NATIONAL AUTO CREDIT INC /DE - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2004
-----------------------------

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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

555 Madison Avenue, 29th Floor, New York, New York 10022
- --------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)

(212) 644-1400
- ----------------------------------------------------
(Registrant's telephone number, including area code)

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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Securities and Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:

Class Outstanding at June 11, 2004
- ----------------------------- ----------------------------
Common Stock, $0.05 par value 9,052,614

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Report of Independent Registered Public Accounting Firm 1

Condensed Consolidated Balance Sheets as of
April 30, 2004 and January 31, 2004 2

Condensed Consolidated Statements of Operations for the
Three Months Ended April 30, 2004 and 2003 3

Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Three Months Ended
April 30, 2004 4

Condensed Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 2004 and 2003 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19

Item 3. Quantitative and Qualitative Disclosures about
Market Risk 27

Item 4. Controls and Procedures 27

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 29

Item 6. Exhibits and Reports on Form 8-K 32

Signatures 32

Certifications 33

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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 reviewed the accompanying condensed consolidated balance sheet
of National Auto Credit, Inc. and subsidiaries as of April 30, 2004, the related
condensed consolidated statements of operations for each of the three-month
periods ended April 30, 2004 and 2003; the related condensed consolidated
statement of stockholders' equity and comprehensive loss for the three-month
period ended April 30, 2004 and the condensed consolidated statements of cash
flows for the three-month periods ended April 30, 2004 and 2003. The financial
statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by
the Public Company Accounting Oversight Board ("PCAOB"). A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.

Based on our review, we are not aware of any material modifications
that should be made to such condensed consolidated financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with standards established by
the PCAOB, the consolidated balance sheet as of January 31, 2004, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for the year then ended (not presented
herein) and in our report dated April 16, 2004, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of January 31, 2004, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.

/s/ Grant Thornton LLP
Cleveland, Ohio
June 11, 2004

1

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

April 30, January 31,
2004 2004
--------- -----------
(unaudited)
ASSETS

Cash and cash equivalents $ 325 $ 376
Accounts receivable, net of allowance of
$70 and $75, respectively (Note 1) 1,674 1,979
Income taxes refundable 2,070 2,162
Prepaid expenses 175 293
Other current assets 117 399
------- -------
Total current assets 4,361 5,209

Property and equipment, net of accumulated
depreciation of $716 and $528, respectively (Note 1) 2,673 2,756
Investment in AFC (Note 3) 8,626 8,549
Goodwill (Notes 1 and 2) 4,920 4,920
Other intangible assets, net of accumulated
amortization of $426 and $284, respectively (Notes 1 and 2) 9,056 9,198
Other assets 280 284
------- -------
$29,916 $30,916
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current maturities of long term obligations (Note 4) $ 1,324 $ 1,339
Accounts payable 1,211 1,238
Self-insurance claims 405 408
Accrued income taxes 327 334
Deferred revenue 578 776
Other liabilities 1,470 1,547
------- -------
Total current liabilities 5,315 5,642

Long term obligations (Note 4) 8,960 8,969
Convertible promissory note (Note 4) 2,825 2,825
------- -------
17,100 17,436
------- -------

COMMITMENTS AND CONTINGENCIES (Note 5) -- --

STOCKHOLDERS' EQUITY
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 (140,416) (139,746)
Deferred compensation (107) (113)
Treasury stock, at cost, 30,896,975 and 30,896,975
shares, respectively (23,112) (23,112)
------- -------
Total stockholders' equity 12,816 13,480
------- -------
$29,916 $30,916
======= =======

See accompanying notes to condensed consolidated financial statements.

2

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Three Months Ended
April 30,
------------------
2004 2003
------ ------

Revenues $3,293 $ 330

Cost of revenues 1,947 197
------ ------
Gross profit 1,346 133

Selling, general and administrative 1,930 923
------ ------

Loss from operations (584) (790)

Interest income from investments -- 20
Income from AFC investment 78 119
Interest expense (163) (8)
------ ------

Loss from continuing operations
before income taxes (669) (659)
Provision for income taxes -- --
------ ------
Loss from continuing operations (669) (659)
Loss from discontinued
operations, net of tax (1) (6)
------ ------

Net loss $ (670) $ (665)
====== ======

Basic and diluted loss per share
Continuing operations $ (.07) $ (.08)
Discontinued operations -- --
------ ------
Net loss per share $ (.07) $ (.08)
====== ======

Weighted average number of shares outstanding
Basic and diluted 9,053 7,862
===== =====

See accompanying notes to condensed consolidated financial statements.

3

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
THREE MONTHS ENDED APRIL 30, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Preferred Stock Common Stock
---------------- ------------------- Additional Deferred
Par Par Pain-In Retained Treasury Compensation Comprehensive
Shares Value Shares Value Capital Deficit Stock Expense Total Income (Loss)
------ ----- ------ ----- ------- ------- ----- ------- ----- -------------

Balance at
January 31, 2004 -- $ -- 39,949,589 $1,997 $174,454 $(139,746) $(23,112) $(113) $13,480

Net loss (670) (670) $(670)

Deferred
compensation 6 6 6
------- ------ ---------- ------ -------- --------- -------- ----- ------- ------
Comprehensive loss $(664)
======

Balance at
April 30, 2004 -- $ -- 39,949,589 $1,997 $174,454 $(140,416) $(23,112) $(107) $12,816
======= ====== ========== ====== ======== ========= ======== ===== =======

See accompanying notes to condensed consolidated financial statements.

