UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended January 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transition Period from ______ to ______
Commission file number 1-11601
NATIONAL AUTO CREDIT, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1816760
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(State of incorporation) (I.R.S. Employer
Identification No.)
555 Madison Avenue, 29th Floor, New York New York 10022
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 644-1400
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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COMMON STOCK, PAR VALUE $.05 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of this Form 10-K or any
amendment to this Form 10-K. ( )
As of May 10, 2002, 8,641,754 shares of Common Stock of National Auto Credit,
Inc. were outstanding.
Aggregate market value of the registrant's Common Stock held by non-affiliates
at May 10, 2002, was approximately $648,283 (Based on the closing price of the
registrant's common stock on the OTC Bulletin Board on May 10, 2002).
DOCUMENTS INCORPORATED BY REFERENCE
NONE
TABLE OF CONTENTS
Part I Page
----
Item 1. Business...................................................... 1
2. Properties.................................................... 5
3. Legal Proceedings............................................. 5
4. Submission of Matters to a Vote of Security Holders........... 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
6. Selected Financial Data....................................... 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
7a. Quantitative and Qualitative Disclosures About Market Risk.... 20
8. Financial Statements and Supplementary Data................... 21
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 69
Part III
Item 10. Directors and Executive Officers of the Registrant............ 69
11. Executive Compensation........................................ 71
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 77
13. Certain Relationships and Related Transactions................ 78
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 80
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
National Auto Credit, Inc. ("the Company" or "NAC") began operations in
1969 and was incorporated in Delaware in 1971. Through and including December
31, 2001, NAC's operations were conducted principally through three operating
segments, (i) the e-commerce segment, which is comprised of ZoomLot
Corporation's ("ZoomLot") development of e-commerce services to facilitate the
process by which used car dealerships, lenders and insurance companies
communicate and complete the transactions between them that are needed to
provide used car dealers' customers with financing, insurance and other
services, (ii) the movie exhibition segment, which is comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment.
NAC recently completed a strategic review of its investment in ZoomLot,
acquired December 15, 2000, and the development of its e-commerce services.
NAC's strategic review included evaluating the evolving market conditions of the
used car dealer and financing industries, the start-up nature of the ZoomLot
operations, the current market demand for and penetration of ZoomLot's
e-commerce solution to electronically link eligible used car dealers and their
qualified customers with available used car lenders and financing terms, current
operating losses and forecasts of future operating results and strategic
opportunities available to ZoomLot. As a result of this review, management of
NAC determined that it was unable to predict, with the requisite degree of
certainty, when or whether ZoomLot would achieve positive cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated the steps
to discontinue both its e-commerce and auto financing segments. As a result, as
of January 31, 2002, NAC is engaged only in the movie exhibition segment.
In connection with its decision to discontinue the operations of ZoomLot,
NAC entered into formal negotiations with the former shareholders of ZoomLot to
resolve certain financial obligations of NAC and of the former ZoomLot
shareholders resulting from the terms of the Merger Agreement and Plan of
Reorganization dated December 15, 2000 (the "Merger Agreement"). Under the
Merger Agreement, 666,667 shares of Series C Preferred Stock issued in the
acquisition of ZoomLot were forfeitable if ZoomLot did not reach certain
financial performance goals by December 31, 2003, and NAC was obligated to
redeem, at the option of the holders, the 729,047 shares of the Series C
Preferred Stock issued under the Merger Agreement, at a per share price equal to
the greater of $15.00 or ten times the fair market price of NAC's Common Stock,
if ZoomLot did reach those financial performance goals. Additionally, Ernest G.
Garcia II, Cygnet Capital Corporation or Verde Reinsurance Company Ltd., former
ZoomLot shareholders, were obligated to make a payment of $5.2 million to NAC if
ZoomLot did not reach the financial performance goals by December 31, 2003. As
the result of shares of NAC Common Stock issued upon the conversion of the
Series B Preferred Stock issued in the acquisition of ZoomLot, and open market
purchases, Mr. Garcia had become the beneficial owner of 17.7% of the then
outstanding shares of Common Stock of NAC.
Since NAC now intended to discontinue ZoomLot's operations prior to
December 31, 2003, it was necessary to resolve the effect of that on the
obligations of NAC and the former ZoomLot stockholders under the Merger
Agreement. As a result of the negotiations, on January 31, 2002, NAC, entered
into an Exchange and Repayment Agreement ("Exchange Agreement") dated January
31, 2002 with Mr. Garcia, Cygnet Capital Corporation, Verde Reinsurance Company
Ltd., Ernie Garcia III 2000 Trust, Brian Garcia 2000 Trust, EJMS Investors
Limited Partnership, Ernest C. Garcia II, Ray Fidel, Steven P. Johnson, Mark
Sauder, Colin
1
Bachinsky, Chris Rompalo, Donna Clawson, Mary Reiner, and Kathy Chacon, who
collectively were the former shareholders of ZoomLot.
The Exchange Agreement sets forth the agreement among all the parties to
terminate the operations of ZoomLot. The parties agreed, among other things,
that the financial performance goals (specifically the "First Objective" and the
"Second Objective" as those terms are defined in the Merger Agreement) had not
and would not be met. Accordingly, the 666,667 shares of Series C Preferred
Stock forfeitable if those goals were not met were deemed forfeited and were
returned and surrendered to NAC. For financial reporting purposes, those shares
of Series C Preferred Stock had been treated as contingently issuable, and
accordingly their return had no effect on NAC's consolidated financial
statements.
Additionally, under the Exchange Agreement, the contingent obligation of
Mr. Garcia, Cygnet Capital Corporation or Verde Reinsurance Company Ltd., to
make a payment of $5.2 million to NAC if ZoomLot did not reach the financial
performance goals by December 31, 2003 was resolved by (i) the transfer back to
NAC of 3,079,530 shares of NAC Common Stock, which for the purposes of the
Exchange Agreement were valued at $1.25 per share, (ii) the return to NAC of
62,380 shares of NAC Series C Redeemable Preferred Stock at an aggregate
agreed-upon value of $854,875, which represented the carrying amount of such
shares of Series C Preferred Stock in NAC's consolidated financial statements,
and (iii) the issuance to NAC of a promissory note in the amount of $986,048,
payable, together with interest at 4% per annum, in cash or NAC Common Stock (at
a mutually agreed-upon value of $1.25 per share) on or before January 30, 2003.
For financial reporting purposes, NAC recorded the 3,079,530 shares of
Common Stock returned under the Exchange Agreement at $431,000, representing
their market value of the basis of the quoted market price of NAC's Common
Stock, recorded the 62,380 shares of Series C Redeemable Preferred Stock
returned at their aggregate carrying amount of $854,875, and recorded the note
receivable, a component of other assets, at a net value of $110,000 reflecting
the market value at January 31, 2002 of the shares of NAC Common Stock the maker
of the note has the option to tender in payment of the principal. NAC also
incurred or accrued costs of $850,000 for the winding down and closing of
ZoomLot's operations, including rental and broker costs to sublease ZoomLot's
corporate office, employee severance costs and costs of early lease
terminations. As a result, NAC recognized a net gain on the disposal of
ZoomLot's operation of $394,000. In addition, for the year ended January 31,
2002, NAC incurred losses from the discontinued operations for its e-commerce
operations of $9.4 million, including non-cash charges of $7.4 million for the
amortization and write-off of goodwill associated with the acquisition of
ZoomLot. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes 2 and 3 of Notes to Consolidated
Financial Statements.
As a further consequence to NAC's decision to discontinue its ZoomLot
e-commerce operations, NAC also formally exited the sub-prime used automobile
consumer finance business effective December 31, 2001. From October 1995 through
March 2000, NAC's principal business activity was to invest in sub-prime used
automobile consumer loans, which took the form of installment loans
collateralized by the related vehicle. NAC purchased such loans, or interests in
pools of such loans, from member dealerships, and performed the underwriting and
collection functions for such loans. In the first and second quarters for the
year ended January 31, 2001, NAC sold its active loan portfolio and the majority
of its charged-off portfolio. However, since NAC had not, until December 2001,
made a definitive decision that it would not reenter the consumer lending
business, either through ZoomLot or another means, the automobile financing
operations had not previously been classified as a discontinued operation. As a
result of the formal decision reached in connection with the decision to
discontinue ZoomLot's operations, the automobile financing operations were
classified as a discontinued operation as of January 31, 2002. For the year
ended January 31, 2002, NAC realized income from discontinued operations for its
automobile financing operations of $658,000 principally as a result of the sale
of previously charged-off loans. For the years ended January 31, 2001 and 2000,
NAC's discontinued
2
automobile financing operations incurred a loss of $1.8 million and generated
income of $6.6 million, respectively. See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 3 of Notes to
Consolidated Financial Statements.
In addition to these developments, during the year ended January 31, 2002,
NAC relocated its offices to New York City, New York, completed July 2001, and
closed its Solon, Ohio offices and operations, completed in July 2001.
NAC now plans to examine new business opportunities, which may be pursued
through the investment in or acquisition of existing operating businesses or
other means. At January 31, 2002 NAC had cash and marketable securities of $7.1
million, which together with any cash flow derived from its investment in AFC
will be used to pursue such opportunities. Additionally, NAC will continue to
pursue reductions in its operating expenses and new debt or equity financing
(for which there can be no assurance NAC will obtain such financing) as means of
supplementing the resources available to pursue new opportunities.
NAC's principal executive offices are located at 555 Madison Avenue, 29th
Floor, New York, New York, 10022. Its telephone number is 212-644-1400.
NAC uses a January 31 year-end for financial reporting purposes.
References herein to the fiscal year ended January 31, 2002 shall be the term
"Fiscal 2002" and references to other "Fiscal" years shall mean the year, which
ended on January 31 of the year indicated. The term the "Company" or "NAC" as
used herein refers to National Auto Credit, Inc. together with its subsidiaries
unless the context otherwise requires.
AUTOMOBILE FINANCING BUSINESS
NAC's automobile financing operation historically involved investing in
sub-prime used automobile consumer loans, which took the form of installment
loans collateralized by the related vehicle. NAC purchased such automobile
loans, or interests in pools of such loans (collectively "loan investments"),
from member dealers through its wholly-owned subsidiary, NAC, Inc. NAC performed
the underwriting and collection functions for all automobile loans it purchased
in whole, and also performed such functions where NAC had purchased interests in
a pool of such loans. NAC's operations enabled member dealers to provide used
car purchase financing to customers who had limited access to more traditional
consumer credit sources that might otherwise be unable to obtain financing.
The business of investing in sub-prime automobile loans involves investing
in loans which are high risk, in that the borrowers are individuals with below
average credit quality, and the collateral is subject to loss, damage,
significant declines in value and difficulties of repossession. Accordingly,
each individual loan had a significant risk of not performing in accordance with
its contractual terms. The business relied on mitigating this risk by acquiring
large numbers of loans, thus reducing the exposure to the risk of the default on
any one particular loan, and on reasonably estimating the credit losses to be
incurred and setting loan purchase prices accordingly. An inability to
reasonably predict the future performance of loans purchased, or to set loan
purchase prices that properly reflected those estimates, could significantly
increase the risk of material losses from the business of investing in sub-prime
used automobile loans.
As previously discussed, in Fiscal 2001 NAC sold all of the automobile
retail installment loans remaining in NAC's active loan portfolio and
substantially all of its remaining charged-off automobile installment loans.
After the sale of such loans NAC eliminated essentially all personnel who had
previously been engaged in NAC's loan underwriting, processing and collection
operations. Effective December 31, 2001, NAC discontinued its automobile
financing operation.
3
E-COMMERCE BUSINESS
NAC conducted its e-commerce business through ZoomLot. ZoomLot was engaged
in the development of services to facilitate, through e-commerce, the process by
which used car dealerships, lenders and insurance companies communicate and
complete the transactions between them that are needed to provide the used car
dealer's customers with financing, insurance, and other services. ZoomLot's
service of matching the consumer automobile loans, or "contracts" submitted by
dealers wishing to sell contracts which were retained by them upon the sale of a
vehicle against the underwriting criteria of finance companies, and then
submitting those contracts to the finance companies whose underwriting criteria
the contracts meet, is commonly referred to as "contract aggregation".
ZoomLot was formed in March 2000 for the purpose of acquiring the
Internet-based operations of Cygnet Dealer Finance, Inc. ("CDF"), an affiliated
company and acquired these operations from CDF on July 1, 2000. Prior to that
date, ZoomLot, which commenced operations in January 2000, was operated as a
division of CDF. ZoomLot and CDF share common management, certain personnel, and
facilities. In connection with the acquisition of the Internet-based business
from CDF, ZoomLot and CDF entered into a management services contract whereby
ZoomLot provided management services and was responsible for substantially all
operating expenses of CDF in exchange for a monthly management fee equivalent to
..625% (7.5% annually) of CDF's loan portfolio managed by ZoomLot. For Fiscal
2002 and the period from December 15, 2000 (the date of NAC's acquisition of
ZoomLot) until January 31, 2001, CDF paid ZoomLot management fees of $626,000
and $145,000, respectively. Under this arrangement, NAC accounted for the
management fees as a reduction of ZoomLot's operating expenses which have been
included in the loss from discontinued operations.
MOVIE EXHIBITION BUSINESS
NAC engages in the movie exhibition business through its investment in
AFC. AFC is the owner of the Angelika Film Center which it holds under a long
term lease having a remaining term of approximately 24 years. AFC is owned 50%
by NAC and 50% by Reading International, Inc. Each of the owners of AFC are
entitled to a proportionate share of the cash distributions that are paid by
AFC.
The Angelika Film Center is a 17,000 square foot, six screen multiplex
theater and cafe that focuses on the exhibition of art and specialty films. The
exhibition of art and specialty films, while seasonal in nature, is less so than
the film exhibition business in general. Art and specialty films tend to be
released more evenly over the course of the year and, if successful, tend to
enjoy a longer run than wide release films. Art and specialty films are obtained
from a number of sources ranging from divisions of the larger film distributors
specializing in specialty films to individuals that have acquired domestic
rights to one film. Generally film payment terms are based on an agreed upon
percentage of the box office receipts.
EMPLOYEES
As of January 31, 2002, NAC employed four people, all located at its
corporate headquarters in New York. None of NAC's employees are covered by a
collective bargaining agreement. NAC believes it maintains good relations with
its employees.
4
ITEM 2. PROPERTIES
NAC's corporate headquarters are leased premises of approximately 5,500
square feet of office space in New York, New York. The aggregate annual base
rental for the New York office is $199,000. The lease expires in July 2006.
NAC leases a document storage warehouse of approximately 6,400 square feet
in Solon, Ohio. The aggregate annual base rental for the warehouse is $28,800.
The lease expires in June 2004.
ZoomLot's operations were conducted from office space of approximately
11,000 square feet in Phoenix, Arizona. The aggregate annual base rental for the
Phoenix office is $276,000. The lease expires in September 2006. ZoomLot has
subleased its office facility to an unrelated third party in the real estate
development industry through the remaining term of the lease at an annual rate
of $253,000. NAC has accrued and charged as a reduction of the gain on the
disposal of ZoomLot's discontinued operations $107,000 for the annual rate
differential of $23,000 per year, plus the cost of certain operating expenses
due under the terms of the master lease and sublease agreements.
ITEM 3. LEGAL PROCEEDINGS
Shareholder Complaints
On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the Director Defendants
breached their fiduciary duties to NAC, (ii) a judgment voiding an employment
agreement with James J. McNamara and rescinding a stock exchange agreement in
which NAC acquired ZoomLot Corporation, (iii) a judgment voiding the grant of
stock options and the award of director fees allegedly related thereto, (iv) an
order directing the Director Defendants to account for alleged damages sustained
and profits obtained by the Director Defendants as a result of the alleged
various acts complained of, (v) the imposition of a constructive trust over
monies or other benefits received by the Director Defendants and (vi) an award
of costs and expenses.
On August 16, 2001, NAC received a complaint (the "Markovich Complaint")
filed by Levy Markovich ("Markovich"), a shareholder of NAC, with the Court of
Chancery of Delaware on or about August 16, 2001, against James J. McNamara,
John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC as a nominal
defendant. The Markovich Complaint principally seeks: (i) a declaration that the
Director Defendants have breached their fiduciary duties to NAC, (ii) a judgment
voiding an employment agreement with James J. McNamara and rescinding a stock
exchange agreement in which NAC acquired ZoomLot Corporation, (iii) a judgment
voiding the grant of options and the award of directors fees allegedly related
thereto, (iv) an order directing the Director Defendants to account for alleged
damages sustained and alleged profits obtained by the Director Defendants as a
result of the alleged various acts complained of, (v) the imposition of a
constructive trust over monies or other benefits received by the directors, and
(vi) an award of costs and expenses.
5
On August 31, 2001, NAC received a complaint (the "Harbor Complaint")
filed by Harbor Finance Partners ("Harbor"), a shareholder of NAC, with the
Court of Chancery of Delaware on or about August 31, 2001, against Thomas F.
Carney, Jr., Mallory Factor, John A. Gleason, Donald Jasensky, William S.
Marshall, James J. McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C.
Garcia, and ZoomLot Corporation as Defendants and NAC as a nominal defendant.
The Harbor Complaint principally seeks: (i) a judgment requiring the Director
Defendants to promptly schedule an annual meeting of shareholders within thirty
(30) days of the date of the Harbor Complaint; (ii) a judgment declaring that
the Director Defendants breached their fiduciary duties to NAC and wasted its
assets; (iii) an injunction preventing payment of monies and benefits to James
J. McNamara under his employment agreement with NAC and requiring Mr. McNamara
to repay the amounts already paid to him thereunder; (iv) a judgment rescinding
the agreement by NAC to purchase ZoomLot and refunding the amounts it paid; (v)
a judgment rescinding the award of monies and options to the directors on
December 15, 2000 and requiring the directors to repay the amounts they received
allegedly related thereto; (vi) a judgment requiring the defendants to indemnify
NAC for alleged losses attributable to their alleged actions; and (vii) a
judgment awarding interest, attorney's fees, and other costs, in an amount to be
determined.
On October 12, 2001, NAC received a complaint (the "Zadra Complaint")
filed by Robert Zadra, a shareholder of NAC, with the Supreme Court of the State
of New York on or about October 12, 2001 against James J. McNamara, John A.
Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, Thomas F. Carney, Jr., and NAC as Defendants. The
Zadra Complaint seeks (i) a declaration that the Director Defendants have
breached their fiduciary duties to NAC, (ii) a judgment voiding the grant of
options and the award of directors fees, (iii) a judgment voiding an employment
agreement with James J. McNamara, (iv) an order directing the Director
Defendants to account for alleged damages sustained and alleged profits obtained
by the Director Defendants as a result of the alleged various acts complained
of, and (v) an award of costs and expenses.
NAC intends to vigorously defend each of the respective claims made in the
Academy Complaint, Markovich Complaint, Harbor Complaint and Zadra Complaint, as
it believes that the claims have no merit. By order of the Delaware Chancery
Court on November 12, 2001, the Academy, Markovich and Harbor Complaints were
consolidated and the Academy Complaint was deemed the operative complaint. A
motion to dismiss the Academy Complaint has been filed but has not yet been
decided. NAC also intends to vigorously defend the Zadra Complaint. A motion to
dismiss the Zadra Complaint has also been filed. As each of these litigation
matters are in a very early stage, no prediction is made with respect to their
respective ultimate outcomes.
Self-Insurance Reserves for Property Damage and Personal Injury Claims
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In Fiscal
1996, NAC disposed of its rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by NAC. NAC also had a dealership operation
that sold cars that were retired from the rental fleet, primarily to member
dealers of NAC's financial services business. That operation was discontinued in
Fiscal 1997 as the result of NAC's discontinuation of its automobile rental
operations and dealership which are included in the results of discontinued
operations (see Note 3 of Notes to Consolidated Financial Statements).
6
NAC maintained and continues to maintain self-insurance for claims
relating to bodily injury or property damage from accidents involving the
vehicles rented to customers by its discontinued automobile rental operations.
NAC was, when required by either governing state law or the terms of its rental
agreement, self-insured for the first $1.0 million per occurrence, and for
losses in excess of $5.0 million per occurrence, for bodily injury and property
damage resulting from accidents involving its rental vehicles. NAC was also
self-insured, up to certain retained limits, for bodily injury and property
damage resulting from accidents involving NAC vehicles operated by employees
within the scope of their employment. In connection therewith, NAC established
certain reserves in its financial statements for the estimated cost of
satisfying those claims (see Notes 3 and 15 of Notes to Consolidated Financial
Statements).
NAC is named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to passengers in the vehicle. Initially, the Plaintiffs
appeared to be recovering well from the injuries sustained. However,
subsequently plaintiff Simpson underwent an accident-related surgery on his back
for removal of a shunt, during which nerves in the spine were severed causing
paraplegia. The Plaintiffs are suing for damages resulting from their injuries
and the subsequent paraplegia suffered by plaintiff Simpson. The doctor and
hospital that performed the surgery were also named as defendants by Plaintiffs
and have been impleaded by NAC under a theory of medical malpractice. Damages
alleged in the complaint are not specified, although in discovery Plaintiffs
have indicated they are seeking millions of dollars in compensatory and other
damages. The matter is scheduled for trial during 2003. NAC maintains a number
of defenses relating to this matter. NAC has almost exhausted its self-insured
retention of $500,000 on this case and NAC attempted to get its excess carrier,
the Transamerica Insurance Company ("TIC"), to take over the defense of this
action and indemnify NAC up to the policy limits. However, as a result TIC has
filed a suit (TIC Co. v. Darrell Smith, Aaron Simpson and NAC in the United
States Court for the Northern District of Illinois) for a declaratory judgment
seeking a ruling that it has no liability as an "excess insurer" of NAC in
connection with the Smith and Simpson action and that under Illinois law, NAC's
(and thereafter TIC's) financial responsibility is capped at an amount for less
than what the Plaintiffs are seeking in the state court action. The federal
court initially dismissed this complaint prior to NAC answering on the grounds
that the matter to be decided was premature as the original action had not be
resolved. TIC made a motion to have the court reconsider its decision and NAC
has filed a response arguing that the court should take action on this matter at
this time. The Court granted TIC's motion and has permitted the action to
proceed. NAC's answer is due May 2002.
Because of the uncertainties related to these two matters, as well as
several smaller legal proceedings involving NAC's former rental operations and
self-insurance claims, it is difficult to project with precision the ultimate
effect the adjudication or settlement of these matters will have on NAC. At
January 31, 2002 NAC had accrued $769,000 to cover all outstanding
self-insurance liabilities. As additional information regarding NAC's potential
liabilities becomes available, NAC will revise the estimates as appropriate.
Other
In the normal course of its business, NAC is named as defendant in legal
proceedings. It is NAC's policy to vigorously defend litigation and/or enter
into settlements of claims where management deems appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of Security Holders during the fourth
quarter of Fiscal 2002.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
NAC's Common Stock, $.05 par value, has been trading on the
Over-The-Counter Bulletin Board (the "OTCBB"), operated by The Nasdaq Stock
Market, Inc., since March 23, 1998 under the ticker symbol "NAKD." Prior to that
date, NAC's Common Stock was traded on the New York Stock Exchange under the
symbol NAK.
The following table sets forth the range of the high and low quotations
for Common Stock on the OTCBB during the periods indicated as reported by the
National Quotation Bureau, Inc. Such market quotations reflect inter-dealer
prices, without mark-up, mark-downs or commissions and may not necessarily
represent actual transactions
High Low
---- ---
Year ended January 31, 2001
---------------------------
First Quarter (February 1 - April 30) .............. $1.28 $ .75
Second Quarter (May 1 - July 31).................... .91 .73
Third Quarter (August 1 - October 31)............... .84 .59
Fourth Quarter (November 1 - January 31)............ .80 .27
Year ended January 31, 2002
---------------------------
First Quarter (February 1 - April 30)............... $ .36 $ .18
Second Quarter (May 1 - July 31).................... .28 .17
Third Quarter (August 1 - October 31)............... .28 .14
Fourth Quarter (November 1 - January 31)............ .19 .12
STOCKHOLDERS
At May 10, 2002 there were 1,181 stockholders of record of NAC's Common
Stock based upon a securities position listing furnished to NAC by American
Stock Transfer & Trust Company. On that date, the closing bid quotation of the
Common Stock on OTCBB was $0.10 per share.
