between $15.00 and $25.00. Any call for redemption would have the likely effect of causing the exercise of the Warrants. There can be no assurances that a material number of the Warrants will be exercised in the near term, if at all, or that the trading price of the Company's Common Stock will, in the near term, be sufficient to permit a redemption of the Warrants. The Company has granted certain registration rights to the holders of the Debentures and the Warrants. Pursuant to these rights, the Company has agreed to include the resale of up to approximately 2.9 million shares, issuable, if at all, upon the conversion of the Debentures and the exercise of the Warrants in a registration statement to be filed with the Securities and Exchange Commission on or before May 15, 1996. The Company's liquidity and capital resources may continue to be affected by the trading price of the Company's Common Stock. Trading prices at levels consistently higher than the conversion prices of the Debentures will likely facilitate conversion of the Debentures in the near term. A conversion of the Debentures would positively affect the Company's liquidity by obviating the need to repay the principal amount (and in certain instances, interest) due thereunder. Trading at reduced prices, however, will make less likely conversion of the Debentures, thus requiring the Company to allocate certain of its capital resources towards the retirement of the Debentures at maturity. As of the date of this Report, the Company had outstanding 6,700,041 shares of Common Stock. By virtue of the registration rights, commencing May 15, 1996, the Company will be commencing the registration for resale purposes of up to approximately 2.9 million shares issuable, if at all, upon the conversion of the Debentures and exercise of the Warrants. This may have the effect of substantially increasing the number of shares eligible for public trading. Although it is impossible to predict market influences and prospective values for securities, it is possible that, in and of itself, the increase in the number of shares available for public trading could have a depressive effect upon the trading value of the Company's Common Stock. Securitization of Loans During the fourth quarter of 1995, the Company completed the sale of approximately $40 million of automotive loans in a privately-placed securitization transaction. This was followed by a further sale of approximately $41 million of automotive loans in a second securitization transaction that occurred during March 1996. Both of these transactions resulted in the issuance of asset-backed securities which received a rating of "A", "BBB" and "BB" by Duff & Phelps Audit Rating Co. and Fitch Investors Services L.P. The proceeds from these transactions were used to reduce the Company's outstanding warehouse facility, thereby making the warehouse facility available to fund the acquisition of additional automotive contracts. The Company expects to complete future securitizations, generally, on a quarterly basis. 16 In securitization transactions, the Company transfers automobile loans to a newly-formed securitization trust which issues one or more classes of asset-backed securities. The asset-backed securities are simultaneously sold to investors. Periodically, collections of principal and interest on the loans are paid to holders of the related asset-backed securities by the trustee. The Company continues to act as the servicer of the automobile loans held in the trust in return for a monthly fee. To further credit enhance the asset-backed securities and thereby to improve the level of profitability from the sale of securitized loans, the Company has set aside a portion of the proceeds from the sale in a reserve account to be held in the trust. Withdrawals may be made from the reserve account to the extent that collections from the loans held in the trust are not sufficient to cover periodic distributions to holders of the trust's asset-backed securities. At periodic dates, amounts on deposit in the reserve account in excess of certain specified percentages of the principal balance of the loans held in the trust are returned to the Company. Other Potential Uses of Working Capital In the short term, the Company may be required to repay advances from its chief executive officer, the balance of which was $2,919,000 as of December 31, 1995, which is due on March 31, 1996. Thereafter, the balance due thereunder becomes due upon demand which may be made upon thirty days written notice to the Company. The Company may potentially be caused to allocate certain capital resources in the future towards the purchase of the business of SFI. SFI is a Florida-based auto finance broker that at December 31, 1995 accounted for approximately 35% of the Company's loan and lease receivables. Pursuant to an option agreement entered into on August 1, 1995 (the "SFI Purchase Option"), the Company has an option through August 1, 2000 to purchase the business of SFI for the purchase price of $1,000,000, plus 125,000 shares of the Company's Common Stock and options to purchase 65,000 shares of Common Stock at $6.00 per share. An option price of $250,000 paid to SFI on August 1, 1995 is to be credited against the purchase price. In the event the Company decides to exercise the SFI Purchase Option, the Company has agreed to register the shares of Common Stock to be distributed in the transaction, and pending such registration, the Company has agreed to lend up to $900,000 to the sole stockholder of SFI at then prevailing market rates of interest, with such loan being secured by a security interest in up to 120,000 shares until such time as the shares are registered. Management is currently evaluating the economic benefits of exercising the SFI Purchase Option and to date has made no determination on the likelihood of whether or when such a purchase may occur, if at all. In the interim, the SFI Purchase Option provides the Company with a right of first refusal to purchase all of the finance contracts acquired or originated by SFI. Given the Company's dependence on its present sources of financing for current cash flow and continued growth, loss of such sources would have a material adverse impact on the Company's conduct of business and prospects. Management is presently evaluating additional sources of financing through continuation and expansion of its existing practices; that is, through offering debt participation interests to institutional investors, traditional lines of credit, and through additional equity placemen ts. In addition, the Company intends to continue utilizing alternative financing sources and