4

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

Three Months Ended
April 30,
--------------------------
2004 2003
---------- ----------

Cash flows from operating activities
Net loss $ (670) $ (665)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss from discontinued operations 1 6
Depreciation and amortization 330 26
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 305 (229)
Income tax refundable 92 --
Accrued income tax (7) (64)
Accounts payable and other liabilities (27) 106
Deferred revenue (198) --
Other operating assets and liabilities, net 256 (273)
---- ----
Net cash provided by (used in) operating activities 82 (1,093)
---- ----
Cash flows from investing activities
Acquisition of OMI net of cash acquired -- (97)
Proceeds from AFC distributions -- 183
Purchase of property and equipment (105) (25)
---- ----
Net cash provided by (used in) investing activities (105) 61
---- ----

Cash flows from financing activities
Proceeds from line of credit -- 8
Payments of long term debt (24) (6)
---- ----
Net cash provided by (used in) financing activities (24) 2
---- ----

Increase (decrease) in cash and cash equivalents from
continuing operations (47) (1,030)
Increase (decrease) in cash and cash
equivalents from discontinued operations (4) (56)
Cash and cash equivalents at beginning of period 376 1,873
---- ----
Cash and cash equivalents at end of period $ 325 $ 787
==== ====
Supplemental disclosures of cash flow information
Interest paid $ 167 $ 7
==== ====
Income taxes paid $ 7 $ 64
==== ====
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 condensed consolidated financial statements.

5

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

General

The accompanying unaudited condensed consolidated financial
statements include the accounts of National Auto Credit, Inc. and Subsidiaries
("NAC"). 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 3). 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 was
comprised of ZoomLot Corporation's ("ZoomLot") development of e-commerce
services to facilitate the process by which used car dealerships, lenders and
insurance companies communicate and complete the transactions between them that
are needed to provide used car dealers' customers with financing, insurance and
other services, (ii) the movie exhibition segment, which was comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment. However, 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.

The financial statements are unaudited, but in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of NAC's consolidated financial
position, results of operations, stockholders' equity and comprehensive income,
and cash flows for the periods presented.

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial statements and with the rules of the Securities and
Exchange Commission applicable to interim financial statements, and therefore do
not include all disclosures that might normally be required for interim
financial statements prepared in accordance with generally accepted accounting
principles. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with NAC's consolidated financial
statements, including the notes thereto, appearing in NAC's Annual Report on
Form 10-K for the year ended January 31, 2004. The results of operations for the
three months ended April 30, 2004 are not necessarily indicative of the
operating results for the full year.

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. 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.

6

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Discontinued Operations

Effective December 31, 2001, NAC suspended its ZoomLot operations and
initiated steps to discontinue e-commerce operations. Additionally, as a
consequence of NAC's decision to discontinue its ZoomLot e-commerce operations,
NAC also formally exited the sub-prime used automobile consumer finance business
effective December 31, 2001. As a result of these decisions, both the e-commerce
and automobile finance segments have been classified as discontinued operations
as of January 31, 2002. For the three months ended April 30, 2004 and 2003, NAC
incurred a loss from discontinued operations of $1,000 and $6,000, respectively.

NAC is evaluating various additional strategic business alternatives,
including, but not limited to, the purchase of one or more existing businesses
or the entry into one or more businesses.

Revenues

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 $113,000 are
included as a component of other current assets at April 30, 2004.

NAC recognizes revenue from designing and developing websites when the
customer accepts the completed project. Deposits and other prepayments are
recorded as deferred revenue until revenue is recognized. These contracts are
limited to the design and development of websites. Clients have the option to
engage NAC to maintain and upgrade their websites. These contracts are separate
from the website development and design agreements, and the related revenue is
recognized over the term of the contracts, 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.

7

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cost of 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

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 are stated at cost. Depreciation, including
depreciation on assets held under capital leases, is computed on the
straight-line method over the estimated useful lives of the assets which range
from eighteen months to ten years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives of the related
improvements.

Goodwill and Other Intangible Assets

NAC adopted Statement of Financial Accounting Standards No. ("SFAS")
141, "Business Combinations", and SFAS 142,"Goodwill and Other Intangible
Assets", effective February 1, 2002. Under SFAS 142 intangible assets with
indefinite lives, including goodwill, are no longer subject to amortization and
are subject to testing for impairment annually and whenever there is an
impairment indicator.

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 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 the estimated useful life of the intangible. From the
three months ended April 30, 2004, NAC charged to operations $142,000 for the
amortization of these intangible assets.

8

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment of Long-Lived Assets

Effective February 1, 2002, NAC adopted SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. In accordance with this statement,
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.

Reclassifications

Certain Fiscal 2004 amounts have been reclassified to conform with
Fiscal 2005 presentations.

