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, 2005 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 ------------------------ ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 555 Madison Avenue, 29th Floor, New York New York 10022 -------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (212) 644-1400 -------------- 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 ------------------- 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. ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes __ No _X_ As of May 11, 2005, 10,102,614 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 July 31, 2004, was approximately $3,107,106(Based on the closing price of the registrant's common stock on the OTC Bulletin Board on July 31, 2004). DOCUMENTS INCORPORATED BY REFERENCE None TABLE OF CONTENTS Part I Page ------ ---- Item 1. Business............................................................. 1 2. Properties........................................................... 6 3. Legal Proceedings.................................................... 7 4. Submission of Matters to a Vote of Security Holders.................. 9 Part II ------- Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............... 10 6. Selected Financial Data.............................................. 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 13 7a. Quantitative and Qualitative Disclosures About Market Risk........... 27 8. Financial Statements and Supplementary Data.......................... 28 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................ 71 9a. Controls and Procedures.............................................. 71 Part III -------- Item 10. Directors and Executive Officers of the Registrant................... 71 11. Executive Compensation............................................... 73 12. Security Ownership of Certain Beneficial Owners and Management....... 78 13. Certain Relationships and Related Transactions....................... 79 14. Principal Accountant Fees and Services............................... 80 Part IV ------- Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................... 82 PART I Some of the information in this report contains forward looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause us or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. You should not rely on forward-looking statements in this report. Forward-looking statements typically are identified by use of terms such as "anticipate", "believe", "plan", "expect", "intend", "may", "will", "should", "estimate", "predict", "potential", "continue" and similar words although some forward-looking statements are expressed differently. This report may contain forward-looking statements attributed to third parties relating to their estimates regarding the growth of our markets. All forward-looking statements address matters that involve risk and uncertainties, and there are many important risks, uncertainties and other factors that could cause our actual results, as well as those of the markets we serve, levels of activity, performance, achievements and prospects to differ materially from the forward-looking statements contained in this report. You should also consider carefully the statements under other sections of this report which address additional facts that could cause our actual results to differ from those set forth in any forward-looking statements. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. 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. NAC consummated a series of acquisitions during the year ended January 31, 2004 transforming its business operations into a multi-dimensional corporate communications and entertainment company. NAC specializes in the full service design, creative development, production, post production editing and transmission, via broadcast satellite videoconferencing, webcasting and traditional on-site presentations of corporate communication, education and training video and other services for use at corporate events. Additionally, NAC, through its investment in the Angelika Film Center LLC ("AFC"), operates in the movie exhibition industry. NAC acquired its investment in AFC in April 2000. Prior to Fiscal 2003, NAC's operations were conducted principally through three operating segments, (i) the e-commerce segment, which were 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 was comprised of the activities of Angelika Film Center LLC ("AFC") and (iii) the automobile financing segment. However, as the consequence of NAC's strategic review completed in the fourth quarter of Fiscal 2002, NAC suspended its ZoomLot operations and initiated the steps to discontinue both its e-commerce and auto financing segments. As a result of these decisions, both the e-commerce and automobile financing segments were classified as discontinued operations as of January 31, 2002. NAC uses a January 31 year-end for financial reporting purposes. References herein to the fiscal year ended January 31, 2005 shall be the term "Fiscal 2005" 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. 1 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. Significant Developments In order to settle a derivative and class action entitled Robert Zadra, et al v, James A. McNamara, et al (Index. No. 01-604859) (hereinafter referred to as the "New York Action") that was commenced against NAC and certain of its directors in the Supreme Court of the State of New York, New York County (the "New York Court"), NAC entered into a November 2004 Amended Stipulation of Settlement (the "New York Settlement Stipulation"). Under the terms of the New York Settlement Stipulation, NAC agreed (subject to certain terms and conditions) to, among other things, (a) adopt or implement certain corporate governance procedures or policies, (b) issue to a class of NAC shareholders who had continuously held NAC Common Stock from December 14, 2000 through December 24, 2002 up to one million warrants (one warrant per 8.23 shares of Common Stock), with each warrant having a five year term and being exercisable for shares of NAC Common Stock at a price of $1.55 per share, (c) cancel 50% of certain stock options granted on December 15, 2000, and (d) make certain payments for legal fees for counsel to the plaintiffs in the New York Action. In addition, the New York Settlement Stipulation created for the benefit of NAC a Settlement Fund in the amount of $2.5 million which has been funded by an insurance policy. The legal fees for counsel to the plaintiffs in the New York Action are not to exceed 25% of the Settlement Fund. In order to facilitate the settlement and dismissal of a separate derivative action entitled In re National Auto Credit, Inc, Shareholders Litigation (Index No. 19028 NC) (hereinafter referred to as the "Delaware Action"), which had been commenced in the Chancery Court for the State of Delaware (the "Delaware Court") against NAC, as well as the New York Action, on April 22, 2005, NAC entered into a Stock Purchase Agreement ("Agreement") with Academy Capital Management, Inc., Diamond A. Partners, L.P., Diamond A. Investors, L.P., Ridglea Investor Services, Inc. and William S. Banowsky (hereinafter referred to collectively as the "Selling Stockholders"). The Selling Stockholders had also raised objections to the settlement of the New York Action. The New York Court (a) rejected the objections raised by the Selling Stockholders and (b) approved as fair and in the best interests of NAC and its shareholders the proposed settlement of the New York Action as set forth in the New York Settlement Stipulation. The Selling Stockholders then filed an appeal (the "Appeal") to such determination by the New York Court. Pursuant to the terms of the Agreement, the Selling Stockholders agreed, among other things, to do the following: o enter into a stipulation (to be filed with the New York Court) pursuant to which they will (a) irrevocably withdraw, with prejudice, any objections they had asserted or might have asserted with respect to the settlement of the New York Action, (b) stipulate to the entry of an order dismissing the New York Action and (c) agree to the dismissal of the Appeal. o enter into a stipulation (to be filed with the Appellate Division, First Department, of the Supreme Court of the State of New York) providing for the dismissal of the Appeal. o enter into a stipulation (to be filed in the Delaware Court), pursuant to which they will agree to the dismissal of the Delaware Action with prejudice. The Selling Stockholders have executed and delivered to NAC and NAC has filed with the applicable New York Court and Delaware Court each of the stipulations referred to above. 2 Pursuant to the Agreement, NAC has agreed (subject to certain terms and conditions set forth in the Agreement) to purchase from the Selling Shareholders their 1,562,500 shares of NAC Common Stock at a price of $0.6732 per share (or a total purchase price of $1,051,875) and to contribute $100,000 to cover a portion of the legal fees incurred by the Selling Shareholders. NAC's obligation to purchase such shares is conditioned upon (as well as certain other conditions) (a) an order or judgment having been entered by the New York Court in the New York Action, dismissing the New York Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed, and (b) an order or judgment having been entered by the Delaware Court in the Delaware Action, dismissing the Delaware Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed. NAC anticipates that all or a substantial portion of the purchase price for any shares purchased from the Selling Shareholders, as well as the $100,000 referred to above for legal fees of the Selling Shareholders, will be funded from the net proceeds of the $2.5 million that has been provided by NAC's insurer for a Settlement Fund in the New York Action. As acknowledged by the Selling Shareholders in the Agreement, NAC was willing to enter into the Agreement, settle the New York Action and the Delaware Action and consummate the other transactions contemplated by the Agreement in order to terminate prolonged and expensive litigation and NAC's entry into the Agreement would not constitute or be deemed to constitute or evidence any improper or illegal conduct by or on behalf of NAC (or any of its directors, officers, employees and other agents or representatives) or any other wrong doing by NAC (or any of its directors, officers, employees and other agents or representatives). The Agreement was approved by the disinterested and independent members of NAC's Board of Directors. Management currently anticipates that the settlement of the New York Action and the Delaware Action, as described above, will be completed by August 31, 2005. When the settlement is confirmed, NAC will record the repurchase shares at their market value, based upon the market price of NAC's Common Stock on April 22, 2005 (which was $0.54 per share). As a consequence, upon the confirmation of the settlement in Fiscal 2006 and based upon current estimates, NAC will (i) record as a component of stockholder's equity the net proceeds of $1.9 million derived from the Settlement Fund, (ii) record a charge to stockholder equity for the issuance of the five-year warrants issued to eligible shareholders, (iii) charge to operations for the excess cost to repurchase the Common Stock and related legal costs of $208,000 and $100,000, respectively, and (iv) record an net increase in cash and cash equivalents, after the Common Stock repurchase of approximately $750,000. Management believes that settlement of the New York Action and the Delaware Actions, as provided for in the Agreement and the New York Settlement Stipulation, will allow management to concentrate its efforts on NAC's business and will allow NAC to avoid the costs and distractions of prolonged litigation. Other NAC will continue to pursue reductions in its operating expenses and new debt or equity financing (which there can be no assurance NAC will obtain such financing) as means of supplementing NAC's resources available to pursue new acquisitions, joint ventures or other business development opportunities. At January 31, 2005 NAC had cash and cash equivalents of $471,000 and $826,000 income tax refund receivable which together with any cash flow derived from its investment in AFC and the operations of The Campus Group and OMI will be used to pursue such opportunities. 3 CORPORATE COMMUNICATION BUSINESS NAC, through Audience Response Systems, Inc. ("ARS"), the Campus Group Companies, Inc. ("Campus" and collectively with ARS known as the "Campus Group") and OMI Business Communications, Inc. ("OMI"), engages in a broad range of strategic content development, management and broadcast services to single and multiple site corporate events, meetings and symposiums. The Campus Group was acquired July 2003 and OMI was acquired April 2003. NAC serves Fortune 100 pharmaceutical and financial services organizations as well as other companies and industries seeking to develop communication and education content for periodic corporate events. Through a collaborative effort between NAC and its clients, relevant education, product information, regulatory requirements or other communication initiatives are developed and executed. Frequently, these services result in the development of corporate communication, education and/or training videos which are then broadcast at a single site or simulcast via satellite/internet to multiple sites both domestic and international. Furthermore, once produced, such content is frequently modified and integrated into a corporate website for future on-demand access by a broad range of geographically dispersed users. NAC, through ARS, also provides on-site corporate event data management services whereby clients can obtain and respond dynamically in real-time to audience preferences, attitudes or responses to specific queries within an event. These data services assist in further engaging corporate and other audiences in understanding and relating to the overall communication program, insuring better information retention, provide a record of responses for regulatory and testing purposes and in many cases provide clients with live field data not otherwise as easily obtained. Competition The corporate communication, symposium, education and training industry in which NAC primarily competes is very fragmented and highly competitive. Certain of NAC's competitors, including several diversified companies, may have greater financial and other resources than NAC. Most competitors generally operate on a local or regional level. As clients increasingly require vendors to offer comprehensive services and support sophisticated broadcast technologies, many operators may not have the capital resources, management skills and technical expertise necessary to compete, or provide integrated communication services. Although NAC believes that it has certain creative design, technological, managerial and other advantages over its competitors, there can be no assurance that NAC will maintain such advantages. Clients NAC's clients include national and multi-national pharmaceutical and financial services companies such as American Express Company, BearingPoint LLP, Booz Allen Hamilton Inc. ("Booz Allen"), Cardinal Health, Inc. ("Cardinal Health"), KPMG Peat Marwick LLP, Pfizer Inc. ("Pfizer"), PricewaterhouseCoopers LLP, R&D Strategic Solutions, Inc. and Wells Fargo & Company as well as other companies seeking to develop communication, education and/or training content for periodic events. Revenues for Fiscal 2005 were $11.3 million and comprised principally of revenues of $9.2 million and $2.1 million derived from The Campus Group and OMI, respectively. Revenues for Fiscal 2004 were $7.1 million and are comprised principally of, (i) OMI revenues of $2.2 million for the ten month period ended January 31, 2004 and (ii) The Campus Group revenues of $4.9 million for the six month period ended January 31, 2004. 4 Pfizer and R&D Strategic Solutions, Inc. accounted for 36% and 13%, respectively, of revenues for Fiscal 2005. For Fiscal 2004, Pfizer, Booz Allen and Cardinal Health accounted for 18%, 13% and 13%, respectively, of revenues. Since NAC revenues from The Campus Group and OMI are measured from the date of each acquisition during Fiscal 2004, such revenues are not necessarily fully indicative of the results for an entire fiscal year. The loss of any one such client could have a material adverse effect on NAC. 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 21 years. AFC is owned 50% by NAC and 50% by Reading International, Inc. Each of the owners of AFC is 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. AUTOMOBILE FINANCING BUSINESS - DISCONTINUED FISCAL 2002 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. 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. 5 E-COMMERCE BUSINESS - DISCONTINUED FISCAL 2002 NAC conducted its e-commerce business through its ZoomLot subsidiary. 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") and acquired these operations from CDF on July 1, 2000. ZoomLot was discontinued effective December 31, 2001. EMPLOYEES As of January 31, 2005, NAC employed sixty-five people on a full-time basis. None of NAC's employees are covered by a collective bargaining agreement. NAC believes it maintains good relations with its employees. ITEM 2. PROPERTIES. NAC occupies a series of leased facilities as follows: Base Annual Location Square Feet Rent Expiration of Term Purpose -------- ----------- ---- ------------------ ------- Bohemia, NY 15,000 $100,000 April 2010 Warehouse and distribution Evansville, IN 6,800 $ 54,000 September 2005 Sales, service and field support New York, NY 5,500 $199,000 July 2006 Corporate Headquarters New York, NY 4,900 $225,000 September 2007 Creative Services and Production Studio Tuckahoe, NY 11,000 $ 75,000 April 2010 Creative Services and Production Studio In addition to the above facilitates, 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. 6 ITEM 3. LEGAL PROCEEDINGS In July and August 2001, NAC received three separate derivative complaints filed with the Delaware Court by each of Academy Capital Management, Inc ("Academy Complaint"), Levy Markovich, ("Markovich Complaint") and Harbor Finance Partners ("Harbor Complaint"), all shareholders of NAC, 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. By order of the Delaware Court on November 12, 2001, the Academy, Markovich and Harbor Complaints were consolidated as the Delaware Action. The Delaware Action 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, (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, (vi) a judgment requiring the Director Defendants to promptly schedule an annual meeting of shareholders and (vii) an award of costs and expenses. On October 12, 2001, NAC received a derivative complaint filed by Robert Zadra, a shareholder of NAC, that had been filed with the New York Court 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. On or about May 29, 2002 the complaint was amended to include class action allegations. The New York Action contains allegations similar to those in the Delaware Action concerning the Board's approval of the employment agreement with James McNamara, option grants and past and future compensation to the Director Defendants, and the ZoomLot transaction. The New York Action seeks (i) a declaration that as a result of approving these transactions the Director Defendants breached their fiduciary duties to NAC, (ii) a judgment enjoining Director Defendants from proceeding with or exercising the option agreements, (iii) rescission of the option grants to Director Defendants, if exercised, (iv) an order directing the Director Defendants to account for alleged profits and losses obtained by the Director Defendants as a result of the alleged various acts complained of, (v) awarding compensatory damages to NAC and the class, together with prejudgment interest, and (vi) an award of costs and expenses. NAC has vigorously defended against each of the respective claims made in the Delaware Action and New York Action, as it believes that the claims have no merit. The parties in the New York Action thereafter engaged in settlement negotiations and, in December 2002, the parties entered into a stipulation of settlement which was thereafter amended in November 2004 (the "New York Settlement Stipulation"). Under the terms of the New York Settlement Stipulation, NAC agreed (subject to certain terms and conditions) to, among other things, (a) adopt or implement certain corporate governance procedures or policies, (b) issue to a class of NAC shareholders who had continuously held NAC Common Stock from December 14, 2000 through December 24, 2002 up to one million warrants (one warrant per 8.23 shares of Common Stock), with each warrant having a five year term and being exercisable for shares of NAC Common Stock at a price of $1.55 per share, (c) cancel 50% of certain stock options granted on December 15, 2000, and (d) make certain payments for legal fees for counsel to the plaintiffs in the New York Action. In addition, the New York Settlement Stipulation created for the benefit of NAC a Settlement Fund in the amount of $2.5 million which has been funded by an insurance policy. The legal fees for counsel to the plaintiffs in the New York Action are not to exceed 25% of the Settlement Fund. 7 In order to facilitate the settlement and dismissal of the separate Delaware Action as well as the New York Action, on April 22, 2005, NAC entered into a Stock Purchase Agreement with Academy Capital Management, Inc., Diamond A. Partners, L.P., Diamond A. Investors, L.P., Ridglea Investor Services, Inc. and William S. Banowsky. The Selling Stockholders had also raised objections to the settlement of the New York Action. The New York Court (a) had rejected the objections raised by the Selling Stockholders and (b) had approved as fair and in the best interests of NAC and its shareholders the proposed settlement of the New York Action as set forth in the New York Settlement Stipulation. The Selling Stockholders had then filed the Appeal. Pursuant to the terms of the Agreement, the Selling Stockholders agreed, among other things, to do the following: o enter into a stipulation (to be filed with the New York Court) pursuant to which they will (a) irrevocably withdraw, with prejudice, any objections they had asserted or might have asserted with respect to the settlement of the New York Action, (b) stipulate to the entry of an order dismissing the New York Action and (c) agree to the dismissal of the Appeal. o enter into a stipulation (to be filed with the Appellate Division, First Department, of the Supreme Court of the State of New York) providing for the dismissal of the Appeal. o enter into a stipulation (to be filed in the Delaware Court), pursuant to which they will agree to the dismissal of the Delaware Action with prejudice. The Selling Stockholders have executed and delivered to NAC and NAC has filed with the applicable New York Court and Delaware Court each of the stipulations referred to above. Pursuant to the Agreement, NAC has agreed (subject to certain terms and conditions set forth in the Agreement) to purchase from the Selling Shareholders their 1,562,500 shares of NAC Common Stock at a price of $0.6732 per share (or a total purchase price of $1,051,875) and to contribute $100,000 to cover a portion of the legal fees incurred by the Selling Shareholders. NAC's obligation to purchase such shares is conditioned upon (as well as certain other conditions) (a) an order or judgment having been entered by the New York Court in the New York Action, dismissing the New York Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed, and (b) an order or judgment having been entered by the Delaware Court in the Delaware Action, dismissing the Delaware Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed. NAC anticipates that all or a substantial portion of the purchase price for any shares purchased from the Selling Shareholders, as well as the $100,000 referred to above for legal fees of the Selling Shareholders, will be funded from the net proceeds of the $2.5 million that has been provided by NAC's insurer for a Settlement Fund in the New York Action. As acknowledged by the Selling Shareholders in the Agreement, NAC was willing to enter into the Agreement, settle the New York Action and the Delaware Action and consummate the other transactions contemplated by the Agreement in order to terminate prolonged and expensive litigation and NAC's entry into the Agreement would not constitute or be deemed to constitute or evidence any improper or illegal conduct by or on behalf of NAC (or any of its directors, officers, employees and other agents or representatives) or any other wrong doing by NAC (or any of its directors, officers, employees and other agents or representatives). The Agreement was approved by the disinterested and independent members of NAC's Board of Directors. Management currently anticipates that the settlement of the New York Action and the Delaware Action, as described above, will be completed by August 31, 2005. 