structures, such as securitizations of loans, in order to maximize profitability and make available sufficient funds to continue implementation of the Company's growth strategy over the long term. However, there can be no assurances that the Company will secure additional sources of financing. See "Securitization of Loans." By virtue of the Company's status as a public company, management will likely seek to gain access to equity or debt capital through a sale of securities either through the public market or to institutional investors. Any funding provided by the sale of securities, if at all, would be used directly to acquire additional automotive finance contracts, or would enhance the Company's borrowing base so as to facilitate increased lines of credit or participation agreements. Management believes that the Company's current cash flow from operations, proceeds from private placement transactions, as well as advances on its credit facilities and debt participation interests, are adequate to meet the Company's liquidity requirements for its existing operations. Continued growth of the Company's operations will remain subject to expansion of the Company's sources of financing. The terms of the borrowings under the participation agreements and the credit facilities provide for repayments of principal and interest to the lenders in amounts which, in general, correspond with and are exceeded by the scheduled repayment of the secured loans and leases receivable. Effects of Inflation Inflationary pressures may have an effect on the Company's internal operations and on its overall business. The Company's operating costs are subject to general economic and inflationary pressures. While operating costs have increased during the past years, the Company does not believe that its operations have been significantly affected by inflation. The Company's business is subject to risk of inflation. Significant increases in interest rates that are normally associated with strong periods of inflation may have an impact upon the number of individuals that are likely or able to afford the purchase of an automobile through consumer finance or lease transactions. The Company believes, however, that because of its customer profile, and the need of its customers for basic transportation, such factors are not likely to have a material adverse impact on the Company's business. 17 NAL Financial Group Inc. Consolidated Balance Sheets December 31, 1995 and 1994
1995 1994 ---- ---- ASSETS Finance receivables Automotive finance contracts, net $ 99,790,636 $ 23,974,929 Consumer finance contracts, net 2,289,503 1,491,694 Mortgage finance contracts, net 1,805,068 4,822,667 Less: reserves available for credit losses (2,671,001) (305,000) ------------- ------------- Finance receivables, net 101,214,206 29,984,290 ------------- ------------- Cash 920,981 664,848 Restricted cash 1,031,734 1,061,041 Accrued interest receivable 1,459,600 167,692 Investment in operating leases, net 4,054,613 1,230,647 Automobile inventory 1,886,451 150,779 Property and equipment, net 1,802,889 510,885 Excess servicing receivables 4,999,165 -- Other assets 4,665,287 748,171 ------------- ------------- Total Assets $ 122,034,926 $ 34,518,353 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Debt participation interests $ 42,380,522 $ 10,273,645 Credit and warehouse facilities 33,428,946 12,228,396 Convertible subordinated debt, net 12,924,379 -- Stockholder loans 2,919,000 62,494 Drafts payable 2,593,098 -- Deferred taxes 1,603,587 110,460 Accounts payable and accrued expenses 1,046,884 400,057 Other liabilities 1,278,594 587,494 ------------- ------------- Total Liabilities 98,175,010 23,662,546 ------------- ------------- Commitments and contingencies (Notes 8 and 17) -- -- Stockholders' Equity Preferred stock -- $1,000 par value: 10,000,000 shares authorized, no shares issued -- -- Common stock -- $0.15 par value: 50,000,000 shares authorized 1995 -- 6,699,987 shares issued and outstanding 1994 -- 5,592,968 shares issued and outstanding 1,004,998 838,945 Paid in capital 18,524,706 8,483,714 Retained earnings 4,330,212 1,533,148 ------------- ------------- Total Stockholders' Equity 23,859,916 10,855,807 ------------- ------------- Total Liabilities and Stockholders' Equity $ 122,034,926 $ 34,518,353 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 18 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. 19 NAL Financial Group Inc. Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1995 and 1994
Preferred Stock Common Stock ----------------- ------------------------ Less: Total Par Par Paid in Note Retained Stockholders' Shares Value Shares 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. 20 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 receivables (4,999,165) -- Decrease in restricted cash 29,307 921,492 Increase in other assets (3,514,607) (75,428) Decease in due from affiliates -- 43,667 Increase in accrued interest receivable (1,291,908) -- Increase in drafts payable 2,593,098 -- Increase in accounts payable and accrued expenses 825,631 -- Increase in other liabilities 627,505 190,030 Increase (decrease) in accrued income taxes 1,493,127 (33,590) ------------- ------------- Net cash used in operating activities (2,207,371) (2,023,539) ------------- ------------- Cash flows from investing activities: Purchase of SFI option (250,000) -- Proceeds from sale of loan pools 12,514,061 14,614,031 Purchase of operating lease vehicles (3,400,690) (1,283,300) Payments received on automotive finance contracts 22,042,555 7,417,861 Purchase of automotive finance contracts (154,866,844) (22,681,679) Payments received on consumer finance contracts 1,996,335 8,421,534 Purchase of consumer finance contracts (1,050,549) (14,795,381) Payments received on mortgage finance contracts 2,587,063 5,083,106 Purchase of mortgage finance contracts -- (221,713) Proceeds from sale of automobile inventory 8,845,103 -- Purchase of property and equipment (1,535,671) (253,004) ------------- ------------- Net cash used by investing activities (113,118,637) (3,698,545) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock 2,100,950 7,722,861 Proceeds from securitization of finance contracts 37,511,237 -- Proceeds from issuance of subordinate debentures 21,338,728 -- Proceeds from participations and credit facilities 135,178,400 33,911,781 Repayments of participations and credit facilities (81,870,973) (34,249,908) Payment of debt issue costs (1,532,707) (24,352) Note payable from stockholder 2,856,506 -- Dividends paid -- (1,069,459) ------------- ------------- Net cash provided by financing activities 115,582,141 6,290,923 ------------- ------------- Net