DIVIDEND POLICY
It has been NAC's policy to retain any earnings and preserve its cash
resources to finance the growth of its business, provide resources for future
acquisition(s) and reduce outstanding debt and other liabilities; accordingly,
NAC has generally not issued a cash dividend. However, NAC does from time to
time reassess its cash dividend policy and may issue cash dividends in the
future if circumstances warrant. No cash dividends were declared for the fiscal
years ended January 31, 2002 and 2001.
8
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected financial data appearing in or
derived from NAC's historical financial statements, adjusted for the
discontinued operations of its e-commerce, automobile finance and auto rental
business. The selected financial data should be read in conjunction with the
consolidated financial statements appearing elsewhere herein, and with Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations (in thousands, except per share amounts):
STATEMENT OF OPERATIONS DATA Years Ended January 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ----------- ----------- ---------
Revenue $ 445 $ 4,102 $ 2,284 $ 635 $ -
Costs and expenses $ 5,933 $ 50,609 $ 22,948 $ 14,579 $ 13,391
Loss from continuing operations $ (5,488) $(46,507) $ (20,664) $ (13,944) $(10,169)
Discontinued operations, net of tax(1) (9,174) (1,084) 7,377 (1,671) (81,515)
Gain (loss) on disposal of discontinued
operations, net of tax(1) 394 308 (28) - -
----------- ---------- ----------- ----------- ---------
Net loss $ (14,268) $(47,283) $ (13,315) $ (15,615) $(91,684)
=========== ========== =========== =========== =========
Basic and diluted (loss) earnings per share
Continuing operations $ (.47) $ (1.67) $ (.73) $ (.49) $ (0.36)
Discontinued operations (.78) (.04) .26 (.06) (2.85)
Disposal of discontinued operations .03 .01 - - -
----------- ---------- ----------- ----------- ---------
Total $ (1.22) $ (1.70) $ (.47) $ (.55) $ (3.21)
=========== ========== =========== =========== =========
Weighted average number of shares outstanding
Basic 11,692 27,761 28,169 28,609 28,542
=========== ========== =========== =========== =========
Diluted 11,692 27,761 28,169 28,609 28,542
=========== ========== =========== =========== =========
As of January 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ----------- ----------- ---------
BALANCE SHEET DATA
Cash and cash equivalents $ 6,122 $ 12,444 $ 54,333 $ 32,109 $ 4,682
Gross finance receivable(2) - - 50,847 115,473 269,690
Total assets 20,534 39,066 103,962 127,292 234,114
Notes payable - - - - 83,838
Redeemable preferred stock(3) - 629 - - -
Total stockholders' equity 16,325 31,455 83,879 99,776 115,290
OTHER DATA
Gross loans in force(4) $ - $ - $ 51,175 $ 124,314 $347,776
(1) See Note 3 of Notes to Consolidated Financial Statements for further
discussion of discontinued operations.
(2) See Note 5of Notes to Consolidated Financial Statements for further
discussion of Installment Loans.
(3) See Notes 2, 3 and 12 of Notes to Consolidated Financial Statements for
further discussion of Series C Redeemable Preferred Stock.
(4) Gross loans in force represented the total contractual payments (including
payments representing future interest) receivable from the installment
loans which NAC owned, or in which NAC owned an interest through the
purchase of an interest under sharing arrangements with dealers. The amount
included payments that, if collected, would be remitted to the dealers
under these sharing arrangements. While not a measure of NAC's loan assets
under generally accepted accounting principles, NAC viewed gross loans in
force as a measure of the level of its activities and the activities of its
competitors.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Auto Credit, Inc. ("the Company" or "NAC") began operations in
1969 and was incorporated in Delaware in 1971. Through and including December
31, 2001, NAC's operations were conducted principally through three operating
segments, (i) the e-commerce segment, which is comprised of ZoomLot
Corporation's ("ZoomLot") development of e-commerce services to facilitate the
process by which used car dealerships, lenders and insurance companies
communicate and complete the transactions between them that are needed to
provide used car dealers' customers with financing, insurance and other
services, (ii) the movie exhibition segment, which is comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment.
Significant Developments in Fiscal 2002
NAC recently completed a strategic review of its investment in ZoomLot,
acquired December 15, 2000, and the development of its e-commerce services.
NAC's strategic review included evaluating the evolving market conditions of the
used car dealer and financing industries, the start-up nature of the ZoomLot
operations, the current market demand for and penetration of ZoomLot's
e-commerce solution to electronically link eligible used car dealers and their
qualified customers with available used car lenders and financing terms, current
operating losses and forecasts of future operating results and strategic
opportunities available to ZoomLot. As a result of this review, management of
NAC determined that it was unable to predict, with the requisite degree of
certainty, when or whether ZoomLot would achieve positive cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated the steps
to discontinue both its e-commerce and auto finance segments. As a result, as of
January 31, 2002, NAC is engaged only in the movie exhibition segment.
In connection with its decision to discontinue the operations of ZoomLot,
NAC entered into formal negotiations with the former shareholders of ZoomLot to
resolve certain financial obligations of NAC and of the former ZoomLot
shareholders resulting from the terms of the Merger Agreement and Plan of
Reorganization dated December 15, 2000 (the "Merger Agreement"). Under the
Merger Agreement, 666,667 shares of Series C Preferred Stock issued in the
acquisition of ZoomLot were forfeitable if ZoomLot did not reach certain
financial performance goals by December 31, 2003, and NAC was obligated to
redeem, at the option of the holders, the 729,047 shares of the Series C
Preferred Stock issued under the Merger Agreement, at a per share price equal to
the greater of $15.00 or ten times the fair market price of NAC's Common Stock,
if ZoomLot did reach those financial performance goals. Additionally, Ernest G.
Garcia II, Cygnet Capital Corporation or Verde Reinsurance Company Ltd., former
ZoomLot shareholders, were obligated to make a payment of $5.2 million to NAC if
ZoomLot did not reach the financial performance goals by December 31, 2003. As
the result of shares of NAC Common Stock issued upon the conversion of the
Series B Preferred Stock issued in the acquisition of ZoomLot, and open market
purchases, Mr. Garcia had become the beneficial owner of 17.7% of the then
outstanding shares of Common Stock of NAC.
Since NAC now intended to discontinue ZoomLot's operations prior to
December 31, 2003, it was necessary to resolve the effect of that on the
obligations of NAC and the former ZoomLot stockholders under the Merger
Agreement. As a result of the negotiations, on January 31, 2002, NAC entered
into an Exchange and Repayment Agreement ("Exchange Agreement") dated January
31, 2002 with Mr. Garcia, Cygnet Capital Corporation, Verde Reinsurance Company
Ltd., Ernie Garcia III 2000 Trust, Brian Garcia 2000 Trust, EJMS
10
Investors Limited Partnership, Ernest C. Garcia II, Ray Fidel, Steven P.
Johnson, Mark Sauder, Colin Bachinsky, Chris Rompalo, Donna Clawson, Mary
Reiner, and Kathy Chacon, who collectively were the former shareholders of
ZoomLot.
The Exchange Agreement sets forth the agreement among all the parties to
terminate the operations of ZoomLot. The parties agreed, among other things,
that the financial performance goals (specifically the "First Objective" and the
"Second Objective" as those terms are defined in the Merger Agreement) had not
and would not be met. Accordingly, the 666,667 shares of Series C Preferred
Stock forfeitable if those goals were not met were deemed forfeited and were to
be returned and surrendered to NAC. For financial reporting purposes, those
shares of Series C Preferred Stock had been treated as contingently issuable,
and accordingly their return had no effect on NAC's consolidated financial
statements.
Additionally, under the Exchange Agreement, the contingent obligation of
Mr. Garcia, Cygnet Capital Corporation or Verde Reinsurance Company Ltd., to
make a payment of $5.2 million to NAC if ZoomLot did not reach the financial
performance goals by December 31, 2003 was resolved by (i) the transfer back to
NAC of 3,079,530 shares of NAC Common Stock, which for the purposes of the
Exchange Agreement were valued at $1.25 per share, (ii) the return to NAC of
62,380 shares of NAC Series C Redeemable Preferred Stock at an aggregate
agreed-upon value of $854,875, which represented the carrying amount of such
shares of Series C Preferred Stock in NAC's consolidated financial statements,
and (iii) the issuance to NAC of a promissory note in the amount of $986,048,
payable, together with interest at 4% per annum, in cash or NAC Common Stock (at
a mutually agreed-upon value of $1.25 per share) on or before January 30, 2003.
For financial reporting purposes, NAC recorded the 3,079,530 shares of
Common Stock returned under the Exchange Agreement at $431,000, representing
their market value of the basis of the quoted market price of NAC's Common
Stock, recorded the 62,380 shares of Series C Redeemable Preferred Stock
returned at their aggregate carrying amount of $854,875, and recorded the note
receivable, a component of other assets, at a net value of $110,000 reflecting
the market value at January 31, 2002 of the shares of NAC Common Stock the maker
of the note has the option to tender in payment of the principal. NAC also
incurred or accrued costs of $850,000 for the winding down and closing of
ZoomLot's operations, including rental and broker costs to sublease ZoomLot's
corporate office, employee severance costs and costs of early lease
terminations. As a result, NAC recognized a net gain on the disposal of
ZoomLot's operation of $394,000. See "Discontinued Operations" and Notes 2 and 3
of Notes to Consolidated Financial Statements.
As a further consequence of NAC's decision to discontinue its ZoomLot
e-commerce operations, NAC also formally exited the sub-prime used automobile
consumer finance business effective December 31, 2001. From October 1995 through
March 2000, NAC's principal business activity was to invest in sub-prime used
automobile consumer loans, which took the form of installment loans
collateralized by the related vehicle. NAC purchased such loans, or interests in
pools of such loans, from member dealerships, and performed the underwriting and
collection functions for such loans. In the first and second quarters for the
year ended January 31, 2001, NAC sold its active loan portfolio and the majority
of its charged-off portfolio. However, since NAC had not, until December 2001,
made a definitive decision that it would not reenter the consumer lending
business, either through ZoomLot or another means, the automobile financing
operations had not previously been classified as a discontinued operation. As a
result of the formal decision reached in connection with the decision to
discontinue ZoomLot's operations, the automobile financing operations were
classified as a discontinued operation as of January 31, 2002. See "Discontinued
Operations" and Note 3 of Notes to Consolidated Financial Statements.
11
Significant Developments in Fiscal 2001
Settlement of Frankino Litigation and Repurchase of Common Stock from
Frankino Parties. On November 3, 2000, NAC entered into a Settlement Agreement
with Mr. Frankino, individually, as trustee and president of the Samuel J.
Frankino and Connie M. Frankino Charitable Foundation, as trustee of the Corrine
L. Dodero Trust for the Arts and Sciences and as managing partner of the
Frankino and Frankino Investment Company, a Nevada general partnership, (Mr.
Frankino and all such entities referred to herein collectively as "Frankino
Parties"). The Settlement Agreement, among other things, settled all of the
litigation between NAC and Mr. Frankino, and resulted in the repurchase by NAC
of all of NAC's securities held by the Frankino Parties and certain other
parties. In conjunction with the settlement of the above-referenced litigation,
the parties to the litigations, as well as William Dodero, Lorraine Dodero,
William Maund and Robert Upton, exchanged general releases and releases against
future claims.
Under the terms of the Settlement Agreement, NAC (i) repurchased an
aggregate of 15,743,012 shares of Common Stock of NAC owned by the Frankino
Parties for a total purchase price of $35.3 million, or $2.245 per share of
Common Stock; (ii) repurchased an aggregate of 120,348 shares of Common Stock of
NAC owned by certain of NAC's directors including shares of Common Stock held by
William Maund, Lorraine Dodero, William Dodero and Lorraine Dodero, as joint
tenants with rights of survivorship, and shares of Common Stock held by Lorraine
Dodero, as a trustee of a grantor trust for the benefit of her daughter, Corrine
Dodero, for a total purchase price of $181,000 (such repurchase of the 120,348
shares was completed on January 4, 2001), or $1.50 per share of Common Stock;
and (iii) reimbursed certain legal fees previously incurred by Mr. Frankino in
the amount of $2.0 million.
As a result of the repurchases of shares of Common Stock under the
Settlement Agreement, NAC expensed in the fourth quarter of Fiscal 2001, $25.1
million representing the excess of the amount paid under the Settlement
Agreement over the market value of the shares repurchased.
Stock Purchase and Standstill Agreement with Reading. On November 3, 2000,
simultaneously with the execution and closing of the Settlement Agreement with
the Frankino Parties, NAC executed and closed a Stock Purchase and Standstill
Agreement ("Reading Agreement") with Reading, FA, Inc., a Nevada corporation and
a wholly-owned subsidiary of Reading ("FA"), Citadel Holding Corporation, a
Nevada corporation ("Citadel"), and Craig Corporation, a Nevada corporation
("Craig"), (collectively the "Reading Stockholders"). Prior to the execution of
the Reading Agreement, the Reading Stockholders collectively owned an aggregate
of 10,055,000 shares of Common Stock and 100 shares of Series A Preferred Stock,
par value $.05 per share.
Under the terms of the Reading Agreement, NAC repurchased from the Reading
Stockholders 5,277,879 shares of Common Stock and all 100 shares of Series A
Preferred Stock for an aggregate purchase price of $8.5 million, or $1.60 per
share.
On December 15, 2000, NAC entered into a second agreement with the Reading
Stockholders for the repurchase of 4,777,121 shares of Common Stock for an
aggregate price of $8.0 million, and on December 21, 2000, NAC purchased 25,000
shares of Common Stock from an associate of Reading for $41,000. As a part of
the second agreement, the provisions of the November 3, 2000 Stock Purchase and
Standstill Agreement that had continuing effect were terminated.
12
As a result of the repurchases of shares of Common Stock from the Reading
Stockholders, NAC expensed $10.5 million in the fourth quarter of Fiscal 2001,
representing the excess of the amount paid for the shares repurchased from
Reading Stockholders over the aggregate market value of such shares.
See Note 12 of Notes to Consolidated Financial Statements.
RESULTS OF CONTINUING OPERATIONS
Interest Income on Investments: Interest income is derived principally
from the interest earned on NAC's investments in marketable securities,
commercial paper and money market accounts. Interest income from investments in
Fiscal 2002 was $344,000 as compared to $3.9 million in Fiscal 2001. The
decrease in interest income is substantially due to a significant decrease in
invested funds from Fiscal 2001 to Fiscal 2002. During the fourth quarter of
Fiscal 2001, NAC utilized its cash liquidity to repurchased 25,943,360 shares of
NAC Common Stock for an aggregate of $52.0 million. As a consequence of the
repurchase of Common Stock, NAC's average cash reserves and investments in
marketable securities, commercial paper and money market accounts were $9.1
million in Fiscal 2002 as compared to $57.5 million for Fiscal 2001. Interest
income for Fiscal 2000 was $2.3 million during which time NAC's average cash
reserves and investments in marketable securities, commercial paper and money
market accounts were $41.7 million.
Income from Investment in AFC: NAC accounts for its investment in AFC
using the equity method. For Fiscal 2002 and the nine months from April 5, 2000
(the date of NAC's acquisition of its investment in AFC) to December 31, 2000
NAC realized income from its investment in AFC of $101,000 and $230,000,
respectively, which represents NAC's share of AFC net income, net of NAC's
amortization expense.
AFC's fiscal year ends December 31. The following sets forth summarized
operating results for AFC (in thousands):
Years Ended December 31,
------------------------
2001 2000 1999
------ ------ ------
Revenues $6,958 $6,462 $7,376
Film rental 2,243 2,087 1,909
Operating costs 3,127 2,509 2,635
Depreciation and amortization 693 692 688
General and administrative expenses 149 184 418
------ ------ ------
6,212 5,472 5,650
------ ------ ------
Net income $ 746 $ 990 $1,726
====== ====== ======
NAC's proportionate share of net income $ 373 $ 434 $ --
Amortization expense 272 204
------ ------ ------
Income from investment in AFC $ 101 $ 230 $ --
====== ====== ======
As the result of the combined effects of a 1.9% increase in attendance and
4.2% increase in average ticket prices, revenues increased $496,000 for the year
ended December 31, 2001 as compared to the year ended December 31, 2000. AFC's
revenues can fluctuate from month-to-month and year-to-year principally as a
result of film attendance, and at times the ticket prices, depending on audience
interest in, and the popularity of the films AFC exhibits and other factors. AFC
revenues for the year ended December 31, 2000 were $6.5 million as compared to
$7.4 million for the year ended December 31, 1999. The decrease in revenues from
13
period to period was due principally to the net effect of a 17.4% decrease in
attendance offset by a 6.6% increase in average ticket prices.
For the years ended December 31, 2001, 2000 and 1999, film rental expense,
as a percentage of revenues, were 32.2%, 32.2% and 25.9%, respectively. Film
rental expense generally is a factor of a fixed percentage rental rate per film
multiplied by the number of tickets sold. AFC experiences fluctuations in film
rental expense, as a percentage of revenue, depending upon the rental rate per
film and the popularity of the film.
For the years ended December 31, 2001, 2000 and 1999, operating expense
were $3.1 million, $2.5 million and $2.6 million, respectively. The nature of
AFC's operating costs tend to generally be more fixed overhead related costs and
advertising expenses. Operating expenses of AFC have increased $618,000 for the
year ended December 31, 2001 to $3.1 million from $2.5 million for the year
ended December 31, 2000. The increase in operating expenses is a result
principally of an increase in advertising expenditures of $300,000 as AFC
expanded its advertising programs for the year to increase attendance. Operating
expenses for the year ended December 31, 1999 were fairly constant at $2.6
million.
General and Administrative: General and administrative expenses include
cost of executive, accounting and legal personnel, occupancy, legal,
professional, insurance, and other general corporate overhead costs. General and
administrative expenses decreased $2.3 million for Fiscal 2002 to $5.4 million
from $7.7 million for Fiscal 2001. General and administrative expenses were $4.7
million for Fiscal 2000.
The decrease in general and administrative expenses of $2.3 million in
Fiscal 2002, as compared to Fiscal 2001, was due to (i) a one time bonus of
$750,000 paid in Fiscal 2001 awarded to the Chairman of the Board for past
services, (ii) a decrease of $400,000 in depreciation and amortization as a
result of the sale of property during Fiscal 2001, and (iii) a decrease of
$857,000 related to a reduction of professional services, inclusive of board of
director fees, contracted by NAC. The increase in general and administrative
expenses of $2.9 in Fiscal 2001 as compared to Fiscal 2000 was due (i) to an
increase in director fees of $1.2 million (director fees of approximately $1.1
million were classified in litigation and other charges in Fiscal 2000) and the
one-time bonus awarded to the Chairman of the Board of $750,000; (ii) an
increase in salaries and benefits and compensation expense for a grant of NAC's
Common Stock of 350,000 shares to the chief executive officer; and (iii) the
reduction of the Fiscal 2000 expenses (with no similar reductions in Fiscal
2001) from a credit recorded when NAC was able to settle certain state tax
liabilities at amounts less than initially estimated.
Litigation and Other Charges: In Fiscal 1998, following the resignation of
Deloitte & Touche LLP, NAC instituted investigations of its previous financial
reporting and underwent changes in management. NAC accrued initial estimates of
certain resulting costs, and additional costs in excess of those initial
estimates are being expensed as incurred or as such estimates are revised. In
the first quarter of Fiscal 2001, NAC accrued an initial estimate of the costs
to be incurred in the litigation with Mr. Frankino that commenced in April 2000,
and additional cost in excess of that initial estimate were expensed as incurred
or as such estimate was revised.
14
Included in the results of operations for Fiscal 2002, 2001 and 2000,
respectively, are the following costs related to the litigation, investigations
and management changes (in thousands):
Years Ended January 31,
----------------------------
2002 2001 2000
------ ------- -------
Legal and settlement costs relating to litigation matters $ -- $ 5,799 $ 7,037
Crisis management consulting -- 116 3,063
Financing, loan waiver and prepayment fees -- -- 408
Fees for special independent audits -- -- 523
Costs of special investigations -- -- 273
Other -- 375 4
------ ------- -------
$ -- $ 6,290 $11,308
====== ======= =======
Cost Related to Purchase of Shares: The Fiscal 2001 expense of $35.6
million results from the repurchases of 25,943,360 shares of its Common Stock in
two transactions during the fourth quarter of Fiscal 2001 (see "General -
Significant Developments in Fiscal 2001"). During Fiscal 2000 NAC repurchased
2,849,630 shares of its Common Stock pursuant to an option agreement (the
"Option Agreement"), which NAC entered into with a then-unaffiliated stockholder
on May 10, 1999.
Write-down of Assets Held for Sale: NAC has certain investments in
affordable housing projects which previously NAC had been holding for
realization through the receipt of distributions from the operations of the
projects and the use of the tax credits generated by the investments. In the
fourth quarter of Fiscal 2000, NAC committed to a plan to sell the investments
and recorded, in that quarter, a write-down of $4.7 million to reduce the
carrying amount of the investments to their fair value less estimated costs to
sell. During Fiscal 2001, NAC reduced its original estimate of the fair value of
the investments to $2.7 million, primarily due to the expiration of certain tax
credits and the increase of the effective yield used in determining the fair
value. As a result, NAC recorded an additional write-down of $3.2 million.
On January 14, 2002, NAC sold its limited partnership interests in eight
projects to Idacorp Financial Services, Inc. ("Idacorp Financial") for $2.5
million. In connection with the sale NAC agreed to obtain certain Low-Income
Housing Credit Disposition Bonds (the "Bonds") meeting the requirements of
Section 42(j)(6) of the Internal Revenue Code of 1986, as amended, at its own
expense and Idacorp Financial agreed to reasonably cooperate with NAC and to
make best efforts to cause the respective general partners of each of the
partnerships to provide NAC with information reasonably available to the
partnerships that is reasonably necessary to obtain such Bonds. NAC incurred
costs, comprised of closing costs, transfer fees and fees for the Bonds, of
$510,000 and as a result incurred a loss (reflected in continuing operations) of
$549,000. NAC retained its limited partnership interests in three projects,
which at January 31, 2002 are included in other assets at their estimated fair
market value of $200,000.
During the fourth quarter of Fiscal 2000, NAC also committed to plans to
sell certain real estate investments. During Fiscal 2001, NAC sold the
investments for aggregate cash proceeds of approximately $1.0 million and
recorded a loss on sale of $215,000.
Income Taxes: For Fiscal 2002, 2001 and 2000, NAC recorded income tax
benefits of $331,000, $1.2 million and $3.8 million, respectively, that
represent either (i) adjustments that increased the previously estimated amount
of net operating losses eligible to be carried back against prior year's taxable
income or (ii) adjustments to revise (reduce) previous estimates of certain
income taxes. These tax benefits arose and are a component of discontinued
operations. In addition, NAC has an income tax refundable in the amount of $3.5
million at January 31, 2002.
15
As of January 31, 2002 NAC has net operating loss carryforwards of $75.9
million that may be used to reduce future taxable income, subject to
limitations. NAC also has unused low income housing credits totaling $6.6
million. At January 31, 2002, NAC has claims for refunds in the amount of $3.5
million.
As a result of NAC's November 3, 2000 repurchases of shares of its Common
Stock, NAC underwent a "change in ownership" as defined for the purposes of
Sections 382 and 383 of the Internal Revenue Code. As a result of the "change in
ownership", the use of net operating loss carryforwards totaling $56.7 million
incurred prior to November 3, 2000 will be subject to significant annual
limitation. Additionally, the use of low income housing tax credit carryforwards
of $5.2 million generated prior to November 3, 2000 will be subject to the
Section 382 limitation. The use of the net operating loss and low income housing
credit carryforwards incurred after November 3, 2000, which total $19.2 million
and $1.3 million, respectively, as of January 31, 2002, are not subject to the
Section 382 limitation.
