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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, 2001
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.)
30000 Aurora Road, Solon, Ohio 44139
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (440) 349-1000
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. ( )
As of April 30, 2001, 11,721,284 shares of Common Stock of National Auto Credit,
Inc. were outstanding.
Aggregate market value of the registrant's Common Stock held by nonaffiliates at
April 30, 2001, was approximately $1,577,893 (Based on the closing price of the
registrant's common stock on the OTC Bulletin Board on April 30, 2001).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed 120 days from the end of the fiscal
year covered by this Form 10-K are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I PAGE
Item 1. Business.............................................................. 1
Executive Officers of the Registrant.................................. 13
2. Properties............................................................ 14
3. Legal Proceedings..................................................... 15
4. Submission of Maters to a Vote of Security Holders.................... 16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................... 17
6. Selected Financial Data............................................... 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 21
7a. Quantitative and Qualitative Disclosures About Market Risk............ 36
8. Financial Statements and Supplementary Data........................... 37
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 79
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 80
11. Executive Compensation................................................ 80
12. Security Ownership of Certain Beneficial Owners and Management........ 80
13. Certain Relationships and Related Transactions........................ 80
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................................... 81
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PART I
ITEM 1. BUSINESS
OVERVIEW
- --------
National Auto Credit, Inc. ("the Company" or "NAC") began operations in
1969 and was incorporated in Delaware in 1971. The Company's principal business
activity conducted through ZoomLot Corporation ("ZoomLot"), a wholly-owned
subsidiary, which is 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 currently provides these services, on a limited
basis, using a combination of Internet and manual processes, and is continuing
its efforts to develop a fully e-commerce process. The Company acquired ZoomLot
on December 15, 2000. The Company also owns a 50% membership interest in
Angelika Film Center, LLC ("AFC"). Additionally, the Company is considering
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.
From October 1995 through March 2000, the Company's principal business
activity was to invest in sub-prime used automobile consumer loans, which took
the form of installment loans collateralized by the related vehicle. The Company
purchased such loans, or interests in pools of such loans, from member
dealerships, and performed the underwriting and collection functions for such
loans. In the first and second quarters for the year ended January 31, 2001, the
Company sold its active loan portfolio and the majority of its charged-off
portfolio. However, since the Company had not yet made a definitive decision
that it will not re-enter some aspect of the consumer lending business, these
operations have not been classified as a discontinued operation as of January
31, 2001.
Prior to the year ended January 31, 1997, the Company also engaged in the
automobile rental business, including the subsequent sale of cars from its
rental fleet. The automobile rental operations, conducted under the names Agency
Rent-A-Car, Altra Auto Rental and Automate Auto Rental, rented vehicles
principally on a short-term basis to the insurance replacement market. National
Motors, Inc. was a company owned dealership that sold vehicles retired from the
rental fleet. The Company sold the automobile rental operations in Fiscal 1996,
and in 1997 discontinued the operations of National Motors, Inc.
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As of January 31, 2001 the Company's operations are classified as three
operating segments:
- the automobile financing segment;
- the e-commerce segment, which is comprised of ZoomLot's
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 currently
provides these services, on a limited basis, using a combination
of Internet and manual processes, and is continuing its efforts to
develop a fully e-commerce process;
- the movie exhibition segment, which is comprised of the activities
of AFC.
Operating segment information for the year ended January 31, 2001 is
presented in Note Q of Notes to Consolidated Financial Statements.
The Company's principal executive offices are located at 30000 Aurora
Road, Solon, Ohio. Its telephone number is 440-349-1000.
The Company uses a January 31 year-end for financial reporting purposes.
References herein to the fiscal year ended January 31, 2001 shall be the term
"Fiscal 2001" 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.
SIGNIFICANT DEVELOPMENTS
- ------------------------
The following sets forth discussions of certain significant events that
occurred during Fiscal 2001 that affected the Company's business, results of
operations, financial position and cash flows.
SALE OF AUTOMOBILE INSTALLMENT LOAN PORTFOLIO. On March 17, 2000, the
Company, acting through NAC, Inc., a wholly-owned subsidiary, sold to Crescent
Bank & Trust substantially all of the automobile retail installment loans
remaining in the Company's active portfolio for $17.9 million. In prior
transactions in March 2000, NAC, Inc., sold to First Southwestern Financial
Services, for $2.7 million, certain automobile retail installment loans held in
the Company's active portfolio and to Ameristar Financial Servicing Company,
L.L.C., for $2.2 million, certain automobile retail installment loans held in
the Company's portfolio of charged-off accounts (representing approximately
one-third of the charged-off portfolio). In other transactions, the Company sold
a portion of its charged-off portfolio for approximately $1.4 million. In the
first quarter of Fiscal 2002, the Company completed the sale of substantially
all its remaining charged-off automobile installment loans for approximately
$300,000. In all of the transactions, the buyer was an independent party that
did not have a material relationship with the Company, nor was the buyer an
affiliate of the Company, a director or officer of the Company or an associate
of any officer or director of the Company. In each case, the selling price was
determined based upon arm's length negotiations between the parties and was paid
in cash at closing.
The sale of the loans resulted in an aggregate loss of approximately $1.4
million, which the Company reported in Fiscal 2001. Additionally, as the result
of the sale of the loans, the Company's interest income from the loans was
substantially reduced in Fiscal 2001.
PURCHASE OF INVESTMENT IN AFC. On April 5, 2000, the Company through its
wholly-owned subsidiary National Cinemas, Inc., purchased a 50% membership
interest in AFC. The 50% membership interest was purchased from Reading
Entertainment, Inc. ("Reading") in consideration for 8,999,900 shares of the
Company's common stock ("Common Stock") and 100 shares of the Company's Series A
Convertible Preferred Stock ("Series A Preferred Stock"), representing 100% of
the Company's Series A Preferred Stock outstanding.
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Each of the owners of AFC is entitled to a proportionate share of the cash
distributions that are paid quarterly by AFC. As a result of the transfer, AFC
is now owned 50% by the Company, 33.34% by Reading and 16.66% by Citadel
Cinemas, Inc., (a wholly-owned subsidiary of Citadel Holding Corporation).
AFC is the owner of the Angelika Film Center which it holds under a
long-term lease having a remaining term of approximately 25 years. The Angelika
Film Center is a 17,000 square foot, six-screen multiplex theater and cafe in
the Soho District of Manhattan in New York City that focuses on the exhibition
of art and specialty films.
SETTLEMENT OF FRANKINO LITIGATION AND REPURCHASE OF COMMON STOCK FROM
FRANKINO PARTIES. Certain disputes and differences between Samuel J. Frankino
("Mr. Frankino") and the Company had resulted in litigation styled National Auto
Credit, Inc. v. Samuel J. Frankino, C.A. No. 17973 and Samuel J. Frankino v.
David L. Huber, ET AL., C.A. No. 17984 in the Court of Chancery of the State of
Delaware (the "Actions"). The pendency of the Actions was previously disclosed
in, among other filings, the Company's Form 10-K, filed May 15, 2000.
On November 3, 2000, the Company entered into a Settlement Agreement and
Release (the "Settlement Agreement") with Mr. Frankino, individually, as trustee
and president of the Samuel J. Frankino and Connie M. Frankino Charitable
Foundation, as trustee of the Corrine L. Dodero Trust for the Arts and Sciences
and as managing partner of the Frankino and Frankino Investment Company, a
Nevada general partnership, (Mr. Frankino and all such entities referred to
herein collectively as "Frankino Parties"). The Settlement Agreement, among
other things, settled all of the Actions and resulted in the repurchase by the
Company of all of the Company's securities held by the Frankino Parties and
certain other parties. In conjunction with the settlement of the
above-referenced litigation, the parties to the Actions, as well as William
Dodero, Lorraine Dodero, William Maund and Robert Upton, exchanged general
releases and releases against future claims.
Under the terms of the Settlement Agreement, the Company (i) repurchased
an aggregate of 15,743,012 shares of Common Stock of the Company owned by the
Frankino Parties for a total purchase price of $35,340,000, or $2.245 per share
of Common Stock; (ii) repurchased an aggregate of 120,348 shares of Common Stock
of the Company owned by certain of the Company's directors including shares of
Common Stock held by William Maund, Lorraine Dodero, William Dodero and Lorraine
Dodero, as joint tenants with rights of survivorship, and shares of Common Stock
held by Lorraine Dodero, as a trustee of a grantor trust for the benefit of her
daughter, Corrine Dodero, for a total purchase price of $180,522, or $1.50 per
share of Common Stock; and (iii) reimbursed certain legal fees previously
incurred by Mr. Frankino in the amount of $2,011,600. See Item 5-"Market for
Registrant's Common Equity and Related Stockholder Matters", Item 7-
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Note K of Notes to Consolidated Financial Statements.
In accordance with the terms of the Settlement Agreement, Mr. Frankino,
Lorraine Dodero, William Maund, William Dodero and Robert Upton resigned
positions as directors of the Company on November 3, 2000, immediately following
the execution of the Settlement Agreement. The Frankino Parties also made
certain covenants designed to limit the ability of the Frankino Parties to
affect the Company's day-to-day operations or its long-term strategic
direction, to purchase equity securities of the Company or to solicit proxies.
STOCK PURCHASE AND STANDSTILL AGREEMENT WITH READING. On November 3,
2000, simultaneously with the execution and closing of the Settlement Agreement
with the Frankino Parties, the Company executed and closed a Stock Purchase and
Standstill Agreement ("Reading Agreement") with Reading, FA, Inc., a Nevada
corporation and a wholly-owned subsidiary of Reading ("FA"), Citadel Holding
Corporation, a Nevada corporation ("Citadel"), and Craig Corporation, a Nevada
corporation ("Craig"), (collectively the "Reading Stockholders"). Prior to the
execution of the Reading Agreement, the Reading Stockholders collectively owned
an aggregate of 10,055,000 shares of Common Stock and 100 shares of Series A
Preferred Stock, par value $.05 per share.
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Under the terms of the Reading Agreement, the Company repurchased from
the Reading Stockholders 5,277,879 shares of Common Stock and all 100 shares of
Series A Preferred Stock for an aggregate purchase price of $8,469,000, or $1.60
per share.
On December 15, 2000, the Company entered into a second agreement with
the Reading Stockholders for the repurchase of 4,777,121 shares of the Company's
Common Stock for an aggregate price of $8,000,000, and on December 21, 2000, the
Company purchased 25,000 shares of Common Stock from an associate of Reading for
$41,000. As a part of the second agreement, the provisions of the November 3,
2000 Stock Purchase and Standstill Agreement that had continuing effect were
terminated. See Item 5-"Market for the Registrant's Common Equity and Related
Stockholder Matters", Item 7-"Management's Discussion and Analysis of Financial
Condition and Results of Operations", and Note K of Notes to Consolidated
Financial Statements.
ZOOMLOT MERGER TRANSACTION. On December 15, 2000, the Company entered
into a merger transaction ("Merger Transaction") with ZoomLot Corporation
("ZLT"), a Delaware corporation, whereby ZLT was merged into a newly created and
wholly-owned and surviving subsidiary of the Company, which was renamed ZoomLot
Corporation ("ZoomLot").
Under the terms of the Merger Transaction, the Company issued to the
former ZLT stockholders 270,953 shares of its Series B convertible preferred
stock and 729,047 shares of its Series C redeemable preferred stock, each at
$.50 par value.
The Series C redeemable preferred stock has no conversion or voting
rights, but the holders of the Series C redeemable preferred stock have certain
rights to require the redemption of the shares, either at any time after
September 30, 2003 or earlier upon the occurrence of certain events or the
achievement of certain objectives. 666,667 shares of the Series C redeemable
preferred stock are subject to forfeiture unless certain objectives are met or
certain events occur.
The Series B convertible preferred stock had a par value of $.50 per
share. The holders of the Series B convertible preferred stock could at any time
convert the shares of Series B convertible preferred stock into shares of the
Company's Common Stock at the ratio (subject to adjustment for stock splits and
other anti-dilutive events) of ten shares of Common Stock for each share of
Series B convertible preferred stock. The holders of the outstanding Series B
convertible preferred stock had certain voting rights.
Additionally, the terms of the Series B convertible preferred stock
provided that it would automatically convert into shares of the Company's Common
Stock, at the ratio of ten shares of the Company's Common Stock for each share
of Series B convertible preferred stock, upon the termination of the November 3,
2000 Stock Purchase and Standstill Agreement between the Company and the Reading
Stockholders. That agreement was terminated in connection with the Company's
December 15, 2000 repurchase of additional shares of Common Stock from the
Reading Stockholders described above. As a result, on December 15, 2000 the
Company converted the 270,953 shares of the Series B convertible preferred stock
into 2,709,530 shares of its Common Stock.
As a part of the Merger Transaction, the Company made a capital
contribution to ZoomLot of approximately $5 million, which ZoomLot used to repay
advances that had been made to it by Cygnet Capital Corporation ("Cygnet
Capital"). Mr. Ernest C. Garcia, II, is the sole stockholder and chief executive
officer of Cygnet Capital. Mr. Garcia was also a stockholder of ZLT, and by
virtue of the Merger Transaction became the beneficial holder of 170,701 shares
of Series B convertible preferred stock and 459,299 shares of Series C
redeemable preferred stock. Upon the December 15, 2000 conversion of the Series
B convertible preferred stock into shares of Common Stock, Mr. Garcia became the
beneficial owner of 1,707,004 shares of Common Stock. Mr. Garcia has also
acquired beneficial ownership of shares of Common Stock in market purchases, and
currently beneficially owns 2,077,004 shares of Common Stock, which represent
approximately 18% of the outstanding shares of the Company's Common Stock. Mr.
Garcia, Cygnet Capital, or Verde Reinsurance Company, Ltd., a company owned by
Mr. Garcia, are required to repay the $5 million to the Company unless ZoomLot
meets the objectives, or an event occurs, that eliminates the forfeiture of the
Class C redeemable preferred stock.
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See Item 5 - "Market for the Registrant's Common Equity and Related
Stockholder Matters", Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and Notes B and K of Notes to
Consolidated Financial Statements.
AUTOMOBILE FINANCING BUSINESS
- -----------------------------
General
The Company'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. The Company purchased
such automobile loans, or interests in pools of such loans (collectively "loan
investments"), from member dealers through its wholly-owned subsidiary, NAC,
Inc. The Company performed the underwriting and collection functions for all
automobile loans it purchased in whole, and also performed such functions where
the Company had purchased interests in a pool of such loans. The Company's
operations enabled member dealers to provide used car purchase financing to
customers who had limited access to more traditional consumer credit sources
that might otherwise be unable to obtain financing.
The business of investing in sub-prime automobile loans involves
investing in loans which are high risk, in that the borrowers are individuals
with below average credit quality, and the collateral is subject to loss,
damage, significant declines in value and difficulties of repossession.
Accordingly, each individual loan had a significant risk of not performing in
accordance with its contractual terms. The business relied on mitigating this
risk by acquiring large numbers of loans, thus reducing the exposure to the risk
of the default on any one particular loan, and on reasonably estimating the
credit losses to be incurred and setting loan purchase prices accordingly. An
inability to reasonably predict the future performance of loans purchased, or to
set loan purchase prices that properly reflected those estimates, could
significantly increase the risk of material losses from the business of
investing in sub-prime used automobile loans.
As previously discussed, in Fiscal 2001 the Company sold all of the
automobile retail installment loans remaining in the Company's active loan
portfolio and substantially all of its remaining charged-off automobile
installment loans. After the sale of such loans the Company eliminated
essentially all personnel who had previously been engaged in the Company's loan
underwriting, processing and collection operations.
As a result, as of January 31, 2001, the Company had no active automobile
financing operations.
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However, since the Company had not yet made a definitive decision that it will
not reenter some aspect of the consumer lending business, these operations have
not been classified as a discontinued operation as of January 31, 2001.
E-COMMERCE BUSINESS
- -------------------
General
The Company conducts its e-commerce business through ZoomLot. ZoomLot is
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 currently provides these services, on a limited basis, using a
combination of Internet and manual processes, and is continuing its efforts to
develop a fully e-commerce process.
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"; however, ZoomLot does not warehouse or pool purchased contracts
for resale, but rather either merely facilitates a finance company's purchase of
a contract from the dealer, or purchases contracts from dealers for immediate
pre-arranged resale. As a result, the Company does not assume credit risk with
respect to the contracts.
ZoomLot was founded in January 2000 and initially operated as a division
of Cygnet Dealer Finance, Inc. ("CDF"). ZoomLot was separately incorporated in
March 2000.
ZoomLot's objective is to establish itself as a vertical market maker by
facilitating financing, insurance, warranty and other back office transactions
"on-line," thereby creating a digital marketplace in the used car industry that
will support large numbers of transactions and users.
According to CNW Research, Inc., automobile financing is the
third-largest consumer finance market in the country after mortgage debt and
credit card debt, with more than $500 billion in contracts on new and used cars
originated in 1999. However, to date, e-commerce applications in the used car
business have been focused on business-to-consumer transactions, featuring
services designed to allow used car buyers to search and price used cars
on-line.
ZoomLot's e-commerce services are aimed at the independent automotive
dealer. There are approximately 60,000 independent used car dealers in the
United States, and sales by those dealers in 1999 approximated 14.3 million used
cars for an aggregate of approximately $104 billion. ZoomLot specifically
targets the small dealers with one lot and few employees, a $100,000 flooring
facility or $150,000 in inventory financed with owner's equity, and a strong
personal credit history.
While franchised used car dealers, and new car dealers, traditionally
have been able to access financing from banks, credit unions and captive finance
subsidiaries, the independent used car dealers that comprise ZoomLot's target
market generally have not had access to such sources of capital. Such lenders
have viewed the underwriting and servicing of consumer loans generated by the
sales of such independent dealers as too high in cost, mainly because the lack
of standard operating and documentation practices among such dealers increases
the cost of underwriting, processing and monitoring a loan.
As a result, when such independent dealers have retained a consumer
automobile loan, or "contract", upon the sale of a vehicle, their sources for
financing their operations through the resale of that contract have generally
been limited to finance companies that specialize in higher-risk used car
consumer loans. During
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1997 and 1998, there was significant competition among the finance companies
that specialized in this market. As a result, during that period such companies
acquired contracts at discounts from the face amounts of the contracts that were
insufficient to allow the companies to absorb credit losses and still maintain
profitability. As a result, since 1998 several companies that specialized in
used car consumer loans have filed bankruptcy or have otherwise ceased
operations, and there has been a significant reduction in the availability of
capital for the purchase of such loans from independent dealers. In response,
many independent dealers have had to rely in part on financing from local
finance companies. Such local finance companies are often smaller, with less
capital and limited purchasing capacity. The result is to increase the cost and
decrease in the reliability of capital for the independent dealers.
ZoomLot's goal is to increase the sources and lower the cost of the
capital available to the independent dealers in its market by providing
efficient methods by which dealers can submit contracts to finance companies
whose underwriting criteria the contract satisfies, as well as providing these
dealers with other benefits of an on-line marketplace. An additional component
of ZoomLot's plan is the formation of alliances with finance, insurance and
warranty providers who will competitively bid their products and services to
ZoomLot dealers.
Products
CONTRACT AGGREGATION. ZoomLot's principal product is its service of
facilitating the process by which independent dealers seeking to sell contracts,
and finance companies wishing to purchase contracts, communicate and complete
such transactions. ZoomLot currently has two programs by which it provides this
contract aggregation service.
Under ZoomLot's "Pass-Through" program, ZoomLot submits to one or more
finance companies contracts submitted by dealers that meet the underwriting
criteria of those finance companies.
Independent dealers submit information about the contracts they wish to
sell to ZoomLot. ZoomLot in turn reviews the contracts, comparing them to the
underwriting criteria of various finance companies with which ZoomLot has
relationships, and forwards the contracts to those finance companies whose
underwriting criteria the contracts appear to meet. Finance companies then
negotiate directly with the dealer regarding the required terms of the contract
and the price at which the contract will be purchased. If a contract is sold,
ZoomLot receives a fixed fee from the purchasing finance company.
Currently, although the independent dealers can transmit the information
about the contracts they wish to sell to ZoomLot via the Internet, and ZoomLot
in turn submits those contracts to finance companies via the Internet, the
process of matching the contracts against the underwriting criteria of the
finance companies ("filtration") has not been fully automated. While some of the
filtration is performed by a limited version of the FundHere(TM) software that
ZoomLot is currently developing (as discussed below), until the development of
FundHere(TM) is complete, some of this process will remain manual.
Under the Pass-Through program, ZoomLot does not buy the contract from
the dealer, but rather seeks to match the dealer with one or more finance
companies willing to bid on the purchase of the submitted contract. Accordingly
ZoomLot bears no credit risk, and receives a fee from the purchasing finance
company irrespective of any future default by the consumer.
ZoomLot's second method of providing dealers with a means of selling
their contracts is its "Private Label" program. Under this program, ZoomLot
purchases qualifying contracts from dealers and then resells them to finance
companies which have agreed, in advance, to purchase from ZoomLot any contracts
ZoomLot presents that meet certain specified underwriting criteria.
ZoomLot presently has Private Label agreements with two finance
companies. The first agreement, which commenced in May 2000, is for a term of
five years, subject to annual renewal or cancellation. The
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second agreement is cancelable upon 60 days notice.
Under the agreements, ZoomLot purchases from dealers, in its own name,
contracts that meet the underwriting criteria established in advance by these
finance companies. Under the first agreement, ZoomLot performs the underwriting
and funding on the basis of that finance company's guidelines, and the finance
company is required to purchase any contract that meets its guidelines and as to
which ZoomLot delivers a valid contract and title. Under the second agreement,
ZoomLot submits proposed contract purchases for approval, and the finance
company performs its own underwriting prior to approving ZoomLot's purchase of
the contract on its behalf.
Both finance companies purchase the contracts from ZoomLot within 48
hours of ZoomLot's purchase, at a price equal to ZoomLot's cost to acquire the
contract plus a fixed fee per contract. Although ZoomLot would have to find
another buyer for, or retain on its own, any contract it acquired that failed to
meet the criteria, to date such instances have not been material, and the
Company does not believe this presents a material risk.
WARRANTIES AND INSURANCE. In addition to contract aggregation ZoomLot
also currently assists dealers in offering used car buyers warranty and
insurance products.
In general, the used cars sold by independent dealers are not covered by
extended warranties, and the used car buyer must purchase a warranty separately
if one is desired. Finance companies will generally finance the warranty
purchase, as the warranty serves to protect the value of the collateral and
reduce the risk that a borrower will either miss or skip payments due to the
need to pay for repairs or abandon the vehicle, and stop making payments, due to
an inability to pay for repairs.
In order to offer dealerships the ability to sell the buyer a warranty at
the time of sale, ZoomLot entered into an agreement with Buyers Choice, Inc.,
under which Buyers Choice, Inc. issues warranty contracts. Customers purchasing
a warranty offered by Buyers Choice, Inc. can select from a range of coverages,
including basic warranties that cover the engine, transmission, differential and
towing, to more complete warranties that cover essentially all systems and
provide towing, roadside assistance and substitute transportation. The
warranties are offered for a range of periods, from 3 months/3,000 miles to 48
months/48,000 miles. Under the agreement between ZoomLot and Buyers Choice,
Inc., ZoomLot receives a fee, based on a percentage of the warranty price, for
each warranty sold, and Buyers Choice, Inc. assumes all responsibility for the
servicing and administration of the warranties. The liability for the payment of
repair costs and other claims under the warranties is borne by Lyndon Insurance
Group, a subsidiary of Protective Life Corporation, which insures Buyers Choice,
Inc. with respect to such costs and claims. ZoomLot's agreement with Buyers
Choice, Inc., expires on December 31, 2001.
