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, 2004
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from ______ to ______.
Commission file number 1-11601
NATIONAL AUTO CREDIT, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1816760
(State of incorporation) (I.R.S. Employer Identification No.)
555 Madison Avenue, 29th Floor, New York New York 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 644-1400
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
COMMON STOCK, PAR VALUE $.05 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of this Form 10-K or any
amendment to this Form 10-K. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [_] No [X]
As of May 11, 2004, 9,052,614 shares of Common Stock of National Auto Credit,
Inc. were outstanding.
Aggregate market value of the registrant's Common Stock held by non-affiliates
at July 31, 2003, was approximately $1,477,859 (Based on the closing price of
the registrant's common stock on the OTC Bulletin Board on July 31, 2003).
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
Page
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Part I
Item 1. Business......................................................... 1
2. Properties....................................................... 6
3. Legal Proceedings................................................ 6
4. Submission of Matters to a Vote of Security Holders.............. 10
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............. 11
6. Selected Financial Data.......................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 14
7a. Quantitative and Qualitative Disclosures About Market Risk....... 27
8. Financial Statements and Supplementary Data...................... 28
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 76
9a. Controls and Procedures.......................................... 76
Part III
Item 10. Directors and Executive Officers of the Registrant............... 76
11. Executive Compensation........................................... 78
12. Security Ownership of Certain Beneficial Owners and Management... 84
13. Certain Relationships and Related Transactions................... 85
14. Principal Accountant Fees and Services........................... 86
Part IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K....................................... 88
PART I
Some of the information in this report contains forward looking statements
within the meaning of the federal securities laws that relate to future events
or our future financial performance and involve known and unknown risks,
uncertainties and other factors that may cause us or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. You should
not rely on forward-looking statements in this report. Forward-looking
statements typically are identified by use of terms such as "anticipate",
"believe", "plan", "expect", "intend", "may", "will", "should", "estimate",
"predict", "potential", "continue" and similar words although some
forward-looking statements are expressed differently. This report also contains
forward-looking statements attributed to third parties relating to their
estimates regarding the growth of our markets. All forward-looking statements
address matters that involve risk and uncertainties, and there are many
important risks, uncertainties and other factors that could cause our actual
results, as well as those of the markets we serve, levels of activity,
performance, achievements and prospects to differ materially from the
forward-looking statements contained in this report. You should also consider
carefully the statements under "Risk Factors" and other sections of this report
which address additional facts that could cause our actual results to differ
from those set forth in the forward-looking statements. We undertake no
obligation to publicly update or review any forward-looking statements, whether
as a result of new information, future developments or otherwise.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
National Auto Credit, Inc. ("the Company" or "NAC") began operations in
1969 and was incorporated in Delaware in 1971. NAC consummated a series of
acquisitions during the year ended January 31, 2004 transforming its business
operations into a multi-dimensional corporate communications and entertainment
company. NAC specializes in the full service design, creative development,
production, post production editing and transmission, via broadcast satellite
videoconferencing, webcasting and traditional on-site presentations of corporate
communication, education and training video and other services for use at
corporate events. Additionally, NAC, through its investment in the Angelika Film
Center LLC ("AFC"), operates in the movie exhibition industry. NAC acquired its
investment in AFC in April 2000.
Prior to Fiscal 2003, NAC's operations were conducted principally through
three operating segments, (i) the e-commerce segment, which were comprised of
ZoomLot Corporation's ("ZoomLot") development of e-commerce services to
facilitate the process by which used car dealerships, lenders and insurance
companies communicate and complete the transactions between them that are needed
to provide used car dealers' customers with financing, insurance and other
services, (ii) the movie exhibition segment, which was comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment. However, as the consequence of NAC's strategic review, as
described below, completed in the fourth quarter of Fiscal 2002, NAC suspended
its ZoomLot operations and initiated the steps to discontinue both its
e-commerce and auto financing segments.
NAC uses a January 31 year-end for financial reporting purposes. References
herein to the fiscal year ended January 31, 2004 shall be the term "Fiscal 2004"
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.
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NAC's principal executive offices are located at 555 Madison Avenue, 29th
Floor, New York, New York, 10022. Its telephone number is 212-644-1400.
Significant Developments in Fiscal 2004
Acquisition - The Campus Group
In July 2003, NAC consummated a Stock Purchase Agreement whereby NAC
acquired all outstanding capital stock of The Campus Group, four affiliated
companies providing satellite videoconferencing, multi-media production services
and corporate meeting services, from Mr. Steven Campus and certain family trusts
for an aggregate purchase price of $15.5 million. The Campus Group,
headquartered in Tuckahoe, New York, specializes in the full service design,
creative development, production, post production editing and transmission, via
broadcast satellite videoconferencing, webcasting and traditional on-site
presentations, of corporate communication, education and training video and
other services for use at corporate events. For financial reporting purposes,
the effective date of the merger was July 31, 2003.
In exchange for the acquisition of all of the outstanding capital stock of
The Campus Group, NAC (i) paid $2.8 million at closing from NAC's available cash
balances, (ii) issued to Mr. Campus and certain family trusts promissory notes
of $9.9 million, and (iii) issued to a family trust a convertible promissory
note of $2.8 million. The Campus Group revenues for the years ended December 31,
2002 and 2001 were $10.7 million and $12.7 million, respectively. The Campus
Group realized net income of $1.2 million and $2.3 million for those years,
respectively.
As part of The Campus Group acquisition, Mr. Campus entered into an
employment agreement for which he has agreed to serve as President of each of
the four acquired companies with an initial term of three years. The term of the
employment agreement will be automatically extended until such time as the
promissory notes and convertible promissory note are retired. Mr. Campus,
subject to certain limitations, will have control over day-to-day operations of
The Campus Group. Under the terms of the employment agreement, Mr. Campus will
be entitled to base compensation of $100,000 per year and a performance bonus
based upon the operating results of the acquired companies.
Acquisition - OMI
In April 2003, NAC consummated a Merger and Plan of Reorganization
Agreement whereby NAC acquired all of the outstanding common stock of ORA/Metro
Incorporated, now known as OMI Business Communications, Inc. ("OMI"), from Mr.
Dean R. Thompson, sole stockholder of OMI. OMI, headquartered in New York, New
York, is a multi-media production services, corporate meeting services, web-site
development and web content management company. OMI specializes in the full
service design, creative development, production and post production editing of
corporate communication and training videos for use at corporate events and as
collateral content material for client web-sites. Additionally, OMI frequently
provides event planning services including site selection, survey, event
management and related services associated with remote location presentations.
For financial reporting purposes, the effective date of the merger was April 1,
2003.
In exchange for the acquisition of all of the outstanding common stock of
OMI, NAC (i) issued 200,000 shares of NAC Common Stock, valued at $26,000 (ii)
assumed $814,000 in bank debt and capital lease obligations to financial
institutions and (iii) issued a promissory note payable to Mr. Thompson in the
amount of $153,000, payable in monthly installments of principal and interest
over a 36 month period. In addition to the initial payments, NAC agreed to a
contingent payment to Mr. Thompson of $150,000 based upon OMI's
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financial performance during the three-year period ending January 31, 2006.
OMI's revenues for the years ended December 31, 2002 and 2001 were $2.5 million
and $3.5 million, respectively. OMI incurred net losses of $343,000 and $27,000
for those years, respectively.
As part of the OMI acquisition, OMI entered into a five year employment
agreement with Mr. Thompson under which Mr. Thompson will serve as President of
OMI and, subject to certain limitations, will have control over the day-to-day
operations of OMI. Under the terms of the employment agreement, Mr. Thompson
will be entitled to base compensation of $175,000 per year, a grant of stock
options for up to 200,000 shares of NAC Common Stock and a performance bonus
based upon the operating results of the acquired companies.
Other
NAC continues to examine new business opportunities, which may be pursued
through the investment in or acquisition of existing corporate operating
businesses or other means. At January 31, 2004 NAC had cash and marketable
securities of $376,000 and $2.2 million income tax refund receivable which
together with any cash flow derived from its investment in AFC and the
operations of The Campus Group and OMI will be used to pursue such
opportunities. Additionally, NAC will continue to pursue reductions in its
operating expenses and new debt or equity financing (which there can be no
assurance NAC will obtain such financing) as means of supplementing the
resources available to pursue new opportunities.
Discontinued Operations
In the fourth quarter of Fiscal 2002, NAC completed a strategic review of
its investment in ZoomLot Corporation ("ZoomLot"), acquired December 15, 2000,
and the development of its e-commerce services. NAC's strategic review included
evaluating the evolving market conditions of the used car dealer and financing
industries, the start-up nature of the ZoomLot operations, the current market
demand for and penetration of ZoomLot's e-commerce solution to electronically
link eligible used car dealers and their qualified customers with available used
car lenders and financing terms, current operating losses and forecasts of
future operating results and strategic opportunities available to ZoomLot. As a
result of this review, management of NAC determined that it was unable to
predict, with the requisite degree of certainty, when or whether ZoomLot would
achieve positive cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated steps to
discontinue e-commerce operations. Additionally, as a consequence of NAC's
decision to discontinue its ZoomLot e-commerce operations, NAC also formally
exited the sub-prime used automobile consumer finance business effective
December 31, 2001. As a result of these decisions, both the e-commerce and
automobile finance segments have been classified as discontinued operations as
of January 31, 2002.
CORPORATE COMMUNICATION BUSINESS
NAC, through The Campus Group and OMI, engages in a broad range of
strategic content development, management and broadcast services to single and
multiple site corporate events, meetings and symposiums. NAC serves Fortune 100
pharmaceutical and financial services organizations as well as other companies
and industries seeking to develop communication and education content for
periodic corporate events. Through a collaborative effort between NAC and its
clients, relevant education, product information, regulatory requirements or
other communication initiatives are developed and executed. Frequently, these
services result in the development of corporate communication, education and/or
training video which are then broadcast at a
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single site or simulcast via satellite/internet to multiple sites both domestic
and international. Furthermore, once produced, such content is frequently
modified and integrated into a corporate website for future on-demand access by
a broad range of geographically dispersed users.
NAC, through its Evansville, Indiana office, also provides on-site
corporate event data management services whereby clients can obtain and respond
dynamically in real-time to audience preferences, attitudes or responses to
specific queries within an event. These data services assist in further engaging
corporate and other audiences in understanding and relating to the overall
communication program, insuring better information retention, provide a record
of responses for regulatory and testing purposes and in many cases provide
clients with live field data not otherwise as easily obtained.
Competition
The corporate communication, education and training industry in which NAC
primarily compete is very fragmented and highly competitive. Certain of NAC's
competitors, including several diversified companies, may have greater financial
and other resources than NAC. Most competitors generally operate on a local or
regional level. As clients increasingly require vendors to offer comprehensive
services and support sophisticated broadcast technologies, many operators may
not have the capital resources, management skills and technical expertise
necessary to compete, or provide integrated communication services. Although NAC
believes that it has certain creative design, technological, managerial and
other advantages over its competitors, there can be no assurance that NAC will
maintain such advantages.
Clients
NAC's clients include national and multi-national pharmaceutical and
financial services companies such as American Express Company, Booz Allen
Hamilton Inc. ("Booz Allen"), Cardinal Health, Inc. ("Cardinal Health"), Pfizer
Inc. ("Pfizer"), PricewaterhouseCoopers LLP, Wells Fargo & Company as well as
other companies seeking to develop communication, education and/or training
content for periodic events.
Revenues for Fiscal 2004 were $7.1 million and are comprised principally of
revenues derived from the Acquired Companies operations, (i) OMI revenues of
$2.2 million for the ten month period ended January 31, 2004 and (ii) The Campus
Group revenues of $4.9 million for the six month period ended January 31, 2004.
Pro forma revenues, computed by combining the revenues of NAC with the revenues
of the Acquired Companies for the periods in Fiscal 2004 and Fiscal 2003 prior
to their acquisition were $12.2 million for Fiscal 2004 as compared to $13.2
million for Fiscal 2003.
As a consequence of the acquisitions, Pfizer, Booz Allen and Cardinal
Health accounted for 18%, 13% and 13%, respectively of NAC's revenues for Fiscal
2004. Since NAC's revenues from Acquired Companies are measured from the date of
each acquisition, such revenues are not necessarily fully indicative of the
results NAC may achieve in Fiscal 2005 when it consolidates the Acquired
Companies for the entire fiscal year. The loss of any one such client could have
a material adverse effect on NAC.
MOVIE EXHIBITION BUSINESS
NAC engages in the movie exhibition business through its investment in AFC.
AFC is the owner of the Angelika Film Center which it holds under a long term
lease having a remaining term of approximately 22 years. AFC is owned 50% by NAC
and 50% by Reading International, Inc. Each of the owners of AFC is entitled to
a proportionate share of the cash distributions that are paid by AFC.
4
The Angelika Film Center is a 17,000 square foot, six screen multiplex
theater and cafe that focuses on the exhibition of art and specialty films. The
exhibition of art and specialty films, while seasonal in nature, is less so than
the film exhibition business in general. Art and specialty films tend to be
released more evenly over the course of the year and, if successful, tend to
enjoy a longer run than wide release films. Art and specialty films are obtained
from a number of sources ranging from divisions of the larger film distributors
specializing in specialty films to individuals that have acquired domestic
rights to one film. Generally film payment terms are based on an agreed upon
percentage of the box office receipts.
AUTOMOBILE FINANCING BUSINESS - DISCONTINUED FISCAL 2002
NAC's automobile financing operation historically involved investing in
sub-prime used automobile consumer loans, which took the form of installment
loans collateralized by the related vehicle. NAC purchased such automobile
loans, or interests in pools of such loans (collectively "loan investments"),
from member dealers through its wholly owned subsidiary, NAC, Inc. NAC performed
the underwriting and collection functions for all automobile loans it purchased
in whole, and also performed such functions where NAC had purchased interests in
a pool of such loans. NAC's operations enabled member dealers to provide used
car purchase financing to customers who had limited access to more traditional
consumer credit sources that might otherwise be unable to obtain financing.
The business of investing in sub-prime automobile loans involves investing
in loans which are high risk, in that the borrowers are individuals with below
average credit quality, and the collateral is subject to loss, damage,
significant declines in value and difficulties of repossession. Accordingly,
each individual loan had a significant risk of not performing in accordance with
its contractual terms. The business relied on mitigating this risk by acquiring
large numbers of loans, thus reducing the exposure to the risk of the default on
any one particular loan, and on reasonably estimating the credit losses to be
incurred and setting loan purchase prices accordingly. An inability to
reasonably predict the future performance of loans purchased, or to set loan
purchase prices that properly reflected those estimates, could significantly
increase the risk of material losses from the business of investing in sub-prime
used automobile loans.
In Fiscal 2001 NAC sold all of the automobile retail installment loans
remaining in NAC's active loan portfolio and substantially all of its remaining
charged-off automobile installment loans. After the sale of such loans NAC
eliminated essentially all personnel who had previously been engaged in NAC's
loan underwriting, processing and collection operations. Effective December 31,
2001, NAC discontinued its automobile financing operation.
E-COMMERCE BUSINESS - DISCONTINUED FISCAL 2002
NAC conducted its e-commerce business through ZoomLot. ZoomLot was engaged
in the development of services to facilitate, through e-commerce, the process by
which used car dealerships, lenders and insurance companies communicate and
complete the transactions between them that are needed to provide the used car
dealer's customers with financing, insurance, and other services. ZoomLot's
service of matching the consumer automobile loans, or "contracts" submitted by
dealers wishing to sell contracts which were retained by them upon the sale of a
vehicle against the underwriting criteria of finance companies, and then
submitting those contracts to the finance companies whose underwriting criteria
the contracts meet, is commonly referred to as "contract aggregation".
5
ZoomLot was formed in March 2000 for the purpose of acquiring the
Internet-based operations of Cygnet Dealer Finance, Inc. ("CDF"), an affiliated
company and acquired these operations from CDF on July 1, 2000. Prior to that
date, ZoomLot, which commenced operations in January 2000, was operated as a
division of CDF. ZoomLot and CDF share common management, certain personnel, and
facilities. In connection with the acquisition of the Internet-based business
from CDF, ZoomLot and CDF entered into a management services contract whereby
ZoomLot provided management services and was responsible for substantially all
operating expenses of CDF in exchange for a monthly management fee equivalent to
..625% (7.5% annually) of CDF's loan portfolio managed by ZoomLot. For Fiscal
2003, as a result of the discontinued operations, ZoomLot did not realize CDF
management fees. For Fiscal 2002, CDF paid ZoomLot management fees of $626,000.
Under this arrangement, NAC accounted for the management fees as a reduction of
ZoomLot's operating expenses which have been included in the loss from
discontinued operations.