New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or in which equity investors
do not bear the residual economic risks. The interpretation was immediately
applicable to variable interest entities ("VIEs") created after January 31,
2003, and to VIEs in which an enterprise obtains an interest after that date. It
applies in the fiscal year or interim period beginning after December 15, 2003,
to VIEs in which an enterprise holds a variable interest that was acquired
before February 1, 2003. FIN No. 46 was adopted by NAC effective February 1,
2004. At the time of adoption, there was no material impact to NAC's financial
statements.

9

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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. 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 for the years ended December 31, 2002 and 2001 were $10.7
million and $12.7 million, respectively. The Campus Group realized net income of
$1.2 million and $2.3 million for those years, respectively. For financial
reporting purposes, the effective date of the transaction is July 31, 2003.

As part of The Campus Group acquisition, Mr. Campus entered into an
employment agreement for 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 acquired companies.

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
Other intangible assets 9,482
Goodwill arising in the acqusition 4,379
--------
17,835
Accounts payable and accrued expenses (228)
Due to shareholder (1,256)
--------
Net assets acquired $ 16,351
========

10

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 - ACQUISITIONS (CONTINUED)

OMI
In April 2003, NAC consummated a Merger Agreement and Plan of
Reorganization whereby NAC acquired all of the outstanding common stock of
ORA/Metro, Inc., now known as OMI Business Communications, Inc. ("OMI"), from
Mr. Dean R. Thompson, sole stockholder of OMI. 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. OMI's revenues for the years ended
December 31, 2002 and 2001 were $2.5 million and $3.5 million, respectively. OMI
incurred net losses of $343,000 and $27,000 for those years, respectively. For
financial reporting purposes, the effective date of the merger is 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
based upon the operating results of the acquired companies.

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 acqusition 541
------
1,610
Accounts payable and accrued expenses (516)
Debt (805)
------
Net assets acquired $ 289
======

11

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 - ACQUISITIONS (CONTINUED)

The following sets forth the pro forma condensed results of operations
of NAC, The Campus Group and OMI for the three months ended April 30, 2003 as if
the acquisition were consummated on February 1, 2003. Prior to its 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 three month periods ended April 30, with the historical results of The
Campus Group and OMI for the three month periods ended March 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:

Three Months
Ended April 30, 2003
--------------------
Revenues $ 3,190
=========
Net loss from continuing operations $ (593)
=========
Loss per share from continuing operations $ (0.07)
=========

NOTE 3 - INVESTMENT IN AFC

On April 5, 2000, NAC, through its wholly owned subsidiary National
Cinemas, Inc., acquired a 50% membership interest in Angelika Film Center, LLC
("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.

AFC is currently owned 50% by NAC and 50% by Reading International,
Inc. ("Reading"). The articles and bylaws of AFC provide that for all matters
subject to a vote of the members, a majority is required, except that in the
event of a tie vote, the Chairman of Reading shall cast the deciding vote.

NAC uses the equity method to account for its investment in AFC.
NAC's initial investment exceeded its share of AFC's net assets and that portion
of the investment balance is accounted for in a manner similar to goodwill. 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 the three months ended April 30, 2004 and 2003,
NAC recorded income of $78,000 and $119,000, respectively, representing its
share of AFC's net income.

12

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3 - INVESTMENT IN AFC (CONTINUED)

Summarized income statement data for AFC for the three months ended
March 31, 2004, and 2003, respectively, is as follows (in thousands):

Three Months Ended
March 31,
--------------------------
2004 2003
--------- ---------
Revenues $ 1,305 $ 1,603

Film rental 260 392
Operating costs 633 736
Depreciation and amortization 214 205
General and administrative expenses 42 31
--------- ---------
1,149 1,364
--------- ---------
Net income $ 156 $ 239
========= =========
NAC's proportionate share of net income $ 78 $ 119
========= =========

NOTE 4 - CURRENT AND LONG TERM OBLIGATIONS

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 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 April 30, 2004, NAC has outstanding obligations under the
terms of the Base Notes, Trailing Notes and the Convertible Notes of $6.3
million, $3.3 million and $2.8 million, respectively.

13

NOTE 4 - 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.

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 with the Term Loan, the bank has requested repayment
of the Term Loan. NAC has classified the Term Loan as a component of current
maturities at April 30, 2004. The outstanding balance of the Term Loan at June
11, 2004 is $142,000.

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. 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 no interest through May 2004
and at the rate of 4% per annum thereafter. The SBA Loan is collateralized by
substantially all of OMI's assets and the personal guarantee of Mr. Thompson.
Pursuant to the terms of the Merger Agreement, NAC is seeking to obtain releases
of Mr. Thompson's personal guarantees from each financial institution.

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.

OMI leases computer equipment under several different capital leases
with finance institutions with various payments terms, expiration dates and
imputed annual rates of interest.

The components of long term obligations at April 30, 2004 are as
follows (in thousands):

April 30, 2004
--------------
Capital leases $ 55
Term loan 148
SBA loan 402
Promissory note 83
Base promissory notes 6,321
Trailing promissory notes 3,275
Convertible note payable 2,825
--------

13,109
Less current maturities (1,324)
--------
Long term obligations and
convertible note payable $ 11,785
========

14

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 4 - CURRENT AND LONG TERM OBLIGATIONS (CURRENT)

NAC's current maturities and long term obligations at April 30, 2004
are as follows (in thousands):

April 30, 2004
--------------
2005 $ 1,329
2006 1,180
2007 1,199
2008 1,260
2009 1,325
Thereafter 6,821
--------

13,114
less interest due under
capital leases obligations (5)
--------
$ 13,109
========

The cost and accumulated depreciation for equipment under capital
leases were $335,000 and $121,000, respectively at April 30, 2004.