8 Management believes that settlement of the New York Action and the Delaware Action, as provided for in the Agreement and the New York Settlement Stipulation, will allow management to concentrate its efforts on NAC's business and will allow NAC to avoid the costs and distractions of prolonged litigation. 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 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 occurring in Fiscal 1996 and prior. 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. NAC is the subject to certain self-insurance claims and litigation expenses relating to its discontinued automobile rental operations. NAC estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, NAC's historical loss experience and projected loss factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of NAC's sale of its automobile rental operations in 1995, NAC believes that all incurred claims have been reported to NAC and that there are no longer any incurred but not yet reported claims to be received by NAC. NAC's self-insurance liability at January 31, 2005 and 2004 was $256,000 and $408,000, respectively. Because of the uncertainties related to several residual small claims and 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. 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. 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 2005. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. 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." The following table sets forth the range of the high and low closing quotations for Common Stock on the OTCBB during the periods indicated as reported by the OTCBB. 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, 2004 --------------------------- First Quarter (February 1 - April 30) ........ $.20 $.12 Second Quarter (May 1 - July 31) ............. .24 .13 Third Quarter (August 1 - October 31) ........ .47 .19 Fourth Quarter (November 1 - January 31)...... .63 .33 Year ended January 31, 2005 --------------------------- First Quarter (February 1 - April 30) ........ $.70 $.38 Second Quarter (May 1 - July 31) ............. .62 .40 Third Quarter (August 1 - October 31) ........ .45 .38 Fourth Quarter (November 1 - January 31)...... .40 .31 STOCKHOLDERS At May 11, 2005 there were 1,183 stockholders of record of NAC's Common Stock based upon a securities position listing furnished to NAC by American Stock Transfer & Trust Company, NAC's transfer agent. On that date, the closing bid quotation of the Common Stock on OTCBB was $0.75 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, 2005 and 2004. 10 SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS 2003 Restricted Stock Plan As a consequence of the significant acquisitions consummated during Fiscal 2004, NAC sponsored a 2003 Restricted Stock Plan ("2003 Plan") that provides stock grants to all employees. The 2003 Plan authorizes the grant of up to a maximum of 400,000 restricted shares of Common Stock to employees of NAC. During Fiscal 2004, there were 372,000 shares of Common Stock granted under the terms of the 2003 Plan at an estimated fair value of $0.32 per share. Each share granted is restricted and unregistered stock and each award vests at the rate of 20% per year over a five year period. The underlying shares may not be sold, transferred, pledged or otherwise disposed until they vest. During the vesting period, unvested shares are voted by the manager of each business unit. No shares were granted to executive officers or directors under the 2003 Plan. For Fiscal 2004, NAC charged $119,000 to deferred compensation expense, which is reported as a component of shareholders' equity, for the 2003 Plan grants. The deferred compensation expense is amortized against operations on a straight-line basis over the 5 year vesting period of the restricted Common Stock. For Fiscal 2005 and Fiscal 2004, deferred compensation amortization expense was $24,000 and $6,000, respectively. The following table sets forth, as of January 31, 2005, with respect to compensation plans (including individual compensation arrangements) under which equity securities of NAC are authorized for issuance. NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE NUMBER OF SECURITIES REMAINING AVAILABLE ISSUED UPON EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE UNDER EQUITY OUTSTANDING OPTIONS, WARRANTS OUTSTANDING OPTIONS, COMPENSATION PLANS (EXCLUDING SECURITIES AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) PLAN CATEGORY ( A ) ( B ) ( C ) ---------------------------- --------------------------------- -------------------------- ------------------------------------------ Equity compensation plans approved by security holders 1,630,000 $0.80 373,352 Equity compensation plans not approved by security holders - - 28,000 --------------------------------- -------------------------- ------------------------------------------ Total 1,630,000 $0.80 401,352 --------------------------------- -------------------------- ------------------------------------------ 11 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, ---------------------------- -------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Service revenues $ 11,343 $ 7,144 $ -- $ -- $ 4,102 Operating costs and expenses $ 14,250 $ 11,001 $ 3,506 $ 5,384 $ 50,609 Loss from continuing operations $ (3,164) $ (3,383) $ (419) $ (5,488) $(46,507) Discontinued operations, net of tax(1) -- 401 310 (8,780) (776) -------- -------- -------- -------- -------- Net loss $ (3,164) $ (2,982) $ (109) $(14,268) $(47,283) ======== ======== ======== ======== ======== Basic and diluted (loss) earnings per share Continuing operations $ (.33) $ (.41) $ (.05) $ (.47) $ (1.67) Discontinued operations -- .05 .04 (.75) (.03) -------- -------- -------- -------- -------- Total $ (.33) $ (.36) $ (.01) $ (1.22) $ (1.70) ======== ======== ======== ======== ======== Weighted average number of shares outstanding Basic 9,529 8,182 8,380 11,692 27,761 ======== ======== ======== ======== ======== Diluted 9,529 8,182 8,380 11,692 27,761 ======== ======== ======== ======== ======== As of January 31, -------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- BALANCE SHEET DATA ------------------ Cash and cash equivalents $ 471 $ 376 $ 1,873 $ 6,122 $ 12,444 Total assets $ 28,089 $ 30,916 $ 18,712 $ 20,534 $ 39,066 Long term debt and convertible debt $ 11,475 $ 11,794 $ -- $ -- $ -- Redeemable preferred stock $ -- $ -- $ -- $ -- $ 629 Total stockholders' equity $ 10,577 $ 13,480 $ 16,110 $ 16,325 $ 31,455 (1) See Note 10 of Notes to Consolidated Financial Statements for further discussion of discontinued operations. 12 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. NAC consummated a series of acquisitions during the year ended January 31, 2004 transforming its business operations into a multi-dimensional corporate communications and entertainment company. NAC specializes in the full service design, creative development, production, post production editing and transmission, via broadcast satellite videoconferencing, webcasting and traditional on-site presentations of corporate communication, education and training video and other services for use at corporate events. Additionally, NAC, through its investment in the Angelika Film Center LLC ("AFC"), operates in the movie exhibition industry. NAC acquired its investment in AFC in April 2000. Prior to Fiscal 2003, NAC's operations were conducted principally through three operating segments, (i) the e-commerce segment, which were 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 was comprised of the activities of AFC and (iii) the automobile financing segment. However, as the consequence of NAC's strategic review completed in the fourth quarter of Fiscal 2002, NAC suspended its ZoomLot operations and initiated the steps to discontinue both its e-commerce and auto financing segments. As a result of these decisions, both the e-commerce and automobile financing segments have been classified as discontinued operations as of January 31, 2002. SIGNIFICANT DEVELOPMENTS IN FISCAL 2005 Settlement of Shareholder Litigation In order to settle a derivative and class action entitled Robert Zadra, et al v, James A. McNamara, et al (Index. No. 01-604859) (hereinafter referred to as the "New York Action") that was commenced against NAC and certain of its directors in the Supreme Court of the State of New York, New York County (the "New York Court"), NAC entered into a November 2004 Amended Stipulation of Settlement (the "New York Settlement Stipulation"). Under the terms of the New York Settlement Stipulation, NAC agreed (subject to certain terms and conditions) to, among other things, (a) adopt or implement certain corporate governance procedures or policies, (b) issue to a class of NAC shareholders who had continuously held NAC Common Stock from December 14, 2000 through December 24, 2002 up to one million warrants (one warrant per 8.23 shares of Common Stock), with each warrant having a five year term and being exercisable for shares of NAC Common Stock at a price of $1.55 per share, (c) cancel 50% of certain stock options granted on December 15, 2000, and (d) make certain payments for legal fees for counsel to the plaintiffs in the New York Action. In addition, the New York Settlement Stipulation created for the benefit of NAC a Settlement Fund in the amount of $2.5 million which has been funded by an insurance policy. The legal fees for counsel to the plaintiffs in the New York Action are not to exceed 25% of the Settlement Fund. In order to facilitate the settlement and dismissal of a separate derivative action entitled In re National Auto Credit, Inc, Shareholders Litigation (Index No. 19028 NC) (hereinafter referred to as the "Delaware Action"), which had been commenced in the Chancery Court for the State of Delaware (the "Delaware Court") against NAC, as well as the New York Action, on April 22, 2005, NAC entered into a Stock Purchase Agreement with Academy Capital Management, Inc., Diamond A. Partners, L.P., Diamond A. Investors, L.P., 13 Ridglea Investor Services, Inc. and William S. Banowsky (hereinafter referred to collectively as the "Selling Stockholders"). The Selling Stockholders had also raised objections to the settlement of the New York Action. The New York Court (a) had rejected the objections raised by the Selling Stockholders and (b) had approved as fair and in the best interests of NAC and its shareholders the proposed settlement of the New York Action as set forth in the New York Settlement Stipulation. The Selling Stockholders had then filed an appeal (the "Appeal") to such determination by the New York Court. Pursuant to the terms of the Agreement, the Selling Stockholders agreed, among other things, to do the following: o enter into a stipulation (to be filed with the New York Court) pursuant to which they will (a) irrevocably withdraw, with prejudice, any objections they had asserted or might have asserted with respect to the settlement of the New York Action, (b) stipulate to the entry of an order dismissing the New York Action and (c) agree to the dismissal of the Appeal. o enter into a stipulation (to be filed with the Appellate Division, First Department of the Supreme Court of the State of New York) providing for the dismissal of the Appeal. o enter into a stipulation (to be filed in the Delaware Court), pursuant to which they will agree to the dismissal of the Delaware Action with prejudice. The Selling Stockholders have executed and delivered to NAC and NAC has filed with the applicable New York Court and Delaware Court each of the stipulations referred to above. Pursuant to the Agreement, NAC has agreed (subject to certain terms and conditions set forth in the Agreement) to purchase from the Selling Shareholders their 1,562,500 shares of NAC Common Stock at a price of $0.6732 per share (or a total purchase price of $1,051,875) and to contribute $100,000 to cover a portion of the legal fees incurred by the Selling Shareholders. NAC's obligation to purchase such shares is conditioned upon (as well as certain other conditions) (a) an order or judgment having been entered by the New York Court in the New York Action, dismissing the New York Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed, and (b) an order or judgment having been entered by the Delaware Court in the Delaware Action, dismissing the Delaware Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed. NAC anticipates that all or a substantial portion of the purchase price for any shares purchased from the Selling Shareholders, as well as the $100,000 referred to above for legal fees of the Selling Shareholders, will be funded from the net proceeds of the $2.5 million that has been provided by NAC's insurer for a Settlement Fund in the New York Action. As acknowledged by the Selling Shareholders in the Agreement, NAC was willing to enter into the Agreement, settle the New York Action and the Delaware Action and consummate the other transactions contemplated by the Agreement in order to terminate prolonged and expensive litigation and NAC's entry into the Agreement would not constitute or be deemed to constitute or evidence any improper or illegal conduct by or on behalf of NAC (or any of its directors, officers, employees and other agents or representatives) or any other wrong doing by NAC (or any of its directors, officers, employees and other agents or representatives). The Agreement was approved by the disinterested and independent members of NAC's Board of Directors. Management currently anticipates that the settlement of the New York Action and the Delaware Action, as described above, will be completed by August 31, 2005. When the settlement is confirmed, NAC will record the repurchase shares at their market value, based upon the market price of NAC's Common Stock on April 22, 14 2005 (which was $0.54 per share). As a consequence, upon the confirmation of the settlement in Fiscal 2006 and based upon current estimates, NAC will (i) record as a component of stockholder's equity the net proceeds of $1.9 million derived from the Settlement Fund, (ii) record a charge to stockholder equity for the issuance of the five-year warrants issued to eligible shareholders, (iii) charge to operations for the excess cost to repurchase the Common Stock and related legal costs of $208,000 and $100,000, respectively, and (iv) record an net increase in cash and cash equivalents, after the Common Stock repurchase of approximately $750,000. Management believes that settlement of the New York Action and the Delaware Actions, as provided for in the Agreement and the New York Settlement Stipulation, will allow management to concentrate its efforts on NAC's business and will allow NAC to avoid the costs and distractions of prolonged litigation. SIGNIFICANT DEVELOPMENTS IN FISCAL 2004 Acquisition - The Campus Group In July 2003, NAC consummated a Stock Purchase Agreement whereby NAC acquired all outstanding capital stock of The Campus Group, four affiliated companies providing satellite videoconferencing, multi-media production services and corporate meeting services, from Mr. Steven Campus and certain family trusts for an aggregate purchase price of $15.5 million. The Campus Group, headquartered in Tuckahoe, New York, specializes in the full service design, creative development, production, post production editing and transmission, via broadcast satellite videoconferencing, webcasting and traditional on-site presentations, of corporate communication, education and training video and other services for use at corporate events. For financial reporting purposes, the effective date of the transaction was July 31, 2003. In exchange for the acquisition of all of the outstanding capital stock of The Campus Group, NAC (i) paid $2.8 million at closing from NAC's available cash balances, (ii) issued to Mr. Campus and certain family trusts promissory notes of $9.9 million, and (iii) issued to a family trust a convertible promissory note of $2.8 million. The Campus Group revenues and net income for the year ended December 31, 2002 were $10.7 million and $1.2 million, respectively. As part of The Campus Group acquisition, Mr. Campus entered into an employment agreement under which he has agreed to serve as President of each of the four acquired companies with an initial term of three years. The term of the employment agreement will be automatically extended until such time as the promissory notes and convertible promissory note are retired. Mr. Campus, subject to certain limitations, will have control over day-to-day operations of The Campus Group. Under the terms of the employment agreement, Mr. Campus will be entitled to base compensation of $100,000 per year and a performance bonus based upon the operating results of the Campus Group. Acquisition - OMI In April 2003, NAC consummated a Merger and Plan of Reorganization Agreement whereby NAC acquired all of the outstanding common stock of OMI Business Communications, Inc. ("OMI"), from Mr. Dean R. Thompson, sole stockholder of OMI. OMI, headquartered in New York, New York, is a multi-media production services, corporate meeting services, web-site development and web content management company. OMI specializes in the full service design, creative development, production and post production editing of corporate communication and training videos for use at corporate events and as collateral content material for client web-sites. Additionally, OMI frequently provides event planning services including site selection, survey, event management and related services associated with remote location presentations. For financial reporting 15 purposes, the effective date of the transaction was April 1, 2003. The Campus Group and OMI together are known as the "Acquired Companies". In exchange for the acquisition of all of the outstanding common stock of OMI, NAC (i) issued 200,000 shares of NAC Common Stock, valued at $26,000 (ii) assumed $814,000 in bank debt and capital lease obligations to financial institutions and (iii) issued a promissory note payable to Mr. Thompson in the amount of $153,000, payable in monthly installments of principal and interest over a 36 month period. In addition to the initial payments, NAC agreed to a contingent payment to Mr. Thompson of $150,000 based upon OMI's financial performance during the three-year period ending January 31, 2006. As part of the OMI acquisition, OMI entered into a five year employment agreement with Mr. Thompson under which Mr. Thompson will serve as President of OMI and, subject to certain limitations, will have control over the day-to-day operations of OMI. Under the terms of the employment agreement, Mr. Thompson will be entitled to base compensation of $175,000 per year, a grant of stock options for up to 200,000 shares of NAC Common Stock and a performance bonus based upon the operating results of OMI. CRITICAL ACCOUNTING POLICIES NAC's consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require NAC to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses of NAC. NAC's significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. However, certain accounting policies are deemed "critical", as they require management's highest degree of judgment, estimates and assumptions. These accounting estimates and disclosures have been discussed with the Audit Committee of NAC's Board of Directors. A discussion of NAC's critical accounting policies, the judgments and uncertainties affecting their application, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions are as follows: Service Revenues: NAC's service revenues are earned within short time periods, generally less than one week. NAC recognizes revenue from video production, video editing, meeting services and broadcast satellite or webcast services when the video is complete and delivered or all technical services have been rendered. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. NAC does not have licensing or other arrangements that result in additional revenues following the delivery of the video or a broadcast. Costs accumulated in the production of the video, meeting services or broadcasts are deferred until the sale and delivery are complete. Deferred production costs of $401,000 and $398,000, respectively, are included as a component of other current assets at January 31, 2005 and 2004. NAC recognizes revenue from website design and development when the customer accepts the completed project. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. These contracts are generally limited to the design and development of websites and the presentation of site library content developed by NAC. Clients also have the option to engage NAC to maintain and upgrade their websites. These projects are separate from the website development and design engagements, and the related revenue is recognized over the term of the agreement, which is generally up to one year. NAC recognizes revenue from developing and maintaining websites pursuant to the requirements of Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue Recognition with Respect to Certain Arrangements." Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an 16 arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. If at the outset of the customer arrangement, NAC determines that the arrangement fee is not fixed or determinable or that collectibility is not probable, NAC defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable or, when collectibility is uncertain, as cash is collected. Cost of Service Revenues: Cost of revenues consists of direct expenses specifically associated with client service revenues. The cost of revenues includes direct salaries and benefits, purchased products or services for clients, web hosting, support services, shipping and delivery costs. Accounts Receivable: NAC extends credit to clients in the normal course of business. NAC continuously monitors collections and payments from clients and maintains an allowance for doubtful accounts based upon historical experience and any specific client collection issues that have been identified. Since accounts receivable are concentrated in a relatively few number of clients, a significant change in the liquidity or financial position of any of these clients could have a material adverse impact on the collectibility of the accounts receivable and future operating results. NAC does not have any off-balance sheet credit exposure related to its customers. Valuation of Long-lived Assets and Goodwill: NAC reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable and it annually assesses whether goodwill has been impaired by comparing the carrying amount of the goodwill to its fair value. When it is determined that the carrying amount of long-lived assets or goodwill is impaired, impairment is measured by comparing an asset's estimated fair value to its carrying value. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; and industry competition, general economic and business conditions, among other factors. Management has determined that there was no impairment to our long-lived assets and goodwill on the basis of a review of a discounted cash flow analysis, which for goodwill is performed at the level of the subsidiaries to which the goodwill relates. If there is a material change in the assumptions used in the determination of fair value or a material change in the conditions or circumstances influencing fair value, NAC could be required to recognize a material impairment charge. Self-Insurance Claims: NAC maintained and continues to maintain self-insurance for claims and associated litigation expenses relating to bodily injury or property damage from accidents involving the vehicles rented to customers by its discontinued automobile rental operations occurring in Fiscal 1996 and prior. 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. NAC is subject to certain self-insurance claims and litigation expenses relating to its discontinued automobile rental operations. NAC estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, NAC's historical loss experience and projected loss 17 factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of NAC's sale of its automobile rental operations in 1995, NAC believes that all incurred claims have been reported to NAC and that there are no longer any incurred but not yet reported claims to be received by NAC. NAC's self-insurance liability at January 31, 2005 and 2004 was $256,000 and $408,000, respectively. Because of the uncertainties related to several residual small claims and 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. As additional information regarding NAC's potential liabilities becomes available, NAC will revise the estimates as appropriate. Income Taxes: NAC recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Loss carrybacks, reversal of deferred tax liabilities, tax planning and estimates of future taxable income are considered in assessing the need for a valuation allowance. At the time it is determined that NAC is unable to realize deferred tax assets in excess of the recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should management determine that NAC would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. RESULTS FROM CONTINUING OPERATIONS As a consequence of NAC's (i) acquisition of The Campus Group and OMI in Fiscal 2004, and (ii) the formal exit from NAC's prior legacy business of auto finance and rental operations in Fiscal 2002, NAC has presented its financial statements in a manner that reflects the nature of the Acquired Companies' operations and the on-going operations of NAC and has reclassified the auto finance and rental operations as discontinued operations for all period presented. Furthermore, for Fiscal 2004, the results from continuing operations include the results from (i) The Campus Group, acquired July 31, 2003, only for the six months ended January 31, 2004 and (ii) OMI, acquired April 1, 2003, only for the ten months ended January 31, 2004. For Fiscal 2003, there were no continuing operations as NAC exited its legacy business during that period. Management's strategic initiatives for Fiscal 2005 have been (i) integrating The Campus Group and OMI acquisitions to use and share common internal and external resources to achieve improved operational efficiency, (ii) eliminating redundant fixed production expenses, (iii) creating a common NAC marketing group which cross sells NAC's services, (iv) developing business opportunities and strategies which expand its client base, (v) eliminating non-productive investments or costs and (vi) settling outstanding litigation with shareholders. During Fiscal 2005, NAC identified and eliminated annual expenses of $932,000 through leveraging The Campus Group, OMI's and NAC's internal resources and eliminating redundant expenses. NAC began to realize the effects of the expense elimination beginning in August 2004. NAC charged to NAC SG&A expense for Fiscal 2005, Fiscal 2004 and Fiscal 2003 $185,000, $334,000 and $109,000, respectively, relating exclusively to shareholder litigation. Upon the final settlement of the New York Action and the Delaware Action which is expected in Fiscal 2006, NAC will eliminate these costs and benefit from the redirection of additional management time to business development activities in the future. Generally, the time required to cultivate a new client relationship to the point where NAC is generating service revenues from such clients is between 6 to 12 months. Through NAC's marketing initiatives, management believes that NAC is well positioned for revenue growth for Fiscal 2006 with new and existing clients while maintaining a reduced and more streamlined cost structure. As a consequence of NAC strategic initiatives for Fiscal 2005, management is seeking to generate positive cash flow from the combined effects of its operations and its investment in AFC for Fiscal 2006. 18 Service Revenues: Revenues for Fiscal 2005 and Fiscal 2004 were $11.3 million and $7.1 million, respectively. The Campus Group revenues increased $4.5 million to $9.2 million for Fiscal 2005 as compared to $4.9 million for Fiscal 2004. OMI revenues decreased $156,000 to $2.1 million for Fiscal 2005 as compared to $2.2 million for Fiscal 2004. The increase in The Campus Group revenues Fiscal 2005 of $4.5 million is due principally to the effect of the inclusion of The Campus Group's revenues in the consolidated results of operations for the full year in Fiscal 2005 as compared to only six months for Fiscal 2004. The decrease in OMI revenues for Fiscal 2005 as compared to Fiscal 2004, is due principally to the net effect of (i) fluctuations of the timing and scope of client events from period-to-period, offset by (ii) the effect of the inclusion of OMI's results from operations for the full year in Fiscal 2005 compared to only ten months for Fiscal 2004. Cost of Service Revenues: Cost of revenues for Fiscal 2005 and Fiscal 2004 were $6.9 million and $4.0 million, respectively. The Campus Group cost of revenues increased $2.8 million to $5.5 for Fiscal 2005 as compared to $2.7 million for Fiscal 2004 principally as a consequence of increased revenue levels from period-to-period. Average gross margin for The Campus Group was 40.1% for Fiscal 2005 as compared to 44.5% for Fiscal 2004. The decline in the average gross margin for The Campus Group is due principally to the combined effects of (i) an increase in fixed production personnel and related costs to support medical symposium events sold by The Campus Group and (ii) a lower average gross margin, due to lower service fees charged, on the symposium business for Fiscal 2005 as compared to Fiscal 2004. Average gross margins for OMI was 35.1% for Fiscal 2005 as compared to 42.0% for Fiscal 2004. The decline in the average gross margin for OMI is due principally to the media production expenses and related production personnel costs attributable to new client assignments that were performed at a substantial discount to OMI's normal rates. Selling, General and Administrative ("SG&A"): For Fiscal 2005, SG&A expense includes twelve months of The Campus Group ("Campus SG&A"), OMI ("OMI SG&A") and NAC ("NAC SG&A") operations. For Fiscal 2004, SG&A expenses includes ten months of OMI SG&A, six months of Campus SG&A and twelve months of NAC SG&A. For Fiscal 2003, SG&A includes only NAC SG&A. SG&A expense for Fiscal 2005 increased $364,000 to $7.4 million as compared to $7.0 million for Fiscal 2004. SG&A expense of $7.4 million for Fiscal 2005 was comprised of Campus SG&A, OMI SG&A and NAC SG&A of $2.8 million, $1.1 million and $3.5 million respectively. SG&A expense of $7.0 million for Fiscal 2004 was comprised of Campus SG&A, OMI SG&A and NAC SG&A of $1.6 million, $1.3 million and $4.1 million respectively. SG&A expense for Fiscal 2003 was $3.5 million comprised exclusively of NAC SG&A. Campus SG&A increased $1.2 million to $2.8 million for Fiscal 2005 as compared to $1.6 million for Fiscal 2004 is due principally to the effect of Campus Group SG&A for the full year in Fiscal 2005 as compared to only six months for Fiscal 2004. OMI SG&A decreased $128,000 to $1.1 million for Fiscal 2005 as compared to $1.3 million due to the net effects of (i) a reduction in OMI SG&A expenditures through leveraging and utilization of existing The Campus Group and NAC professional and personnel resources, offset by (ii) Fiscal 2005 OMI SG&A was comprised of a full-year period as compared with a ten-month period for Fiscal 2004. NAC SG&A decreased $657,000 to $3.5 million for Fiscal 2005 as compared to $4.1 million for Fiscal 2004 principally due to a reduction in legal, corporate insurance and other professional service expenses from period-to-period as NAC completed its transition from its legacy operations of auto finance to corporate communications businesses. NAC SG&A expense in Fiscal 2003 was $3.5 million and was comprised principally of NAC personnel, occupancy, legal, professional, insurance and other general corporate overhead costs. 19 Interest Income: Interest income is derived principally from the interest earned on NAC's investments in marketable securities, commercial paper, and money market accounts. Interest earned on NAC investments for Fiscal 2005, Fiscal 2004 and Fiscal 2003 was $6,000, $79,000 and $142,000, respectively. The decrease in interest income over each of the Fiscal periods is due principally to a decrease in the weighted average investment balances during the period as funds were used in Fiscal 2004 to (i) consummate the acquisition of The Campus Group, (ii) discontinue the auto finance and e-commerce businesses and (iii) to sustain corporate operations. In addition to the interest income earned on investments, NAC also recorded interest income as result of a series of claims for income tax refunds from 1988 through 1997. In Fiscal 2003, NAC recorded interest income of approximately $500,000 relating to the income tax refund claims. In Fiscal 2004, NAC realized additional interest income of $451,000 as a result of a final determination of refund by the Internal Revenue Service ("IRS") relating to its claims for refund for fiscal years 1988 through 1997. In Fiscal 2005, NAC realized an additional $243,000 in interest as a result of adjusted refund claims and final determination of refund by the IRS for 1995 and 1996. Income from Investment in AFC: NAC accounts for its investment in AFC using the equity method. For Fiscal 2005, Fiscal 2004 and Fiscal 2003, NAC's share of the net income of AFC was $344,000, $333,000 and $375,000, respectively. AFC's fiscal year ends December 31. The following sets forth summarized operating results for AFC (in thousands): Years Ended December 31, --------------------------------------------- 2004 2003 2002 ------------- ------------- ------------ Revenues $5,093 $5,791 $6,032 Film rental 941 1,320 1,627 Operating costs 2,505 2,744 2,831 Depreciation and amortization 787 850 699 General and administrative expenses 171 211 125 ------ ------ ------ 4,404 5,125 5,282 ------ ------ ------ Net income $ 689 $ 666 $ 750 ====== ====== ====== NAC's proportionate share of net income $ 344 $ 333 $ 375 ====== ====== ====== AFC's revenues decreased $698,000 to $5.1 million for the year ended December 31, 2004 as compared to $5.8 million the year ended December 31, 2003. The decrease in AFC's revenues was principally as a result of a 13.8% decrease in attendance while ticket prices remained stable from period-to-period. 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. AFC's revenues decreased $241,000 for the year ended December 31, 2003 as compared to the year ended December 31, 2002 principally as a result of the net effects of (i) an 8.5% decrease in attendance, offset in part by (ii) a 1.1% increase in average ticket prices and (iii) an increase of $140,000 in other concession and cafe revenues. For the years ended December 31, 2004, 2003 and 2002, film rental expense, as a percentage of revenues, were 18.5%, 22.8% and 27.0%, 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 20 rental expense, as a percentage of revenue, depending upon the rental rate per film, length of time the film is exhibited and the popularity of the film. For the years ended December 31, 2004, 2003 and 2002, operating costs were $2.5 million, $2.7 million and $2.8 million, respectively. Furthermore, operating costs, as a percentage of revenues were 49.2%, 47.4% and 46.9% for the years ended December 31, 2004, 2003 and 2002, respectively. The nature of AFC's operating costs tend to generally be more fixed overhead related costs and advertising expenses. Operating costs decreased $239,000 for the year ended December 31, 2004 as compared to the year ended December 31, 2003 due to reduced operating personnel expenses as a consequence of reduced attendance from period-to-period. Operating expenses remained stable from the year ended December 31, 2002 to the year ended December 31, 2003. As a result of the net cash flow realized by AFC, distributions by AFC to NAC for Fiscal 2005, Fiscal 2004 and Fiscal 2003 were $937,000, $1.1 million and $300,000, respectively. The lower level of distributions for Fiscal 2003 as compared to Fiscal 2005 and Fiscal 2004 is a result principally of the AFC capital improvement program to refurbish the theatre during Fiscal 2003. In August 2002, AFC initiated a $1.1 million capital improvement program to renovate the interior of the theatre and upgrade certain equipment, services and facilities. AFC financed the capital program through its current cash flow from operations and as a consequence cash distributions were reduced until the completion of the capital program in December 2002. Interest Expense: In connection with the acquisitions of The Campus Group and OMI during Fiscal 2004, NAC issued $12.8 million in promissory notes to finance a portion of the cost of the acquisitions and assumed certain outstanding debt obligations of $814,000 at the time of the OMI acquisition. Interest expense for Fiscal 2005 and Fiscal 2004 was $776,000 and $369,000, respectively. Income Taxes: For Fiscal 2004 and Fiscal 2003, NAC recorded income tax benefits of $395,000 and $2.2 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. For Fiscal 2004 and Fiscal 2003, $415,000 and $145,000, respectively, of the tax benefits is a component of discontinued operations. As of January 31, 2005 NAC has federal net operating loss carryforwards of $87.1 million that may be used to reduce future taxable income, subject to limitations. NAC also has unused low income housing credits totaling $4.3 million. At January 31, 2005, NAC has claims for refunds in the amount of $826,000. Additionally, as of January 31, 2005, NAC has state and local net operating losses of $1.9 million to reduce future income, subject to limitations. 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 $56.3 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 $3.1 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 $30.8 million and $1.2 million, respectively, as of January 31, 2005, are not subject to the Section 382 limitation. As of January 31, 2005 NAC has $908,000 of minimum tax credits which may be applied against any future regular income taxes which exceed alternative minimum taxes. These credits may be carried forward indefinitely and are also subject to the Section 383 limitation. 21 SEASONALITY OF BUSINESS NAC's revenues are derived from services performed for clients principally on a project-by-project basis. The nature, scope and timing of client projects are determined independently by each client based upon their own internal operating and communications needs which fluctuate from quarter-to-quarter and year-to-year. To date, NAC has not experienced any determinable revenue trends based upon seasonality. DISCONTINUED OPERATIONS E-commerce Operations: In Fiscal 2005 and Fiscal 2004, there were no revenues or expenses incurred attributable to the e-commerce operations. In Fiscal 2003 NAC's e-commerce operations realized income of $2,000 as a result of the winding down of operations. Automobile Financing: In Fiscal 2005, NAC's automobile financing operations realized revenues of $13,000 principally resulting from the collection of previously charged-off loans and incurred $13,000 in administrative expenses. In Fiscal 2004, NAC's automobile financing operations realized income of $117,000, principally resulting from income tax benefits realized upon the final determination of refund issued by the Internal Revenue Service during the period. In Fiscal 2003, NAC's automobile financing operations realized income of $33,000, comprised of $28,000 from the collection of previously charged-off loans and a $145,000 income tax benefit, offset by $140,000 in legal and general expenses as a result of the winding down of operations. 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). In Fiscal 2005, there were no revenues or expenses incurred attributable to the auto rental operations. In Fiscal 2004, NAC's auto rental operations realized income of $284,000, principally resulting from income tax benefits realized upon the final determination of refund issued by the Internal Revenue Service and Canadian Revenue Authority during the period. For Fiscal 2003, 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 14 of Notes to Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES Throughout the Fiscal 2005 and as of May 11, 2005, NAC has operated on its existing cash balances, proceeds from its income tax refund, cash flows from operations, distributions from its investment in AFC and proceeds from a $1.0 million promissory note issued in July 2004. NAC will continue to pursue reductions in its operating expenses and new debt or equity financing (which there can be no assurance NAC will obtain such financing) as means of supplementing NAC's resources available to pursue new acquisitions, joint ventures or other business development opportunities. At January 31, 2005, NAC had cash of $471,000 and an $826,000 22 income tax refund receivable, which together with any cash flow derived from its investment in AFC and the operations of NAC's corporate communications business will be used to pursue such opportunities. As a consequence of periodic fluctuations in NAC's working capital needs based upon the timing of collections, periods of increased media production activity and the then pending collection of the income tax refundable, on July 14, 2004 NAC consummated a Loan and Security Agreement ("Loan Agreement") with a lender and issued a Promissory Note ("Note") of $1.0 million. The lender, Time Passages Corp., is an unaffiliated third party lender. The President of Time Passages Corp. was a former director of NAC who last served on NAC's board in January 2002. Pursuant to the terms of the Note, (i) the outstanding principal of the Note is due July 13, 2005, (ii) NAC is required to pay interest only, monthly and in arrears, during the term and (iii) the Note bears interest at 20% per annum. NAC may prepay the Note at anytime and without a prepayment penalty. The Note is secured by a perfected first priority security interest in and to, and a lien on and pledge of, NAC's right, title and interest in and to virtually all of NAC's assets. The lien does not extend to the common stock of The Campus Group and other permitted liens. In January 2005, NAC prepaid $650,000 of the Note. At January 31, 2005, the outstanding balance of the Note was $350,000. In February 2005, NAC prepaid the $350,000 remaining balance and retired the Note. In July 2004, NAC initiated a private placement ("NAC Private Placement") whereby NAC offered for sale up to 1.3 million shares of unregistered, restricted treasury stock at $0.25 per share. Pursuant to the terms of the NAC Private Placement, NAC sold an aggregate of 950,000 shares of its treasury stock at $0.25 per share from which it derived net proceeds of approximately $237,000. The restricted shares may not be sold or otherwise transferred without registration under the Securities and Exchange Act of 1933, as amended, or applicable state securities laws or an exemption there from. In the event that NAC proposes to register any of its securities under the Securities Act, whether for its own account or for the account of another shareholder, the treasury stock issued pursuant to the NAC Private Placement will be included in such registration. As a consequence of NAC's acquisition of The Campus Group effective July 31, 2003, NAC issued to Mr. Campus and certain family trusts promissory notes of $9.9 million and issued to a family trust a convertible promissory note of $2.8 million. Of the $9.9 million in promissory notes issued by NAC, $6.6 million of the promissory notes ("Base Notes") bear interest at 5% per annum and are repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed seven years. The remaining $3.3 million in promissory notes ("Trailing Notes") issued by NAC bear interest at 5% per annum and are repayable in quarterly installments, commencing upon the retirement of the Base Notes, according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years subsequent to the retirement of the Base Notes. The $2.8 million convertible promissory note (i) bears interest at 5% per annum, payable quarterly in cash or accumulating as principal at the election of NAC, (ii) requires principal payments to commence upon the retirement of the $9.9 million of Base Notes and the Trailing Notes and is then repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years and (iii) is convertible at the option of the holder into shares of NAC common stock at a base conversion price of $1.50 per share. The holder may not convert the convertible promissory note into NAC common stock prior to repayment of the Base Notes and the Trailing Notes. The promissory notes are secured by the capital stock of the companies comprising The Campus Group. At January 31, 2005, NAC has outstanding obligations under the terms of the Base Notes, Trailing Notes and the Convertible Notes of $6.1 million, $3.3 million and $2.8 million, respectively. As a consequence of NAC's acquisition of OMI effective April 1, 2003, NAC assumed $814,000 in bank debt and capital lease obligations to financial institutions and issued a promissory note payable to Mr. Thompson in the amount of $153,000. 