Currently ZoomLot offers warranties through dealers at the time of sale.
However, ZoomLot also hopes to expand its marketing of warranty products to
include direct marketing to used car buyers, after the sale is completed, using
information about buyers generated from its Pass-Through and Private Label
programs.
Most states require that an automobile purchaser have liability insurance
before taking possession of the purchased car at the dealership. Dealers will
therefore sometimes arrange for a customer to obtain short-term (generally
thirty day) coverage upon the purchase of an automobile, thus allowing the
consumer to immediately drive the purchased vehicle while seeking a conventional
automobile insurance policy. ZoomLot has entered into an agreement with Instant
Auto, Inc. whereby ZoomLot offers this short-term insurance to customers through
the dealers. Under the agreement with Instant Auto, Inc., ZoomLot receives a
fixed fee for each instance in which a potential customer requests a rate quote
from Instant Auto, Inc., and Instant Auto Inc. assumes all obligations for
administration of the policy, including the claims processing function and the
payment of claims. Instant Auto, Inc. is licensed to write automobile liability
policies in eight states. ZoomLot's agreement with Instant Auto, Inc. expires on
March 31, 2002, but may be terminated earlier by
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either party upon 30 days notice.
Product Development
ZoomLot is engaged in the ongoing development of the FundHere(TM)
Aggregator. The plans for this software are for it, when fully developed, to
enable a dealer to submit a contract to ZoomLot via the Internet, and allow
ZoomLot to identify the finance companies whose underwriting criteria the
contract satisfies and obtain bids from those companies for the purchase of the
contract. The software is intended to allow a dealer to track which finance
companies the contract information has been submitted to, as well as to receive
bids, if any, from the finance companies on-line. The dealer would then be able
to accept or reject the bid on-line.
A limited version of the FundHere(TM) technology was launched in 2000,
and is available to dealers through ZoomLot's Web site (www.zoomlot.com). That
limited version allows independent dealers to transmit the information about the
contracts they wish to sell to ZoomLot via the Internet, and ZoomLot in turn
submits those contracts to finance companies via the Internet. Additionally
ZoomLot can perform a preliminary level of filtration through the software.
However, the final filtration must be performed manually. Additionally, the
limited version of the FundHere(TM) software does not allow dealers to track,
on-line, which finance companies their contract information has been submitted
to, nor does it allow the finance companies to communicate their purchase bids
to the dealers on-line. Those aspects of the contract aggregation service will
remain manual until the development of FundHere(TM) is completed.
Marketing and Competition
The market for on-line contract aggregation and related services is new
and rapidly developing. Current and potential new competitors could establish
on-line loan aggregators that are competitive with ZoomLot's.
ZoomLot believes that its competitive success will depend upon
establishing and maintaining relationships with a significant share of dealers
who have historically sold their contracts using means other than the Internet,
and upon establishing and maintaining relationships with a significant number of
finance companies that service the market. Each will in part depend on the
other, in that to establish relationships with dealers ZoomLot will have to show
that is has, and is capable of, establishing and maintaining relationships with
finance companies, and vice versa. ZoomLot's ability to establish these
relationships will depend on, among other things, the quality and ease of use of
its contract aggregation program and the number and quality of strategic
alliances it established with other e-commerce providers. Although ZoomLot
believes that, as an early entrant into the business, it can compete
effectively, ZoomLot will need to complete the development of its FundHere(TM)
Aggregator on a timely basis, develop name awareness among finance companies and
independent dealers, establish additional strategic alliances, and continually
upgrade its technology to remain competitive. Additionally, many of ZoomLot's
potential competitors have longer operating histories, greater name recognition,
larger customer bases, and significantly greater financial, technical, and
marketing resources than ZoomLot. In addition, participants in other areas of
the financial services industry may enter this marketplace.
ZoomLot presently markets to dealers through advertisements in several
industry journals, personal contact by ZoomLot representatives, and
participation in the National Independent Auto Dealers Association.
An important factor in establishing and maintaining relationships with
dealers will be the ease of the access to and use of the contract aggregator
service, including its integration with the applications a dealer uses to run
its business. In order to submit a contract for purchase, a dealer must enter
into its computer significant information about the vehicle and its buyer. That
information must also be entered into the dealer's own management system to
produce the contract and otherwise maintain the dealer's records. As a result,
contract aggregation services that are integrated into dealer management
applications are likely to have a competitive advantage, in that the integration
will allow the data to be entered once for both purposes, and the
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submission of the data to the contract aggregator via the Internet will not
require the use of an application separate from the dealer's main management
system.
Currently approximately 25% of the market for dealership management
software is controlled by two products, Tracker Plus(TM) and CarBiz(TM). The
remainder of the market is divided among numerous software providers.
ZoomLot does not currently own or license a dealer management program.
However, many of the companies that do sell or license such programs do not have
and currently are not developing contract aggregation programs, and ZoomLot has
begun discussions with several of those companies to explore strategic alliances
under which ZoomLot's contract aggregation would be integrated into their dealer
management product. Additionally, ZoomLot has an option to purchase a dealer
management software application from CDF, and is currently evaluating the
acquisition of other dealership management software applications which may be
available.
Government Regulation
ZoomLot's present and proposed finance contract aggregation operations,
particularly its Private Label program, are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations, including but not limited to the Truth in Lending
Act of 1974, as amended, and Regulation Z of the Federal Reserve Board's
regulations, the Equal Credit Opportunity Act of 1974, as amended and Regulation
B of the Federal Reserve Board's regulations, and the Fair Credit Reporting Act
of 1970, as amended. In addition, many states in which ZoomLot does business
regulates consumer automobile sales finance transactions, including the amount
of interest and other fees which may be charged, communications with consumers
and others regarding payment of amounts due under sales finance contracts, the
enforcement of security interests in automobiles that secure sales finance
contracts and the collection of deficiency claims. ZoomLot maintains sales
finance licenses in those states where ZoomLot does business that require
licenses for the purchase of automobile sales finance contracts.
State and federal laws and regulations also can affect the supply of used
automobiles. For example, environmental protection regulations governing
emissions or fuel consumption could restrict the ability of dealers to market
certain makes or models of used automobiles. To the extent the supply of used
automobiles was restricted by such laws or regulations, ZoomLot's business could
be adversely affected.
ZoomLot's present and proposed operations in providing products such as
insurance and warranty products are not subject to extensive regulation.
ZoomLot's operations are currently limited to the referral of potential
customers to providers of insurance and warranty products. The providers of
insurance and warranty products that the Company makes referrals to are
regulated primarily by state insurance and consumer protection laws and
agencies. ZoomLot does not act as an insurance carrier or agency in connection
with referrals for insurance and warranty products.
While ZoomLot's management believes that it maintains all requisite
licenses and permits to carry out its business, and that it is in substantial
compliance with all applicable federal, state and local law and regulations,
there can be no assurance that ZoomLot will be able to maintain all requisite
licenses and permits, and the failure to satisfy those and other regulatory
requirements could have a material adverse effect on the operations of ZoomLot,
including severe monetary and other penalties. Further, the adoption of
additional laws, rules and regulations at the federal, state or local level,
could have a material adverse effect on ZoomLot's business.
Relationship with CDF
ZoomLot Corporation was formed in March 2000 for the purpose of acquiring
the Internet-based
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operations of CDF, an affiliated company and acquired these operations from CDF
on July 1, 2000. Prior to that date, ZoomLot, which commenced operations in
January 2000, was operated as a division of CDF. ZoomLot and CDF share common
management, certain personnel, and facilities. In connection with the
acquisition of the Internet-based business from CDF, ZoomLot and CDF entered
into a management services contract whereby ZoomLot will provide management
services and be responsible for substantially all operating expenses of CDF in
exchange for a monthly management fee equivalent to .625% (7.5% annually) of
CDF's loan portfolio managed by ZoomLot. For the period from December 15, 2000
(the date of the Company's acquisition of ZoomLot) until January 31, 2001, CDF
paid ZoomLot management fees of $145,000. Under this arrangement, the Company
accounts for the management fees as a reduction of ZoomLot's and the Company's
operating expenses.
ZoomLot also sub-leases office space from CDF at a per-foot rate that
reflects CDF's rental cost under its lease.
Summary of Certain Risk Factors Related to ZoomLot's Business
The following sets forth a summary of the risk factors related to
ZoomLot's business.
ZoomLot was formed in March 2000, and to date has generated limited
revenues. The Company accordingly has a limited operating history upon which an
investor may evaluate its operations and future prospects. ZoomLot has incurred
losses every quarter since its inception and there can be no assurance that it
will be profitable at any time in the foreseeable future. If ZoomLot continues
to lose money, the Company's financial condition and results of operations will
be adversely affected, and a continuation of significant losses by ZoomLot could
threaten the Company's continued viability.
ZoomLot's potential for future profitability must be considered in light
of the risks, uncertainties, expenses and difficulties frequently encountered by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets, such as the market for Web-based business to business
e-commerce. To achieve profitability, ZoomLot must, among other things, continue
to expand the number of dealers it serves and be successful in being chosen by
those dealers to place a high percentage of the total contracts they sell,
continue to expand the participation of finance companies in its program, and
maintain a high degree of dealer and finance company satisfaction. Achieving
these objectives will depend significantly on the successful completion of the
development of the FundHere(TM) Aggregator and the subsequent successful
introduction of this technology to dealers and finance companies, as well as
success in providing dealers with easy use of the program through integration
into a dealer management system or through ZoomLot's Web site and success in
responding to other competitive developments.
There is no assurance that ZoomLot will be successful in achieving these
goals. Failure to achieve these objectives would have a material adverse effect
on the business, results of operations and financial condition of ZoomLot and
the Company.
ZoomLot is currently developing the FundHere(TM) Aggregator. The
successful completion and implementation of this software is paramount to the
future success of ZoomLot. The successful completion of the FundHere(TM)
Aggregator would allow ZoomLot to automate much of the communication and
filtration process it must now perform manually, and would allow ZoomLot to
realize significant improvement in operating efficiencies and lower its variable
costs for each contract submitted by dealers. Should ZoomLot be unable to
successfully complete the development of the FundHere(TM) Aggregator, or upon
its completion fail to realize the anticipated benefits, it may be difficult for
ZoomLot to achieve profitability.
ZoomLot's contract aggregation services compete and will compete against
a variety of Internet and traditional automotive finance services. ZoomLot is
consequently affected by the competitive factors faced by both Web-based finance
aggregators as well as traditional, offline companies within the automotive
finance and
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automotive-related industries. The market for Internet-based commercial services
is new, and competition among commercial Web sites may increase significantly in
the future. Many of ZoomLot's current or potential competitors are substantially
better financed than ZoomLot. ZoomLot's business is characterized by minimal
barriers to entry, and new competitors can launch a competitive service at
relatively low cost.
ZoomLot's future success depends on its ability to identify, hire, train
and retain highly qualified sales, marketing, managerial and technical
personnel. In addition, as ZoomLot introduces new services ZoomLot may need to
hire a significant number of personnel. Competition for such personnel is
intense, and ZoomLot may not be able to attract, or retain such personnel in the
future. The inability to attract and retain the necessary personnel could have a
material adverse effect on ZoomLot's business, results of operations and
financial condition. Further, ZoomLot's business and operations are
substantially dependent on the performance of its executive officers and key
employees, some of whom are employed on an at-will basis. The loss of the
services of one or more of ZoomLot's executive officers or key employees could
have a material adverse effect on ZoomLot's business, results of operations and
financial condition.
The used automobile sales industry is subject to significant seasonality,
which materially affects the timing of, and revenue earned from ZoomLot's
finance contract aggregation business. Consequently ZoomLot may suffer
significant fluctuations in revenue depending upon such seasonal effects on the
volume of used cars purchased from dealers. However, during seasonal periods
when revenues are depressed as the result of lower used car sales, ZoomLot will
nonetheless have significant fixed operating costs.
ZoomLot is also indirectly subject to interest rate sensitivity. Changes
in interest rates can affect the prices finance companies bid for dealer
contracts, which in turn can affect the price of used cars. Higher sales prices
for used cars and a resulting decline in sales volume could adversely affect
ZoomLot's revenues.
There are currently few laws or regulations that apply directly to the
Internet. Because ZoomLot's business will become increasingly dependent on
on-line filtering and processing, the adoption of new local, state, national or
international laws or regulations may decrease the growth of Internet usage or
the acceptance of Internet commerce which could, in turn, decrease the demand
for ZoomLot's services and increase costs or otherwise have a material adverse
effect on ZoomLot's business, results of operations and financial condition.
ZoomLot's computer infrastructure is potentially vulnerable to physical
or electronic computer break-ins, viruses and similar disruptive problems and
security breaches. Any such problems or security breach could jeopardize
confidential information, cause interruptions in operations and/or cause ZoomLot
to have liability to one or more third parties. Any of these events would have a
material adverse effect on ZoomLot's business, results of operations and
financial condition.
ZoomLot depends on continued technological improvements in its systems
and in the Internet overall. If ZoomLot is unable to handle an unexpectedly
large increase in the volume of dealers using its Web site, it might not be able
to assure dealers that contract submissions would be processed on a timely and
efficient basis, and as a result ZoomLot's results and operations could be
materially and adversely affected.
MOVIE EXHIBITION BUSINESS
- -------------------------
General
The Company 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 25 years. AFC is owned 50%
by the Company, 33.34% by Reading and 16.66% by Citadel Cinemas, Inc., (a
wholly-owned subsidiary of Citadel Holding Corporation). Each of the owners of
AFC are entitled to a proportionate share of the cash distributions that are
paid by AFC.
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The Angelika Film Center is a 17,000 square foot, six screen multiplex
theater and cafe that focuses on the exhibition of art and specialty films. The
exhibition of art and specialty films, while seasonal in nature, is less so than
the film exhibition business in general. Art and specialty films tend to be
released more evenly over the course of the year and, if successful, tend to
enjoy a longer run than wide release films. Art and specialty films are obtained
from a number of sources ranging from divisions of the larger film distributors
specializing in specialty films to individuals that have acquired domestic
rights to one film. Generally film payment terms are based on an agreed upon
percentage of the box office receipts.
EMPLOYEES
- ---------
As of January 31, 2001, the Company employed 75 people, comprised of 33
employees at National Auto Credit, Inc., and 42 employees at ZoomLot. None of
the Company's employees are covered by a collective bargaining agreement. The
Company believes it maintains good relations with its employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
Set forth below is certain information, as of April 30, 2001, concerning
the Company's executive officers.
Name Age Position
- ------------------ --- -------------------------------------
James J. McNamara 52 Chairman of the Board and
Chief Executive Officer
Robert B. Dixon 64 Chief Financial Officer and Treasurer
Herbert F. Kozlov 48 Secretary
Raymond A. Varcho 45 Vice President, General Counsel
and Assistant Secretary
Sean P. Maroney 35 Director of Financial Reporting
JAMES J. MCNAMARA
Mr. McNamara has been Chairman of the Board and Chief Executive Officer
since November 3, 2000. President of Film Management Corporation since 1995.
Chairman of the Board and Chief Executive Officer of Princeton Media Group, Inc.
(a magazine publisher) from 1994 to 1998. President and Chief Executive Officer
of Celebrity Entertainment, Inc. since 1992. (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). Mr. McNamara
accepted the position of Director of National Auto Credit, Inc. effective
February 20, 1998 and served as its Chairman from April 1998 to November 1999.
ROBERT B. DIXON
Mr. Dixon has been Chief Financial Officer and Treasurer since April
2001. Mr. Dixon was an independent financial consultant to the Company from
January 2001 to April 2001, and from 1996 to 2000, was Vice President of Finance
of Command Systems, Inc. From 1993 to 1996, Mr. Dixon was Deputy Director and
Executive Vice President of The Connecticut Development Authority.
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HERBERT F. KOZLOV
Mr. Kozlov has been the Company's Secretary since April 2001. Mr. Kozlov
is a member of the law firm of Parker Duryee, Rosoff & Haft. Mr. Kozlov has been
a practicing attorney for more than ten years. Mr. Kozlov is also a director of
Magnum Sports & Entertainment, Inc. (f/k/a/ Worldwide Sports & Entertainment
Inc.), Alpha Hospitality Corporation, HMG Worldwide Corporation and a number of
privately held companies.
RAYMOND A. VARCHO
Mr. Varcho has been Vice President, General Counsel and Assistant
Secretary since April 2001. Mr. Varcho was Vice President, General Counsel and
Secretary prior to April 2001 and has been employed by the Company since October
1997. Previously, Mr. Varcho held various positions at Rockwell International
Corporation, most recently as Assistant General Counsel, from 1989 to 1997.
SEAN P. MARONEY
Mr. Maroney has been Director of Financial Reporting and has been
employed by the Company since 1995. Mr. Maroney held the positions of Operations
Controller and Manager of Accounting prior to assuming his present duties in
January 1999. Prior to his employment with the Company, Mr. Maroney held various
positions at Leaseway Transportation Inc. and KPMG Peat Marwick. Mr. Maroney is
a certified public accountant.
ITEM 2. PROPERTIES
The Company's corporate headquarters are leased premises of approximately
13,500 square feet of office space in Solon, Ohio, a southeast suburb of
Cleveland. The lease expires in December 2001, but may be terminated at any time
upon thirty days notice. The Company previously owned the buildings in which
this space is located. The Company sold these buildings in Fiscal 2001. See Note
F of Notes to Consolidated Financial Statements.
The Company is planning to move its headquarters to New York City, New
York during Fiscal 2002. The Company believes that adequate space can be leased
in New York City. In connection with its plan to move its headquarters, the
Company in Fiscal 2001 recorded a charge for the costs to be incurred in the
abandonment of its leased space in Solon, Ohio. See Note O of Notes to
Consolidated Financial Statements.
ZoomLot's operations are conducted from office space of approximately
11,000 square feet which ZoomLot sub-leases from CDF at CDF's offices in
Phoenix, Arizona. ZoomLot sub-leases this space from CDF at a per-foot rate that
reflects CDF's rental cost under its lease.
ITEM 3. LEGAL PROCEEDINGS
PENDING GOVERNMENT INVESTIGATIONS. The Securities and Exchange
Commission, the United States Attorney for the Northern District of Ohio, and
the Federal Bureau of Investigation are investigating the financial reporting
and related issues raised as the result of the resignation of the Company's
independent former auditors, Deloitte & Touche, LLP, ("Deloitte & Touche") on
January 16, 1998. The Company is fully cooperating with the investigations.
Although the Company has accrued certain costs it expects to incur in responding
to the investigations, the ultimate outcome of these investigations cannot
presently be predicted and the Company has not recorded any provision for any
monetary penalties that may result from civil or criminal proceedings that might
be commenced at the conclusion of such investigations. The Company's liquidity
will be adversely affected as it incurs costs to respond to the investigations.
An unfavorable resolution of any of these investigations could have a material
adverse effect on the Company's financial position, results of operations
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and liquidity.
SETTLEMENT OF CLASS-ACTION LAWSUITS. The Company and certain of its
former officers and directors were named as defendants in eleven class action
lawsuits, which were filed in the United States District Court for the Northern
District of Ohio, subsequent to the January 1998 resignation of Delotte &
Touche. The actions, which were consolidated, alleged fraud and other violations
of the federal securities laws and sought money damages as the result of various
alleged frauds and violations of the Securities Exchange Act of 1934, including
misrepresentations about the adequacy of the Company's allowance for credit
losses and its loan underwriting practices.
In April 2000, the Company and the class action plaintiffs'
representatives reached an agreement in principle to settle this class action
securities litigation. Under the terms agreed upon, the Company paid $6.5
million in November 2000 to the plaintiffs' class in consideration for, among
other things, the release of the Company and certain of its former officers and
directors from all liability. The settlement is not an admission of liability by
any party. The Court gave final approval to settlement on November 28, 2000.
SETTLEMENT OF LITIGATION WITH SAMUEL J. FRANKINO, ET AL. During Fiscal
2001, certain disputes and differences between Mr. Frankino and the Company
resulted in litigation styled National Auto Credit, Inc. v. Samuel J. Frankino,
C.A. No. 17973 and Samuel J. Frankino v. David L. Huber, ET AL., C.A. No. 17984
in the Court of Chancery of the State of Delaware (the "Actions").
On November 3, 2000, the Company entered into a Settlement Agreement and
Release with Mr. Frankino, individually as trustee and president of the Samuel
J. Frankino and Connie M. Frankino Charitable Foundation, as trustee of the
Corrine L. Dodero Trust for the Arts and Sciences and as managing partner of the
Frankino and Frankino Investment Company, a Nevada general partnership. The
Settlement Agreement among other things settled all of the Actions and resulted
in the repurchase by the Company of all of the Company's securities held by the
Frankino Parties and certain other parties to the Actions. In conjunction with
the settlement of the above-referenced litigation, the parties to the Actions,
as well as William Dodero, Lorraine Dodero, William Maund and Robert Upton,
exchanged general releases and releases against future claims.
Under the terms of the Settlement Agreement, the Company (i) repurchased
an aggregate of 15,743,012 shares of Common Stock owned by the Frankino Parties
for a total purchase price of $35,340,000, or $2.245 per share of Common Stock;
(ii) repurchased an aggregate of 120,348 shares of Common Stock owned by certain
of the Company's directors including shares of Common Stock held by William
Maund, Lorraine Dodero, William Dodero and Lorraine Dodero, as joint tenants
with rights of survivorship, and shares of Common Stock held by Lorraine Dodero,
as a trustee of a grantor trust for the benefit of her daughter, Corrine Dodero,
for a total purchase price of $180,522, or $1.50 per share of Common Stock; and
(iii) reimbursed certain legal fees previously incurred by Mr. Frankino in the
amount of $2,011,600.
In accordance with the terms of the Settlement Agreement, Mr. Frankino,
Lorraine Dodero, William Maund, William Dodero and Robert Upton resigned
positions as directors of the Company on November 3, 2000, immediately following
the execution of the Settlement Agreement. The Frankino Parties also made
certain covenants designed to limit the ability of the Frankino Parties to
affect the Company's day-to-day operations or its long-term strategic direction,
to purchase equity securities of the Company or to solicit proxies.
SELF-INSURANCE RESERVES FOR PROPERTY DAMAGE AND PERSONAL INJURY CLAIMS.
The Company maintains 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. In connection therewith, the Company
established certain reserves in its financial statements for the estimated cost
of satisfying those claims. See Note P of Notes to Consolidated Financial
Statements.
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OTHER. In the normal course of its business, the Company is named as
defendant in legal proceedings. It is the Company's policy to vigorously defend
litigation and/or enter into settlements of claims where management deems
appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of Security Holders during the fourth
quarter of Fiscal 2001.
On April 5, 2000, the Company's Board of Directors amended the Company's
bylaws to establish procedures for actions by written consent without a meeting
of stockholders. Generally, the amendment provides that a stockholder wishing to
take action by written consent must request a record date, after which time the
Board of Directors has five business days to set a record date, which may be no
later than five business days after the Board acts. The amendment also requires
that the request for a record date contain certain information about the
proposed action by consent. If the Board does not set a record date, then the
record date is the date upon which the consent is delivered to the Company,
absent prior action of the Board as may be required by Delaware law. To be
valid, a written consent action must be signed by holders of outstanding stock
representing not less than the minimum number of votes necessary to take the
corporate action at a meeting at which all shares are present and voted. The
Board of Directors also adopted a bylaw requiring an affirmative vote of eighty
percent (80%) of outstanding shares of each class of voting stock in order to
alter, add, amend or repeal the Company's bylaws.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
- ------------------
The Company's Common Stock, $.05 par value, has been trading on the OTC
Bulletin Board, operated by the National Association of Securities Dealers,
Inc., since March 23, 1998 under the ticker symbol "NAKD." Prior to that date,
the Company's Common Stock was traded on the New York Stock Exchange under the
symbol NAK.