As of January 31, 2002 NAC has $3.0 million of alternative minimum tax
credits which may be applied against any future alternative minimum taxes which
exceed regular income taxes. These credits may be carried forward indefinitely
and are also subject to the Section 383 limitation.
DISCONTINUED OPERATIONS
E-commerce Operations: In Fiscal 2002 NAC's e-commerce operations incurred
an operating loss of $9.4 million, reflecting revenues of $867,000 and expenses
of $10.2 million. Included in the expenses of $10.2 million were non-cash
charges of $7.4 million for the amortization and write-off of the goodwill
arising in the December 2000 acquisition of ZoomLot. The remaining expenses of
$2.8 million represent the expenses incurred in ZoomLot's attempts to develop
its e-commerce method of facilitating the process by which used car dealerships,
lenders and insurance companies communicate and complete the transactions
between them that are needed to provide the used auto dealers' customers with
financing, insurance and other services.
In Fiscal 2001 NAC's e-commerce operations incurred an operating loss of
$628,000 principally as the result of operating expenses of $708,000 which
represent goodwill amortization of $191,000 and expenses of $517,000 incurred in
ZoomLot's attempts to develop its e-commerce business. These Fiscal 2001 amounts
reflect the activity of ZoomLot for the 46 days during Fiscal 2001 that it was
owned by NAC.
Automobile Financing: In fiscal 2002 NAC's automobile financing operations
generated operating income of $658,000, comprised of $155,000 from the
collection of previously charged off loans, the gain of $34,000 from the sale of
its remaining charged off loans, and a $468,000 reduction in the provision for
credit losses.
In fiscal 2001 NAC's automobile financing operations incurred an operating
loss, after income tax benefit, of $1.8 million. On March 17, 2000, NAC, acting
through NAC, Inc., a wholly-owned subsidiary, sold to Crescent Bank & Trust
substantially all of the automobile retail installment loans remaining in NAC's
active portfolio for $17.9 million. In prior transactions in March 2000, NAC,
Inc., sold to First Southwestern Financial Services, for $2.7 million, certain
automobile retail installment loans held in NAC's active portfolio and to
Ameristar Financial Servicing Company, L.L.C., for $2.2 million, certain
automobile retail installment loans held in NAC's portfolio of charged-off
accounts (representing approximately one-third of the charged-off portfolio). In
other transactions, NAC sold a portion of its charged-off portfolio for
approximately $1.4 million. In all of the transactions, the buyer was an
independent party that did not have a material relationship with NAC, nor was
the buyer an affiliate of NAC, a director or officer of NAC or an associate of
any officer or director of NAC. In each case, the selling price was determined
based upon arm's length negotiations between
16
the parties and was paid in cash at closing. The sale of the loans resulted in
an aggregate loss of approximately $1.4 million, which NAC reported in Fiscal
2001. Additionally, as the result of the sale of the loans, NAC's interest
income from the loans was substantially reduced in Fiscal 2001, to $404,000 from
$7.3 million in fiscal 2000. NAC recorded a reversal into income of previously
recorded credit losses of $1,365,000 for Fiscal 2001. In determining the
allowance for credit losses, NAC used weighted-average estimates of future cash
flows from its loans expressed as a percentage of the contractual amounts
receivable, which was approximately 58% at February 29, 2000 (prior to the sale
of the loans as described above) and resulted in a reversal into income of
$856,000. NAC recorded a reversal into income of an additional $509,000 as a
result of cash received from loans previously charged-off.
In fiscal 2000 NAC's automobile financing operations generated after-tax
operating income of $6.6 million. The operating results for fiscal 2000 include
a reduction in the allowance for credit losses of $6.1 million. Additionally,
for Fiscal 2000, NAC recorded an income tax benefit of $3.3 million. The income
tax benefit represented (i) adjustments that increased the previously estimated
amount of net operating losses eligible to be carried back against prior years'
taxable income, and (ii) adjustments to revise (reduce) previous estimates of
certain income taxes. The reduction in the allowance for credit losses recorded
in Fiscal 2000 is principally the result of cash flows from loan collections
during that period which exceeded the amounts projected that was used in
establishing the allowance for credit losses at January 31, 1999.
Auto Rental: NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra
Auto Rental and Automate Auto Rental, previously engaged in the rental of
automobiles on a short-term basis, principally to the insurance replacement
market. In the year ended January 31, 1996, NAC disposed of its rental fleet
business through the sale of certain assets and through certain leases to a
national car rental company. All liabilities related to the discontinued rental
business, principally self-insurance claims, were retained by NAC. NAC also had
a dealership operation that sold cars that were retired from the rental fleet,
primarily to member dealers of NAC's automobile financing business. That
operation was discontinued in the year ended January 31, 1997 as a result of
NAC's disposal of its automobile rental operations. The results of both the auto
rental and dealership operations are included in the results of discontinued
operations (together as "auto rental" operations). For the years ended January
31, 2002 and 2001, the results of the discontinued auto rental operations
principally represent the effects of the settlement of, and changes in NAC's
reserves for, claims against NAC related to the self-insured claims (see Note15
of Notes to Consolidated Financial Statements). For the year ended January 31,
2000, the results of the discontinued auto rental operations principally
represent the effects of the settlement of, and changes in NAC's reserves for,
claims against NAC related to the self-insured claims and the effects of the
favorable settlement of certain state tax (other than income tax) matters for
amounts less than previously estimated and accrued.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 2002, NAC used $7.5 million cash flows from continuing
operations. This is due to the effect of (i) NAC's net loss from continuing
operations of $5.5 million less net non-cash charges of $1.1 million and (ii)
the $3.1 million net change in operating assets and liabilities. NAC also used
$2.1 million of cash from the various discontinued operations. NAC generated
$3.3 million in cash flows from investing activities principally as the result
of the proceeds of $2.1 million from its sale of assets and distributions from
AFC of $909,000.
17
During Fiscal 2001, NAC used $49.8 million of cash flows from continuing
operations. This was due to NAC's net loss from continuing operations of $46.5
million, which includes the $35.6 million (the portion charged to expense) of
the $52.0 million paid to repurchase shares of NAC Common Stock, plus the net
non-cash charges of $2.0 million. This amount was further offset by a $5.4
million net change in operating assets and liabilities. NAC also used $5.9
million of cash from the various discontinued operations. NAC generated $35.5
million in cash flows from investing activities principally as the result of
collections and the proceeds from its loan portfolio of $24.2 million and the
proceeds from the sale of property of $8.6 million. NAC used $21.6 million in
financing activities as the result of the payments to repurchase shares of $16.4
million and the payment on notes payable of $5.2 million assumed by NAC as part
of the ZoomLot acquisition.
During Fiscal 2000, NAC used $15.7 million of cash flows from continuing
operations. This was due to NAC's net loss from continuing operations of $20.6
million, which includes the $2.2 million (the portion charged to expense) of the
total $4.8 million paid to repurchase shares of NAC's Common Stock, plus the net
non-cash charges of $5.8 million. This amount was further offset by a $810,000
net change in operating assets and liabilities. NAC also used $3.2 million of
cash from the various discontinued operations. NAC generated $43.7 million in
cash flows from investing activities principally as the result of $45.8 million
of cash flows from the net reduction in the size of its loan portfolio. NAC used
$2.6 million of cash flows from financing activities primarily as the result of
the purchase of the treasury stock. The net cash flows generated by these
sources were used to finance the negative operating cash flows.
NAC believes that the available cash and cash equivalents and marketable
securities of $7.1 million and the investment income there from, the collection
of the income tax refund of $3.5 million as well as the cash distributions from
its investment in AFC will be sufficient to pay operating expenses, existing
liabilities, and fund its activities through January 31, 2003 as NAC explores
new strategic business alternatives. As discussed in Note 15 of Notes to
Consolidated Financial Statements, NAC is presently a defendant or nominal
defendant in various derivative shareholder complaints. Although NAC intends to
vigorously defend each of the claims, each of these litigations are in a very
early stage, and no prediction can be made with respect to their ultimate
outcomes. An adverse outcome could have a material adverse effect on NAC's
liquidity, financial condition or results of operations. Additionally, as
previously discussed, NAC's lack of external financing sources may limit its
ability to pursue strategic business alternatives being considered by NAC's
Board of Directors. Such limitations may have an adverse impact on NAC's
financial position, results of operations and liquidity.
OTHER
New Accounting Pronouncements. On July 20, 2001, the Financial Accounting
Standards Board (FASB) issued SFAS 141, Business Combinations, and SFAS 142,
Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for NAC are as follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July 1,
2001;
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability;
18
o Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective February 1, 2002,
all previously recognized goodwill and intangible assets with indefinite
lives will no longer be subject to amortization;
o Effective February 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator; and
o All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
Prior to NAC's decision in December 2001 to discontinue ZoomLot's
operations and the resulting write-off of the goodwill arising from the
acquisition of ZoomLot, NAC was recognizing goodwill amortization of $191,000
per month for the amortization of that goodwill. NAC will no longer recognize
this charge as a result of the discontinuation of ZoomLot operations. NAC also
recognizes a monthly charge (as a reduction of its earnings from its investment
in AFC) of $23,000 for the amortization, in a manner similar to goodwill, of the
excess of NAC's investment in AFC over its share of the net assets of AFC. NAC
is currently evaluating the potential impact, if any, of the adoption of SFAS
142 will have on its results of operations, cash flows or financial position.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of the
liability for an asset retirement obligation in the period in which it is
incurred. The amount initially recorded as the asset retirement obligation is
based upon the estimated present value of the retirement costs to be incurred,
and is capitalized as a part of the asset. The obligation is subsequently
accreted for the passage of time by charges to interest expense, and the
capitalized costs is amortized as part of depreciation expense related to the
asset. The asset retirement obligation is also continually re-estimated, with
changes in its present value caused by changes in the estimated retirement cost
recorded as adjustments to the carrying amount and subsequent depreciation of
the asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002
and will be adopted by NAC effective February 1, 2002. NAC is currently
evaluating the potential impact, if any, of the adoption of SFAS 143 will have
on its results of operations, cash flows or financial position.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
with the exception of impairment and disposal issues related to goodwill and
other intangible assets that are not amortized. SFAS 144 also supersedes the
accounting and reporting provision of Accounting Principles Board Opinion No.
(APB) 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains many of the fundamental
recognition and measurement provisions of SFAS 121, and also retains the
requirement in APB 30 to separately identify and report discontinued operations.
However, SFAS extends the APB 30 reporting requirements for discontinued
operations to components of an entity that have either been disposed of or is
classified as assets held for sale that may not have qualified as segments under
APB 30, as a result of which operating results that previously were not
classified as discontinued operations may be treated as such upon the adoption
of SFAS 144. SFAS 144 is effective for fiscal years beginning after December 15,
2001, and will be adopted by NAC effective February 1, 2002. NAC is currently
evaluating the potential impact, if any, of the adoption of SFAS 144 will have
on its results of operations, cash flows or financial position.
Inflation. Inflation has not had a material affect on NAC's business.
19
FORWARD-LOOKING STATEMENTS
Various statements made in this Item 7 and elsewhere in this Annual Report
on Form 10-K concerning the manner in which NAC intends to conduct its future
operations, and potential trends that may impact its future results of
operations, are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. NAC may be unable to realize its plan
and objectives due to various important factors, including, but not limited to,
the failure of the Board of Directors to promptly determine what strategic
business plan NAC should pursue, the failure of NAC to implement any such plan
due to its inability to identify suitable acquisition candidates or its
inability to obtain the financing necessary to complete any desired
acquisitions, or any adverse outcome of the pending shareholder actions or other
litigation.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like virtually all commercial enterprises, NAC can be exposed to the risk
("market risk") that the cash flows to be received or paid relating to certain
financial instruments could change as a result of changes in interest rate,
exchange rates, commodity prices, equity prices and other market changes.
NAC does not engage in trading activities and does not utilize interest
rate swaps or other derivative financial instruments or buy or sell foreign
currency, commodity or stock indexed futures or options. Accordingly, NAC is not
exposed to market risk from these sources.
NAC's automobile loan portfolio was comprised of fixed rate financing
agreements with high credit risk consumers. The rates on these financing
agreements cannot be increased for changes in market conditions, and accordingly
these loans were not subject to market risk.
As of January 31, 2002, NAC has no interest bearing debt, and accordingly
no market risk associated with increases in interest costs resulting from
changes in market rates.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
National Auto Credit, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of National
Auto Credit, Inc. and Subsidiaries as of January 31, 2002 and 2001 and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended January 31, 2002. Our audits also included the financial statement
schedule listed in the Index at Item 14(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Auto Credit, Inc. and Subsidiaries as of January 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
/s/Grant Thornton LLP
Cleveland, Ohio
April 9, 2002
21
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 31,
----------------------
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 6,122 $ 12,444
Marketable securities (Notes 1 and 4) 994 1,083
Investment in AFC (Note 6) 9,220 10,027
Property and equipment, net of accumulated
depreciation of $57 and $186, respectively (Note 1) 71 789
Goodwill (Notes 1, 2 and 3) -- 6,673
Assets held for sale (Note 8) -- 2,785
Income taxes refundable 3,507 3,664
Other assets 620 1,601
--------- ---------
TOTAL ASSETS $ 20,534 $ 39,066
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Self-insurance claims (Note 15) $ 769 $ 970
Accrued income taxes (Note 11) 697 1,029
Other liabilities (Note 10) 2,743 4,983
--------- ---------
4,209 6,982
COMMITMENTS AND CONTINGENCIES (Note 15) -- --
REDEEMABLE PREFERRED STOCK (Note 12)
(redemption value of $936 in 2001)
-- 629
STOCKHOLDERS' EQUITY (Notes 2, 3 and 12)
Preferred stock -- --
Common stock - $.05 par value,
authorized 40,000,000 shares, issued
39,377,589 and 39,420,437 shares, respectively 1,969 1,971
Common stock to be issued -- 219
Additional paid-in capital 174,337 174,385
Retained deficit (136,346) (121,801)
Accumulated other comprehensive loss (133) (44)
Treasury stock, at cost, 30,735,835 and 27,901,305
shares, respectively (23,502) (23,275)
--------- ---------
16,325 31,455
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,534 $ 39,066
========= =========
See accompanying notes to consolidated financial statements.
22
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended January 31,
--------------------------------
2002 2001 2000
-------- -------- --------
REVENUE
Interest income on investments $ 344 $ 3,872 $ 2,284
Income from investment in AFC 101 230 --
-------- -------- --------
Total 445 4,102 2,284
COSTS AND EXPENSES
General and administrative 5,384 7,696 4,750
Litigation and other charges (Note 15) -- 6,290 11,308
Write-off of option (Note 6) -- 500 --
Loss (gain) on sale of property (Notes 7 and 8) 549 (2,868) --
Cost related to purchase of shares (Note 12) -- 35,593 2,224
Write-down of assets held for sale (Note 8) -- 3,398 4,666
-------- -------- --------
Total 5,933 50,609 22,948
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (5,488) (46,507) (20,664)
Benefit for income taxes (Note 11) -- -- --
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (5,488) (46,507) (20,664)
DISCONTINUED OPERATIONS, NET OF TAX (Note 3) (9,174) (1,084) 7,377
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS (Note 3) 394 308 (28)
-------- -------- --------
NET LOSS (14,268) (47,283) (13,315)
Accretion of discount on redeemable preferred stock (Note 12) 226 12 --
-------- -------- --------
NET LOSS APPLICABLE TO COMMON STOCK $(14,494) $(47,295) $(13,315)
======== ======== ========
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
Continuing operations $ (.47) $ (1.67) $ (.73)
Discontinued operations (.78) (.04) .26
Disposal of discontinued operations .03 .01 --
-------- -------- --------
Net loss per share $ (1.22) $ (1.70) $ (.47)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000's)
Basic and diluted 11,692 27,761 28,169
======== ======== ========
See accompanying notes to consolidated financial statements.
23
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Common Stock
------------------------ --------------------- Common Additional
Par Par Stock to Paid-In
Shares Value Shares Value be Issued Capital
---------- --------- ----------- ------- --------- ----------
BALANCE, JANUARY 31, 1999 - $ - 29,982,512 $ 1,500 $ - $ 166,168
Net loss
Treasury stock purchase
Stock cancelled under benefit plans (19,211) (2) (29)
---------- --------- ----------- ------- --------- ----------
BALANCE, JANUARY 31, 2000 - - 29,963,301 1,498 - 166,139
Net loss
Stocks issued for
investment in AFC (Note 6) 100 - 6,762,247 338 6,954
Acquisition of ZoomLot (Note 2) 270,953 135 1,312
Repurchase of Series A
preferred stock (Note 12) (100) -
Conversion of Series B
preferred stock (Note 12) (270,953) (135) 2,709,530 135 -
Repurchase of common
shares (Note 12)
Stock award (Note 13) 219
Stock cancelled under
benefit plans (14,641) - (20)
Accretion on redeemable preferred stock
Other comprehensive income (loss)
unrealized loss on marketable
securities
---------- --------- ----------- ------- --------- ----------
BALANCE, JANUARY 31, 2001 - - 39,420,437 1,971 219 174,385
Net loss
Stock award (219)
Accretion on redeemable preferred stock
Return of common stock in settlement of
ZoomLot agreements (Notes 2 and 3)
Stock cancelled under benefit plans (42,848) (2) (48)
Other comprehensive income (loss)
unrealized loss on marketable
securities
---------- --------- ----------- ------- --------- ----------
BALANCE, JANUARY 31, 2002 - $ - 39,377,589 $ 1,969 $ - $ 174,337
========== ========= =========== ======= ========= ==========
Other Comprehensive
Retained Treasury Comprehensive Income
Deficit Stock Income (loss) Total (Loss)
---------- ---------- ------------- -------- --------------
BALANCE, JANUARY 31, 1999 $ (55,789) $ (12,103) $ - $ 99,776
Net loss (13,315) $(13,315) $ (13,315)
Treasury stock purchase (2,551) (2,551)
Stock cancelled under benefit plans (31)
---------- ---------- ------------- -------- --------------
BALANCE, JANUARY 31, 2000 (69,104) (14,654) - 83,879 $ (13,315)
==============
Net loss (47,283) (47,283) $ (47,283)
Stocks issued for
investment in AFC (Note 6) (5,402) 7,816 9,706
Acquisition of ZoomLot (Note 2) 1,447
Repurchase of Series A
preferred stock (Note 12) -
Conversion of Series B
preferred stock (Note 12) -
Repurchase of common
shares (Note 12) (16,437) (16,437)
Stock award (Note 13) 219
Stock cancelled under
benefit plans (20)
Accretion on redeemable preferred stock (12) (12)
Other comprehensive income (loss)
unrealized loss on marketable
securities (44) (44) (44)
---------- ---------- ------------- -------- --------------
BALANCE, JANUARY 31, 2001 (121,801) (23,275) (44) 31,455 $ (47,327)
==============
Net loss (14,268) (14,268) $ (14,268)
Stock award (51) 204 (66)
Accretion on redeemable preferred stock (226) (226)
Return of common stock in settlement of
ZoomLot agreements (Notes 2 and 3) (431) (431)
Stock cancelled under benefit plans (50)
Other comprehensive income (loss)
unrealized loss on marketable
securities (89) (89) (89)
---------- ---------- ------------- -------- --------------
BALANCE, JANUARY 31, 2002 $(136,346) $ (23,502) $ (133) $ 16,325 $ (14,357)
========== ========== ============= ======== ==============
See accompanying notes to consolidated financial statements.
24
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended January 31,
--------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net loss $(14,268) $(47,283) $(13,315)
Adjustments to reconcile net loss to net cash
(used in) provided by continuing operating activities:
Loss from discontinued operations 9,174 1,084 (7,377)
Gain on disposal of discontinued operations (394) (308) 28
Depreciation and amortization 606 779 1,119
Gain on sale of property -- (2,868) --
Write-off of option -- 500 --
Loss on write-down of assets held for sale 589 3,398 4,666
Stock compensation (116) 199 (31)
Changes in operating assets and liabilities:
Accrued income tax/refundable (175) -- --
Other liabilities (2,240) (7,092) (1,116)
Other operating assets and liabilities, net (691) 1,727 306
-------- -------- --------
Net cash used in continuing operating activities (7,515) (49,864) (15,720)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on gross finance receivable 155 5,730 61,155
Proceeds from sale of loans 313 24,187 --
Change in contracts in progress 614 -- --
Proceeds from sale of property -- 8,606 --
Proceeds from sale of assets held for sale 2,065 1,041 --
Purchase of loans -- -- (15,316)
Investments and acquisitions -- (1,690) --
Proceeds from AFC distributions 909 556 --
Purchase of marketable securities -- (25,092) --
Proceeds from sale of marketable securities -- 23,820 --
Purchase of other property and equipment (326) (188) (1,091)
Purchase of affordable housing investments (471) (1,455) (1,017)
-------- -------- --------
Net cash provided by investing activities 3,259 35,515 43,731
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on operating debt and notes payable -- (5,185) --
Payments to acquire treasury stock -- (16,437) (2,551)
-------- -------- --------
Net cash used in financing activities -- (21,622) (2,551)
-------- -------- --------
(Decrease) increase in cash and cash equivalents from continuing operations (4,256) (35,971) 25,460
(Decrease) in cash and cash equivalents from discontinued operations (2,066) (5,918) (3,236)
Cash and cash equivalents at beginning of year 12,444 54,333 32,109
-------- -------- --------
Cash and cash equivalents at end of year $ 6,122 $ 12,444 $ 54,333
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ -- $ -- $ 67
======== ======== ========
Income taxes paid $ 293 $ 697 $ 105
======== ======== ========
See accompanying notes to consolidated financial statements.
25
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: National Auto Credit, Inc. ("the Company" or "NAC") began
operations in 1969 and was incorporated in Delaware in 1971. Through and
including December 31, 2001, NAC's operations were conducted principally through
three operating segments, (i) the e-commerce segment, which was comprised of
ZoomLot Corporation's ("ZoomLot") development of e-commerce services to
facilitate the process by which used car dealerships, lenders and insurance
companies communicate and complete the transactions between them that are needed
to provide used car dealers' customers with financing, insurance and other
services, (ii) the movie exhibition segment, which is comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment.
NAC recently completed a strategic review of its investment in ZoomLot,
acquired December 15, 2000 and the development of its e-commerce services. NAC's
strategic review included evaluating the evolving market conditions of the used
car dealer and financing industries, the start-up nature of the ZoomLot
operations, the current market demand for and penetration of ZoomLot's
e-commerce solution to electronically link eligible used car dealers and their
qualified customers with available used car lenders and financing terms, current
operating losses and forecasts of future operating results and strategic
opportunities available to ZoomLot. As a result of this review, management of
NAC determined that it was unable to predict, with the requisite degree of
certainty, when or whether ZoomLot would achieve positive cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated steps to
discontinue e-commerce operations. Additionally, as a consequence of NAC's
decision to discontinue its ZoomLot e-commerce operations, NAC also formally
exited the sub-prime used automobile consumer finance business effective
December 31, 2001. In the first and second quarters of the year ended January
31, 2001, NAC sold its active loan portfolio and the majority of its charged-off
portfolio. However, since NAC had not, until December 31, 2001, made a
definitive decision that it would not reenter the consumer lending business,
either through ZoomLot or another means, the automobile finance operations had
not previously been classified as a discontinued operation. As a result of these
decisions, both the e-commerce and automobile finance segments have been
classified as discontinued operations, and as of January 31, 2002, NAC is
engaged only in the movie exhibition segment.
NAC is evaluating various additional strategic business alternatives,
including, but not limited to, the purchase of one or more existing businesses
or the entry into one or more businesses.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the amounts of NAC and its wholly-owned subsidiaries and its investment in AFC,
a 50% owned limited liability company, which is accounted for under the equity
method. All material intercompany accounts and transactions have been eliminated
in consolidation.
ESTIMATES: The preparation of financial statements and the accompanying
notes thereto, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the respective reporting periods. Actual results
could differ from those estimates.
26
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS: All highly liquid investments, such as commercial paper
and debt instruments with initial maturities of three months or less are
considered to be cash equivalents. Cash equivalents are stated at cost, which
approximates the market value.