23 During 2001, OMI obtained a $300,000 bank term loan (the "Term Loan") to finance certain capital expenditures. The Term Loan is payable in monthly installments of $6,000, comprised of principal and interest, over a five year term, expiring in July 2006. The Term Loan bears interest at the rate of 8.25% per annum. The Term Loan is collateralized by substantially all of OMI's assets and the personal guarantee of Mr. Thompson. In April 2004, as a consequence of a change in control provision in the Term Loan, the bank requested accelerated repayment of the Term Loan. NAC has classified the Term Loan as a component of current maturities at January 31, 2005. The outstanding balance of the Term Loan at January 31, 2005 was $95,000. On April 25, 2002, OMI obtained a $402,000 loan guaranteed by the U.S. Small Business Administration (the "SBA Loan") to finance losses incurred as a result of the September 11, 2001 terrorist attacks in New York City. At January 31, 2005, the remaining balance of the SBA Loan of $383,000 is repayable in monthly installments of $3,309 with the last payment due in April 2017. The SBA Loan bears interest at the rate of 4% per annum. The promissory note payable to Mr. Thompson is payable in monthly installments of principal and interest over a 36 month period expiring April 2006. The promissory note bears interest at 5% per annum. The outstanding balance of the promissory note at January 31, 2005 was $73,000. OMI leases computer equipment under several different capital leases with finance institutions with various payment terms, expiration dates and imputed annual rates of interest. At January 31, 2005, amounts outstanding under the capital leases were $21,000. For Fiscal 2005, NAC's cash and cash equivalents increased $95,000 due to the net effects of (i) the net loss from continuing operations of $1.8 million, (ii) proceeds of $1.3 million from the collection of the income tax refund (iii) the $131,000 net change in operating assets and liabilities, (ii) capital expenditures of $246,000, (iii) the repayment of debt of $1.0 million, (iv) proceeds from the issuance of a promissory note of $1.0 million and the sale of treasury stock of $237,000, and (v) AFC distributions of $937,000. NAC also used $152,000 of cash principally for legal and claim expenses associated with NAC's discontinued operations. During Fiscal 2004, NAC generated $1.7 million cash flows from continuing operations. This is due to the effect of (i) the net loss from continuing operations of $2.2 million, (ii) net proceeds from the income tax refund of $3.4 million and (iii) the $499,000 net change in operating assets and liabilities. NAC also used $123,000 of cash in the various discontinued operations. NAC used $1.3 million in cash flows from investing activities principally due to the net effect of (i) $3.2 million used to acquire The Campus Group and OMI, (ii) capital expenditures of $265,000, (iii) distributions received from AFC of $1.1 million and (iv) net proceeds of $1.1 million derived from the sale of marketable securities. Also during Fiscal 2004, NAC used cash to repay debt of $490,000 and to retire a $1.3 million obligation assumed by NAC in the acquisition of The Campus Group Companies. During Fiscal 2003, NAC used $4.3 million cash flows in continuing operations. This is due to the effect of (i) NAC's net loss from continuing operations of $419,000, (ii) an increase in the income tax refundable of $2.1 million and (iii) the $1.9 million net change in operating assets and liabilities. NAC also used $294,000 of cash in the various discontinued operations. NAC generated $363,000 in cash flows from investing activities principally as the result of distributions from AFC of $300,000. NAC believes that the available cash and cash equivalents totaling $471,000 at January 31, 2005, the collection of the federal income tax refund of $826,000 and any cash distributions from its investment in AFC and cash flow from operations will be sufficient to pay operating expenses, existing liabilities, fund existing 24 debt repayments and fund its activities through the next twelve months as NAC explores new strategic business alternatives. 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. In addition, pursuant to the terms of the New York Settlement Stipulation and upon its final confirmation and the dismissal of the Delaware Action, NAC would receive an estimated $1.9 million as the net proceeds, after plaintiff attorney's fees, from the Settlement Fund. Pursuant to the terms of the Stock Purchase Agreement ("Agreement") with the Selling Shareholders, NAC has agreed to purchase 1,562,500 shares of NAC Common Stock at a price of $0.6732 per share (or a total purchase price of $1,051,875) and to contribute $100,000 to cover a portion of the legal fees incurred by the Selling Shareholders. NAC expects to use a portion of the net proceeds derived from the Settlement Fund to purchase the 1,562,500 shares of Common Stock. At January 31, 2005, no provision for the New York Settlement Stipulation has been recorded in the consolidated financial statements as the final dismissals of the New York Action and the Delaware Action have not been issued by the respective courts. The following table presents certain payments due under contractual obligations with minimum firm commitments as of January 31, 2005 Payments Due by Period ------------------------------------------------------------------- Less Than More Than Contractual Obligations Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years ----------------------- ----- ------ ----------- ----------- ------- (in thousands) Long-term Debt Obligations $ 13,065 $1,589 $ 2,353 $ 2,585 $ 6,538 Capital Lease Obligations 25 25 - - - Operating Lease Obligation 1,917 647 876 350 44 Purchase Obligation - - - - - Other Long-Term Liabilities - - - - - ------------------------------------------------------------------- $ 15,007 $2,261 $ 3,229 $ 2,935 $ 6,582 =================================================================== OTHER New Accounting Pronouncements In December, 2004 the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. NAC is required to adopt SFAS 123R at the beginning of Fiscal 2007, (effective February 1, 2006) Under SFAS No. 123R, NAC must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retrospective adoption options. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption while the retrospective methods would record compensation expense 25 for all unvested stock options and restricted stock beginning with the first period restated. NAC has not yet determined the method of adoption or the effect of adopting SFAS 123R, and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, which is an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based upon the fair value of the assets exchanged, with certain exemptions to that principle. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a consequence of the exchange. The adoption of SFAS No. 153 will be effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. NAC expects that the adoption of SFAS No. 153 will not have a material impact NAC's consolidated financial statements. Inflation Inflation has not had a material effect on NAC's business. 26 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. As of January 31, 2005, the interest rates under NAC's long term and convertible debt are fixed. As a result NAC has limited market risk associated with market interest rates. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005 and 2004 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, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, 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, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Grant Thornton LLP Cleveland, Ohio April 22, 2005 28 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) January 31, ----------------------- 2005 2004 --------- ---------- ASSETS Cash and cash equivalents (Note 1) $ 471 $ 376 Accounts receivable, net of allowance of $65 and $75, respectively (Note 1) 2,132 1,979 Income taxes refundable (Note 8) 826 2,162 Prepaid expenses 256 293 Other current assets 494 399 --------- --------- Total current assets 4,179 5,209 Property and equipment, net of accumulated depreciation of $1,216 and $528, respectively (Notes 1 and 3) 2,240 2,756 Investment in AFC (Note 4) 7,955 8,549 Goodwill (Notes 1 and 2) 4,920 4,920 Other intangible assets, net of accumulated amortization of $852 and $284, respectively (Notes 1 and 2) 8,630 9,198 Other assets 165 284 --------- --------- $ 28,089 $ 30,916 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current maturities of long term obligations (Note 7) $ 1,612 $ 1,339 Accounts payable 1,255 1,238 Self-insurance claims (Note 14) 256 408 Accrued income taxes (Note 8) 328 334 Deferred revenue (Note 1) 1,194 776 Other liabilities (Note 6) 1,392 1,547 --------- --------- Total current liabilities 6,037 5,642 Long term obligations (Note 7) 8,650 8,969 Convertible promissory note (Note 7) 2,825 2,825 --------- --------- 17,512 17,436 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes 14 and 17) -- -- STOCKHOLDERS' EQUITY (Note 9) Preferred stock -- -- Common stock - $.05 par value, authorized 40,000,000 shares, issued 39,949,589 and 39,949,589 shares, respectively 1,997 1,997 Additional paid-in capital 174,454 174,454 Retained deficit (143,383) (139,746) Deferred compensation (89) (113) Treasury stock, at cost, 29,946,975 and 30,896,975 shares, respectively (22,402) (23,112) --------- --------- Total stockholders' equity 10,577 13,480 --------- --------- $ 28,089 $ 30,916 ========= ========= See accompanying notes to consolidated financial statements. 29 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Years Ended January 31, -------------------------------- 2005 2004 2003 -------- -------- -------- Service revenues (Notes 1 and 15) $ 11,343 $ 7,144 $ -- Cost of service revenues (Note 1) 6,896 4,011 -- -------- -------- -------- Gross profit 4,447 3,133 -- Selling, general and administrative 7,398 6,990 3,506 -------- -------- -------- Loss from operations (2,951) (3,857) (3,506) Interest income 249 530 642 Income from AFC investment (Note 4) 344 333 375 Interest expense (Note 7) (776) (369) -- -------- -------- -------- Loss from continuing operations before income taxes (3,134) (3,363) (2,489) Provision (benefit) for income taxes (Note 8) 30 20 (2,070) -------- -------- -------- Loss from continuing operations (3,164) (3,383) (419) Income from discontinued operations, net of tax (Note 10) -- 401 310 -------- -------- -------- Net loss applicable to common stock $ (3,164) $ (2,982) $ (109) ======== ======== ======== Basic and diluted (loss) earnings per share Continuing operations $ (.33) $ (.41) $ (.05) Discontinued operations -- .05 .04 -------- -------- -------- Net loss per share $ (.33) $ (.36) $ (.01) ======== ======== ======== Weighted average number of shares outstanding Basic and diluted 9,529 8,182 8,380 ======== ======== ======== See accompanying notes to consolidated financial statements. 30 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Preferred Stock Common Stock ----------------- ------------------------- Additional Par Par Paid-In Retained Shares Value Shares Value Capital Deficit ------- -------- ---------- ------------- ------------ ------------- BALANCE, JANUARY 31, 2002 -- $ -- 39,377,589 $ 1,969 $ 174,337 $ (136,346) Net loss (109) Surrender of common shares as payment on note receivable Other comprehensive income (loss) unrealized loss on marketable securities ------- ------- ------------ ------------ ------------ ------------ BALANCE, JANUARY 31, 2003 -- -- 39,377,589 1,969 174,337 (136,455) Net loss Acquisition of OMI 200,000 10 16 (2,962) Stock awards to employees 372,000 18 101 (166) Stock issued for acquisition services (143) Deferred compensation expense Other comprehensive income (loss) unrealized loss on marketable securities ------- ------- ------------ ------------ ------------ ------------ BALANCE, JANUARY 31, 2004 -- -- 39,949,589 1,997 174,454 (139,746) Net loss (3,164) Treasury stock sold (473) Deferred compensation expense ------- ------- ------------ ------------ ------------ ------------ BALANCE, JANUARY 31, 2005 -- $ -- 39,949,589 $ 1,997 $ 174,454 $ (143,383) ======= ======= ============ ============ ============ ============ Deferred Other Comprehensive Treasury Compensation Comprehensive Income Stock Expense Income (loss) Total (Loss) ------------- ------------ ------------- ------------ ------------- BALANCE, JANUARY 31, 2002 $ (23,502) $ -- $ (133) $ 16,325 Net loss (109) (109) Surrender of common shares as payment on note receivable (96) (96) Other comprehensive income (loss) unrealized loss on marketable securities (10) (10) (10) ------------ ------------ ------------ ------------ ----------- BALANCE, JANUARY 31, 2003 (23,598) -- (143) 16,110 $ (119) =========== Net loss (2,982) (2,982) Acquisition of OMI 26 Stock awards to employees 262 (119) 96 Stock issued for acquisition services 224 81 Deferred compensation expense 6 6 Other comprehensive income (loss) unrealized loss on marketable securities 143 143 ------------ ------------ ------------ ------------ ----------- BALANCE, JANUARY 31, 2004 (23,112) (113) -- 13,480 $ (2,982) =========== Net loss (3,164) (3,164) Treasury stock sold 710 237 Deferred compensation expense 24 24 ------------ ------------ ------------ ------------ ----------- BALANCE, JANUARY 31, 2005 $ (22,402) $ (89) $ -- $ 10,577 $ (3,164) ============ ============ ============ ============ =========== See accompanying notes to consolidated financial statements. 31 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years Ended January 31, ------------------------------------------- 2005 2004 2003 ------------- ------------- ------------- CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES Net loss $ (3,164) $ (2,982) $ (109) Adjustments to reconcile net loss to net cash (used in) provided by continuing operating activities: Loss (gain) from discontinued operations - 13 (310) Depreciation and amortization 1,330 722 33 Changes in operating assets and liabilities: Accounts receivable (153) (566) - Accrued income tax/refundable 1,330 3,443 (2,070) Accounts payable and other liabilities 435 1,384 (1,017) Other operating assets and liabilities, net (413) (319) (845) ------------- ------------- ------------- Net cash provided by (used in) continuing operating activities (635) 1,695 (4,318) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Change in contracts in progress - - 106 Acquisition of OMI net of cash acquired - (97) - Acquisition of The Campus Group net of cash acquired - (3,111) - Proceeds from AFC distributions 937 1,079 300 Proceeds from sale of marketable securities - 1,071 - Purchase of other property and equipment (246) (265) (43) ------------- ------------- ------------- Net cash provided by (used in) investing activities 691 (1,323) 363 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net payments on debt and notes payable (1,046) (490) - Proceeds from sale of treasury stock 237 - - Proceeds from issuance of promissory note 1,000 - - Payments to retire Due to the Former Shareholder of The Campus Group - (1,256) - ------------- ------------- ------------- Net cash provided by (used in) financing activities 191 (1,746) - ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents from continuing operations 247 (1,374) (3,955) Decrease in cash and cash equivalents from discontinued operations (152) (123) (294) Cash and cash equivalents at beginning of year 376 1,873 6,122 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 471 $ 376 $ 1,873 ============= ============= ============= -continued- See accompanying notes to consolidated financial statements. 32 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (IN THOUSANDS) Years Ended January 31, ------------------------------- 2005 2004 2003 -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 624 $ 209 $ 3 ======== ======== ======== Income taxes paid $ 67 $ 64 $ -- ======== ======== ======== Stock awards to employees $ -- $ 214 $ -- ======== ======== ======== Stock issued for acquisition services $ -- $ 81 $ -- ======== ======== ======== Acquisition of The Campus Group: Non-cash assets acquired $ 17,260 Liabilities assumed (1,484) -------- 15,776 Promissory notes issued (12,665) -------- Cash paid, net of cash acquired $ 3,111 ======== Acquisition of OMI: Non-cash assets acquired $ 1,597 Liabilities assumed (1,321) -------- 276 Promissory notes issued (153) Common stock issued (26) -------- Cash paid, net of cash acquired $ 97 ======== See accompanying notes to consolidated financial statements. 33 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 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. NAC consummated a series of acquisitions during the year ended January 31, 2004 transforming its business operations into a multi-dimensional corporate communications and entertainment company (see Note 2). NAC specializes in the full service design, creative development, production, post production editing and transmission, via broadcast satellite videoconferencing, webcasting and traditional on-site presentations of corporate communication, education and training video and other services for use at corporate events. Additionally, NAC, through its investment in the Angelika Film Center LLC ("AFC"), operates in the movie exhibition industry (see Note 4). NAC acquired its investment in AFC in April 2000. Prior to Fiscal 2003, NAC's operations were conducted principally through three operating segments, (i) the e-commerce segment, which were 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 was comprised of the activities of AFC and (iii) the automobile financing segment. However, as the consequence of NAC's strategic review completed in the fourth quarter of Fiscal 2002, NAC suspended its ZoomLot operations and initiated the steps to discontinue both its e-commerce and auto financing segments as of January 31, 2002 (see Note 10). NAC continues to examine new business opportunities, which may be pursued through the investment in or acquisition of existing corporate operating businesses or other means. 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. 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. As of January 31, 2005, the Company's cash balance was $471,000 and the bank balance was $1,052,000. Of the total bank balance, $223,000 was covered by federal depository insurance and $829,000 was uninsured GOODWILL AND OTHER INTANGIBLE ASSETS: Intangible assets with indefinite lives, including goodwill, are not subject to amortization but are subject to testing for impairment at least annually or whenever there is an impairment indicator. 34 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In its acquisition of The Campus Group, NAC acquired certain intangible assets including client relationships and lists and a non-competition agreement with an initial aggregate fair value of $9.5 million. The useful lives of these intangibles are estimated to be 17 years and 9 years, respectively. The intangible assets with definite useful lives are amortized using the straight-line method over those lives. For Fiscal 2005 and from July 31, 2003, the date to acquisition, to January 31, 2004, NAC charged to operations $568,000 and $284,000, respectively, for the amortization of these intangible assets. IMPAIRMENT OF LONG-LIVED ASSETS: NAC reviews the carrying value of its long-lived assets (other than goodwill) whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If indicators of impairment exist, NAC would determine whether the estimated undiscounted sum of the future cash flows of such assets is less than its carrying amount. If less, an impairment loss would be recognized based on the excess of the carrying amount of such assets over their respective fair values. NAC would determine the fair value by using quoted market prices, if available, for such assets; or if quoted market prices are not available, NAC would discount the expected estimated future cash flows. Certain of these long-lived assets were disposed of or have been written-down to their estimated fair value (see Notes 10 and 11). ACCOUNTS RECEIVABLE: Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is NAC's best estimate of the amount of probable credit losses in NAC's existing accounts receivable. NAC determines the allowance based on analysis of historical bad debts, client concentrations, client credit-worthiness and current economic trends. NAC reviews its allowance for doubtful accounts quarterly. Past-due balances over 90 days and specified other balances are reviewed individually for collectibility. All other balances are reviewed on an aggregate basis. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. NAC does not have any off-balance sheet credit exposure related to its customers. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost (see Note 3). Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from eighteen months to ten years. 