The following table reflects the high and low prices for the Company's
Common Stock on the OTC Bulletin Board during the periods indicated as reported
by the National Quotation Bureau, Inc.
High Low
------------ ------------
Year ended January 31, 2000
First Quarter (February 1 - April 30) ....... $1.52 $1.03
Second Quarter (May 1 - July 31) ............ 1.23 .80
Third Quarter (August 1 - October 31) ....... 1.04 .73
Fourth Quarter (November 1 - January 31) .... .97 .50
Year ended January 31, 2001
First Quarter (February 1 - April 30) ....... $1.28 $.75
Second Quarter (May 1 - July 31) ............ .91 .73
Third Quarter (August 1 - October 31) ....... .84 .59
Fourth Quarter (November 1 - January 31) .... .80 .27
With respect to prices reported by the OTC Bulletin Board, such prices
reflect inter-dealer bid prices, may not represent actual transactions, and do
not reflect dealer mark-ups and mark-downs or commissions.
STOCKHOLDERS
- ------------
At April 30, 2001 there were 1,210 stockholders of record of the
Company's Common Stock based upon a securities position listing furnished to the
Company by The Bank of New York.
DIVIDENDS
- ---------
It has been the Company's policy to retain any earnings to finance the
growth of its business and reduce outstanding debt and other liabilities;
accordingly, the Company has generally not issued a cash dividend. However, the
Company 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, 2001 and 2000.
SALES OF UNREGISTERED SECURITIES
- --------------------------------
On April 5, 2000, the Company issued to Reading 8,999,900 shares of its
Common Stock and 100 shares of its Series A Preferred Stock in exchange for a
50% membership interest in AFC. The shares were issued in reliance upon the
exemption under Section 4(2) of, and Rule 506 promulgated under, the Securities
Act of 1933. No commissions were paid in connection with the issuance of the
shares. See Notes E and K of Notes to Consolidated Financial Statements.
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On December 15, 2000 the Company issued to the stockholders of ZLT
270,953 shares of its Series B convertible preferred stock and 729,047 shares of
its Series C redeemable preferred stock in exchange for 100% of the common stock
of ZoomLot. The shares were issued in reliance upon the exemption under Section
4(2) of, and Rule 506 promulgated under, the Securities Act of 1933. No
commissions were paid in connection with the issuance of the shares.
The holders of the Series B convertible preferred stock could at any
time convert the Series B convertible preferred stock into shares of the
Company's Common Stock at the ratio (subject to adjustment for stock splits and
other anti-dilutive events) of ten shares of Common Stock for each share of
Series B convertible preferred stock.
Additionally, the terms of the Series B convertible preferred stock
provided that it would automatically convert into shares of the Company's Common
Stock, at the ratio of ten shares of the Company's Common Stock for each share
of Series B convertible preferred stock, upon the termination of the November 3,
2000 Stock Purchase and Standstill Agreement between the Company and the Reading
Stockholders. That agreement was terminated in connection with the Company's
December 15, 2000 repurchase of additional shares of Common Stock from the
Reading Stockholders (see Item 1 - "Business - Significant Developments - Stock
Purchase and Standstill Agreement with Reading"). As a result, on December 15,
2000 the Company converted the 270,953 shares of the Series B convertible
preferred stock into 2,709,530 shares of its Common Stock. The shares of Common
Stock issued upon the conversion of the shares of Series B convertible preferred
stock were issued in reliance upon the exemptions contained in Section 3(a)(9)
and Section 4(2) of the Securities Act of 1933. No commissions were paid in
connection with the issuance of the shares.
The holders of the Series C redeemable preferred stock have certain
rights to require the redemption of the shares. At any time after the earlier of
September 30, 2003 or the occurrence of a "redemption event" (but in no event
earlier than January 1, 2003) the holder of a share of Series C redeemable
preferred stock will be entitled to redeem each share of Series C redeemable
preferred stock for a cash payment by the Company equal to the greater of (i)
$15.00 (as adjusted for any stock splits, stock dividends, recapitalizations or
similar events), plus all declared but unpaid dividends on such shares or (ii)
ten times the fair market price (determined based on the average daily closing
price of the Company's Common Stock for the twenty days preceding the redemption
date) of a share of Common Stock as of the date notice of redemption is received
by the Company. However, any shares of Series C redeemable preferred stock that
are subject to the forfeiture provisions of the Merger Transaction may not be
redeemed until such forfeiture provisions no longer apply. A "redemption event"
will be deemed to have occurred if (i) ZoomLot meets an "objective", as
described below, which eliminates the forfeiture of the shares of Series C
redeemable preferred stock, or (ii) there occurs a "valuation event" which
eliminates the forfeiture of the shares of Series C redeemable preferred stock.
666,667 shares of the Series C redeemable preferred stock are subject to
forfeiture unless certain "objectives" are met or certain "valuation events"
occur. Specifically, one half of those shares will be forfeited, if, by December
31, 2003, ZoomLot, including any of its subsidiaries, has failed to achieve zero
or positive earnings, before interest expense, interest income, depreciation,
amortization and extraordinary items but after applicable income taxes, for a
period of six consecutive months. The remaining one-half of those shares will be
forfeited if, by December 31, 2003, ZoomLot, including any of its subsidiaries,
has not achieved at least $4.5 million in earnings before interest, taxes,
depreciation and amortization for a period of twelve consecutive months. If,
however, certain "valuation events" should occur prior to December 31, 2003,
those financial performance objectives will be deemed to have been achieved.
These valuation events generally consist of (i) a transaction that would involve
an investment in ZoomLot or one of its subsidiaries of at least $10 million,
where the pre-investment valuation of ZoomLot or any subsidiary of ZoomLot is at
least $30 million, (ii) a change in control of the Company or (iii) the
termination of the key executives of ZoomLot without cause.
The Company also has the right, at any time after January 1, 2003, to
redeem any or all of the Series C redeemable preferred stock that then remains
outstanding for a cash payment by the Company equal to the
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greater of (i) $15.00 (as adjusted for any stock splits, stock dividends,
recapitalizations or similar events), plus all declared but unpaid dividends on
such shares or (ii) ten times the fair market price (determined based on the
average daily closing price of the Company's Common Stock for the twenty days
preceding the redemption date) of a share of Common Stock as of the date notice
of redemption is received by the Company. If when the Company calls for the
redemption of shares of the Series C redeemable preferred stock there remain
outstanding shares of Series C redeemable preferred stock which are still
subject to forfeiture, the Company may elect to first redeem the shares of
Series C redeemable preferred stock that are not subject to forfeiture before
redeeming shares of Series C redeemable preferred stock that are subject to
forfeiture.
See Notes B and K of Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected financial data appearing in or
derived from the Company's historical financial statements. 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 (thousands of
dollars, except per share amounts):
INCOME STATEMENT DATA Years Ended January 31,
-------------------------------------------------------------
2001(1) 2000 1999 1998 1997
---------- --------- --------- --------- ---------
REVENUE $ 4,709 $ 9,760 $ 16,914 $ 36,396 $ 63,872
COSTS AND EXPENSES $ 54,848 $ 27,102 $ 32,979 $ 149,265 $ 54,236
(LOSS) INCOME FROM CONTINUING OPERATIONS $ (48,939) $ (14,056) $ (16,065) $ (85,711) $ 7,568
DISCONTINUED OPERATIONS, NET OF TAX(2) 1,656 741 450 (5,973) (397)
--------- --------- --------- --------- ---------
NET (LOSS) INCOME $ (47,283) $ (13,315) $ (15,615) $ (91,684) $ 7,171
========= ========= ========= ========= =========
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
Continuing operations $ (1.76) $ (.50) $ (.56) $ (3.00) $ .26
Discontinued operations .06 .03 .01 (.21) (.01)
--------- --------- --------- --------- ---------
Total $ (1.70) $ (.47) $ (.55) $ (3.21) $ .25
========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING(3)
Basic 27,761 28,169 28,609 28,542 28,501
========= ========= ========= ========= =========
Diluted 27,761 28,169 28,609 28,542 28,621
========= ========= ========= ========= =========
As of January 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- --------- --------- ---------
BALANCE SHEET DATA
GROSS FINANCE RECEIVABLE $ -- $ 50,847 $115,473 $ 269,690 $419,280
TOTAL ASSETS 39,066 103,962 127,292 234,114 332,475
NOTES PAYABLE -- -- -- 83,838 80,200
REDEEMABLE PREFERRED STOCK(4) 629 -- -- -- --
TOTAL STOCKHOLDERS' EQUITY 31,455 83,879 99,776 115,290 206,985
OTHER DATA
GROSS LOANS IN FORCE(5) $ -- $ 51,175 $124,314 $ 347,776 $494,247
PERCENT OF NOTES PAYABLE TO
STOCKHOLDERS' EQUITY -- -- -- 72.7% 38.7%
NUMBER OF EMPLOYEES 75 100 250 300 400
(1) Includes the operations of ZoomLot from December 15, 2000, the date of
its acquisition by the Company. See Note B of Notes to Consolidated
Financial Statements.
(2) See Note P of Notes to Consolidated Financial Statements for further
discussion of discontinued operations.
(3) The weighted average number of shares outstanding has been adjusted to
reflect a 10% stock dividend issued in April 1996.
(4) See Notes B and K of Notes to Consolidated Financial Statements for
further discussion of redeemable preferred stock.
(5) Gross loans in force represented the total contractual payments
(including payments representing future interest) receivable from the
installment loans which the Company owned, or in which the Company owned
an interest through the purchase of an interest under sharing
arrangements with dealers. The amount included payments that, if
collected, would be remitted to the dealers under these sharing
arrangements (see Note D of Notes to Consolidated Financial Statements).
While not a measure of the Company's loan assets under generally accepted
accounting principles, the Company viewed gross loans in force as a
measure of the level of its activities and the activities of its
competitors.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
National Auto Credit, Inc. began operations in 1969 and was incorporated
in Delaware in 1971. The Company's principal business activity is conducted
through ZoomLot, a wholly-owned subsidiary, which is 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 currently
provides these services, on a limited basis, using a combination of Internet and
manual processes, and is continuing its efforts to develop a fully e-commerce
process. The Company acquired ZoomLot on December 15, 2000. The Company also
owns a 50% membership interest in AFC. Additionally, the Company is considering
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.
From October 1995 through March 2000, the Company's principal business
activity was to invest in sub-prime used automobile consumer loans, which took
the form of installment loans collateralized by the related vehicle. The Company
purchased such loans, or interests in pools of such loans, from member
dealerships, and performed the underwriting and collection functions for such
loans. In the first and second quarters for Fiscal 2001, the Company sold its
active loan portfolio and the majority of its charged-off portfolio. However,
since the Company had not yet made a definitive decision that it will not
reenter some aspect of the consumer lending business, these operations have not
been classified as a discontinued operation as of January 31, 2001.
As of January 31, 2001 the Company's operations are classified as three
operating segments:
- the automobile financing segment;
- the e-commerce segment, which is comprised of ZoomLot's
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 currently
provides these services, on a limited basis, using a combination
of Internet and manual processes, and is continuing its efforts to
develop a fully e-commerce process;
- the movie exhibition segment, which is comprised of the activities
of AFC.
The Company reports and evaluates the performance of its operating
segments on the basis of revenues and income (loss) before income taxes. In
measuring revenues and income (loss) before income taxes, the Company's
operating segments use the same accounting principles described in Note A of
Notes to Consolidated Financial Statements. However, the revenues and income
(loss) before income taxes reported by each of the Company's operating segments
is not necessarily indicative of what the results of operations would have been
for such operating segment had it operated as a stand-alone entity. Operating
segment information for the year ended January 31, 2001 is presented in Note Q
of Notes to Consolidated Financial Statements.
ZoomLot's potential for future profitability must be considered in light
of the risks, uncertainties, expenses and difficulties frequently encountered by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets, such as the market for Web-based business to business
e-commerce. To achieve profitability, ZoomLot must, among other things, continue
to expand the number of
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dealers it serves and be successful in being chosen by those dealers to place a
high percentage of the total contracts they sell, continue to expand the
participation of finance companies in its program, and maintain a high degree of
dealer and finance company satisfaction. Achieving these objectives will depend
significantly on the successful completion of the development of the
FundHere(TM) Aggregator and the subsequent successful introduction of this
technology to dealers and finance companies, as well as success in providing
dealers with easy use of the program through integration into a dealer
management system or through ZoomLot's Web site and success in responding to
other competitive developments. As a result of the newness of ZoomLot's
operations and its continued development efforts, ZoomLot's historical results
are not indicative of future results of operations, and ZoomLot may be expected
to continue to operate at a loss in the near term.
The Company obtained no new debt financing during Fiscal 2001, and
operated on internally generated cash flows. This resulted from the cash
proceeds received from the sale of loans and the proceeds from the sale of
property. The Company plans to pursue new debt, or equity financing, for use in
funding its strategic business alternatives, but the early development stage of
the Company's most significant currently operating business, the ZoomLot
e-commerce segment, and the Company's pending regulatory investigations may
limit its ability to obtain external financing.
The Company's board of directors is considering various additional
strategic business alternatives, including but not limited to, the purchase of
one or more existing operating businesses or the entry into one or more
businesses. From April 2000 until the settlement of litigation with Mr. Frankino
on November 3, 2000, the Board could not consummate any such transaction due to
an Order Maintaining Status Quo entered in the Delaware Chancery Court in
connection with the Frankino litigation filed in April 2000. In December 2000,
the board of directors adopted a five year business plan, as set forth in
Exhibit 99.1 to the Company's Form 8-K, filed on December 15, 2000.
The Company's current lack of external financing sources nevertheless may
limit its ability to pursue such alternatives. In the interim, the Company will
use the current income derived from its investment in AFC, the investment of its
cash, together with the cash and cash equivalents itself, to pay operating
expenses and existing liabilities. The Company has available cash and cash
equivalents and marketable securities of approximately $11,000,000 at April 30,
2001, and it believes that such cash and cash equivalents and the investment
income therefrom will be sufficient to pay operating expenses and existing
liabilities.
The Securities and Exchange Commission, the United States Attorney for
the Northern District of Ohio, and the Federal Bureau of Investigation are
investigating the issues raised as the result of the resignation of Deloitte &
Touche on January 16, 1998. The Company is fully cooperating with the
investigations. Although the Company has accrued certain costs it expects to
incur in responding to the investigations, the ultimate outcome of these
investigations cannot presently be predicted and the Company has not recorded
any provision for any monetary penalties that may result from civil or criminal
proceedings that might be commenced at the conclusion of such investigations.
The Company's liquidity will be adversely affected as it incurs costs to respond
to the investigations. An unfavorable resolution of any of these investigations
could have a material adverse effect on the Company's financial position,
results of operations and liquidity. See Item 3, "Legal Proceedings."
The following sets forth discussions of certain significant events that
occurred during Fiscal 2001 that affected the Company's business, results of
operations, financial position and cash flows.
SALE OF AUTOMOBILE INSTALLMENT LOAN PORTFOLIO. On March 17, 2000, the
Company, acting through NAC, Inc., a wholly-owned subsidiary, sold to Crescent
Bank & Trust substantially all of the automobile retail installment loans
remaining in the Company's active portfolio for $17.9 million. In prior
transactions in March 2000, NAC, Inc. sold to First Southwestern Financial
Services, for $2.7 million, certain automobile retail installment loans held in
the Company's active portfolio and to Ameristar Financial Servicing Company,
L.L.C., for $2.2 million, certain automobile retail installment loans held in
the Company's portfolio of charged-off
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accounts (representing approximately one-third of the charged-off portfolio). In
other transactions, the Company sold a portion of its charged-off portfolio for
approximately $1.4 million. In the first quarter of Fiscal 2002, the Company
completed the sale of substantially all its remaining charged-off automobile
installment loans for approximately $300,000. In all of the transactions, the
buyer was an independent party that did not have a material relationship with
the Company, nor was the buyer an affiliate of the Company, a director or
officer of the Company or an associate of any officer or director of the
Company. In each case, the selling price was determined based upon arm's length
negotiations between the parties and was paid in cash at closing.
The sale of the loans resulted in an aggregate loss of approximately $1.4
million, which the Company reported in Fiscal 2001. Additionally, as the result
of the sale of the loans, the Company's interest income from the loans was
substantially reduced in Fiscal 2001.
PURCHASE OF INVESTMENT IN AFC. On April 5, 2000, the Company, through
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 for 8,999,900 shares of the
Company's Common Stock and 100 shares of Series A convertible preferred stock.
The Company repurchased all of the Series A convertible preferred stock on
November 3, 2000. AFC is now owned 50% by the Company, 33.34% by Reading and
16.66% by Citadel Cinemas, Inc., (a wholly-owned subsidiary of Citadel Holding
Corporation). The articles and bylaws of AFC provide that for all matters
subject to a vote of the members, a majority vote is required, except that in
the event of a tie vote, the Chairman of Reading shall cast the deciding vote.
AFC holds the Angelika Film Center under a long term lease having a
remaining term of approximately 25 years. 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 Company uses the equity method to account for its investment in AFC.
AFC uses a December 31 fiscal year-end for financial reporting purposes. The
Company 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 fiscal year ended January
31, 2001, the Company recorded income of $230,000 representing its share of
AFC's net income for the nine months ended December 31, 2000. See Note E of
Notes to Consolidated Financial Statements.
SETTLEMENT OF FRANKINO LITIGATION AND REPURCHASE OF COMMON STOCK FROM
FRANKINO PARTIES. On November 3, 2000, the Company entered into a Settlement
Agreement with Mr. Frankino, individually, as trustee and president of the
Samuel J. Frankino and Connie M. Frankino Charitable Foundation, as trustee of
the Corrine L. Dodero Trust for the Arts and Sciences, and as managing partner
of the Frankino and Frankino Investment Company, a Nevada general partnership
(Mr. Frankino and all such entities referred to herein collectively as "Frankino
Parties"). The Settlement Agreement, among other things, settled all of the
litigation between the Company and Mr. Frankino, and resulted in the repurchase
by the Company of all the Company's securities held by the Frankino Parties and
certain other parties. In conjunction with the settlement of the
above-referenced litigation, the parties to the litigations, as well as William
Dodero, Lorraine Dodero, William Maund and Robert Upton, exchanged general
releases against future claims.
Under the terms of the Settlement Agreement, the Company (i) repurchased
an aggregate of 15,743,012 shares of Common Stock of the Company owned by the
Frankino Parties for a total purchase price of $35,340,000, or $2.245 per share
of Common Stock; (ii) repurchased an aggregated of 120,348 shares of Common
Stock of the Company owned by certain of the Company's directors, including
shares of Common Stock held by William Maund, Lorraine Dodero, William Dodero
and Lorraine Dodero, as joint tenants with rights of survivorship, and shares of
Common Stock held by Lorraine Dodero, as a trustee of a grantor trust for
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the benefit of her daughter, Corrine Dodero, for a total purchase price of
$180,522 (such repurchase of the 120,348 shares was completed on January 4,
2001), or $1.50 per share of Common Stock, and (iii) reimbursed certain legal
fees previously incurred by Mr. Frankino in the amount of $2,011,600.
As a result of the repurchases of shares of Common Stock under the
Settlement Agreement, the Company expensed in the fourth quarter of Fiscal 2001,
$25,111,000, representing the excess of the amount paid under the Settlement
Agreement over the market value of the shares repurchased.
REPURCHASE OF COMMON STOCK FROM READING STOCKHOLDERS. On November 3,
2000, simultaneously with the execution and closing of the Settlement Agreement
with the Frankino Parties, the Company executed and closed a Stock Purchase and
Standstill Agreement ("the Reading Agreement") with Reading, FA, Citadel Holding
Corporation, and Craig Corporation. Prior to the execution of the Reading
Agreement, the Reading Stockholders collectively owned an aggregate of
10,055,000 shares of Common Stock and 100 shares of Series A convertible
preferred stock, par value $.05 per share.
Under the terms of the Reading Agreement, the Company repurchased from
the Reading Stockholders 5,277,879 shares of Common Stock of the Company and all
100 shares of Series A convertible preferred stock for an aggregate purchase
price of $8,469,000, or $1.60 per share.
On December 15, 2000, the Company entered into a second agreement with
the Reading Stockholders for the repurchase of 4,777,121 shares of Common Stock
for an aggregate price of $8,000,000; and on December 21, 2000 the Company
purchased 25,000 shares of Common Stock from an affiliate of Reading for
$41,000. As a part of the second agreement the provisions of the November 3,
2000 Reading Agreement that had continuing effect were terminated.
As a result of the repurchases of shares of Common Stock from the Reading
Stockholders, the Company expensed $10,482,000 in the fourth quarter of Fiscal
2001, representing the excess of the amount paid for the shares repurchased from
the Reading Stockholders over the aggregate market value of such shares.
ACQUISITION OF ZOOMLOT. On December 15, 2000, the Company entered into a
Merger Agreement and Plan of Reorganization ("Merger Agreement") to acquire
ZoomLot.
Under the terms of the Merger Agreement, the Company issued to the
former ZLT Stockholders Group 270,953 shares of its Series B convertible
preferred stock and 729,047 shares of its Series C redeemable preferred stock,
each at $.50 par value.
The acquisition was accounted for using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). Under APB 16, the tangible assets, identifiable
intangible assets and liabilities of the acquired company are recorded at their
fair value, and the excess of the purchase price over the fair value of the net
(of liabilities) tangible and identifiable intangible assets is recorded as
goodwill. Additionally, under the purchase method of accounting the operating
results of the acquired company are included in the consolidated results of
operations from the date of the acquisition. The Company determined that the
fair value of ZoomLot's tangible assets and liabilities approximated their
historical recorded amounts, and accordingly has recorded the entire excess of
the purchase price over ZoomLot's historical stockholders' deficit as goodwill.
The goodwill will be amortized on a straight-line basis over three years.
The Series C redeemable preferred stock has a par value of $.50 per
share, and has no conversion or voting rights. No dividends shall be made with
respect to any share of Common Stock unless a dividend in an amount equal to ten
times the amount of the dividend payable with respect to a share of Common Stock
is paid with respect to each share of the Series C redeemable preferred stock.
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or
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involuntary, the holders of shares of Series C redeemable preferred stock shall
be entitled to receive an amount per share equal to ten times the amount payable
per share of Common Stock upon such liquidation, dissolution or winding up.
The holders of the Series C redeemable preferred stock have certain
rights to require the redemption of the shares. At any time after the earlier of
September 30, 2003 or the occurrence of a "redemption event" (but in no event
earlier than January 1, 2003), the holder of a share of Series C redeemable
preferred stock will be entitled to redeem each such share for a cash payment by
the Company equal to the greater of (i) $15.00 (as adjusted for any stock
splits, stock dividends, recapitalizations or similar events), plus all declared
but unpaid dividends on such shares or (ii) ten times the fair market price
(determined based on the average daily closing price of the Company's Common
Stock for the twenty days preceding the redemption date) of a share of Common
Stock as of the date notice of redemption is received by the Company. However,
any shares of Series C redeemable preferred stock that are subject to the
forfeiture provisions of the Merger Agreement may not be redeemed until such
forfeiture provisions no longer apply. A "redemption event" will be deemed to
have occurred if (i) ZoomLot meets an "objective", as described below, which
eliminates the forfeiture of shares of Series C redeemable preferred stock, or
(ii) there occurs a "valuation event" which eliminates the forfeiture of the
shares of Series C redeemable preferred stock.