EMPLOYEES
As of January 31, 2004, NAC employed sixty-five full-time people. None of
NAC's employees are covered by a collective bargaining agreement. NAC believes
it maintains good relations with its employees.
ITEM 2. PROPERTIES
NAC occupies a series of leased facilities as follows:
Base Annual
Location Square Feet Rent Expiration of Term Purpose
-------- ----------- ----------- ------------------ ---------------------------------------
Bohemia, NY 15,000 $100,000 April 2010 Warehouse and distribution
Evansville, IN 6,800 $ 54,000 September 2005 Sales, service and field support
New York, NY 5,500 $199,000 July 2006 Corporate Headquarters
New York, NY 4,900 $225,000 September 2007 Creative Services and Production Studio
Tuckahoe, NY 11,000 $ 75,000 April 2010 Creative Services and Production Studio
In addition to the above facilitates, ZoomLot's operations were conducted
from office space of approximately 11,000 square feet in Phoenix, Arizona. The
aggregate annual base rental for the Phoenix office is $276,000. The lease
expires in September 2006. ZoomLot has subleased its office facility to an
unrelated third party in the real estate development industry through the
remaining term of the lease at an annual rate of $253,000. NAC charged as a
reduction of the gain on the disposal of ZoomLot's discontinued operations in
Fiscal 2002 the annual rate differential of $23,000 per year, plus the cost of
certain operating expenses due under the terms of the master lease and sublease
agreements.
ITEM 3. LEGAL PROCEEDINGS
Shareholder Complaints
On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the
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Director Defendants breached their fiduciary duties to NAC, (ii) a judgment
voiding an employment agreement with James J. McNamara and rescinding a stock
exchange agreement in which NAC acquired ZoomLot Corporation ("ZoomLot"), (iii)
a judgment voiding the grant of stock options and the award of director fees
allegedly related thereto, (iv) an order directing the Director Defendants to
account for alleged damages sustained and profits obtained by the Director
Defendants as a result of the alleged various acts complained of, (v) the
imposition of a constructive trust over monies or other benefits received by the
Director Defendants and (vi) an award of costs and expenses.
On August 16, 2001, NAC received a derivative complaint (the "Markovich
Complaint") filed by Levy Markovich ("Markovich"), a shareholder of NAC, with
the Court of Chancery of Delaware on or about August 16, 2001, against James J.
McNamara, John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald
Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC
as a nominal defendant. The Markovich Complaint principally seeks: (i) a
declaration that the Director Defendants have breached their fiduciary duties to
NAC, (ii) a judgment voiding an employment agreement with James J. McNamara and
rescinding a stock exchange agreement in which NAC acquired ZoomLot, (iii) a
judgment voiding the grant of options and the award of directors fees allegedly
related thereto, (iv) an order directing the Director Defendants to account for
alleged damages sustained and alleged profits obtained by the Director
Defendants as a result of the alleged various acts complained of, (v) the
imposition of a constructive trust over monies or other benefits received by the
directors, and (vi) an award of costs and expenses.
On August 31, 2001, NAC received a derivative complaint (the "Harbor
Complaint") filed by Harbor Finance Partners ("Harbor"), a shareholder of NAC,
with the Court of Chancery of Delaware on or about August 31, 2001, against
Thomas F. Carney, Jr., Mallory Factor, John A. Gleason, Donald Jasensky, William
S. Marshall, James J. McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C.
Garcia, and ZoomLot Corporation as Defendants and NAC as a nominal defendant.
The Harbor Complaint principally seeks: (i) a judgment requiring the Director
Defendants to promptly schedule an annual meeting of shareholders within thirty
(30) days of the date of the Harbor Complaint; (ii) a judgment declaring that
the Director Defendants breached their fiduciary duties to NAC and wasted its
assets; (iii) an injunction preventing payment of monies and benefits to James
J. McNamara under his employment agreement with NAC and requiring Mr. McNamara
to repay the amounts already paid to him thereunder; (iv) a judgment rescinding
the agreement by NAC to purchase ZoomLot and refunding the amounts it paid; (v)
a judgment rescinding the award of monies and options to the directors on
December 15, 2000 and requiring the directors to repay the amounts they received
allegedly related thereto; (vi) a judgment requiring the defendants to indemnify
NAC for alleged losses attributable to their alleged actions; and (vii) a
judgment awarding interest, attorney's fees, and other costs, in an amount to be
determined.
On October 12, 2001, NAC received a derivative complaint filed by Robert
Zadra, a shareholder of NAC, with the Supreme Court of the State of New York on
or about October 12, 2001 against James J. McNamara, John A. Gleason, William S.
Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T. Zackaroff, Mallory Factor,
Thomas F. Carney, Jr., and NAC as Defendants. On or about May 29, 2002 the
complaint was amended to include class action allegations (the "Zadra Amended
Complaint"). The Zadra Amended Complaint contains allegations similar to those
in the Delaware actions concerning the Board's approval of the employment
agreement with James McNamara, option grants and past and future compensation to
the Director Defendants, and the ZoomLot transaction. The Amended Complaint
seeks (i) a declaration that as a result of approving these transactions the
Director Defendants breached their fiduciary duties to NAC, (ii) a judgment
enjoining defendants from proceeding with or exercising the option agreements; ,
(iii) rescission of the option grants to defendants, if exercised, (iv) an order
directing the Director Defendants to account for alleged profits and losses
obtained by the Director Defendants as a result of the alleged various acts
complained of, (v) awarding
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compensatory damages to NAC and the class, together with prejudgment interest,
and (vi) an award of costs and expenses.
NAC has vigorously defended against each of the respective claims made in
the Academy Complaint, Markovich Complaint, Harbor Complaint and the Zadra
Amended Complaint, as it believes that the claims have no merit. By order of the
Delaware Chancery Court on November 12, 2001, the Academy, Markovich and Harbor
Complaints were consolidated under the title "In re National Auto Credit, Inc.
Shareholders Litigation," Civil Action No. 19028 NC (Delaware Chancery Court)
("Delaware Consolidated Derivative Action") and the Academy Complaint was deemed
the operative complaint.
The parties in the New York action thereafter engaged in settlement
negotiations and the parties entered into a stipulation of settlement in
December 2002, proposing to settle all class and derivative claims. In January
2003, the New York Supreme Court entered an order which, among other things,
conditionally certified a class of shareholders for settlement purposes,
approved the form of notice of the proposed settlement, and scheduled a hearing
to approve the settlement. Notice of the proposed settlement was given to the
shareholders of the Company and members of the class as per the Court's order in
January and February 2003. Hearings on the proposed settlement were held on May
13, 2003 and October 15, 2003. Subsequent to the October 15, 2003 hearing, the
New York Supreme Court approved the terms of the proposed settlement and issued
the Court's written Order and Judgment in December 2003. Certain Plaintiffs in
the Delaware Consolidated Action have objected to the terms of the settlement
and have filed an appeal with the New York Appellate Court. As of April 16,
2004, no date has been set by the Appellate Court to review the appeal.
In the Delaware Consolidated Action, a motion to dismiss that Action was
also filed in 2002 and was denied by the Delaware court in January 2003. In
January 2004, NAC re-filed a motion to dismiss the Delaware Consolidated Action
based upon the New York Supreme Court's written Order and Judgment issued in
December 2003. The Delaware Court has previously stayed further proceedings in
the Consolidated Action pending issuance of the New York court's order. In April
2004, oral arguments were presented to the Delaware Court regarding NAC motion
to dismiss. As of April 16, 2004, no decision has been made by the Delaware
Court.
Self-Insurance Reserves for Property Damage and Personal Injury Claims.
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In Fiscal
1996, NAC disposed of its rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by NAC.
NAC maintained and continues to maintain self-insurance for claims relating
to bodily injury or property damage from accidents involving the vehicles rented
to customers by its discontinued automobile rental operations. NAC was, when
required by either governing state law or the terms of its rental agreement,
self-insured for the first $1.0 million per occurrence, and for losses in excess
of $5.0 million per occurrence, for bodily injury and property damage resulting
from accidents involving its rental vehicles. NAC was also self-insured, up to
certain retained limits, for bodily injury and property damage resulting from
accidents involving NAC vehicles operated by employees within the scope of their
employment. In connection therewith, NAC established certain reserves in its
financial statements for the estimated cost of satisfying those claims. See Note
15 to Notes to Consolidated Financial Statements.
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NAC is named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to Plaintiffs, passengers in the vehicle. Initially, the
Plaintiffs appeared to be recovering well from the injuries sustained. However,
subsequently plaintiff Simpson underwent an accident-related surgery on his back
for removal of a shunt, during which nerves in the spine were severed causing
paraplegia. The Plaintiffs are suing for damages resulting from their injuries
and the subsequent paraplegia suffered by plaintiff Simpson. The doctor and
hospital that performed the surgery were also named as defendants by Plaintiffs
and have been impleaded by NAC under a theory of medical malpractice. Damages
alleged in the complaint are not specified, although in discovery Plaintiffs
have indicated they are seeking millions of dollars in compensatory and other
damages. The matter is scheduled for trial during 2004.
NAC maintains a number of defenses relating to this matter. NAC has almost
exhausted its self-insured retention of $500,000 on this case and NAC attempted
to get its excess carrier, the TIG Insurance Company ("TIG"), to take over the
defense of this action and indemnify NAC up to the policy limits. However, as a
result TIG filed a suit (TIG Insurance Company v. Darrell Smith, Aaron Simpson
and NAC in the United States Court for the Northern District of Illinois) for a
declaratory judgment seeking a ruling that it has no liability as an "excess
insurer" of NAC in connection with the Smith and Simpson action and that under
Illinois law, NAC's (and thereafter TIG's) financial responsibility is capped at
an amount less than what the Plaintiffs are seeking in the state court action.
The federal court initially dismissed this complaint prior to NAC answering on
the grounds that the matter to be decided was premature as the original action
had not been resolved. TIG made a motion to have the court reconsider its
decision and NAC filed a response arguing that the court should take action on
this matter at this time. The Court granted TIG's motion and permitted the
action to proceed. NAC's answer was filed in May 2002. Thereafter, in August
2002, TIG filed a motion for summary judgment, asserting that NAC has no
liability to Smith and Simpson; that if NAC is liable, such liability is capped
in an amount far less that what Plaintiff is seeking in the state court action;
and that it also has no liability to NAC under its excess insurance policy. NAC
filed its own cross-motion for summary judgment, asserting that it has no
liability to Smith and Simpson; and that if there is any liability it is capped
under Illinois state law, or, if not capped, then TIG's excess insurance
coverage applies. Smith and Simpson filed their own cross-motion for summary
judgment, asserting that NAC is liable for Smith and Simpson's injuries and that
NAC's liability is not capped under Illinois law. On February 3, 2003, the Court
granted the motions of TIG and NAC for summary judgment, and denied the motion
for summary judgment of Smith and Simpson. The Court concluded that NAC bears no
financial responsibility to Smith and Simpson because, under the express terms
of the rental agreement at issue, Bennett was not a listed additional driver on
the underlying rental contract. The Court further concluded that TIG, as NAC's
excess insurance carrier, has no responsibility to defend or indemnify the
Bennett estate. Motions for reconsideration were filed by Smith and Simpson in
February and March but were denied by the Court. On April 11, 2003, Smith and
Simpson filed a Notice of Appeal of the Courts' decisions. The Company intends
to vigorously oppose this appeal.
Because of the uncertainties related to these two matters, as well as
several smaller legal proceedings involving NAC's former rental operations and
self-insurance claims, it is difficult to project with precision the ultimate
effect the adjudication or settlement of these matters will have on NAC. At
January 31, 2004 NAC had accrued $408,000 to cover all outstanding
self-insurance liabilities. As additional information regarding NAC's potential
liabilities becomes available, NAC will revise the estimates as appropriate.
9
Other Litigation
In the normal course of its business, NAC is named as defendant in legal
proceedings. It is the policy of NAC to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth
quarter of Fiscal 2004.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
NAC's Common Stock, $.05 par value, has been trading on the
Over-The-Counter Bulletin Board (the "OTCBB"), operated by The Nasdaq Stock
Market, Inc., since March 23, 1998 under the ticker symbol "NAKD."
The following table sets forth the range of the high and low quotations for
Common Stock on the OTCBB during the periods indicated as reported by the
National Quotation Bureau, Inc. Such market quotations reflect inter-dealer
prices, without mark-up, mark-downs or commissions and may not necessarily
represent actual transactions
High Low
---- ----
Year ended January 31, 2004
First Quarter (February 1 - April 30) .................. $.20 $.12
Second Quarter (May 1 - July 31) ....................... .24 .13
Third Quarter (August 1 - October 31) .................. .47 .19
Fourth Quarter (November 1 - January 31) ............... .63 .33
Year ended January 31, 2003
First Quarter (February 1 - April 30) .................. $.24 $.10
Second Quarter (May 1 - July 31) ....................... .16 .07
Third Quarter (August 1 - October 31) .................. .20 .06
Fourth Quarter (November 1 - January 31) ............... .16 .14
STOCKHOLDERS
At May 11, 2004 there were 1,185 stockholders of record of NAC's Common
Stock based upon a securities position listing furnished to NAC by American
Stock Transfer & Trust Company, NAC's transfer agent. On that date, the closing
bid quotation of the Common Stock on OTCBB was $0.57 per share.
DIVIDEND POLICY
It has been NAC's policy to retain any earnings and preserve its cash
resources to finance the growth of its business, provide resources for future
acquisition(s) and reduce outstanding debt and other liabilities; accordingly,
NAC has generally not issued a cash dividend. However, NAC does from time to
time reassess its cash dividend policy and may issue cash dividends in the
future if circumstances warrant. No cash dividends were declared for the fiscal
years ended January 31, 2004 and 2003.
RECENT SALES OF UNREGISTERD SECURITIES
As a consequence of NAC's significant acquisitions consummated during
Fiscal 2004, NAC granted 372,000 shares of Common Stock pursuant to the 2003
Restricted Stock Plan (see Note 13 to Consolidated Financial Statements) valued
at $119,000 representing the fair value of the Common Stock at the time of
award. NAC charged to deferred compensation expense, a component of
stockholders' equity, $119,000 during Fiscal
11
2004. In addition, NAC awarded to three of its executive business managers,
other than its Chief Executive Officer, an aggregate of 350,000 shares of
unregistered, restricted Common Stock from treasury stock valued at $95,000
representing the fair value of the Common Stock at the time of award. NAC
charged to operations $95,000 in compensation expense for Fiscal 2004 for the
award of Common Stock.
NAC issued 300,000 shares of Common Stock from treasury stock in Fiscal
2004 to certain professional advisors for their services rendered in connection
with NAC's acquisition initiatives consummated during the year. The 300,000
shares of Common Stock, valued at $82,000 at the time of grant, have been
accounted for as a component of the cost of the acquisitions.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
2003 Restricted Stock Plan
As a consequence of the significant acquisitions consummated during Fiscal
2004, NAC sponsored a 2003 Restricted Stock Plan ("2003 Plan") that provides
stock grants to all employees. The 2003 Plan authorizes the grant of up to a
maximum of 400,000 restricted shares of Common Stock to employees of NAC. During
Fiscal 2004, there were 372,000 shares of Common Stock granted under the terms
of the plan. Each share granted is restricted and unregistered stock and each
award vests at the rate of 20% per year over a five year period. The underlying
shares may not be sold, transferred, pledged or otherwise disposed until they
vest. During the vesting period, unvested shares are voted by the manager of
each business unit. No shares were granted to executive officers or directors
under the 2003 Plan. For Fiscal 2004, NAC charged to deferred compensation
expense $119,000, a component of shareholders' equity, for the 2003 Plan grants.
The deferred compensation expense is amortized on a straight-line basis over the
5 year vesting period of the restricted Common Stock.
The following table sets forth, as of January 31, 2004, with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of NAC are authorized for issuance.