NOTE 5 - COMMITMENTS AND CONTINGENCIES

Shareholder Complaints
On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the Director Defendants
breached their fiduciary duties to NAC, (ii) a judgment voiding an employment
agreement with James J. McNamara and rescinding a stock exchange agreement in
which NAC acquired ZoomLot Corporation, (iii) a judgment voiding the grant of
stock options and the award of director fees allegedly related thereto, (iv) an
order directing the Director Defendants to account for alleged damages sustained
and profits obtained by the Director Defendants as a result of the alleged
various acts complained of, (v) the imposition of a constructive trust over
monies or other benefits received by the Director Defendants and (vi) an award
of costs and expenses.

15

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

On August 16, 2001, NAC received a complaint (the "Markovich
Complaint") filed by Levy Markovich ("Markovich"), a shareholder of NAC, with
the Court of Chancery of Delaware on or about August 16, 2001, against James J.
McNamara, John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald
Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC
as a nominal defendant. The Markovich Complaint principally seeks: (i) a
declaration that the Director Defendants have breached their fiduciary duties to
NAC, (ii) a judgment voiding an employment agreement with James J. McNamara and
rescinding a stock exchange agreement in which NAC acquired ZoomLot Corporation,
(iii) a judgment voiding the grant of options and the award of directors fees
allegedly related thereto, (iv) an order directing the Director Defendants to
account for alleged damages sustained and alleged profits obtained by the
Director Defendants as a result of the alleged various acts complained of, (v)
the imposition of a constructive trust over monies or other benefits received by
the directors, and (vi) an award of costs and expenses.

On August 31, 2001, NAC received a complaint (the "Harbor Complaint")
filed by Harbor Finance Partners ("Harbor"), a shareholder of NAC, with the
Court of Chancery of Delaware on or about August 31, 2001, against Thomas F.
Carney, Jr., Mallory Factor, John A. Gleason, Donald Jasensky, William S.
Marshall, James J. McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C.
Garcia, and ZoomLot Corporation as Defendants and NAC as a nominal defendant.
The Harbor Complaint principally seeks: (i) a judgment requiring the Director
Defendants to promptly schedule an annual meeting of shareholders within thirty
(30) days of the date of the Harbor Complaint; (ii) a judgment declaring that
the Director Defendants breached their fiduciary duties to NAC and wasted its
assets; (iii) an injunction preventing payment of monies and benefits to James
J. McNamara under his employment agreement with NAC and requiring Mr. McNamara
to repay the amounts already paid to him thereunder; (iv) a judgment rescinding
the agreement by NAC to purchase ZoomLot and refunding the amounts it paid; (v)
a judgment rescinding the award of monies and options to the directors on
December 15, 2000 and requiring the directors to repay the amounts they received
allegedly related thereto; (vi) a judgment requiring the defendants to indemnify
NAC for alleged losses attributable to their alleged actions; and (vii) a
judgment awarding interest, attorney's fees, and other costs, in an amount to be
determined.

On October 12, 2001, NAC received a derivative complaint filed by
Robert Zadra, a shareholder of NAC, with the Supreme Court of the State of New
York on or about October 12, 2001 against James J. McNamara, John A. Gleason,
William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T. Zackaroff,
Mallory Factor, Thomas F. Carney, Jr., and NAC as Defendants. On or about May
29, 2002 the complaint was amended to include class action allegations (the
"Zadra Amended Complaint"). The Zadra Amended Complaint contains allegations
similar to those in the Delaware actions 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
Amended Complaint 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 defendants from proceeding with or exercising the
option agreements, (iii) rescission of the option grants to 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 Academy Complaint, Markovich Complaint, Harbor Complaint and the Zadra
Amended Complaint, as it believes that the claims have no merit. By order of the
Delaware Chancery Court on November 12, 2001, the Academy, Markovich and Harbor
Complaints were consolidated under the title "In re National Auto Credit, Inc.
Shareholders Litigation," Civil Action No. 19028 NC (Delaware Chancery Court)
("Delaware Consolidated Derivative Action") and the Academy Complaint was deemed
the operative complaint.

16

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

The parties in the New York action thereafter engaged in settlement
negotiations and the parties entered into a stipulation of settlement in
December 2002, proposing to settle all class and derivative claims. In January
2003, the New York Supreme Court entered an order which, among other things,
conditionally certified a class of shareholders for settlement purposes,
approved the form of notice of the proposed settlement, and scheduled a hearing
to approve the settlement. Notice of the proposed settlement was given to the
shareholders of the Company and members of the class as per the Court's order in
January and February 2003. Hearings on the proposed settlement were held on May
13, 2003 and October 15, 2003. Subsequent to the October 15, 2003 hearing, the
New York Supreme Court approved the terms of the proposed settlement and issued
the Court's written Order and Judgment in December 2003. Certain Plaintiffs in
the Delaware Consolidated Action have objected to the terms of the settlement
and have filed an appeal with the New York Appellate Court. The Appellate Court
scheduled a preliminary conference in July 2004 to review the appeal.