666,667 shares of the Series C redeemable preferred stock are subject to
forfeiture unless certain "objectives" are met or certain "valuation events"
occur. Specifically, one-half of those shares will be forfeited, if, by December
31, 2003, ZoomLot, including any of its subsidiaries, has failed to achieve zero
or positive earnings, before interest expense, interest income, depreciation,
amortization and extraordinary items but after applicable income taxes, for a
period of six consecutive months. The remaining one-half of those shares will be
forfeited if, by December 31, 2003, ZoomLot, including any of its subsidiaries,
has not achieved at least $4.5 million in earnings before interest, taxes,
depreciation and amortization for a period of twelve consecutive months. If,
however, certain "valuation events" should occur prior to December 31, 2003,
those financial performance objectives will be deemed to have been achieved.
These valuation events generally consist of (i) a transaction that would involve
an investment in ZoomLot or one of its subsidiaries of at least $10 million,
where the pre-investment valuation of ZoomLot or any subsidiary of ZoomLot is at
least $30 million, (ii) a change in control of the Company or (iii) the
termination of the key executives of ZoomLot without cause.
The Company also has the right, at any time after January 1, 2003, to
redeem any or all of the Series C redeemable preferred stock that then remains
outstanding for a cash payment by the Company equal to the greater of (i) $15.00
(as adjusted for any stock splits, stock dividends, recapitalizations or similar
events), plus all declared but unpaid dividends on such shares or (ii) ten times
the fair market price (determined based on the average daily closing price of
the Company's Common Stock for the twenty days preceding the redemption date) of
a share of Common Stock as of the date notice of redemption is received by the
Company. If when the Company calls for the redemption of shares of the Series C
redeemable preferred stock there remain outstanding the shares of Series C
redeemable preferred stock which are still subject to forfeiture, the Company
may elect to first redeem the shares of Series C redeemable preferred stock that
are not subject to forfeiture before redeeming shares of Series C redeemable
preferred stock that are subject to forfeiture.
The Company recorded the 62,380 shares of Series C redeemable preferred
stock issued and not subject to forfeiture at a value of $9.89 per share (an
aggregate of $617,000), representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to be payable on September 30,
2003. Between the acquisition date and September 30, 2003, the carrying amount
of the Series C redeemable preferred stock (which is classified as redeemable
preferred stock on the Company's consolidated balance sheet), will be accreted
to the redemption value of $15 per share. Additionally, the amount of the
periodic accretion, which will reduce net income in computing earnings per
share, will be adjusted, if the redemption price becomes greater than $15 per
share, as the result of an increase in the price of the Company's Common Stock
to over $1.50 per share; and the rate of accretion will be accelerated if a
"valuation event" occurs, making the Series C preferred stock redeemable earlier
than September 30, 2003.
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The Company recorded the 666,667 shares of Series C redeemable preferred
stock issued but subject to forfeiture at a value of $9.53 per share (an
aggregate of $6,353,000), representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to be payable on December 31,
2003. However, because the shares are subject to forfeiture unless certain
conditions are met or events occur, they represent "contingent consideration"
under APB 16. As a result, although the shares have legally been issued, their
value has not been included in the determination of goodwill, and instead is
reflected as a reduction of the carrying amount of Series C redeemable preferred
stock. The value of any shares of Series C redeemable preferred stock that
become no longer subject to forfeiture will be added to goodwill, on the basis
on the present value of their redemption value at that time, at such time as the
event or condition eliminating the forfeiture occurs.
In recording the acquisition of ZoomLot, the Company recorded the 270,953
shares of Series B convertible preferred stock issued at a value of $5.34 per
share (an aggregate of $1,447,000), reflecting the average price of the
Company's Common Stock for the five days subsequent to the execution of the
Merger Agreement of $.534 and the conversion ratio of one share of Series B
convertible preferred stock for ten shares of the Company's Common Stock.
The Series B convertible preferred stock had a par value of $.50 per
share. The holders of the Series B convertible preferred stock could at any time
convert the Series B convertible preferred stock into shares of the Company's
Common Stock at the ratio (subject to adjustment for stock splits and other
anti-dilutive events) of ten shares of Common Stock for each share of Series B
convertible preferred stock. The holders of the outstanding Series B convertible
preferred stock had certain voting rights.
The terms of the Series B convertible preferred stock provided that it
would automatically convert into shares of the Company's Common Stock, at the
ratio of ten shares of the Company's Common Stock for each share of Series B
convertible preferred stock, upon the termination of the November 3, 2000 Stock
Purchase and Standstill Agreement between the Company and the Reading
Stockholders. That agreement was terminated in connection with the Company's
December 15, 2000 repurchase of additional shares of Common Stock from the
Reading Stockholders described above. As a result, on December 15, 2000 the
Company converted the 270,953 shares of the Series B convertible preferred stock
into 2,709,530 shares of its Common Stock.
As a part of the Merger Agreement, the Company made a capital
contribution to ZoomLot of approximately $5 million, which ZoomLot used to repay
advances that had been made to it by Cygnet Capital Corporation ("Cygnet
Capital"). Ernest C. Garcia, II, is the sole stockholder and chief executive
officer of Cygnet Capital. Mr. Garcia was also a stockholder of ZLT, and by
virtue of the Merger Agreement became the beneficial holder of 170,701 shares
of Series B convertible preferred stock and 459,299 shares of Series C
redeemable preferred stock. Upon the December 15, 2000 conversion of the Series
B convertible preferred stock into shares of Common Stock, Mr. Garcia became the
beneficial owner of 1,707,004 shares of Common Stock. Mr. Garcia has also
acquired beneficial ownership of shares of Common Stock in market purchases, and
currently beneficially owns 2,077,004 shares of Common Stock, which represent
approximately 18% of the outstanding shares of the Company's Common Stock. Mr.
Garcia, Cygnet Capital, or Verde Reinsurance Company, Ltd., a company owned by
Mr. Garcia, are required to repay the $5 million to the Company unless ZoomLot
meets the objectives, or an event occurs, that eliminates the forfeiture of the
Class C redeemable preferred stock.
See Notes B and K of Notes to Consolidated Financial Statements.
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RESULTS OF OPERATIONS
---------------------
INTEREST INCOME FROM LOANS: The Company's loan investments resulted from
purchases of installment loans at discounts from the face or contractual amount.
Those discounts reflected both (i) an element of interest income that the
Company sought to earn on its investment in the loans, and (ii) the Company's
assessment, at the time of purchase, that a portion of the loans it purchased
were impaired in that the loans would not be repaid in accordance with their
contractual terms.
At the time of purchase, the Company grouped loans into loan pools that
it believed would have common future cash flow characteristics, on the basis of
possessing similar contractual and risk characteristics. Loans were initially
recorded at the cost to purchase the loans, adjusted for any net loan
origination fees and related direct incremental loan origination costs. At the
time of purchase, the Company's net initial investment in the loans was recorded
by establishing as the "gross finance receivable" the contractual cash flows
(including contractual interest) to which the Company was entitled, which was
offset by the difference between the gross finance receivable and the net
initial investment, which was segregated into two components: (i) unearned
income, which represented the difference between the net initial investment and
the Company's estimate of the future cash flows from the gross finance
receivable and (ii) a credit loss discount, which represented the difference
between the Company's estimate of the future cash flows from the gross finance
receivable and its contractual cash flows.
Unearned income was recognized as income over the life of the loans on
the interest method, using for each pool of loans the interest rate that
reflected the difference between the Company's net investment in the loans and
its estimate of the future cash flows therefrom as determined at the time of the
loan purchase. The Company's net investment in each loan pool included its net
initial investment, any interest income recognized but not yet collected,
reduced by collections and any previously recorded allowance for credit losses.
Interest income from loans declined to $404,000 in Fiscal 2001 from
$7,331,000 in Fiscal 2000, representing a decline of 94.5%. The decline was due
to the sale of substantially all of the Company's loans in March 2000.
Interest income from loans declined to $7,331,000 in Fiscal 2000 from
$15,322,000 in Fiscal 1999, representing a decline of 52.2%. The decline was
principally attributable to the 58.4% decrease in the size of the Company's
total net loan investments, (i.e., the gross finance receivables less the
unearned income, credit loss discount and allowance for credit losses) from
$70,401,000 at January 31, 1999 to $29,306,000 at January 31, 2000. Interest
income declined at a rate less than the decline in the size of the Company's
total loan investment as a result in an increase in the Company's effective
yield on its loans. The Company's effective yield on its loans, calculated as
interest income as a percentage of the total net investments in loans, increased
from 13.8% for Fiscal 1999 to 14.7% for Fiscal 2000. The effective yield
increased in Fiscal 2000 because of an increase in expected cash flows over
original estimates for certain loan pools. The higher than estimated collections
affected the yield of certain loan pools because the additional cash flows were
high enough to completely eliminate previously recorded loan loss allowances for
those loan pools, after which additional increases in expected collections are
accounted for as yield adjustments. At January 31, 2000, the Company's total net
loan investment of $29,306,000 had a weighted-average yield of 13.6%.
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30
INTEREST INCOME ON INVESTMENTS: Interest income is derived principally
from the interest earned on the Company's investments in marketable securities,
commercial paper and money market accounts. Interest income from these
investments increased to $3,872,000 in Fiscal 2001 from $2,284,000 in Fiscal
2000. The increase was due to an increase in the weighted average investment
balances to $57,478,000 from $41,734,000 in the prior year, as well as an
increase in the average interest rate being earned to 6.7% compared to 5.5% for
the fiscal year ended January 31, 2000. The Company's investments increased
primarily as the result of the investment of the proceeds from the sale of its
loans. However, the Company's interest income on investments will decrease
significantly in Fiscal 2002 due to the Company's use of its cash equivalents
and investments to fund the repurchases of Company stock, totaling approximately
$52 million, during the fourth quarter of Fiscal 2001.
During Fiscal 2000, the Company invested its cash balances in short-term
marketable securities to generate interest income of $2,284,000, as compared to
$635,000 in Fiscal 1999. The Company used the cash flows from the net reduction
in the size of its automobile loan portfolio and the refund of previously paid
income taxes to repay all its outstanding debt to zero in the fourth quarter of
Fiscal 1999.
INCOME FROM INVESTMENT IN AFC. The Company accounts for its investment in
AFC using the equity method, and the $230,000 reported as the income from the
investment in AFC represents the Company's share of AFC's net income for the
nine months from April 5, 2000 (the date of the Company's acquisition of its
investment in AFC) to December 31, 2000 (AFC's fiscal year-end).
The following sets forth summarized operating results for AFC (in
thousands):
Years Ended December 31,
---------------------------------
2000 1999
------------- -------------
Revenues $6,462 $7,376
Film rental 2,087 1,909
Operating costs 2,509 2,635
General and administrative
expenses 184 418
Depreciation and amortization 692 688
------ ------
5,472 5,650
------ ------
Net income $ 990 $1,726
====== ======
AFC's revenues decreased from the year ended December 31, 1999 to the
year ended December 31, 2000 as the result of a decrease in attendance. The
attendance at AFC will vary depending on audience interest in, and the
popularity of, the films it exhibits, and other factors.
OTHER INCOME: Other income for Fiscal 2001 include the revenues from
ZoomLot of approximately $80,000 for the period from the Company's acquisition
of ZoomLot on December 15, 2000 until January 31, 2001, and income of $123,000
from other sources.
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31
ZoomLot's services facilitate 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
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"; however, ZoomLot does not warehouse or pool purchased contracts
for resale, but rather either merely facilitates a finance company's purchase of
a contract from the dealer, or purchases contracts from dealers for immediate
pre-arranged resale. As a result, the Company does not assume credit risk with
respect to the contracts.
ZoomLot currently has two means by which it provides this contract
aggregation service. Under the Pass-Thru program, ZoomLot's responsibility is to
filter the contract information provided by the dealer against the criteria
established by the participating finance companies. ZoomLot then transmits the
contract information to each of the finance companies whose underwriting
criteria the contract satisfies. If the contract is sold, ZoomLot receives a
fixed fee from the purchasing finance company. In addition, ZoomLot operates a
Private Label program whereby it acquires contracts on behalf of two finance
companies subject to their underwriting criteria. Under the Private Label
program, ZoomLot will underwrite a contract that is submitted by a used car
dealer subject to the criteria established by the participating finance
companies. If the contract meets their criteria, ZoomLot will then place a bid
based on the finance company's pricing model with the dealer to purchase the
contract. If the bid is accepted, ZoomLot then performs certain verification
procedures related to the underlying customer and if the requisite information
is deemed to be satisfactory, it will acquire the contract from the dealer. The
finance company then repurchases the contract from ZoomLot for the amount
ZoomLot paid for the contract plus a fee for acquiring the contract. During
Fiscal 2001, the average revenue per contract was approximately $300.
In addition, ZoomLot generates additional revenue by marketing insurance
and warranty products to automobile dealers for purchase by their customers.
ZoomLot receives referral or placement fees from the companies selling the
respective products. All responsibility and liability for the servicing and
administration of the insurance policies and warranties as well as the payment
of insurance claims, repair costs and other claims is assumed by the companies
issuing the products or third party insurers.
Other income in Fiscal 2000 of $145,000 and $957,000 in fiscal 1999
included fees from the sale of warranty contracts, fees earned for collection
services, floor planning, enrollment and maintenance fees charged to dealers.
PROVISION FOR CREDIT LOSSES: Effective February 1, 1997, the Company
refined its methodology for determining the allowance for credit losses to group
loans into pools with similar characteristics and to assess the recoverability
of its loan investments on the basis of the present value of the expected future
cash flows, as discussed in Statement of Financial Accounting Standards ("SFAS")
114 (as amended by SFAS 118), "Accounting by Creditors for Impairment of a
Loan." On a continual basis the Company reviewed its estimates of future cash
flows for its loan pools. Such estimates were revised to reflect changes in
historical collection rates, charge-off rates, loan delinquencies and other
economic indicators that served as the basis for predicting future loan
performance. The Company's net investment in each loan pool was compared to the
present value of the revised estimate of future cash flows, discounted using the
rate at which the Company was recognizing interest income on that pool of loans.
Where the estimated cash flows had been revised downward and, as a result, such
a comparison reflected an excess of the investment over the present value of the
future cash flows, the Company recorded an allowance for credit losses by a
charge to expense, and also reduced unearned income by a reclassification to the
credit loss discount so that future interest income would reflect the same
original annual interest rate on the net investment in the particular loan pool.
In those instances where a revised estimate of future cash flows indicated an
increase in estimated cash flows over the previous estimate, the Company first
reversed into income any previously recorded provision for credit losses, and
then increased the rate at which future interest income was recognized by a
reclassification from the credit loss discount to unearned income.
29
32
Information concerning the changes in the allowances for credit losses
and the provision for credit losses charged to expense is set forth in Note D of
Notes to the Consolidated Financial Statements.
The Company recorded a reversal into income of previously recorded credit
losses of $1,365,000 for Fiscal 2001. In determining the allowance for credit
losses, the Company used weighted-average estimates of future cash flows from
its loans expressed as a percentage of the contractual amounts receivable, which
was approximately 58% at February 29, 2000 (prior to the sale of the loans as
described above) and resulted in a reversal into income of $856,000. The Company
recorded a reversal into income of an additional $509,000 as a result of cash
received from loans previously charged-off.
The provision for credit losses for Fiscal 2000 reflects negative
provisions, or reductions in the allowance for credit losses, of $6,118,000.
During Fiscal 1999, the provision for credit losses was $2,961,000. The
reduction in the allowance for credit losses recorded in Fiscal 2000 is
principally the result of cash flows from loan collections during that period
which exceeded the amounts projected that was used in establishing the allowance
for credit losses at January 31, 1999. The higher than estimated collections
came principally from certain of the Company's older, larger loan pools and
reflect both improvements in the Company's collection procedures and the effect
of the revisions to the future collection estimates made in Fiscal 1999. In
determining the allowance for credit losses, the Company used weighted-average
estimates of the future cash flows from its loans, expressed as a percentage of
the contractual amounts receivable. Although the Fiscal 2000 excess collections
resulted in reductions in the allowance for credit losses, the Company did not
significantly change its estimates of remaining cash flows from the collections
of loan pools, and as a result, the negative credit loss provisions reflect
principally the actual cash collections in excess of estimated amounts. The
weighted-average estimate of future cash flows from loans, expressed as a
percentage of the contractual amounts receivable, was 58.0% at January 31, 2000,
as compared to 57.3% at January 31, 1999. At January 31, 2000, the allowance for
credit losses was 8.3% of the Company's net investment in loans, before the
allowance, as compared to 19.3% at January 31, 1999. This decrease is due to the
charge-off of loans from certain of the Company's older, larger pools, as well
as the affect of purchasing higher quality loans in Fiscal 1999 and 2000 (which
through January 31, 2000 had not required the recording of any significant loan
loss allowances).
LOSS ON SALE OF LOANS: During Fiscal 2001, the Company sold its active
automobile loan portfolio and the majority of its charged-off portfolio for
aggregate cash proceeds of $24,187,000. The Company also received $6,134,000 in
actual cash collections on the loans during Fiscal 2001. The sales of the loans
resulted in an aggregate loss of $1,420,000. The loss includes a charge of
$666,000 for the write-off of deferred loan origination assets and liabilities
and the accrual for the potential repurchase of certain loans for breach of any
representation or warranty made by the Company.
OPERATING EXPENSES: Operating expenses include sales and marketing costs,
collection costs and other operating costs. Operating expenses declined 77% to
$2,407,000 for Fiscal 2001 from $10,272,000 for Fiscal 2000 and decreased as a
percent of revenue to 51% in Fiscal 2001 from 105% in Fiscal 2000. Operating
expenses were $11,078,000 or 65% of revenues in Fiscal 1999.
The decrease in operating expenses was a result of a reduction in
personnel costs and the cessation of loan underwriting, processing and
collection operations upon the Company's sale of its loans. Additionally,
certain personnel and occupancy costs historically associated with the loan
operations, but in which the Company continues to incur, have since April 2000
been classified as general and administrative expenses.
Included in operating expenses for Fiscal 2001 are costs relating to
ZoomLot for the 46-day period ended January 31, 2001 of $708,000. These costs
are after the effect of $145,000 paid to ZoomLot by CDF. CDF previously operated
ZoomLot, and ZoomLot and CDF share common personnel and facilities. ZoomLot
receives a monthly fee from CDF for performing these management services and to
reimburse ZoomLot for the costs incurred to administer the CDF operations.
30
33
Personnel costs, amortization of goodwill, rent, advertising, and
internet technology related expenses comprised the majority of ZoomLot's
expenses. Personnel costs, which totaled $342,000 or 48% of ZoomLot's operating
expenses and amortization of goodwill of $191,000 or 27% of operating expenses
comprised the largest components of ZoomLot's expenses.
ZoomLot is currently developing the FundHere(TM) Aggregator. The
successful completion and implementation of this software is paramount to the
future success of ZoomLot. The successful completion of the FundHere(TM)
Aggregator would allow ZoomLot to automate much of the communication and
filtration process it must now perform manually, and would allow ZoomLot to
realize significant improvement in operating efficiencies and lower its variable
costs for each contract submitted by dealers. Should ZoomLot be unable to
successfully complete the development of the FundHere(TM) Aggregator, or upon
its completion fail to realize the anticipated benefits, it may be difficult for
ZoomLot to achieve profitability. Until ZoomLot completes the development of the
FundHere(TM) Aggregator, it will incur expenses for the development of the
software and will have higher variable costs, both of which will adversely
affect its results of operations.
Operating expenses decreased in Fiscal 2000, as compared to Fiscal 1999,
due to the reduction in personnel and other operating expenses as a result of
the declining loan portfolio offset by increases in expenses associated with the
installation and development of upgraded computer and information systems.
GENERAL AND ADMINISTRATIVE: General and administrative expenses include
cost of executive, accounting and legal personnel, occupancy, legal,
professional, insurance, and other general corporate overhead costs. General and
administrative expenses are more fixed in nature than operating expenses and are
not expected to vary as directly with revenues. General and administrative
expenses increased to $7,696,000 for Fiscal 2001 from $4,750,000 for Fiscal 2000
and increased as a percentage of revenues from 48.7% in Fiscal 2000 to 163% in
Fiscal 2001. General and administrative expenses were $4,994,000 or 29.5% of
revenues in Fiscal 1999.
The increase in general and administrative expenses of $2,946,000 in
Fiscal 2001, as compared to Fiscal 2000, was due to (i) an increase in director
fees of $1,150,000 (director fees of approximately $1,100,000 were classified in
litigation and other charges in Fiscal 2000) and the bonus awarded to the
Chairman of the Board, for past services, of $750,000; (ii) an increase in
salaries and benefits and compensation expense for a grant of the Company's
Common Stock of 350,000 shares to the chief executive officer; (iii) the
reduction of the Fiscal 2000 expenses (with no similar reductions in Fiscal
2001) from a credit recorded when the Company was able to settle certain state
tax liabilities at amounts less than initially estimated; and (iv) the
previously discussed change in the classification (from operating expenses to
general and administrative expenses) of certain costs.
The slight decrease in general and administrative expenses in Fiscal
2000, as compared to Fiscal 1999, was due to lower personnel and occupancy
costs, and the reversal of certain prior state property, franchise and
installment paper tax liabilities to reflect the settlement of those liabilities
for amounts less than previously estimated. These were partially offset by an
increase in professional services.
LITIGATION AND OTHER CHARGES: In Fiscal 1998, following the resignation
of Deloitte & Touche, the Company instituted investigations of its previous
financial reporting and underwent changes in management. The Company accrued
initial estimates of certain resulting costs, and additional costs in excess of
those initial estimates are being expensed as incurred or as such estimates are
revised. In the first quarter of Fiscal 2001, the Company accrued an initial
estimate of the costs to be incurred in the litigation with Mr. Frankino that
commenced in April 2000, and additional cost in excess of that initial estimate
were expensed as incurred or as such estimate was revised.
31
34
Included in the results of operations for Fiscal 2001, 2000, and 1999,
respectively, are the following costs related to the litigation, investigations
and management changes (in thousands):
Years Ended January 31,
---------------------------------------------
2001 2000 1999
------------ ------------ -------------
Legal and settlement costs relating to litigation matters $ 5,799 $ 7,037 $ 2,545
Crisis management consulting 116 3,063 3,898
Financing, loan waiver and prepayment fees -- 408 1,483
Fees for special independent audits -- 523 845
Costs of special investigations -- 273 654
Other 375 4 160
------- ------- -------
$ 6,290 $11,308 $ 9,585
======= ======= =======
COST RELATED TO PURCHASE OF SHARES: The Fiscal 2001 expense of
$35,593,000 results from the repurchases of Common Stock from the Frankino
parties and the Reading Stockholders discussed above.