GOODWILL: Goodwill arising from NAC's acquisition of ZoomLot was being
amortized on a straight-line basis over a three-year period until NAC's decision
in December 2001 to discontinue ZoomLot's operations and the resulting write-off
of the goodwill arising from the acquisition of ZoomLot which remained at that
date (see Notes 2 and 3). NAC's initial investment in AFC exceeded its share of
AFC's net assets and that portion of the investment is accounted for in a manner
similar to goodwill and amortized on a straight-line basis over 20 years (see
Note 6).
IMPAIRMENT OF LONG-LIVED ASSETS: NAC evaluates impairment of long-lived
assets pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" which requires impairment losses to be recorded on long-lived
assets used in operations when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Management periodically
evaluates property and equipment and intangible assets for impairment whenever
events or changes in circumstances indicate the assets may be impaired. This
evaluation consists of comparing estimated future cash flows (undiscounted and
without interest charges) over the remaining life of the asset to its carrying
value. When such evaluation results in a deficiency, the carrying amount of the
asset is reduced to its estimated fair value through a charge to income. Certain
of these long-lived assets are being disposed of and have been written-down to
their estimated fair value (see Notes 3 and 8).
MARKETABLE SECURITIES: Marketable securities consist of U.S. Government
Agency mortgage-backed obligations, mortgage-backed securities and mutual funds.
NAC accounts for its marketable securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires that
marketable debt and equity securities be adjusted to market value at the end of
each accounting period, except in the case of debt securities which a holder has
the positive intent and ability to hold to maturity, in which case the debt
securities are carried at amortized cost. For marketable debt and equity
securities carried at market value, unrealized market value gains and losses are
included directly in net income if the securities are actively traded for
short-term profit, or otherwise are charged or credited to a separate component
of stockholders' equity ("accumulated other comprehensive income (loss)").
NAC determines the proper classification of its marketable debt and equity
securities at the time of purchase and reevaluates such designations as of each
balance sheet date. At January 31, 2002 and 2001, all marketable securities were
designated as available for sale. Accordingly, these securities are stated at
market value, with unrealized gains and losses reported in a separate component
of stockholders' equity ("accumulated other comprehensive income (loss)").
Realized gains and losses on sale of securities, as determined on a specific
identification basis, are included in net income.
27
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years for furniture
and equipment. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful lives of the
related improvements.
INCOME TAXES: Deferred income taxes are provided for all temporary
differences between the book and tax basis of assets and liabilities. Deferred
income taxes are adjusted to reflect new tax rates when they are enacted into
law. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. A
valuation allowance is recognized if it is anticipated that some or all of a net
deferred tax asset may not be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION: NAC accounts for stock options
and awards in accordance with SFAS 123, "Accounting for Stock-Based
Compensation", which allows companies to continue to recognize compensation
expense for grants to employees pursuant to Accounting Principles Board Opinion
No. 25, ("APB 25"), "Accounting for Stock Issued to Employees" but requires
companies to disclose the effect on net income (loss) and earnings (loss) per
share had NAC adopted the provisions of SFAS 123 requiring the recognition of
compensation expense based on the fair value of the options or awards (see Note
13).
EARNINGS PER SHARE: Basic earnings per share is computed by dividing net
income (loss), after reduction for the accretion of the discount on NAC's Series
C Redeemable Preferred Stock (see Note 12), by the weighted-average number of
Common Shares outstanding for the year. Dilutive earnings per share for all
years presented is the same as basic earnings per share because the inclusion of
common stock equivalents would have an antidilutive effect on loss per share for
Fiscal 2002, 2001 and 2000.
NEW ACCOUNTING PRONOUNCEMENTS: On July 20, 2001, the Financial Accounting
Standards Board (FASB) issued SFAS 141, Business Combinations, and SFAS 142,
Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for NAC are as follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July 1,
2001;
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability;
o Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective February 1, 2002,
all previously recognized goodwill and intangible assets with indefinite
lives will no longer be subject to amortization;
28
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Effective February 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator; and
o All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
Prior to NAC's decision in December 2001 to discontinue ZoomLot's
operations and the resulting write-off of the goodwill arising from the
acquisition of ZoomLot, NAC was recognizing goodwill amortization of $191,000
per month for the amortization of that goodwill. NAC will no longer recognize
this charge as a result of the discontinuation of ZoomLot operations. NAC also
recognizes a monthly charge (as a reduction of its earnings from its investment
in AFC) of $23,000 for the amortization, in a manner similar to goodwill, of the
excess of NAC's investment in AFC over its share of the net assets of AFC. NAC
is currently evaluating the potential impact, if any, of the adoption of SFAS
142 will have on its results of operations, cash flows or financial position.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record to the fair value of the
liability for an asset retirement obligation in the period in which it is
incurred. The amount initially recorded as the asset retirement obligation is
based upon the estimated present value of the retirement costs to be incurred,
and is capitalized as a part of the asset. The obligation is subsequently
accreted for the passage of time by charges to interest expense, and the
capitalized costs is amortized as part of depreciation expense related to the
asset. The asset retirement obligation is also continually re-estimated, with
changes in its present value caused by changes in the estimated retirement cost
recorded as adjustments to the carrying amount and subsequent depreciation of
the asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002
and will be adopted by NAC effective February 1, 2002. NAC is currently
evaluating the potential impact, if any, of the adoption of SFAS 143 will have
on its results of operations, cash flows or financial position.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
with the exception of impairment and disposal issues related to goodwill and
other intangible assets that are not amortized. SFAS 144 also supersedes the
accounting and reporting provision of Accounting Principles Board Opinion No.
(APB) 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains many of the fundamental
recognition and measurement provisions of SFAS 121, and also retains the
requirement in APB 30 to separately identify and report discontinued operations.
However, SFAS extends the APB 30 reporting requirements for discontinued
operations to components of an entity that have either been disposed of or is
classified as assets held for sale that may not have qualified as segments under
APB 30, as a result of which operating results that previously were not
classified as discontinued operations may be treated as such upon the adoption
of SFAS 144. SFAS 144 is effective for fiscal years beginning after December 15,
2001, and will be adopted by NAC effective February 1, 2002. NAC is currently
evaluating the potential impact, if any, of the adoption of SFAS 144 will have
on its results of operations, cash flows or financial position.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
29
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 2 - ACQUISITIONS
On December 15, 2000, NAC entered into a Merger Agreement and Plan of
Reorganization (the "Merger Agreement") to acquire ZoomLot. Under the terms of
the Merger Agreement, NAC issued to the former ZoomLot stockholders 270,953
shares of its Series B Convertible Preferred Stock and 729,047 shares of its
Series C Redeemable Preferred Stock, each at $.50 par value. Pursuant to the
terms of the Series B Convertible Preferred Stock, on December 15, 2000 NAC
obtained the right to call for the conversion of the shares of Series B
Convertible Preferred Stock, and NAC converted the 270,953 shares of the Series
B Convertible Preferred stock into 2,709,530 shares of NAC Common Stock.
The holders of the Series C Redeemable Preferred Stock had certain rights
to require the redemption of the shares. At any time after the earlier of
September 30, 2003 or the occurrence of a "redemption event" (but no event
earlier than January 1, 2003) the holder of each share of Series C Redeemable
Preferred Stock would have been entitled to redeem each Series C share for a
cash payment by NAC equal to the greater of (i) $15.00 (as adjusted for any
stock splits, stock dividends, recapitalizations or similar events), plus all
declared but unpaid dividends on such shares or (ii) ten times the fair market
price (determined based on the average daily closing price of NAC's Common Stock
for the twenty days preceding the redemption date) of a share of Common Stock as
of the date of notice for redemption was received by NAC. However, under the
terms of the Merger Agreement 666,667 shares of the Series C Redeemable
Preferred Stock were subject to forfeiture unless certain financial performance
"objectives" were met or certain "valuation events" occurred, and any shares of
Series C Redeemable Preferred Stock that were subject to forfeiture could not be
redeemed until such forfeiture provisions no longer applied. A "redemption
event" would have been deemed to have occurred if (i) ZoomLot has met an
"objective", as described below, which eliminated the forfeiture of Series C
shares, or (ii) there had occurred a "valuation event" which eliminated the
forfeiture of the Series C shares. Specifically, one-half of the 666,667 Series
C Preferred Redeemable Shares would have been forfeited, if, by December 31,
2003, ZoomLot, including any of its subsidiaries, had failed to achieve zero or
positive earnings, before interest expense, interest income, depreciation,
amortization and extraordinary items but after applicable income taxes, for a
period of six consecutive months, and the remaining one-half of those shares
would have been forfeited if, by December 31, 2003, ZoomLot, including any of
its subsidiaries, had not achieved at least $4.5 million in earnings before
interest expense, interest income, depreciation, amortization and extraordinary
items but after applicable income taxes, for a period of twelve consecutive
months. If, however, certain "valuation events" had occurred prior to December
31, 2003, those financial performance objectives would be deemed to have been
achieved. These valuation events generally consisted of (i) transaction that
would have involved an investment in ZoomLot or one of its subsidiaries of at
least $10.0 million, where the pre-investment in ZoomLot or any subsidiary of
ZoomLot was at least $30.0 million, (ii) a change of control of NAC or (iii) the
termination of the key executives of ZoomLot without cause.
As part of the Merger Agreement, NAC made a capital contribution to
ZoomLot of $5.2 million, which ZoomLot used to repay advances that had been made
to it by Cygnet Capital Corporation ("Cygnet Capital"). The chief executive
office and sole stockholder of Cygnet Capital was also a stockholder of ZoomLot,
and by virtue of the Merger Agreement and subsequent conversion of Series B
Convertible Preferred Stock became the beneficial holder of 1,707,004 shares of
NAC Common Stock and 459,229 shares of Series C Redeemable Preferred Stock. This
stockholder had also previously acquired beneficial ownership of shares of NAC
Common Stock in market purchases, and beneficially owned an aggregate of
2,077,004 shares NAC Common Stock, which represent 17.7% of the then outstanding
shares of NAC's Common Stock. Under the Merger Agreement the stockholder, Cygnet
Capital, or another company owned by the stockholder, were required to
30
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 2 - ACQUISITIONS (CONTINUED)
repay the $5.2 million to NAC unless ZoomLot met the financial performance
objectives, or an event occurs, that eliminated the forfeiture of the Series C
Redeemable Preferred Stock.
In connection with its decision to discontinue the operations of ZoomLot,
NAC entered into formal negotiations with the former stockholders of ZoomLot to
resolve the financial obligations of NAC and of the former ZoomLot stockholders
resulting from the terms of the Merger Agreement. Since NAC now intended to
discontinue ZoomLot's operations prior to December 31, 2003, it was necessary to
resolve the effect of that on the obligations, as described above, of NAC and
the former ZoomLot stockholders under the Merger Agreement. As a result of the
negotiations, on January 31, 2002, NAC, entered into an Exchange and Repayment
Agreement ("Exchange Agreement") dated January 31, 2002 with the former ZoomLot
stockholders.
The Exchange Agreement sets forth the agreement among all the parties to
terminate the operations of ZoomLot. The parties agreed, among other things,
that the financial performance objectives set forth in the Merger Agreement had
not and would not be met. Accordingly, the 666,667 shares of Series C Preferred
Stock forfeitable if those financial performance were not met were deemed
forfeited and were returned and surrendered to NAC. For financial reporting
purposes, in recording the acquisition of ZoomLot those shares of Series C
Preferred Stock had been treated as contingently issuable, and accordingly their
return had no effect on NAC's consolidated financial statements.
Additionally, under the Exchange Agreement, the contingent obligation of
the chief executive officer and sole stockholder of Cygnet Capital, Cygnet
Capital, or another company owned by the stockholder to make a payment of $5.2
million to NAC if ZoomLot did not reach the financial performance objectives by
December 31, 2003 was resolved by (i) the transfer back to NAC of 3,079,530
shares of NAC Common Stock, which for the purposes of the Exchange Agreement
were valued at $1.25 per share, (ii) the return to NAC of 62,380 shares of NAC
Series C Preferred Stock at an aggregate agreed-upon value of $854,875, which
represented the carrying amount of such shares of Series C preferred Stock in
NAC's consolidated financial statements, and (iii) the issuance to NAC of a
promissory note in the amount of $986,048, payable, together with interest at 4%
per annum, in cash or NAC Common Stock (at a mutually agreed-upon value of $1.25
per share) on or before January 30, 2003. The accounting treatment for these
provisions of the Exchange Agreement is discussed in Note 3.
The acquisition of ZoomLot was accounted for using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16"). Under APB 16, the tangible assets,
identifiable intangible assets and liabilities of the acquired company are
recorded at their fair value, and the excess of the purchase price over the fair
value of the net (of liabilities) tangible and identifiable intangible assets is
recorded as goodwill. Additionally, under the purchase method of accounting the
operating results of the acquired company are included in the consolidated
results of operations from the date of the acquisition.
In recording the acquisition of ZoomLot, NAC recorded the 270,953 shares
of Series B Convertible Preferred Stock issued at a value of $5.34 per share for
an aggregate of $1.4 million, reflecting the average price of NAC's Common Stock
for the five days subsequent to the execution of the Merger Agreement of $.534
and the conversion ratio of one share of Series B Convertible Preferred Stock
for 10 shares of NAC's Common Stock.
31
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 2 - ACQUISITIONS (CONTINUED)
NAC recorded the 62,380 shares of Series C Redeemable Preferred Stock
issued and not subject to forfeiture at a value of $9.89 per share for an
aggregate of $617,000, representing the present value of the $15 per share
redemption value to be payable on September 30, 2003.
NAC determined that the fair value of ZoomLot's tangible assets and
liabilities approximated their historical recorded amounts, and accordingly has
recorded the entire excess of the purchase price over ZoomLot's historical
stockholders' deficit as goodwill.
The components and allocation of the purchase price were as follows
(in thousands):
Amount
--------
Components of purchase price:
Series B convertible preferred stock $ 1,447
Series C redeemable preferred stock:
Shares not subject to forfeiture 617
Shares subject to forfeiture 6,353
Contingent purchase price:
Series C shares subject to forfeiture (6,353)
Transaction costs 612
--------
Total purchase price $ 2,676
========
Allocation of purchase price:
Historical net deficit of ZoomLot $ (4,188)
Goodwill 6,864
--------
Total $ 2,676
========
NOTE 3 - DISCOUNTINUED OPERATIONS
As discussed in Note 1, as a consequence of NAC's strategic review and
determination, effective December 31, 2001, NAC suspended its ZoomLot operations
and initiated the steps to discontinue e-commerce operations. Additionally, as a
consequence of NAC's decision to discontinue its ZoomLot e-commerce operations
NAC also formally exited the sub-prime used automobile consumer finance business
effective December 31, 2001. In the first and second quarters of the year ended
January 31, 2001, NAC sold its active loan portfolio and the majority of its
charged-off portfolio. However, since NAC had not, until December 2001, made a
definitive decision that it would not reenter the consumer lending business,
either through ZoomLot or another means, the automobile financing operations had
not previously been classified as a discontinued operation. As a result of these
decisions, both the e-commerce and automobile financing segments have been
classified as discontinued operations.
32
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 3 - DISCOUNTINUED OPERATIONS (CONTINUED)
As discussed in Note 2, in connection with the discontinuation of
ZoomLot's operations, NAC entered into the Exchange Agreement with the former
stockholders of ZoomLot. Under the Exchange Agreement, the 666,667 shares of
Series C Preferred Stock forfeitable if ZoomLot failed to meet certain financial
performance objective were deemed forfeited and were returned and surrendered to
NAC. For financial reporting purposes, in recording the acquisition of ZoomLot
those shares of Series C Preferred Stock had been treated as contingently
issuable, and accordingly their return had no effect on NAC's consolidated
financial statements.
Additionally, under the Exchange Agreement, the contingent obligation of
the chief executive officer and sole stockholder of Cygnet Capital, Cygnet
Capital, or another company owned by the stockholder to make a payment of $5.2
million to NAC if ZoomLot did not reach the financial performance objectives by
December 31, 2003 was resolved by (i) the transfer back to NAC of 3,079,530
shares of NAC Common Stock, which for the purposes of the Exchange Agreement
were valued at $1.25 per share, (ii) the return to NAC of 62,380 shares of NAC
Series C Preferred Stock at an aggregate agreed-upon value of $854,875, which
represented the carrying amount of such shares of Series C Preferred Stock in
NAC's consolidated financial statements, and (iii) the issuance to NAC of a
promissory note in the amount of $986,048, payable, together with interest at 4%
per annum, in cash or NAC Common Stock (at a mutually agreed-upon value of $1.25
per share) on or before January 30, 2003.
For financial reporting purposes, NAC recorded the 3,079,530 shares of
Common Stock returned under the Exchange Agreement at $431,000, representing
their market value of the basis of the quoted market price of NAC's Common
Stock, recorded the 62,380 shares of Series C Preferred Stock returned at their
aggregate carrying amount of $854,875, and recorded the note receivable, a
component of other assets, at a net value of $110,000 reflecting the market
value at January 31, 2002 of the shares of NAC Common Stock the maker of the
note has the option to tender in payment of the principal. NAC also incurred or
accrued costs of $850,000 for the winding down and closing of ZoomLot's
operations, including rental and broker costs to sublease ZoomLot's corporate
office, employee severance costs and costs of early lease terminations. As a
result, NAC recognized a net gain on the disposal of ZoomLot's operation of
$394,000.
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In the year
ended January 31, 1996, NAC disposed of its rental fleet business through the
sale of certain assets and through certain leases to a national car rental
company. All liabilities related to the discontinued rental business,
principally self-insurance claims, were retained by NAC. NAC also had a
dealership operation that sold cars that were retired from the rental fleet,
primarily to member dealers of NAC's automobile financing business. That
operation was discontinued in the year ended January 31, 1997 as the result of
NAC's disposal of its automobile rental operations. The results of both the auto
rental and dealership operations are included in the results of discontinued
operations (together as "auto rental" operations). For the years ended January
31, 2002 and 2001, the results of the discontinued auto rental operations
principally represent the effects of the settlement of, and changes in NAC's
reserves for, claims against NAC related to the self-insured claims (see Note
15). For the year ended January 31, 2000, the results of the discontinued auto
rental operations principally represent the effects of the settlement of, and
changes in NAC's reserves for, claims against NAC related to the self-insured
claims and the effects of the favorable settlement of certain state tax (other
than income tax) matters for amounts less than previously estimated and accrued.
33
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 3 - DISCOUNTINUED OPERATIONS (CONTINUED)
Summarized results of discontinued operations are as follows (in
thousands):
Discontinued Operations
---------------------------------------------
Auto Auto
E-Commerce Financing Rental Total
---------- --------- -------- --------
FISCAL 2002
Revenue $ 867 $ 34 $ -- $ 901
Operating expense (10,236) -- -- (10,236)
General and administrative (expenses) income -- 293 (463) (170)
-------- -------- -------- --------
(10,236) 293 (463) (10,406)
-------- -------- -------- --------
Income (loss) before income taxes (9,369) 327 (463) (9,505)
Provision (benefit) for income taxes -- (331) -- (331)
-------- -------- -------- --------
Income (loss) from discontinued operations (9,369) 658 (463) (9,174)
Gain (loss) on disposal of operations, net of tax 394 -- -- 394
-------- -------- -------- --------
Income (loss) from discontinued operations $ (8,975) $ 658 $ (463) $ (8,780)
======== ======== ======== ========
FISCAL 2001
Revenue $ 80 $ 527 $ -- $ 607
Operating (expense) income (708) (1,754) 1,348 (1,114)
General and administrative (expenses) income -- (1,777) -- (1,777)
-------- -------- -------- --------
(708) (3,531) 1,348 (2,891)
-------- -------- -------- --------
Income (loss) before income taxes (628) (3,004) 1,348 (2,284)
Provision (benefit) for income taxes -- (1,200) -- (1,200)
-------- -------- -------- --------
Income (loss) from discontinued operations (628) (1,804) 1,348 (1,084)
Gain (loss) on disposal of operations, net of tax -- -- 308 308
-------- -------- -------- --------
Income (loss) from discontinued operations $ (628) $ (1,804) $ 1,656 $ (776)
======== ======== ======== ========
FISCAL 2000
Revenue $ -- $ 7,476 $ -- $ 7,476
Operating (expense) income -- (4,154) (600) (4,754)
General and administrative (expenses) income -- -- 807 807
-------- -------- -------- --------
-- (4,154) 207 (3,947)
-------- -------- -------- --------
Income (loss) before income taxes -- 3,322 207 3,529
Provision (benefit) for income taxes -- (3,286) (562) (3,848)
-------- -------- -------- --------
Income (loss) from discontinued operations -- 6,608 769 7,377
Gain (loss) on disposal of operations, net of tax -- -- (28) (28)
-------- -------- -------- --------
Income (loss) from discontinued operations $ -- $ 6,608 $ 741 $ 7,349
======== ======== ======== ========
34
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 4 - MARKETABLE SECURITIES
The marketable securities as of January 31, 2002 and 2001 are summarized
as follows (in thousands):
Gross Unrealized
-----------------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------- ------------
Equity securities - mutual funds at
January 31, 2002 $ 1,127 $ - $ (133) $ 994
Equity securities - mutual funds at
January 31, 2001 $ 1,127 $ - $ (44) $ 1,083
All marketable securities held by NAC are classified as available for
sale. During the year ended January 31, 2001, NAC invested $25.1 million, which
includes accrued interest, in various debt and equity securities. All the debt
securities held by NAC were sold or called at par value during the fiscal year,
and proceeds of $23.8 million were received upon such sales and redemptions. The
gross realized gains and losses for the current year were not material.
NOTE 5 - INSTALLMENT LOANS, NET
From October 1995 through March 2000, NAC's principal business activity
was to invest in sub-prime used automobile consumer loans, which took the form
of installment loans collateralized by the related vehicle. NAC purchased such
loans, or interests in pools of such loans, from member dealerships, and
performed the underwriting and collection functions for such loans. In the first
and second quarters for the year ended January 31, 2001, NAC sold its active
loan portfolio and the majority of its charged-off portfolio.
During Fiscal 2001, NAC sold its active loan portfolio and the majority of
its charged-off portfolio for aggregate cash proceeds of $24.2 million. NAC also
received $6.1 million in actual cash collections on the loans during Fiscal
2001. The sales of the loans resulted in an aggregate loss of $1.4 million. The
loss includes a charge of $666,000 for the write-off of deferred loan
origination assets and liabilities and the accrual for the potential repurchase
of certain loans for breach of any representation or warranty made by NAC. NAC
completed the sale of substantially all of its remaining charged-off loans
during Fiscal 2002 for $313,000. In addition, during Fiscal 2002, NAC collected
$155,000 on previously charged-off loans.
35
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 5 - INSTALLMENT LOANS, NET (CONTINUED)
As discussed in Note 1, as a consequence of NAC's decision to discontinue
its ZoomLot e-commerce operations, NAC also formally exited the sub-prime used
automobile consumer financing business effective December 31, 2001. As a result,
income, expenses, and gains and losses resulting from NAC's investment in or
sale of installment loans is now included in the results of discontinued
operations (see Note 3).
The following table sets forth the components of and changes in the gross
finance receivable, unearned income, credit loss discount and allowance for
credit losses of NAC's net installment loans as of and for the years ended
January 31, 2000, 2001 and 2002 (in thousands):
Gross Credit Allowance Installment
Finance Unearned Loss for Credit Loans,
Receivable Income Discount Losses Net
---------------- --------------- ----------------- ----------------- -----------------
Balance, January 31, 1999 $ 115,473 $ (7,052) $ (21,190) $ (16,830) $ 70,401
Purchases 27,061 (1,972) (11,375) - 13,714
Cash collected (68,258) - - - (68,258)
Charge-offs (23,429) - 15,353 8,076 -
Provision for credit losses - - - 6,118 6,118
Interest income - 7,331 - - 7,331
Reclassification - (953) 953 - -
---------------- --------------- ----------------- ----------------- -----------------
Balance, January 31, 2000 50,847 (2,646) (16,259) (2,636) 29,306
Purchases - - - - -
Cash collected (6,134) - - - (6,134)
Charge-offs (1,203) - 1,538 (335) -
Provision for credit losses - - - 1,365 1,365
Interest income - 404 - - 404
Reclassification - (417) 417 - -
Sale of loans1 (43,510) 2,659 14,304 1,606 (24,941)
---------------- --------------- ----------------- ----------------- -----------------
Balance, January 31, 2001 - - - - -
Cash collected (155) - - - (155)
Provision for credit losses 468 - - - 468
Sale of loans (313) - - - (313)
---------------- --------------- ----------------- ----------------- -----------------
Balance, January 31, 2002 $ - $ - $ - $ - $ -
================ =============== ================= ================= =================
(1) Includes cash proceeds of $24.2 million.