increase in cash 256,133 568,839 Cash, beginning of year 664,848 96,009 ------------- ------------- Cash, end of year $ 920,981 $ 664,848 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 6,443,859 $ 1,859,353 ============= ============= Cash paid during the year for taxes $ 491,558 $ 320,501 ============= ============= Supplemental schedule of non-cash investing and financing activities: Conversion of subordinated debt $ 8,260,000 -- ============= ============= Net transfers to automobile inventory $ 11,742,181 -- ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 21 NAL Financial Group Inc. Notes to Consolidated Financial Statements December 31, 1995 and 1994 1. Organization and Nature of Operations NAL Financial Group Inc. (the "Company") commenced operations in June 1991 as a specialized finance company for the purpose of engaging in consumer finance transactions involving the origination, purchase, remarketing and servicing of consumer loan and lease receivables. Since June 1994, the Company's principal business has been the acquisition and servicing of automotive finance contracts originated by dealers in connection with sales or leases to individuals with sub-prime credit with the intent to pool and sell these contracts through the Company's securitization programs. The Company completed its initial securitization during December 1995. In a securitization, the Company creates securities backed by automotive finance contracts and sells these securities in privately placed transactions. Purchasers of the securities receive a pass-through rate of interest set at the time of sale and the Company receives a base servicing fee for its servicing efforts. In addition, the Company is entitled to certain excess servicing fees which represent collections on the contracts in excess of those required to pay investor principal and interest and the base servicing fee. On November 30, 1994, the Company merged with Corporate Financial Ventures, Inc. ("CFVI"), a public company (the "Merger"). Under the terms of the Merger, the Company's stockholders received 3,160,000 shares of CFVI in exchange for all outstanding shares of stock of the Company. Stockholders of the Company received approximately 56% of the outstanding common stock of CFVI. Additionally, the Company raised net proceeds of approximately $7,700,000 in a private placement of 1,549,667 shares of its common stock in connection with the Merger. The Merger has been accounted for as a reverse acquisition by the Company. Upon completion of the Merger, CFVI assumed the historic operations of the Company and changed its name to NAL Financial Group Inc. As the Merger is not considered a business combination as defined in Accounting Principles Board Opinion No. 16, "Business Combinations," pro forma information is not presented. The operations of CFVI prior to the Merger were not significant. The Company operates its business through six wholly-owned subsidiaries. The principal operations of the Company are conducted through NAL Acceptance Corporation ("NAC"). NAL Insurance Services, Inc. provides automobile and other forms of insurance services. NAL Mortgage Corporation presently is inactive. Performance Cars of South Florida, Inc. was incorporated in January 1995 to conduct the Company's used vehicle operations. Autorics, Inc. and Autorics II, Inc. were established during 1995 for the limited purpose of purchasing and the re-selling of the Company's automotive finance contracts through the Company's securitization programs. 2. Accounting Policies A summary of the significant accounting policies followed in the preparation of the accompanying financial statements is presented below: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. Revenue Recognition Interest income consists of both contractual interest and purchase discount accretion and is recognized over the contractual term of the finance contracts using the interest method. Purchase discount represents the differential, if any, between the amount financed on a contract and the price paid by the Company to acquire the contract, net of any acquisition costs. Any discount on automotive finance con tracts which management considers necessary to absorb future credit losses is allocated to the reserves available for credit losses. The remaining portion of the discount, if any, is recognized as interest income as described above. Revenue from operating leases is recognized as rental revenue on a straight-line basis over the lease term. Accrual of interest income ceases the sooner of when a contract becomes delinquent by 90 days or the under-lying collateral is repossessed. At December 31, 1995 and 1994, the Company had approximately $2,800,000 and $236,000, respectively, in non-accrual finance contracts. Had these contracts been on full accrual, $236,000 and $26,000 would have been recognized to earnings for the years ended December 31, 1995 and 1994, respectively. Late charges and other miscellaneous fees are credited to income as earned. Fees from the resale of guaranteed asset protection ("GAP") insurance policies are non-rebatable and recognized as earnings in the current period. Reserves Available for Credit Losses The Company purchases contracts from dealers at discounts pursuant to a financing program that bases the level of discount on, among other things, the credit risk of the borrower. As discussed above, the portion of the discount on automotive finance contracts required to absorb future credit losses, based on management's assessment, is allocated to the reserves available for credit losses. 22 As part of the Company's financing program with dealers, agreements are entered into whereby holdbacks are established to protect the Company from potential losses. Pursuant to the agreements, when the Company acquires contracts, it withholds a portion of the proceeds from the dealers to absorb credit losses. Holdback amounts are refunded to the dealers if the contract performs throughout its term. In cases where the purchase discount and/or dealer holdbacks are not adequate to cover potential losses, the Company establishes an allowance for losses by charging a provision against earnings. The combined allowance, discount and dealer holdbacks available for credit losses are maintained at an amount considered by management to be adequate to absorb potential credit losses based upon an evaluation of known and inherent risks in the portfolios. Management's periodic evaluation is based upon an analysis of the portfolios, historical loss experience, current economic conditions, collateral value and other relevant factors. Future adjustments to the reserve