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. 35 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SELF-INSURANCE CLAIMS: NAC is the subject to certain self-insurance claims and associated litigation expenses relating to its discontinued automobile rental operations. NAC estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, NAC's historical loss experience and projected loss factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of NAC's sale of its automobile rental operations in 1995, NAC believes that all incurred claims have been reported to NAC and that there are no longer any incurred but not yet reported claims to be received by NAC. Because of the uncertainties related to several residual small claims and 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. As additional information regarding NAC's potential liabilities becomes available, NAC will revise the estimates as appropriate. SERVICE REVENUES: NAC's service revenues are earned within short time periods, generally less than one week. NAC recognizes revenue from video production, video editing, meeting services and broadcast satellite or webcast services when the video is complete and delivered or all technical services have been rendered. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. NAC does not have licensing or other arrangements that result in additional revenues following the delivery of the video or a broadcast. Costs accumulated in the production of the video, meeting services or broadcasts are deferred until the sale and delivery are complete. Deferred production costs of $401,000 and $398,000, respectively, are included as a component of other current assets at January 31, 2005 and 2004. NAC recognizes revenue from website design and development when the customer accepts the completed project. Deposits and other prepayments are recorded as deferred revenue until revenue is recognized. These contracts are generally limited to the design and development of websites and the presentation of site library content developed by NAC. Clients also have the option to engage NAC to maintain and upgrade their websites. These projects are separate from the website development and design engagements, and the related revenue is recognized over the term of the agreement, which is generally up to one year. NAC recognizes revenue from developing and maintaining websites pursuant to the requirements of Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue Recognition with Respect to Certain Arrangements." Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable, collectibility is probable and the arrangement does not require significant customization of the software. If at the outset of the customer arrangement, NAC determines that the arrangement fee is not fixed or determinable or that collectibility is not probable, NAC defers the revenue and recognizes the revenue when the arrangement fee becomes due and payable or, when collectibility is uncertain, as cash is collected. COST OF SERVICE REVENUES: Cost of revenues consists of direct expenses specifically associated with client service revenues. The cost of revenues includes direct salaries and benefits, purchased products or services for clients, web hosting, support services, shipping and delivery costs. 36 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING FOR STOCK-BASED COMPENSATION: NAC accounts for stock options and awards in accordance with the provisions of 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 If NAC had recorded compensation expense using the fair value method of SFAS 123, NAC's net after tax loss and loss per share would have been as follows (in thousands, except per share amounts): Years Ended January 31, ----------------------------- 2005 2004 2003 ------- ------- ------- Net loss applicable to common stock, as reported $(3,164) $(2,982) $ (109) Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects 24 6 Deducted: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (24) (6) (152) ------- ------- ------- Pro forma net loss $(3,164) $(2,982) $ (261) ======= ======= ======= Loss per share, as reported $ (0.33) $ (0.36) $ (0.01) ======= ======= ======= Pro forma loss per share $ (0.33) $ (0.36) $ (0.03) ======= ======= ======= No stock options were granted in Fiscal 2005, Fiscal 2004 or Fiscal 2003. EARNINGS PER SHARE: Basic earnings (loss) per share is computed by dividing net income (loss) 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 2005, 2004 and 2003. Common stock equivalents, in the form of stock options, which were excluded from the earnings (loss) per share due to their dilutive effect were 1,630,000, 1,630,000 and 1,875,000 for Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. 37 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS: In December, 2004 the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. NAC is required to adopt SFAS 123R as of the beginning of Fiscal 2007, (effective February 1, 2006). Under SFAS No. 123R, NAC must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retrospective adoption options. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption while the retrospective methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. NAC has not yet determined the method of adoption or the effect of adopting SFAS 123R, and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, which is an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based upon the fair value of the assets exchanged, with certain exemptions to that principle. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a consequence of the exchange. The adoption of SFAS No. 153 will be effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. NAC expects that the adoption of SFAS No. 153 will not have a material impact NAC's consolidated financial statements. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to the current year presentation. 38 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 2 - ACQUISITIONS The Campus Group In July 2003, NAC consummated a Stock Purchase Agreement whereby NAC acquired all outstanding capital stock of four affiliated companies, Campus Group Companies, Inc., Audience Response Systems, Inc, Interactive Conferencing Network, Inc. and Multi-Video Services, Inc., collectively known as The Campus Group, from Mr. Steve Campus and certain Family Trusts. The Campus Group was NAC's second acquisition in the corporate communication, education and training industry. Through the acquisition of The Campus Group, NAC expanded its service offerings to corporate clients and broadened NAC's client base. The Campus Group's operations are service in nature requiring moderate investments in technology. The significant value in the acquisition is principally its (i) industry position (ii) assembled workforce, (iii) management strength (iv) trademarks, (v) client lists and client relations, and (vi) client industry expertise. In exchange for the acquisition of all of the outstanding capital stock of The Campus Group, NAC (i) paid $2.8 million at closing from NAC's available cash balances, (ii) issued to Mr. Campus and certain family trusts promissory notes of $9.9 million, and (iii) issued to a family trust a convertible promissory note of $2.8 million. For financial reporting purposes, the effective date of the transaction was July 31, 2003. As part of The Campus Group acquisition, Mr. Campus entered into an employment agreement under which he has agreed to serve as President of each of the four acquired companies with an initial term of three years. The term of the employment agreement will be automatically extended until such time as the promissory notes and convertible promissory note are retired. Mr. Campus, subject to certain limitations, will have control over day-to-day operations of The Campus Group. Under the terms of the employment agreement, Mr. Campus will be entitled to base compensation of $100,000 per year and a performance bonus based upon the operating results of the Campus Group. The components and allocation of the purchase price were as follows (in thousands): Amount -------- Components of purchase price: Cash paid at closing $ 2,825 Promissory notes issued at closing 9,840 Convertible note issued at closing 2,825 Transaction costs 861 -------- Total purchase price $ 16,351 ======== Allocation of purchase price: Current assets $ 1,758 Property and equipment 2,216 Goodwill arising in the acquisition 4,379 Other intangible assets 9,482 -------- 17,835 Accounts payable and accrued expenses (228) Due to shareholder (1,256) -------- Net assets acquired $ 16,351 ======== 39 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 2 - ACQUISITIONS (CONTINUED) NAC engaged the valuation services of an independent third party appraisal company to assist NAC with respect to determining the fair value of tangible and intangible assets acquired in accordance with SFAS No. 141 Business Combinations. As a consequence of The Campus Group acquisition, NAC recognized goodwill and other intangible assets of $4.4 million and $9.5 million, respectively. Based upon the valuation analysis of The Campus Group assets, the following values were assigned to each intangible asset classification: Description Amount Estimated Useful Life ----------- ------ --------------------- Client relationships and lists $9,350,000 17 years Non-competition agreement 159,000 9 years ---------- $9,509,000 ========== NAC does not expect amortization of goodwill or other intangibles, if any, to be deductible for income tax purposes. OMI In April 2003, NAC consummated a Merger Agreement and Plan of Reorganization whereby NAC acquired all of the outstanding common stock of OMI Business Communications, Inc. ("OMI") from Mr. Dean R. Thompson, sole stockholder of OMI. OMI was NAC's initial acquisition into the corporate communication, education and training industry. NAC management has significant experience in the corporate communication industry and identified OMI to initiate NAC's strategy to acquire businesses in this industry. OMI's operations are service in nature requiring moderate investments in technology. The significant value in the acquisition is principally its (i) industry position (ii) assembled workforce, (iii) management strength and (vi) potential to serve as a platform for future acquisitions in the industry. In exchange for the acquisition of all of the outstanding common stock of OMI, NAC (i) issued 200,000 shares of NAC Common Stock, valued at $26,000 (ii) assumed $814,000 in bank debt and capital lease obligations to financial institutions and (iii) issued a promissory note payable to Mr. Thompson in the amount of $153,000, payable in monthly installments of principal and interest over a 36 month period. In addition to the initial payments, NAC agreed to a contingent payment to Mr. Thompson of $150,000 based upon OMI's financial performance during the three-year period ending January 31, 2006. In the event Mr. Thompson meets the performance objectives during the three-year period, pro rata compensation expense would be charged to operations in each year that the performance objectives are met. For financial reporting purposes, the effective date of the merger was April 1, 2003. As part of the OMI acquisition, OMI entered into a five year employment agreement with Mr. Thompson under which Mr. Thompson will serve as President of OMI and, subject to certain limitations, will have control over the day-to-day operations of OMI. Under the terms of the employment agreement, Mr. Thompson will be entitled to base compensation of $175,000 per year, a grant of stock options for up to 200,000 shares of NAC Common Stock and a performance bonus, which will be charged to operations, based upon the operating results of OMI. 40 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 2 - ACQUISITIONS (CONTINUED) The components and allocation of the purchase price were as follows (in thousands): Amount ------- Components of purchase price: Common stock $ 26 Promissory note 153 Transaction costs 110 ------- Total purchase price $ 289 ======= Allocation of purchase price: Current assets $ 376 Property and equipment 632 Other assets 61 Goodwill arising in the acquisition 541 ------- 1,610 Accounts payable and accrued expenses (516) Debt (805) ------- Net assets acquired $ 289 ======= As a consequence of the OMI acquisition, NAC recognized goodwill of $541,000. NAC does not expect amortization of goodwill, if any, to be deductible for income tax purposes. The following sets forth the pro forma condensed results of operations of NAC, The Campus Group and OMI for the year ended January 31, 2004 as if the acquisitions were consummated on February 1, 2003. Prior to their acquisition, The Campus Group and OMI used a December 31 year end, and accordingly the pro forma results have been prepared by combining the historical results for NAC for the year ended January 31, with the historical results of The Campus Group and OMI for the year ended December 31. These pro forma results have been prepared for illustrative purposes only and do not purport to be indicative of what would have occurred had the acquisition been in effect for the periods indicated or the results which may occur in the future. Pro forma revenues, net loss and loss per share are as follows: Year Ended January 31, --------------------- 2004 2003 ---- ---- Service revenues $ 12,240 $13,209 ======== ======= Net loss from continuing operations $ (3,241) $ 339 ======== ======= Loss per share from continuing operations $ (0.39) $ 0.04 ======== ======= 41 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 3 - PROPERTY AND EQUIPMENT The components of property and equipment are as follows (in thousands): January 31, ---------------------------------------- Description 2005 2004 Estimated Useful Life ------------------- ------------------ ------------------ -------------------------------------- Leasehold Improvements $ 357 $ 357 Lesser of useful life or term of lease Machinery & Equipment 1,280 1,176 5 years Computer Equipment 858 774 3 years Furniture & Fixtures 238 305 5 years Automobiles 80 55 2 - 3 years Software 509 483 5 to 10 years Small Tools 4 4 18 months Film Library 130 130 5 years ------------------ ------------------ 3,456 3,284 Less Accumulated depreciation (1,216) (528) ------------------ ------------------ $ 2,240 $ 2,756 ================== ================== Depreciation expense was $762,000, $438,000 and $33,000 for Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. NOTE 4 - 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 an initial investment of $11.1 million. At April 5, 2000, the investment exceeded NAC's share of the net assets of AFC by approximately $5.6 million, which is being treated in a manner similar to goodwill (see Note 1). While AFC is currently owned 50% by NAC and 50% by Reading, its articles and bylaws 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 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 2005, Fiscal 2004 and Fiscal 2003, NAC recorded income from its investment in AFC of $344,000, $333,000 and $375,000, respectively, representing its share of AFC's income. 42 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 4 - INVESTMENT IN AFC (CONTINUED) Summarized financial statement information for AFC as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 is as follows (in thousands): December 31, --------------- 2004 2003 ------ ------ CONDENSED BALANCE SHEET: Current assets $ 755 $ 894 Property and equipment, net 1,212 1,409 Goodwill 6,888 7,479 Other assets 89 89 ------ ------ $8,944 $9,871 ====== ====== Current liabilities $ 645 $ 682 Non-current liabilities 1,779 1,610 Members' equity 6,520 7,579 ------ ------ $8,944 $9,871 ====== ====== For the Year Ended December 31, ------------------------ 2004 2003 2002 ------ ------ ------ CONSENSED STATEMENT OF EARNINGS: Revenues $5,093 $5,791 $6,032 Film rental 941 1,320 1,627 Operating costs 2,505 2,744 2,831 Depreciation and amortization 787 850 699 General and administrative expenses 171 211 125 ------ ------ ------ 4,404 5,125 5,282 ------ ------ ------ Net income $ 689 $ 666 $ 750 ====== ====== ====== NAC's proportionate share of net income $ 344 $ 333 $ 375 ====== ====== ====== NOTE 5 - FINANCIAL INSTRUMENTS NAC has various financial instruments including cash and cash equivalents, marketable securities, investments in affordable housing limited partnerships, miscellaneous other assets, promissory notes and a loan guaranteed by the U.S. Small Business Administration ("SBA Loan"). 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. 43 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 6 - OTHER LIABILITIES The components of other liabilities are as follows (in thousands): January 31, --------------- 2005 2004 ------ ------ Accrued interest $ 350 $ 160 Accrued litigation expenses 98 334 Accrued expenses 884 951 Accrued state and local taxes 60 102 ------ ------ Total $1,392 $1,547 ====== ====== NOTE 7 - CURRENT AND LONG TERM OBLIGATIONS On July 14, 2004, NAC consummated a Loan and Security Agreement ("Loan Agreement") with a lender and issued a Promissory Note ("Note") of $1.0 million. The lender, Time Passages Corp., is an unaffiliated third party lender. The President of Time Passages Corp. was a former director of NAC who last served on NAC's board in January 2002. Pursuant to the terms of the Note, (i) the outstanding principal of the Note is due July 13, 2005, (ii) NAC is required to pay interest only, monthly and in arrears, during the term and (iii) the Note bears interest at 20% per annum. NAC may prepay the Note at anytime and without a prepayment penalty. The Note is secured by a perfected first priority security interest in and to, and a lien on and pledge of, NAC's right, title and interest in and to virtually all of NAC's assets. The lien does not extend to the common stock of The Campus Group and other permitted liens. In January 2005, NAC prepaid $650,000 of the Note. At January 31, 2005, the outstanding balance of the Note was $350,000. In February 2005, NAC prepaid the $350,000 remaining balance and retired the Note. As a consequence of NAC's acquisition of The Campus Group effective July 31, 2003, NAC issued to Mr. Campus and certain family trusts promissory notes of $9.9 million and issued to a family trust a convertible promissory note of $2.8 million. Of the $9.9 million in promissory notes issued by NAC, $6.6 million of the promissory notes ("Base Notes") bear interest at 5% per annum and are repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed seven years. The remaining $3.3 million in promissory notes ("Trailing Notes") issued by NAC bear interest at 5% per annum and are repayable in quarterly installments, commencing upon the retirement of the Base Notes, according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years subsequent to the retirement of the Base Notes. The $2.8 million convertible promissory note (i) bears interest at 5% per annum, payable quarterly in cash or accumulating as principal at the election of NAC, (ii) requires principal payments to commence upon the retirement of the Base Notes and Trailing Notes and is then repayable in quarterly installments according to a formula based upon the future cash flows realized from The Campus Group over a period not to exceed three years and (iii) is convertible at the option of the holder into shares of NAC common stock at a base conversion price of $1.50 per share. The holder may not convert the convertible promissory note into NAC Common Stock prior to repayment of the Base Notes and Trailing Notes. The promissory notes are secured by the capital stock of the companies comprising The Campus Group. At January 31, 2005, NAC had outstanding obligations under the terms of the Base Notes, Trailing Notes and Convertible Notes of $6.1 million, $3.3 million and $2.8 million, respectively and accrued interest of $313,000. 44 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 7 - CURRENT AND LONG TERM OBLIGATIONS (CONTINUED) As a consequence of NAC's acquisition of OMI effective April 1, 2003, NAC assumed $814,000 in bank debt and capital lease obligations to financial institutions and issued a promissory note payable to Mr. Thompson in the amount of $153,000. The bank debt included a term loan payable in monthly installments of $6,000, comprised of principal and interest through July 2006 and a $100,000 revolving credit facility (the "Credit Facility"). In July 2003, NAC paid $83,000 to retire and cancel the Credit Facility. The Term Loan, which has an outstanding balance of $95,000 at January 31, 2005, bears interest at the rate of 8.25% per annum and is collateralized by substantially all of OMI's assets and the personal guarantee of Mr. Thompson. In April 2004, as a consequence of a change in control provision with the Term Loan, the bank requested accelerated repayment of the Term Loan. Accordingly, NAC has classified the Term Loan as a component of current maturities of long term obligations at January 31, 2005 and 2004. The bank debt also included a $402,000 SBA Loan OMI obtained to finance losses incurred as a result of the September 11, 2001 terrorist attacks in New York City. The SBA Loan is repayable in monthly installments of $3,309 beginning in May 2004, with the last payment due in April 2017. The loan bears at the rate of 4% per annum. The outstanding balance of the SBA Loan at January 31, 2005 was $383,000. The promissory note payable to Mr. Thompson is payable in monthly installments of principal and interest over a 36 month period expiring April 2006. The promissory note bears interest at 5% per annum. At January 31, 2005, there was $73,000 outstanding under the promissory note. OMI leases computer equipment under several different capital leases with finance institutions with various payments terms, expiration dates and imputed annual rates of interest. At January 31, 2005, there was $21,000 outstanding under these capital leases. 45 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 7 - CURRENT AND LONG TERM OBLIGATIONS (CONTINUED) The components of long term obligations and convertible debt at January 31, 2005 and January 31, 2004 are as follows (in thousands): January 31, -------------------- 2005 2004 -------- -------- Capital leases $ 21 $ 66 Promissory note 73 86 Term loan 95 158 SBA loan 383 402 Promissory note 350 -- Base promissory notes 6,065 6,321 Trailing promissory notes 3,275 3,275 Convertible debt 2,825 2,825 -------- -------- 13,087 13,133 Less current maturities (1,612) (1,339) -------- -------- Long-term obligations and convertible debt $ 11,475 $ 11,794 ======== ======== NAC's current maturities and convertible debt obligations at January 31, 2005 are as follows (in thousands): Amount ---------- 2005 $ 1,614 2006 1,154 2007 1,199 2008 1,260 2009 1,325 Thereafter 6,538 ---------- 13,090 Less interest due under capital leases obligations (3) ---------- $13,087 ========== The cost and accumulated depreciation for equipment under capital leases were $335,000 and $205,000, respectively at January 31, 2005. The cost and accumulated depreciation for equipment under capital leases were $335,000 and $93,000, respectively at January 31, 2004. 