36
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 6 - INVESTMENT IN AFC
On April 5, 2000, NAC, through its wholly-owned subsidiary National
Cinemas, Inc., purchased a 50% membership interest in AFC. AFC is the owner and
operator of the Angelika Film Center, which is a multiplex cinema and cafe
complex in the Soho District of Manhattan in New York City. The 50% membership
interest was purchased from Reading International, Inc. ("Reading"), formerly
known as Reading Entertainment, Inc., for 8,999,900 shares of NAC's Common
Stock, which included 2,237,653 shares issued from treasury stock, and 100
shares of Series A Convertible Preferred Stock. NAC repurchased the 100 shares
of Series A Convertible Preferred Stock from Reading on November 3, 2000 (see
Note 12).
AFC is currently owned 50% by NAC and 50% by Reading. The articles and
bylaws of AFC provide that for all matters subject to a vote of the members, a
majority is required, except that in the event of a tie vote, the Chairman of
Reading shall cast the deciding vote.
NAC also purchased from Reading two separate and independent options to
acquire additional cinema assets owned by Reading in the United States. During
the second quarter of fiscal year 2001, the options lapsed without being
exercised by NAC and the $500,000 paid to acquire them was charged to expense.
NAC's initial investment was $11.1 million, comprised of (i) the 9,000,000
shares of Common Stock issued, valued at $1.08 per share on the basis of the
average price quoted by the OTCBB for the period immediately following April 5,
2000, (ii) transaction costs, and (iii) the $500,000 paid for one of the
options. The investment exceeds NAC's share of the net assets of AFC by
approximately $5.6 million, which is being treated in a manner similar to
goodwill and through January 31, 2002 has been amortized on the straight-line
method over 20 years (see Note 1). NAC uses the equity method to account for its
investment in AFC. AFC uses a December 31 year-end for financial reporting
purposes. NAC reports on a January 31 year-end, and for its fiscal quarters
ending April 30, July 31, October 31 and January 31 records its pro-rata share
of AFC's earnings on the basis of AFC's fiscal quarters ending March 31, June
30, September 30, and December 31, respectively. For Fiscal 2002, NAC recorded
income of $101,000, net of the effect of $272,000 in AFC amortization expense,
representing its share of AFC's net income for the year ended December 31, 2001.
For Fiscal 2001, NAC recorded income of $230,000, net of the effect of $204,000
in AFC amortization expense, representing its share of AFC's net income for the
nine months ended December 31, 2000.
37
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 6 - INVESTMENT IN AFC (CONTINUED)
Summarized financial statement information for AFC as of December 31, 2001
and 2000 and for the years then ended is as follows (in thousands):
December 31,
--------------------------------
2001 2000
------------ -----------
CONDENSED BALANCE SHEET:
Current assets $ 1,620 $ 1,239
Property and equipment, net 549 621
Goodwill 8,659 9,250
Other assets 75 89
------------ -----------
$ 10,903 $ 11,199
============ ===========
Current liabilities $ 1,111 $ 554
Non-current liabilities 1,271 1,052
Members' equity 8,521 9,593
------------ -----------
$ 10,903 $ 11,199
============ ===========
For the Year Ended December 31,
--------------------------------
2001 2000
------------ -----------
CONSENSED STATEMENT OF EARNINGS:
Revenues $ 6,958 $ 6,462
Film rental 2,243 2,087
Operating costs 3,127 2,509
Depreciation and amortization 693 692
General and administrative expenses 149 184
------------ -----------
6,212 5,472
------------ -----------
Net income $ 746 $ 990
============ ===========
NAC's proportionate share of net income $ 373 $ 434
Amortization expense 272 204
------------ -----------
Income from investment in AFC $ 101 $ 230
============ ===========
38
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 7 - SALE OF PROPERTY AND EQUIPMENT
NAC, through its wholly-owned subsidiary, ARAC, Inc., owned certain real
property which consisted of two four-story, 55,000 square foot office buildings
and approximately ten and one-half acres of land located in Solon, Ohio (the
"Solon Real Property"). On August 23, 2000, an Agreement of Purchase and Sale
was entered into between PVF Capital Corp. ("PVF") and ARAC, Inc. for the sale
of the Solon Real Property to PVF at a gross sales price of $8.7 million cash at
closing (less brokers' fees, pro-rated real estate taxes, adjustments
attributable to tenant leases, and cost and fees of closing), and the sale was
closed on September 1, 2000. The transaction resulted in a gain of $2.9 million.
Concurrent with the closing, NAC entered into a lease agreement for office space
located within the Solon Real Property. The lease agreement provided NAC office
space at a monthly rental of $17,000 for the period January 1, 2001 through
December 31, 2001 and provided NAC with the option to terminate the lease at any
time with at least thirty days written notice to PVF. NAC exercised the option
and terminated the lease agreement effective June 30, 2001 as part of NAC's
relocation to New York.
NOTE 8 - ASSETS HELD FOR SALE
Assets held for sale at January 31, 2001 were $2.8 million comprised
principally of $2.7 million for affordable housing projects which NAC invested
through its interests in various limited liability partnerships. Historically,
NAC's investment in affordable housing projects had been held for realization
through the receipt of distributions from the operations of the projects and the
use of the tax credits generated by the investments. In the fourth quarter of
Fiscal 2000, NAC committed to a plan to sell the investments and in that quarter
recorded a write-down of $4.7 million to reduce the carrying amount of the
investments to their fair value less estimated costs to sell. During the Fiscal
2001, NAC reduced its original estimate of the fair value of the investments to
$2.7 million, primarily due to the expiration of certain tax credits and the
increase of the effective yield used in determining the fair value. As a result,
NAC recorded an additional write-down of $3.2 million.
On January 14, 2002, NAC sold its limited partnership interests in eight
projects to Idacorp Financial Services, Inc. ("Idacorp Financial") for $2.5
million. In connection with the sale NAC agreed to obtain certain Low-Income
Housing Credit Disposition Bonds (the "Bonds") meeting the requirements of
Section 42(j)(6) of the Internal Revenue Code of 1986, as amended, at its own
expense and Idacorp Financial agreed to reasonably cooperate with NAC and to
make best efforts to cause the respective general partners of each of the
partnerships to provide NAC with information reasonably available to the
partnerships that is reasonably necessary to obtain such Bonds. NAC incurred
costs, comprised of closing costs, transfer fees and fees for the Bonds, of
$510,000 and as a result incurred at loss (reflected in continuing operations)
of $549,000. NAC retained its limited partnership interests in three projects,
which at January 31, 2002 are included in other assets at their estimated fair
market value of $200,000.
During the fourth quarter of Fiscal 2000, NAC also committed to plans to
sell certain real estate investments. During Fiscal 2002 and 2001, NAC sold the
investments for aggregate cash proceeds of $81,000 and $1.0 million,
respectively, and charged to continuing operations a loss on sale of $29,000 and
$215,000, respectively.
39
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 9 - FINANCIAL INSTRUMENTS
NAC has various financial instruments including cash and cash equivalents,
marketable securities, investments in affordable housing limited partnerships,
and miscellaneous other assets. Many of these instruments are short-term in
nature and the fair value of these financial instruments has been estimated
based on available market information and appropriate valuation methodologies.
NAC has determined that their carrying values approximate estimated fair values.
NOTE 10 - OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
January 31,
------------------------------------
2002 2001
------------ -------------
Accounts payable $ 397 $ 363
Accrued litigation expenses 737 826
Accrued expenses 1,557 1,930
Accrued restructuring costs (Note 16) - 855
Accrued state and local taxes 52 577
Deferred capital contributions - 432
------------ -------------
Total $ 2,743 $ 4,983
============ =============
NOTE 11 - INCOME TAXES
The components of the provision (benefit) for income taxes, in the
consolidated statement of operations are as follows (in thousands):
Years Ended January 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Current
Federal $ (331) $ (1,200) $ (2,848)
State - - (1,000)
------------ ------------ ------------
(331) (1,200) (3,848)
Deferred
Federal - - -
State - - -
------------ ------------ ------------
- - -
------------ ------------ ------------
Total (331) (1,200) (3,848)
Allocated to discontinued operations 331 1,200 3,848
------------ ------------ ------------
Continuing operations $ - $ - $ -
============ ============ ============
40
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 11 - INCOME TAXES (CONTINUED)
For Fiscal 2002, 2001 and 2000, NAC recorded income tax benefits of
$331,000, $1.2 million and $3.8 million, respectively, that represent either (i)
adjustments that increased the previously estimated amount of net operating
losses eligible to be carried back against prior year's taxable income or (ii)
adjustments to revise (reduce) previous estimates of certain income taxes. These
tax benefits arose and are a component of discontinued operations. In addition,
NAC has an income tax refundable in the amount of $3.5 million at January 31,
2002.
As of January 31, 2002 NAC has net operating loss carryforwards of $75.9
million that may be used to reduce future taxable income, subject to
limitations. Such net operating loss carryforwards will expire $23.4 million in
Fiscal 2019, $21.2 million in Fiscal 2020, $24.1 million in Fiscal 2021 and $7.2
million in Fiscal 2022.
As a result of NAC's November 3, 2000 repurchases of shares of its Common
Stock (see Note 12), NAC underwent a "change in ownership" as defined for the
purposes of Sections 382 and 383 of the Internal Revenue Code. As a result of
the "change in ownership" described above, the use of net operating loss
carryforwards totaling $56.7 million incurred prior to November 3, 2000 will be
subject to significant annual limitation. The use of the net operating loss
carryforwards incurred after November 3, 2000, which total $19.2 million as of
January 31, 2002, are not subject to the Section 382 limitation.
As of January 31, 2002, NAC also has unused low income housing credits
totaling $6.6 million which expire $1.4 million per annum for each of Fiscal
2013, Fiscal 2019, Fiscal 2020, Fiscal 2021 and Fiscal 2022. Of such low income
housing credits, $5.2 million were generated prior to November 3, 2000 and are
therefore subject to the Section 383 limitation described above.
As of January 31, 2002, NAC has $3.0 million of alternative minimum tax
credits, which may be applied against any future alternative minimum taxes which
exceed regular income taxes. These credits may be carried forward indefinitely
and are also subject to the Section 383 limitation.
At the date of its acquisition, ZoomLot had net operating loss
carryforwards of approximately $2.2 million. NAC may use these net operating
loss carryforwards through Fiscal 2021 to reduce the taxable income generated by
ZoomLot, subject to certain annual limitations.
41
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 11 - INCOME TAXES (CONTINUED)
The components of the net deferred tax asset (liability) are as follows
(in thousands):
January 31,
-----------------------------
2002 2001
------------ ------------
Deferred tax assets:
Depreciation $ 146 $ 167
Self-insurance claims 269 339
State income taxes 138 94
Accrued liabilities 863 1,229
Tax credits carryforwards 9,535 8,602
Net operating loss carryforward 26,567 23,666
Other 2 3
------------ ------------
Total deferred tax assets 37,520 34,100
------------ ------------
Deferred tax liabilities:
Limited partnership investments (457) (1,180)
------------ ------------
Total deferred tax liabilities (457) (1,180)
------------ ------------
Net deferred tax asset before valuation allowance 37,063 32,920
Less: valuation allowance (37,063) (32,920)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
A valuation allowance for all of NAC's net deferred tax assets has been
provided as NAC is unable to determine, at this time, that the generation of
future taxable income against which the net operating loss and tax credit
carryforwards could be used can be predicted to be more likely than not. The net
change in the valuation allowance for the years ended January 31, 2002, 2001 and
2000 was $4.1 million, $5.5 million and $6.2 million, respectively.
Reconciliations of the federal statutory tax rate to the effective tax
rate for continuing operations are as follows:
Years Ended January 31,
-------------------------------------------
2002 2001 2000
------------ ------------- ------------
Statutory rate (35.0)% (35.0)% (35.0)%
Premanent differences 1.9 26.8 0.2
State income taxes (net of federal tax benefit) (0.8) (0.1) (4.2)
Deferred tax valuation allowance 56.7 10.6 36.0
Tax credits (17.8) (2.1) 2.3
Other (5.0) (0.2) 0.7
------------ ------------- ------------
Effective Tax Rate (.0)% (.0)% (.0)%
============ ============= ============
42
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 12 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
Redeemable Preferred Stock
The following sets forth the changes in Series C Redeemable Preferred
Stock for the years ended January 31, 2002 and 2001 (dollars in thousands):
Shares Dollars
----------------- -----------------
Balance, January 31, 2000 - $ -
Issuance of Series C Redeemable Preferred
Stock for the acquisition of ZoomLot:
Shares not subject to forfeiture 62,380 617
Shares subject to forfeiture 666,667 6,353
Contingent purchase price (6,353)
Accretion of discount to redemption price 12
----------------- -----------------
Balance, January 31, 2001 729,047 629
Accretion of discount to redemption price 226
Shares redeemed pursuant to terms of Exchange
Agreement (Notes 2 and 3) (62,380) (855)
Shares forfeited pursuant to terms of Exchange
Agreement (Notes 2 and 3) (666,667) -
----------------- -----------------
Balance, January 31, 2002 - $ -
================= =================
43
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 12 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
Preferred Stock
NAC is authorized to issue up to 2,000,000 shares of Preferred Stock, in
one or more series, having such preferences and terms as the Board of Directors
may determine. At January 31, 2002, there were no outstanding shares of
Preferred Stock and NAC had 2,000,000 shares of Preferred Stock authorized and
available for issuance. The following sets forth the changes in Preferred Stock
for the year ended January 31, 2001 (dollars in thousands):
Shares
-------------------------------
Series A Series B Amount
--------------- -------------- --------------
Issuance of Series A
shares for investment in AFC 100 - $ -
Repurchase of Series A shares (100) - -
Issuance of Series B
shares for acquisition of ZoomLot - 270,953 135
Conversion of Series B shares - (270,953) (135)
--------------- -------------- --------------
Balance, January 31, 2001 - - $ -
=============== ============== ==============
The Series A Convertible Preferred Stock was convertible into shares of
NAC's Common Stock on a one for one basis, subject to traditional antidilution
adjustments. The Series A Convertible Preferred Stock was entitled to vote on a
share for share basis with NAC's Common Stock as a single class, except that as
a separate class the Series A Convertible Preferred Stock was required to
approve any amendments to NAC's charter, any amendments to NAC's bylaws made by
the stockholders, or, to the extent permitted by law, the removal of any
director from NAC's Board of Directors. The Series A Convertible Preferred Stock
had a liquidation value of $1.50 per share and was entitled to a dividend
preference equal to any dividends declared on NAC's Common Stock, determined on
a per share basis. On November 3, 2000, NAC repurchased the 100 shares of Series
A Convertible Preferred Stock back from Reading as part of the settlement
described below. These shares have been retired and are no longer outstanding as
of January 31, 2001.
The Series B Convertible Preferred Stock had a par value of $.50 per
share. The holders of the Series B Convertible Preferred Stock could at any time
convert the Series B shares into shares of NAC's Common Stock at the ratio
(subject to adjustment for stock splits and other anti-dilutive events) of ten
shares of Common Stock for each share of Series B Convertible Preferred Stock.
The holders of the outstanding Series B Convertible Preferred Stock had certain
voting rights.
44
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 12 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
The terms of the Series B Convertible Preferred Stock provided that it
would automatically convert into shares of NAC's Common Stock, at the ratio of
ten shares of NAC's Common Stock for each share of Series B Convertible
Preferred Stock, upon the termination of the Stock Purchase and Standstill
Agreement, executed November 3, 2000 between NAC and the Reading Stockholders
(see Note 12 - Common Stock Repurchases below). That agreement was terminated in
connection with NAC's December 15, 2000 repurchase of additional shares of
Common Stock from the Reading Stockholders described below. As a result, on
December 15, 2000 NAC converted the 270,953 shares of the Series B Convertible
Preferred Stock into 2,709,530 shares of its Common Stock.
Common Stock Repurchases
As described in Notes 2 and 3, in January 2002 under the Exchange
Agreement, the contingent obligation of the chief executive officer and sole
stockholder of Cygnet Capital, Cygnet Capital, or another company owned by the
stockholder to make a payment of $5.2 million to NAC if ZoomLot did not reach
the financial performance objectives by December 31, 2003 was in part resolved
by the transfer back to NAC of 3,079,530 shares of NAC Common Stock, which for
the purposes of the Exchange Agreement were valued at $1.25 per share. For
financial reporting purposes, NAC recorded the 3,079,530 shares of Common Stock
returned under the Exchange Agreement at $431,000, representing their market
value of the basis of the quoted market price of NAC's Common Stock.
During Fiscal 2001, NAC repurchased 25,943,360 shares of its Common Stock.
The Fiscal 2001 repurchases of Common Stock included the repurchase of shares
from Mr. Sam Frankino and certain parties related to him, and repurchases from
Reading and certain parties related to it as described below.
45
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 12 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
On November 3, 2000, NAC entered into a Settlement Agreement and Release
(including Agreement for Sale of Shares) (the "Settlement Agreement") with Mr.
Sam Frankino, individually, as trustee and president of the Samuel J. Frankino
and Connie M. Frankino Charitable Foundation, as trustee of the Corrine L.
Dodero Trust for the Arts and Sciences, and as managing partner of the Frankino
and Frankino Investment Company, a Nevada general partnership (Mr. Frankino and
all such entities referred to herein collectively as "Frankino Parties"). The
Settlement Agreement, among other things, settled all of the litigation between
NAC and Mr. Frankino and resulted in the repurchase by NAC of all NAC securities
held by Mr. Frankino, the other Frankino Parties and certain other of his
related parties. In conjunction with the settlement of the above-referenced
litigation, the parties to the litigations, as well as William Dodero, Lorraine
Dodero, William Maund and Robert Upton, exchanged general releases and releases
against future claims.
Under the terms of the Settlement Agreement, NAC (i) repurchased an
aggregate of 15,743,012 shares of Common Stock of NAC owned by the Frankino
Parties for a total purchase price of $35.3 million, or $2.245 per share of
Common Stock, (ii) and repurchased an aggregate of 120,348 shares of Common
Stock of NAC owned by certain of NAC's directors, including shares of Common
Stock held by William Maund, shares of Common Stock held by Lorraine Dodero,
shares of Common Stock held by William Dodero and Lorraine Dodero, as joint
tenants with rights of survivorship, and shares of Common Stock held by Lorraine
Dodero, as a trustee of a grantor trust for the benefit of her daughter, Corrine
Dodero, for a total purchase price of $180,000 (such repurchase of the 120,348
shares was completed on January 4, 2001), or $1.50 per share of common stock,
and (iii) reimbursed certain legal fees previously incurred by Mr. Frankino in
the amount of $2,011,600.
As a result of the repurchases of shares of Common Stock under the
Settlement Agreement, NAC charged to operations in the fourth quarter of Fiscal
2001, $25.1 million, representing the excess of the amount paid under the
Settlement Agreement over the market value of the shares repurchased.
On November 3, 2000, simultaneously with the execution and closing of the
Settlement Agreement with Mr. Frankino and the Frankino Parties, NAC executed
and closed a Stock Purchase and Standstill Agreement (the "Reading Agreement")
with Reading Entertainment, Inc., FA, Inc., Citadel Holding Corporation, and
Craig Corporation (collectively the "Reading Stockholders"). Prior to the
execution of the Reading Agreement, the Reading Stockholders collectively owned
an aggregate of 10,055,000 shares of NAC Common Stock and 100 shares of Series A
Convertible Preferred Stock, par value $.05 per share.
Under the terms of the Reading Agreement, NAC repurchased from FA, Inc.
5,277,879 shares of Common Stock of NAC and all 100 shares of Series A
convertible preferred stock for an aggregate purchase price of $8.5 million, or
$1.60 per share.
On December 15, 2000, NAC entered into a second agreement with Reading
Stockholders for the repurchase of 4,777,121 shares of NAC's Common Stock for an
aggregate price of $8.0 million, and on December 21, 2000, NAC purchased 25,000
shares of Common Stock from an associate of Reading for $41,000. As a part of
the second agreement the provisions of the November 3, 2000 Reading Agreement
between the Reading Stockholders and NAC that had continuing effect were
terminated.
46
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 12 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
As a result of the repurchases of shares of Common Stock from the Reading
Stockholders and an associate, NAC expensed in the fourth quarter of Fiscal 2001
$10.5 million, representing the excess of the amount paid for the shares
repurchased from the Reading Stockholders over their market value.
During Fiscal 2000, NAC repurchased 2,849,630 shares of its Common Stock.
The Fiscal 2000 repurchase of 2,849,630 shares of Common Stock was pursuant to
an option agreement (the "Option Agreement"), which NAC entered into with a
then-unaffiliated stockholder on May 10, 1999. NAC acquired the option by paying
the stockholder $1.0 million, which was paid on May 12, 1999, all of which was
to be credited toward the aggregate exercise price of $1.50 per share payable by
NAC upon any exercise of its option. On June 24, 1999, NAC exercised its right
under the Option Agreement to extend the period of the option ("the First
Extension") for 45 days, until August 8, 1999, by paying the stockholder an
additional $500,000, of which $250,000 was to be credited towards the aggregate
exercise price payable upon any exercise of the option. On August 8, 1999, NAC
and the unaffiliated stockholder agreed to an additional extension ("the Second
Extension") of the option, for 120 days, for which NAC paid the stockholder an
additional $1.0 million, of which $750,000 was to be credited towards the
aggregate exercise price payable upon any exercise of the option.
NAC accounted for the initial option purchase, and the extension payments,
by initially determining the fair value of the option or option extension to be
de minimis. In determining the fair value of the option or extension, NAC
considered the period over which the option or extension was exercisable, the
option exercise price, the market price of NAC's Common Stock and the portion of
the payments creditable to the payment due upon any exercise of the option. The
excess of the option or extension payments over the market value of the
underlying Common Stock was charged to expense. An aggregate of $2,224,000 was
charged to expense in Fiscal 2000, which represented the total of the $1.0
million payment made to obtain the initial option and $1.2 million of the
payments made to obtain the First Extension and Second Extension.
On November 22, 1999, the Board of Directors of NAC approved the exercise
of its option. On December 2, 1999, NAC exercised such option and paid the
unaffiliated stockholder an additional $2.3 million for the 2,849,630 shares
subject to the option, which amount equals the product of 2,849,630 and the
$1.50 per share exercise price, less the $2.0 million in aggregate credits to
which NAC became entitled under the Option Agreement, the First Extension and
the Second Extension. NAC recorded the 2,849,630 repurchased shares at a price
of $.895 per share, or an aggregate of approximately $2.6 million, representing
the market price of the Common Stock at the date the Second Extension was agreed
to.
Stockholders' Rights Plan
On September 26, 2001, NAC's Board of Directors declared a dividend of one
preferred share purchase right ("Right") for each outstanding share of Common
Stock to stockholders of record at the close of business on October 8, 2001 (the
"Record Date"). Under certain circumstances, a Right may be exercised to
purchase from NAC a unit consisting of one one-hundredth of a share (a "Unit")
of Series D Junior Participating Preferred Stock, par value $.05 per share (the
"Series D Preferred Stock") at a Purchase Price of $5.00 per Unit, subject to
adjustment.
47
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 12 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
The Rights become exercisable upon the earlier of (i) ten business days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), other than as a result of repurchases of stock by NAC or certain
inadvertent actions by institutional or certain other stockholders, or (ii) 10
business days (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person. Once exercisable, and in some
circumstances if certain additional conditions are met, the rights plan allows
NAC stockholders (other than the acquirer) to purchase NAC Common Stock or
Common Stock, at a substantial discount, in the surviving acquirer in the event
of a merger.