WEIGHTED-AVERAGE NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE OUTSTANDING UNDER EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY ( A ) ( B ) ( C )
---------------------- ----------------------- ----------------- ------------------------------
Equity compensation
plans approved by
security holders 1,630,000 $0.80 373,352
Equity compensation
plans not approved
by security holders -- -- 28,000
--------- ----- -------
Total 1,630,000 $0.80 401,352
--------- ----- -------
12
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected financial data appearing in or
derived from NAC's historical financial statements, adjusted for the
discontinued operations of its e-commerce, automobile finance and auto rental
business. The selected financial data should be read in conjunction with the
consolidated financial statements appearing elsewhere herein, and with Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations (in thousands, except per share amounts):
Years Ended January 31,
-------------------------------------------------
2004 2003 2002 2001 2000
------- ------ -------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenues $ 7,144 $ -- $ -- $ 4,102 $ 2,284
Costs and expenses $11,001 $3,506 $ 5,384 $ 50,609 $ 22,948
Loss from continuing operations $(3,383) $ (419) $ (5,488) $(46,507) $(20,664)
Discontinued operations, net of tax(1) 401 310 (9,174) (1,084) 7,377
Gain (loss) on disposal of discontinued operations, net of tax(1) -- -- 394 308 (28)
------- ------ -------- -------- --------
Net loss $(2,982) $ (109) $(14,268) $(47,283) $(13,315)
======= ====== ======== ======== ========
Basic and diluted (loss) earnings per share
Continuing operations $ (.41) $ (.05) $ (.47) $ (1.67) $ (.73)
Discontinued operations .05 .04 (.78) (.04) .26
Disposal of discontinued operations -- -- .03 .01 --
------- ------ -------- -------- --------
Total $ (.36) $ (.01) $ (1.22) $ (1.70) $ (.47)
======= ====== ======== ======== ========
Weighted average number of shares outstanding
Basic 8,182 8,380 11,692 27,761 28,169
======= ====== ======== ======== ========
Diluted 8,182 8,380 11,692 27,761 28,169
======= ====== ======== ======== ========
As of January 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- --------
BALANCE SHEET DATA
Cash and cash equivalents $ 376 $ 1,873 $ 6,122 $12,444 $ 54,333
Total assets $30,916 $18,712 $20,534 $39,066 $103,962
Long term debt and convertible debt $11,794 $ -- $ -- $ -- $ --
Redeemable preferred stock(2) $ -- $ -- $ -- $ 629 $ --
Total stockholders' equity $13,480 $16,110 $16,325 $31,455 $ 83,879
(1) See Note 11 of Notes to Consolidated Financial Statements for further
discussion of discontinued operations.
(2) See Notes 10 and 11 of Notes to Consolidated Financial Statements for
further discussion of Series C Redeemable Preferred Stock.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
National Auto Credit, Inc. ("the Company" or "NAC") began operations in
1969 and was incorporated in Delaware in 1971. NAC consummated a series of
acquisitions during the year ended January 31, 2004 transforming its business
operations into a multi-dimensional corporate communications and entertainment
company. NAC specializes in the full service design, creative development,
production, post production editing and transmission, via broadcast satellite
videoconferencing, webcasting and traditional on-site presentations of corporate
communication, education and training video and other services for use at
corporate events. Additionally, NAC, through its investment in the Angelika Film
Center LLC ("AFC"), operates in the movie exhibition industry. NAC acquired its
investment in AFC in April 2000.
Prior to Fiscal 2003, NAC's operations were conducted principally through
three operating segments, (i) the e-commerce segment, which were comprised of
ZoomLot Corporation's ("ZoomLot") development of e-commerce services to
facilitate the process by which used car dealerships, lenders and insurance
companies communicate and complete the transactions between them that are needed
to provide used car dealers' customers with financing, insurance and other
services, (ii) the movie exhibition segment, which was comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment. However, as the consequence of NAC's strategic review, as
described below, completed in the fourth quarter of Fiscal 2002, NAC suspended
its ZoomLot operations and initiated the steps to discontinue both its
e-commerce and auto financing segments.
SIGNIFICANT DEVELOPMENTS IN FISCAL 2004
Acquisition - The Campus Group
In July 2003, NAC consummated a Stock Purchase Agreement whereby NAC
acquired all outstanding capital stock of The Campus Group, four affiliated
companies providing satellite videoconferencing, multi-media production services
and corporate meeting services, from Mr. Steven Campus and certain family trusts
for an aggregate purchase price of $15.5 million. The Campus Group,
headquartered in Tuckahoe, New York, specializes in the full service design,
creative development, production, post production editing and transmission, via
broadcast satellite videoconferencing, webcasting and traditional on-site
presentations, of corporate communication, education and training video and
other services for use at corporate events. For financial reporting purposes,
the effective date of the merger was July 31, 2003.
In exchange for the acquisition of all of the outstanding capital stock of
The Campus Group, NAC (i) paid $2.8 million at closing from NAC's available cash
balances, (ii) issued to Mr. Campus and certain family trusts promissory notes
of $9.9 million, and (iii) issued to a family trust a convertible promissory
note of $2.8 million. The Campus Group revenues for the years ended December 31,
2002 and 2001 were $10.7 million and $12.7 million, respectively. The Campus
Group realized net income of $1.2 million and $2.3 million for those years,
respectively.
As part of The Campus Group acquisition, Mr. Campus entered into an
employment agreement under which he has agreed to serve as President of each of
the four acquired companies with an initial term of three years. The term of the
employment agreement will be automatically extended until such time as the
promissory notes and convertible promissory note are retired. Mr. Campus,
subject to certain limitations, will have control over day-to-day operations of
The Campus Group. Under the terms of the employment agreement, Mr. Campus
14
will be entitled to base compensation of $100,000 per year and a performance
bonus based upon the operating results of the acquired companies.
Acquisition - OMI
In April 2003, NAC consummated a Merger and Plan of Reorganization
Agreement whereby NAC acquired all of the outstanding common stock of ORA/Metro
Incorporated, now known as OMI Business Communications, Inc. ("OMI"), from Mr.
Dean R. Thompson, sole stockholder of OMI. OMI, headquartered in New York, New
York, is a multi-media production services, corporate meeting services, web-site
development and web content management company. OMI specializes in the full
service design, creative development, production and post production editing of
corporate communication and training videos for use at corporate events and as
collateral content material for client web-sites. Additionally, OMI frequently
provides event planning services including site selection, survey, event
management and related services associated with remote location presentations.
For financial reporting purposes, the effective date of the merger was April 1,
2003.
In exchange for the acquisition of all of the outstanding common stock of
OMI, NAC (i) issued 200,000 shares of NAC Common Stock, valued at $26,000 (ii)
assumed $814,000 in bank debt and capital lease obligations to financial
institutions and (iii) issued a promissory note payable to Mr. Thompson in the
amount of $153,000, payable in monthly installments of principal and interest
over a 36 month period. In addition to the initial payments, NAC agreed to a
contingent payment to Mr. Thompson of $150,000 based upon OMI's financial
performance during the three-year period ending January 31, 2006. OMI's revenues
for the years ended December 31, 2002 and 2001 were $2.5 million and $3.5
million, respectively. OMI incurred net losses of $343,000 and $27,000 for those
years, respectively.
As part of the OMI acquisition, OMI entered into a five year employment
agreement with Mr. Thompson under which Mr. Thompson will serve as President of
OMI and, subject to certain limitations, will have control over the day-to-day
operations of OMI. Under the terms of the employment agreement, Mr. Thompson
will be entitled to base compensation of $175,000 per year, a grant of stock
options for up to 200,000 shares of NAC Common Stock and a performance bonus
based upon the operating results of the acquired companies.
Other
Throughout the year ended January 31, 2004 and as of April 30, 2004, NAC
had no external source of financing, and has operated on its existing cash
balances, cash flows from The Campus Group and OMI since the date of each
acquisition and distributions from its investment in AFC. NAC continues to
pursue its plan of examining new business opportunities, which may be pursued
through the investment in, or acquisition of existing operating businesses or
other means. At January 31, 2004 NAC had cash and marketable securities of
$376,000 and $2.2 million income tax refund receivable which together with any
cash flow derived from its investment in AFC and the operations of The Campus
Group and OMI will be used to pursue such opportunities. Additionally, NAC will
continue to pursue reductions in its operating expenses and new debt or equity
financing (there can be no assurance NAC will obtain such financing) as means of
supplementing the resources available to pursue new opportunities.
15
SIGNIFICANT DEVELOPMENTS IN FISCAL 2003 AND
FISCAL 2002 - DISCONTINUED OPERATIONS
In the fourth quarter of Fiscal 2002, NAC completed a strategic review of
its investment in ZoomLot Corporation ("ZoomLot"), acquired December 15, 2000,
and the development of its e-commerce services. NAC's strategic review included
evaluating the evolving market conditions of the used car dealer and financing
industries, the start-up nature of the ZoomLot operations, the current market
demand for and penetration of ZoomLot's e-commerce solution to electronically
link eligible used car dealers and their qualified customers with available used
car lenders and financing terms, current operating losses and forecasts of
future operating results and strategic opportunities available to ZoomLot. As a
result of this review, management of NAC determined that it was unable to
predict, with the requisite degree of certainty, when or whether ZoomLot would
achieve positive cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated steps to
discontinue e-commerce operations. Additionally, as a consequence of NAC's
decision to discontinue its ZoomLot e-commerce operations, NAC also formally
exited the sub-prime used automobile consumer finance business effective
December 31, 2001. As a result of these decisions, both the e-commerce and
automobile finance segments have been classified as discontinued operations as
of January 31, 2002.
In connection with NAC's decision to discontinue the operations of ZoomLot,
NAC entered into formal negotiations with the former shareholders of ZoomLot to
resolve certain financial obligations of NAC and of the former ZoomLot
shareholders resulting from the terms of the Merger Agreement and Plan of
Reorganization dated December 15, 2000 (the "Merger Agreement"). Under the
Merger Agreement, 666,667 shares of Series C Preferred Stock issued in the
acquisition of ZoomLot were forfeitable if ZoomLot did not reach certain
financial performance goals by December 31, 2003, and NAC was obligated to
redeem, at the option of the holders, the 729,047 shares of the Series C
Preferred Stock issued under the Merger Agreement, at a per share price equal to
the greater of $15.00 or ten times the fair market price of NAC's Common Stock,
if ZoomLot did reach those financial performance goals. Additionally, Ernest G.
Garcia II, Cygnet Capital Corporation or Verde Reinsurance Company Ltd., former
ZoomLot shareholders, were obligated to make a payment of $5.2 million to NAC if
ZoomLot did not reach the financial performance goals by December 31, 2003. As
the result of shares of NAC Common Stock issued upon the conversion of the
Series B Preferred Stock issued in the acquisition of ZoomLot, and open market
purchases, Mr. Garcia had become the beneficial owner of 17.7% of the then
outstanding shares of Common Stock of NAC.
Since NAC discontinued ZoomLot's operations, it was necessary to resolve
the effect of that on the obligations of NAC and the former ZoomLot stockholders
under the Merger Agreement. As a result of the negotiations, on January 31,
2002, NAC entered into an Exchange and Repayment Agreement ("Exchange
Agreement") dated January 31, 2002 with Mr. Garcia, Cygnet Capital Corporation,
Verde Reinsurance Company Ltd., Ernie Garcia III 2000 Trust, Brian Garcia 2000
Trust, EJMS Investors Limited Partnership, Ernest C. Garcia II, Ray Fidel,
Steven P. Johnson, Mark Sauder, Colin Bachinsky, Chris Rompalo, Donna Clawson,
Mary Reiner, and Kathy Chacon, who collectively were the former shareholders of
ZoomLot.
The Exchange Agreement sets forth the agreement among all the parties to
terminate the operations of ZoomLot. The parties agreed, among other things,
that the financial performance goals (specifically the "First Objective" and the
"Second Objective" as those terms are defined in the Merger Agreement) had not
and would not be met. Accordingly, the 666,667 shares of Series C Preferred
Stock forfeitable if those goals were not met were deemed forfeited and were
returned and surrendered to NAC. For financial reporting purposes, those
16
shares of Series C Preferred Stock had been treated as contingently issuable,
and accordingly their return had no effect on NAC's consolidated financial
statements.
Additionally, under the Exchange Agreement, the contingent obligation of
Mr. Garcia, Cygnet Capital Corporation or Verde Reinsurance Company Ltd., to
make a payment of $5.2 million to NAC if ZoomLot did not reach the financial
performance goals by December 31, 2003 was resolved by (i) the transfer back to
NAC of 3,079,530 shares of NAC Common Stock, which for the purposes of the
Exchange Agreement were valued at $1.25 per share, (ii) the return to NAC of
62,380 shares of NAC Series C Redeemable Preferred Stock at an aggregate
agreed-upon value of $854,875, which represented the carrying amount of such
shares of Series C Preferred Stock in NAC's consolidated financial statements,
and (iii) the issuance to NAC of a promissory note in the amount of $986,048,
payable, together with interest at 4% per annum, in cash or NAC Common Stock (at
a mutually agreed-upon value of $1.25 per share) on or before January 30, 2003.
For financial reporting purposes, NAC recorded the 3,079,530 shares of
Common Stock returned under the Exchange Agreement at $431,000, representing
their market value of the basis of the quoted market price of NAC's Common
Stock, recorded the 62,380 shares of Series C Redeemable Preferred Stock
returned at their aggregate carrying amount of $854,875, and recorded the note
receivable, a component of other assets, at a net value of $110,000 reflecting
the market value at January 31, 2002 of the shares of NAC Common Stock the maker
of the note has the option to tender in payment of the principal. NAC also
incurred or accrued costs of $850,000 for the winding down and closing of
ZoomLot's operations, including rental and broker costs to sublease ZoomLot's
corporate office, employee severance costs and costs of early lease
terminations. As a result, NAC recognized a net gain on the disposal of
ZoomLot's operation of $394,000. See "Discontinued Operations" and Note 11 of
Notes to Consolidated Financial Statements.
On August 29, 2002, the former ZoomLot shareholders transferred to NAC
409,140 shares of NAC Common Stock as an installment payment against the
promissory note. The market value of the 409,140 shares at the date of their
transfer was $16,000 less than the $56,000 carrying amount of the note
extinguished by the transfer, and, accordingly, NAC recorded the surrendered
shares at their market value of $40,000 and a note receivable collectibility
charge (included in general and administrative expenses) for the $16,000
deficiency. On November 13, 2002, the former ZoomLot shareholders transferred to
NAC 402,000 shares of NAC common stock with a net value of $56,000 as the second
and final payment against the promissory note. No gain or loss was realized on
the final payment against the promissory note.
As a further consequence of NAC's decision to discontinue its ZoomLot
e-commerce operations, NAC also formally exited the sub-prime used automobile
consumer finance business effective December 31, 2001. From October 1995 through
March 2000, NAC's principal business activity was to invest in sub-prime used
automobile consumer loans, which took the form of installment loans
collateralized by the related vehicle. NAC purchased such loans, or interests in
pools of such loans, from member dealerships, and performed the underwriting and
collection functions for such loans. In the first and second quarters for the
year ended January 31, 2001, NAC sold its active loan portfolio and the majority
of its charged-off portfolio. However, since NAC had not, until December 2001,
made a definitive decision that it would not reenter the consumer lending
business, either through ZoomLot or another means, the automobile financing
operations had not previously been classified as a discontinued operation. As a
result of the formal decision reached in connection with the decision to
discontinue ZoomLot's operations, the automobile financing operations were
classified as a discontinued operation as of January 31, 2002. See "Discontinued
Operations" and Note 11 of Notes to Consolidated Financial Statements.
17
CRITICAL ACCOUNTING POLICIES
NAC's consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which require NAC to make estimates
and assumptions. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses of NAC. NAC's significant accounting policies
are described in Note 1 of Notes to Consolidated Financial Statements. However,
certain accounting policies are deemed "critical", as they require management's
highest degree of judgment, estimates and assumptions. These accounting
estimates and disclosures have been discussed with the Audit Committee of NAC's
Board of Directors. A discussion of NAC's critical accounting policies, the
judgments and uncertainties affecting their application, and the likelihood that
materially different amounts would be reported under different conditions or
using different assumptions are as follows:
Revenues: NAC recognizes revenue from video production, video editing,
meeting services and broadcast satellite or webcast services when the video is
complete and delivered or all technical services have been rendered. Deposits
and other prepayments are recorded as deferred revenue until revenue is
recognized. NAC does not have licensing or other arrangements that result in
additional revenues following the delivery of the video or a broadcast. Costs
accumulated in the production of the video, meeting services or broadcasts are
deferred until the sale and delivery are complete. Deferred production costs of
$398,000 are included as a component of other current assets at January 31,
2004.
NAC recognizes revenue from designing and developing websites when the
customer accepts the completed project. Deposits and other prepayments are
recorded as deferred revenue until revenue is recognized. These contracts are
limited to the design and development of websites. Clients have the option to
engage NAC to maintain and upgrade their websites. These contracts are separate
from the website development and design agreements, and the related revenue is
recognized over the term of the contracts, which is generally up to one year.