During Fiscal 2000 the Company repurchased 2,849,630 shares of its Common
Stock pursuant to an option agreement (the "Option Agreement"), which the
Company entered into with a then-unaffiliated stockholder on May 10, 1999. The
Company acquired the option by paying the stockholder $1,000,000 on May 12,
1999, all of which was to be credited toward the aggregate exercise price of
$1.50 per share payable by the Company upon any exercise of its option. On June
24, 1999, the Company exercised its right under the Option Agreement to extend
the period of the option (the "First Extension") for 45 days, until August 8,
1999, by paying the stockholder an additional $500,000, of which $250,000 was to
be credited towards the aggregate exercise price payable upon any exercise of
the option. On August 8, 1999, the Company and the unaffiliated stockholder
agreed to an additional extension (the "Second Extension") of the Option
Agreement, for 120 days, for which the Company paid the stockholder an
additional $1,000,000, of which $750,000 was to be credited towards the
aggregate exercise price payable upon any exercise of the option.
The Company accounted for the initial option purchase, and the extension
payments, by initially determining the fair value of the option together with
the extension payments to be de minimis. In determining the fair value of the
option or extension, the Company considered the period over which the option or
extension was exercisable, the option exercise price, the market price of the
Company's stock and the portion of the payments creditable to the payment due
upon any exercise of the option. The excess of the option or extension payments
over the market value of the underlying Common Stock was charged to expense. An
aggregate of $2,224,000 was charged to expense in Fiscal 2000, which represented
the total of the $1,000,000 payment made to obtain the initial option and
$1,224,000 of the payments made to obtain the First Extension and Second
Extension.
On November 22, 1999, the Board of Directors of the Company approved the
exercise of its option. On December 2, 1999, the Company exercised such option
and paid the unaffiliated stockholder an additional $2,274,000 for the 2,849,630
shares subject to the option, which amount equals the product of 2,849,630 and
the $1.50 per share exercise price, less the $2,000,000 in aggregate credits to
which the Company became entitled under the Option Agreement, the First
Extension and the Second Extension. The Company recorded the 2,849,630
repurchased shares at a price of $.895 per share, or an aggregate of
approximately $2,551,000, representing the market price of the common stock at
the date the Second Extension was agreed to.
WRITE-DOWN OF ASSETS HELD FOR SALE: The Company has certain investments
in affordable housing projects which previously the Company had been holding for
realization through the receipt of distributions from the operations of the
projects and the use of the tax credits generated by the investments. In the
fourth quarter of Fiscal 2000, the Company committed to a plan to sell the
investments and recorded, in that quarter, a write-down of $4,666,000 to reduce
the carrying amount of the investments to their fair value less estimated
32
35
costs to sell. During Fiscal 2001, the Company reduced its original estimate of
the fair value of the investments to $2,670,000, primarily due to the expiration
of certain tax credits and the increase of the effective yield used in
determining the fair value. As a result, the Company recorded an additional
write-down of $3,183,000. The Company expects to complete the sale of the
investments by the end of the second quarter of Fiscal 2002 and future operating
results could be affected by revisions of the estimates of the fair value less
estimates costs to sell the investments, which changes could be material due to
the uncertainties inherent in the estimation process.
During the fourth quarter of Fiscal 2000, the Company also committed to
plans to sell certain real estate investments. During Fiscal 2001, the Company
sold the investments for aggregate cash proceeds of approximately $1,000,000 and
recorded a loss on sale of $215,000.
RESTRUCTURING CHARGES: During January 2001, the Company committed to a
plan of restructuring its operations and relocating its corporate offices from
Solon, Ohio to New York City, New York. As a part of the plan, and in accordance
with Emerging Issues Task Force Issue No. 94-3, "Liabilities Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity" the
Company recorded a restructuring charge of $1,777,000 which is comprised of a
write-down for property and equipment of $922,000 and accrued expenses of
$855,000 representing the costs to be incurred in the completion of the steps
contained in the restructuring plan. Those steps include the termination of
thirty-two employees, for which the Company has accrued costs of $575,000, and
other steps, including the termination of leases and outplacement services,
estimated to cost $280,000. As of January 31, 2001 none of the accrued costs
have been incurred and $855,000 remains accrued. See Note O of Notes to
Consolidated Financial Statements.
INCOME TAXES: For the year ended January 31, 2001, the Company recorded
an income tax benefit of $1,200,000 as a result of an adjustment to reduce
previous estimates of certain accrued income taxes. At January 31, 2001, the
Company has claims for refunds in the amount of $3,664,000.
For Fiscal 2000, the Company recorded an income tax benefit of
$3,286,000. The income tax benefit represented (i) adjustments that increased
the previously estimated amount of net operating losses eligible to be carried
back against prior years' taxable income, and (ii) adjustments to revise
(reduce) previous estimates of certain income taxes.
As of January 31, 2001 the Company has net operating loss carryforwards
of $65,616,000 that may be used to reduce future taxable income, subject to
limitations. The Company also has unused low income housing credits totaling
$5,598,000.
As a result of the Company's November 3, 2000 repurchases of shares of
its Common Stock, the Company 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 net operating loss carryforwards described above, the use of net
operating loss carryforwards totaling $60,343,000 incurred prior to November 3,
2000 will be subject to significant annual limitation. Additionally, the use of
low income credit carryforwards of $5,248,000 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 $5,273,000 and $350,000, respectively, as of January 31, 2001,
are not subject to the Section 382 limitation.
As of January 31, 2001 the Company has $3,004,000 of alternative minimum
tax credits which may be applied against any future alternative minimum taxes
which exceed regular income taxes. These credits may be carried forward
indefinitely and are also subject to the Section 383 limitation.
At the date of its acquisition ZoomLot had net operating loss
carryforwards of approximately $2,000,000. The Company may use these net
operating loss carryforwards through Fiscal 2021 to reduce the taxable income
generated by ZoomLot, subject to certain annual limitations.
33
36
See Note J of Notes to Consolidated Financial Statements.
DISCONTINUED OPERATIONS: Prior to Fiscal 1997, the Company also engaged
in the automobile rental business, including the subsequent sale of cars when
retired from its rental fleet. The automobile rental operations, conducted under
the names Agency Rent-A-Car, Altra Auto Rental and Automate Auto Rental, rented
vehicles principally on a short-term basis to the insurance replacement market.
The Company disposed of its rental fleet and this operation in Fiscal 1996
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 the Company. National Motors
was a Company owned dealership which sold vehicles retired from the rental
fleet. The Company discontinued the operations of National Motors in Fiscal
1997.
The Fiscal 2001 income of $1,656,000 represents the reversal of
previously recorded expense relating to the self-insurance claims liabilities
due to the favorable settlement of certain claims. See Note P of Notes to
Consolidated Financial Statements.
The Fiscal 2000 income of $741,000 represents the effects of negative
operating expenses of $207,000, an income tax benefit of $562,000, and a
revision of the loss on the disposal of the discontinued operation of $28,000,
net of tax. The negative operating expenses reflect the reversal of previously
accrued state taxes (other than income taxes) as the result of the settlement of
certain tax liabilities at amounts less than previously estimated and the
expiration of the statute of limitations with respect to certain other state
taxes, offset by a provision of $600,000 for self-insured liabilities. The
income tax benefit reflects the reversal of previously accrued income taxes as
the result of similar settlements and expiration of statute of limitation as
described above.
The Fiscal 1999 income of $450,000 represents the effects of refunds from
a funded workers' compensation partnership related to the discontinued
operations.
On an ongoing basis the Company's results of operations and liquidity are
unlikely to be affected by these discontinued operations except for the effects
of the payment of self-insurance claims on the Company's liquidity, and the
effects on the results of operations of any additional revisions to the
Company's estimates for its self-insurance liabilities. The Company's aggregate
self-insurance claims liability of $970,000 as of January 31, 2001 is subject to
further revision as new information is available, and such revisions may be
material due to the uncertainties inherent in the estimation process.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During Fiscal 2001, the Company used $55,981,000 of cash flows from
operations. The Company's payments for operating, general and administrative,
and litigation and other expenses together with $35,593,000 (the portion charged
to expense) of the $52,030,000 paid to repurchase shares of the Company's Common
Stock continue to exceed revenues from operations. The Company generated
$35,515,000 in cash flows from investing activities principally as the result of
collections and the proceeds from its loan portfolio of $24,187,000 and the
proceeds from the sale of property of $8,606,000. The Company used $21,423,000
in financing activities primarily as the result of the payments to repurchase
shares of $16,437,000 and the payment on notes payable of $5,185,000 assumed by
the Company as part of the ZoomLot acquisition.
During Fiscal 2000, the Company used $18,925,000 of cash flows from
operations. The cash flows from interest income declined due to the declining
portfolio balance and were exceeded by the Company's payments for operating,
general and administrative and litigation and other expenses together with
$2,224,000 (the portion charged to expense) of the total of $4,775,000 paid to
repurchase shares of the Company's common stock. The Company generated
$43,731,000 in cash flows from investing activities principally as the result of
$45,839,000 of cash flows from the net reduction in the size of its loan
portfolio. The Company used $2,582,000 of cash flows from financing activities
primarily as the result of the purchase of the treasury stock. The net cash
flows
34
37
generated by these sources were used to finance the negative operating cash
flows and retain a cash balance of $54,333,000 at January 31, 2000.
During Fiscal 1999, the Company generated $33,402,000 in cash flows from
operations, and generated $79,734,000 of cash flows from the net reduction in
the size of its loan portfolio. The $33,402,000 of cash flows from operations
included the benefit of a net refund of $52,079,000 of previously paid income
taxes generated by the carryback of the Company's 1998 losses. The cash flow
generated by these sources were used in 1999 to repay $83,838,000 of debt
outstanding under the Company's bank group facility and senior notes, and to
retain a cash balance of $32,109,000 at January 31, 1999. During Fiscal 1998 and
1999, the Company was from time to time in default of the covenants in its bank
group and senior note debt agreements. In the fourth quarter of Fiscal 1998
continuing through the third quarter of Fiscal 1999, the Company entered into a
series of amendments to those agreements to waive the defaults while the Company
repaid the outstanding borrowings. The Company completed the repayment of the
borrowings under the bank group facility and the redemption of the senior notes
in November 1998.
The Company believes that the available cash and cash equivalents and
marketable securities of approximately $11,000,000 as of April 30, 2001, and the
investment income therefrom as well as the cash distributions from its
investment in AFC will be sufficient to pay operating expenses, existing
liabilities, including costs associated with pending investigations, and fund
its activities through January 31, 2002. The Company estimates the capital
requirements to fund its ZoomLot operations and investment in software and
computer equipment may total approximately $6,500,000 for the period ending
January 31, 2002. Additionally, as previously discussed, the Company's lack of
external financing sources may limit its ability to pursue strategic business
alternatives being considered by the Company's Board of Directors. Such
limitations may have an adverse impact on the Company's financial position,
results of operations and liquidity.
OTHER
- -----
NEW ACCOUNTING PRONOUNCEMENTS. In June 2000, the Financial Accounting
Standard Board issued SFAS 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS
138"). SFAS 138 must first be applied in the first quarter of fiscal years that
begin after June 15, 2000 (the first quarter of Fiscal 2002 for the Company) and
in general requires that entities recognize all derivative financial instruments
as assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS 138 also provides
that changes in the fair value of assets or liabilities being hedged with
recognized derivative instruments be recognized and included in earnings. The
Company does not presently utilize derivative instruments, either for hedging or
other purposes, and therefore anticipates that the adoption of the requirements
of SFAS 138 will not have a material affect on its financial statements.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," which replaces SFAS 125. SFAS 140 provides standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001, and is effective for recognition and reclassification of collateral and
for disclosures relating to securitizations and collateral for fiscal years
ended after December 15, 2000. The Company believes that SFAS 140 will not have
a material affect on its financial statements.
INFLATION. Inflation has not had a material affect on the Company's
business.
35
38
FORWARD-LOOKING STATEMENTS
- --------------------------
Various statements made in this Item 7 and elsewhere in this Annual
Report on Form 10-K concerning the manner in which the Company intends to
conduct its future operations, and potential trends that may impact its future
results of operations, are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company may be unable to
realize its plan and objectives due to various important factors, including, but
not limited to, the failure of the Board of Directors to promptly determine what
strategic business plan the Company should pursue, the failure of the Company to
implement any such plan due to its inability to identify suitable acquisition
candidates or its inability to obtain the financing necessary to complete any
desired acquisitions, or any adverse action taken by the Securities and Exchange
Commission that impedes the ability of the Company to pursue any desired plan of
action. In addition, ZoomLot's operations are subject to certain risk factors.
See Item 1 - "Business - E-Commerce Business - Summary of Certain Risk Factors
Related to ZoomLot's Business".
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like virtually all commercial enterprises, the Company 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.
The Company 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,
the Company is not exposed to market risk from these sources.
The Company's automobile loan portfolio was comprised of fixed rate
financing agreements with high credit risk consumers. The rates on these
financing agreements cannot be increased for changes in market conditions, and
accordingly these loans were not subject to market risk.
As of January 31, 2001, the Company has no interest bearing debt, and
accordingly no market risk associated with increases in interest costs resulting
from changes in market rates.
36
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
National Auto Credit, Inc. and Subsidiaries
Solon, Ohio
We have audited the accompanying consolidated balance sheets of National
Auto Credit, Inc. and Subsidiaries as of January 31, 2001 and 2000 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, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Auto Credit, Inc. and Subsidiaries as of January 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
/s/Grant Thornton LLP
Cleveland, Ohio
April 16, 2001 (except for Note E as to which the date is May 9, 2001)
37
40
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 31,
------------------------
2001 2000
--------- ------------
ASSETS
Cash and cash equivalents $ 12,444 $ 54,333
Marketable securities (Note C) 1,083 --
Installment loans, net (Note D) -- 29,306
Investment in AFC (Note E) 10,027 --
Property and equipment, net of accumulated
depreciation of $186 and $5,219, respectively (Note F) 789 7,677
Goodwill (Note A) 6,673 --
Assets held for sale (Note G) 2,785 6,861
Income taxes refundable 3,664 3,664
Other assets 1,601 2,121
--------- ---------
TOTAL ASSETS $ 39,066 $ 103,962
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Self-insurance claims (Note P) $ 970 $ 4,089
Accrued income taxes (Note J) 1,029 2,926
Other liabilities (Note I) 4,983 13,068
--------- ---------
6,982 20,083
COMMITMENTS AND CONTINGENCIES (Note N) -- --
REDEEMABLE PREFERRED STOCK (Note K)
(redemption value of $936) 629 --
STOCKHOLDERS' EQUITY (Notes K and L)
Preferred stock -- --
Common stock - $.05 par value,
authorized 40,000,000 shares, issued
39,420,437 and 29,963,301 shares, respectively 1,971 1,498
Common stock to be issued 219 --
Additional paid-in capital 174,385 166,139
Retained deficit (121,801) (69,104)
Accumulated other comprehensive income (loss) (44) --
Treasury stock, at cost, 27,901,305 and 4,195,598
shares, respectively (23,275) (14,654)
--------- ---------
31,455 83,879
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,066 $ 103,962
========= =========
See notes to consolidated financial statements.
38
41
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended January 31,
---------------------------------
2001 2000 1999
--------- -------- --------
REVENUE
Interest income from loans $ 404 $ 7,331 $ 15,322
Interest income on investments 3,872 2,284 635
Income from investment in AFC 230 -- --
Other income 203 145 957
-------- -------- --------
Total 4,709 9,760 16,914
COSTS AND EXPENSES
Provision for credit losses (1,365) (6,118) 2,961
Operating 2,407 10,272 11,078
Loss on sale of loans (Note D) 1,420 -- --
General and administrative 7,696 4,750 4,994
Litigation and other charges (Note N) 6,290 11,308 9,585
Write-off of option (Note E) 500 -- --
Gain on sale of property (Note F) (2,868) -- --
Cost related to purchase of shares (Note K) 35,593 2,224 --
Write-down of assets held for sale (Note G) 3,398 4,666 --
Restructuring charges (Note O) 1,777 -- --
Interest expense -- -- 4,361
-------- -------- --------
Total 54,848 27,102 32,979
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (50,139) (17,342) (16,065)
Benefit for income taxes (Note J) (1,200) (3,286) --
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (48,939) (14,056) (16,065)
DISCONTINUED OPERATIONS, NET OF TAX (Note P) 1,656 741 450
-------- -------- --------
NET LOSS (47,283) (13,315) (15,615)
Accretion of discount on redeemable preferred stock (Note K) 12 -- --
-------- -------- --------
NET LOSS APPLICABLE TO COMMON STOCK $(47,295) $(13,315) $(15,615)
======== ======== ========
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
Continuing operations $ (1.76) $ (.50) $ (.56)
Discontinued operations .06 .03 .01
-------- -------- --------
Net loss per share $ (1.70) $ (.47) $ (.55)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000's)
Basic and diluted 27,761 28,169 28,609
======== ======== ========
See notes to consolidated financial statements.
39
42
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Common Stock
----------------- ------------------- Common Additional
Par Par Stock to Paid-In Retained
Shares Value Shares Value be Issued Capital Deficit
------ ----- ------ ----- --------- ---------- ---------
BALANCE,
JANUARY 31, 1998 -- $ -- 29,906,112 $ 1,495 $ -- $ 166,072 $ (40,174)
Net loss (15,615)
Stock issued under
benefit plans 76,400 5 96
---------- -------- ---------- -------- --------- ---------- ----------
BALANCE,
JANUARY 31, 1999 -- -- 29,982,512 1,500 -- 166,168 (55,789)
Net loss (13,315)
Stock cancelled under
benefit plans (19,211) (2) (29)
Treasury stock
purchase
---------- -------- ---------- -------- --------- ---------- ----------
BALANCE,
JANUARY 31, 2000 -- -- 29,963,301 1,498 -- 166,139 (69,104)
Net loss (47,283)
Stocks issued for
investment in AFC (Note E) 100 -- 6,762,247 338 6,954 (5,402)
Acquisition of ZoomLot (Note B) 270,953 135 1,312
Repurchase of Series A
preferred stock (Note K) (100) --
Conversion of Series B
preferred stock (Note K) (270,953) (135) 2,709,530 135 --
Repurchase of common
shares (Note K)
Stock award (Note L) 219
Stock cancelled under
benefit plans (14,641) -- (20)
Accretion on redeemable preferred stock (12)
Other comprehensive income (loss)
unrealized loss on marketable
securities
---------- -------- ---------- -------- --------- ---------- ----------
BALANCE,
JANUARY 31, 2001 -- $ -- 39,420,437 $ 1,971 $ 219 $ 174,385 $ (121,801)
========== ======== ========== ======== ========= ========== ==========
Other Comprehensive
Treasury Comprehensive Income
Stock Income (loss) Total (Loss)
-------- ------------- ----- -------------
BALANCE,
JANUARY 31, 1998 $ (12,103) $ -- $ 115,290
Net loss (15,615) $ (15,615)
Stock issued under
benefit plans 101
---------- -------- ---------- ----------
BALANCE,
JANUARY 31, 1999 (12,103) -- 99,776 $ (15,615)
==========
Net loss (13,315) $ (13,315)
Stock cancelled under
benefit plans (31)
Treasury stock
purchase (2,551) (2,551)
---------- -------- ---------- ----------
BALANCE,
JANUARY 31, 2000 (14,654) -- 83,879 $ (13,315)
==========
Net loss (47,283) $ (47,283)
Stocks issued for
investment in AFC (Note E) 7,816 9,706
Acquisition of ZoomLot (Note B) 1,447
Repurchase of Series A
preferred stock (Note K) --
Conversion of Series B
preferred stock (Note K) --
Repurchase of common
shares (Note K) (16,437) (16,437)
Stock award (Note L) 219
Stock cancelled under
benefit plans (20)
Accretion on redeemable preferred stock (12)
Other comprehensive income (loss)
unrealized loss on marketable
securities (44) (44) (44)
---------- -------- ---------- ----------
BALANCE,
JANUARY 31, 2001 $ (23,275) $ (44) $ 31,455 $ (47,327)
========== ======== ========== ==========
See Notes to consolidated financial statements.
40
43
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended January 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (47,283) $ (13,315) $ (15,615)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,107 1,396 1,296
Provision for credit losses (1,365) (6,118) 2,961
Loss on sale of loans 1,420 -- --
Gain on sale of property (2,868) -- --
Write-off of option 500 -- --
Loss on write-down of assets held for sale 3,398 4,666 --
(Gain) loss on disposal of rental operations (308) 28 88
Changes in operating assets and liabilities:
Accrued income tax/refundable (1,897) (3,953) 52,079
Other liabilities (7,601) (1,116) (4,722)
Self-insurance claims (2,811) (819) (4,352)
Other operating assets and liabilities, net 1,727 306 1,667
--------- --------- ---------
Net cash (used in) provided by operating activities (55,981) (18,925) 33,402
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on gross finance receivable 5,730 61,155 105,950
Proceeds from sale of loans 24,187 -- --
Proceeds from sale of property 8,606 -- --
Proceeds from sale of assets held for sale 1,041 -- --
Purchase of loans -- (15,316) (26,216)
Investments and acquisitions (1,690) -- --
Proceeds from AFC distributions 556 -- --
Purchase of marketable securities (25,092) -- --
Proceeds from sale of marketable securities 23,820 -- --
Purchase of other property and equipment (188) (1,091) (833)
Purchase of affordable housing investments (1,455) (1,017) (1,219)
Other investing activities, net -- -- 80
--------- --------- ---------
Net cash provided by investing activities 35,515 43,731 77,762
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on operating debt and notes payable (5,185) -- (83,838)
Payments to acquire treasury stock (16,437) (2,551) --
Stock (cancelled) issued under benefit plans (20) (31) 101
Common stock to be issued 219 -- --
--------- --------- ---------
Net cash used in financing activities (21,423) (2,582) (83,737)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents (41,889) 22,224 27,427
Cash and cash equivalents at beginning of year 54,333 32,109 4,682
--------- --------- ---------
Cash and cash equivalents at end of year $ 12,444 $ 54,333 $ 32,109
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ -- $ 67 $ 5,646
========= ========= =========
Income taxes paid (refunded) $ 697 $ 105 $ (52,079)
========= ========= =========
See notes to consolidated financial statements.
41
44
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
National Auto Credit, Inc. ("the Company") began operations in 1969 and was
incorporated in Delaware in 1971. The Company's principal business activity is
conducted through ZoomLot Corporation ("ZoomLot"), a wholly-owned subsidiary,
which is 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 currently provides these services, on a limited basis, using a
combination of Internet and manual processes, and is continuing its efforts to
develop a fully e-commerce process. The Company acquired ZoomLot on December 15,
2000. The Company also owns a 50% membership interest in Angelika Film Center,
LLC ("AFC"). Additionally, the Company is considering 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.
Through the second quarter of Fiscal 2001, the Company engaged in the
business of investing in sub-prime used automobile consumer loans. The Company
purchased such loans, or interests in pools of such loans, from member
dealerships, and performed the underwriting and collection functions for such
loans. In the first and second quarters of Fiscal 2001, the Company sold its
active loan portfolio and the majority of its charged-off portfolio (see Note
D). However, since the Company had not yet made a definitive decision that it
will not reenter some aspect of the consumer lending business, these operations
have not been classified as a discontinued operation as of January 31, 2001.
As of January 31, 2001, the Company's operations are classified as three
operating segments. See Note Q.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the amounts of the Company
and its wholly-owned subsidiaries and an 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. The Company also has restricted cash of $576,000 pursuant to
agreements with certain former Presidents and Directors of the Company.