may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. The Company charges off delinquent automotive and consumer accounts no later than 150 days of delinquency. Recovery of charged-off balances begins with the Company's collection specialists. If results are not obtained within a reasonable time frame, the account is either turned over to a collection agency or an attorney for action, including wage garnishment, judgement and asset search. Restricted Cash Restricted cash represents deposit accounts established pursuant to servicing agreements between the Company and various participants which represents collections from customers. The collection accounts are settled monthly by the Company with the participants. Net Investment in Operating Leases Operating automotive leases to third parties are originated by dealers and acquired by the Company, which assumes ownership of the vehicle. Vehicles held under operating lease agreements are recorded at cost and depreciated on a straight-line basis over the lease term to the estimated residual value. Automobile Inventory Vehicles acquired through repossession or termination of a lease or loan are valued at the lower of the unpaid principal balance or market value at the date of repossession. Debt Issue Costs Debt issue costs are capitalized and amortized to operations on a straight line basis over the life of the related debt, which currently approximates one to three years. Property and Equipment Property and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Excess Servicing Receivables Excess servicing receivables ("ESR") result from the sale of contracts on which the Company retains servicing rights and a portion of the excess cash flows. ESRs are determined by computing the difference between the weighted average yield of the contracts sold and the yield to the purchaser, adjusted for the normal servicing fee based on the agreements between the Company and the purchaser. The resulting differential is recorded as a gain in the year of the sale equal to the present value of the estimated cash flows, net of any portion of the excess that may be due to the purchaser and adjusted for anticipated prepayments, repossessions, liquidations and other losses. The excess servicing cash flows over the estimated remaining life of the contracts have been calculated using estimates for prepayments, losses (charge-offs) and weighted average discount rates, which the Company expects market participants would use for similar instruments. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The Company utilizes an asset and liability approach to account for income taxes on a current and deferred basis using current income tax rates. Deferred income tax assets are recognized for temporary differences that will result in deductible amounts in future years. Deferred income tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Concentration of Credit Risk The Company considers its primary market area for automotive financing activities to be the southeast United States. The properties collateralizing the other loan receivable portfolios are located primarily throughout the eastern United States, Texas and California. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' abilities to honor their obligations to the Company is dependent upon the economic stability of these areas. 23 Interest Rate Risk Contract acquisitions are funded primarily through participations, credit and warehouse facilities. The participations and credit facilities bear interest at fixed rates tied to the prime rate and the durations are determined by the durations of the related contracts since the proceeds of the obligor payments are applied to the repayment of the participations. The warehouse facility bears interest at a variable rate tied to LIBOR and the duration is determined by the timing of the Company's securitization transactions. Contract acquisitions financed by this facility are warehoused pending securitization. Upon completion of a securitization, any remaining amounts due associated with the contracts securitized are repaid along with unpaid interest. Earnings Per Share Earnings per common share are computed based on the weighted average number of common and common equivalent shares outstanding during the period. The weighted average number of shares of common and common equivalent shares outstanding used to compute primary and fully diluted earnings per share was 6,200,362 for the year ended December 31, 1995, and 5,192,968 and 5,592,968, respectively, for the year ended December 31, 1994. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near term are the adequacy of reserves available for credit losses, the present value of the estimated future cash flows utilized to calculate excess servicing receivables, the realization of estimated residual values on direct finance leases and the realization of automotive inventory. Reclassification Certain 1994 amounts have been reclassified to conform with current year presentation. 3. Automotive Finance Contracts Automotive finance contracts at December 31, 1995 and 1994 consist of the following:
1995 1994 ---- ---- Contracts held in portfolio: Direct finance lease payments $ 16,361,733 $ 4,936,889 Estimated residual values 9,170,719 2,985,254 ------------ ------------ Total direct finance lease 25,532,452 7,922,143 Less: Unearned interest (7,069,448) (2,004,435) ------------ ------------ Total direct finance leases, net 18,463,004 5,917,708 ------------ ------------ Loan contracts 17,080,482 8,175,202 Loan contracts with recourse 29,226,018 -- ------------ ------------ Total loan contracts 46,306,500 8,175,202 ------------ ------------ Total contracts held in portfolio 64,769,504 14,092,910 Less: Unearned fees (123,322) (815,768) ------------ ------------ Total contracts held in portfolio, net 64,646,182 13,277,142 Contracts held for sale 21,685,000 -- Advances to dealers 13,459,454 10,697,787 ------------ ------------ Total automobile finance contracts, net $ 99,790,636 $ 23,974,929 ============ ============