NAC recognizes revenue from developing and maintaining websites pursuant to
the requirements of Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9,
"Software Revenue Recognition with Respect to Certain Arrangements." Under SOP
97-2, revenue attributable to an element in a customer arrangement is recognized
when persuasive evidence of an arrangement exists and delivery has occurred,
provided the fee is fixed or determinable, collectibility is probable and the
arrangement does not require significant customization of the software. If at
the outset of the customer arrangement, NAC determines that the arrangement fee
is not fixed or determinable or that collectibility is not probable, NAC defers
the revenue and recognizes the revenue when the arrangement fee becomes due and
payable or, when collectibility is uncertain, as cash is collected.
Cost of Revenues: Cost of revenues consists of direct expenses specifically
associated with client service revenues. The cost of revenues includes direct
salaries and benefits, purchased products or services for clients, web hosting,
support services, shipping and delivery costs.
Accounts Receivable: NAC extends credit to clients in the normal course of
business. NAC continuously monitors collections and payments from clients and
maintain an allowance for doubtful accounts based upon historical experience and
any specific client collection issues that have been identified. Since accounts
receivable are concentrated in a relatively few number of clients, a significant
change in the liquidity or financial position of any of these clients could have
a material adverse impact on the collectibility of the accounts receivable and
future operating results.
18
Valuation of Long-lived Assets and Goodwill: NAC reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be fully recoverable and it annually
assesses whether goodwill has been impaired by comparing the carrying amount of
the goodwill to its fair value. When it is determined that the carrying amount
of long-lived assets or goodwill is impaired, impairment is measured by
comparing an asset's estimated fair value to its carrying value. The
determination of fair value is based on quoted market prices in active markets,
if available, or independent appraisals; sales price negotiations; or projected
future cash flows discounted at a rate determined by management to be
commensurate with our business risk. The estimation of fair value utilizing
discounted forecasted cash flows includes significant judgments regarding
assumptions of revenue, operating and marketing costs; selling and
administrative expenses; interest rates; property and equipment additions and
retirements; and industry competition, general economic and business conditions,
among other factors.
Management has determined that there was no impairment to our long-lived
assets and goodwill on the basis of a review of a discounted cash flow analysis,
which for goodwill is performed at the level of the subsidiaries to which the
goodwill relates. If there is a material change in the assumptions used in the
determination of fair value or a material change in the conditions or
circumstances influencing fair value, NAC could be required to recognize a
material impairment charge.
Self-Insurance Claims: NAC maintained and continues to maintain
self-insurance for claims relating to bodily injury or property damage from
accidents involving the vehicles rented to customers by its discontinued
automobile rental operations. NAC was, when required by either governing state
law or the terms of its rental agreement, self-insured for the first $1.0
million per occurrence, and for losses in excess of $5.0 million per occurrence,
for bodily injury and property damage resulting from accidents involving its
rental vehicles. NAC was also self-insured, up to certain retained limits, for
bodily injury and property damage resulting from accidents involving NAC
vehicles operated by employees within the scope of their employment. In
connection therewith, NAC established certain reserves in its financial
statements for the estimated cost of satisfying those claims.
Income Taxes: NAC recognizes deferred tax assets and liabilities based on
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. Loss carrybacks, reversal of deferred tax
liabilities, tax planning and estimates of future taxable income are considered
in assessing the need for a valuation allowance. At the time it is determined
that NAC is unable to realize deferred tax assets in excess of the recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should management determine that
NAC would not be able to realize all or part of its net deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to income
in the period such determination was made.
19
RESULTS FROM CONTINUING OPERATIONS
As a consequence of NAC's (i) acquisition of The Campus Group and OMI (the
"Acquired Companies"), and (ii) the formal exit from NAC's prior legacy business
of auto finance and rental operations, NAC has presented its financial
statements in a manner that reflects the nature of the acquired operations and
on-going operations of NAC and has reclassified the auto finance and rental
operations as discontinued operations. For Fiscal 2004, the results from
continuing operations include the results from (i) The Campus Group, acquired
July 31, 2003, only for the six months ended January 31, 2004 and (ii) OMI,
acquired April 1, 2004, only for the ten months ended January 31, 2004. As a
result, the results of continuing operations for Fiscal 2004 lack comparability
to those for Fiscal 2003 and Fiscal 2002 and may also not be fully indicative of
the results NAC may achieve in Fiscal 2005 when it consolidates the Acquired
Companies for the entire fiscal year.
Revenues: Revenues for Fiscal 2004 were $7.1 million and are comprised
principally of revenues derived from the Acquired Companies operations, (i) OMI
revenues of $2.2 million for the ten month period ended January 31, 2004 and
(ii) The Campus Group revenues of $4.9 million for the six month period ended
January 31, 2004. Pro forma revenues, computed by combining the revenues of NAC
with the revenues of the Acquired Companies for the periods in Fiscal 2004 and
Fiscal 2003 prior to their acquisition were $12.2 million for Fiscal 2004 as
compared to $13.2 million for Fiscal 2003.
Pro Forma revenues for The Campus Group were $9.8 million for Fiscal 2004
as compared to $10.7 million for Fiscal 2003. The decline in pro forma revenues
of $900,000 was principally due to a decline revenues of $1.5 million resulting
from client budget restrictions and timing of certain assignments with larger
clients, which created a decline in both the scope and the frequency of video
production and broadcaster services during the period, offset by an increase of
$623,000 in revenues due to an increase in the number of support and data
collection service assignments for smaller corporate and other meetings
scheduled during Fiscal 2004. The pro forma revenues for OMI were $2.4 million
for Fiscal 2004 as compared to $2.5 million for Fiscal 2003.
Cost of Revenues: Cost of revenues for Fiscal 2004 were $4.0 million and
are comprised principally of cost of revenues derived from the Acquired
Companies operations, (i) OMI cost of revenues of $1.3 million for the ten month
period ended January 31, 2004 and (ii) The Campus Group cost of revenues of $2.7
million for the six month period ended January 31, 2004. The average gross
margin for Fiscal 2004 was 42.0% and 44.5% for OMI and The Campus Group,
respectively. The average gross margins for the Acquired Companies are
comparable to the average gross margins of the Acquired Companies prior to NAC's
acquisition.
Selling, General and Administrative ("SG&A"): For Fiscal 2004, SG&A
expenses includes ten months of OMI's operations ("OMI SG&A"), six months of The
Campus Group's operations ("Campus SG&A") and twelve months of NAC's personnel,
occupancy, legal, professional, insurance and other general corporate overhead
costs("NAC SG&A"). For Fiscal 2003 and Fiscal 2002, SG&A includes only NAC SG&A.
For Fiscal 2004, SG&A expense was $7.0 million comprised of (i) Campus SG&A
of $1.6 million, (ii) OMI SG&A of $1.3 million, and (iii) NAC SG&A of $4.1
million. SG&A for the Acquired Companies have remained comparable to their
historical levels prior to NAC's acquisition. NAC SG&A for Fiscal 2004 was $4.1
million as compared to $3.5 million and $5.4 million for Fiscal 2003 and Fiscal
2002, respectively. The increase in Fiscal 2004 of $600,000 of NAC SG&A was due
principally to (i) an increase of $300,000 resulting from increased personnel
costs as a consequence of the acquisitions and (ii) an increase of $100,000
resulting from the expansion of NAC's corporate insurance to include the
coverage of the operations of the Acquired Companies. The NAC SG&A decreased to
$3.5 million from $5.4 million for Fiscal 2002. The decrease of
20
$1.9 million in Fiscal 2003 was due principally to (i) a decrease of $1.4
million relating to professional services as a result of a reduction in auto
finance and related legacy operations and (ii) a decrease of $209,000 in
personnel costs resulting from NAC's relocation of its corporate headquarters
from Ohio to New York.
Interest Income on Investments: Interest income is derived principally from
the interest earned on NAC's investments in marketable securities, commercial
paper and money market accounts. Interest earned on NAC investments for Fiscal
2004, Fiscal 2003 and Fiscal 2002 were $79,000, $142,000 and $344,000,
respectively. The decrease in interest income over each of the Fiscal periods is
due principally to a decrease in the weighted average investment balances during
the period as funds were used to (i) consummate the acquisition of The Campus
Group, (ii) discontinue the auto finance and e-commerce businesses and (iii) to
sustain corporate operations.
In addition to the interest income earned on investments, during the fourth
quarter of Fiscal 2003, NAC recorded interest income due NAC of approximately
$500,000 as a result of the claim for its income tax refund for fiscal years
1988 through 1997. In Fiscal 2004, NAC realized additional interest income of
$451,000 as a result of a final determination of refund by the Internal Revenue
Service relating to its claims for refund for fiscal years 1988 through 1997.
Income from Investment in AFC: NAC accounts for its investment in AFC using
the equity method. For Fiscal 2004, Fiscal 2003 and Fiscal 2002, NAC's share of
the net income of AFC was $333,000, $375,000 and $373,000, respectively, which
represents NAC's share of AFC net income. In addition, in Fiscal 2002, prior to
the adoption of SFAS 141 and SFAS 142, NAC recorded amortization expenses of
$272,000 as a reduction of its income from investments in AFC. As a result of
NAC's adoption of SFAS 141 and SFAS 142, this amortization charge was
discontinued in Fiscal 2003.
AFC's fiscal year ends December 31. The following sets forth summarized
operating results for AFC (in thousands):
Years Ended December 31,
------------------------
2003 2002 2001
------ ------ ------
Revenues $5,791 $6,032 $6,958
Film rental 1,320 1,627 2,243
Operating costs 2,744 2,831 3,127
Depreciation and amortization 850 699 693
General and administrative expenses 211 125 149
------ ------ ------
5,125 5,282 6,212
------ ------ ------
Net income $ 666 $ 750 $ 746
====== ====== ======
NAC's proportionate share of net income $ 333 $ 375 $ 373
Amortization expense -- -- 272
------ ------ ------
Income from investment in AFC $ 333 $ 375 $ 101
====== ====== ======
AFC's revenues decreased $241,000 for the year ended December 31, 2003 as
compared to the year ended December 31, 2002 principally as a result of the net
effects of (i) an 8.5% decrease in attendance, offset in part by (ii) a 1.1%
increase in average ticket prices and (iii) an increase of $140,000 in other
concession and cafe revenues. AFC's revenues can fluctuate from month-to-month
and year-to-year principally as a result of film attendance, and at times the
ticket prices, depending on audience interest in, and the popularity of the
films AFC exhibits and other factors. AFC's revenues decreased $926,000 for the
year ended December 31, 2002 to
21
$6.0 million as compared to $6.9 million the year ended December 31, 2001. The
decrease was due to the result of the net effects of a 14.7% decrease in
attendance, offset in part by a 2.3% increase in average ticket prices
For the years ended December 31, 2003, 2002 and 2001, film rental expense,
as a percentage of revenues, were 22.8%, 27.0% and 32.2%, respectively. Film
rental expense generally is a factor of a fixed percentage rental rate per film
multiplied by the number of tickets sold. AFC experiences fluctuations in film
rental expense, as a percentage of revenue, depending upon the rental rate per
film, length of time the film is exhibited and the popularity of the film.
For the years ended December 31, 2003, 2002 and 2001, operating costs were
$2.8 million, $2.8 million and $3.1 million. The nature of AFC's operating costs
tend to generally be more fixed overhead related costs and advertising expenses.
Operating expenses remained stable from the year ended December 31, 2002 to the
year ended December 31, 2003. Operating expenses of AFC decreased $296,000 for
the year ended December 31, 2002 to $2.8 million from $3.1 million for the year
ended December 31, 2001 principally as the result of a decrease in advertising
expenditures of $108,000 as AFC developed co-op advertising programs with third
parties to offset its advertising program costs for the year.
As a result of the net cash flow realized by AFC, distributions by AFC to
NAC for Fiscal 2004, Fiscal 2003 and Fiscal 2002 were $1.1 million, $300,000 and
$909,000, respectively. The decrease in distributions for Fiscal 2003 as
compared to Fiscal 2004 and Fiscal 2002 is a result principally of the AFC
capital improvement program to refurbish the theatre during Fiscal 2003. In
August 2002, AFC initiated a $1.1 million capital improvement program to
renovate the interior of the theatre and upgrade certain equipment, services and
facilities. AFC financed the capital program through its current cash flow from
operations and as a consequence cash distributions were reduced until the
completion of the capital program which was finished in December 2002.
Loss on Sale of Property: On January 14, 2002, NAC sold its limited
partnership interests in eight projects to Idacorp Financial Services, Inc. for
$2.5 million. NAC incurred closing costs, transfer fees and a provision for the
previously deducted investment tax credits in lieu of posting a bond, of
$510,000 and as a result incurred a loss (reflected in continuing operations) of
$549,000. NAC retained its limited partnership interests in three projects,
which at January 31, 2004 and 2003 are included in other assets at their
estimated fair market value of $200,000.
Interest Expense: As a consequence of the acquisitions of The Campus Group
and OMI, NAC issued certain promissory notes to finance a portion of the cost of
each acquisition as well as assumed certain outstanding debt obligations at the
time of the OMI acquisition. Interest expense for Fiscal 2004 was $369,000 due
to the issuance of an aggregate of $12.9 million of promissory notes pursuant to
the terms of each of the acquisitions and the assumption of $814,000 in bank
debt and capital lease obligations.
Income Taxes: For Fiscal 2004, Fiscal 2003 and Fiscal 2002, NAC recorded
income benefits of $395,000, $2.2 million and $331,000, respectively, that
represent either (i) adjustments that increased the previously estimated amount
of net operating losses eligible to be carried back against prior year's taxable
income or (ii) adjustments to revise (reduce) previous estimates of certain
income taxes. For Fiscal 2002, these tax benefits arose and are a component of
discontinued operations. For Fiscal 2004 and Fiscal 2003, $415,000 and $145,000,
respectively, of the tax benefits is a component of discontinued operations.
As of January 31, 2004 NAC has net operating loss carryforwards of $86.5
million that may be used to reduce future taxable income, subject to
limitations. NAC also has unused low income housing credits totaling $4.4
million. At January 31, 2004, NAC has claims for refunds in the amount of $2.2
million.
22
As a result of NAC's November 3, 2000 repurchases of shares of its Common
Stock, NAC underwent a "change in ownership" as defined for the purposes of
Sections 382 and 383 of the Internal Revenue Code. As a result of the "change in
ownership", the use of net operating loss carryforwards totaling $56.3 million
incurred prior to November 3, 2000 will be subject to significant annual
limitation. Additionally, the use of low income housing tax credit carryforwards
of $3.2 million generated prior to November 3, 2000 will be subject to the
Section 382 limitation. The use of the net operating loss and low income housing
credit carryforwards incurred after November 3, 2000, which total $30.2 million
and $1.2 million, respectively, as of January 31, 2004, are not subject to the
Section 382 limitation.
As of January 31, 2004 NAC has $908,000 of minimum tax credits which may be
applied against any future regular income taxes which exceed alternative minimum
taxes. These credits may be carried forward indefinitely and are also subject to
the Section 383 limitation.
DISCONTINUED OPERATIONS
E-commerce Operations: In Fiscal 2004, there were no revenues or expenses
incurred attributable to the e-commerce operations. In Fiscal 2003 NAC's
e-commerce operations realized income of $2,000 as a result of the winding down
of operations. In Fiscal 2002 NAC's e-commerce operations incurred an operating
loss of $9.4 million, reflecting revenues of $867,000 and expenses of $10.2
million. Included in the expenses of $10.2 million were non-cash charges of $7.4
million for the amortization and write-off of the goodwill arising in the
December 2000 acquisition of ZoomLot. The remaining expenses of $2.8 million
represent the expenses incurred in ZoomLot's attempts to develop its e-commerce
method of facilitating the process by which used car dealerships, lenders and
insurance companies communicate and complete the transactions between them that
are needed to provide the used auto dealers' customers with financing, insurance
and other services.
Automobile Financing: In Fiscal 2004, NAC's automobile financing operations
realized income of $117,000, principally resulting from income tax benefits
realized upon the final determination of refund issued by the Internal Revenue
Service during the period. In Fiscal 2003 NAC's automobile financing operations
realized income of $33,000 comprised of $28,000 from the collection of
previously charged-off loans and $145,000 income tax benefit, offset by $140,000
in legal and general expenses as a result of the winding down of operations. In
Fiscal 2002 NAC's automobile financing operations generated operating income of
$658,000, comprised of $155,000 from the collection of previously charged off
loans, the gain of $34,000 from the sale of its remaining charged off loans, and
a $468,000 reduction in the provision for credit losses.