GOODWILL:
Goodwill arising from the Company's acquisition of ZoomLot is amortized on
a straight-line basis over a three-year period. Goodwill arising from the
Company's investment in AFC is amortized on a straight-line
42
45
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
basis over 20 years. Accumulated amortization of goodwill is $395,000 at January
31, 2001. See Notes B and E.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates impairment of long-lived assets pursuant to SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121") which requires impairment losses to
be recorded on long-lived assets used in operations when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management periodically evaluates property and equipment and
intangible assets for impairment whenever events or changes in circumstances
indicate the assets may be impaired. This evaluation consists of comparing
estimated future cash flows (undiscounted and without interest charges) over the
remaining life of the asset to its carrying value. When such evaluation results
in a deficiency, the carrying amount of the asset is reduced to its estimated
fair value through a charge to income. Certain of these long-lived assets are
being disposed of and have been written-down to their estimated fair value. See
Note G.
MARKETABLE SECURITIES:
Marketable securities consist of U.S. Government Agency mortgage-backed
obligations, mortgage-backed securities and mutual funds. The Company accounts
for its marketable securities under Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), which requires that marketable debt and equity securities be
adjusted to market value at the end of each accounting period, except in the
case of debt securities which a holder has the positive intent and ability to
hold to maturity, in which case the debt securities are carried at amortized
cost. For marketable debt and equity securities carried at market value,
unrealized market value gains and losses are included directly in net income if
the securities are actively traded for short-term profit, or otherwise are
charged or credited to a separate component of stockholders' equity
("accumulated other comprehensive income (loss)").
The Company determines the proper classification of its marketable debt and
equity securities at the time of purchase and reevaluates such designations as
of each balance sheet date. At January 31, 2001, all marketable securities were
designated as available for sale. Accordingly, these securities are stated at
market value, with unrealized gains and losses reported in a separate component
of stockholders' equity ("accumulated other comprehensive income (loss)").
Realized gains and losses on sale of securities, as determined on a specific
identification basis, are included in net income.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the related improvements.
The Company follows the provisions of Statement of Position No. 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1") and Emerging Issues Task Force 00-2, "Accounting for
Web Site Development Costs", which provides guidance regarding when software
developed or obtained for internal use or development of a web site should be
capitalized. These pronouncements require that certain costs incurred during the
application development stage be capitalized, while costs incurred during the
preliminary project stage and post-implementation/operation stage should be
expensed as incurred. Capitalized costs are amortized over the estimated lives
of the related applications, which
43
46
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
lives range from 2 to 5 years.
INCOME TAXES:
Deferred income taxes are provided for all temporary differences between
the book and tax basis of assets and liabilities. Deferred income taxes are
adjusted to reflect new tax rates when they are enacted into law. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
recognized if it is anticipated that some or all of a net deferred tax asset may
not be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
The Company accounts for stock options and awards in accordance with SFAS
123, "Accounting for Stock-Based Compensation," which allows companies to
continue to recognize compensation expense for grants to employees pursuant to
Accounting Principles Board Opinion No. 25, ("APB 25"), "Accounting for Stock
Issued to Employees" but requires companies to disclose the effect on net income
(loss) and earnings (loss) per share had the Company adopted the provisions of
SFAS 123 requiring the recognition of compensation expense based on the fair
value of the options or awards. See Note L.
EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income (loss), after
reduction for the accretion of the discount on the Company's Series C redeemable
preferred stock (see Note K), 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 2001,
2000 and 1999.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133" ("SFAS 138"). SFAS 138 must first be applied in the first quarter of fiscal
years that begin after June 15, 2000 (the first quarter of Fiscal 2002 for the
Company) and in general requires that entities recognize all derivative
financial instruments as assets or liabilities, measured at fair value, and
include in earnings the changes in the fair value of such assets and
liabilities. SFAS 138 also provides that changes in the fair value of assets or
liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company does not presently utilize derivative
instruments, either for hedging or other purposes, and therefore anticipates
that the adoption of the requirements of SFAS 138 will not have a material
affect on its financial statements.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which replaces SFAS 125. SFAS 140 provides standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001, and is effective for recognition and reclassification of collateral and
for disclosures relating to securitizations and collateral for fiscal years
ended after December 15, 2000. The Company believes that SFAS 140 will not have
a material affect on its financial statements.
44
47
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE B - ACQUISITION
On December 15, 2000, the Company entered into a Merger Agreement and Plan
of Reorganization (the "Merger Agreement") to acquire ZoomLot.
Under the terms of the Merger Agreement, the Company issued to the former
ZoomLot stockholders 270,953 shares of its Series B convertible preferred stock
and 729,047 shares of its Series C redeemable preferred stock, each at $.50 par
value. Subject to certain conditions, the shares of the Series B convertible
preferred stock were convertible into shares of the Company's common stock at
the ratio (subject to adjustment for stock splits and other anti-dilutive
events) of ten shares of common stock for each share of preferred stock. On
December 15, 2000 the Company obtained the right to call for the conversion of
the shares of Series B convertible preferred stock, and the Company converted
the 270,953 shares of the Series B convertible preferred stock into 2,709,530
shares of its common stock (see Note K).
The shares of the Series C redeemable preferred stock are redeemable, at
the option of the holders or the option of the Company, for a price per share
equal to the greater of $15 or ten times (subject to adjustment for stock splits
and other anti-dilutive events) the market price of the Company's common stock
at the time of redemption. The holders of the Series C redeemable preferred
stock may redeem the shares beginning on September 30, 2003, unless there first
occurs one of certain events as described in Note K, in which case the Series C
shares become redeemable upon the occurrence of such event (but in no event
earlier than January 1, 2003). Additionally, of the 729,047 shares of Series C
redeemable preferred stock issued, 666,667 shares are subject to forfeiture, as
described in Note K. Such 666,667 shares of Series C redeemable preferred stock
would not become redeemable until they first are no longer subject to
forfeiture. The remaining 62,380 shares of Series C redeemable preferred stock
are not subject to forfeiture.
The acquisition was accounted for using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). Under APB 16, the tangible assets, identifiable
intangible assets and liabilities of the acquired company are recorded at their
fair value, and the excess of the purchase price over the fair value of the net
(of liabilities) tangible and identifiable intangible assets is recorded as
goodwill. Additionally, under the purchase method of accounting the operating
results of the acquired company are included in the consolidated results of
operations from the date of the acquisition.
In recording the acquisition of ZoomLot, the Company recorded the 270,953
shares of Series B convertible preferred stock issued at a value of $5.34 per
share (an aggregate of $1,447,000), reflecting the average price of the
Company's common stock for the five days subsequent to the execution of the
Merger Agreement of $.534 and the conversion ratio of one share of Series B
convertible preferred stock for 10 shares of the Company's common stock.
The Company recorded the 62,380 shares of Series C redeemable preferred
stock issued and not subject to forfeiture at a value of $9.89 per share (an
aggregate of $617,000), representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to be payable on September 30,
2003.
45
48
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE B - ACQUISITION (cont.)
The Company recorded the 666,667 shares of Series C redeemable preferred
stock issued but subject to forfeiture at a value of $9.53 per share (an
aggregate of $6,353,000), representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to be payable on December 31,
2003. However, because the shares are subject to forfeiture unless certain
conditions are met or events occur, they represent "contingent consideration"
under APB 16. As a result, although the shares have legally been issued, their
value has not been included in the determination of goodwill, and instead is
reflected as a reduction of the carrying amount of redeemable preferred stock
("redeemable preferred stock subject to forfeiture"). The value of any shares of
Series C redeemable preferred stock that become no longer subject to forfeiture
will be added to goodwill, on the basis of the present value of their redemption
value at that time, at such time as the event or condition eliminating the
forfeiture occurs.
The Company determined that the fair value of ZoomLot's tangible assets and
liabilities approximated their historical recorded amounts, and accordingly has
recorded the entire excess of the purchase price over ZoomLot's historical
stockholders' deficit as goodwill. The goodwill will be amortized on a
straight-line basis over three years.
The components and allocation of the purchase price were as follows (in
thousands):
Components of purchase price:
Series B convertible preferred stock $ 1,447
Series C redeemable preferred stock:
Shares not subject to forfeiture 617
Shares subject to forfeiture 6,353
Contingent purchase price:
Series C shares subject to forfeiture (6,353)
Transaction costs 612
-------
Total purchase price $ 2,676
=======
Allocation of purchase price:
Historical net deficit of ZoomLot $ (4,188)
Goodwill 6,864
--------
Total $ 2,676
========
As a part of the Merger Agreement, the Company made a capital contribution
to ZoomLot of approximately $5 million, which ZoomLot used to repay advances
that had been made to it by Cygnet Capital Corporation ("Cygnet Capital"). The
chief executive officer and sole stockholder of Cygnet Capital was also a
stockholder of ZoomLot, and by virtue of the Merger Agreement became the
beneficial holder of 170,701 shares of Series B convertible preferred stock and
459,299 shares of Series C redeemable preferred stock. Upon the December 15,
2000 conversion of the Series B convertible preferred stock into shares of
common stock, that individual became the beneficial owner of 1,707,004 shares
of common stock. That stockholder has also acquired beneficial ownership of
shares of common stock in market purchases, and currently beneficially owns
approximately 18% of the outstanding shares of the Company's common stock. The
stockholder, Cygnet Capital, or another company owned by the stockholder, are
required to repay the $5 million to the Company unless ZoomLot meets the
objectives, or an event occurs, that eliminates the forfeiture of the Class C
redeemable preferred stock (see Note K).
46
49
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE B - ACQUISITION (cont.)
The following sets forth the unaudited pro forma condensed results of
operations for Fiscal 2001 assuming the acquisition of ZoomLot had been
completed on February 1, 2000. ZoomLot began operations in January 2000, and
accordingly pro forma information for the year ended January 31, 2000 is not
presented. The following pro forma information is presented for illustrative
purposes only and does not purport to be indicative of the operating results
that would have been obtained had the acquisition been completed on that date,
nor of future operating results. Pro forma revenues, net loss and loss per share
are as follows (in thousands, except for the per share amount):
Total revenue $ 4,840
Net loss $ (53,370)
Loss per share $ (1.92)
NOTE C - MARKETABLE SECURITIES
The marketable securities as of January 31, 2001 are summarized as follows
(in thousands):
Gross Unrealized
----------------------------------
Cost Gains Losses Fair Value
------- ---------------- -------------- --------------
Equity securities - mutual funds $ 1,127 $ - $ 44 $ 1,083
All marketable securities held by the Company are classified as available
for sale. During Fiscal 2001, the Company invested $25,092,000, which includes
accrued interest, in various debt and equity securities. All the debt securities
held by the Company were sold or called at par value during the fiscal year, and
proceeds of
47
50
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE C - MARKETABLE SECURITIES (cont.)
$23,820,000 were received upon such sales and redemptions. The gross realized
gains and losses for the current year were not material. The Company had no
marketable securities in Fiscal 2000.
NOTE D - INSTALLMENT LOANS, NET
During Fiscal 2001, the Company sold its active loan portfolio and the
majority of its charged-off portfolio for aggregate cash proceeds of
$24,187,000. The Company also received $6,134,000 in actual cash collections on
the loans during Fiscal 2001. The sales of the loans resulted in an aggregate
loss of $1,420,000. The loss includes a charge of $666,000 for the write-off of
deferred loan origination assets and liabilities and the accrual for the
potential repurchase of certain loans for breach of any representation or
warranty made by the Company. The Company also completed the sale of
substantially all of its remaining charged-off loans during the first quarter of
Fiscal 2002 for approximately $300,000.
The following table sets forth the components of and changes in the gross
finance receivable, unearned income, credit loss discount and allowance for
credit losses of the Company's net installment loans as of and for the years
ended January 31, 1999, 2000 and 2001 (in thousands):
Gross Credit Allowance Installment
Finance Unearned Loss for Credit Loans,
Receivable Income Discount Losses Net
---------- ---------- ---------- ----------- ------------
Balance, January 31, 1998 $ 269,690 $ (20,534) $ (34,920) $ (61,789) $ 152,447
Purchases 44,349 (1,840) (15,316) - 27,193
Cash collected (120,934) - - - (120,934)
Charge-offs (77,632) - 29,046 48,586 -
Provision for credit losses - - - (2,961) (2,961)
Interest income - 15,322 - - 15,322
Dealer fees charged - - - (666) (666)
--------- --------- --------- --------- ---------
Balance, January 31, 1999 115,473 (7,052) (21,190) (16,830) 70,401
Purchases 27,061 (1,972) (11,375) - 13,714
Cash collected (68,258) - - - (68,258)
Charge-offs (23,429) - 15,353 8,076 -
Provision for credit losses - - - 6,118 6,118
Interest income - 7,331 - - 7,331
Reclassification - (953) 953 - -
--------- --------- --------- --------- ---------
Balance, January 31, 2000 50,847 (2,646) (16,259) (2,636) 29,306
Purchases - - - - -
Cash collected (6,134) - - - (6,134)
Charge-offs (1,203) - 1,538 (335) -
Provision for credit losses - - - 1,365 1,365
Interest income - 404 - - 404
Reclassification - (417) 417 - -
Sale of loans(1) (43,510) 2,659 14,304 1,606 (24,941)
--------- --------- --------- --------- ---------
Balance, January 31, 2001 $ - $ - $ - $ - $ -
========= ========= ========= ========= =========
(1) Includes cash proceeds of $24,187,000.
48
51
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE E - INVESTMENT IN AFC
On April 5, 2000, the Company, 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 Entertainment, Inc. ("Reading") for
8,999,900 shares of the Company's common stock (which included 2,237,653 shares
issued from treasury stock) and 100 shares of Series A convertible preferred
stock. The Company repurchased the 100 shares of Series A convertible preferred
stock back from Reading on November 3, 2000. See Note K.
AFC is currently owned 50% by the Company, 33.34% by Reading and 16.66% by
Citadel Cinemas, Inc. (a wholly-owned subsidiary of Citadel Holding
Corporation). 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.
The Company also purchased from Reading two separate and independent
options to acquire additional cinema assets owned by Reading in the United
States. During the second quarter of fiscal year 2001, the options lapsed
without being exercised by the Company and the $500,000 paid to acquire them was
charged to expense.
The Company's initial investment was $11,078,000, comprised of (i) the
9,000,000 shares issued, valued at $1.08 per share on the basis of the average
price quoted by the OTC Bulletin Board for the period immediately following
April 5, 2000, (ii) transaction costs, and (iii) the $500,000 paid for one of
the options. The investment exceeds the Company's share of the net assets of AFC
by approximately $5,600,000, which is being treated as goodwill and will be
amortized on the straight-line method over 20 years. The Company uses the equity
method to account for its investment in AFC. AFC uses a December 31 year-end for
financial reporting purposes. The Company 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 2001, the Company recorded income of $230,000 representing its share
of AFC's net income for the nine months ended December 31, 2000.
49
52
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE E - INVESTMENT IN AFC (cont.)
Summarized financial statement information for AFC as of December 31, 2000
and for the year then ended is as follows (in thousands):
Condensed Balance Sheet: December 31,
2000
-------------
Current assets $ 1,239
Property and equipment, net 621
Goodwill 9,250
Other assets 89
-------
$11,199
=======
Current liabilities $ 554
Non-current liabilities 1,052
Members' equity 9,593
-------
$11,199
=======
Condensed Statement of Earnings: For the Year Ended
December 31, 2000
-----------------
Revenues $ 6,462
Film rental 2,087
Operating costs 2,509
Depreciation and amortization 692
General and administrative expenses 184
-------
5,472
-------
Net income $ 990
=======
50
53
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE F - PROPERTY AND EQUIPMENT
The Company, through its wholly-owned subsidiary, ARAC, Inc., owned certain
real property which consisted of two four-story, 55,000 square foot office
buildings and approximately ten and one-half acres of land located in Solon,
Ohio (the "Solon Real Property"). On June 28, 2000, the Company received an
indication of interest from PVF Capital Corp., an Ohio Corporation ("PVF") to
purchase the Solon Real Property and its contents. On August 23, 2000, an
Agreement of Purchase and Sale was entered into between PVF and ARAC, Inc. for
the sale of the Solon Real Property to PVF at a gross sales price of $8,700,000
cash at closing (less brokers' fees, pro-rated real estate taxes, adjustments
attributable to tenant leases, and cost and fees of closing), and the sale was
closed on September 1, 2000. The transaction resulted in a gain of $2,868,000.
Concurrent with the closing the Company entered into a lease agreement for
office space located within the Solon Real Property. The lease agreement
provides the Company office space at a monthly rental of $17,300 for the period
January 1, 2001 through December 31, 2001. The Company may terminate the lease
agreement at any time upon thirty days prior written notice to PVF.
NOTE G - ASSETS HELD FOR SALE
Assets held for sale are as follows (in thousands):
January 31,
----------------
2001 2000
------ -----
Affordable housing investments $2,670 $5,605
Developed real estate leased to commercial tenant - 616
Undeveloped real estate subject to a ground lease - 640
Other assets 115 -
------ ------
Total $2,785 $6,861
====== ======
The Company has certain investments in affordable housing projects which
previously the Company had been holding for realization through the receipt of
distributions from the operations of the projects and the use of the tax credits
generated by the investments. In the fourth quarter of Fiscal 2000, the Company
committed to a plan to sell the investments and recorded, in that quarter, a
write-down of $4,666,000 to reduce the carrying amount of the investments to
their fair value less estimated costs to sell. During the fiscal year ended
January 31, 2001, the Company reduced its original estimate of the fair value of
the investments to $2,670,000, primarily due to the expiration of certain tax
credits and the increase of the effective yield used in determining the fair
value. As a result, the Company recorded an additional write-down of $3,183,000.
The Company expects to complete the sale of the investments by the end of the
second quarter of Fiscal 2002 and future operating results could be affected by
revisions of the estimates of the fair value less estimated costs to sell the
investments, which changes could be material due to the uncertainties inherent
in the estimation process. As a limited partner in these affordable housing
projects, the Company is required to make future contributions on January 31,
2002, of $432,000, plus interest at an average rate of 8.9% per annum.
During the fourth quarter of Fiscal 2000, the Company also committed to
plans to sell certain real estate investments. During Fiscal 2001, the Company
sold the investments for aggregate cash proceeds of approximately $1,000,000 and
recorded a loss on sale of $215,000.
51
54
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE H - FINANCIAL INSTRUMENTS
The Company has various financial instruments including cash and cash
equivalents, marketable securities, investments in affordable housing limited
partnerships, and miscellaneous other assets. Many of these instruments are
short-term in nature and the fair value of these financial instruments has been
estimated based on available market information and appropriate valuation
methodologies. The Company has determined that their carrying values approximate
estimated fair values.
The Company determined the fair value of installment loans using the
mark-to-market accounting method for dealers in securities under section 475 of
the Internal Revenue Code. The carrying value and fair value was $29,306,000 and
$29,585,000, respectively, at January 31, 2000. During Fiscal 2001, the Company
sold its active loan portfolio.
NOTE I - OTHER LIABILITIES
Other liabilities are as follows (in thousands):
January 31,
----------------------
2001 2000
-------- --------
Accounts payable $ 363 $ 632
Accrued litigation expenses 826 7,591
Accrued expenses 1,930 1,974
Accrued restructuring costs (Note O) 855 -
Accrued state and local taxes 577 1,232
Deferred capital contributions (Note G) 432 1,639
------- -------
Total $ 4,983 $13,068
======= =======
52
55
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE J - 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,
--------------------------------
2001 2000 1999
--------- -------- ------
Current
Federal $(1,200) $(2,848) $ -
State - (1,000) -
------- ------- ---
(1,200) (3,848) -
Deferred
Federal - - -
State - - -
------- ------- ---
- - -
------- ------- ---
Total (1,200) (3,848) -
Allocated to discontinued operations - (562) -
------- ------- ---
Continuing operations $(1,200) $(3,286) $ -
======= ======= ===
As of January 31, 2001 the Company has net operating loss carryforwards of
$65,616,000 that may be used to reduce future taxable income, subject to
limitations. Such net operating loss carryforwards will expire $23,348,000 in
Fiscal 2019, $21,177,000 in Fiscal 2020, and $21,091,000 in Fiscal 2021.
As a result of the Company's November 3, 2000 repurchases of shares of its
common stock (see Note K), the Company 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 net operating loss carryforwards described above, the use of
net operating loss carryforwards totaling $60,343,000 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
$5,273,000 as of January 31, 2001, are not subject to the Section 382
limitation.
As of January 31, 2001, the Company also has unused low income housing
credits totaling $5,598,000 which expire $1,395,000 in Fiscal 2013, $1,406,000
in Fiscal 2019, $1,397,000 in Fiscal 2020 and $1,400,000 in Fiscal 2021. Of such
low income housing credits, $5,248,000 were generated prior to November 3, 2000
and are therefore subject to the Section 383 limitation described above.
As of January 31, 2001 the Company has $3,004,000 of alternative minimum
tax credits, which may be applied against any future alternative minimum taxes,
which exceed regular income taxes. These credits may be carried forward
indefinitely and are also subject to the Section 383 limitation.
At the date of its acquisition ZoomLot had net operating loss carryforwards
of approximately $2,000,000. The Company may use these net operating loss
carryforwards through Fiscal 2021 to reduce the taxable income generated by
ZoomLot, subject to certain annual limitations.
53
56
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE J - INCOME TAXES (cont.)
The components of the net deferred tax asset (liability) are as follows (in
thousands):
January 31,
---------------------
2001 2000
--------- ------
Deferred tax assets:
Depreciation $ 167 $ -
Self-insurance claims 339 1,420
Allowance for credit losses - 923
State income taxes 94 551
Accrued liabilities 1,229 3,888
Tax credits carryforwards 8,602 7,655
Net operating loss carryforward 23,666 15,771
Other 3 221
-------- --------
Total deferred tax assets 34,100 30,429
-------- --------
Deferred tax liabilities:
Depreciation - (726)
Limited partnership investments (1,180) (1,821)
Mark-to-market valuation and related income adjustments - (76)
Other - (376)
-------- --------
Total deferred tax liabilities (1,180) (2,999)
-------- --------
Net deferred tax asset before valuation allowance 32,920 27,430
Less: valuation allowance (32,920) (27,430)
-------- --------
Net deferred tax asset $ - $ -
======== ========
A valuation allowance for all of the Company's net deferred tax assets has
been provided as the Company is unable to determine, at this time, that the
generation of future taxable income against which the net operating loss and tax
credit carryforwards could be used can be predicted to be more likely than not.
The net change in the valuation allowance for the years ended January 31, 2001,
2000 and 1999 was $5,490,000, $6,219,000 and $4,618,000, respectively.
The Company was able to carryback its Fiscal 1998 net operating loss and
received a refund of approximately $47,000,000 in 1999 of previously paid taxes.
In addition, the Company has claims for tax refunds in the amount of $3,664,000
at January 31, 2001.
54
57
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE J - INCOME TAXES (cont.)
Reconciliations of the federal statutory tax rate to the effective tax rate
for continuing operations are as follows:
Years Ended January 31,
-----------------------------------------
2001 2000 1999
------------ ------------- ----------
Statutory rate (35.0)% (35.0)% (35.0)%
State income taxes, net of federal tax benefit 0.9 (5.0) 9.4
Deferred tax valuation allowance 11.4 35.8 28.7
Tax credits (2.0) 2.7 (9.4)
Adjustment to prior year carryback estimates (2.5) (18.9) -
Common stock repurchase costs 25.8 - -
Other (1.0) 1.5 6.3
------ ------ -------
Effective Tax Rate (2.4)% (18.9)% 0%
======= ====== =======
NOTE K - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
(A) Redeemable Preferred Stock
The following sets forth the changes in redeemable preferred stock for the
year ended January 31, 2001 (dollars in thousands):
Shares Dollars
------- ----------
Issuance of Series C redeemable preferred
stock for the acquisition of ZoomLot
Shares not subject to forfeiture 62,380 $ 617
Shares subject to forfeiture 666,667 6,353
Contingent purchase price (6,353)
Accretion of discount to redemption price 12
-------- --------
Balance, January 31, 2001 729,047 $ 629
======== ========
The Series C redeemable preferred stock has a par value of $.50 per share,
and has no conversion or voting rights. No dividends shall be made with respect
to any share of common stock unless a dividend in an amount equal to ten times
the amount of the dividend payable with respect to a share of common stock is
paid with respect to each share of the Series C redeemable preferred stock.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of shares of Series C redeemable
preferred stock shall be entitled to receive an amount per share equal to ten
times the amount payable per share of common stock upon such liquidation,
dissolution or winding up.