The Rights will expire on September 26, 2011 and may be redeemed by NAC
for $0.01 per Right at any time prior to the close of business on the later of
(i) the tenth business day following the acquisition by a person or group of
beneficial ownership of 15% or more of NAC's Common Stock or (ii) the tenth
business day (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person.
NOTE 13 - BENEFITS PLANS
NAC's 1993 Equity Incentive Plan provides for the granting of incentive
and non-qualified stock options, stock appreciation rights, and common stock and
restricted common stock awards to key employees. The total number of shares
available for options or awards granted under this Plan is 2,200,000 shares.
There were 42,848, 14,641 and 19,211 shares of restricted Common Stock cancelled
under this Plan during the years ended January 31, 2002, 2001 and 2000,
respectively. There were 128,352 shares available for future stock awards or
option grants at January 31, 2002.
NAC's 1983 Stock Option Plan provided for the granting of both incentive
and non-qualified stock options to key employees. This Plan terminated on April
17, 1993 and no further options may be granted, although options still remain
outstanding. Options previously granted under the Plan extend for ten years and
become exercisable in installments over the first five years.
NAC's 1995 Dealer Stock Option Plan for Member Dealers provided for the
granting of up to 550,000 common stock options to member dealers based upon
certain volume criteria. The options became exercisable over a three-year
period. This program was discontinued during Fiscal 1998. During Fiscal 2001,
the remaining options were cancelled and there are no options currently
outstanding.
48
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 13 - BENEFITS PLANS (CONTINUED)
A summary of all options granted, exercised, and cancelled by all plans
were as follows:
Weighted Average
Number of Exercise Price
Options Per Share
------- ---------
Balance January 31, 1999 635,610 3.12
Granted 800,000 1.03
Exercised - -
Cancelled (528,650) 2.81
--------------
Balance January 31, 2000 906,960 1.46
Granted 1,200,000 0.66
Exercised - -
Cancelled (222,560) 2.25
--------------
Balance January 31, 2001 1,884,400 0.86
Granted - -
Exercised - -
Cancelled (9,400) 4.53
--------------
Balance January 31, 2002 1,875,000 0.84
==============
The weighted-average fair value of options granted during Fiscal 2001 and
2000 was $0.51 and $.94 per share, respectively. No options were granted in
Fiscal 2002.
The outstanding options expire at dates through the year 2010. A summary
of stock options outstanding and exercisable as of January 31, 2002 is as
follows:
Options Outstanding Options Exercisable
------------------------------------------------------------- -----------------------------------
Range of Weighted Average Weighted Average Weighted Average
Per Share Number Remaining Contractual Per Share Number Per Share
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
--------------- ------------ ------------------------ ------------------- ----------- ---------------------
$0.66 to $0.92 1,275,000 8.76 $0.68 1,025,000 $0.68
$1.03 to $1.15 450,000 7.42 1.04 450,000 1.04
$1.66 150,000 6.27 1.66 150,000 1.66
------------ -----------
Total 1,875,000 1,625,000
============ ===========
49
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 13 - BENEFITS PLANS (CONTINUED)
If NAC had recorded compensation expense using the fair value method of
SFAS 123, the Company's net after tax loss and loss per share would have been as
follows (in thousands, except per share amounts):
Years Ended January 31,
------------------------------------------------------------
2002 2001 2000
----------------- ------------------- -------------------
Net loss applicable to common stock, as reported $ (14,494) $ (47,295) $ (13,315)
Pro forma net loss (14,647) (47,629) (13,696)
Loss per share, as reported (1.22) (1.70) (.47)
Pro forma loss per share (1.25) (1.72) (.49)
The fair value of each award or option grant included in the above
calculations is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
the years ended January 31, 2001 and 2000. No stock options were granted in
Fiscal 2002.
Years Ended January 31,
--------------------------------------
2001 2000
----------------- ------------------
Risk-free interest rate 5.24% 6.109%
Expected life 7.00 years 7.00 years
Expected volatility 93.06% 108.499%
Dividend yield 0% 0%
The effects of applying SFAS 123 for the pro forma disclosures are not
representative of the effects expected on reported net earnings (loss) per share
in future years, since the valuations are based on highly subjective assumptions
about the future, including stock price volatility and exercise patterns.
NAC has a 401(k) Savings and Profit-Sharing Plan ("401k") covering
substantially all employees who have completed one year of service with NAC.
This savings plan allows eligible employees to contribute up to 15 percent of
their compensation on a pre-tax basis. NAC matches 50% of the first 4% of the
employees' contribution. NAC contributions are vested incrementally over 6
years. The charge to operations for NAC's contribution was $8,000, $26,000 and
$67,000 for years ended January 31, 2002, 2001 and 2000, respectively.
NAC does not provide post-retirement or post-employment benefits to its
employees.
In December 2000, NAC entered into an employment agreement with Mr. James
McNamara for his employment as NAC's Chief Executive Officer. Under the
contract, Mr. McNamara was entitled to receive a stock award of 350,000 shares
of NAC's Common Stock upon the signing of the contract, and Mr. McNamara
surrendered options for the purchase of 175,000 shares of NAC's Common Stock,
which had previously been awarded to him. NAC charged to expense, and recorded
as a component of stockholders' equity ("Common stock to be issued"), the fair
value of the 350,000 shares of Common Stock at $219,000, which became issuable
upon the signing of the contract. The 350,000 shares of Common Stock were issued
in March 2001.
50
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 14 - RELATED PARTY TRANSACTIONS
NAC contracted for investor relations and other financial advisory
services from Mallory Factor Inc during Fiscal 2002 and Fiscal 2001. For Fiscal
2002 and 2001, NAC paid Mallory Factor Inc. $125,000 and $251,000, respectively.
Effective April 2001, NAC consummated an agreement to sub-lease its New York
corporate headquarters from Mallory Factor Inc. Pursuant to the terms of the
Sublease Agreement, NAC subleases its 5,500 square foot New York office
commencing April 1, 2001 and NAC issues all payments directly to the landlord in
accordance with the terms of the Master Lease The sublease agreement provides
for an annual base rent of $199,000 and the term expires July 31, 2006. Mallory
Factor, who was a member of NAC's Board of Directors from December 2000 until
January 2002, is a principal at Mallory Factor Inc.
During Fiscal 2001, NAC paid $43,000 to Automotive Personnel, LLC, for
placement services rendered in Fiscal 1998. In addition, NAC paid $69,000 in
Fiscal 2002 for outplacement services provided to the employees of NAC
terminated as a part of its restructuring plan. The President of Automotive
Personnel, LLC, was a member of NAC's Board of Directors until December 2001.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Shareholder Litigation and Regulatory Investigations
NAC and certain of its former officers and directors were named as
defendants in eleven purported class action lawsuits which were filed in the
United States District Court for the Northern District of Ohio subsequent to the
January 1998 resignation of NAC's former independent auditors, Deloitte &
Touche, LLP ("Deloitte & Touche"). The actions, which were consolidated, alleged
fraud and other violations of the federal securities laws and seeks money
damages as the result of various alleged frauds and violations of the Securities
Exchange Act of 1934, including misrepresentations about the adequacy of NAC's
allowance for credit losses and its loan underwriting practices. In April 2000,
NAC and the class action plaintiffs' representatives reached an agreement in
principle to settle the class action securities litigation. Under the terms
agreed upon, NAC agreed to pay to the plaintiffs' class $6.5 million in
consideration for, among other things, the release of all defendants from
liability. The settlement was not an admission of liability by any party. At
January 31, 2000 NAC accrued the $6.5 million settlement amount together with an
estimate of the legal fees that will be incurred in completing the settlement.
The settlement was approved and completed in Fiscal 2001. The Securities and
Exchange Commission, the United States Attorney for the Northern District of
Ohio, and the Federal Bureau of Investigation, investigated the issues raised as
the result of the resignation of Deloitte & Touche. The investigations have
concluded without any further action required by NAC.
51
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The components of litigation and other charges for Fiscal 2002, 2001 and
2000, respectively, are the following costs (in thousands):
Years Ended January 31,
---------------------------------------------
2002 2001 2000
------------ ------------ -------------
Legal and settlement cost relating to litigation matters $ - $ 5,799 $ 7,037
Crisis management consulting - 116 3,063
Financing, loan waiver and prepayment fees - - 408
Fees for special independent audits - - 523
Costs of special investigations - - 273
Other - 375 4
------------ ------------ -------------
$ - $ 6,290 $ 11,308
============ ============ =============
Shareholder Complaints
On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the Director Defendants
breached their fiduciary duties to NAC, (ii) a judgment voiding an employment
agreement with James J. McNamara and rescinding a stock exchange agreement in
which NAC acquired ZoomLot Corporation, (iii) a judgment voiding the grant of
stock options and the award of director fees allegedly related thereto, (iv) an
order directing the Director Defendants to account for alleged damages sustained
and profits obtained by the Director Defendants as a result of the alleged
various acts complained of, (v) the imposition of a constructive trust over
monies or other benefits received by the Director Defendants and (vi) an award
of costs and expenses.
On August 16, 2001, NAC received a complaint (the "Markovich Complaint")
filed by Levy Markovich ("Markovich"), a shareholder of NAC, with the Court of
Chancery of Delaware on or about August 16, 2001, against James J. McNamara,
John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC as a nominal
defendant. The Markovich Complaint principally seeks: (i) a declaration that the
Director Defendants have breached their fiduciary duties to NAC, (ii) a judgment
voiding an employment agreement with James J. McNamara and rescinding a stock
exchange agreement in which NAC acquired ZoomLot Corporation, (iii) a judgment
voiding the grant of options and the award of directors fees allegedly related
thereto, (iv) an order directing the Director Defendants to account for alleged
damages sustained and alleged profits obtained by the Director Defendants as a
result of the alleged various acts complained of, (v) the imposition of a
constructive trust over monies or other benefits received by the directors, and
(vi) an award of costs and expenses.
52
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On August 31, 2001, NAC received a complaint (the "Harbor Complaint")
filed by Harbor Finance Partners ("Harbor"), a shareholder of NAC, with the
Court of Chancery of Delaware on or about August 31, 2001, against Thomas F.
Carney, Jr., Mallory Factor, John A. Gleason, Donald Jasensky, William S.
Marshall, James J. McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C.
Garcia, and ZoomLot Corporation as Defendants and NAC as a nominal defendant.
The Harbor Complaint principally seeks: (i) a judgment requiring the Director
Defendants to promptly schedule an annual meeting of shareholders within thirty
(30) days of the date of the Harbor Complaint; (ii) a judgment declaring that
the Director Defendants breached their fiduciary duties to NAC and wasted its
assets; (iii) an injunction preventing payment of monies and benefits to James
J. McNamara under his employment agreement with NAC and requiring Mr. McNamara
to repay the amounts already paid to him thereunder; (iv) a judgment rescinding
the agreement by NAC to purchase ZoomLot and refunding the amounts it paid; (v)
a judgment rescinding the award of monies and options to the directors on
December 15, 2000 and requiring the directors to repay the amounts they received
allegedly related thereto; (vi) a judgment requiring the defendants to indemnify
NAC for alleged losses attributable to their alleged actions; and (vii) a
judgment awarding interest, attorney's fees, and other costs, in an amount to be
determined.
On October 12, 2001, NAC received a complaint (the "Zadra Complaint")
filed by Robert Zadra, a shareholder of NAC, with the Supreme Court of the State
of New York on or about October 12, 2001 against James J. McNamara, John A.
Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, Thomas F. Carney, Jr., and NAC as Defendants. The
Zadra Complaint seeks (i) a declaration that the Director Defendants have
breached their fiduciary duties to NAC, (ii) a judgment voiding the grant of
options and the award of directors fees, (iii) a judgment voiding an employment
agreement with James J. McNamara, (iv) an order directing the Director
Defendants to account for alleged damages sustained and alleged profits obtained
by the Director Defendants as a result of the alleged various acts complained
of, and (v) an award of costs and expenses.
NAC intends to vigorously defend each of the respective claims made in the
Academy Complaint, Markovich Complaint, Harbor Complaint and Zadra Complaint, as
it believes that the claims have no merit. By order of the Delaware Chancery
Court on November 12, 2001, the Academy, Markovich and Harbor Complaints were
consolidated and the Academy Complaint was deemed the operative compliant. A
motion to dismiss the Academy Complaint has been filed but has not yet been
decided. NAC also intends to vigorously defend the Zadra Complaint. A motion to
dismiss the Zadra Complaint also has been filed. As each of these litigation
matters are in a very early stage, no prediction is made with respect to their
respective ultimate outcomes.
53
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Self-Insurance Reserves for Property Damage and Personal Injury Claims.
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In Fiscal
1996, NAC disposed of its rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by NAC. NAC also had a dealership operation
that sold cars that were retired from the rental fleet, primarily to member
dealers of NAC's financial services business. That operation was discontinued in
Fiscal 1997 as the result of NAC's discontinuation of its automobile rental
operations and the dealership are included in the results of discontinued
operations (see Note 3).
NAC maintained and continues to maintain self-insurance for claims
relating to bodily injury or property damage from accidents involving the
vehicles rented to customers by its discontinued automobile rental operations.
NAC was, when required by either governing state law or the terms of its rental
agreement, self-insured for the first $1.0 million per occurrence, and for
losses in excess of $5.0 million per occurrence, for bodily injury and property
damage resulting from accidents involving its rental vehicles. NAC was also
self-insured, up to certain retained limits, for bodily injury and property
damage resulting from accidents involving NAC vehicles operated by employees
within the scope of their employment. In connection therewith, NAC established
certain reserves in its financial statements for the estimated cost of
satisfying those claims.
Prior to Fiscal 2000, NAC estimated its future payments for self-insurance
liabilities based upon an actuarial analysis of reported and incurred but not
reported claims. In Fiscal 2002, 2001 and 2000, due to the number of years since
NAC exited the rental car business and the reduction in the number of open
claims, NAC used the services of a claims review specialist and/or litigation
experts to review all open claims and determine the required case reserve on a
claim by claim basis. Changes in estimates of liabilities resulting from this
analysis are recognized in income (as a component of the results of the
discontinued auto rental operations (see Note 3)) in the period in which the
estimates are changed.
NAC is named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to passengers in the vehicle. Initially, the Plaintiffs
appeared to be recovering well from the injuries sustained. However,
subsequently plaintiff Simpson underwent an accident-related surgery on his back
for removal of a shunt, during which nerves in the spine were severed causing
paraplegia. The Plaintiffs are suing for damages resulting from their injuries
and the subsequent paraplegia suffered by plaintiff Simpson. The doctor and
hospital that performed the surgery were also named as defendants by Plaintiffs
and have been impleaded by NAC under a theory of medical malpractice. Damages
alleged in the complaint are not specified, although in discovery Plaintiffs
have indicated they are seeking millions of dollars in compensatory and other
damages. The matter is scheduled for trial during 2003. NAC maintains a number
of defenses relating to this matter. NAC has almost exhausted its self-insured
retention of $500,000 on this case and NAC attempted to get its excess carrier,
the Transamerica Insurance Company ("TIC"), to take over the defense of this
action and indemnify NAC up to the policy limits. However, as a result TIC has
filed a suit (TIC Co. v. Darrell Smith, Aaron Simpson and NAC in the United
54
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
States Court for the Northern District of Illinois) for a declaratory judgment
seeking a ruling that it has no liability as an "excess insurer" of NAC in
connection with the Smith and Simpson action and that under Illinois law, NAC's
(and thereafter TIC's) financial responsibility is capped at an amount for less
than what the Plaintiffs are seeking in the state court action. The federal
court initially dismissed this complaint prior to NAC answering on the grounds
that the matter to be decided was premature as the original action had not be
resolved. TIC made a motion to have the court reconsider its decision and NAC
has filed a response arguing that the court should take action on this matter at
this time. The Court granted TIC's motion and has permitted the action to
proceed. NAC's answer is due May 2002.
Because of the uncertainties related to these two matters, as well as
several smaller legal proceedings involving NAC's former rental operations and
self-insurance claims, it is difficult to project with precision the ultimate
effect the adjudication or settlement of these matters will have on NAC. At
January 31, 2002 NAC had accrued $769,000 to cover all outstanding
self-insurance liabilities. As additional information regarding NAC's potential
liabilities becomes available, NAC will revise the estimates as appropriate.
Other Litigation
In the normal course of its business, NAC is named as defendant in legal
proceedings. It is the policy of NAC to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate.
Employment Agreement
In December 2000, NAC entered into an employment agreement with Mr. James
McNamara for his employment as NAC's Chief Executive Officer. Under the
contract, Mr. McNamara is entitled to receive a $1.0 million cash bonus
immediately upon NAC's Common Stock being listed on the NASDAQ Stock Market, the
American Stock Exchange or the New York Stock Exchange; provided, however, that
such listing shall have occurred prior to December 31, 2003.
55
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease Commitments
NAC leases office and warehouse facilities in New York, NY and Solon, OH,
respectively, under leases expiring at various dates. NAC's ZoomLot subsidiary,
has subleased its office in Phoenix, AZ to an unaffiliated third party for the
remainder of its term which expires in September 2006 at a rate of $253,000 per
annum. In addition to the lease base rents, NAC is generally required to pay
increases over base period amounts for taxes and other operating expense. At
January 31, 2002, future minimum payments under noncancellable operating leases,
net of the effects of the sublease, are as follows:
Fiscal Year Amount
----------- ------
2003 $ 241
2004 228
2005 211
2006 199
2007 99
------
$ 978
======
NOTE 16 - RESTRUCTURING
During January 2001, NAC committed to a plan of restructuring its
operations and relocating its corporate offices from Solon, Ohio to New York
City, New York. As a part of the plan, and in accordance with EITF Issue No.
94-3, "Liabilities Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity", NAC recorded a restructuring charge of $1.8
million which is comprised of a write-down for property and equipment of
$922,000 and the accrual of expenses aggregating $855,000. The accrual at
January 31, 2001 represents the costs to be incurred in Fiscal 2002 for the
completion of the steps contained in the restructuring plan. The nature of the
costs accrued and the changes in the amounts accrued during Fiscal 2002 are as
follows (in thousands):
Year Ended January 31, 2002
-----------------------------------------------------------------
Accrued at Changes in Accrued at
Beginning of Year Incurred Estimates Year End
---------------- -------------- -------------- --------------
Employee termination costs $ 575 $ (617) $ 42 $ -
Lease terminations 130 (107) (23) -
Outplacement fees and other 150 (191) 41 -
---------------- -------------- -------------- --------------
Total $ 855 $ (915) $ 60 $ -
================ ============== ============== ==============
56
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited quarterly financial information for
Fiscal 2002, 2001 and 2000 (in thousands, except per share amounts):
Quarter
-----------------------------------------------------------------
First Second Third Fourth
------------- ------------- -------------- --------------
FISCAL 2002
Total Revenue(1) $ 226 $ 48 $ 87 $ 84
============= ============= ============== ==============
Loss from continuing operations(1) $ (758) $ (901) $ (1,395) $ (2,434)
Discontinued operations, net of tax(1) (1,596) (1,787) (6,552) 1,155
------------- ------------- -------------- --------------
Net loss $ (2,354) $ (2,688) $ (7,947) $ (1,279)
============= ============= ============== ==============
Basic and Diluted (loss) Earnings Per Share(2)
Continuing operations $ (.06) $ (.08) $ (.12) $ (.21)
Discontinued operations (.14) (.15) (.56) .10
------------- ------------- -------------- --------------
Net loss per share $ (.20) $ (.23) $ (.68) $ (.11)
============= ============= ============== ==============
FISCAL 2001
Total Revenue(1) $ 980 $ 1,293 $ 1,336 $ 493
============= ============= ============== ==============
Loss from continuing operations(1) $ (2,380) $ (1,505) $ (10) $ (42,612)
Discontinued operations, net of tax(1) (3,343) 1,366 406 795
------------- ------------- -------------- --------------
Net loss $ (5,723) $ (139) $ 396 $ (41,817)
============= ============= ============== ==============
Basic and Diluted (loss) Earnings Per Share(2)
Continuing operations $ (.08) $ (.04) $ - $ (3.21)
Discontinued operations (.12) .04 .01 .06
------------- ------------- -------------- --------------
Net loss per share $ (.20) $ - $ .01 $ (3.15)
============= ============= ============== ==============
FISCAL 2000
Total Revenue(1) $ 425 $ 480 $ 576 $ 803
============= ============= ============== ==============
Loss from continuing operations(1) $ (3,035) $ (5,256) $ 788 $ (13,161)
Discontinued operations, net of tax(1) (1,108) 559 (1,951) 9,849
------------- ------------- -------------- --------------
Net loss $ (4,143) $ (4,697) $ (1,163) $ (3,312)
============= ============= ============== ==============
Basic and Diluted (loss) Earnings Per Share(2):
Continuing operations $ (.11) $ (.18) $ .02 $ (.48)
Discontinued operations (.03) .02 (.06) $ .36
------------- ------------- -------------- --------------
Net loss per share $ (.14) $ (.16) $ (.04) $ (.12)
============= ============= ============== ==============
(1) Total Revenue, loss from continuing operations and loss from discontinued
operations has been reclassified from prior quarters to conform to the current
presentation.
(2) The sum of the quarters do not equal year to date. A large fluctuation in
the fourth quarter fiscal year 2001 is the result of NAC's repurchase of
25,943,360 common shares. See Note 12
57
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ANGELIKA FILM CENTERS, LLC
December 27, 2001 and December 28, 2000
58
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ANGELIKA FILM CENTERS, LLC
We have audited the accompanying balance sheets of Angelika Film Centers, LLC (a
Delaware limited liability company) as of December 27, 2001 and December 28,
2000, and the related statements of income, members' equity, and cash flows for
the years then ended. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Angelika Film Centers, LLC as
of December 27, 2001 and December 28, 2000, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Cleveland, Ohio
March 8, 2002
59
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
BALANCE SHEETS
(dollar amounts in thousands)
December 27, 2001 and December 28, 2000
DECEMBER 27, DECEMBER 28,
2001 2000
-------------------- --------------------
ASSETS
Current Assets
Cash $ 1,081 $ 820
Trade and other receivables 7 37
State and local income taxes receivable - 27
Due from affiliates (Note E) 348 103
Concession inventories (Note A) 9 20
Prepaid expenses and other current assets 175 232
-------------------- -------------------
Total current assets 1,620 1,239
Property, Equipment and Leasehold Improvements, net
(Note B) 549 621
Goodwill (Note A) 8,659 9,250
Deposits 75 89
-------------------- -------------------
TOTAL ASSETS $ 10,903 $ 11,199
==================== ===================
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,076 $ 496
Deferred income and other obligations 35 58
-------------------- -------------------
Total current liabilities 1,111 554
Deferred Rental Obligations (Note C) 1,271 1,052
-------------------- -------------------
Total liabilities 2,382 1,606
Commitments and Contingencies (Note D) - -
Members' Equity (Note A) 8,521 9,593
-------------------- -------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 10,903 $ 11,199
==================== ===================
The accompanying notes are an integral part of these financial statements.
60
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENTS OF INCOME
(dollar amounts in thousands)
For the years ended December 27, 2001 and December 28, 2000
DECEMBER 27, DECEMBER 28,
2001 2000
----------------- ----------------
Revenue
Theatre income $ 5,756 $ 5,416
Theatre concessions 655 621
Cafe concession sales 416 353
Rental and other income 131 72
--------- ----------
Total operating income 6,958 6,462
Operating costs and expenses
Film Rental 2,243 2,087
Operating costs 3,127 2,509
General and administrative expenses 98 164
Depreciation and amortization 693 692
--------- ----------
Total operating costs and expenses 6,161 5,452
--------- ----------
Income from operations 797 1,010
--------- ----------
Other income
Interest income - 28
--------- ----------
Total other income - 28
--------- ----------
Income before state and local tax expense 797 1,038
State and local income tax expense (Note A) 51 48
--------- ----------
NET INCOME $ 746 $ 990
========= ==========
The accompanying notes are an integral part of these financial statements.