Auto Rental: NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra
Auto Rental and Automate Auto Rental, previously engaged in the rental of
automobiles on a short-term basis, principally to the insurance replacement
market. In the year ended January 31, 1996, NAC disposed of its rental fleet
business through the sale of certain assets and through certain leases to a
national car rental company. All liabilities related to the discontinued rental
business, principally self-insurance claims, were retained by NAC. NAC also had
a dealership operation that sold cars that were retired from the rental fleet,
primarily to member dealers of NAC's automobile financing business. That
operation was discontinued in the year ended January 31, 1997 as a result of
NAC's disposal of its automobile rental operations. The results of both the auto
rental and dealership operations are included in the results of discontinued
operations (together as "auto rental" operations).
In Fiscal 2004, NAC's automobile rental operations realized income of
$284,000, principally resulting from income tax benefits realized upon the final
determination of refund issued by the Internal Revenue Service and Canadian
Revenue Authority during the period. For the years ended January 31, 2003 and
2002, the results
23
of the discontinued auto rental operations principally represent the effects of
the settlement of, and changes in NAC's reserves for, claims against NAC related
to the self-insured claims (see Note 15 of Notes to Consolidated Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
As a consequence of NAC's acquisition of The Campus Group effective July
31, 2003, NAC issued to Mr. Campus and certain family trusts promissory notes of
$9.9 million and issued to a family trust a convertible promissory note of $2.8
million. Of the $9.9 million in promissory notes issued by NAC, $6.6 million of
the promissory notes ("Base Notes") bear interest at 5% per annum and are
repayable in quarterly installments according to a formula based upon the future
cash flows realized from The Campus Group over a period not to exceed seven
years. The remaining $3.3 million in promissory notes ("Trailing Notes") issued
by NAC bear interest at 5% per annum and are repayable in quarterly
installments, commencing upon the retirement of the Base Notes, according to a
formula based upon the future cash flows realized from The Campus Group over a
period not to exceed three years subsequent to the retirement of the Base Notes.
The $2.8 million convertible promissory note (i) bears interest at 5% per annum,
payable quarterly in cash or accumulating as principal at the election of NAC,
(ii) requires principal payments to commence upon the retirement of the Base
Notes and Trailing Notes and is then repayable in quarterly installments
according to a formula based upon the future cash flows realized from The Campus
Group over a period not to exceed three years and (iii) is convertible at the
option of the holder into shares of NAC common stock at a base conversion price
of $1.50 per share. The holder may not convert the convertible promissory note
into NAC common stock prior to repayment of the Base Notes and Trailing Notes.
The promissory notes are secured by the capital stock of the companies
comprising The Campus Group. In December 2003, NAC paid $244,000 in principal
and $161,000 in interest pursuant to the terms of the notes. At January 31,
2004, NAC has outstanding obligations under the terms of the Base Notes,
Trailing Notes and Convertible Notes of $6.3 million, $3.3 million and $2.8
million, respectively.
As a consequence of NAC's acquisition of OMI effective April 1, 2003, NAC
assumed $814,000 in bank debt and capital lease obligations to financial
institutions and issued a promissory note payable to Mr. Thompson in the amount
of $153,000.
During 2001, OMI obtained a $300,000 bank term loan (the "Term Loan") to
finance certain capital expenditures. The Term Loan is payable in monthly
installments of $6,000, comprised of principal and interest, over a five year
term, expiring in July 2006. The Term Loan bears interest at the rate of 8.25%
per annum. In addition, during 2001 OMI obtained a $100,000 revolving credit
facility (the "Credit Facility") with a bank which must be renewed annually. The
Credit Facility bears interest at 2.5% per annum above the bank's prime rate.
The Term Loan and the Credit Facility are collateralized by substantially all of
OMI's assets and the personal guarantee of Mr. Thompson. In July 2003, NAC paid
$83,000 to retire the Credit Facility. In April 2004, as a consequence of a
change in control provision with the Term Loan, the bank has requested repayment
of the Term Loan in full prior to May 31, 2004. The outstanding balance of the
Term Loan at April 16, 2004 is $150,000.
On April 25, 2002, OMI obtained a $402,000 loan guaranteed by the U.S.
Small Business Administration (the "SBA Loan") to finance losses incurred as a
result of the September 11, 2001 terrorist attacks in New York City. The SBA
Loan is repayable in monthly installments of $3,309 beginning in May 2004, with
the last payment due in April 2017. The loan bears no interest through May 2004
and at the rate of 4% per annum thereafter.
24
The promissory note payable to Mr. Thompson is payable in monthly
installments of principal and interest over a 36 month period expiring April
2006. The promissory note bears interest at 5% per annum. At January 31, 2004,
there was $86,000 outstanding under the promissory note.
OMI leases computer equipment under several different capital leases with
finance institutions with various payments terms, expiration dates and imputed
annual rates of interest.
During Fiscal 2004, NAC generated $1.7 million cash flows from continuing
operations. This is due to the effect of (i) NAC's net loss from continuing
operations of $2.2 million, (ii) net proceeds from the income tax refundable of
$3.4 million and (iii) the $499,000 net change in operating assets and
liabilities. NAC also used $123,000 of cash in the various discontinued
operations. NAC used $1.3 million in cash flows from investing activities
principally due to the net effect of (i) $3.2 million used to acquire The Campus
Group and OMI, (ii) capital expenditures of $265,000, (iii) distributions
received from AFC of $1.1 million and (iv) net proceeds of $1.1 million derived
from the sale of marketable securities. Also during Fiscal 2004, NAC used cash
to repay debt of $490,000 and retire Due to the Former Shareholder of The Campus
Group Companies, an obligation assumed by NAC at the acquisition date, of $1.3
million.
During Fiscal 2003, NAC used $4.3 million cash flows from continuing
operations. This is due to the effect of (i) NAC's net loss from continuing
operations of $419,000, (ii) an increase in the income tax refundable of $2.1
million and (iii) the $1.9 million net change in operating assets and
liabilities. NAC also used $294,000 of cash in the various discontinued
operations. NAC generated $363,000 in cash flows from investing activities
principally as the result of distributions from AFC of $300,000.
During Fiscal 2002, NAC used $7.5 million cash flows from continuing
operations. This is due to the effect of (i) NAC's net loss from continuing
operations of $5.5 million less net non-cash charges of $1.1 million and (ii)
the $3.1 million net change in operating assets and liabilities. NAC also used
$2.1 million of cash in the various discontinued operations. NAC generated $3.3
million in cash flows from investing activities principally as the result of the
proceeds of $2.1 million from its sale of assets and distributions from AFC of
$909,000.
NAC believes that the available cash and cash equivalents of $376,000, the
collection of the income tax refund of $2.2 million and cash flow derived from
its Acquired Companies as well as the cash distributions from its investment in
AFC will be sufficient to pay operating expenses, existing liabilities, and fund
its activities through January 31, 2005 as NAC continues to expand into new
strategic business alternatives. As discussed in Note 15 of Notes to
Consolidated Financial Statements, NAC is presently a defendant or nominal
defendant in various derivative shareholder complaints. Although NAC intends to
vigorously defend each of the claims and no prediction can be made with respect
to their ultimate outcomes. An adverse outcome could have a material adverse
effect on NAC's liquidity, financial condition or results of operations.
Additionally, as previously discussed, NAC's lack of external financing sources
may limit its ability to pursue strategic business alternatives being considered
by NAC's Board of Directors. Such limitations may have an adverse impact on
NAC's financial position, results of operations and liquidity.
OTHER
New Accounting Pronouncements
In July, 2002 the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires companies to recognize costs associated with
exit or disposal activities when they are incurred, rather than at the date of a
25
commitment to an exit or disposal plan. Examples of costs covered by the
standard included lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. Previous accounting guidance was provided by
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 replaces Issue 94-3 and is required to be
applied prospectively to exit or disposal activities initiated after December
2002. SFAS 146 was adopted by NAC effective February 1, 2003. At the time of
adoption, there was no material impact to NAC's financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on the reported results. The provisions of SFAS 148
are effective for financial statements for fiscal years ending after December
15, 2002. SFAS 148 was adopted by NAC effective February 1, 2003. At the time of
adoption, there was no material impact to NAC's financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or in which equity investors
do not bear the residual economic risks. The interpretation was immediately
applicable to variable interest entities ("VIEs") created after January 31,
2003, and to VIEs in which an enterprise obtains an interest after that date. It
applies in the fiscal year or interim period beginning after December 15, 2003,
to VIEs in which an enterprise holds a variable interest that was acquired
before February 1, 2003. NAC does not hold any interests in VIEs as defined by
FIN No. 46 and as a result, the adoption of FIN No. 46 is not expected to have a
material impact on the consolidated financial statements of NAC.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer measures certain financial instruments
with characteristics of both liabilities and equity and classifies them in its
balance sheet. It requires that an issuer classify a financial instrument that
is within its scope, such as an issue of preferred or common shares that are
subject to redemption at specified times or at the option of the holder, as a
liability when that financial instrument embodies an obligation of the issuer.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS 150 was adopted by NAC
effective February 1, 2003. At the time of adoption, there was no material
impact to NAC's financial statements.
Inflation
Inflation has not had a material affect on NAC's business.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like virtually all commercial enterprises, NAC can be exposed to the risk
("market risk") that the cash flows to be received or paid relating to certain
financial instruments could change as a result of changes in interest rate,
exchange rates, commodity prices, equity prices and other market changes.
NAC does not engage in trading activities and does not utilize interest
rate swaps or other derivative financial instruments or buy or sell foreign
currency, commodity or stock indexed futures or options. Accordingly, NAC is not
exposed to market risk from these sources.
As of January 31, 2004, the interest rates under NAC's long term and
convertible debt are fixed. As a result NAC has limited market risk associated
with market interest rates.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
National Auto Credit, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of National
Auto Credit, Inc. and Subsidiaries as of January 31, 2004 and 2003 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, 2004. Our audits also included the financial statement
schedule listed in the Index at Item 15(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, 2004 and 2003 and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2004 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, 2004
28
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 31,
---------------------
2004 2003
--------- ---------
ASSETS
Cash and cash equivalents (Note 1) $ 376 $ 1,873
Marketable securities (Notes 1 and 3) -- 984
Accounts receivable, net of allowance of $75 (Note 1) 1,979 --
Income taxes refundable (Note 9) 2,162 5,577
Prepaid expenses 293 138
Other current assets 399 500
--------- ---------
Total current assets 5,209 9,072
Property and equipment, net of accumulated
depreciation of $528 and $90, respectively
(Notes 1 and 4) 2,756 81
Investment in AFC (Note 5) 8,549 9,295
Goodwill (Notes 1 and 2) 4,920 --
Other intangible assets, net of accumulated
amortization of $284 (Notes 1 and 2) 9,198 --
Other assets 284 264
--------- ---------
$ 30,916 $ 18,712
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current maturities of long term obligations (Note 8) $ 1,339 $ --
Accounts payable 1,238 117
Self-insurance claims (Note 15) 408 518
Accrued income taxes (Note 9) 334 711
Deferred revenue (Note 1) 776 --
Other liabilities (Note 7) 1,547 1,256
--------- ---------
Total current liabilities 5,642 2,602
Long term obligations (Note 8) 8,969 --
Convertible promissory note (Note 8) 2,825 --
--------- ---------
17,436 2,602
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 15) -- --
STOCKHOLDERS' EQUITY (Notes 10 and 11)
Preferred stock -- --
Common stock - $.05 par value,
authorized 40,000,000 shares, issued
39,949,589 and 39,377,589 shares, respectively 1,997 1,969
Additional paid-in capital 174,454 174,337
Retained deficit (139,746) (136,455)
Deferred compensation (113)
Accumulated other comprehensive loss -- (143)
Treasury stock, at cost, 30,896,975 and 31,546,975
shares, respectively (23,112) (23,598)
--------- ---------
Total stockholders' equity 13,480 16,110
--------- ---------
$ 30,916 $ 18,712
========= =========
See accompanying notes to consolidated financial statements.
29
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended January 31,
----------------------------
2004 2003 2002
------- ------- --------
Revenues (Notes 1 and 16) $ 7,144 $ -- $ --
Cost of revenues (Note 1) 4,011 -- --
------- ------- --------
Gross profit 3,133 -- --
Selling, general and administrative 6,990 3,506 5,384
------- ------- --------
Loss from operations (3,857) (3,506) (5,384)
Interest income from investments 530 642 344
Income from AFC investment (Note 5) 333 375 101
Loss on sale of property (Note 12) -- -- (549)
Interest expense (Note 8) (369) -- --
------- ------- --------
Loss from continuing operations
before income taxes (3,363) (2,489) (5,488)
Provision (benefit) for income taxes (Note 9) 20 (2,070) --
------- ------- --------
Loss from continuing operations (3,383) (419) (5,488)
Income (loss) from discontinued operations, net of tax (Note 11) 401 310 (9,174)
Gain on disposal of discontinued operations (Note 11) -- -- 394
------- ------- --------
Net loss (2,982) (109) (14,268)
Accretion of discount on redeemable preferred stock (Note 10) -- -- 226
------- ------- --------
Net loss applicable to common stock $(2,982) $ (109) $(14,494)
======= ======= ========
Basic and diluted (loss) earnings per share
Continuing operations $ (.41) $ (.05) $ (.47)
Discontinued operations .05 .04 (.78)
Disposal of discontinued operations -- -- .03
------- ------- --------
Net loss per share $ (.36) $ (.01) $ (1.22)
======= ======= ========
Weighted average number of shares outstanding
Basic and diluted 8,182 8,380 11,692
======= ======= ========
See accompanying notes to consolidated financial statements.
30
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Common Stock
--------------- ------------------- Common Additional
Par Par Stock to Paid-In
Shares Value Shares Value be Issued Capital
------ ----- ---------- ------ --------- ----------
BALANCE, JANUARY 31, 2001 -- $-- 39,420,437 $1,971 $ 219 $174,385
Net loss
Stock award (219)
Accretion on redeemable preferred stock
Return of common stock in settlement of
ZoomLot agreements (Note 10)
Stock cancelled under benefit plans (42,848) (2) (48)
Other comprehensive income (loss)
unrealized loss on marketable securities
--- --- ---------- ------ ----- --------
BALANCE, JANUARY 31, 2002 -- -- 39,377,589 1,969 -- 174,337
Net loss
Surrender of common shares as
payment on note receivable (Note 11)
Other comprehensive income (loss)
unrealized loss on marketable securities
--- --- ---------- ------ ----- --------
BALANCE, JANUARY 31, 2003 -- -- 39,377,589 1,969 -- 174,337
Net loss
Acquisition of OMI 200,000 10 16
Stock awards to employees 372,000 18 101
Stock issued for acquisition services
Deferred compensation expense
Other comprehensive income (loss)
unrealized loss on marketable securities
--- --- ---------- ------ ----- --------
BALANCE, JANUARY 31, 2004 -- $-- 39,949,589 $1,997 $ -- $174,454
=== === ========== ====== ===== ========
Deferred Other Comprehensive
Retained Treasury Compensation Comprehensive Income
Deficit Stock Expense Income (loss) Total (Loss)
--------- -------- ------------ ------------- -------- -------------
BALANCE, JANUARY 31, 2001 $(121,801) $(23,275) $ -- $ (44) $ 31,455
Net loss (14,268) (14,268) $(14,268)
Stock award (51) 204 (66)
Accretion on redeemable preferred stock (226) (226)
Return of common stock in settlement of
ZoomLot agreements (Note 10) (431) (431)
Stock cancelled under benefit plans (50)
Other comprehensive income (loss)
unrealized loss on marketable securities (89) (89) (89)
--------- -------- ----- ----- -------- --------
BALANCE, JANUARY 31, 2002 (136,346) (23,502) -- (133) 16,325 $(14,357)
========
Net loss (109) (109) (109)
Surrender of common shares as
payment on note receivable (Note 11) (96) (96)
Other comprehensive income (loss)
unrealized loss on marketable securities (10) (10) (10)
--------- -------- ----- ----- -------- --------
BALANCE, JANUARY 31, 2003 (136,455) (23,598) -- (143) 16,110 $ (119)
========
Net loss (2,982) (2,982) (2,982)
Acquisition of OMI 26
Stock awards to employees (166) 262 (119) 96
Stock issued for acquisition services (143) 224 81
Deferred compensation expense 6 6
Other comprehensive income (loss)
unrealized loss on marketable securities 143 143
--------- -------- ----- ----- -------- --------
BALANCE, JANUARY 31, 2004 $(139,746) $(23,112) $(113) $ -- $ 13,480 $ (2,982)
========= ======== ===== ===== ======== ========
See accompanying notes to consolidated financial statements.