In the Delaware Consolidated Action, a motion to dismiss that Action
was also filed in 2002 and was denied by the Delaware court in January 2003. In
January 2004, NAC re-filed a motion to dismiss the Delaware Consolidated Action
based upon the New York Supreme Court's written Order and Judgment issued in
December 2003. The Delaware Court has previously stayed further proceedings in
the Consolidated Action pending issuance of the New York court's order. In April
2004, oral arguments were presented to the Delaware Court regarding NAC motion
to dismiss. As of June 11, 2004, no decision has been made by the Delaware
Court.

No predictions can be made with respect to the outcome of these matters
and, accordingly, no provision for any loss or settlement that may occur has
been recorded in the consolidated financial statement.

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.
NAC was, when required by either governing state law or the terms of its rental
agreement, self-insured for the first $1.0 million per occurrence, and for
losses in excess of $5.0 million per occurrence, for bodily injury and property
damage resulting from accidents involving its rental vehicles. NAC was also
self-insured, up to certain retained limits, for bodily injury and property
damage resulting from accidents involving NAC vehicles operated by employees
within the scope of their employment. In connection therewith, NAC established
certain reserves in its financial statements for the estimated cost of
satisfying those claims.

17

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

NAC was named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to Plaintiffs, passengers in the vehicle.

In November 2003, the plaintiffs reached an agreement to settle with
all parties against whom they had claims. In May 2004, the definitive agreements
were executed and confirmed by the Circuit Court of Cook County dismissing the
Plaintiffs action against NAC with prejudice without any further liability or
cost to NAC.

Because of the uncertainties related to several smaller legal
proceedings involving NAC's former rental operations and self-insurance claims,
it is difficult to project with precision the ultimate effect the adjudication
or settlement of these matters will have on NAC. At April 30, 2004, NAC had
accrued $405,000 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.

18

ITEM 2.
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
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.

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. 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:

Revenues

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 $113,000 are
included as a component of other current assets at April 30, 2004.

NAC recognizes revenue from designing and developing websites when the
customer accepts the completed project. Deposits and other prepayments are
recorded as deferred revenue until revenue is recognized. These contracts are
limited to the design and development of websites. Clients have the option to
engage NAC to maintain and upgrade their websites. These contracts are separate
from the website development and design agreements, and the related revenue is
recognized over the term of the contracts, which is generally up to one year.

19

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

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 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 maintain 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 collectability of the accounts receivable and
future operating results.

Valuation of Long-lived Assets and Goodwill

NAC reviews 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.

20

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

Self-Insurance Claims

NAC maintained and continues to maintain self-insurance for claims
relating to bodily injury or property damage from accidents involving the
vehicles rented to customers by its discontinued automobile rental operations.
NAC was, when required by either governing state law or the terms of its rental
agreement, self-insured for the first $1.0 million per occurrence, and for
losses in excess of $5.0 million per occurrence, for bodily injury and property
damage resulting from accidents involving its rental vehicles. NAC was also
self-insured, up to certain retained limits, for bodily injury and property
damage resulting from accidents involving NAC vehicles operated by employees
within the scope of their employment. In connection therewith, NAC established
certain reserves in its financial statements for the estimated cost of
satisfying those claims.

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.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2004
AS COMPARED TO THE THREE MONTHS ENDED APRIL 30, 2003

Revenues: Revenues for the three months ended April 30, 2004 were $3.3
million and are comprised principally of revenues derived from the Acquired
Companies operations, (i) OMI revenues of $261,000 and (ii) The Campus Group
revenues of $3.0 million. Pro forma revenues for the three months ended April
30, 2003, computed by combining the revenues of NAC with the revenues of the
Acquired Companies prior to their acquisition, were $3.2 million as compared to
revenues of $3.3 million for the three months ended April 30, 2004.

For the three months ended April 30, 2003, pro forma revenues for The
Campus Group were $2.7 million as compared to revenues of $3.0 million for the
three months ended April 30, 2004. The increase in revenues of $338,000 for the
three months ended April 30, 2004 as compared to pro forma revenues for the
three months ended April 30, 2003 was principally due to the net effect of (i)
an increase in revenues of $775,000 resulting from timing of certain assignments
with larger clients, which created a increase in both the scope and the
frequency of video production and broadcast services during the period, offset
by (ii) a decrease of $437,000 in revenues due to a decrease in the number of
support and data collection service assignments for smaller corporate and other
meetings scheduled during the three months ended April 30, 2004.

21

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

For the three months ended April 30, 2003, pro forma revenues for OMI
were $509,000 as compared to revenues of $261,000 for the three months ended
April 30, 2004. The decrease in revenues of $248,000 for the three months ended
April 30, 2004 as compared to pro forma revenues for the three months ended
April 30, 2003 was principally due to a reduction in the number, scope and value
of assignments completed from period to period.

Cost of Revenues: Cost of revenues for three months April 30, 2004 were
$1.9 million and are comprised principally of cost of revenues derived from the
Acquired Companies operations, (i) The Campus Group cost of revenues of $1.7
million and (ii) OMI cost of revenues of $174,000. The average gross margin for
the three months ended April 30, 2004 was 41.3% and 33.8% for The Campus Group
and OMI, respectively. The average gross margins for the Acquired Companies are
comparable to the average gross margins of the Acquired Companies at similar
revenue levels prior to NAC's acquisition.