55
58
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE K - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (cont.)
The holders of the Series C redeemable preferred stock have certain rights
to require the redemption of the shares. At any time after the earlier of
September 30, 2003 or the occurrence of a "redemption event" (but in no event
earlier than January 1, 2003) the holder of a share of Series C redeemable
preferred stock will be entitled to redeem each Series C share for a cash
payment by the Company equal to the greater of (i) $15.00 (as adjusted for any
stock splits, stock dividends, recapitalizations or similar events), plus all
declared but unpaid dividends on such shares or (ii) ten times the fair market
price (determined based on the average daily closing price of the Company's
common stock for the twenty days preceding the redemption date) of a share of
common stock as of the date notice of redemption is received by the Company.
However, any shares of Series C redeemable preferred stock that are subject to
the forfeiture provisions of the Merger Agreement (see Note B) may not be
redeemed until such forfeiture provisions no longer apply. A "redemption event"
will be deemed to have occurred if (i) ZoomLot meets an "objective", as
described below, which eliminates the forfeiture of Series C shares, or (ii)
there occurs a "valuation event" which eliminates the forfeiture of the Series C
shares.
666,667 shares of the Series C redeemable preferred stock are subject to
forfeiture unless certain "objectives" are met or certain "valuation events"
occur. Specifically, one-half of those shares will be forfeited, if, by December
31, 2003, ZoomLot, including any of its subsidiaries, has failed to achieve zero
or positive earnings, before interest expense, interest income, depreciation,
amortization and extraordinary items but after applicable income taxes, for a
period of six consecutive months. The remaining one-half of those shares will be
forfeited if, by December 31, 2003, ZoomLot, including any of its subsidiaries,
has not achieved at least $4.5 million in earnings before interest, taxes,
depreciation and amortization for a period of twelve consecutive months. If,
however, certain "valuation events" should occur prior to December 31, 2003,
those financial performance objectives will be deemed to have been achieved.
These valuation events generally consist of (i) transaction that would involve
an investment in ZoomLot or one of its subsidiaries of at least $10 million,
where the pre-investment valuation of ZoomLot or any subsidiary of ZoomLot is at
least $30 million, (ii) a change in control of the Company or (iii) the
termination of the key executives of ZoomLot without cause.
The Company also has the right, at any time after January 1, 2003, to
redeem any or all of the Series C redeemable preferred stock that then remains
outstanding for a cash payment by the Company equal to the greater of (i) $15.00
(as adjusted for any stock splits, stock dividends, recapitalizations or similar
events), plus all declared but unpaid dividends on such shares or (ii) ten times
the fair market price (determined based on the average daily closing price of
the Company's common stock for the twenty days preceding the redemption date) of
a share of common stock as of the date notice of redemption is delivered by the
Company. If when the Company calls for the redemption of shares of the Series C
redeemable preferred stock there remain outstanding shares of Series C
redeemable preferred stock which are still subject to forfeiture, the Company
may elect to first redeem the shares of Series C redeemable preferred stock that
are not subject to forfeiture before redeeming shares of Series C redeemable
preferred stock that are subject to forfeiture.
The Company recorded the 62,380 shares of Series C redeemable preferred
stock issued and not subject to forfeiture at a value of $9.89 per share (an
aggregate of $617,000), representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to be payable on September 30,
2003. Between the acquisition date and September 30, 2003 the carrying amount of
the Series C redeemable preferred stock, which is classified as redeemable
preferred stock on the Company's consolidated balance sheet, will be accreted to
the redemption value of $15 per share. Additionally, the amount of the periodic
accretion, which will reduce net income in computing earnings per share, will be
adjusted if the redemption price becomes greater than $15 per share as the
result of an increase in the price of the Company's common stock to over $1.50
per share, and the
56
59
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE K - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (cont.)
rate of accretion will be accelerated if a "valuation event" occurs, making the
Series C redeemable preferred stock redeemable earlier than September 30, 2003.
The Company recorded the 666,667 shares of Series C redeemable preferred
stock issued but subject to forfeiture at a value of $9.53 per share (an
aggregate of $6,353,000), representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to be payable on December 31,
2003. However, because the shares are subject to forfeiture unless certain
conditions are met or events occur, they represent "contingent consideration"
under APB 16. As a result, although the shares have legally been issued, their
value has not been included in the determination of goodwill, and instead is
reflected as a reduction of the carrying amount of redeemable preferred stock.
The value of any shares of Series C redeemable preferred stock that become no
longer subject to forfeiture will be added to goodwill, based on the present
value of their redemption value at that time, at such time as the event or
condition eliminating the forfeiture occurs.
(B) Preferred Stock
The following sets forth the changes in preferred stock for the year ended
January 31, 2001 (dollars in thousands):
Shares
-------------------------------
Series A Series B Amount
--------------- -------------- --------------
Issuance of Series A
shares for investment in AFC 100 - $ -
Repurchase of Series A shares (100) - -
Issuance of Series B
shares for acquisition of ZoomLot - 270,953 135
Conversion of Series B shares - (270,953) (135)
-------- ------------ ---------
Balance, January 31, 2001 - - $ -
======== ============ =========
The Company 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. The Company's Series C redeemable preferred stock
constitutes a series of preferred stock. As a result, as of January 31, 2001,
the Company has outstanding a total of 729,047 shares of preferred stock,
comprised of the Series C shares, and had 1,270,953 preferred shares available
for future issuance.
The Series A convertible preferred stock was convertible into shares of the
Company's common stock on a one for one basis, subject to traditional
antidilution adjustments. The Series A convertible preferred stock was entitled
to vote on a share for share basis with the Company's common stock as a single
class, except that as a separate class the Series A convertible preferred stock
was required to approve any amendments to the Company's charter, any amendments
to the Company's bylaws made by the stockholders, or, to the extent permitted by
law, the removal of any director from the Company's Board of Directors. The
Series A convertible preferred stock had a liquidation value of $1.50 per share
and was entitled to a dividend preference equal to any dividends declared on the
Company's common stock, determined on a per share basis. On November 3, 2000,
the Company repurchased the 100 shares of Series A convertible preferred stock
back from Reading as part of the settlement described below. These shares have
been retired and are no longer outstanding as of January 31, 2001.
57
60
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE K - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (cont.)
The Series B convertible preferred stock had a par value of $.50 per share.
The holders of the Series B convertible preferred stock could at any time
convert the Series B shares into shares of the Company's common stock at the
ratio (subject to adjustment for stock splits and other anti-dilutive events) of
ten shares of common stock for each share of Series B convertible preferred
stock. The holders of the outstanding Series B convertible preferred stock had
certain voting rights.
The terms of the Series B convertible preferred stock provided that it
would automatically convert into shares of the Company's common stock, at the
ratio of ten shares of the Company's common stock for each share of Series B
convertible preferred stock, upon the termination of the Stock Purchase and
Standstill Agreement, executed November 3, 2000 between the Company and the
Reading Stockholders (see Note K (c) below). That agreement was terminated in
connection with the Company's December 15, 2000 repurchase of additional shares
of common stock from the Reading Stockholders described below. As a result, on
December 15, 2000 the Company converted the 270,953 shares of the Series B
convertible preferred stock into 2,709,530 shares of its common stock.
(C) Common Stock Repurchases
During Fiscal 2001, the Company repurchased 25,943,360 shares of its common
stock. The Fiscal 2001 repurchases of common stock included the repurchase of
shares from Mr. Sam Frankino and certain parties related to him, and repurchases
from Reading and certain parties related to it.
On November 3, 2000, the Company entered into a Settlement Agreement and
Release (including Agreement for Sale of Shares) (the "Settlement Agreement")
with Mr. Sam Frankino, individually, as trustee and president of the Samuel J.
Frankino and Connie M. Frankino Charitable Foundation, as trustee of the Corrine
L. Dodero Trust for the Arts and Sciences, and as managing partner of the
Frankino and Frankino Investment Company, a Nevada general partnership (Mr.
Frankino and all such entities referred to herein collectively as "Frankino
Parties"). The Settlement Agreement, among other things, settled all of the
litigation between the Company and Mr. Frankino and resulted in the repurchase
by the Company of all the Company securities held by Mr. Frankino, the other
Frankino Parties and certain other of his related parties. In conjunction with
the settlement of the above-referenced litigation, the parties to the
litigations, as well as William Dodero, Lorraine Dodero, William Maund and
Robert Upton, exchanged general releases and releases against future claims.
Under the terms of the Settlement Agreement, the Company (i) repurchased
an aggregate of 15,743,012 shares of common stock of the Company owned by the
Frankino Parties for a total purchase price of $35,340,000, or $2.245 per share
of common stock, (ii) and repurchased an aggregate of 120,348 shares of common
stock of the Company owned by certain of the Company's directors, including
shares of common stock held by William Maund, shares of common stock held by
Lorraine Dodero, shares of common stock held by William Dodero and Lorraine
Dodero, as joint tenants with rights of survivorship, and shares of common stock
held by Lorraine Dodero, as a trustee of a grantor trust for the benefit of her
daughter, Corrine Dodero, for a total purchase price of $180,522 (such
repurchase of the 120,348 shares was completed on January 4, 2001), or $1.50 per
share of common stock, and (iii) reimbursed certain legal fees previously
incurred by Mr. Frankino in the amount of $2,011,600.
As a result of the repurchases of shares of common stock under the
Settlement Agreement, the Company expensed in the fourth quarter of Fiscal 2001,
$25,111,000, representing the excess of the amount paid under
58
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE K - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (cont.)
the Settlement Agreement over the market value of the shares repurchased.
On November 3, 2000, simultaneously with the execution and closing of the
Settlement Agreement with Mr. Frankino and the Frankino Parties, the Company
executed and closed a Stock Purchase and Standstill Agreement (the "Reading
Agreement") with Reading Entertainment, Inc., FA, Inc., Citadel Holding
Corporation, and Craig Corporation (collectively the "Reading Stockholders").
Prior to the execution of the Reading Agreement, the Reading Stockholders
collectively owned an aggregate of 10,055,000 shares of Company common stock and
100 shares of Series A convertible preferred stock, par value $.05 per share.
Under the terms of the Reading Agreement, the Company repurchased from FA,
Inc. 5,277,879 shares of common stock of the Company and all 100 shares of
Series A convertible preferred stock for an aggregate purchase price of
$8,469,000, or $1.60 per share.
On December 15, 2000, the Company entered into a second agreement with
Reading Stockholders for the repurchase of 4,777,121 shares of the Company's
common stock for an aggregate price of $8,000,000, and on December 21, 2000, the
Company purchased 25,000 shares of common stock from an associate of Reading for
$41,000. As a part of the second agreement the provisions of the November 3,
2000 Reading Agreement between the Reading Stockholders and the Company that had
continuing effect were terminated.
As a result of the repurchases of shares of common stock from the Reading
Stockholders and associate, the Company expensed in the fourth quarter of Fiscal
2001 $10,482,000, representing the excess of the amount paid for the shares
repurchased from the Reading Stockholders over their market value.
During Fiscal 2000, the Company repurchased 2,849,630 shares of its common
stock.
The Fiscal 2000 repurchase of 2,849,630 shares of common stock was pursuant
to an option agreement (the "Option Agreement"), which the Company entered into
with a then-unaffiliated stockholder on May 10, 1999. The Company acquired the
option by paying the stockholder $1,000,000, which was paid on May 12, 1999, all
of which was to be credited toward the aggregate exercise price of $1.50 per
share payable by the Company upon any exercise of its option. On June 24, 1999,
the Company exercised its right under the Option Agreement to extend the period
of the option ("the First Extension") for 45 days, until August 8, 1999, by
paying the stockholder an additional $500,000, of which $250,000 was to be
credited towards the aggregate exercise price payable upon any exercise of the
option. On August 8, 1999, the Company and the unaffiliated stockholder agreed
to an additional extension ("the Second Extension") of the option, for 120 days,
for which the Company paid the stockholder an additional $1,000,000, of which
$750,000 was to be credited towards the aggregate exercise price payable upon
any exercise of the option.
The Company accounted for the initial option purchase, and the extension
payments, by initially determining the fair value of the option or option
extension to be de minimis. In determining the fair value of the option or
extension, the Company considered the period over which the option or extension
was exercisable, the option exercise price, the market price of the Company's
common stock and the portion of the payments creditable to the payment due upon
any exercise of the option. The excess of the option or extension payments over
the market value of the underlying common stock was charged to expense. An
aggregate of $2,224,000 was charged to expense in Fiscal 2000, which represented
the total of the $1,000,000 payment made to obtain the initial option and
$1,224,000 of the payments made to obtain the First Extension and Second
Extension.
59
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE K - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (cont.)
On November 22, 1999, the Board of Directors of the Company approved the
exercise of its option. On December 2, 1999, the Company exercised such option
and paid the unaffiliated stockholder an additional $2,274,000 for the 2,849,630
shares subject to the option, which amount equals the product of 2,849,630 and
the $1.50 per share exercise price, less the $2,000,000 in aggregate credits to
which the Company became entitled under the Option Agreement, the First
Extension and the Second Extension. The Company recorded the 2,849,630
repurchased shares at a price of $.895 per share, or an aggregate of
approximately $2,551,000, representing the market price of the common stock at
the date the Second Extension was agreed to.
NOTE L - BENEFITS PLANS
The Company's 1993 Equity Incentive Plan provides for the granting of
incentive and non-qualified stock options, stock appreciation rights, and common
stock and restricted common stock awards to key employees. The total number of
shares available for options or awards granted under this Plan is 2,200,000
shares. There were (14,641), (19,211), and 76,400 shares of restricted common
stock awarded (cancelled) under this Plan during the years ended January 31,
2001, 2000, and 1999, respectively. There were 118,952 shares available for
future stock awards or option grants at January 31, 2001.
The Company's 1983 Stock Option Plan provided for the granting of both
incentive and non-qualified stock options to key employees. This Plan terminated
on April 17, 1993 and no further options may be granted, although options still
remain outstanding. Options previously granted under the Plan extend for ten
years and become exercisable in installments over the first five years.
The Company's 1995 Dealer Stock Option Plan for Member Dealers provided for
the granting of up to 550,000 common stock options to member dealers based upon
certain volume criteria. The options became exercisable over a three-year
period. This program was discontinued during Fiscal 1998. During Fiscal 2001,
the remaining options were cancelled and there are no options currently
outstanding.
60
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE L - BENEFITS PLANS (cont.)
A summary of all options granted, exercised, and cancelled by all plans
were as follows:
Weighted Average
Number of Exercise Price
Options Per Share
-------------- ----------------
Balance January 31, 1998 365,166 $ 8.94
Granted 513,000 1.34
Exercised - -
Cancelled (242,556) 8.10
--------
Balance January 31, 1999 635,610 3.12
Granted 800,000 1.03
Exercised - -
Cancelled (528,650) 2.81
--------
Balance January 31, 2000 906,960 1.46
Granted 1,200,000 0.66
Exercised - -
Cancelled (222,560) 2.25
---------
Balance January 31, 2001 1,884,400 0.86
=========
The weighted-average fair value of options granted during Fiscal 2001, 2000
and 1999 were was $0.51, $.94 and $1.18 per share, respectively.
The outstanding options expire at dates through the year 2010. A summary of
stock options outstanding and exercisable as of January 31, 2001 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------ ------------------------------------
Range of Weighted Average Weighted Average Weighted Average
Per Share Number Remaining Contractual Per Share Number Per Share
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- --------------- -------------- ------------------------ ---------------------- ------------ ----------------------
$0.66 to $0.92 1,275,000 9.76 $0.68 775,000 $0.69
$1.03 to $1.15 455,000 8.42 1.04 455,000 1.04
$1.66 150,000 7.27 1.66 150,000 1.66
$8.18 to $8.98 4,400 0.73 8.38 4,400 8.38
------------- -----------
Total 1,884,400 1,384,400
============= ===========
61
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE L - BENEFITS PLANS (cont.)
If the Company had recorded compensation expense using the fair value
method of SFAS 123, the Company's net after tax loss and loss per share would
have been as follows (in thousands, except per share amounts):
Years Ended January 31,
------------------------------------------------------------
2001 2000 1999
----------------- ------------------- -------------------
Net loss applicable to common stock, as reported $ (47,295) $ (13,315) $ (15,615)
Pro forma net loss (47,629) (13,696) (16,054)
Loss per share, as reported (1.70) (.47) (.55)
Pro forma loss per share (1.72) (.49) (.56)
The fair value of each award or option grant included in the above
calculations is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
the years ended January 31, 2001, 2000 and 1999.
Years Ended January 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ------------------ -----------------
Risk-free interest rate 5.24% 6.109% 5.175%
Expected life 7.00 years 7.00 years 7.00 years
Expected volatility 93.06% 108.499% 111.733%
Dividend yield 0% 0% 0%
The effects of applying SFAS 123 for the pro forma disclosures are not
representative of the effects expected on reported net earnings (loss) per share
in future years, since the valuations are based on highly subjective assumptions
about the future, including stock price volatility and exercise patterns.
The Company has a 401(k) Savings and Profit-Sharing Plan ("401k") covering
substantially all employees who have completed one year of service with the
Company. This savings plan allows eligible employees to contribute up to 15
percent of their compensation on a pre-tax basis. The Company matches 50% of the
first 4% of the employees' contribution. Company contributions are vested
incrementally over 6 years. The charge to operations for the Company's
contribution was $25,700, $67,300 and $69,500 for years ended January 31, 2001,
2000 and 1999, respectively. The Company ceased allowing purchases of Company
common stock in the 401(k) plan effective July 1, 1997.
The Company does not provide post-retirement or post-employment benefits to
its employees.
In December 2000, the Company entered into an employment agreement with Mr.
James McNamara for his employment as the Company's Chief Executive Officer.
Under the contract, Mr. McNamara was entitled to receive a stock award of
350,000 shares of the Company's common stock upon the signing of the contract,
and Mr. McNamara surrendered options for the purchase of 175,000 shares of the
Company's common stock, which had previously been awarded to him. The Company
charged to expense, and recorded in stockholders' equity ("Common stock to be
issued"), the fair value of the 350,000 shares of common stock ($219,000), which
became issuable upon of the signing of the contract. The 350,000 shares of
common stock were issued in March 2001.
62
65
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE M - RELATED PARTY TRANSACTIONS
The Company obtains investor relations and other financial advisory
services from Mallory Factor, Inc. These services are obtained under a one-year
agreement originally entered into in April 2000 and extended for one year in
April 2001. In Fiscal 2001, the Company paid Mallory Factor, Inc. $251,000 under
the agreement. Mallory Factor is a member of the Company's Board of Directors.
During Fiscal 2001, the Company paid $43,000 to Automotive Personnel, LLC,
for placement services rendered in Fiscal 1998. In addition, the Company paid
$59,750 in the first quarter of Fiscal 2002 for outplacement services provided
to the employees of the Company terminated as a part of its restructuring plan.
The President of Automotive Personnel, LLC, is a member of the Company's Board
of Directors.
NOTE N - COMMITMENTS AND CONTINGENCIES
In the normal course of its business, the Company is named as defendant in
legal proceedings. It is the policy of the Company to vigorously defend
litigation and/or enter into settlements of claims where management deems
appropriate.
The Company and certain of its former officers and directors were named as
defendants in eleven purported class action lawsuits which were filed in the
United States District Court for the Northern District of Ohio subsequent to the
January 1998 resignation of the Company's former independent auditors, Deloitte
& Touche, LLP ("Deloitte & Touche"). The actions, which were consolidated,
alleged fraud and other violations of the federal securities laws and seeks
money damages as the result of various alleged frauds and violations of the
Securities Exchange Act of 1934, including misrepresentations about the adequacy
of the Company's allowance for credit losses and its loan underwriting
practices. In April 2000, the Company and the class action plaintiffs'
representatives reached an agreement in principle to settle the class action
securities litigation. Under the terms agreed upon, the Company agreed to pay to
the plaintiffs' class $6.5 million in consideration for, among other things, the
release of all defendants from liability. The settlement was not an admission of
liability by any party. At January 31, 2000 the Company accrued the $6.5 million
settlement amount together with an estimate of the legal fees that will be
incurred in completing the settlement. The settlement was approved and completed
in Fiscal 2001.
The Securities and Exchange Commission, the United States Attorney for the
Northern District of Ohio, and the Federal Bureau of Investigation, are
investigating the issues raised as the result of the resignation of Deloitte &
Touche. The Company is cooperating fully with the investigations. The ultimate
outcome of these investigations on the Company cannot presently be predicted and
the Company has not recorded any provision for any monetary penalties that may
result from civil or criminal proceedings that might be commenced at the
conclusion of such investigations. An unfavorable resolution of any of these
investigations could have a material adverse effect on the Company's financial
position, results of operations and liquidity.
Following the resignation of Deloitte & Touche, the Company instituted
investigations of its previous financial reporting and underwent changes in
management. In Fiscal 1998, the Company accrued initial estimates of certain
resulting costs, and additional costs in excess of those initial estimates are
being expensed as incurred or as such estimates are revised.
63
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE N - COMMITMENTS AND CONTINGENCIES (cont.)
Included in the results of operations for Fiscal 2001, 2000 and 1999,
respectively, are the following costs (in thousands):
Years Ended January 31,
---------------------------------------------
2001 2000 1999
------------ ------------ -------------
Legal and settlement cost relating to litigation matters $ 5,799 $ 7,037 $ 2,545
Crisis management consulting 116 3,063 3,898
Financing, loan waiver and prepayment fees - 408 1,483
Fees for special independent audits - 523 845
Costs of special investigations - 273 654
Other 375 4 160
------- -------- -------
$ 6,290 $ 11,308 $ 9,585
======= ======== =======
In December 2000, the Company entered into an employment agreement with Mr.
James McNamara for his employment as the Company's Chief Executive Officer.
Under the contract, Mr. McNamara is entitled to receive a $1,000,000 cash bonus
immediately upon the Company's common stock being listed on the NASDAQ Stock
Market, the American Stock Exchange or the New York Stock Exchange; provided,
however, that such listing shall have occurred prior to December 31, 2003.
NOTE O - RESTRUCTURING
During January 2001, the Company committed to a plan of restructuring its
operations and relocating its corporate offices from Solon, Ohio to New York
City, New York. As a part of the plan, and in accordance with EITF Issue No.
94-3, "Liabilities Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity", the Company recorded a restructuring charge of
$1,777,000 which is comprised of a write-down for property and equipment of
$922,000 and the accrual of expenses aggregating $855,000. The accrual
represents the costs to be incurred in the completion of the steps contained in
the restructuring plan. The nature of the costs accrued and the changes in the
amounts accrued are as follows (in thousands):
Year Ended January 31, 2001
----------------------------------------------
Initially Accrued at
Accrued Incurred Year End
-------------- ------------- -------------
Employee termination costs $ 575 $ - $ 575
Lease terminations 130 - 130
Outplacement fees and other 150 - 150
------------- ------------ ------------
Total $ 855 $ - $ 855
============= ============ ============
64
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE P - DISCONTINUED OPERATIONS
The Company previously engaged in the rental of automobiles on a short-term
basis, principally to the insurance replacement market. In Fiscal 1996, the
Company 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 the Company.