31
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended January 31,
----------------------------
2004 2003 2002
------- ------- --------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net loss $(2,982) $ (109) $(14,268)
Adjustments to reconcile net loss to net cash
(used in) provided by continuing operating activities:
Loss (gain) from discontinued operations 13 (310) 9,174
Gain on disposal of discontinued operations -- -- (394)
Depreciation and amortization 722 33 606
Loss on write-down of assets held for sale -- -- 589
Stock compensation -- -- (116)
Changes in operating assets and liabilities:
Accounts receivable (566) -- --
Accrued income tax/refundable 3,443 (2,070) (175)
Accounts payable and other liabilities 1,384 (1,017) (2,240)
Other operating assets and liabilities, net (319) (845) (691)
------- ------- --------
Net cash provided by (used in) continuing operating activities 1,695 (4,318) (7,515)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on gross finance receivable -- -- 155
Proceeds from sale of loans -- -- 313
Change in contracts in progress -- 106 614
Acquisition of OMI net of cash acquired (97) -- --
Acquisition of The Campus Group net of cash acquired (3,111) -- --
Proceeds from sale of assets held for sale -- -- 2,065
Proceeds from AFC distributions 1,079 300 909
Proceeds from sale of marketable securities 1,071 -- --
Purchase of other property and equipment (265) (43) (326)
Purchase of affordable housing investments -- -- (471)
------- ------- --------
Net cash provided by (used in) investing activities (1,323) 363 3,259
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on debt and notes payable (490) -- --
Payments to retire Due to the Former Shareholder of The Campus Group (1,256) -- --
------- ------- --------
Net cash used in financing activities (1,746) -- --
------- ------- --------
Decrease in cash and cash equivalents from continuing operations (1,374) (3,955) (4,256)
Decrease in cash and cash equivalents from discontinued operations (123) (294) (2,066)
Cash and cash equivalents at beginning of year 1,873 6,122 12,444
------- ------- --------
Cash and cash equivalents at end of year $ 376 $ 1,873 $ 6,122
======= ======= ========
- continued -
See accompanying notes to consolidated financial statements.
32
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
Years Ended January 31,
-----------------------
2004 2003 2002
-------- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 209 $ 3 $ --
======== === ====
Income taxes paid $ 64 $-- $293
======== === ====
Stock awards to employees $ 214 $-- $ --
======== === ====
Stock issued for acquisition services $ 81 $-- $ --
======== === ====
Acquisition of The Campus Group:
Non-cash assets acquired $ 17,260
Liabilities assumed (1,484)
--------
15,776
Promissory notes issued (12,665)
--------
Cash paid, net of cash acquired $ 3,111
========
Acquisition of OMI:
Non-cash assets acquired $ 1,597
Liabilities assumed (1,321)
--------
276
Promissory notes issued (153)
Common stock issued
(26)
--------
Cash paid, net of cash acquired $ 97
========
See accompanying notes to consolidated financial statements.
33
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: National Auto Credit, Inc. ("the Company" or "NAC") began
operations in 1969 and was incorporated in Delaware in 1971. NAC consummated a
series of acquisitions during the year ended January 31, 2004 transforming its
business operations into a multi-dimensional corporate communications and
entertainment company (see Note 2). NAC specializes in the full service design,
creative development, production, post production editing and transmission, via
broadcast satellite videoconferencing, webcasting and traditional on-site
presentations of corporate communication, education and training video and other
services for use at corporate events. Additionally, NAC, through its investment
in the Angelika Film Center LLC ("AFC"), operates in the movie exhibition
industry (see Note 5). NAC acquired its investment in AFC in April 2000.
Prior to Fiscal 2003, NAC's operations were conducted principally through
three operating segments, (i) the e-commerce segment, which were comprised of
ZoomLot Corporation's ("ZoomLot") development of e-commerce services to
facilitate the process by which used car dealerships, lenders and insurance
companies communicate and complete the transactions between them that are needed
to provide used car dealers' customers with financing, insurance and other
services, (ii) the movie exhibition segment, which was comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment. However, as the consequence of NAC's strategic review, as
described below, completed in the fourth quarter of Fiscal 2002, NAC suspended
its ZoomLot operations and initiated the steps to discontinue both its
e-commerce and auto financing segments as of January 31, 2002 (see Note 11).
Discontinued Operations
In the fourth quarter of Fiscal 2002, NAC completed a strategic review of
its investment in ZoomLot Corporation ("ZoomLot"), acquired December 15, 2000,
and the development of its e-commerce services. NAC's strategic review included
evaluating the evolving market conditions of the used car dealer and financing
industries, the start-up nature of the ZoomLot operations, the current market
demand for and penetration of ZoomLot's e-commerce solution to electronically
link eligible used car dealers and their qualified customers with available used
car lenders and financing terms, current operating losses and forecasts of
future operating results and strategic opportunities available to ZoomLot. As a
result of this review, management of NAC determined that it was unable to
predict, with the requisite degree of certainty, when or whether ZoomLot would
achieve positive cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated steps to
discontinue e-commerce operations. Additionally, as a consequence of NAC's
decision to discontinue its ZoomLot e-commerce operations, NAC also formally
exited the sub-prime used automobile consumer finance business effective
December 31, 2001. As a result of these decisions, both the e-commerce and
automobile finance segments have been classified as discontinued operations as
of January 31, 2002.
NAC continues to examine new business opportunities, which may be pursued
through the investment in or acquisition of existing corporate operating
businesses or other means.
34
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the amounts of NAC and its wholly owned subsidiaries and its investment in AFC,
a 50% owned limited liability company, which is accounted for under the equity
method. All material intercompany accounts and transactions have been eliminated
in consolidation.
ESTIMATES: The preparation of financial statements and the accompanying
notes thereto, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the respective reporting periods. Actual results
could differ from those estimates.
CASH EQUIVALENTS: All highly liquid investments, such as commercial paper
and debt instruments with initial maturities of three months or less are
considered to be cash equivalents. Cash equivalents are stated at cost, which
approximates the market value.
GOODWILL AND OTHER INTANGIBLE ASSETS: NAC adopted Statement of Financial
Accounting Standards No. ("SFAS") 141, "Business Combinations", and SFAS
142,"Goodwill and Other Intangible Assets", effective February 1, 2002. Prior to
the adoption of SFAS 142, NAC recorded a monthly charge (as a reduction of its
earnings from its investment in AFC) of $23,000 for the amortization, in a
manner similar to goodwill, of the excess of NAC's investment in AFC over its
share of the net assets of AFC. Under SFAS 142 intangible assets with indefinite
lives, including goodwill, are no longer subject to amortization and are subject
to testing for impairment annually and whenever there is an impairment
indicator.
In its acquisition of The Campus Group, NAC acquired certain intangible
assets including client relationships and lists and a non-competition agreement
with an initial fair value of $9.5 million. The useful life of these intangibles
are estimated to be 17 years and 9 years, respectively. The intangible assets
with definite useful lives are amortized using the straight-line method over the
estimated useful life of the intangible. From July 31, 2003, the date to
acquisition, to January 31, 2004, NAC charged to operations $284,000 for the
amortization of these intangible assets.
The goodwill arising from NAC's acquisition of ZoomLot was being amortized
on a straight-line basis over a three year period until the remaining amount was
written off as the result of NAC's decision in December, 2001 to discontinue the
operations of ZoomLot. The amortization and write-off of that goodwill is
included in the results of discontinued operations (see Note 11).
IMPAIRMENT OF LONG-LIVED ASSETS: Effective February 1, 2002, NAC adopted
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In
accordance with this statement, NAC reviews the carrying value of its long-lived
assets (other than goodwill) whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. If indicators of
impairment exist, NAC would determine whether the estimated undiscounted sum of
the future cash flows of such assets is less than its carrying amount. If less,
an impairment loss would be recognized based on the excess of the carrying
amount of such assets over their respective fair values. NAC would determine the
fair value by using quoted market prices, if available, for such assets; or if
quoted market prices are not available, NAC would discount the expected
estimated future cash flows. Certain of these long-lived assets are being
disposed of and have been written-down to their estimated fair value (see Notes
11 and 12).
35
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES: Marketable securities consist of U.S. Government
Agency mortgage-backed obligations, mortgage-backed securities and mutual funds.
NAC accounts for its marketable securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires that
marketable debt and equity securities be adjusted to market value at the end of
each accounting period, except in the case of debt securities which a holder has
the positive intent and ability to hold to maturity, in which case the debt
securities are carried at amortized cost. For marketable debt and equity
securities carried at market value, unrealized market value gains and losses are
included directly in net income if the securities are actively traded for
short-term profit, or otherwise are charged or credited to a separate component
of stockholders' equity ("accumulated other comprehensive income (loss)").
NAC determines the proper classification of its marketable debt and equity
securities at the time of purchase and re-evaluates such designations as of each
balance sheet date. At January 31, 2003, 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.
ACCOUNTS RECEIVABLE: Accounts receivable are recorded at the invoiced
amount and do not bear interest. The allowance for doubtful accounts is NAC's
best estimate of the amount of probable credit losses in NAC's existing accounts
receivable. NAC determines the allowance based on analysis of historical bad
debts, client concentrations, client credit-worthiness and current economic
trends. NAC reviews its allowance for doubtful accounts quarterly. Past-due
balances over 90 days and specified other balances are reviewed individually for
collectibility. All other balances are reviewed on an aggregate basis. Account
balances are written off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. NAC
does not have any off-balance sheet credit exposure related to its customers.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost (see Note
4). Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from eighteen months to ten years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful lives of the related
improvements.
INCOME TAXES: Deferred income taxes are provided for all temporary
differences between the book and tax basis of assets and liabilities. Deferred
income taxes are adjusted to reflect new tax rates when they are enacted into
law. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. A
valuation allowance is recognized if it is anticipated that some or all of a net
deferred tax asset may not be realized.
REVENUES: NAC recognizes revenue from video production, video editing,
meeting services and broadcast satellite or webcast services when the video is
complete and delivered or all technical services have been rendered. Deposits
and other prepayments are recorded as deferred revenue until revenue is
recognized. NAC does not have licensing or other arrangements that result in
additional revenues following the delivery of the video or a broadcast. Costs
accumulated in the production of the video, meeting services or broadcasts are
deferred until the sale and delivery are complete. Deferred production costs of
$398,000 are included as a component of other current assets at January 31,
2004.
36
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NAC recognizes revenue from designing and developing websites when the
customer accepts the completed project. Deposits and other prepayments are
recorded as deferred revenue until revenue is recognized. These contracts are
limited to the design and development of websites. Clients have the option to
engage NAC to maintain and upgrade their websites. These contracts are separate
from the website development and design agreements, and the related revenue is
recognized over the term of the contracts, which is generally up to one year.
NAC recognizes revenue from developing and maintaining websites pursuant to
the requirements of Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9,
"Software Revenue Recognition with Respect to Certain Arrangements." Under SOP
97-2, revenue attributable to an element in a customer arrangement is recognized
when persuasive evidence of an arrangement exists and delivery has occurred,
provided the fee is fixed or determinable, collectibility is probable and the
arrangement does not require significant customization of the software. If at
the outset of the customer arrangement, NAC determines that the arrangement fee
is not fixed or determinable or that collectibility is not probable, NAC defers
the revenue and recognizes the revenue when the arrangement fee becomes due and
payable or, when collectibility is uncertain, as cash is collected.
COST OF REVENUES: Cost of revenues consists of direct expenses specifically
associated with client service revenues. The cost of revenues includes direct
salaries and benefits, purchased products or services for clients, web hosting,
support services, shipping and delivery costs.
ACCOUNTING FOR STOCK-BASED COMPENSATION: NAC accounts for stock options and
awards in accordance with SFAS 123, "Accounting for Stock-Based Compensation",
which allows companies to continue to recognize compensation expense for grants
to employees pursuant to Accounting Principles Board Opinion No. 25, ("APB 25"),
"Accounting for Stock Issued to Employees" but requires companies to disclose
the effect on net income (loss) and earnings (loss) per share had NAC adopted
the provisions of SFAS 123 requiring the recognition of compensation expense
based on the fair value of the options or awards
If NAC had recorded compensation expense using the fair value method of
SFAS 123, the Company's net after tax loss and loss per share would have been as
follows (in thousands, except per share amounts):
Years Ended January 31,
--------------------------
2004 2003 2002
------- ----- --------
Net loss applicable to common stock, as reported $(2,982) $(109) $(14,494)
Pro forma net loss (2,982) (261) (14,647)
Loss per share, as reported (.36) (.01) (1.22)
Pro forma loss per share (.36) (.03) (1.25)
37
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 year ended January 31, 2001. No stock options were granted in Fiscal 2004,
Fiscal 2003 or Fiscal 2002.
Year Ended
January 31,
2001
-----------
Risk-free interest rate 5.24%
Expected life 7.00 years
Expected volatility 93.06%
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.
EARNINGS PER SHARE: Basic earnings per share is computed by dividing net
income (loss), after reduction for the accretion of the discount on NAC's Series
C Redeemable Preferred Stock (see Note 10), 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 2004, 2003 and 2002.
NEW ACCOUNTING PRONOUNCEMENTS: In July, 2002 the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred, rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard included lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 replaces
Issue 94-3 and is required to be applied prospectively to exit or disposal
activities initiated after December 2002. SFAS 146 was adopted by NAC effective
February 1, 2003. At the time of adoption, there was no material impact to NAC's
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on the reported results. The provisions of SFAS 148
are effective for financial statements for fiscal years ending after December
15, 2002. SFAS 148 was adopted by NAC effective February 1, 2003. At the time of
adoption, there was no material impact to NAC's financial statements.
38
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or in which equity investors
do not bear the residual economic risks. The interpretation was immediately
applicable to variable interest entities ("VIEs") created after January 31,
2003, and to VIEs in which an enterprise obtains an interest after that date. It
applies in the fiscal year or interim period beginning after December 15, 2003,
to VIEs in which an enterprise holds a variable interest that was acquired
before February 1, 2003. NAC does not hold any interest in VIE's as defined by
FIN No. 46 and as a result the adoption of FIN No. 46 is not expected to have a
material impact on the consolidated financial statements of NAC.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer measures certain financial instruments
with characteristics of both liabilities and equity and classifies them in its
balance sheet. It requires that an issuer classify a financial instrument that
is within its scope, such as an issue of preferred or common shares that are
subject to redemption at specified times or at the option of the holder, as a
liability when that financial instrument embodies an obligation of the issuer.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS 150 was adopted by NAC
effective February 1, 2003. At the time of adoption, there was no material
impact to NAC's financial statements.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
NOTE 2 - ACQUISITIONS
The Campus Group
In July 2003, NAC consummated a Stock Purchase Agreement whereby NAC
acquired all outstanding capital stock of four affiliated companies, Campus
Group Companies, Inc., Audience Response Systems, Inc, Interactive Conferencing
Network, Inc. and Multi-Video Services, Inc., collectively known as The Campus
Group. In exchange for the acquisition of all of the outstanding capital stock
of The Campus Group, NAC (i) paid $2.8 million at closing from NAC's available
cash balances, (ii) issued to Mr. Campus and certain family trusts promissory
notes of $9.9 million, and (iii) issued to a family trust a convertible
promissory note of $2.8 million. The Campus Group revenues for the years ended
December 31, 2002 and 2001 were $10.7 million and $12.7 million, respectively.
The Campus Group realized net income of $1.2 million and $2.3 million for those
years, respectively. For financial reporting purposes, the effective date of the
transaction was July 31, 2003.
As part of The Campus Group acquisition, Mr. Campus entered into an
employment agreement under which he has agreed to serve as President of each of
the four acquired companies with an initial term of three years. The term of the
employment agreement will be automatically extended until such time as the
promissory notes and convertible promissory note are retired. Mr. Campus,
subject to certain limitations, will have control over day-to-day operations of
The Campus Group. Under the terms of the employment agreement, Mr. Campus will
be entitled to base compensation of $100,000 per year and a performance bonus
based upon the operating results of the acquired companies.
39
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 2 - ACQUISITIONS (CONTINUED)
The components and allocation of the purchase price were as follows (in
thousands):
Amount
-------
Components of purchase price:
Cash paid at closing $ 2,825
Promissory notes issued at closing 9,840
Convertible note issued at closing 2,825
Transaction costs 861
-------
Total purchase price $16,351
=======
Allocation of purchase price:
Current assets $ 1,758
Property and equipment 2,216
Goodwill arising in the acquisition 4,379
Other intangible assets 9,482
-------
17,835
Accounts payable and accrued expenses (228)
Due to shareholder (1,256)
-------
Net assets acquired $16,351
=======
OMI
In April 2003, NAC consummated a Merger Agreement and Plan of
Reorganization whereby NAC acquired all of the outstanding common stock of OMI
from Mr. Dean R. Thompson, sole stockholder of OMI. In exchange for the
acquisition of all of the outstanding common stock of OMI, NAC (i) issued
200,000 shares of NAC Common Stock, valued at $26,000 (ii) assumed $814,000 in
bank debt and capital lease obligations to financial institutions and (iii)
issued a promissory note payable to Mr. Thompson in the amount of $153,000,
payable in monthly installments of principal and interest over a 36 month
period. In addition to the initial payments, NAC agreed to a contingent payment
to Mr. Thompson of $150,000 based upon OMI's financial performance during the
three-year period ending January 31, 2006. OMI's revenues for the years ended
December 31, 2002 and 2001 were $2.5 million and $3.5 million, respectively. OMI
incurred net losses of $343,000 and $27,000 for those years, respectively. For
financial reporting purposes, the effective date of the merger was April 1,
2003.