61
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENTS OF MEMBERS' EQUITY
(dollar amounts in thousands)
For the years ended December 27, 2001 and December 28, 2000
NATIONAL CITADEL
CINEMAS, FA SUTTON HILL CINEMAS,
INC. INC. ASSOCIATES INC. TOTAL
------------- ------------ ---------------- ------------- ------------
BALANCE AT DECEMBER 31, 1999 $ - $ 8,350 $ 1,669 $ - $ 10,019
Distribution to members (557) (629) (116) (114) (1,416)
Transfer of interest in AFC
(Note A) 4,955 (4,957) (1,609) 1,611 -
Net income 398 428 56 108 990
------------- ------------ ------------ ------------- ------------
BALANCE AT DECEMBER 28, 2000 4,796 3,192 - 1,605 9,593
Distribution to members (909) (606) - (303) (1,818)
Net income 373 248 - 125 746
------------- ------------ ------------ ------------- ------------
BALANCE AT DECEMBER 27, 2001 $ 4,260 $ 2,834 $ - $ 1,427 $ 8,521
============= ============ ============ ============= ============
The accompanying notes are an integral part of these financial statements.
62
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
For the years ended December 27, 2001 and December 28, 2000
DECEMBER 27, DECEMBER 28,
2001 2000
------------ ---------------
Cash Flows from Operating Activities:
Net income $ 746 $ 990
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 693 692
Deferred rent expense 219 242
Changes in assets and liabilities associated with
operating activities:
Trade and other receivables 30 (22)
State and local income taxes receivable 27 (27)
Due to (from) affiliates (245) (89)
Concessions inventories 11 (11)
Prepaid expenses and other current assets 57 (176)
Deposits 14 -
Accounts payable and accrued liabilities 580 132
State and local income taxes payable - (16)
Deferred income and other obligations (23) 8
--------- ----------
Net cash provided by operating activities 2,109 1,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and
leasehold improvements (30) (14)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to members (1,818) (1,416)
--------- ----------
NET INCREASE IN CASH 261 293
Cash at beginning of year 820 527
--------- ----------
Cash at end of period $ 1,081 $ 820
========= ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes $ 51 $ 91
========= ==========
The accompanying notes are an integral part of these financial statements.
63
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
December 27, 2001 and December 28, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Angelika Film Centers LLC (AFC) is a Delaware limited liability company,
whose membership interest at December 27, 2001 is held 33.34% by FA, Inc.
(FA), 16.66% by Citadel Cinemas, Inc. (Citadel) and 50% by National Cinemas,
Inc. (NCI), a wholly-owned subsidiary of National Auto Credit, Inc.
NCI acquired its 50% interest from FA on April 5, 2000. Prior to NCI's
purchase of its 50% interest, FA's share of profits and losses was 83.34%,
subsequent to that date it now shares 33.34% of profit and losses.
On July 28, 2000, Citadel acquired its 16.66% interest from Sutton Hill
Associates. Citadel's share of profit and losses in AFC was effective as of
June 1, 2000 as defined in the purchase agreement.
Fiscal Year
AFC`s fiscal year ends on the Thursday closest to December 31. The twelve
months ending December 27, 2001 and December 28, 2000 contained 52 weeks.
Unless stated otherwise, references herein are to the AFC's fiscal years.
Cash and Cash Equivalents
AFC considers all highly liquid investments and money market accounts with
the original maturities of three months or less to be cash equivalents.
Concession Inventories
Inventories are comprised of concession goods and are stated at lower of
cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which
range from 7 to 12 years for leasehold improvements, furniture, fixtures and
equipment. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful lives of
the related improvements.
64
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 27, 2001 and December 28, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
AFC is a limited liability company; therefore, no federal income taxes have
been provided for its operations. Any liability or benefit from the AFC's
income or losses is the responsibility of the individual members. AFC
provides for state and city income tax liabilities in accordance with the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").
Goodwill
AFC originally recorded $11,810,000 as goodwill in conjunction with an asset
acquisition during fiscal year 1996. AFC licenses the use of the name
"Angelika" under a licensing agreement. The Company had an independent
appraisal, which was used to determine the fair value of assets acquired.
The Company is amortizing goodwill on a straight-line basis over a
twenty-year period. Accumulated amortization of goodwill is $3,151,000 and
$2,560,000 at December 27, 2001 and December 28, 2000, respectively.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses were
approximately $357,000 and $40,000 for the years ended December 27, 2001 and
December 28, 2000, respectively.
Fair Value Financial Instruments
The Company has various financial instruments including cash and cash
equivalents, trade and other receivables and accounts payable and accrued
liabilities. These instruments are short-term in nature and the Company has
determined that their carrying values approximate estimated fair values.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets pursuant to Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121") which requires impairment losses to be recorded on long-lived assets
used in operations when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management periodically
evaluates property and equipment and intangible assets for impairment
whenever events or changes in circumstances indicate the assets may be
impaired. This evaluation consists of comparing estimated future cash flows
(undiscounted and without interest charges) over the remaining life of the
asset to its carrying value. When such evaluation results in a deficiency,
the carrying amount of the asset is reduced to its estimated fair value
through a charge to income. No impairment was recorded during the 12 months
ended December 27, 2001 and December 28, 2000.
65
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 27, 2001 and December 28, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Estimates
The preparation of financial statements and the accompanying notes thereto,
in conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and
expenses during the respective reporting periods. Actual results could
differ from those estimates.
New Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 141, Business Combinations, and SFAS 142, Goodwill and Intangible
Assets. SFAS 141 is effective for all business combinations completed after
June 30, 2001. SFAS 142 is effective for fiscal years beginning after
December 15, 2001; however, certain provisions of this Statement apply to
goodwill and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS 142. Major provisions of these Statements and their
effective dates for NAC are as follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001;
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability;
o Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002,
all previously recognized goodwill and intangible assets with
indefinite lives will no longer be subject to amortization;
o Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator; and
o All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
AFC currently recognizes a monthly charge of $49,200 for the amortization of its
goodwill recorded in conjunction with the asset acquisition during fiscal year
1996. AFC is currently evaluating the potential impact, if any, of the adoption
of SFAS 142 will have on its results of operations, cash flows or financial
position.
66
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 27, 2001 and December 28, 2000
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 27, 2001 and December 28, 2000, a summary of property, equipment
and leasehold improvements is as follows (in thousands):
DECEMBER 27, DECEMBER 28,
2001 2000
------------------------------
Leasehold improvements $ 525 $ 525
Furniture, fixtures and equipment 537 507
------------------------------
1,062 1,032
Less accumulated depreciation 513 411
------------------------------
Property, equipment and
leasehold improvements, $ 549 $ 621
==============================
NOTE C - LEASE COMMITMENTS
AFC leases a theater and office space under non-cancelable operating leases
which mature in August 2026 and January 2002, respectively. Rental expense
was $845,000, including non-cash rent of $219,000 and $242,000, for the
years ended December 27, 2001 and December 28, 2000, respectively. At
December 27, 2001, future minimum rental commitments for the next five years
were as follows (in thousands):
2002 $ 665
2003 657
2004 657
2005 657
2006 657
Thereafter 18,321
------------
TOTAL MINIMUM LEASE PAYMENTS $21,614
============
AFC has scheduled rent increases under the theater lease. The accompanying
statement of operations reflects rent expense on a straight-line basis over
the term of the theater lease. Deferred rental obligations of $1,271,000 and
$1,052,000 are reflected in the accompanying balance sheets as of December
27, 2001 and December 28, 2000, respectively.
67
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 27, 2001 and December 28, 2000
NOTE D - COMMITMENTS AND CONTINGENCIES
AFC has been involved in various lawsuits. The ultimate outcome of these
lawsuits is not always determinable; however, in the opinion of management,
based in part upon advice of counsel, the amount of losses that might be
sustained, if any, would not materially affect the financial position of
AFC.
NOTE E - RELATED PARTY TRANSACTIONS
City Cinemas Corporation (City Cinemas), an affiliate of Sutton Hill
Associates, operates and manages the Angelika Film Centers pursuant to a
management agreement (the Agreement). City Cinemas operates the theater in
accordance with the terms of a management agreement entered into with the
AFC in August 1996. City Cinemas is to be paid an annual management fee of
$125,000 and a bonus fee contingent on the attainment of certain income
levels (as defined in the Agreement). Management and bonus fee expense
amounted to the base fee of $125,000 for the years ended December 27, 2001
and December 28, 2000. Effective on June 1, 2000, this management contract
was assigned to Citadel.
AFC's leasehold interest for the Angelika Theater is guaranteed by both the
Reading Company and Reading Entertainment, Inc. through the day prior to the
15th anniversary of the lease commencement.
At December 27, 2001 and December 28, 2000, AFC has an aggregate receivable
balance of $348,000 and $103,000, respectively, due from City Cinemas and
Citadel. This amount is comprised of monies collected by those affiliated
entities for gift certificates and credit card purchases that are then
remitted to AFC.
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants due to disagreements on
accounting and financial disclosure during the 24 months prior to January 31,
2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of NAC, as of April 15, 2002 are as
follows:
Name Age Position
-------------------------- ----- ----------
James J. McNamara 53 Chairman of the Board and
Chief Executive Officer
Robert V. Cuddihy, Jr 42 Chief Financial Officer and
Treasurer
Herbert F. Kozlov 49 Secretary
Thomas F. Carney, Jr. 48 Director
John A. Gleason 53 Director
Henry Y. L. Toh 44 Director
William S. Marshall 84 Director
JAMES J. McNAMARA has been Chairman of the Board and Chief Executive
Officer since November 3, 2000. Mr. McNamara has been a Director of NAC since
February 20, 1998 and previously served as its Chairman from April 1998 to
November 1999. Mr. McNamara has also been President of Film Management
Corporation (a film company) since 1995, and he has been President and Chief
Executive Officer of Celebrity Entertainment, Inc. (an entertainment company)
since 1992. Mr. McNamara was Chairman of the Board and Chief Executive Officer
of Princeton Media Group, Inc. (a magazine publisher) from 1994 to 1998. A
subsidiary of Princeton Media Group, Inc. and Celebrity Entertainment, Inc. each
effected an assignment of their respective assets for the benefit of creditors
in 1998.
ROBERT V. CUDDIHY, JR. has been NAC's Chief Financial Officer and Treasurer
since September 2001. Mr. Cuddihy was an independent financial consultant to NAC
from May 2001 to August 2001. From July 1987 to March 2001, Mr. Cuddihy was the
Chief Financial Officer of HMG Worldwide Corporation, a company engaged in
in-store marketing and retail store fixturing design and manufacture, and also
served as a Director from February 1998 to May 2001. HMG Worldwide Corporation
filed a petition in bankruptcy in October 2001. From July 1981 to July 1987, Mr.
Cuddihy was with KMPG Peat Marwick, Certified Public Accountants, where he last
served as a senior audit manager.
69
HERBERT F. KOZLOV has been NAC's Secretary since April 2001. Mr. Kozlov is
a member of the law firm of Reed Smith LLP. Mr. Kozlov's former firm of Parker
Duryee, Rosoff & Haft, which had been serving as counsel to NAC, merged with
Reed Smith LLP effective January 1, 2002. Mr. Kozlov has been a practicing
attorney for more than ten years. Mr. Kozlov is also a director of Magnum
Entertainment & Sports, Inc. (f/k/a/ Worldwide Entertainment & Sports Corp.), a
company formerly engaged in the business of providing management, agency and
marketing services to professional athletes and entertainers, and Alpha
Hospitality Corporation, an operator of gaming facilities, and a number of
privately held companies.
THOMAS F. CARNEY, JR. has been a Director since December 15, 2000. Mr.
Carney is an attorney engaged in the private practice of law at the Carney Legal
Group, P.A., a law firm based in Florida. Mr. Carney has also served as Chairman
of the Board of Carney and Company, Inc. ("CCI"), which is principally engaged
in investment banking and holding company operations, from its formation in
December 1983 to the present. CCI's subsidiaries include The Carney Group, Inc.,
which is engaged in the business of investment banking, and Renard Petroleum
Corporation, which was formerly engaged in the business of oil exploration and
development.
JOHN A. GLEASON has been a Director of NAC since April 5, 2000. Mr. Gleason
previously served as Director of NAC from February 20, 1998 to September 28,
1999. From 1995 to 1998, Mr. Gleason served on NAC's Dealer Advisory Board,
serving as Chairman of such panel from 1996 to 1998. Mr. Gleason has been the
President and principal of Automax, Inc., an independent car dealership since
1987. Mr. Gleason has been the President of New Franklin, Inc., an automobile
finance consulting firm, since 1992 and has been a partner in Coslar Properties
LLC, a real estate firm, since 1995.
HENRY Y. L. TOH has been a Director of NAC since December 22, 1998. Mr. Toh
is also a Director of three other public companies, I-Link Incorporated (an
Internet telephone company) since 1992, Teletouch Communications, Inc. (a paging
and telecom services provider) since December 2001 and Bigmar, Inc. (an
international pharmaceutical firm) since April 2002. Mr. Toh has been a director
of Four Vines International, Inc. (a wine producer and distributor) since 1996
and has been the principal officer of Four M. International, Inc. (a private
investment entity) since 1992.
WILLIAM S. MARSHALL has been a Director of NAC since April 5, 2000. Mr.
Marshall twice previously served as director of NAC from 1983 to 1993 and from
March 9, 1998 to September 29, 1999. Mr. Marshall has been an attorney engaged
in private practice since April 1985. For more than four years prior thereto,
Mr. Marshall was a partner/stockholder of the Miami, Florida office of the law
firm Baskin & Steingut, P.A.
70
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
all NAC officers and directors, and persons who own more than ten percent of a
registered class of NAC equity securities, to file reports of ownership and
changes in ownership of equity securities of NAC with the SEC and any applicable
stock exchange. Officers, directors and greater than ten percent stockholders
are required by SEC regulation to furnish NAC with copies of all Section 16(a)
forms that they file. Based solely upon a review of Forms 3, 4, and 5 furnished
to NAC pursuant to the Exchange Act during Fiscal 2002, NAC believes that none
of its officers, directors and greater than 10% beneficial owners failed to file
such Forms on a timely basis during the most recent fiscal year. For Fiscal 2001
Messrs. Carney, Gleason, Marshall, McNamara and Toh failed to file a Form 4 and
failed to file timely a Form 5.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows all compensation paid by NAC for the fiscal years
ended January 31, 2002, 2001 and 2000 to (i) any persons who served as Chief
Executive Officer or President of NAC during Fiscal 2002 and (ii) the
individuals, other than persons who served as the Chief Executive Officer, who
served as an executive officer of NAC at January 31, 2002 and whose income
exceeded $100,000.
---------------------------------------------------------------------------------------------------------------------
Annual Compensation
-------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Name and Principal Position Fiscal Year Salary Bonus Other Annual
Compensation
---------------------------------------------------------------------------------------------------------------------
James J. McNamara, 2002 $ 500,000 $ 250,000 $ -
Chairman and CEO(1),(3) 2001 $ 134,856 $ 750,000 $ 10,250
2000 $ - $ - $ 10,250
---------------------------------------------------------------------------------------------------------------------
Robert V. Cuddihy, Jr. 2002 $ 16,666 $ 16,666 $ 77,500
Chief Financial Officer(4) 2001 $ - $ - $ -
2000 $ - $ - $ -
---------------------------------------------------------------------------------------------------------------------
Robert Dixon 2002 $ - $ - $ 198,479
Chief Financial Officer(5) 2001 $ - $ - $ -
2000 $ - $ - $ -
---------------------------------------------------------------------------------------------------------------------
Sean P. Maroney 2002 $ 79,312 $ - $ 89,365
Director of Financial 2001 $ 101,617 $ 4,998 $ 6,900
Reporting(6) 2000 $ 91,731 $ 6,202 $ 6,598
---------------------------------------------------------------------------------------------------------------------
Raymond Varcho 2002 $ 141,916 $ - $ 141,653
Secretary(7) 2001 $ 196,154 $ 4,998 $ 15,115
2000 $ 165,416 $ 6,440 $ 15,441
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------
Long Term Compensation
------------------------------------
Awards
----------------------------------------------------------------
Number of Securities Underlying All Other Compensation(2)
Options/SARs
----------------------------------------------------------------
- $ 68,740
750,000 $ 224,750
100,000 $ 583,654
----------------------------------------------------------------
- $ -
- $ -
- $ -
----------------------------------------------------------------
- $ -
- $ -
- $ -
----------------------------------------------------------------
- $ -
- $ 7,205
- $ 4,802
----------------------------------------------------------------
- $ -
- $ 3,654
- $ 8,858
----------------------------------------------------------------
(*) Employees who were Directors did not receive any additional
compensation for serving on the Board of Directors.
(1) The amounts included in "Other Annual Compensation" are the
imputed value for the use of Company automobiles and related tax
reimbursement.
(2) "All Other Compensation" includes aggregate stock awards
pursuant to employment agreements, executive life and disability
insurance, vision, 401(k) match and executive plan medical premiums.
71
(3) Pursuant to Mr. McNamara's Employment Agreement dated December
15, 2000, options to purchase 175,000 shares of NAC's Common Stock
(granted in fiscal years 1999 and 2000) were canceled.
(4) Mr. Cuddihy became an employee of NAC in September 2001. For
Mr. Cuddihy, the amount in "All Other Compensation" includes amounts
paid to Mr. Cuddihy for services he performed for NAC as an independent
consultant from May 2001 to September 2001.
(5) Mr. Dixon, a consultant to NAC, provided financial services to
NAC from February 2001 to November 2001. Additionally, Mr. Dixon served
in the capacity of NAC's principal financial officer until September
2001.
(6) Mr. Maroney was NAC's Director of Financial Reporting until
April 2001. For Mr. Maroney, the amount in "All Other Compensation"
includes amounts paid to Mr. Maroney pursuant to a severance
arrangement with NAC.
(7) Mr. Varcho was NAC's internal corporate counsel and corporate
Secretary until April 2001. For Mr. Varcho, the amount in "All Other
Compensation" includes amounts paid to Mr. Varcho pursuant to a
severance arrangement with NAC.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NAC's Board of Directors did not grant options during Fiscal 2002 to any
Executive Officers of NAC.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
There were no exercises of options or stock appreciation rights by
officers or directors during Fiscal 2002.
72
EMPLOYMENT AGREEMENTS
Employment Agreement with James J. McNamara
On December 15, 2000, NAC's Board of Directors approved an Employment
Agreement, effective as of November 3, 2000, with James J. McNamara. Under the
terms of that agreement, Mr. McNamara shall be employed as Chief Executive
Officer for an initial term of three years, until December 31, 2003, with a base
salary of $500,000 per year. In the event that NAC should achieve in any year
certain performance milestones with respect to the market price of its Common
Stock, as set forth in Exhibit A of the Employment Agreement, Mr. McNamara will
also receive a target cash bonus of $300,000, which may also be increased by the
Board if the Board believes it appropriate to reward the Chief Executive
Officer's performance for that year. Those performance milestones are as
follows. Mr. McNamara will receive 25% of the target cash bonus if the market
price of the Common Stock is 110% of such market price at the end of the prior
employment year. Mr. McNamara will receive 50% of the target cash bonus if the
market price of the Common Stock is 120% of such market price at the end of the
prior employment year; Mr. McNamara will receive 100% of the target cash bonus
if the market price of the Common Stock is 130% of such market price at the end
of the prior employment year. The market price of the Common Stock as of the
commencement of Mr. McNamara's Employment Agreement was $0.65.
Following the initial three-year term, the Employment Agreement will
automatically renew for consecutive year-long terms unless 90 days prior notice
is given by either party. NAC may terminate the Employment Agreement at any time
for cause, and Mr. McNamara may terminate at any time in his discretion.
In the event of a change of control resulting in his separation from NAC,
Mr. McNamara would also receive a $250,000 target bonus for any years remaining
under the Employment Agreement. Mr. McNamara has also received a lump-sum
payment of $750,000 as a signing bonus and compensation for past services
rendered to NAC and he will be entitled to an additional bonus in the amount of
$1,000,000 in the event that NAC's Common Stock is listed on the NASDAQ National
Stock Market, Inc., the American Stock Exchange or the New York Stock Exchange.
As a signing bonus, Mr. McNamara was granted the right to 350,000 shares of
Common Stock. Mr. McNamara was previously granted options to purchase 175,000
shares of restricted Common Stock, which he surrendered to NAC, prior to the
issuance of the shares constituting his signing bonus.
The employment agreement also grants Mr. McNamara the right to options to
purchase an additional 750,000 shares of NAC Common Stock with an exercise price
equal to the average of the closing bid prices of the Common Stock on the OTCBB
for the five trading days preceding December 16, 2000 or $.664, which also may
be exercised by means of cashless exercise. Such options shall have a term of 10
years from the date of grant; and shall be fully vested and be exercisable as
follows: (a) options with respect to 250,000 shares shall vest and be
exercisable immediately; (b) options with respect to 250,000 shares shall vest
and be exercisable on and after December 15, 2001; and (c) options with respect
to 250,000 shares shall vest and be exercisable on and after December 15, 2002;
provided, however, that upon a change of control, as defined in the Employment
Agreement, all options that have not yet vested and become exercisable shall be
deemed to have vested and have become exercisable as of the time immediately
preceding such change of control. Further, the options shall be issued under a
qualified omnibus long-term incentive plan that will provide for incentive stock
options pursuant to the Internal Revenue Code of 1986, as amended (the "Code").
From time to time, the Board may, in its discretion, increase Mr. McNamara's
base salary and grant additional options to Mr. McNamara, on such terms as the
Board determines.
73
The Agreement also provides for certain payments in the event of a
termination without cause by NAC or a termination for good reason by Mr.
McNamara as follows: NAC will pay to Mr. McNamara one dollar ($1) less than the
amount that would constitute an "excess parachute payment" under Code Section
280G of the Internal Revenue Code. NAC shall pay to Mr. McNamara such amount in
lump sum cash payment as soon as practicable following the effective date of
such termination. NAC shall also continue to provide Mr. McNamara with all
employee benefits and perquisites, which he was participating in or receiving at
the effective date of termination (or if greater, at the end of the prior year)
for two years following termination.
If it is determined by reason of any payment, or the occurrence of an
option vesting, pursuant to the terms of the Employment Agreement (or upon any
other plan, agreement or program) upon a Change in Control, as defined in the
Employment Agreement (collectively "the Payment"), the Executive would be
subject to the excise tax imposed by Code Section 4999 (the "Parachute Tax"),
then Mr. McNamara shall be entitled to receive an additional payment or payments
(a "Gross-Up Payment") in an amount such that, after payment by Mr. McNamara of
all taxes (including any Parachute Tax) imposed upon the Gross-Up Payment, Mr.
McNamara will retain an amount of the Gross-Up Payment equal to the Parachute
Tax imposed upon the Payment.
Employment Agreement with Robert V. Cuddihy, Jr.
Effective December 31, 2001, NAC consummated an employment agreement with
Robert V. Cuddihy, Jr. Under the terms of the agreement, Mr. Cuddihy shall be
employed as Chief Financial Officer and Treasurer for an initial term of three
years, until December 31, 2004, with a base salary of $240,000 per year and a
minimum annual bonus of $20,000 per year. Mr. Cuddihy is also entitled to NAC
employee benefits of health insurance, 401-K plan and related programs.
Following the initial three year term, the agreement will automatically renew
for consecutive year-long terms unless 90 days prior written notice is given by
either party. In the event that the agreement is terminated by NAC without
cause, Mr. Cuddihy shall receive one year compensation in the form of severance
compensation.
1993 EQUITY INCENTIVE PLAN
NAC's 1993 Equity Incentive Plan (the "Plan") provides for the grant of
Incentive Options, Non-Qualified Options, Stock Appreciation Rights, Restricted
Stock Appreciation Rights, Restricted Stock and Common Stock (all of which are
sometimes collectively referred to as "Awards") to the Executive Officers
referred to in the cash compensation table as well as to other employees of NAC
and its subsidiaries and any former employee of NAC eligible to receive an
assumed or replacement award or award settlement. Awards may be granted singly,
in combination or in tandem. In addition, Awards may be made in combination, or
in tandem with, in replacement of, or as the payment for grants or rights under
any other compensation plan of the NAC, including the Option Plan or the plan of
any acquired entity.