The Company has entered into arrangements with certain of its dealers and other origination sources by which the Company may require the reimbursement for credit losses sustained on contracts purchased from these sources. The Company services automotive finance contracts of approximately $48 million for others. Automotive finance contracts are collateralized primarily by the related automobiles and the related security deposits on leases. These contracts are pledged as security under various debt agreements. Contracts held in portfolio are stated at cost as the Company has the ability and presently intends to hold the portfolio to maturity. Contracts held for sale are contracts pending securitization and are stated at the lower of cost or estimated fair value on an aggregate basis. Advances to dealers represent amounts funded by the Company to automobile dealerships which are collateralized by loan and lease receivables of the dealers, totalling approximately $18,106,000 and $15,463,000, at December 31, 1995 and 1994, respectively. The Company services contracts amounting to $7,783,000 for two of the dealerships. These advances bear interest at fixed rates, or at variable rates subject to certain minimum percentages. The duration of these advances is determined by the duration of the related collateralized loan and lease receivables. At December 31, 1995, contractual maturities of automotive finance contracts are as follows:
1996 1997 1998 1999 2000 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Direct finance leases $ 2,292,832 $ 7,172,485 $ 8,426,841 $ 6,305,136 $ 1,329,848 $ 5,310 $25,532,452 Loan contracts 10,207,017 11,795,493 12,254,748 8,805,294 3,185,518 58,430 46,306,500 Advances to dealers 4,867,676 3,446,671 3,423,349 1,428,079 286,612 7,067 13,459,454 ----------- ----------- ----------- ----------- ----------- ----------- ----------- $17,367,525 $22,414,649 $24,104,938 $16,538,509 $ 4,801,978 $ 70,807 $85,298,406 =========== =========== =========== =========== =========== =========== ===========
It is the Company's experience that generally a portion of the portfolios are repaid before the contractual maturity dates. Accordingly, the above tabulation is not to be regarded as a forecast of the timing of future cash collections. Additionally, this tabulation assumes liquidation of the residual values upon expiration of the leases. 24 4. Consumer Finance Contracts December 31, 1995 1994 - ------------ ---- ---- Mobile homes $ 221,434 $ 524,274 Equipment leases (net of unearned interest of $285,730) 853,637 -- Other 1,407,601 1,808,742 ----------- ----------- Total 2,482,672 2,333,016 Less: Purchase discount (193,169) (841,322) ----------- ----------- Consumer loans receivable, net $ 2,289,503 $ 1,491,694 =========== =========== 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 ========== It is the Company's experience that a portion of the portfolio is repaid before the contractual maturity date. Accordingly, the above tabulation is not to be regarded as a forecast of the timing of future cash collections. 5. Mortgage Finance Contracts December 31, 1995 1994 - ------------ ---- ---- Residential mortgages $ 2,064,043 $ 6,041,464 Less: Purchase discount (258,975) (1,218,797) ----------- ----------- Mortgage finance contracts, net $ 1,805,068 $ 4,822,667 =========== =========== 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 investme nt 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. 6. Reserves Available for Credit Losses Changes in reserves available for credit losses for the year ended December 31, 1995 and 1994, consisted of the following:
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 automotive contracts -- (2,061,280) (127,000) (2,188,280) -- Refund of dealer reserve -- -- (22,256) (22,256) -- ----------- ----------- ----------- ----------- ----------- Balance at end of period $ 652,998 $ 1,513,001 $ 505,002 $ 2,671,001 $ 305,000 =========== =========== =========== =========== ===========
The Company allocated approximately $4.2 million to the reserves available for credit losses during 1995, which represents management's estimate of the purchase discount on automotive finance contracts necessary to absorb future credit losses. Management periodically reviews the adequacy of the reserves available for credit losses and considers whether the level of reserve is sufficient to cover any losses of the carrying value based on the collateral pledged for the finance contracts, an analysis of the equity invested in the collateral by the borrowers, delinquency data and historical loss experience, and any recourse arrangements the Company has with dealers or other sellers of finance contracts. 7. Net Investment in Operating Leases December 31, 1995 1994 - ------------ ---- ---- Vehicles held under operating leases, at cost $ 4,449,451 $ 1,283,300 Less: Accumulated depreciation (394,838) (52,653) ----------- ----------- $ 4,054,613 $ 1,230,647 =========== =========== At December 31, 1995, future minimum rental revenue on operating leases are as follows: 1996 $1,078,762 1997 937,021 1998 430,164 1999 24,876 ---------- $2,470,823 ========== 25 8. Property and Equipment Property and equipment at December 31, 1995 and 1994 consists of the following: Amount -------------------------- Estimated 1995 1994 useful life ---- ---- ----------- Furniture, fixtures and office equipment $ 2,158,928 $ 646,899 5-7 years Less: Accumulated depreciation (356,039) (136,014) ----------- ----------- $ 1,802,889 $ 510,885 =========== =========== 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 ========== 9. Excess Servicing Receivables The Company's excess servicing receivables at December 31, 1995 consists of the following: Servicing cash flows on loans sold, net of estimated prepayments $ 9,607,000 Less: Discount to present value (834,000) Reserve for loan losses (1,705,000) Deferred servicing income (2,069,000) ----------- Excess servicing receivables $ 4,999,000 =========== 10. Debt Participation Interests Debt participation interests at December 31, 1995 and 1994 consists of the following: 1995 1994 ---- ---- Participation with Fairfax Savings, a Federal Savings Bank ("Fairfax"), interest at fixed rates ranging from 10% to 13.5%; principal and interest due monthly, secured by undivided interest in automotive finance contracts, consumer finance contracts and mortgage finance contracts. $41,845,372 $ 9,321,395 Participations with investors, secured by undivided interest in automotive finance contracts, consumer finance contracts and mortgage finance contracts; interest at a fixed rate of 18%. 470,432 911,311 Participations with a stockholder, secured by undivided interest in certain automotive finance contracts and mortgage finance contracts; interest at fixed rates of 11.5%-18%. 