As part of the OMI acquisition, OMI entered into a five year employment
agreement with Mr. Thompson under which Mr. Thompson will serve as President of
OMI and, subject to certain limitations, will have control over the day-to-day
operations of OMI. Under the terms of the employment agreement, Mr. Thompson
will be entitled to base compensation of $175,000 per year, a grant of stock
options for up to 200,000 shares of NAC Common Stock and a performance bonus
based upon the operating results of the acquired companies.
40
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 2 - ACQUISITIONS (CONTINUED)
The components and allocation of the purchase price were as follows (in
thousands):
Amount
------
Components of purchase price:
Common stock $ 26
Promissory note 153
Transaction costs 110
------
Total purchase price $ 289
======
Allocation of purchase price:
Current assets $ 376
Property and equipment 632
Other assets 61
Goodwill arising in the acquisition 541
------
1,610
Accounts payable and accrued expenses (516)
Debt (805)
------
Net assets acquired $ 289
======
The following sets forth the pro forma condensed results of operations of
NAC, The Campus Group and OMI for the year ended January 31, 2004 and 2003 as if
the acquisitions were consummated on February 1, 2003 and 2002, respectively.
Prior to its acquisition, The Campus Group and OMI used a December 31 year end,
and accordingly the pro forma results have been prepared by combining the
historical results for NAC for the year ended January 31, with the historical
results of The Campus Group and OMI for the year ended December 31. These pro
forma results have been prepared for illustrative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been in
effect for the periods indicated or the results which may occur in the future.
Pro forma revenues, net loss and loss per share are as follows:
Year Ended January 31,
----------------------
2004 2003
------- -------
Revenues $12,240 $13,209
======= =======
Net income (loss) from continuing operations $(3,241) $ 339
======= =======
Income (loss) per share from continuing operations $ (0.39) $ 0.04
======= =======
41
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 3 - MARKETABLE SECURITIES
The marketable securities as of January 31, 2003 are summarized as follows
(in thousands):
Gross Unrealized
------------------------------------
Cost Gains Losses Fair Value
------ ----- ------ ----------
Equity securities - mutual funds at
January 31, 2003 $1,127 $-- $(143) $984
There were no investments by NAC in marketable securities as of January 31,
2004.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 31, 2004:
Description January 31, 2004 Estimated Useful Life
----------- ---------------- ---------------------
Leasehold Improvements $ 357 Lesser of useful life or term of lease
Machinery & Equipment 1,176 5 years
Computer Equipment 774 3 years
Furniture & Fixtures 305 5 years
Automobiles 55 2 years
Software 483 5 to 10 years
Small Tools 4 18 months
Film Library 130 5 years
------
3,284
Less
Accumulated depreciation (528)
------
$2,756
======
Depreciation expense was $438,000, $33,000 and $334,000 for Fiscal 2004,
Fiscal 2003 and Fiscal 2002, respectively.
42
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 5 - INVESTMENT IN AFC
On April 5, 2000, NAC, through its wholly owned subsidiary National
Cinemas, Inc., purchased a 50% membership interest in AFC. AFC is the owner and
operator of the Angelika Film Center, which is a multiplex cinema and cafe
complex in the Soho District of Manhattan in New York City. The 50% membership
interest was purchased from Reading International, Inc. ("Reading"), formerly
known as Reading Entertainment, Inc. for an initial investment of $11.1 million.
At April 5, 2000, the investment exceeded NAC's share of the net assets of AFC
by approximately $5.6 million, which is being treated in a manner similar to
goodwill (see Note 1).
AFC is currently owned 50% by NAC and 50% by Reading. The articles and
bylaws of AFC provide that for all matters subject to a vote of the members, a
majority is required, except that in the event of a tie vote, the Chairman of
Reading shall cast the deciding vote.
NAC uses the equity method to account for its investment in AFC. AFC uses a
December 31 year-end for financial reporting purposes. NAC reports on a January
31 year-end, and for its fiscal quarters ending April 30, July 31, October 31
and January 31 records its pro-rata share of AFC's earnings on the basis of
AFC's fiscal quarters ending March 31, June 30, September 30, and December 31,
respectively. For Fiscal 2004, 2003 and 2002, NAC recorded income from its
investment in AFC of $333,000, $375,000 and $373,000, respectively, representing
its share of AFC's income. Additionally, in Fiscal 2002, prior to the adoption
of SFAS 141 and SFAS 142, NAC recorded amortization expense of $272,000 as a
reduction of its income from its investment in AFC. As a result of NAC's
adoption of SFAS 141 and SFAS 142, this amortization charge was discontinued in
Fiscal 2003.
43
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 5 - INVESTMENT IN AFC (CONTINUED)
Summarized financial statement information for AFC as of December 31, 2003
and 2002 and for the years ended December 31, 2003, 2002 and 2001 is as follows
(in thousands):
December 31,
----------------
2003 2002
------ -------
CONDENSED BALANCE SHEET:
Current assets $ 894 $ 1,185
Property and equipment, net 1,409 1,524
Goodwill 7,479 8,069
Other assets 89 89
------ -------
$9,871 $10,867
====== =======
Current liabilities $ 682 $ 756
Non-current liabilities 1,610 1,440
Members' equity 7,579 8,671
------ -------
$9,871 $10,867
====== =======
For the Year Ended December 31,
-------------------------------
2003 2002 2001
------ ------ ------
CONSENSED STATEMENT OF EARNINGS:
Revenues $5,791 $6,032 $6,958
Film rental 1,320 1,627 2,243
Operating costs 2,744 2,831 3,127
Depreciation and amortization 850 699 693
General and administrative expenses 211 125 149
------ ------ ------
5,125 5,282 6,212
------ ------ ------
Net income $ 666 $ 750 $ 746
====== ====== ======
NAC's proportionate share of net income $ 333 $ 375 $ 373
Amortization expense -- -- 272
------ ------ ------
Income from investment in AFC $ 333 $ 375 $ 101
====== ====== ======
NOTE 6 - FINANCIAL INSTRUMENTS
NAC has various financial instruments including cash and cash equivalents,
marketable securities, investments in affordable housing limited partnerships,
and miscellaneous other assets. Many of these instruments are short-term in
nature and the fair value of these financial instruments has been estimated
based on available market information and appropriate valuation methodologies.
NAC has determined that their carrying values approximate estimated fair values.
44
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 7 - OTHER LIABILITIES
The components of other liabilities are as follows (in thousands):
January 31,
---------------
2004 2003
------ ------
Accrued interest $ 160 $ --
Accrued litigation expenses 334 368
Accrued expenses 951 841
Accrued state and local taxes 102 47
------ ------
Total $1,547 $1,256
====== ======
NOTE 8 - CURRENT AND LONG TERM OBLIGATIONS
As a consequence of NAC's acquisition of The Campus Group effective July
31, 2003, NAC issued to Mr. Campus and certain family trusts promissory notes of
$9.9 million and issued to a family trust a convertible promissory note of $2.8
million. Of the $9.9 million in promissory notes issued by NAC, $6.6 million of
the promissory notes ("Base Notes") bear interest at 5% per annum and are
repayable in quarterly installments according to a formula based upon the future
cash flows realized from The Campus Group over a period not to exceed seven
years. The remaining $3.3 million in promissory notes ("Trailing Notes") issued
by NAC bear interest at 5% per annum and are repayable in quarterly
installments, commencing upon the retirement of the Base Notes, according to a
formula based upon the future cash flows realized from The Campus Group over a
period not to exceed three years subsequent to the retirement of the Base Notes.
The $2.8 million convertible promissory note (i) bears interest at 5% per annum,
payable quarterly in cash or accumulating as principal at the election of NAC,
(ii) requires principal payments to commence upon the retirement of the Base
Notes and Trailing Notes and is then repayable in quarterly installments
according to a formula based upon the future cash flows realized from The Campus
Group over a period not to exceed three years and (iii) is convertible at the
option of the holder into shares of NAC common stock at a base conversion price
of $1.50 per share. The holder may not convert the convertible promissory note
into NAC common stock prior to repayment of the Base Notes and Trailing Notes.
The promissory notes are secured by the capital stock of the companies
comprising The Campus Group. In December 2003, NAC paid $244,000 in principal
and $161,000 in interest pursuant to the terms of the notes. At January 31,
2004, NAC has outstanding obligations under the terms of the Base Notes,
Trailing Notes and Convertible Notes of $6.3 million, $3.3 million and $2.8
million, respectively.
As a consequence of NAC's acquisition of OMI effective April 1, 2003, NAC
assumed $814,000 in bank debt and capital lease obligations to financial
institutions and issued a promissory note payable to Mr. Thompson in the amount
of $153,000.
45
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 8 - CURRENT AND LONG TERM OBLIGATIONS (CONTINUED)
During 2001, OMI obtained a $300,000 bank term loan (the "Term Loan") to
finance certain capital expenditures. The Term Loan is payable in monthly
installments of $6,000, comprised of principal and interest, over a five year
term, expiring in July 2006. The Term Loan bears interest at the rate of 8.25%
per annum. In addition, during 2001 OMI obtained a $100,000 revolving credit
facility (the "Credit Facility") with a bank which must be renewed annually. The
Credit Facility bears interest at 2.5% per annum above the bank's prime rate.
The Term Loan and the Credit Facility are collateralized by substantially all of
OMI's assets and the personal guarantee of Mr. Thompson. In July 2003, NAC paid
$83,000 to retire the Credit Facility. In April 2004, as a consequence of a
change in control provision with the Term Loan, the bank has requested repayment
of the Term Loan in full prior to May 31, 2004. The outstanding balance of the
Term Loan at April 16, 2004 is $150,000.
On April 25, 2002, OMI obtained a $402,000 loan guaranteed by the U.S.
Small Business Administration (the "SBA Loan") to finance losses incurred as a
result of the September 11, 2001 terrorist attacks in New York City. The SBA
Loan is repayable in monthly installments of $3,309 beginning in May 2004, with
the last payment due in April 2017. The loan bears no interest through May 2004
and at the rate of 4% per annum thereafter.
The promissory note payable to Mr. Thompson is payable in monthly
installments of principal and interest over a 36 month period expiring April
2006. The promissory note bears interest at 5% per annum. At January 31, 2004,
there was $86,000 outstanding under the promissory note.
OMI leases computer equipment under several different capital leases with
finance institutions with various payments terms, expiration dates and imputed
annual rates of interest.
The components of long term obligations and convertible debt at January 31,
2004 are as follows (in thousands):
January 31, 2004
----------------
Capital leases $ 66
Term loan 158
SBA loan 402
Promissory note 86
Base promissory notes 6,321
Trailing promissory notes 3,275
Convertible debt 2,825
-------
13,133
Less current maturities (1,339)
-------
Long term obligations and
convertible debt $11,794
=======
46
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 8 - CURRENT AND LONG TERM OBLIGATIONS (CONTINUED)
NAC's current maturities and convertible debt obligations at January 31,
2004 are as follows (in thousands):
January 31, 2004
----------------
2004 $ 1,348
2005 1,198
2006 1,199
2007 1,260
2008 1,325
Thereafter 6,811
-------
13,141
Less interest due under
capital leases obligations (8)
-------
$13,133
=======
The cost and accumulated depreciation for equipment under capital leases
were $335,000 and $93,000, respectively at January 31, 2004.
NOTE 9 - 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,
-----------------------
2004 2003 2002
----- ------- -----
Current
Federal $ -- $(2,215) $(331)
Foreign (287) -- --
State (108) -- --
----- ------- -----
(395) (2,215) (331)
Deferred
Federal -- -- --
Foreign -- -- --
State -- -- --
----- ------- -----
-- -- --
----- ------- -----
Total (395) (2,215) (331)
Allocated to discontinued operations 415 145 331
----- ------- -----
Continuing operations $ 20 $(2,070) $ --
===== ======= =====
47
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 9 - INCOME TAXES (CONTINUED)
For Fiscal 2004, Fiscal 2003 and Fiscal 2002, NAC recorded income tax
benefits of $395,000, $2.2 million and $331,000, respectively, that represent
either (i) adjustments that increased the previously estimated amount of net
operating losses eligible to be carried back against prior years taxable income
or (ii) adjustments to revise (reduce) previous estimates of certain income
taxes. For Fiscal 2002 these tax benefits arose and are a component of
discontinued operations. For Fiscal 2004 and Fiscal 2003, $415,000 and $145,000,
respectively, of the tax benefit is a component of discontinued operations.
As of January 31, 2004 NAC has net operating loss carryforwards of $86.5
million that may be used to reduce future taxable income, subject to
limitations. Such net operating loss carryforwards will expire: $23.0 million in
Fiscal 2019, $21.2 million in Fiscal 2020, $24.1 million in Fiscal 2021, $10.6
million in Fiscal 2022, $5.2 million in Fiscal 2023 and $2.4 million in Fiscal
2024. At January 31, 2004, NAC has claims for refunds in the amount of $2.2
million.
As a result of NAC's November 3, 2000 repurchases of shares of its Common
Stock, NAC underwent a "change in ownership" as defined for the purposes of
Sections 382 and 383 of the Internal Revenue Code. As a result of the "change in
ownership" described above, the use of net operating loss carryforwards totaling
$56.3 million incurred prior to November 3, 2000 will be subject to significant
annual limitation. The use of the net operating loss carryforwards incurred
after November 3, 2000, which total $30.2 million as of January 31, 2004, are
not subject to the Section 382 limitation.
As of January 31, 2004, NAC also has unused low income housing credits
totaling $4.4 million which expire: $644,000 in Fiscal 2013, $833,000 in Fiscal
2019, $966,000 in Fiscal 2020, $981,000 in Fiscal 2021, $908,000 in Fiscal 2022,
$53,000 in Fiscal 2023 and $12,000 in Fiscal 2024. Of such low income housing
credits, $3.2 million were generated prior to November 3, 2000 and are therefore
subject to the Section 383 limitation described above.
As of January 31, 2004, NAC has $908,000 of minimum tax credits, which may
be applied against any future regular income taxes which exceed alternative
minimum taxes. These credits may be carried forward indefinitely and are also
subject to the Section 383 limitation.
48
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 9 - INCOME TAXES (CONTINUED)
The components of the net deferred tax asset (liability) are as follows (in
thousands):
January 31,
-------------------
2004 2003
-------- --------
Deferred tax assets:
Depreciation $ 1 $ 2
Self-insurance claims 142 181
State income taxes 100 138
Accrued liabilities 574 385
Tax credits carryforwards 5,305 5,420
Net operating loss carryforward 30,264 29,211
Other 7 4
-------- --------
Total deferred tax assets 36,393 35,341
-------- --------
Deferred tax liabilities:
Limited partnership investments (1,715) (1,491)
-------- --------
Total deferred tax liabilities (1,715) (1,491)
-------- --------
Net deferred tax asset before valuation allowance 34,678 33,850
Less: valuation allowance (34,678) (33,850)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
A valuation allowance for all of NAC's net deferred tax assets has been
provided as NAC is unable to determine, at this time, that the generation of
future taxable income against which the net operating loss and tax credit
carryforwards could be used can be predicted to be more likely than not. The net
change in the valuation allowance for Fiscal 2004, Fiscal 2003 and Fiscal 2002
was $828,000, $3.2 million and $4.1 million, respectively.