Selling, General and Administrative ("SG&A"): For the three months
ended April 30, 2004, SG&A expenses includes SG&A expenses of OMI's operations
("OMI SG&A"), The Campus Group's operations ("Campus SG&A") and NAC's personnel,
occupancy, legal, professional, insurance and other general corporate overhead
costs ("NAC SG&A"). As a consequence of the acquisition of OMI effective April
1, 2003, SG&A expenses for the three months ended April 30, 2003 includes OMI
SG&A for one month and NAC SG&A for three months.

For the three months ended April 30, 2004, SG&A expense was $1.9
million comprised of (i) Campus SG&A of $760,000, (ii) OMI SG&A of $304,000, and
(iii) NAC SG&A of $866,000. SG&A for the Acquired Companies have remained
comparable to their historical levels prior to NAC's acquisition. NAC SG&A for
the three months ended April 30, 2004 was $866,000 as compared to $788,000 for
the three months ended April 30, 2003. The increase of $78,000 of NAC SG&A for
the three months April 30, 2004 as compared to the three months ended April 30,
2003 was due principally to increased personnel and corporate insurance costs as
a consequence of the acquisitions.

Income from AFC Investment: NAC accounts for its investment in AFC
using the equity method. For the three months ended April 30, 2004 and 2003, NAC
recorded income of $78,000 and $119,000, respectively, representing NAC's share
of AFC's net income for the three months ended March 31, 2004 and 2003,
respectively.

22

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

The following sets forth summarized operating results for AFC (in
thousands):

Three Months Ended March 31,
----------------------------
2004 2003
------------- -------------
Revenues $ 1,305 $ 1,603

Film rental 260 392
Operating costs 633 736
Depreciation and amortization 214 205
General and administrative expenses 42 31
------- -------
1,149 1,364
------- -------
Net income $ 156 $ 239
======= =======
NAC's proportionate share of net income $ 78 $ 119
======= =======

AFC's revenues decreased $298,000 for the three months ended March 31,
2004 as compared to the three months ended March 31, 2003, principally as a
result of (i) a 20.1% decrease in attendance, (ii) a decrease of $27,000 in
other, concession and cafe revenues and (iii) stable ticket prices
period-to-period. The attendance, and at times the ticket prices, at AFC will
vary depending on audience interest in, and the popularity of the films it
exhibits and other factors. Film rental, as a percentage of revenue, decreased
4.6% to 19.9% from 24.5% for the three months ended March 31, 2004 and 2003,
respectively. Film rental expense generally is a factor of a fixed percentage
rental rate per film multiplied by the number of tickets sold. AFC experiences
fluctuations in film rental expense, as a percentage of revenue, depending upon
the rental rate per film and the popularity of the film. Operating costs, as a
percent of revenue, increased 2.6% to 48.5% for the three months ended March 31,
2004 as compared to 45.9% for the three months ended March 31, 2003 due
principally to an increase in revenues. The nature of AFC's operating costs tend
to generally be more fixed overhead-related costs and advertising expenses.

Income Taxes: Due to net operating losses and the availability of net
operating loss carryforwards, NAC's effective income tax rate was zero for the
three month periods ended April 30, 2004 and April 30, 2003. NAC has provided a
full valuation allowance against its net operating loss carryforward and other
net deferred tax asset items due to the uncertainty of their future realization.

23

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

LIQUIDITY AND CAPITAL RESOURCES

Throughout the three months ended April 30, 2004 and as of June 11,
2004, NAC had no external source of financing, and has operated on its existing
cash balances, cash flows from The Campus Group and OMI and distributions from
its investment in AFC. NAC continues to pursue its plan of examining new
business opportunities, which may be pursued through the investment in, or
acquisition of existing operating businesses or other means. At April 30, 2004
NAC had cash of $325,000 and $2.1 million 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. Additionally, NAC will continue to pursue reductions in its
operating expenses and new debt or equity financing (there can be no assurance
NAC will obtain such financing) as means of supplementing the resources
available to pursue new opportunities.

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 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.

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.

24

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

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 with the Term Loan, the bank has requested repayment
of the Term Loan. NAC has classified the Term Loan as a component of current
maturities at April 30, 2004. The outstanding balance of the Term Loan at June
11, 2004 is $142,000.

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 April
30, 2004, the SBA Loan of $402,000 is repayable in monthly installments of
$3,309 beginning in May 2004, with the last payment due in April 2017. The SBA
Loan bears no interest through May 2004 and at the rate of 4% per annum
thereafter.

At April 30, 2004, the $83,000 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.

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 April 30, 2004, amounts outstanding under
the capital leases were $55,000.

For the three months ended April 30, 2004, NAC's cash and cash
equivalents decreased $51,000 due to the net effects of (i) cash flows generated
from operations of $82,000, (ii) capital expenditures of $105,000 and (iii) the
repayment of debt of $24,000.