46 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 8 - 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, ----------------------------- 2005 2004 2003 ------- ------- ------- Current Federal $ -- $ -- $(2,215) Foreign -- (287) -- State 30 (108) -- ------- ------- ------- 30 (395) (2,215) Deferred Federal -- -- -- Foreign -- -- -- State -- -- -- ------- ------- ------- -- -- -- ------- ------- ------- Total 30 (395) (2,215) Allocated to discontinued operations -- 415 145 ------- ------- ------- Continuing operations $ 30 $ 20 $(2,070) ======= ======= ======= For Fiscal 2004 and Fiscal 2003, NAC recorded income tax benefits of $395,000 and $2.2 million, respectively, that represent either (i) adjustments that increased the previously estimated amount of net operating losses eligible to be carried back against prior years taxable income or (ii) adjustments to revise (reduce) previous estimates of certain income taxes. For Fiscal 2004 and Fiscal 2003, $415,000 and $145,000, respectively, of the tax benefit is a component of discontinued operations. As of January 31, 2005 NAC has federal net operating loss carryforwards of $87.1 million that may be used to reduce future taxable income, subject to limitations. Such net operating loss carryforwards will expire: $23.0 million in Fiscal 2019, $21.2 million in Fiscal 2020, $24.1 million in Fiscal 2021, $10.6 million in Fiscal 2022, $5.2 million in Fiscal 2023 and $3.0 million in Fiscal 2024. At January 31, 2005, NAC has claims for federal tax refunds in the amount of $826,000. As of January 31, 2005, NAC has state and local operating loss carryforwards of $1.9 million which will expire: $816,000 in Fiscal 2021, $499,000 in Fiscal 2022, $481,000 in Fiscal 2023 and $149,000 in Fiscal 2024. As a result of NAC's November 3, 2000 repurchase 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" described above, the use of net operating loss carryforwards totaling $56.3 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 $30.8 million as of January 31, 2005, are not subject to the Section 382 limitation. 47 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 8 - INCOME TAXES (CONTINUED) As of January 31, 2005, NAC also has unused low income housing credits totaling $4.3 million which expire: $569,000 in Fiscal 2013, $820,000 in Fiscal 2019, $953,000 in Fiscal 2020, $968,000 in Fiscal 2021, $898,000 in Fiscal 2022, $50,000 in Fiscal 2023 and $12,000 in Fiscal 2024. Of such low income housing credits, $3.1 million were generated prior to November 3, 2000 and are therefore subject to the Section 383 limitation described above. As of January 31, 2005, NAC has $908,000 of minimum tax credits, which may be applied against any future regular income taxes which exceed alternative minimum taxes. These credits may be carried forward indefinitely and are also subject to the Section 383 limitation. The components of the net deferred tax asset (liability) are as follows (in thousands): January 31, -------------------- 2005 2004 -------- -------- Deferred tax assets: Depreciation $ -- $ 1 Self-insurance claims 90 142 State income taxes -- 100 Accrued liabilities 371 574 Tax credits carryforwards 5,178 5,305 Net operating loss carryforwards (federal and state) 32,461 30,264 Other 10 7 -------- -------- Total deferred tax assets 38,110 36,393 -------- -------- Deferred tax liabilities: Depreciation (124) -- Limited partnership investments (941) (1,715) -------- -------- Total deferred tax liabilities (1,065) (1,715) -------- -------- Net deferred tax asset before valuation allowance 37,045 34,678 Less: valuation allowance (37,045) (34,678) -------- -------- 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 Fiscal 2005, Fiscal 2004 and Fiscal 2003 was $2.4 million,, $828,000 and $3.2 million, respectively. 48 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 8 - INCOME TAXES (CONTINUED) Reconciliations of the federal statutory tax rate to the effective tax rate for continuing operations are as follows: Years Ended January 31, --------------------------- 2005 2004 2003 ------ ------- -------- Statutory rate (35.0)% (35.0)% (35.0)% Permanent differences 13.8 6.0 0.4 State income taxes (net of federal tax benefit) 0.6 0.4 -- Deferred tax valuation allowance 76.6 25.8 (129.1) Tax credits 4.1 3.4 165.3 Benefit due to AMT net operating loss carryback claims -- -- (83.2) Adjustment to NOL carryforward (58.5) -- 6.4 Other (0.7) -- (8.0) ------ ------- -------- Effective Tax Rate .9% .6% (83.2)% ====== ======= ======== NOTE 9 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK 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, 2005 and 2004, there were no outstanding shares of Preferred Stock. Sale of Treasury Stock In July 2004, NAC initiated a private placement ("NAC Private Placement") whereby NAC offered for sale up to 1.3 million shares of unregistered, restricted treasury stock at $0.25 per share. Pursuant to the terms of the NAC Private Placement, NAC sold an aggregate of 950,000 shares of its treasury stock at $0.25 per share from which it derived net proceeds of approximately $237,000. The restricted shares may not be sold or otherwise transferred without registration under the Securities and Exchange Act of 1933, as amended, or applicable state securities laws or an exemption there from. In the event that NAC proposes to register any of its securities under the Securities Act, whether for its own account or for the account of another shareholder, the treasury stock issued pursuant to the NAC Private Placement will be included in such registration. 49 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 9 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED) Stock Grants and Awards As a consequence of NAC's significant acquisitions consummated during Fiscal 2004, NAC granted 372,000 shares of Common Stock pursuant to the 2003 Restricted Stock Plan (see Note 12) valued at $119,000 representing the fair value of the Common Stock at the time of award. Accordingly, NAC charged $119,000 to deferred compensation expense, a component of stockholders' equity, during Fiscal 2004. In addition, NAC awarded to three of its executive business managers, other than its Chief Executive Officer, an aggregate of 350,000 shares of unregistered, restricted Common Stock from treasury stock valued at $95,000 representing the fair value of the Common Stock at the time of award. NAC charged $95,000 in compensation expense to operations in Fiscal 2004 for the award of Common Stock. NAC issued 300,000 shares of Common Stock from treasury stock in Fiscal 2004 to certain professional advisors for their services rendered in connection with NAC's acquisition initiatives consummated during the year. The 300,000 shares of Common Stock, valued at $82,000 at the time of grant, have been accounted for as a component of the cost of the acquisitions. 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. 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. 50 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 9 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED) 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 10 - DISCONTINUED OPERATIONS E-commerce 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. As a result of these decisions, both the e-commerce and automobile financing segments were classified as discontinued operations as of January 31, 2002. Auto Rental and Finance Operations 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, 2005, 2004 and 2003, 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 14). 51 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 10 - DISCONTINUED OPERATIONS (CONTINUED) Summarized results of discontinued operations are as follows (in thousands): Discontinued Operations -------------------------------------------------------- Auto Auto E-Commerce Financing Rental Total ------------ ------------ ------------- ------------ FISCAL 2005 Revenue $ - $ 13 $ - $ 13 General and administrative (expenses) income - (13) - (13) ------------ ------------ ------------- ------------ - (13) - (13) ------------ ------------ ------------- ------------ Income (loss) before income taxes - - - - Provision (benefit) for income taxes - - - - ------------ ------------ ------------- ------------ Income (loss) from discontinued operations $ - $ - $ - $ - ============ ============ ============= ============ FISCAL 2004 Revenue $ - $ 12 $ - $ 12 General and administrative (expenses) income - (26) - (26) ------------ ------------ ------------- ------------ - (26) - (26) ------------ ------------ ------------- ------------ Income (loss) before income taxes - (14) - (14) Provision (benefit) for income taxes - (131) (284) (415) ------------ ------------ ------------- ------------ Income (loss) from discontinued operations $ - $ 117 $ 284 $ 401 ============ ============ ============= ============ FISCAL 2003 Revenue $ - $ 28 $ - $ 28 General and administrative (expenses) income 2 (140) 275 137 ------------ ------------ ------------- ------------ 2 (140) 275 137 ------------ ------------ ------------- ------------ Income (loss) before income taxes 2 (112) 275 165 Provision (benefit) for income taxes - (145) - (145) ------------ ------------ ------------- ------------ Income (loss) from discontinued operations $ 2 $ 33 $ 275 $ 310 ============ ============ ============= ============ 52 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 11 - SALE OF ASSETS Investments in Affordable Housing Projects NAC invested in affordable housing projects 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. On January 14, 2002, NAC sold its limited partnership interests in eight projects to Idacorp Financial Services, Inc. for $2.5 million. NAC incurred closing costs, transfer fees and provision for the recapture of previously deducted investment tax credits in lieu of posting a bond of $510,000 and as a result incurred a loss (reflected in continuing operations) of $549,000. In November 2004, NAC sold an additional limited partnership interest to an independent third party for $35,000. NAC continues to retain its limited partnership interests in two projects, which at January 31, 2005 are included in other assets at their estimated fair market value of $100,000. NOTE 12 - BENEFITS PLANS 1993 Equity Incentive Plan NAC's 1993 Equity Incentive Plan ("1993 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 the 1993 Plan is 2,200,000 shares. There were 245,000 stock options cancelled under this Plan during Fiscal 2004. There were 373,352 shares available for future stock awards or option grants at January 31, 2005. No options were granted under this Plan in Fiscal 2005, Fiscal 2004 and Fiscal 2003. A summary of all options granted, exercised, and cancelled by the 1993 Plan for Fiscal 2005, Fiscal 2004 and Fiscal 2003 is as follows: Years Ended January 31, ------------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------- ------------------------------- ---------------------------------- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------------- ---------------- --------------- ---------------- --------------- ---------------- Options outstanding - beginning of year 1,630,000 $ 0.80 1,875,000 $ 0.84 1,875,000 $ 0.84 Granted - $ - - $ - - $ - Exercised - $ - - $ - - $ - Cancelled - $ - (245,000) $ 1.12 - $ - --------------- --------------- --------------- Options outstanding - end of year 1,630,000 $ 0.80 1,630,000 $ 0.80 1,875,000 $ 0.84 =============== ============= =============== ============ =============== ============= Exercisable, at end of year 1,630,000 1,630,000 1,875,000 =============== =============== =============== Available for grant 373,352 373,352 128,352 =============== =============== =============== Weighted average fair value per share of options granted during year - - - =============== =============== =============== 53 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 12 - BENEFITS PLANS (CONTINUED) The outstanding options expire at dates through the year 2010. A summary of stock options outstanding and exercisable as of January 31, 2005 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 1,205,000 5.75 $0.68 1,205,000 $0.68 $1.03 to $1.15 350,000 4.40 1.04 350,000 1.04 $1.66 75,000 3.21 1.66 75,000 1.66 ------------ ----------- Total 1,630,000 1,630,000 ============ =========== 2003 Restricted Stock Plan As a consequence of the significant acquisitions consummated during Fiscal 2004, NAC sponsored a 2003 Restricted Stock Plan ("2003 Plan") that provides stock grants to all employees. The 2003 Plan authorizes the grant of up to a maximum of 400,000 restricted shares of Common Stock to employees of NAC. During Fiscal 2004, there were 372,000 shares of Common Stock granted under the terms of the 2003 Plan at an estimated fair value of $0.32 per share. Each share granted is restricted and unregistered stock and each award vests at the rate of 20% per year over a five year period. The underlying shares may not be sold, transferred, pledged or otherwise disposed until they vest. During the vesting period, unvested shares are voted by the manager of each business unit. No shares were granted to executive officers or directors under the 2003 Plan. For Fiscal 2004, NAC charged to deferred compensation expense $119,000, a component of shareholders' equity, for the 2003 Plan grants. The deferred compensation expense is amortized on a straight-line basis over the 5 year vesting period of the restricted Common Stock. For Fiscal 2005 and Fiscal 2004, deferred compensation amortization expense was $24,000 and $6,000, respectively. 401(k) Savings and Profit Sharing Plan As a consequence of NAC's acquisitions consummated during Fiscal 2004 NAC maintained three employee defined contribution benefit programs under IRS Code section 401(k) from the date of each acquisition to December 31, 2003. The three employee benefit plans maintained were (i) NAC 401(k) Savings and Profit Sharing Plan ("NAC 401k"), (ii) The Campus Group 401(k) Plan ("Campus 401k"), and (iii) the OMI 401(K) Profit Sharing Plan ("OMI 401k"). Effective December 31, 2003, NAC merged the Campus 401k and the OMI 401k plans into the NAC 401k (the "Plan Merger") and all previously unvested balances for all active employees became vested at December 31, 2003. Prior to the Plan Merger, the Campus 401k covered substantially all The Campus Group employees who have completed one year of service. The Campus 401k allowed eligible employees to contribute up to 50% of their compensation on a pre-tax basis. The Campus 401k provided for a discretionary matching contribution at the end of each plan year. Discretionary contributions under the Campus 401k vest incrementally over 6 years. There were no discretionary matching contributions for Fiscal 2004. 54 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 12 - BENEFITS PLANS (CONTINUED) Prior to the Plan Merger, the OMI 401k covered substantially all OMI employees who have completed one month of service. The OMI 401k allowed eligible employees to contribute up to 50% of the compensation on a pre-tax basis. OMI matched 50% of the first 6% of the employees' contribution to a maximum of $3,000 per annum. OMI matching contributions under the OMI 401k vest after 3 years of employment. For the period April 1, 2003 to December 31, 2003, NAC charged to operations for OMI's matching contributions $13,000. The NAC 401k covered substantially all NAC employees and as of December 31, 2003, all active employees who were covered under the Campus 401k, OMI 401k and have completed 90 days of service. The NAC 401k allows eligible employees to contribute up to 50% of their compensation on a pre-tax basis. Prior to December 31, 2003, NAC matched 50% of the first 4% of the employees' contribution and the contributions vested incrementally over 6 years. Upon the Plan Merger, the NAC 401k provides a safe harbor matching contribution for Fiscal 2005 of (i) 100% of the first 3% of the employee's contribution, (ii) 50% of the next 2% of the employees' contribution for a maximum of 4% matching contribution and (iii) vesting for the NAC matching contribution is immediate. For Fiscal 2005, Fiscal 2004 and Fiscal 2003, the charge to operations for NAC's contribution to the NAC 401k was $162,000, $26,000 and $11,000, respectively. NAC does not provide post-retirement or post-employment benefits to its employees. NOTE 13 - RELATED PARTY TRANSACTIONS The Campus Group leases its corporate headquarters in Tuckahoe, New York and its Bohemia, New York warehouse and distribution center from a former The Campus Group shareholder. The leases expire in April 2010. The annual lease commitment during the term is $175,000 per annum. NAC charged to operations rent expense of $175,000 for Fiscal 2005 and $87,000 for the period August 1, 2003 (date of commencement) to January 31, 2004. Pursuant to the terms of The Campus Group Stock Purchase Agreement dated July 31, 2003, NAC repaid certain loans and advances to former The Campus Group Shareholders (see Note 2). Prior to NAC's acquisition, former shareholders of The Campus Group loaned and advanced $1.3 million for the day-to-day working capital needs of the business. NAC repaid in full the shareholder loans and advances in periodic installments, as required, prior to January 31, 2004. 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 headquarters 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. 55 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 14 - COMMITMENTS AND CONTINGENCIES Self-Insurance Reserves for Property Damage and Personal Injury Claims. As previously disclosed, NAC is the subject to certain self-insurance claims and litigation expenses relating to its discontinued automobile rental operations. NAC estimates the required self-insurance liability based upon specific identification of the known matters subject to future claims, the nature of the claim and the estimated costs to be incurred. These estimates include, but are not limited to, NAC's historical loss experience and projected loss factors. The required self-insurance liability is subject to adjustment in the future based upon changes in the nature of the remaining claims or the ultimate cost. As a consequence of NAC's sale of its automobile rental operations in 1995, NAC believes that all incurred claims have been reported to NAC and that there are no longer any incurred but not yet reported claims to be received by NAC. NAC's self-insurance liability at January 31, 2005 and 2004 was $256,000 and $408,000, respectively. Because of the uncertainties related to several residual small claims and 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, 2005 NAC had accrued $256,000 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. Lease Commitments NAC leases office and warehouse facilities in Indiana and New York 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, 2005, future minimum payments under noncancellable operating leases, net of the effects of the sublease, are as follows: Fiscal Year Amount ------------ ------------- 2006 $ 647 2007 528 2008 348 2009 175 2010 175 Thereafter 44 ------------- $ 1,917 ============= 56 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 15 - SIGNIFICANT CLIENTS Revenues for Fiscal 2005 and Fiscal 2004 were $11.3 million and $7.1 million, respectively, and are comprised principally of revenues derived from the acquired companies operations, The Campus Group and OMI. Pfizer Inc, and R&D Strategic Solutions, Inc. accounted for 36% and 13%, respectively, of service revenues for Fiscal 2005. For Fiscal 2004, Pfizer, Inc., Booz Allen Hamilton Inc. and Cardinal Health, Inc. accounted for 18%, 13% and 13%, respectively, of service revenues. Since NAC revenues from its acquired companies are measured from the date of each acquisition during Fiscal 2004, such revenues are not necessarily fully indicative of the results for an entire fiscal year. The loss of any one such client could have a material adverse effect on NAC. NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables present unaudited quarterly financial information for Fiscal 2005 and Fiscal 2004 (in thousands, except per share amounts): Quarter ---------------------------------------- First Second Third Fourth ------- ------- ------- ------- FISCAL 2005 ----------- Total service revenue $ 3,293 $ 2,388 $ 2,999 $ 2,663 Gross profit 1,346 1,047 1,153 901 Income (loss) from continuing operations $ (669) $ (679) $ (829) $ (987) Discontinued operations, net of tax (1) (5) -- 6 ------- ------- ------- ------- Net income (loss) $ (670) $ (684) $ (829) $ (981) ======= ======= ======= ======= Basic and diluted income (loss) earnings per share(1) Continuing operations $ (.07) $ (.07) $ (.08) $ (.10) Discontinued operations -- -- -- -- ------- ------- ------- ------- Net income (loss) per share $ (.07) $ (.07) $ (.08) $ (.10) ======= ======= ======= ======= FISCAL 2004 ----------- Total service revenue $ 330 $ 551 $ 3,051 $ 3,212 Gross profit 133 175 1,334 1,491 Income (loss) from continuing operations $ (659) $ (728) $ (319) $(1,677) Discontinued operations, net of tax (6) (6) 1 412 ------- ------- ------- ------- Net income (loss) $ (665) $ (734) $ (318) $(1,265) ======= ======= ======= ======= Basic and diluted income (loss) earnings per share(1) Continuing operations $ (.08) $ (.09) $ (.04) $ (.19) Discontinued operations -- -- -- .05 ------- ------- ------- ------- Net income (loss) per share $ (.08) $ (.09) $ (.04) $ (.14) ======= ======= ======= ======= (1) The sum of the quarters do not equal year to date. 57 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 17 - SUBSEQUENT EVENTS Shareholder Complaints In July and August 2001, NAC received three separate derivative complaints filed with the Court of Chancery of Delaware ("Delaware Court") by each of Academy Capital Management, Inc ("Academy Complaint")., Levy Markovich, ("Markovich Complaint") and Harbor Finance Partners ("Harbor Complaint"), all shareholders of NAC, 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. By order of the Delaware Court on November 12, 2001, the Academy, Markovich and Harbor Complaints were consolidated under the title "In re National Auto Credit, Inc. Shareholders Litigation," Civil Action No. 19028 NC (Delaware Court) ("Delaware Action") and the Academy Complaint were consolidated as the Delaware Action. The Delaware Action 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, (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, (vi) a judgment requiring the Director Defendants to promptly schedule an annual meeting of shareholders and (vii) an award of costs and expenses. On October 12, 2001, NAC received a derivative complaint filed by Robert Zadra, a shareholder of NAC, that had been filed with the Supreme Court of the State of New York ("New York Court") 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. On or about May 29, 2002 the complaint was amended to include class action allegations (the "New York Action"). The New York Action contains allegations similar to those in the Delaware Action concerning the Board's approval of the employment agreement with James McNamara, option grants and past and future compensation to the Director Defendants, and the ZoomLot transaction. The New York Action seeks (i) a declaration that as a result of approving these transactions the Director Defendants breached their fiduciary duties to NAC, (ii) a judgment enjoining Director Defendants from proceeding with or exercising the option agreements, (iii) rescission of the option grants to Director Defendants, if exercised, (iv) an order directing the Director Defendants to account for alleged profits and losses obtained by the Director Defendants as a result of the alleged various acts complained of, (v) awarding compensatory damages to NAC and the class, together with prejudgment interest, and (vi) an award of costs and expenses. NAC has vigorously defended against each of the respective claims made in the Delaware Action and New York Action, as it believes that the claims have no merit. 