The total number of shares available for options or awards granted under
this Plan is 2,200,000 shares. There were 42,848, 14,641 and 19,211 shares of
restricted stock cancelled under this Plan during the years ended January 31,
2002, 2001 and 2000, respectively. There were 128,352 shares available for
future stock awards or option grants at January 31, 2002. The shares to be
issued under the Plan may be authorized and unissued shares, treasury shares or
a combination thereof. The Compensation Committee (the "Committee") administers
the Plan. The Committee is comprised of three non-employee Directors, all of
whom must be "disinterested persons" as defined under the Plan.
74
Any compensation income realized by a participant with respect to any
Award granted under the Plan shall be subject to withholding by NAC of income,
employment or other taxes required by federal, state, local or foreign law. The
Committee may in its discretion satisfy the withholding requirement by causing
the entity or subsidiary employing the participant to withhold the appropriate
amount of any and all of such taxes from any other compensation otherwise
payable to such participant.
REMUNERATION OF DIRECTORS
For services in Fiscal 2002, all non-employee directors received: (1)
compensation at the annual rate of $55,000 plus an additional $5,000 per annum
for serving on one or more committees of the Board; and (2) reimbursement for
all reasonable fees and expenses incurred in connection with the performance of
services on behalf of the Company. Fees and expenses shall be reimbursed upon
submission to the Company of appropriate documentation for such fees and
expenses in accordance with then-current Company policy.
Due to the substantial issues faced by NAC during Fiscal 2001 and Fiscal
2002, including the sale and disposition of NAC's automobile loan portfolio, the
issues raised by the Frankino Parties litigation and settlement and the purchase
of the 50% interest in the Angelika Film Centers, LLC interest along with the
subsequent agreements made in December 2000 with Reading and its subsidiaries,
and the purchase of ZoomLot and the subsequent Exchange Agreement with the
former ZoomLot shareholders, various members of the Board of Directors were
required to devote substantial time to the affairs of NAC.
Amounts paid to Directors in Fiscal 2002 aggregated $508,000 for services
rendered during the period as follows:
Director Amount Director Status(1)
------------------------------ ------ ------------------
James J. McNamara(2) $ - Director
Thomas F. Carney, Jr. 60,000 Director
John A. Gleason 60,000 Director
Henry Y.L Toh 60,000 Director
William S. Marshall 60,000 Director
Mallory Factor 60,000 Resigned as a Director January 2002
Donald Jasensky 55,000 Resigned as a Director December 2001
Steven Johnson 48,000 Resigned as a Director January 2002
Gary Trujillo 50,000 Resigned as a Director January 2002
Peter T. Zackaroff 55,000 Resigned as a Director December 2001
(1) During Fiscal 2002, the number of Directors constituting NAC's Board
of Directors decreased due to, among other things (i) the relocation
of NAC's principal office to New York from Ohio, (ii) the
discontinuance of ZoomLot's e-commerce operations and NAC automobile
finance operations and (iii) the hiring of certain full time
employees in New York to manage NAC's day-to-day operations.
(2) Directors who are also employees of NAC do not receive any additional
compensation for serving on the Board of Directors.
75
PERFORMANCE GRAPH
The following graph compares the yearly change in NAC's cumulative total
shareholder return on its Common Stock (based on the market price of NAC's
Common Stock) with the cumulative total return of the S&P 600 Small Cap Index,
the Russell 2000 Index, Reading International, Inc. (a theatre and real estate
concern) and AMC Entertainment, Inc. (a theatre concern).
2/1/97 1/31/98 1/31/99 1/31/00 1/31/01 1/31/02
-------------------------------------------------------------
National Auto Credit, Inc. 100 10 12 14 4 2
S&P 600 Small Cap Index 100 120 118 130 155 158
Russell 2000 Index 100 116 116 134 138 131
AMC Entertainment, Inc. 100 169 107 60 34 68
Reading International, Inc. 100 139 132 95 74 66
For purposes of the above table, NAC is compared to both AMC
Entertainment, Inc. and Reading International Inc. as each company is engaged
principally in the operations of various film theatres. NAC's current operations
are comprised principally of its investment in the Angelika Film Center LLC.
76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 30, 2002
with respect to: (1) all persons known by NAC to be the beneficial owners of
five percent or more of Common Stock; (2) each executive officer and director;
and (3) all executive officers and directors of NAC as a group.
Name and Address of Number of Shares Approximate
Beneficial Owner(1) Beneficially Owned Percentage of Class(2)
------------------- ------------------ ----------------------
James McNamara(3) 1,889,275 20.7%
555 Madison Ave 29th Floor
New York, New York 10022
Academy Capital Management(4) 759,650 8.8%
500 N. Valley Mills Drive Suite 208
Waco, TX 76710
William S. Marshall(5) 255,000 2.9%
555 Madison Ave 29th Floor
New York, New York 10022
John A. Gleason(5) 245,000 2.8%
555 Madison Ave 29th Floor
New York, New York 10022
Henry Y. L. Toh(5) 245,000 2.8%
555 Madison Ave 29th Floor
New York, New York 10022
Thomas F. Carney, Jr.(6) 50,000 0.6%
555 Madison Ave 29th Floor
New York, New York 10022
Robert V. Cuddihy, Jr. - -
555 Madison Ave 29th Floor
New York, New York 10022
All executive officers and 2,684,275 27.0%
Directors as a group (6 persons)(7)
(1) Pursuant to rules promulgated under the Exchange Act of 1934, an individual
is considered to beneficially own shares of Common Stock if he or she
directly or indirectly has or shares (i) voting power, which includes the
power to vote or direct the voting of shares; or (2) investment power, which
includes the power to dispose or direct the disposition of the shares.
Unless otherwise noted, NAC believes that all of such shares are owned of
record by each individual named as beneficial owner and that such individual
has sole voting and dispositive power with respect to the shares of Common
Stock owned by each of them. Such person's percentage ownership is
determined by assuming that the options or convertible securities that are
held by such person, and which are exercisable within 60 days from the date
hereof, have been exercised or converted, as the case may be.
77
(2) Based on 8,641,754 shares outstanding as of April 30, 2002.
(3) Includes 1,389,275 shares of stock and vested options to purchase 500,000
shares of Common Stock. Does not include 250,000 options to purchase Common
Stock which may vest on December 15, 2002.
(4) The information recited is based upon information set forth in Amendment No.
1 to the Form 13-G filed on March 5, 2001 by Academy Capital Management.
(5) Includes 245,000 shares issuable upon exercise of options.
(6) Includes 50,000 shares issuable upon exercise of options.
(7) Includes 1,399,275 shares outstanding and 1,285,000 shares issuable upon
exercise of options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 31, 2002, NAC, entered into an Exchange and Repayment Agreement
("Exchange Agreement") dated January 31, 2002 with Cygnet Capital Corporation,
Verde Reinsurance Company Ltd., Ernie Garcia III 2000 Trust, Brian Garcia 2000
Trust, EJMS Investors Limited Partnership, Ernest C. Garcia II, Ray Fidel,
Steven P. Johnson, Mark Sauder, Colin Bachinsky, Chris Rompalo, Donna Clawson,
Mary Reiner, and Kathy Chacon (the "Former ZoomLot Shareholders"). The Former
ZoomLot Shareholders had previously received Common and Preferred Shares of NAC
pursuant to a Merger Agreement and Plan of Reorganization (the "Merger
Agreement") executed December 15, 2000.
Under the Merger Agreement, 666,667 shares of Series C Preferred Stock
issued in the acquisition of ZoomLot were forfeitable if ZoomLot did not reach
certain financial goals by December 31, 2003, and NAC was obligated to redeem,
at the option of the holders, the 729,047 shares of the Series C Preferred Stock
issued under the Merger Agreement, at a per share price equal to the greater of
$15.00 or ten times the fair market price of NAC's Common Stock, if ZoomLot did
reach those financial goals. Additionally, Ernest G. Garcia II, Cygnet Capital
Corporation or Verde Reinsurance Company Ltd., each being a former shareholder
of ZoomLot, were obligated to make a payment of $5.2 million to NAC if ZoomLot
did not reach the financial performance goals by December 31, 2003. As the
result of shares of NAC Common Stock issued upon the conversion of the Series B
Preferred Stock issued in the acquisition of ZoomLot, and open market purchases,
Mr. Garcia had become the beneficial owner of 18% of the then outstanding shares
of Common Stock of NAC.
Since NAC now intended to discontinue ZoomLot's operations prior to
December 31, 2003, it was necessary to resolve the effect of that on the
obligations of NAC and the former ZoomLot stockholders under the Merger
Agreement. As a result of the negotiations, on January 31, 2002, NAC, entered
into the Exchange Agreement.
The Exchange Agreement sets forth the agreement among all the parties to
terminate the operations of ZoomLot. The parties agreed, among other things,
that the financial performance goals (specifically the "First Objective" and the
"Second Objective" as those terms are defined in the Merger Agreement) had not
and would not be met. Accordingly, the 666,667 shares of Series C Preferred
Stock forfeitable if those goals were not met were deemed forfeited and were to
be returned and surrendered to NAC. For financial reporting purposes, those
shares of Series C Preferred Stock had been treated as contingently issuable,
and accordingly their return had no effect on NAC's consolidated financial
statements.
78
Additionally, under the Exchange Agreement, the contingent obligation of
Mr. Garcia, Cygnet Capital Corporation or Verde Reinsurance Company Ltd., to
make a payment of $5.2 million to NAC if ZoomLot did not reach the financial
goals by December 31, 2003 was resolved by (i) the transfer back to NAC of
3,079,530 shares of NAC Common Stock, which for the purposes of the Exchange
Agreement were valued at $1.25 per share, (ii) the return to NAC of 62,380
shares of NAC Series C Preferred Stock at an aggregate agreed-upon value of
$854,875, which represented the carrying amount of such shares of Series C
preferred Stock in NAC's consolidated financial statements, and (iii) the
issuance to NAC of a promissory note in the amount of $986,048, payable,
together with interest at 4% per annum, in cash or NAC Common Stock (at a
mutually agreed-upon value of $1.25 per share) on or before January 30, 2003.
For financial reporting purposes, NAC recorded the 3,079,530 shares of
Common Stock returned under the Exchange Agreement at $431,000, representing
their market value of the basis of the quoted market price of NAC's common
stock, recorded the 62,380 shares of Series C Preferred Stock returned at their
aggregate carrying amount of $854,875, and recorded the note receivable, a
component of other assets, at a net value of $110,000 reflecting the market
value at January 31, 2002 of the shares of NAC Common Stock the maker of the
note has the option to tender in payment of the principal. NAC also incurred or
accrued costs of $850,000 for the winding down and closing of ZoomLot's
operations, including rental and broker costs to sublease ZoomLot's corporate
office, employee severance costs and costs of early lease terminations. As a
result, NAC recognized a net gain on the disposal of ZoomLot's operation of
$394,000. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes 2 and 3 of Notes to Consolidated
Financial Statements.
NAC contracted for investor relations and other financial advisory
services from Mallory Factor Inc during Fiscal 2002 and Fiscal 2001. Mallory
Factor, a member of NAC's Board of Directors from December 2000 to January 2002,
is a principal at Mallory Factor Inc. For Fiscal 2002 and 2001, NAC paid Mallory
Factor Inc. $125,000 and $251,000, respectively. Effective April 2001, NAC
consummated an agreement to sub-lease its New York corporate headquarters from
Mallory Factor Inc. Pursuant to the terms of the Sublease Agreement, NAC
subleases its 5,500 square foot New York office commencing April 1, 2001 and NAC
issues all payments directly to the landlord in accordance with the terms of the
Master Lease. The sublease agreement provides of an annual base rent of $199,000
and the term expires July 31, 2006.
During Fiscal 2001, NAC paid $43,000 to Automotive Personnel, LLC, for
placement services rendered in Fiscal 1998. In addition, NAC paid $69,000 in
Fiscal 2002 for outplacement services provided to the employees of NAC
terminated as a part of its restructuring plan. Donald Jasensky, the President
of Automotive Personnel, LLC, was a member of NAC's Board of Directors until
December 2001.
Herbert F. Kozlov, Secretary of NAC, is a member of Reed Smith LLP. Mr.
Kozlov's former firm, Parker Duryee Rosoff & Haft, which was counsel to NAC
during Fiscal 2002, merged with Reed Smith LLP effective January 1, 2002.
Payments made to Parker Duryee Rosoff & Haft for Fiscal 2002 were $412,000 for
corporate counsel and litigation services.
79
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DOCUMENTS FILED AS PART OF THIS REPORT:
(a)(1) The following statements are included in Part II, Item 8:
Financial Statements of the Company
Report of Independent Certified Public Accountants
Financial Statements:
Consolidated Balance Sheets - as of
January 31, 2002 and 2001
Consolidated Statement of Operations -
Years Ended January 31, 2002, 2001 and 2000
Consolidated Statement of Stockholders' Equity and Comprehensive Income -
Years Ended January 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years Ended January 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements - Years Ended
January 31, 2002, 2001 and 2000
Financial Statements of AFC
Report of Independent Certified Public Accountants
Financial Statements:
Balance Sheet as of December 27, 2001 and December 28, 2000
Statement of Operations for the years ended
December 27, 2001 and December 28, 2000
Statement of Members' Equity for the years ended
December 27, 2001 and December 28, 2000
Statement of Cash Flows for the years ended
December 27, 2001 and December 28, 2000
Notes to Financial Statements for the years ended
December 27, 2001 and December 28, 2000
80
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONT.)
(a)(2) The following financial statement schedule for the years ended January
31, 2002, 2001 and 2000 is submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because the required information either is
not applicable or is shown in the consolidated financial statements or
notes.
(a)(3) Exhibits
Description
-----------
2.1 Agreement of Merger (incorporated by reference to Exhibit 2 to the
Company's Form 8 B dated December 27, 1995, SEC File No. 1-11601).
2.2 Settlement Agreement and Release (Including Agreement for Sale of Shares)
by and among National Auto Credit, Inc., Mr. Frankino, individually and as
trustee and president of the Samuel J. Frankino and Connie M. Frankino
Charitable Foundation, trustee of the Corrine L. Dodero Trust for the Arts
and Sciences and managing partner of the Frankino and Frankino Investment
Company, dated November 3, 2000 (incorporated by reference to Exhibit 2.1
to the Company's Form 8-K dated November 17, 2000, SEC File No. 1-11601).
2.3 Stock Purchase and Standstill Agreement by and among National Auto Credit,
Inc., Reading Entertainment, Inc., FA, Inc., Citadel Holding Corporation,
and Craig Corporation, dated November 3, 2000 (incorporated by reference
to Exhibit 2.2 on the Current Report on Form 8-K filed November 17, 2000,
SEC File No. 1-11601).
2.4 Merger Agreement and Plan of Reorganization by and among ZLT Acquisition
Corp., a Delaware and a wholly-owned subsidiary of NAC; ZoomLot
Corporation, a Delaware corporation, including all of its subsidiaries;
and Ernest C. Garcia II, Verde Reinsurance Company, Ltd., a Nevis Island
corporation, Ernie Garcia III 2000 Trust, Brian Garcia 2000 Trust, Ray
Fidel, Steven Johnson, Mark Sauder, EJMS Investors Limited Partnership, an
Arizona limited partnership, Colin Bachinsky, Chris Rompalo, Donna
Clawson, Mary Reiner, and Kathy Chacon dated December 15, 2000
(incorporated by reference to Exhibit 2 of the Current Report on Form 8-K
filed January 2, 2001, SEC File No. 1-11601).
2.5 Stock Purchase and Standstill Agreement by and among Reading
Entertainment, Inc., FA, Inc., Citadel Holding Corporation, Craig
Corporation, and National Auto Credit, dated as of December 15, 2000,
(incorporated by reference to Exhibit 99.1 of the Current Report on Form
8-K filed January 2, 2001, SEC File No. 1-11601).
3.1 Restated Certificate of Incorporation of National Auto Credit, Inc.
(incorporated by reference to Exhibit 3 (1) to the Company's Form 8B filed
December 27, 1995, SEC File No. 1-11601).
81
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (CONT.)
(A)(3) EXHIBITS (CONT.)
3.2 Certificate of Designation, Number, Powers, Preferences and Relative,
Participating, Optional and Other Special Rights and the Qualifications,
Limitations, Restrictions, and Other Distinguishing Characteristics of the
Series A Convertible Preferred Stock of National Auto Credit, Inc., dated
as of April 5, 2000 (incorporated by reference to Exhibit 10.3 of the
Current Report on Form 8-K filed on April 20, 2000, File No. 1-11601).
3.3 Amended and Restated Bylaws of National Auto Credit, Inc. dated April 5,
2000 (incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2000, SEC File No. 1-11601).
3.4 Certificate of Designations of Series B and C Preferred Stock of National
Auto Credit, Inc. dated as of December 15, 2000 (incorporated by reference
to Exhibit 4.1 of the Current Report on Form 8-K filed January 2, 2001,
SEC File No. 1-11601).
3.5 Certificate of Designation for the Series D Junior Participating Preferred
Stock (incorporated by reference to the Company's Current Report on Form
8-K, dated October 9, 2001, SEC File No. 1-11601).
4.1 Specimen Stock Certificate - National Auto Credit, Inc. (incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1996, SEC File No. 1-11601).
4.2 Specimen Series C redeemable preferred stock Certificate - National Auto
Credit, Inc. (incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 2001, SEC File No.
1-11601).
4.3 Rights Agreement, dated as of September 26, 2001, between the Company and
American Stock Transfer & Trust Company, which included the form of
Certificate of Designation for the Series D Junior Participating Preferred
Stock as Exhibit "A", the form of Rights Certificate as Exhibit "B" and
the Summary of Rights to Purchase Preferred Stock as Exhibit "C"
(incorporated herein by reference to the Company's Current Report on Form
8-K, dated October 9, 2001, SEC File No. 1-11601).
10.1 National Auto Credit, Inc. 1983 Stock Option Plan (incorporated by
reference to the Company's Post Effective Amendment No. 2 to Form S-8 as
filed on October 1, 1987, File No. 2-93984).
10.2 Form of Directors' Indemnification Agreement dated July 2, 1986
(incorporated by reference to Exhibit 10(f) of the Company's Annual Report
of Form 10-K for fiscal year ended January 31, 1988, File No. 0-12201).
10.3 National Auto Credit, Inc. 1993 Equity Incentive Plan (incorporated by
reference to the Company's Form S-8 Registration Statement as filed on
December 28, 1993, File No. 33-51727).
82
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (CONT.)
(A)(3) EXHIBITS (CONT.)
10.4 National Auto Credit, Inc. 401(k) Savings and Retirement Plan and Trust
(incorporated by reference to the Company's Form S-8 Registration
Statement as filed on December 28, 1993, File No. 33-51727).
10.5 Purchase Agreement among National Auto Credit, Inc., National Cinemas,
Inc., FA, Inc. and Reading Entertainment, Inc., dated as of April 5, 2000
(incorporated by reference to Exhibit 10.1 of the Current Report on Form
8-K filed on April 20, 2000, File No. 1-11601).
10.6 Registration Rights Agreement, dated as of April 5, 2000 (incorporated by
reference to Exhibit 10.2 of the Current Report on Form 8-K filed on April
20, 2000, File No. 1-11601).
10.7 Registration Rights Agreement, dated as of December 15, 2000 (incorporated
by reference to Exhibit 4.2 to the Company's Form 8-K filed January 2,
2001, SEC File No. 1-11601).
10.8 Lockup, Standstill and Voting Agreement, dated as of December 15, 2000,
(incorporated by reference to Exhibit 4.3 of the Current Report on Form
8-K filed January 2, 2001, SEC File No. 1-11601).
10.9 Employment Agreement between NAC and James J. McNamara dated as of
December 15, 2000 (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed January 2, 2001, SEC File No. 1-11601).
10.10 Separation Agreement between NAC and David L. Huber dated as of December
15, 2000 filed and incorporated herein by reference of the Annual Report
on Form 10-K/A filed May 31, 2001 (SEC File No..1-11601).
10.11 Agreement for Purchase and Sale of Limited Liability Partnership Interests
(exhibits to Form 8-K filed January 28, 2002, SEC File No. 1-11601).
10.12 Exchange and Repayment Agreement dated January 31, 2002 by and among
National Auto Credit, Inc., Cygnet Capital Corporation, Verde Reinsurance
Company Ltd, Ernie Garcia III 2000 Trust, Brian Garcia 2000 Trust, EJMS
Investors Limited Partnership, Ernest C. Garcia II, Ray Fidel, Steven P.
Johnson, Mark Sauder, Colin Bachinsky, Chris Rompalo, Donna Clawson, Mary
Reiner, and Kathy Chacon (exhibit to Form 8-K filed February 4, 2002, SEC
File No. 1-11601).
10.13 Amendments to Financial Advisory and Management Consulting Agreement
between NAC and Robert B. Dixon dated as of April 1, 2001 (exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q filed June 15, 2001, SEC File
No. 1-11601).
10.14 Separation Agreement from NAC for Sean P. Maroney dated as of April 25,
2001 (exhibit 10.2 to the Company's Quarterly Report on Form 10-Q file
June 15, 2001, SEC File No. 1-11601).
83
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (CONT.)
(A)(3) EXHIBITS (CONT.)
10.15 Separation Agreement from NAC for Raymond A. Varcho dated as of April 25,
2001 (exhibit 10.2 to the Company's Quarterly Report on Form 10-Q file
June 15, 2001, SEC File No. 1-11601).
10.16 Employment Agreement between Robert V. Cuddihy, Jr. and the Company dated
December 31, 2001 and incorporated by reference herewith.
21 Subsidiaries of National Auto Credit, Inc. at January 31, 2002.
23 Consent of Independent Certified Public Accountants.
(b) REPORTS ON FORM 8-K
On October 9, 2001, a Form 8-K was filed to announce the declaration of a
dividend distribution of one Right for each outstanding share of Common Stock on
terms set forth in a Rights Agreement between the Company and American Stock
Transfer & Trust Company, as Rights Agent.
On January 28, 2002, a Form 8-K was filed to announce that the Company had
entered into an Agreement for Purchase and Sale of Limited Partnership Interests
to sell interest in certain affordable housing limited partnerships.
On February 4, 2002, a Form 8-K was filed to announce that the Company had
entered into an Exchange and Repayment Agreement with the former shareholders of
ZoomLot under which the securities of NAC issued to such former shareholders of
ZoomLot were reacquired by NAC or cancelled and certain obligations of certain
of such former shareholders were restructured.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, National Auto Credit, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
National Auto Credit, Inc.
Registrant
Date May 13, 2002 By: /s/James J. McNamara
-------------------------------- --------------------------
James J. McNamara
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities as indicated on May 13, 2002.
Principal Financial and
Principal Executive Officer Accounting Officer
By: /s/James J. McNamara By: /s/Robert V. Cuddihy, Jr.
---------------------------- -------------------------
James J. McNamara Robert V. Cuddihy, Jr.
Chairman of the Board and Chief Financial Officer and
Chief Executive Officer Treasurer
Directors:
/s/Thomas F. Carney, Jr. /s/William S. Marshall
-------------------------------- -----------------------------
Thomas F. Carney, Jr. William S. Marshall
/s/James J. McNamara /s/John A. Gleason
-------------------------------- -----------------------------
James J. McNamara John A. Gleason
/s/Henry Y. L. Toh
--------------------------------
Henry Y. L. Toh
85
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
-------- -------- -------------------------- ---------- ----------
Balance at Additions Charged to: Balance
beginning of -------------------------- at end of
Description period Expenses Other Deductions period
---------------------------------- ------------ ---------- --------- ---------- ----------
Year ended January 31, 2002
----------------------------------
Self-insurance claims $ 970 $ 463 $ - $ 664 (a) $ 769
Year ended January 31, 2001
----------------------------------
Self-insurance claims $ 4,089 $ (1,656) $ - $ 1,463 (a) $ 970
Year ended January 31, 2000
----------------------------------
Self-insurance claims $ 4,880 $ 628 $ - $ 1,419 (a) $ 4,089
(a) Cash disbursements related to self-insured claims.
86