The Company also had a dealership operation that sold cars that were
retired from the rental fleet, primarily to member dealers of the Company's
financial services business. That operation was discontinued in Fiscal 1997 as
the result of the Company's disposal of its automobile rental operations, and
the results of the operation of the dealership are included in the results of
discontinued operations.
Through October 1, 1995, the Company was, when required by either governing
state law or the terms of its rental agreement, self-insured for the first
$1,000,000 per occurrence, and for losses in excess of $5,000,000 per
occurrence, for bodily injury and property damage resulting from accidents
involving its rental vehicles. The Company also self-insured, up to certain
retained limits, for bodily injury and property damage resulting from accidents
involving Company vehicles operated by employees within the scope of their
employment.
Prior to Fiscal 2000, the Company estimated its future payments for
self-insurance liabilities based upon an actuarial analysis of reported and
incurred but not reported claims. In Fiscal 2001 and 2000, due to the number of
years since the Company exited the rental car business and the reduction in the
number of open claims, the Company used the services of a claims review
specialist to review all open claims and determine the required case reserve on
a claim by claim basis. Changes in estimates of liabilities resulting from this
analysis are recognized in income in the period in which the estimates are
changed. As a result of favorable settlements of open claims, the Company
experienced a reduction in expense in Fiscal 2001. Self-insurance claims expense
(income), which related principally to the rental vehicles and is included in
discontinued operations, was $(1,348,000) for Fiscal 2001, $600,000 for Fiscal
2000 and $50,000 for Fiscal 1999. Included in claims expense are allocated loss
adjustment expenses relating to cost incurred for legal and processing the
claims. This expense (income) included in discontinued operations as an
adjustment to the loss on disposal of operations was $(308,000) for Fiscal 2001,
$28,000 for Fiscal 2000 and $88,000 for Fiscal 1999. The Company's aggregate
self-insurance claims liability of $970,000 as of January 31, 2001 is subject to
further revision as new information becomes available, and such revisions may be
material due to the uncertainties inherent in the estimation process.
65
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE P- DISCONTINUED OPERATIONS (cont.)
Summarized results of discontinued operations are as follows (in
thousands):
Year Ended January 31,
--------------------------------
2001 2000 1999
--------- -------- -------
Revenue $ - $ - $ -
Operating expense (1,348) 600 (538)
General and administrative expenses - (807) -
------- ------- -------
(1,348) (207) (538)
------- ------- -------
Income before income taxes 1,348 207 538
Provision (benefit) for income taxes - (562) -
------- ------- -------
Income from operations 1,348 769 538
Income (loss) on disposal of operations, net of tax 308 (28) (88)
------- ------- -------
Income from discontinued operations $ 1,656 $ 741 $ 450
======= ======= =======
The Fiscal 1999 income of $450,000 represents the effects of refunds from a
funded workers' compensation partnership related to the discontinued operations.
The Fiscal 2000 income of $741,000 represents the effects of negative
operating expenses of $207,000, an income tax benefit of $562,000, and a
revision of the loss on the disposal of the discontinued operation of $28,000,
net of tax. The negative operating expenses reflect the reversal of previously
accrued state taxes (other than income taxes) as the result of the settlement of
certain tax liabilities at amounts less than previously estimated and the
expiration of the statute of limitations with respect to certain other state
taxes, offset by a provision of $600,000 for self-insured liabilities. The
income tax benefit reflects the reversal of previously accrued income taxes as
the result of similar settlements and expiration of statute of limitation as
described above.
The Fiscal 2001 income of $1,656,000 represents the negative operating
expenses of $1,348,000 and a reduction of the loss on the disposal of the
discontinued operations of $308,000. The negative operating expenses and loss on
disposal are due to the favorable settlement of certain self-insured claims.
NOTE Q - SEGMENT INFORMATION
During Fiscal 1999 and Fiscal 2000 the Company operated in a single
operating segment; investing in sub-prime used automobile loans (the "automobile
financing" segment).
66
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NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE Q - SEGMENT INFORMATION (cont.)
In Fiscal 2001, as the result of its investment in AFC and its acquisition
of ZoomLot, the Company began to classify its operations into three operating
segments:
- the automobile financing segment;
- the e-commerce segment, which is comprised of ZoomLot's
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 used car dealer's customers with
financing, insurance, and other services. ZoomLot currently
provides these services, on a limited basis, using a combination
of Internet and manual processes, and is continuing its efforts
to develop a fully e-commerce process;
- the movie exhibition segment, which is comprised of the
activities of AFC.
The Company reports and evaluates the performance of its operating segments
on the basis of revenues and income (loss) before income taxes. In measuring
revenues and income (loss) before income taxes, the Company's operating segments
use the same accounting principles described in Note A. However, the revenues
and income (loss) before income taxes reported by each of the Company's
operating segments is not necessarily indicative of what the results of
operations would have been for such operating segment had it operated as a
stand-alone entity.
Operating segment information for the year ended January 31, 2001 is as
follows (in thousands):
Automobile Movie General
E-Commerce Financing Exhibition Corporate Consolidated
---------------- --------------- --------------- -------------- -------------
Revenues $ 80 $ 527 $ 230 $ 3,872 $ 4,709
Unusual items:
Loss on sale of loans - 1,420 - - 1,420
Litigation and other charges - - - 6,290 6,290
Write-off of options - - 500 - 500
Gain on sale of property - - - (2,868) (2,868)
Cost related to purchase of shares - - - 35,593 35,593
Write-down of assets held for sale - - - 3,398 3,398
Restructuring charges - 869 - 908 1,777
Income (loss) before income taxes (628) (2,096) (270) (47,145) (50,139)
Identifiable assets 9,527 82 10,252 19,205 39,066
67
70
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
NOTE R - QUARTERLY FINANCIAL DATA (Unaudited)
The following tables present unaudited quarterly financial information for
Fiscal 2001 and 2000 (in thousands, except per share amounts):
Quarter
--------------------------------------------------------------
First Second Third Fourth
------------- ------------- -------------- -----------
2001
----
Total Revenue(1) $ 1,492 $ 1,308 $ 1,336 $ 573
======== ======== ======== ========
Loss from continuing operations $ (5,723) $ (815) $ 13 $(42,414)
Discontinued operations, net of tax - 676 383 597
-------- -------- -------- --------
Net loss $ (5,723) $ (139) $ 396 $(41,817)
======== ======== ======== ========
Basic and Diluted (loss) Earnings Per Share(2)
Continuing operations $ (.20) $ (.02) $ - $ (3.19)
Discontinued operations - .02 .01 .04
-------- -------- -------- --------
Net loss per share $ (.20) $ - $ .01 $ (3.15)
======== ======== ======== ========
2000
----
Total Revenue(1) $ 2,572 $ 2,206 $ 2,148 $ 2,834
======== ======== ======== ========
Loss from continuing operations $ (4,143) $ (4,697) $ (1,163) $ (4,053)
Discontinued operations, net of tax - - - 741
-------- -------- -------- --------
Net loss $ (4,143) $ (4,697) $ (1,163) $ (3,312)
======== ======== ======== ========
Basic and Diluted (loss) Earnings Per Share(2):
Continuing operations $ (.14) $ (.16) $ (.04) $ (.15)
Discontinued operations - - - $ .03
-------- -------- -------- --------
Net loss per share $ (.14) $ (.16) $ (.04) $ (.12)
======== ======== ======== ========
(1) Total Revenue has been reclassed for prior quarters to conform to the
current presentation.
(2) The sum of the quarters do not equal year to date. A large fluctuation in
the fourth quarter fiscal year 2001 is the result of the Company's
repurchase of 25,943,360 common shares. See Note K.
68
71
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ANGELIKA FILM CENTERS, LLC
LOS ANGELES, CALIFORNIA
We have audited the accompanying balance sheet of Angelika Film Centers,
LLC (a Delaware limited liability company) as of December 28, 2000, and the
related statements of income, members' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides 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 28, 2000, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/Grant Thornton LLP
Cleveland, Ohio
May 9, 2001
69
72
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
BALANCE SHEET
(dollar amounts in thousands)
December 28, 2000
ASSETS
Current Assets
Cash $ 820
Trade and other receivables 37
State and local income tax receivable 27
Due from affiliates (NOTE E) 103
Concession inventories (NOTE A) 20
Prepaid expenses and other current assets 232
-------
Total current assets 1,239
Property, Equipment and Improvements, net (NOTE B) 621
Goodwill (NOTE A) 9,250
Deposits 89
-------
TOTAL ASSETS $11,199
=======
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 496
Deferred income and other obligations 58
-------
Total current liabilities 554
Deferred Rental Obligations (NOTE C) 1,052
-------
Total liabilities 1,606
Commitments and Contingencies (NOTE D) -
Members' Equity (NOTE A) 9,593
-------
TOTAL LIABILITIES AND MEMBERS' EQUITY $11,199
=======
The accompanying notes are an integral part of this statement.
70
73
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENT OF INCOME
(dollar amounts in thousands)
For the year ended December 28, 2000
Revenue
Theatre income $5,416
Theatre concessions 621
Cafe concession sales 353
Rental and other income 72
------
Total operating income 6,462
Operating costs and expenses
Film Rental 2,087
Operating costs 2,509
General and administrative expenses 164
Depreciation and amortization 692
------
Total operating costs and expenses 5,452
------
Income from operations 1,010
------
Other income
Interest income 28
------
Total other income 28
------
Income before state and local tax expense 1,038
State and local income tax expense (NOTE A) 48
------
NET INCOME $ 990
======
The accompanying notes are an integral part of this statement.
71
74
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENT OF MEMBERS' EQUITY
(dollar amounts in thousands)
For the year ended December 28, 2000
NATIONAL CITADEL
CINEMAS, FA SUTTON HILL CINEMAS,
INC. INC. ASSOCIATES INC. TOTAL
------------ ------------ ---------------- ----------------- --------------
BALANCE AT DECEMBER 31, 1999 $ - $ 8,350 $ 1,669 $ - $ 10,019
Distribution to members (557) (629) (116) (114) (1,416)
Transfer of interest in AFC (NOTE A) 4,955 (4,957) (1,609) 1,611 -
Net income 398 428 56 108 990
-------- -------- ------- ------- --------
BALANCE AT DECEMBER 28, 2000 $ 4,796 $ 3,192 $ - $ 1,605 $ 9,593
======== ======== ======= ======= ========
The accompanying notes are an integral part of this statement.
72
75
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENT OF CASH FLOWS
(dollar amounts in thousands)
For the year ended December 28, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 990
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 692
Deferred rent expense 242
Changes in assets and liabilities associated with
operating activities:
Trade and other receivables (22)
State and local income taxes receivable (27)
Due to (from) affiliates (89)
Concessions inventories (11)
Prepaid expenses and other current assets (176)
Accounts payable and accrued liabilities 132
State and local income taxes payable (16)
Increase in deferred income and other obligations 8
-------
Net cash provided by operating activities 1,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (14)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to members (1,416)
-------
NET INCREASE IN CASH 293
Cash at beginning of year 527
-------
Cash at end of period $ 820
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 91
=======
The accompanying notes are an integral part of this statement.
73
76
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 28, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
Angelika Film Centers LLC (AFC) is a Delaware limited liability company,
whose membership interest at December 28, 2000 is held 33.34% by FA, Inc. (FA),
16.66% by Citadel Cinemas, Inc. (Citadel) and 50% by National Cinemas, Inc.
(NCI), a wholly-owned subsidiary of National Auto Credit, Inc.
NCI acquired its 50% interest from FA on April 5, 2000. Prior to NCI's
purchase of its 50% interest, FA's share of profits and losses was 83.34%,
subsequent to that date it now shares 33.34% of profit and losses.
On July 28, 2000, Citadel acquired its 16.66% interest from Sutton Hill
Associates. Citadel's share of profit and losses in AFC was effective as of June
1, 2000 as defined in the purchase agreement.
AFC was formed in August of 1996 to acquire certain assets of Angelika Film
Centers, Inc. and Houston Cinemas, Inc., both New York corporations (Seller). In
July 1996, AFC acquired personal property, contracts, leasehold improvements,
and goodwill from the Seller for approximately $12,900,000, which included the
assumption of certain liabilities.
The acquisition was accounted for using the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). Under APB 16, the tangible assets, identifiable
intangible assets and liabilities of the acquired company are recorded at their
fair value, and the excess of the purchase price over the fair value of the net
(of liabilities) tangible and identifiable intangible assets is recorded as
goodwill. Additionally, under the purchase method of accounting the operating
results of the acquired company are included in the results of operations from
the date of the acquisition.
The Company had an independent appraisal which was used to determine the
fair value of the tangible assets and leasehold improvements. Accordingly, the
excess of the purchase price over the fair value of the tangible and
identifiable intangible assets was recorded as goodwill (approximately
$11,810,000). The goodwill is being amortized on a straight-line basis over 20
years.
FISCAL YEAR:
AFC's fiscal year ends on the Thursday closest to December 31. The twelve
months ending December 28, 2000 contained 52 weeks. Unless stated otherwise,
references herein are to the AFC's fiscal years.
CASH AND CASH EQUIVALENTS:
AFC considers all highly liquid investments and money market accounts with
the original maturities of three months or less to be cash equivalents.
74
77
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 28, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
CONCESSION INVENTORIES:
Inventories are comprised of concession goods and are stated at lower of
cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 7 to 12 years for leasehold improvements, furniture, fixtures and
equipment. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful lives of the related
improvements.
INCOME TAXES:
AFC is a limited liability company; therefore, no federal income taxes have
been provided for its operations. Any liability or benefit from the AFC's income
or losses is the responsibility of the individual members. AFC provides for
state and city income tax liabilities in accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109).
GOODWILL:
Goodwill arising from AFC's acquisition, as previously discussed, is
amortized on a straight-line basis over a twenty year period. Accumulated
amortization of goodwill is $2,560,000 at December 28, 2000.
ADVERTISING EXPENSE:
Advertising costs are expensed as occurred. Advertising expenses were
approximately $40,000 for the year ended December 28, 2000.
FAIR VALUE FINANCIAL INSTRUMENTS:
The Company has various financial instruments including cash and cash
equivalents, trade and other receivables and accounts payable and accrued
liabilities. These instruments are short-term in nature and the Company has
determined that their carrying values approximate estimated fair values.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates impairment of long-lived assets pursuant to Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121")
which requires impairment losses to be recorded on long-lived assets used in
operations when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Management periodically evaluates
property and equipment and intangible assets for impairment whenever events or
changes in circumstances indicate the assets may be impaired. This evaluation
consists of comparing estimated future cash flows (undiscounted and without
interest charges) over the remaining life of the asset to its carrying value.
When such evaluation results in a deficiency, the carrying amount of the asset
is reduced to its estimated fair value through a charge to income. No impairment
was recorded during the 12 months ended December 28, 2000.
75
78
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 28, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
ESTIMATES:
The preparation of financial statements and the accompanying notes thereto,
in conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the respective reporting periods. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" ("SFAS 138"). SFAS 138 must first be
applied in the first quarter of fiscal years that begin after June 15, 2000 (the
first quarter of fiscal 2001 for the Company) and in general requires that
entities recognize all derivative financial instruments as assets or
liabilities, measured at fair value, and include in earnings the changes in the
fair value of such assets and liabilities. SFAS 138 also provides that changes
in the fair value of assets or liabilities being hedged with recognized
derivative instruments be recognized and included in earnings. AFC does not
presently utilize derivative instruments, either for hedging or other purposes,
and therefore anticipates that the adoption of the requirements of SFAS 138 will
not have a material affect on its financial statements.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 28, 2000, a summary of property, equipment and leasehold
improvements is as follows (in thousands):
Leasehold improvements $ 525
Furniture, fixtures and equipment 507
--------
1,032
Less accumulated depreciation 411
--------
PROPERTY, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET $ 621
========
76
79
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 28, 2000
NOTE C - LEASE COMMITMENTS
AFC leases a theater and office space under non-cancelable operating leases
which mature in August 2026 and January 2002, respectively. Rental expense was
$845,000, including noncash rent of $243,000, for the year ended December 28,
2000. At December 28, 2000, future minimum rental commitments for the next five
years were as follows (in thousands):
2001 $ 710
2002 665
2003 657
2004 657
2005 657
Thereafter 18,978
--------
TOTAL MINIMUM LEASE PAYMENTS $ 22,324
========
The lease commitments include approximately $95,000 for office space used
by an affiliated company that is reimbursable to AFC by that affiliated company.
AFC has scheduled rent increases under the theatre lease. The accompanying
statement of operations reflects rent expense on a straight-line basis over the
term of the theatre lease. Deferred rental obligations of $1,052,000 are
reflected in the accompanying balance sheet as of December 28, 2000.
NOTE D - COMMITMENTS AND CONTINGENT LIABILITIES
The AFC is involved in various lawsuits. The ultimate outcome of these
lawsuits is not presently determinable; however, in the opinion of management,
based in part upon advice of counsel, the amount of losses that might be
sustained, if any, would not materially affect the financial position of the
AFC.
77
80
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 28, 2000
NOTE E - RELATED PARTY TRANSACTIONS
City Cinemas Corporation (City Cinemas), an affiliate of Sutton Hill
Associates, operates and manages the Angelika Film Centers pursuant to a
management agreement (the Agreement). City Cinemas operates the theater in
accordance with the terms of a management agreement entered into with the AFC in
August 1996. City Cinemas is to be paid an annual management fee of $125,000 and
a bonus fee contingent on the attainment of certain income levels (as defined in
the Agreement). Management and bonus fee expense amounted to the base fee of
$125,000 for the year ended December 28, 2000. Effective on June 1, 2000, this
management contract was assigned to Citadel.
AFC's leasehold interest for the Angelika Theatre is guaranteed by both the
Reading Company and Reading Entertainment, Inc. through the day prior to the
15th anniversary of the lease commencement.
At December 28, 2000, AFC has an aggregate receivable balance of $103,000
due from City Cinemas and Citadel. This amount is comprised of monies collected
by those affiliated entities for gift certificates and credit card purchases
that are then remitted to AFC.
78
81
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
79
82
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is hereby made to "Directors and Executive Officers of the Registrant"
in the 2001 Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to "Summary Compensation Table", "Options", "Directors
Fees and Compensation", "Employment Agreements", and "Compensation Committee
Interlock and Insider Participation" in the 2001 Proxy Statement, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Security Ownership of Certain Beneficial Owners and
Management" in the 2001 Proxy Statement, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to "Other Matters - Business Relationship" in the 2001
Proxy Statement, which is incorporated herein by reference.
80
83
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DOCUMENTS FILED AS PART OF THIS REPORT:
(a)(1) The following statements are included in Part II, Item 8:
FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Certified Public Accountants
Financial Statements:
Consolidated Balance Sheets - as of
January 31, 2001 and 2000
Consolidated Statement of Operations -
Years Ended January 31, 2001, 2000 and 1999
Consolidated Statement of Stockholders' Equity and
Comprehensive Income - Years Ended January 31, 2001,
2000 and 1999
Consolidated Statements of Cash Flows -
Years Ended January 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements -
Years Ended January 31, 2001, 2000 and 1999
The following financial statements are included in Part IV, Item 14
FINANCIAL STATEMENTS OF AFC
Report of Independent Certified Public Accountants
Financial Statements:
Balance Sheet as of December 31, 2000
Statement of Operations for the year ended
December 31, 2000
Statement of Members' Equity for the year ended
December 31, 2000
Statement of Cash Flows for the year ended
December 31, 2000
Notes to Financial Statements for the year ended
December 31, 2000
81
84
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(cont.)
(a)(2) The following financial statement schedule for the years ended January
31, 2001, 2000 and 1999 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).
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).
82
85
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(cont.)
(a)(3) EXHIBITS (cont.)
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).
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 Speciman Series C redeemable preferred stock Certificate -
National Auto Credit, Inc., filed herewith and incorporated
herein by reference.
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).
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 National Auto Credit, Inc. 1995 Stock Option Plan for Member
Dealers (incorporated by reference to the Company's Form S-3
Registration Statement as filed on May 3, 1995, File No.
33-58579).
10.6 Purchase and Sale Agreement of Contracts between Crescent Bank &
Trust and NAC, Inc. dated March 17, 2000 (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K filed
April 3, 2000, File No. 1-11601).
10.7 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).
10.8 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).
83
86
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(cont.)
(a)(3) EXHIBITS (cont.)
10.9 Option Letter 1, dated as of April 5, 2000 (incorporated by
reference to Exhibit 10.4 of the Current Report on Form 8-K filed
on April 20, 2000, File No. 1-11601).
10.10 Option Letter 2, dated as of April 5, 2000 (incorporated by
reference to Exhibit 10.5 of the Current Report on Form 8-K filed
on April 20, 2000, File No. 1-11601).
10.11 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).
10.12 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).
10.13 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).
10.14 Separation Agreement between NAC and David L. Huber dated as of
December 15, 2000 filed herewith and incorporated herein by
reference.
21 Subsidiaries of National Auto Credit, Inc. at January 31, 2001.
23 Consent of Independent Certified Public Accountants.
(b) REPORTS ON FORM 8-K
On November 17, 2000, a Form 8-K was filed to announce the settlement with
Mr. Frankino and related parties and a Stock Purchase and Standstill Agreement
with Reading Stockholders on November 3, 2000.
On December 15, 2000, a Form 8-K was filed regarding a five year business
plan.
On January 2, 2001, a Form 8-K was filed regarding a Merger Agreement with
ZoomLot Corporation, an employment agreement with James J. McNamara and a Stock
Purchase and Standstill Agreement with Reading Stockholders (as amended by 8-K/A
filed on March 5, 2001).
84
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 16, 2001 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 16, 2001.
Principal Financial and
Principal Executive Officer Accounting Officer
By: /s/ James J. McNamara By: /s/ Robert B. Dixon
------------------------ --------------------
James J. McNamara Robert B. Dixon
Chairman of the Board and Chief Financial Officer and Treasurer
Chief Executive Officer
DIRECTORS:
/s/ Thomas F. Carney, Jr. /s/ William S. Marshall
- ------------------------------------ -------------------------
Thomas F. Carney, Jr. William S. Marshall
/s/ Mallory Factor /s/ James J. McNamara
- ------------------------------------ -------------------------
Mallory Factor James J. McNamara
/s/ John A. Gleason /s/ Gary L. Trujillo
- ----------------------------------- -------------------------
John A. Gleason Gary L. Trujillo
/s/ Donald Jasensky /s/ Henry Y. L. Toh
- ----------------------------------- -------------------------
Donald Jasensky Henry Y. L. Toh
/s/ Steven P. Johnson /s/ Peter T. Zackaroff
- ----------------------------------- -------------------------
Steven P. Johnson Peter T. Zackaroff
85
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, 2001
--------------------------------
Self-insurance claims $ 4,089 $ (1,656) $ - $ 1,463 (a) $ 970
Year ended January 31, 2000
--------------------------------
Self-insurance claims $ 4,880 $ 628 $ - $ 1,419 (a) $ 4,089
Year ended January 31, 1999
--------------------------------
Self-insurance claims $ 9,144 $ 50 $ - $ 4,314 (a) $ 4,880
(a) Cash disbursements related to self-insured claims.
86