58 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 17 - SUBSEQUENT EVENTS (CONTINUED) The parties in the New York Action thereafter engaged in settlement negotiations and, in December 2002, the parties entered into a stipulation of settlement which was thereafter amended in November 2004 (the "New York Settlement Stipulation"). Under the terms of the New York Settlement Stipulation, NAC agreed (subject to certain terms and conditions) to, among other things, (a) adopt or implement certain corporate governance procedures or policies, (b) issue to a class of NAC shareholders who had continuously held NAC Common Stock from December 14, 2000 through December 24, 2002 up to one million warrants (one warrant per 8.23 shares of Common Stock), with each warrant having a five year term and being exercisable for shares of NAC Common Stock at a price of $1.55 per share, (c) cancel 50% of certain stock options granted on December 15, 2000, and (d) make certain payments for legal fees for counsel to the plaintiffs in the New York Action. In addition, the New York Settlement Stipulation created for the benefit of NAC a Settlement Fund in the amount of $2.5 million which has been funded by an insurance policy. The legal fees for counsel to the plaintiffs in the New York Action are not to exceed 25% of the Settlement Fund. In order to facilitate the settlement and dismissal of the separate Delaware Action as well as the New York Action, on April 22, 2005, NAC entered into a Stock Purchase Agreement ("Agreement") with Academy Capital Management, Inc., Diamond A. Partners, L.P., Diamond A. Investors, L.P., Ridglea Investor Services, Inc. and William S. Banowsky (hereinafter referred to collectively as the "Selling Stockholders"). The Selling Stockholders had also raised objections to the settlement of the New York Action. The New York Court (a) had rejected the objections raised by the Selling Stockholders and (b) had approved as fair and in the best interests of NAC and its shareholders the proposed settlement of the New York Action as set forth in the New York Settlement Stipulation. The Selling Stockholders had then filed an appeal (the "Appeal") to such determination by the New York Court. Pursuant to the terms of the Agreement, the Selling Stockholders agreed, among other things, to do the following: o enter into a stipulation (to be filed with the New York Court) pursuant to which they will (a) irrevocably withdraw, with prejudice, any objections they had asserted or might have asserted with respect to the settlement of the New York Action, (b) stipulate to the entry of an order dismissing the New York Action and (c) agree to the dismissal of the Appeal. o enter into a stipulation (to be filed with the Appellate Division, First Department, of the Supreme Court of the State of New York) providing for the dismissal of the Appeal. o enter into a stipulation (to be filed in the Delaware Court), pursuant to which they will agree to the dismissal of the Delaware Action with prejudice. The Selling Stockholders have executed and delivered to NAC and NAC has filed with the applicable New York Court and Delaware Court each of the stipulations referred to above. 59 NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2005, 2004 AND 2003 NOTE 17 - SUBSEQUENT EVENTS (CONTINUED) Pursuant to the Agreement, NAC has agreed (subject to certain terms and conditions set forth in the Agreement) to purchase from the Selling Shareholders their 1,562,500 shares of NAC Common Stock at a price of $0.6732 per share (or a total purchase price of $1,051,875) and to contribute $100,000 to cover a portion of the legal fees incurred by the Selling Shareholders. NAC's obligation to purchase such shares is conditioned upon (as well as certain other conditions) (a) an order or judgment having been entered by the New York Court in the New York Action, dismissing the New York Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed, and (b) an order or judgment having been entered by the Delaware Court in the Delaware Action, dismissing the Delaware Action with prejudice, which order or judgment shall not be subject to appeal or the time to appeal such order or judgment shall have lapsed. NAC anticipates that all or a substantial portion of the purchase price for any shares purchased from the Selling Shareholders, as well as the $100,000 referred to above for legal fees of the Selling Shareholders, will be funded from the net proceeds of the $2.5 million that has been provided by NAC's insurer for a Settlement Fund in the New York Action. As acknowledged by the Selling Shareholders in the Agreement, NAC was willing to enter into the Agreement, settle the New York Action and the Delaware Action and consummate the other transactions contemplated by the Agreement in order to terminate prolonged and expensive litigation and NAC's entry into the Agreement would not constitute or be deemed to constitute or evidence any improper or illegal conduct by or on behalf of NAC (or any of its directors, officers, employees and other agents or representatives) or any other wrong doing by NAC (or any of its directors, officers, employees and other agents or representatives). The Agreement was approved by the disinterested and independent members of NAC's Board of Directors. 60 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ANGELIKA FILM CENTERS, LLC At December 30, 2004 and December 25, 2003 and For the Years Ended December 30, 2004, December 25, 2003 and December 26, 2002 61 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 30, 2004 and December 25, 2003, the related statement of members' equity as of December 30, 2004 and December 25, 2003 and the related statements of income and cash flows for the years ended December 30, 2004, December 25, 2003 and December 26, 2002. 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 the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, 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 financial statements referred to above present fairly, in all material respects, the financial position of Angelika Film Centers, LLC as of December 30, 2004 and December 25, 2003, and the results of its operations and its cash flows for the years ended December 30, 2004, December 25, 2003 and December 26, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/Grant Thornton LLP Cleveland, Ohio March 24, 2005 62 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) BALANCE SHEETS (dollar amounts in thousands) December 30, 2004 and December 25, 2003 DECEMBER 30, DECEMBER 25, 2004 2003 ------------- ------------- ASSETS Current Assets Cash and cash equivalents $ 670 $ 488 Trade and other receivables 61 16 Due from affiliates (Note E) -- 370 Concession inventories (Note A) 7 7 Prepaid expenses and other current assets 17 13 ------------- ------------- Total current assets 755 894 Property, Equipment and Leasehold Improvements, net (Note B) 1,212 1,409 Intangible With Definitive Life (Note A) 6,888 7,479 Deposits 89 89 ------------- ------------- TOTAL ASSETS $ 8,944 $ 9,871 ============= ============= LIABILITIES AND MEMBERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 502 $ 525 Due to affiliates (Note E) 41 85 Deferred income and other obligations 102 72 ------------- ------------- Total current liabilities 645 682 Deferred Rental Obligations (Note C) 1,779 1,610 ------------- ------------- Total liabilities 2,424 2,292 Commitments and Contingencies (Note D) -- -- Members' Equity (Note A) 6,520 7,579 ------------- ------------- TOTAL LIABILITIES AND MEMBERS' EQUITY $ 8,944 $ 9,871 ============= ============= The accompanying notes are an integral part of these financial statements. 63 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) STATEMENTS OF INCOME (dollar amounts in thousands) For the years ended December 30, 2004, December 25, 2003 and December 26, 2002 DECEMBER 30, DECEMBER 25, DECEMBER 26, 2004 2003 2002 -------------- -------------- -------------- Revenue Theatre income $ 4,092 $ 4,646 $ 5,028 Theatre concessions 508 595 576 Cafe concession sales 329 405 369 Rental and other income 164 145 59 -------------- -------------- -------------- Total operating income 5,093 5,791 6,032 Operating costs and expenses Film rental 941 1,320 1,627 Operating costs 2,505 2,744 2,831 General and administrative expenses 135 176 113 Depreciation and amortization 787 850 699 -------------- -------------- -------------- Total operating costs and expenses 4,368 5,090 5,270 -------------- -------------- -------------- Income from operations 725 701 762 State and local income tax expense (Note A) 36 35 12 -------------- -------------- -------------- NET INCOME $ 689 $ 666 $ 750 ============== ============== ============== The accompanying notes are an integral part of these financial statements. 64 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) STATEMENTS OF MEMBERS' EQUITY (dollar amounts in thousands) For the years ended December 30, 2004 and December 25, 2003 NATIONAL READING CINEMAS, INTERNATIONAL INC. INC. TOTAL ------------ ------------ ------------ BALANCE AT DECEMBER 26, 2002 $ 4,335 $ 4,336 $ 8,671 Distribution to members (879) (879) (1,758) Net income 333 333 666 ------------ ------------ ------------ BALANCE AT DECEMBER 25, 2003 3,789 3,790 7,579 Distribution to members (1,137) (611) (1,748) Net income 344 345 689 ------------ ------------ ------------ BALANCE AT DECEMBER 30, 2004 $ 2,996 $ 3,524 $ 6,520 ============ ============ ============ The accompanying notes are an integral part of these financial statements. 65 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) STATEMENTS OF CASH FLOWS (dollar amounts in thousands) For the years ended December 30, 2004, December 25, 2003 and December 26, 2002 DECEMBER 30, DECEMBER 25, DECEMBER 26, 2004 2003 2002 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 689 $ 666 $ 750 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 788 850 699 Deferred rent expense 169 170 169 Changes in assets and liabilities associated with operating activities: Trade and other receivables (45) (12) 3 Due to (from) affiliates 326 (372) 435 Concessions inventories -- 3 (1) Prepaid expenses and other current assets (4) (5) 153 Accounts payable and accrued liabilities (23) (24) (527) Deferred income and other obligations 30 16 21 ------------- ------------- ------------- Net cash provided by operating activities 1,930 1,292 1,702 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, equipment and leasehold improvements -- (145) (1,084) CASH FLOWS FROM FINANCING ACTIVITIES: Distribution to members (1,748) (1,758) (600) ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH 182 (611) 18 Cash at beginning of year 488 1,099 1,081 ------------- ------------- ------------- Cash at end of period $ 670 $ 488 $ 1,099 ============= ============= ============= Supplemental Disclosures of Cash Flow Information: -------------------------------------------------- Cash paid during the year for income taxes $ 36 $ 24 $ 12 ============= ============= ============= The accompanying notes are an integral part of these financial statements. 66 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS Year Ended December 30, 2004, December 25, 2003 and December 26, 2002 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 30, 2004 is held 50% by Reading International, Inc. (RDI) and 50% by National Cinemas, Inc. (NCI), a wholly-owned subsidiary of National Auto Credit, Inc. 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. FISCAL YEAR ----------- AFC`s fiscal year ends on the last Thursday of December. The twelve months ended December 30, 2004, December 25, 2003 and December 26, 2002 contained 53, 52 and 52 weeks, respectively. 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 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, EQUIPMENT AND LEASEHOLD IMPROVEMENTS ---------------------------------------------- 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. REVENUE RECOGNITION ------------------- Theater revenue is recognized when film tickets are purchased at the box office. Concession revenue arises from the sale of food and other merchandise and is recognized upon delivery. Revenues derived from gift certificates are recognized when the certificates are redeemed. 67 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED Year Ended December 30, 2004, December 25, 2003 and December 26, 2002 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 tax liability or benefit arising from the AFC's income or losses is the responsibility of the individual members. AFC provides for state and city income taxes, as applicable in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). INTANGIBLE WITH DEFINITIVE LIFE ------------------------------- AFC originally recorded $11,810,000 as an intangible in conjunction with an asset acquisition during fiscal year 1996. AFC had an independent appraisal, which was used to determine the fair value of assets acquired. AFC is amortizing the intangible on a straight-line basis over a twenty-year period, which represents the term of the long-term lease. Accumulated amortization of the intangible is $4,922,000 and $4,331,000 at December 30, 2004 and December 25, 2003, respectively. ADVERTISING EXPENSE ------------------- Advertising costs are expensed as incurred. Advertising expenses were approximately $290,000, $297,000 and $249,000 for the years ended December 30, 2004, December 25, 2003 and December 26, 2002, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- AFC 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 AFC has determined that their carrying values approximate estimated fair values. IMPAIRMENT OF LONG-LIVED ASSETS ------------------------------- AFC reviews the carrying value of its long-lived assets (other than goodwill) whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If there were such indicators of impairment, AFC would determine whether the estimated undiscounted sum of the future cash flows to be derived from such assets is less than their carrying amounts. If less, an impairment loss would be recognized based on the excess of the carrying amounts of such assets over their respective fair values. AFC would determine the fair values by using quoted market prices, if available, for such assets; or if quoted market prices are not available, AFC would discount the expected estimated future cash flows. No impairment was recorded during the 12 months ended December 30, 2004 and December 25, 2003. 68 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED Year Ended December 30, 2004, December 25, 2003 and December 26, 2002 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. NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS At December 30, 2004 and December 25, 2003, a summary of property, equipment and leasehold improvements is as follows (in thousands): DECEMBER 30, DECEMBER 25, 2004 2003 --------------------- --------------------- Leasehold improvements $1,297 $1,297 Furniture, fixtures and equipment 994 994 --------------------- --------------------- 2,291 2,291 Less accumulated depreciation 1,079 882 --------------------- --------------------- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET $1,212 $1,409 ===================== ===================== NOTE C - LEASE COMMITMENTS AFC leases a theater under a non-cancelable operating lease which matures in August 2026. Rental expense was $827,000, including deferred rent expense of $170,000, for each of the years ended December 30, 2004, December 25, 2003 and December 26, 2002, respectively. At December 30, 2004, future minimum rental commitments for the next five years were as follows (in thousands): 2005 $657 2006 692 2007 741 2008 741 2009 741 Thereafter 16,063 -------------- TOTAL MINIMUM LEASE PAYMENTS $19,635 ============== 69 ANGELIKA FILM CENTERS, LLC (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED Year Ended December 30, 2004, December 25, 2003 and December 26, 2002 NOTE C - LEASE COMMITMENTS - CONTINUED 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 $1,779,000 and $1,610,000 are reflected in the accompanying balance sheets as of December 30, 2004 and December 25, 2003, respectively. 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, results of operations and liquidity of AFC. NOTE E - RELATED PARTY TRANSACTIONS Citadel Cinemas, Inc. (Citadel), an affiliate of RDI, operates and manages the Angelika Film Centers pursuant to a management agreement (the Agreement) entered into with the AFC in August 1996. This Agreement was assigned to Citadel from another affiliate of RDI effective June 1, 2000. Citadel is to be paid an annual base management fee of $125,000 plus a bonus fee contingent on the attainment of certain income levels (as defined in the Agreement). The management fee consists of only the base fee of $125,000 for the years ended December 30, 2004, December 25, 2003 and December 26, 2002. AFC's leasehold interest in the theater is guaranteed by both the Reading Company, an affiliate of RDI, and Reading Entertainment, Inc., an affiliate of RDI, through the day prior to the 15th anniversary of the lease commencement. At December 30, 2004 and December 25, 2003, AFC had a net aggregate receivable (payable) balance of $(41,000) and $285,000 to Citadel. This amount is comprised of monies collected by affiliated entities of Citadel for gift certificates and credit card purchases offset by amounts paid by Citadel on behalf of AFC. 70 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, 2005. ITEM 9A. CONTROLS AND PROCEDURES. As of the end of the period covered by this annual report, we carried out, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (the "Certifying Officers"), an evaluation of the effectiveness of our "disclosure controls and procedures" (as the term is defined under the Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Act of 1934, as amended (the "Exchange Act")). Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management on a timely basis in order to comply with our disclosure obligations under the Exchange Act, and the rules and regulations promulgated thereunder. Further, there were no changes in our internal controls over financial reporting during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers and directors of NAC, as of April 30, 2005 are as follows: Name Age Position ------------------------ --------- ----------------------------------------- James J. McNamara 56 Chairman of the Board and Chief Executive Officer Robert V. Cuddihy, Jr 45 Chief Financial Officer, Secretary and Treasurer James M. Augur 69 Director John A. Gleason 56 Director Donald Shek 55 Director Henry Y. L. Toh 47 Director 71 JAMES J. McNAMARA has been Chairman of the Board and Chief Executive Officer since November 2000. Mr. McNamara has been a Director of NAC since February 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 has been NAC's Secretary since January 2003. 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 effected an assignment of their assets for the benefit of creditors in 2002. From July 1981 to July 1987, Mr. Cuddihy was with KPMG Peat Marwick, Certified Public Accountants, where he last served as a senior audit manager. JAMES M. AUGUR has been a Director of NAC since May 2004. Mr. Augur has been a commercial and residential architect for over 30 years. Mr. Augur currently serves as a consultant to owners and developers for land planning and architectural services and is the Chairman and President of JMA and Associates. JOHN A. GLEASON has been a Director of NAC since April 2000. Mr. Gleason previously served as Director of NAC from February 1998 to September 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. DONALD SHEK has been a Director of NAC since December 2003. Mr. Shek has been a financial consultant in private practice since January 1998. From 1993 to 2002, Mr. Shek was a Registered Representative for the Financial West Group, a NASD broker/dealer. HENRY Y. L. TOH has been a Director of NAC since December 1998. Mr. Toh is also a Director of two other public companies, Acceris Communications, Inc., formerly I-Link Incorporated (an Internet telephone company), since 1992 and Teletouch Communications, Inc. (a paging and telecom services provider) since December 2001. Mr. Toh has been the principal officer of Four M. International, Inc. (a private investment entity) since 1992. Mr. Toh is also a director of Crown Financial Group, Inc., an NASD Broker/Dealer, since March 2004. Mr. Toh was also a Director of Bigmar, Inc, a pharmaceutical company, from 2002 to February 2004. Audit Committee --------------- The Audit Committee of NAC is comprised of two independent members of the NAC Board of Directors, Mr. Toh and Mr. Shek. Mr. Toh and Mr. Shek each qualify to serve as a financial expert on the Audit Committee. 72 Code of Ethics -------------- Prior to the acquisitions of The Campus Group and OMI, NAC did not maintain a written code of ethics due to the size of the company and the nature of its operations. As a result of NAC's recent acquisitions, NAC's management has initiated the development of a written code of ethics expected to be adopted by the Board of Directors prior to July 31, 2005. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934, as amended, requires all of NAC's 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 2005 and Fiscal 2004, 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. ITEM 11. EXECUTIVE COMPENSATION. The following table shows all compensation paid by NAC for the fiscal years ended January 31, 2005, 2004 and 2003 to (i) any persons who served as Chief Executive Officer or President of NAC during Fiscal 2004 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, 2005 and whose income exceeded $100,000. -------------------------------------------------------------------------------------------------------------------------------- Annual Compensation Long Term Compensation ------------------------------------------------------------------------------------- Awards ------------------------------------- Restricted Name and Principal Fiscal Other Annual Stock Number of Securities All Other Position Year Salary Bonus Compensation Awards(2) Underlying Options/SARs Compensation(1) -------------------------------------------------------------------------------------------------------------------------------- James J. McNamara, 2005 $ 500,000 $ 250,000 $ - - - $ 91,740 Chairman and CEO 2004 $ 500,000 $ 250,000 $ - - - $ 87,740 2003 $ 500,000 $ 250,000 $ - - - $ 89,913 -------------------------------------------------------------------------------------------------------------------------------- Robert V. Cuddihy, Jr. 2005 $ 265,000 $ 30,250 $ - - $ 37,900 Chief Financial Officer 2004 $ 265,000 $ 27,500 $ 54,400 200,000 - $ 22,045 Secretary & Treasurer(2) 2003 $ 265,000 $ 15,000 $ - - - $ 13,662 -------------------------------------------------------------------------------------------------------------------------------- (*) Employees who were Directors did not receive any additional compensation for serving on the Board of Directors. (1) "All Other Compensation" includes aggregate stock awards pursuant to employment agreements, executive life and disability insurance, vision, 401(k) match, executive plan medical premiums and auto expenses paid. (2) The amounts included in "Other Annual Compensation" and "Restricted Stock Awards" for Fiscal 2004 represents the fair market value and the number of shares, respectively, of restricted Common Stock awarded Mr. Cuddihy during Fiscal 2004. 73 OPTION/SAR GRANTS IN LAST FISCAL YEAR NAC's Board of Directors did not grant options during Fiscal 2005 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 2005. ----------------------------------------------------------------------------------------------------------------------------------- Number of Securities Underlying Value of Unexercised In-the- Unexercised Options/SARs Money Options/SARs at at January 31, 2005 (#) January 31, 2005 ($) -------------------------------------------------------------------- Shares Acquired Value Name and Principal Position on Exercise (#) Realized(#) Exercisable Unexercisable Exercisable Unexercisable ----------------------------------------------------------------------------------------------------------------------------------- James McNamara - - 750,000 - - - Chairman and CEO ----------------------------------------------------------------------------------------------------------------------------------- Robert V. Cuddihy, Jr. - - - - - - Chief Financial Officer, Secretary and Treasurer ----------------------------------------------------------------------------------------------------------------------------------- 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 certain performance objectives established by the Board of Directors, Mr. McNamara will also receive a target cash bonus of $250,000, 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. During Fiscal 2005, as a result of Mr. McNamara's efforts in (i) post-acquisition integrating of operations of the Campus Group and OMI, (ii) implementation of a various new business strategies positioning NAC for future growth and diversification of its client base and (iii) the completion of NAC's exit from its discontinued operations as well as other factors, Board of Directors approved a bonus of $250,000. Following the initial three-year term, the Employment Agreement has been automatically extended on a month-to-month basis and may be cancelled with 90 days prior notice 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. The employment agreement also granted 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, December 15, 2000; and are fully vested and exercisable. Further, the options were 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 74 Mr. McNamara's base salary and grant additional options to Mr. McNamara, on such terms as the Board determines. 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 $25,000 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 has been renewed on a month-to-month basis 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. As a consequence of Mr. Cuddihy's performance in Fiscal 2005 in (i) post-acquisition integration all financial and administrative components of the Campus Group and OMI, (ii) successfully converting NAC's management information systems from numerous and disparate free-standing systems to a new, fully integrated, single platform capable of supporting a geographic disbursed organization with a centralized financial and operational reporting data, and (iii) managing day-to-day finance and administration activities of NAC and its newly acquired businesses, Mr. Cuddihy was awarded a bonus of $30,250 in cash. 75 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. No options were granted under this Plan in Fiscal 2005 Fiscal 2004 and Fiscal 2003. There were 245,000 stock options cancelled under this Plan during Fiscal 2004. There were 373,352 shares available for future stock awards or option grants at January 31, 2005. 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 two non-employee Directors, all of whom must be "disinterested persons" as defined under the Plan. 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. 2003 Restricted Stock Plan -------------------------- As a consequence of the significant acquisitions consummated during Fiscal 2004, NAC sponsored a 2003 Restricted Stock Plan ("2003 Plan") that provides stock grants to all employees. The 2003 Plan authorizes the grant of up to a maximum of 400,000 restricted shares of Common Stock to employees of NAC. During Fiscal 2004, there were 372,000 shares of Common Stock granted under the terms of the 2003 Plan at an estimated fair value of $0.32 per share. Each share granted is restricted and unregistered stock and each award vests at the rate of 20% per year over a five year period. The underlying shares may not be sold, transferred, pledged or otherwise disposed until they vest. During the vesting period, unvested shares are voted by the manager of each business unit. No shares were granted to executive officers or directors under the 2003 Plan. For Fiscal 2004, NAC charged $119,000 to deferred compensation expense, a component of shareholders' equity, for the 2003 Plan grants. The deferred compensation expense is amortized on a straight-line basis over the 5 year vesting period of the restricted Common Stock. For Fiscal 2005 and Fiscal 2004, deferred compensation amortization expense was $24,000 and $6,000, respectively. 76 REMUNERATION OF DIRECTORS The Board of Directors receive annual compensation of $15,000 per annum. Non-employee directors serving on the audit committee of the Board are also entitled to additional compensation of $10,000 per annum. The Board of Directors are also entitled to reimbursement for all reasonable fees and expenses incurred in connection with the performance of services on behalf of NAC. Fees and expenses shall be reimbursed upon submission to NAC of appropriate documentation for such fees and expenses in accordance with then-current NAC policy. Amounts paid to Directors in Fiscal 2005 aggregated $75,000 for services rendered during the period as follows: Director Amount Director Status ---------------------- --------- --------------- James J. McNamara(1) $ - Director James M. Augur(2) 10,000 Director John A. Gleason 15,000 Director Donald Shek 25,000 Director Henry Y.L. Toh 25,000 Director (1) Directors who are also employees of NAC do not receive any additional compensation for serving on the Board of Directors. (2) Mr. Augur joined the NAC Board of Director in May 2005 and received a pro-rata payment of the director fee for the period served on the Board. 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, and Reading International, Inc. (a theatre and real estate concern). 2/1/00 1/31/01 1/31/02 1/31/03 1/31/04 1/31/05 ------------------------------------------------------------------- National Auto Credit, Inc. 100 27 13 13 57 30 S&P 600 Small Cap Index 100 119 122 99 145 167 Russell 2000 Index 100 102 97 75 117 125 Reading International, Inc. 100 77 69 145 224 288 For purposes of the above table, NAC is compared to Reading International Inc. as the 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 and corporate communications. 77 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of April 30, 2005 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) 2,885,075 26.8% 555 Madison Ave 29th Floor New York, New York 10022 John A. Gleason(4) 245,000 2.4% 555 Madison Ave 29th Floor New York, New York 10022 Henry Y. L. Toh(4) 245,000 2.4% 555 Madison Ave 29th Floor New York, New York 10022 Robert V. Cuddihy, Jr. 200,000 2.0% 555 Madison Ave 29th Floor New York, New York 10022 James M. Augur - - 555 Madison Ave 29th Floor New York, New York 10022 Donald Shek - - 555 Madison Ave 29th Floor New York, New York 10022 Campus Family 2000 Trust(5) 1,883,333 15.8% 42 Oak Avenue Tuckahoe, New York 10707 All executive officers and 3,575,075 31.8% Directors as a group (6 persons)(6) (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. 78 (2) Based on 10,102,614 shares outstanding as of April 30, 2005. (3) Includes 2,135,075 shares of Common Stock and 750,000 shares issuable upon exercise of options. (4) Includes 245,000 shares issuable upon exercise of options. (5) Pursuant to the terms of the $2.8 million Convertible Promissory Note outstanding at January 31, 2005, the holder has the option to convert the note into Common Stock at the rate of $1.50 per share for an aggregate of 1,883,333 shares of Common Stock if fully converted. (6) Includes 2,335,075 shares outstanding and 1,240,000 shares issuable upon exercise of options. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth, as of January 31, 2005, with respect to compensation plans (including individual compensation arrangements) under which equity securities of NAC are authorized for issuance. NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A)) ( A ) ( B ) ( C ) ---------------------------- -------------------------- -------------------------- -------------------------- Equity compensation plans approved by security holders 1,630,000 $0.80 373,352 Equity compensation plans not approved by security holders - - 28,000 -------------------------- -------------------------- -------------------------- Total 1,630,000 $0.80 401,352 -------------------------- -------------------------- -------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None 79 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Audit Fees ---------- Audit fees were for professional services rendered for the audit of our annual financial statements on Form 10-K for Fiscal 2005 and Fiscal 2004, the reviews of the financial statements included in our quarterly reports on Form 10-Q for Fiscal 2005 and Fiscal 2004 and services in connection with our statutory and regulatory filings for Fiscal 2005 and Fiscal 2004. NAC charged to operations $155,000 and $150,000 for audit fees for Fiscal 2005 and Fiscal 2004, respectively. Audit-Related Fees ------------------ Audit related fees were for assurance and related services rendered that are reasonably related to the audit and reviews of our financial statements for Fiscal 2005 and Fiscal 2004, exclusive of the Audit Fees above. These fees include benefit plans and audits, assistance with registration statements and comfort letters and consents not performed directly in connection with audits. NAC charged to operations $10,000 and $7,000 for audit related fees for Fiscal 2005 and Fiscal 2004, respectively. Tax Fees -------- Tax fees were for services related to tax compliance, consulting and planning services rendered during Fiscal 2005 and Fiscal 2004 and included preparation of tax returns, review of restrictions on net operating loss carryforwards and other general tax services. NAC charged to operations $138,000 and $103,000 for Fiscal 2005 and Fiscal 2004, respectively. All Other Fees -------------- NAC did not incur fees for any services, other than the fees disclosed above relating to audit, audit-related and tax services, rendered during Fiscal 2005 and Fiscal 2004. Audit and Non-Audit Service Pre-Approval Policy ----------------------------------------------- In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, the Audit Committee has adopted an informal approval policy that it believes will result in an effective and efficient procedure to pre-approve services performed by the independent auditor. Audit Services. Audit Services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent auditor to be able to form an opinion on our financial statements. The Audit Committee may pre-approve specified annual audit services engagement terms and fees and other specified audit fees. All other audit services must be specifically pre-approved by the Audit Committee. The Audit Committee monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope or other items. Audit-Related Services. Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements which historically have been provided to us by the independent auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee may pre-approve specified audit-related services within pre-approved fee levels. All other audit-related services must be pre-approved by the Audit Committee. Tax Services. The Audit Committee may pre-approve specified tax services that the Audit Committee believes would not impair the independence of the auditor and that are consistent with SEC rules and guidance. All other tax services must be specifically approved by the Audit Committee. 80 All Other Services. Other services are services provided by the independent auditor that do not fall within the established audit, audit-related and tax services categories. The Audit Committee may pre-approve specified other services that do not fall within any of the specified prohibited categories of services. Procedures. All requests for services to be provided by the independent auditor, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the Chief Financial Officer. The Chief Financial Officer authorizes services that have been pre-approved by the Audit Committee. If there is any question as to whether a proposes service fits within a pre-approved service, the Audit Committee chair is consulted for a determination. The Chief Financial Officer submits requests or applications to provide services that have not been pre-approved by the Audit Committee, which must include an affirmation by the Chief Financial Officer and the independent auditor that the request or application is consistent with the SEC's rules on auditor independence, to the Audit Committee (or its chair or any of its other members pursuant to delegated authority) for approval. 81 PART IV ITEM 15. 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, 2005 and 2004 Consolidated Statements of Operations - Years Ended January 31, 2005, 2004 and 2003 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) - Years Ended January 31, 2005, 2004 and 2003 Consolidated Statements of Cash Flows - Years Ended January 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements - Years Ended January 31, 2005, 2004 and 2003 Financial Statements of AFC --------------------------- Report of Independent Certified Public Accountants Financial Statements: Balance Sheets as of December 30, 2004 and December 25, 2003 Statements of Operations for the years ended December 30, 2004, December 25, 2003 and December 26, 2002 Statements of Members' Equity for the years ended December 30, 2004 and December 25, 2003 Statements of Cash Flows for the years ended December 30, 2004, December 25, 2003 and December 26, 2002 Notes to Financial Statements for the years ended December 30, 2004, December 25, 2003 and December 26, 2002 82 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONT.) (a)(2) The following financial statement schedule for the years ended January 31, 2005, 2004 and 2003 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). 83 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (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). 84 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (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 Agreement for Purchase and Sale of Limited Liability Partnership Interests (exhibits to Form 8-K filed January 28, 2002, SEC File No. 1-11601). 10.11 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). 10.12* 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). 10.13* Employment Agreement between Robert V. Cuddihy, Jr. and the Company dated December 31, 2001 (exhibit to the Annual Report on Form 10-K filed May 13, 2002, SEC File No. 1-11601). 10.14 Merger Agreement and Plan of Reorganization between the Company, ORA/Metro Incorporated and Mr. Dean R. Thompson dated as of April 1, 2003 (exhibit to the Annual Report on Form 10-K filed April 30, 2003, SEC File No. 1-11601). 10.15* Employment Agreement and Non-Competition and Non-Solicitation Agreement between OMI Communications, Inc. and Mr. Dean R. Thompson dated as of April 1, 2003 (exhibit to the Annual Report on Form 10-K filed April 30, 2003, SEC File No. 1-11601). 85 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONT.) 10.16* Non-Negotiable Promissory Note between the Company and Mr. Dean R. Thompson dated as of April 1, 2003 (exhibit to the Annual Report on Form 10-K filed April 30, 2003, SEC File No. 1-11601). 10.17 Registration Rights Agreement between the Company and Mr. Dean R. Thompson dated as of April 1, 2003 (exhibit to the Annual Report on Form 10-K filed April 30, 2003, SEC File No. 1-11601). 10.18 Stock Purchase Agreement between the Company, Campus Group Companies, Inc., Audience Response Systems, Inc., Interactive Conferencing Network, Inc. and Multi-Video Services, Inc. and Steven Campus, the Campus Family 2000 Trust and the Trust Established Under the Will of Nancy Campus (the "Campus Group Shareholders") dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.19 Lock-up, Standstill and Voting Agreement between the Company and The Campus Group Shareholders dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.20 Registration Rights Agreement between the Company and the Campus Family 2000 Trust dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.21* Employment Agreement, Non-Competition and Non-Solicitation Agreement between The Campus Group and Steven Campus dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.22 Amendment to Lease [Tuckahoe Premises] between the Campus Group Companies, Inc. and the Campus Family 2000 Trust dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.23 Amendment to Lease [Bohemia Premises] between the Campus Group Companies, Inc. and the Campus Family 2002 Trust dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.24 Surety Agreement between The Campus Group and The Campus Group Shareholders dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.25 Security Agreement between The Campus Group and The Campus Group Shareholders dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.26 Pledge Agreement The Campus Group and the Campus Group Shareholders dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.27 Non-Negotiable Promissory Notes between the Company and The Campus Group Shareholders dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 86 10.28 Non-Negotiable Convertible Promissory Note between the Company and the Campus Family 2000 Trust dated July 31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No. 1-11601). 10.29 November 2004 Amended Stipulation of Settlement between Robert Zadra individually and on behalf of a class of persons similarly situated and James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh, Donald Jasensky, Peter Zackaroff, Mallory Factor, Thomas F. Carney, Jr. and the Company (exhibit to Form 8-K filed April 22, 2005, SEC File No. 1-11601). 10.30 Stock Purchase Agreement dated as of April 1, 2005 between the Company and Academy Capital Management, Inc, Diamond A. Partners L.P., Diamond A. Investors L.P., Ridglea Investor Services, Inc. and William S. Banowsky (exhibit to Form 8-K filed April 22, 2005, SEC File No. 1-11601). 21 Subsidiaries of National Auto Credit, Inc. at January 31, 2005. 23 Consent of Independent Certified Public Accountants. 31.1 Certification of Principal Executive Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted under Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted under Section 906 of the Sarbanes-Oxley Act of 2002 Items above indicated with an asterisk (*) are management contracts or compensatory plans or arrangements (B) REPORTS ON FORM 8-K On April 22, 2005, NAC filed a Current Report on Form 8-K to report the agreement to purchase 1,562,500 shares of NAC Common Stock in order to facilitate the settlement and dismissal of the New York Action and the Delaware Action. 87 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 11, 2005 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 11, 2005. 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 Treasurer Chief Executive Officer Directors: /s/James M. Augur /s/John A. Gleason ---------------------------------- ------------------------------------ James M. Augur John A. Gleason /s/Donald Shek /s/James J. McNamara ---------------------------------- ------------------------------------- Donald Shek James J. McNamara /s/Henry Y. L. Toh ---------------------------------- Henry Y. L. Toh 88 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, 2005 ------------------------------------- Allowance for doubtful accounts $ 75 $ 4 $ - $ 14 $ 65 Self-insurance claims $ 408 $ - $ - $ 152 (a) $ 256 Year ended January 31, 2004 ------------------------------------- Allowance for doubtful accounts $ - $ 23 $ 70 $ 18 (b) $ 75 Self-insurance claims $ 518 $ - $ - $ 110 (a) $ 408 Year ended January 31, 2003 ------------------------------------- Self-insurance claims $ 769 $ - $ - $ 251 (c) $ 518 (a) Cash disbursements related to self-insured claims. (b) Includes $70,000 provision for doubtful accounts at the date of each acquisition The Campus Group and OMI during Fiscal 2004. (c) Includes $51,000 cash disbursements related to self-insurance claims and a $200,000 reduction in the estimated liability based upon current estimates of outstanding claims.