NAC believes that the available cash and cash equivalents totaling
$325,000 at April 30, 2004, the collection of the federal income tax refund of
$2.1 million and any cash distributions from its investment in AFC and cash flow
from the Acquired Companies' operations will be sufficient to pay operating
expenses, existing liabilities, fund existing debt repayments and fund its
activities through the next twelve months as NAC explores new strategic business
alternatives. As discussed in Note 5 of Notes to Condensed Consolidated
Financial Statements, NAC is presently a defendant or nominal defendant in
various derivative shareholder complaints and various litigation matters
relating to NAC's discontinued auto finance and auto rental businesses. Although
NAC intends to vigorously defend each of the claims, no prediction can be made
with respect to their ultimate outcomes. Accordingly, no provision for any loss
or settlement that may occur has been recorded in the consolidated financial
statements. An adverse outcome could have a material adverse effect on NAC's
liquidity, financial condition or results of operations. Additionally, as
previously discussed, NAC's lack of external financing sources may limit its
ability to pursue strategic business alternatives being considered by NAC's
Board of Directors. Such limitations may have an adverse impact on NAC's
financial position, results of operations and liquidity.

25

NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or in which equity investors
do not bear the residual economic risks. The interpretation was immediately
applicable to variable interest entities ("VIEs") created after January 31,
2003, and to VIEs in which an enterprise obtains an interest after that date. It
applies in the fiscal year or interim period beginning after December 15, 2003,
to VIEs in which an enterprise holds a variable interest that was acquired
before February 1, 2003. FIN No. 46 was adopted by NAC effective February 1,
2004. At the time of adoption, there was no material impact to NAC's financial
statements.

OTHER

NAC's exposure to the risks of inflation is generally limited to the
potential impact of inflation on its operating and general and administrative
expenses. To date, inflation has not had a material adverse impact on NAC.

NAC does not utilize futures, options or other derivative financial
instruments.

26

FORWARD-LOOKING STATEMENTS

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 also contains
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 "Risk Factors" and other sections of this report
which address additional facts that could cause our actual results to differ
from those set forth in the 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 3. 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 April 30, 2004, 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.

ITEM 4. CONTROLS AND PROCEDURES

In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act 1933, as amended, and within 90 days of the date of this
Quarterly Report on Form 10-Q (the "Evaluation Date"), the Chief Executive
Officer and the Chief Financial Officer of NAC (the "Certifying Officers") have
conducted evaluations of NAC's disclosure controls and procedures. As defined
under Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the term "disclosure controls and procedures"
means controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer's management, including its principal
executive officer or officers and principal financial officer or officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. The Certifying Officers have reviewed NAC's
disclosure controls and procedures and have concluded that (subject to the
qualifications and disclosures set forth herein below) those

27

disclosure controls and procedures are effective as of the date of this
Quarterly Report on Form 10-Q. In compliance with Section 302 of the
Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), each of the Certifying Officers
executed an Officer's Certification included in this Quarterly Report on Form
10-Q.

As of this Quarterly Report on Form 10-Q, there have not been any
significant changes in NAC's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including corrective actions with regard to significant deficiencies and
material weaknesses.

28

PART II.
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Shareholder Complaints

On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the Director Defendants
breached their fiduciary duties to NAC, (ii) a judgment voiding an employment
agreement with James J. McNamara and rescinding a stock exchange agreement in
which NAC acquired ZoomLot Corporation, (iii) a judgment voiding the grant of
stock options and the award of director fees allegedly related thereto, (iv) an
order directing the Director Defendants to account for alleged damages sustained
and profits obtained by the Director Defendants as a result of the alleged
various acts complained of, (v) the imposition of a constructive trust over
monies or other benefits received by the Director Defendants and (vi) an award
of costs and expenses.

On August 16, 2001, NAC received a complaint (the "Markovich
Complaint") filed by Levy Markovich ("Markovich"), a shareholder of NAC, with
the Court of Chancery of Delaware on or about August 16, 2001, against James J.
McNamara, John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald
Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC
as a nominal defendant. The Markovich Complaint principally seeks: (i) a
declaration that the Director Defendants have breached their fiduciary duties to
NAC, (ii) a judgment voiding an employment agreement with James J. McNamara and
rescinding a stock exchange agreement in which NAC acquired ZoomLot Corporation,
(iii) a judgment voiding the grant of options and the award of directors fees
allegedly related thereto, (iv) an order directing the Director Defendants to
account for alleged damages sustained and alleged profits obtained by the
Director Defendants as a result of the alleged various acts complained of, (v)
the imposition of a constructive trust over monies or other benefits received by
the directors, and (vi) an award of costs and expenses.

On August 31, 2001, NAC received a complaint (the "Harbor Complaint")
filed by Harbor Finance Partners ("Harbor"), a shareholder of NAC, with the
Court of Chancery of Delaware on or about August 31, 2001, against Thomas F.
Carney, Jr., Mallory Factor, John A. Gleason, Donald Jasensky, William S.
Marshall, James J. McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C.
Garcia, and ZoomLot Corporation as Defendants and NAC as a nominal defendant.
The Harbor Complaint principally seeks: (i) a judgment requiring the Director
Defendants to promptly schedule an annual meeting of shareholders within thirty
(30) days of the date of the Harbor Complaint; (ii) a judgment declaring that
the Director Defendants breached their fiduciary duties to NAC and wasted its
assets; (iii) an injunction preventing payment of monies and benefits to James
J. McNamara under his employment agreement with NAC and requiring Mr. McNamara
to repay the amounts already paid to him thereunder; (iv) a judgment rescinding
the agreement by NAC to purchase ZoomLot and refunding the amounts it paid; (v)
a judgment rescinding the award of monies and options to the directors on
December 15, 2000 and requiring the directors to repay the amounts they received
allegedly related thereto; (vi) a judgment requiring the defendants to indemnify
NAC for alleged losses attributable to their alleged actions; and (vii) a
judgment awarding interest, attorney's fees, and other costs, in an amount to be
determined.