64,718 40,939 ----------- ----------- $42,380,522 $10,273,645 =========== =========== 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 t o Fairfax to the extent of any unpaid principal and interest due on participations. Thereafter, proceeds are allocated to a reserve account until certain balances are achieved and the remainder is paid to the Company. Under the Company's participation agreements, collections received from loans securing the participations are deposited into restricted, trust bank accounts pending distributions to participation holders. Distributions generally are disbursed to participants once each month for the previous month's collections. The Company services the loan and lease receivables collateralizing the participation arrangements, including payment collection and posting, contact with customers, and repossession and disposal of collateral on defaulted contracts. Scheduled maturities of debt participation interests at December 31, 1995 are as follows: 1996 $11,971,194 1997 10,532,585 1998 10,832,758 1999 6,699,261 2000 2,127,517 Thereafter 217,207 ----------- $42,380,522 =========== 11. Credit and Warehouse Facilities Credit and warehouse facilities at December 31, 1995 and 1994 consists of the following: 1995 1994 ---- ---- Note payable under a $25 million ($10 million at December 31, 1994) automobile loan and lease financing facility, interest due monthly at 5.5% over LIBOR established and fixed at time of funding (weighted average rate of 9.3% at December 31, 1995) with General Electric Capital Corporation, secured by certain automotive finance contracts. $21,844,149 $11,019,914 Note payable under a $50 million repurchase financing facility with Greenwich Capital secured by automotive finance contracts. Interest due monthly at 2.25% over LIBOR (weighted average rate of 8.1% at December 31, 1995). 11,584,797 -- Note payable under a $20 million restricted financing facility with Congress Financial Corporation, interest due monthly at 2% over prime rate (10.75% at December 31, 1995), secured by automotive finance contracts, consumer finance contracts and mortgage finance contracts. -- 977,123 Unsecured notes. -- 231,359 ----------- ----------- $33,428,946 $12,228,396 =========== =========== 26 The repurchase facility is used to warehouse automotive finance contracts pending securitization. Under the terms of the repurchase facility, the Company has agreed to engage the lender as investment underwriter on these securitizations until such time that the Company has securitized a cumulative $250 million in automotive finance contracts. Scheduled maturities of credit and warehouse facilities at December 31, 1995 are as follows: Upon securitization $11,584,797 1996 5,071,529 1997 5,459,096 1998 6,081,862 1999 4,441,201 2000 765,133 Thereafter 25,328 ----------- $33,428,946 =========== Since the repayment of the above debt is directly related to the timing of the future cash collections of the related finance contracts, the above schedule of maturities may not be representative of the actual repayments. The above schedule of maturities excludes the balances held in the reserve accounts. Scheduled maturities under the repurchase financing facility are structured to coincide with the securitization of the underlying automotive finance contracts collateralizing the facility. The Company must maintain certain net worth and liquidity ratios based on covenants within its debt agreements. 12. Convertible Subordinated Debt Convertible subordinated debt at December 31, 1995 and 1994 consists of the following: 1995 1994 ---- ---- 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 =========== 13. Stockholders' Equity In October 1993, the president and chief executive officer of the Company, who is also a stockholder, purchased all outstanding shares not previously owned by him to give him 95% ownership in the Company. The president of NAC owned the remaining 5%. In connection with this transaction, the stockholder executed a note in favor of the Company; the note bore interest at 5% and was due September 30, 1995. In June 1994, the Company redeemed 2,143 shares of its common stock from this stockholder by cancelling the note. Merger In accordance with the terms of the Merger, of the 3,160,000 shares of common stock issued to the Company's stockholders, 400,000 shares issued to certain directors and officers were placed in a Voting Trust under the terms of a Voting Trust Agreement. The Voting Trust provides that, on any matter requiring stockholder vote, the trustee will vote the shares in the same percentage as the other then issued and outstanding shares of common stock are voted. Such shares may be released from the Voting Trust pursuant to the following formula. Based upon the Company's audited financial statements for the years ending December 31, 1995, 1996 and 1997, 10,000 shares will be released for each $150,000 of cumulative net income after taxes the Company earns up to $3,000,000, and 5,000 shares will be released for each $150,000 of cumulative net income after taxes in excess of $3,000,000, less the number of shares previously released under this formula. Any shares not released within three years will be cancelled. Originally, the Company intended to account for the release of all shares held in the Voting Trust as compensation expense. In 1995, the Company reassessed the accounting for shares after further consideration of the relevant facts and circumstances and has determined that the release of 340,000 of the 400,000 shares placed into the Voting Trust will be considered additional consideration of the Merger and not result in compensation expense. The remain ing 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. 27 Concurrent with the completion of the Merger, certain stockholders entered into a Shareholders' Agreement whereby the stockholders agreed, among other provisions, for the election of eight directors, two of which will be independent directors. The Shareholders' Agreement also provides certain limitations on transactions involving the stockholders' shares. Stock Option Plan The Company has adopted a stock option plan (the "Plan") which covers 600,000 shares of the Company's common stock. Under the terms of the Plan, officers, directors, key employees and consultants of the Company are eligible to receive incentive as well as non-qualified stock options and stock appreciation rights. Incentive stock options granted under the Plan are exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Company's common stock on the date of the grant. For any stockholder owning more than 10% of the outstanding common stock, incentive stock options are exercisable for a period of up to five years from the date of grant at an exercise price which is not less than 110% of the fair market value of the Company's common stock on the date of the grant. Non-qualified stock options and stock appreciation rights may be granted on terms determined by the Company's Board of Directors. Stock appreciation rights give the holder the privilege of surrendering such rights for the appreciation in the Company's common stock between the time of grant and surrender. The