29

On October 12, 2001, NAC received a derivative complaint filed by
Robert Zadra, a shareholder of NAC, with the Supreme Court of the State of New
York on or about October 12, 2001 against James J. McNamara, John A. Gleason,
William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T. Zackaroff,
Mallory Factor, Thomas F. Carney, Jr., and NAC as Defendants. On or about May
29, 2002 the complaint was amended to include class action allegations (the
"Zadra Amended Complaint"). The Zadra Amended Complaint contains allegations
similar to those in the Delaware actions 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
Amended Complaint 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 defendants from proceeding with or exercising the
option agreements, (iii) rescission of the option grants to 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 Academy Complaint, Markovich Complaint, Harbor Complaint and the Zadra
Amended Complaint, as it believes that the claims have no merit. By order of the
Delaware Chancery Court on November 12, 2001, the Academy, Markovich and Harbor
Complaints were consolidated under the title "In re National Auto Credit, Inc.
Shareholders Litigation," Civil Action No. 19028 NC (Delaware Chancery Court)
("Delaware Consolidated Derivative Action") and the Academy Complaint was deemed
the operative complaint.

The parties in the New York action thereafter engaged in settlement
negotiations and the parties entered into a stipulation of settlement in
December 2002, proposing to settle all class and derivative claims. In January
2003, the New York Supreme Court entered an order which, among other things,
conditionally certified a class of shareholders for settlement purposes,
approved the form of notice of the proposed settlement, and scheduled a hearing
to approve the settlement. Notice of the proposed settlement was given to the
shareholders of the Company and members of the class as per the Court's order in
January and February 2003. Hearings on the proposed settlement were held on May
13, 2003 and October 15, 2003. Subsequent to the October 15, 2003 hearing, the
New York Supreme Court approved the terms of the proposed settlement and issued
the Court's written Order and Judgment in December 2003. Certain Plaintiffs in
the Delaware Consolidated Action have objected to the terms of the settlement
and have filed an appeal with the New York Appellate Court. The Appellate Court
scheduled a preliminary conference in July 2004 to review the appeal.

In the Delaware Consolidated Action, a motion to dismiss that Action
was also filed in 2002 and was denied by the Delaware court in January 2003. In
January 2004, NAC re-filed a motion to dismiss the Delaware Consolidated Action
based upon the New York Supreme Court's written Order and Judgment issued in
December 2003. The Delaware Court has previously stayed further proceedings in
the Consolidated Action pending issuance of the New York court's order. In April
2004, oral arguments were presented to the Delaware Court regarding NAC motion
to dismiss. As of June 11, 2004, no decision has been made by the Delaware
Court.

No predictions can be made with respect to the outcome of these matters
and, accordingly, no provision for any loss or settlement that may occur has
been recorded in the consolidated financial statement.

30

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.
NAC was, when required by either governing state law or the terms of its rental
agreement, self-insured for the first $1.0 million per occurrence, and for
losses in excess of $5.0 million per occurrence, for bodily injury and property
damage resulting from accidents involving its rental vehicles. NAC was also
self-insured, up to certain retained limits, for bodily injury and property
damage resulting from accidents involving NAC vehicles operated by employees
within the scope of their employment. In connection therewith, NAC established
certain reserves in its financial statements for the estimated cost of
satisfying those claims.

NAC was named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to Plaintiffs, passengers in the vehicle.

In November 2003, the plaintiffs reached an agreement to settle with
all parties against whom they had claims. In May 2004, the definitive agreements
were executed and confirmed by the Circuit Court of Cook County dismissing the
Plaintiffs action against NAC with prejudice without any further liability or
cost to NAC.

Because of the uncertainties related to several smaller legal
proceedings involving NAC's former rental operations and self-insurance claims,
it is difficult to project with precision the ultimate effect the adjudication
or settlement of these matters will have on NAC. At April 30, 2004, NAC had
accrued $405,000 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.

31

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A) EXHIBITS

EXHIBIT PAGE
NUMBER TITLE OF EXHIBIT NUMBER
------------------------------------------------------------------------------------------------

31.1 Officer's Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 33
31.2 Officer's Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 34
32.2 Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 35
32.2 Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 36

B) REPORTS ON FORM 8-K

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

NATIONAL AUTO CREDIT, INC.

Date: June 11, 2004 By: /s/ James J. McNamara
----------------- ---------------------
James J. McNamara
Chairman of the Board and
Chief Executive Officer

By: /s/ Robert V. Cuddihy, Jr.
--------------------------
Robert V. Cuddihy, Jr.
Chief Financial Officer

32