following table presents activity for the Plan for the years ended December 31, 1995 and 1994: Number 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 assets of Special Finance, Inc. ("SFI"). SFI is a Florida based auto finance broker that at December 31, 1995 provided approximately 35% of the Company's acquired automotive finance contracts. The option expires August 1, 2000 and gives the Company the right to purchase the business of SFI for the purchase price of $1,000,000, plus 125,000 shares of the Company's Common Stock and options to purchase 65,000 shares of Common Stock at $6.00 per share. An option price of $250,000 paid to SFI on August 1, 1995 is to be credited against the purchase price. In the event the Company decides to exercise the Purchase Option, the Company has agreed to register the shares of Common Stock to be distributed in the transaction, and pending such registration, the Company has agreed to lend up to $900,000 to the sole stockholder of SFI at then prevailing market rates of interest, with such loan being secured by a security interest in up to 120,000 shares until such time as the shares are registered. Management is currently evaluating the economic benefits of exercising the Purchase Option and to date, has made no determination on the likelihood of whether or when such a purchase may occur, if at all. In the interim, the Purchase Option provides the Company with a right of first refusal to purchase all of the finance contracts acquired or originated by SFI. Stock Purchase Warrants The Company has issued detachable stock purchase warrants (the "warrants") in connection with the private placement of convertible subordinated debt. At December 31, 1995, the Company had 1,961,125 in warrants outstanding at exercise prices ranging from $9 to $15. The warrants c ontain features that permit redemption at $.001 per warrant based on the average trading prices of the Company's common stock. 14. Income Taxes The components of the provision for income taxes for the years ended December 31, 1995 and 1994, consist of the following: 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 ========== ========== 28 The income tax provision differs from the amount determined by multiplying pre-tax income by the statutory federal income tax rate. The reconciliation between the expected tax provision and the actual tax provision is as follows: 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 and 1994, is comprised of the following temporary differences: 1995 1994 ---- ---- Deductible Temporary Differences Deferred gain on sale of loan portfolio $ -- $ 89,392 Depreciation 5,850,659 2,400,978 Bad debt reserves 362,441 114,772 Other -- 7,189 ----------- ----------- Deferred income tax asset 6,213,100 2,612,331 ----------- ----------- Taxable Temporary Differences Direct financing leases (6,685,591) (2,709,132) Book over tax gain on sale of contracts (1,131,096) -- Capitalized loan costs -- (13,659) ----------- ----------- Deferred income tax liability (7,816,687) (2,722,791) ----------- ----------- Net deferred income tax liability $(1,603,587) $ (110,460) =========== =========== 15. Related Party Transactions In October 1994, the Company sold a repossessed boat to an officer of the Company in consideration for a note in the amount of $89,000 and the offset by the Company of a $21,000 payable to the officer. The note bore interest at an annual rate of 10% and was repaid in 1995. On November 30, 1994, the Company sold a portfolio of 14 loans with a total principal balance of $1.1 million to the president and chief executive officer of the Company for a price of $591,000. These loans were included in a portfolio purchased during 1994 at a significant discount. The portion of the purchase price allocated to the loans sold approximated the sales price to the officer; therefore, no gain or loss was recognized on the sale. The Company sold these loans at a purchase price based on the estimated discounted cash flows anticipated on the specific loans purchased. This is the same method the Company uses to value its bulk portfolio acquisitions. The sales price of the loans reduced a previously established liability owed by the Company to the officer for bonuses and dividends. The Company continues to service the loans for the officer. An affiliate provided executive and financial services to the Company during 1994. The Company reimbursed the affiliate $675,000 for these services under a consulting agreement. The consulting agreement includes providing advice on the purchase and sale of consumer loan and lease portfolios and financing arrangements. Under the terms of the agreement, the Company pays the affiliate a fee of $50,000 per month through March 1995. During 1994, the Company prepaid the remaining amounts due under the contract at a $75,000 discount. The unamortized portion of the payment in the amount of $131,000 is included in other assets at December 31, 1994. Upon completion of the Merger, the Company entered into an employment agreement (the "Agreement") with the president and chief executive officer of the Company. The Agreement provides for a base salary of $275,000 per year plus discretionary bonuses, as approved by the Board of Directors, in addition to certain benefits. The Agreement is renewable annually for successive three- year periods; however, the president may terminate the Agreement upon written notice the earlier of one year from the date of such notice or 90 days after his replacement has been hired by the Company. The president may not terminate the Agreement prior to three years from the date of the Agreement. During 1995, the Board of Directors approved an increase in base salary to $300,000 per year. At December 31, 1995, the Company had a stockholder loan payable in the amount of $2,919,000, interest at 9%, which is due on March 31, 1996. However, this loan may be extended at the discretion of the chief executive officer for 30-day periods. 16. Employee Benefits The Company sponsors a 401(k) savings plan covering most employees. Contributions made by the Company to the 401(k) plan are based on a specified percentage of employee contributions. Total Company contributions were $48,355 and $22,787 for the years ended December 31, 1995 and 1994, respectively. 17. Litigation The Company is involved in various litigation matters arising in the normal course of business. Legal counsel's and management's assessment are that none of these matters are anticipated to have a material adverse impact on the financial position or results of operations of the Company. 18. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Fair value estimates are made at a specific point in time using estimates of rates of return that the Company believes would be required by independent third party investors. Accordingly, these estimates may not be indicative of rates that would be required if actual sales had taken place. Finance Receivables The fair value of finance receivables is computed by using estimated market rates of return desired by bulk purchasers. 29 Excess Servicing Receivables Excess servicing cash flows over the estimated remaining life of the contracts have been calculated using estimates for prepayments, losses and weighted average discount rates, which the Company expects market participants would use for similar instruments. Accordingly, the carrying amount approximates the fair value. Debt Participation Interests; Credit and Warehouse Facilities The fair value of existing debt is computed based on rates currently available to the Company for debt with similar terms and maturities. Other Financial Liabilities The fair value of other financial liabilities closely approximates carrying amount. The estimated fair values of the Company's financial instruments at December 31, 1995 were as follows: Carrying Fair Amount Value -------- ----- Financial Assets: Cash $ 920,981 $ 920,981 Restricted cash 1,031,734 1,031,734 Finance receivables: Automotive finance contracts 97,119,635 97,323,178 Consumer finance contracts 2,289,503 2,383,365 Mortgage finance contracts 1,805,068 1,981,481 Excess servicing receivables 4,999,165 4,999,165 ------------ ------------ Total $108,166,086 $108,639,904 ============ ============ Financial Liabilities: Debt participation interests $ 42,380,522 $ 42,305,963 Credit and warehouse facilities 33,428,946 33,017,076 Convertible subordinated debt 12,924,379 12,924,379 Stockholder loans 2,919,000 2,919,000 ------------ ------------ Total $ 91,652,847 $ 91,166,418 ============ ============ 19. Subsequent Events In January 1996, the Company completed the sale of $2.5 million of additional subordinated debentures with terms similar to previously issued convertible subordinated debt. On March 22, 1996, the Company completed a securitization of automotive finance contracts of approximately $40.8 million. Report of Independent Certified Public Accountants To the Board of Directors and Stockholders of NAL Financial Group Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of NAL Financial Group Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Fort Lauderdale, Florida February 27, 1996, except as to Note 19, which is as of March 22, 1996 30 Market for Common Equity and Related Stockholder Matters Prior to the Merger on November 30, 1994, virtually no trading of the Company's Common Stock had occurred since 1990. During December 1994, the Company's Common Stock began trading on the over-the-counter market through the OTC Bulletin Board under the symbol "NALF." In May 1995, the Company's Common Stock commenced trading on The NASDAQ National Market(Service Mark) under the same symbol. The following table sets forth the high and low market prices of the Common Stock for the period from December 1994 through December 1995. 1994 High Low - ---- ---- --- Fourth Quarter $ 9.75 $ 7.50 December 1994 1995 High Low - ---- ---- --- First Quarter $12.00 $10.30 Second Quarter $12.49 $10.50 Third Quarter $17.87 $11.97 Fourth Quarter $17.38 $ 9.75 The closing price on March 26, 1996 was $12.50. Records of the Company's stock transfer agent indicate that as of March 26, 1996, the Company had 145 holders of record of its Common Stock. Since a number of the shares of the Company are held by financial institutions in "street name," it is likely that the Company has substantially more beneficial owners of its stock than indicated above. To date, the Company has been unable to accurately ascertain this information. From inception through November 30, 1994, NAL as the predecessor to the Company paid dividends of $1,069,460. No dividends had been paid by COFVI, nor have there been any dividends paid by NAL following the Merger. The payment of dividends is not contemplated in the foreseeable future. The payment of future dividends will be directly dependent upon the earnings of the Company, its financial needs and other similarly unpredictable factors. Earnings are expected to be retained to finance and develop the Company's business. 31 Corporate Information Officers and Senior Management Robert R. Bartolini Chairman of the Board, President and Chief Executive Officer John T. Schaeffer President and Chief Operating Officer, NAL Acceptance Corporation (NAL's operating subsidiary) Robert J. Carlson Vice President -- Finance and Principal Accounting Officer Paul S. Gowar Vice President -- Credit & Funding Dennis R. LaVigne Vice President and Treasurer Paul J. Repecki Vice President -- Corporate Services Peter J. Wilden Vice President -- Collections & Operations JoAnn Woodside Vice President -- Investor Relations and Secretary Directors Robert R. Bartolini Chairman of the Board, President and Chief Executive Officer John T. Schaeffer President and Chief Operating Officer NAL Acceptance Corporation David R. Jones President DR Jones Financial, Inc. James F. DeVoe, Sr. Chairman and Chief Executive Officer J.D. Byrider Systems, Inc. Investor Relations NAL Financial Group Inc. provides information to stockholders and interested investors upon request. For additional information on the Company, or to obtain a copy of NAL's Annual Report on Form 10-K, free of charge, please contact: JoAnn Woodside Vice President -- Investor Relations NAL Financial Group Inc. 500 Cypress Creek Road West, Suite 590 Fort Lauderdale, FL 33309 Phone: 954-958-3605 Fax: 954-489-0694 Headquarters 500 Cypress Creek Road West, Suite 590 Fort Lauderdale, FL 33309 Phone: 954-938-8200 Fax: 954-938-8209 Independent Auditors Price Waterhouse LLP One East Broward Boulevard, Suite 1700 Fort Lauderdale, FL 33301 Counsel Buchanan Ingersoll, Professional Corp. Two Logan Square -- 12th Floor 18th and Arch Streets Philadelphia, PA 19103 English McCaughan & O'Bryan First Fort Lauderdale Place 100 Northeast Third Avenue, Suite 1100 Fort Lauderdale, FL 33301 Transfer Agent/Stockholder Inquiries Inquiries relating to stockholder records, stock transfers, changes of ownership, lost or stolen stock certificates and changes of address should be addressed to: StockTrans, Inc. 7 East Lancaster Avenue Ardmore, PA 19003-2318 Phone: 610-649-7300 Common Stock NAL Financial Group Inc.'s common stock is traded on The NASDAQ National Market(Service Mark) under the symbol NALF. 32 NAL Financial Group Inc. 500 Cypress Creek Road West, Suite 590 Fort Lauderdale, FL 33309 -----END PRIVACY-ENHANCED MESSAGE-----