Reconciliations of the federal statutory tax rate to the effective tax rate
for continuing operations are as follows:
Years Ended January 31,
------------------------
2004 2003 2002
----- ------ -----
Statutory rate (35.0)% (35.0)% (35.0)%
Permanent differences 6.0 0.4 1.9
State income taxes (net of federal tax benefit) 0.4 -- (0.8)
Deferred tax valuation allowance 25.8 (129.1) 56.7
Tax credits 3.4 165.3 (17.8)
Benefit due to AMT net operating loss carryback claims -- (83.2) --
Adjustment to NOL carryforward -- 6.4 --
Other -- (8.0) (5.0)
----- ------ -----
Effective Tax Rate .6% (83.2)% (.0)%
===== ====== =====
49
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
Redeemable Preferred Stock
The following sets forth the changes in Series C Redeemable Preferred Stock
for the year ended January 31, 2002 (dollars in thousands):
Shares Dollars
-------- -------
Balance, January 31, 2001 729,047 $ 629
Accretion of discount to redemption price 226
Shares redeemed pursuant to terms of Exchange
Agreement (Note 11) (62,380) (855)
Shares forfeited pursuant to terms of Exchange
Agreement (Note 11) (666,667)
-------- -----
Balance, January 31, 2002 -- $ --
======== =====
Preferred Stock
NAC is authorized to issue up to 2,000,000 shares of Preferred Stock, in
one or more series, having such preferences and terms as the Board of Directors
may determine. At January 31, 2004 and 2003, there were no outstanding shares of
Preferred Stock and NAC had 2,000,000 shares of Preferred Stock authorized and
available for issuance.
Common Stock Repurchases
As described in Note 11, in January 2002 under the Exchange Agreement, the
contingent obligation of the chief executive officer and sole stockholder of
Cygnet Capital, Cygnet Capital, or another company owned by the stockholder to
make a payment of $5.2 million to NAC if ZoomLot did not reach the financial
performance objectives by December 31, 2003 was in part resolved by the transfer
back to NAC of 3,079,530 shares of NAC Common Stock, which for the purposes of
the Exchange Agreement were valued at $1.25 per share and the issuance to NAC a
promissory note in the amount of $986,000 payable with interest at 4% per annum,
in cash or NAC Common Stock (at a mutually agreed upon value of $1.25 per share)
on or before January 31, 2003. For financial reporting purposes, NAC recorded
the 3,079,530 shares of Common Stock returned under the Exchange Agreement at
$431,000, representing their market value of the basis of the quoted market
price of NAC's Common Stock. In addition, NAC recorded the note receivable, a
component of other assets, at a net value of $110,000 reflecting the market
value at January 31, 2002 of the 788,838 shares of NAC Common Stock the maker of
the note had the option to tender in payment of the principal.
50
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
On August 29, 2002, the former ZoomLot shareholders transferred to NAC
409,140 shares of NAC Common Stock as an installment payment against the
promissory note. The market value of the 409,140 shares at the date of their
transfer was $16,000 less than the $56,000 carrying amount of the note
extinguished by the transfer, and, accordingly, NAC recorded the surrendered
shares at their market value of $40,000 and a note receivable collectibility
charge (included in general and administrative expenses) for the $16,000
deficiency. On November 13, 2002, the former ZoomLot shareholders transferred to
NAC 402,000 shares of NAC common stock with a net value of $56,000 as the second
and final payment against the promissory note. No gain or loss was realized on
the final payment against the promissory note.
Stock Grants and Awards
As a consequence of NAC's significant acquisitions consummated during
Fiscal 2004, NAC granted 372,000 shares of Common Stock pursuant to the 2003
Restricted Stock Plan (see Note 13) valued at $119,000 representing the fair
value of the Common Stock at the time of award. NAC charged to deferred
compensation expense, a component of stockholders' equity, $119,000 during
Fiscal 2004. In addition, NAC awarded to three of its executive business
managers, other than its Chief Executive Officer, an aggregate of 350,000 shares
of unregistered, restricted Common Stock from treasury stock valued at $95,000
representing the fair value of the Common Stock at the time of award. NAC
charged to operations $95,000 in compensation expense for Fiscal 2004 for the
award of Common Stock.
NAC issued 300,000 shares of Common Stock from treasury stock in Fiscal
2004 to certain professional advisors for their services rendered in connection
with NAC's acquisition initiatives consummated during the year. The 300,000
shares of Common Stock, valued at $82,000 at the time of grant, have been
accounted for as a component of the cost of the acquisitions.
Stockholders' Rights Plan
On September 26, 2001, NAC's Board of Directors declared a dividend of one
preferred share purchase right ("Right") for each outstanding share of Common
Stock to stockholders of record at the close of business on October 8, 2001 (the
"Record Date"). Under certain circumstances, a Right may be exercised to
purchase from NAC a unit consisting of one one-hundredth of a share (a "Unit")
of Series D Junior Participating Preferred Stock, par value $.05 per share (the
"Series D Preferred Stock") at a Purchase Price of $5.00 per Unit, subject to
adjustment.
The Rights become exercisable upon the earlier of (i) ten business days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), other than as a result of repurchases of stock by NAC or certain
inadvertent actions by institutional or certain other stockholders, or (ii) 10
business days (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person. Once exercisable, and in some
circumstances if certain additional conditions are met, the rights plan allows
NAC stockholders (other than the acquirer) to purchase NAC Common Stock or
Common Stock, at a substantial discount, in the surviving acquirer in the event
of a merger.
51
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
The Rights will expire on September 26, 2011 and may be redeemed by NAC for
$0.01 per Right at any time prior to the close of business on the later of (i)
the tenth business day following the acquisition by a person or group of
beneficial ownership of 15% or more of NAC's Common Stock or (ii) the tenth
business day (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person.
NOTE 11 - DISCONTINUED OPERATIONS
As discussed in Note 1, as a consequence of NAC's strategic review and
determination, effective December 31, 2001, NAC suspended its ZoomLot operations
and initiated the steps to discontinue e-commerce operations. Additionally, as a
consequence of NAC's decision to discontinue its ZoomLot e-commerce operations,
NAC also formally exited the sub-prime used automobile consumer finance business
effective December 31, 2001. In the first and second quarters of the year ended
January 31, 2001, NAC sold its active loan portfolio and the majority of its
charged-off portfolio. However, since NAC had not, until December 2001, made a
definitive decision that it would not reenter the consumer lending business,
either through ZoomLot or another means, the automobile financing operations had
not previously been classified as a discontinued operation. As a result of these
decisions, both the e-commerce and automobile financing segments were classified
as discontinued operations.
NAC had acquired ZoomLot on December 15, 2000 under a Merger Agreement and
Plan of Reorganization (the "Merger Agreement"). Under the terms of the Merger
Agreement, NAC issued to the former ZoomLot stockholders 270,953 shares of its
Series B Convertible Preferred Stock and 729,047 shares of its Series C
Redeemable Preferred Stock, each at $.50 par value. Pursuant to the terms of the
Series B Convertible Preferred Stock, on December 15, 2000 NAC obtained the
right to call for the conversion of the shares of Series B Convertible Preferred
Stock, and NAC converted the 270,953 shares of the Series B Convertible
Preferred stock into 2,709,530 shares of NAC Common Stock.
The holders of the Series C Redeemable Preferred Stock had certain rights
to require the redemption of the shares. At any time after the earlier of
September 30, 2003 or the occurrence of a "redemption event" (but no event
earlier than January 1, 2003) the holder of each share of Series C Redeemable
Preferred Stock would have been entitled to redeem each Series C share for a
cash payment by NAC equal to the greater of (i) $15.00 (as adjusted for any
stock splits, stock dividends, recapitalizations or similar events), plus all
declared but unpaid dividends on such shares or (ii) ten times the fair market
price (determined based on the average daily closing price of NAC's Common Stock
for the twenty days preceding the redemption date) of a share of Common Stock as
of the date of notice for redemption was received by NAC. However, under the
terms of the Merger Agreement 666,667 shares of the Series C Redeemable
Preferred Stock were subject to forfeiture unless certain financial performance
"objectives" were met or certain "valuation events" occurred, and any shares of
Series C Redeemable Preferred Stock that were subject to forfeiture could not be
redeemed until such forfeiture provisions no longer applied. A "redemption
event" would have been deemed to have occurred if (i) ZoomLot has met an
"objective", as described below, which eliminated the forfeiture of Series C
shares, or (ii) there had occurred a "valuation event" which eliminated the
forfeiture of the Series C shares. Specifically, one-half of the 666,667 Series
C Preferred Redeemable Shares would have been forfeited, if, by December 31,
2003, ZoomLot, including any of its subsidiaries, had failed to achieve zero or
positive earnings, before interest expense, interest
52
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 11 - DISCONTINUED OPERATIONS (CONTINUED)
income, depreciation, amortization and extraordinary items but after applicable
income taxes, for a period of six consecutive months, and the remaining one-half
of those shares would have been forfeited if, by December 31, 2003, ZoomLot,
including any of its subsidiaries, had not achieved at least $4.5 million in
earnings before interest expense, interest income, depreciation, amortization
and extraordinary items but after applicable income taxes, for a period of
twelve consecutive months. If, however, certain "valuation events" had occurred
prior to December 31, 2003, those financial performance objectives would be
deemed to have been achieved. These valuation events generally consisted of (i)
transaction that would have involved an investment in ZoomLot or one of its
subsidiaries of at least $10.0 million, where the pre-investment in ZoomLot or
any subsidiary of ZoomLot was at least $30.0 million, (ii) a change of control
of NAC or (iii) the termination of the key executives of ZoomLot without cause.
As part of the Merger Agreement, NAC made a capital contribution to ZoomLot
of $5.2 million, which ZoomLot used to repay advances that had been made to it
by Cygnet Capital Corporation ("Cygnet Capital"). The chief executive office and
sole stockholder of Cygnet Capital was also a stockholder of ZoomLot, and by
virtue of the Merger Agreement and subsequent conversion of Series B Convertible
Preferred Stock became the beneficial holder of 1,707,004 shares of NAC Common
Stock and 459,229 shares of Series C Redeemable Preferred Stock. This
stockholder had also previously acquired beneficial ownership of shares of NAC
Common Stock in market purchases, and beneficially owned an aggregate of
2,077,004 shares NAC Common Stock, which represent 17.7% of the then outstanding
shares of NAC's Common Stock. Under the Merger Agreement the stockholder, Cygnet
Capital, or another company owned by the stockholder, were required to repay the
$5.2 million to NAC unless ZoomLot met the financial performance objectives, or
an event occurs, that eliminated the forfeiture of the Series C Redeemable
Preferred Stock.
In connection with its decision to discontinue the operations of ZoomLot,
NAC entered into formal negotiations with the former stockholders of ZoomLot to
resolve the financial obligations of NAC and of the former ZoomLot stockholders
resulting from the terms of the Merger Agreement. Since NAC discontinued
ZoomLot's operations, it was necessary to resolve the effect of that on the
obligations, as described above, of NAC and the former ZoomLot stockholders
under the Merger Agreement. As a result of the negotiations, on January 31,
2002, NAC, entered into an Exchange and Repayment Agreement ("Exchange
Agreement") dated January 31, 2002 with the former ZoomLot stockholders.
The Exchange Agreement sets forth the agreement among all the parties to
terminate the operations of ZoomLot. The parties agreed, among other things,
that the financial performance objectives set forth in the Merger Agreement had
not and would not be met. Accordingly, the 666,667 shares of Series C Preferred
Stock forfeitable if those financial performance were not met were deemed
forfeited and were returned and surrendered to NAC. For financial reporting
purposes, in recording the acquisition of ZoomLot those shares of Series C
Preferred Stock had been treated as contingently issuable, and accordingly their
return had no effect on NAC's consolidated financial statements.
53
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 11 - DISCONTINUED OPERATIONS (CONTINUED)
Additionally, under the Exchange Agreement, the contingent obligation of
the chief executive officer and sole stockholder of Cygnet Capital, Cygnet
Capital, or another company owned by the stockholder to make a payment of $5.2
million to NAC if ZoomLot did not reach the financial performance objectives by
December 31, 2003 was resolved by (i) the transfer back to NAC of 3,079,530
shares of NAC Common Stock, which for the purposes of the Exchange Agreement
were valued at $1.25 per share, (ii) the return to NAC of 62,380 shares of NAC
Series C Preferred Stock at an aggregate agreed-upon value of $854,875, which
represented the carrying amount of such shares of Series C preferred Stock in
NAC's consolidated financial statements, and (iii) the issuance to NAC of a
promissory note in the amount of $986,048, payable, together with interest at 4%
per annum, in cash or NAC Common Stock (at a mutually agreed-upon value of $1.25
per share) on or before January 30, 2003.
For financial reporting purposes, in Fiscal 2002 NAC recorded the 3,079,530
shares of Common Stock returned under the Exchange Agreement at $431,000,
representing their market value of the basis of the quoted market price of NAC's
Common Stock, recorded the 62,380 shares of Series C Preferred Stock returned at
their aggregate carrying amount of $854,875, and recorded the note receivable, a
component of other assets, at a net value of $110,000 reflecting the market
value at January 31, 2002 of the shares of NAC Common Stock the maker of the
note has the option to tender in payment of the principal. NAC also incurred or
accrued costs of $850,000 for the winding down and closing of ZoomLot's
operations, including rental and broker costs to sublease ZoomLot's corporate
office, employee severance costs and costs of early lease terminations. As a
result, NAC recognized a net gain on the disposal of ZoomLot's operation of
$394,000 in Fiscal 2002.
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In the year
ended January 31, 1996, NAC disposed of its rental fleet business through the
sale of certain assets and through certain leases to a national car rental
company. All liabilities related to the discontinued rental business,
principally self-insurance claims, were retained by NAC. NAC also had a
dealership operation that sold cars that were retired from the rental fleet,
primarily to member dealers of NAC's automobile financing business. That
operation was discontinued in the year ended January 31, 1997 as the result of
NAC's disposal of its automobile rental operations. The results of both the auto
rental and dealership operations are included in the results of discontinued
operations (together as "auto rental" operations). For the years ended January
31, 2004, 2003 and 2002, the results of the discontinued auto rental operations
principally represent the effects of the settlement of, and changes in NAC's
reserves for, claims against NAC related to the self-insured claims (see Note
15).
54
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 11 - DISCONTINUED OPERATIONS (CONTINUED)
Summarized results of discontinued operations are as follows (in
thousands):
Discontinued Operations
------------------------------------------
Auto Auto
E-Commerce Financing Rental Total
---------- --------- ------ --------
FISCAL 2004
Revenue $ -- $ 12 $ -- $ 12
General and administrative (expenses) income -- (26) -- (26)
-------- ----- ----- --------
-- (26) -- (26)
-------- ----- ----- --------
Income (loss) before income taxes -- (14) -- (14)
Provision (benefit) for income taxes -- (131) (284) (415)
-------- ----- ----- --------
Income (loss) from discontinued operations $ -- $ 117 $ 284 $ 401
======== ===== ===== ========
FISCAL 2003
Revenue $ -- $ 28 $ -- $ 28
General and administrative (expenses) income 2 (140) 275 137
-------- ----- ----- --------
2 (140) 275 137
-------- ----- ----- --------
Income (loss) before income taxes 2 (112) 275 165
Provision (benefit) for income taxes -- (145) -- (145)
-------- ----- ----- --------
Income (loss) from discontinued operations $ 2 $ 33 $ 275 $ 310
======== ===== ===== ========
FISCAL 2002
Revenue $ 867 $ 34 $ -- $ 901
Operating expense (10,236) -- -- (10,236)
General and administrative (expenses) income -- 293 (463) (170)
-------- ----- ----- --------
(10,236) 293 (463) (10,406)
-------- ----- ----- --------
Income (loss) before income taxes (9,369) 327 (463) (9,505)
Provision (benefit) for income taxes -- (331) -- (331)
-------- ----- ----- --------
Income (loss) from discontinued operations (9,369) 658 (463) (9,174)
Gain on disposal of operations, net of tax 394 -- -- 394
-------- ----- ----- --------
Income (loss) from discontinued operations $ (8,975) $ 658 $(463) $ (8,780)
======== ===== ===== ========
55
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 12 - SALE OF ASSETS
Investments in Affordable Housing Projects
NAC invested in affordable housing projects through its interests in
various limited liability partnerships. Historically, NAC's investment in
affordable housing projects had been held for realization through the receipt of
distributions from the operations of the projects and the use of the tax credits
generated by the investments.
On January 14, 2002, NAC sold its limited partnership interests in eight
projects to Idacorp Financial Services, Inc. for $2.5 million. NAC incurred
closing costs, transfer fees and provision for the recapture of previously
deducted investment tax credits in lieu of posting a bond of $510,000 and as a
result incurred a loss (reflected in continuing operations) of $549,000. NAC
retained its limited partnership interests in three projects, which at January
31, 2004 and 2003 are included in other assets at their estimated fair market
value of $200,000.
NOTE 13 - BENEFITS PLANS
1993 Equity Incentive Plan
NAC's 1993 Equity Incentive Plan ("1993 Plan") provides for the granting of
incentive and non-qualified stock options, stock appreciation rights, and common
stock and restricted common stock awards to key employees. The total number of
shares available for options or awards granted under the 1993 Plan is 2,200,000
shares. There were 42,848 shares of restricted Common Stock cancelled under this
Plan during Fiscal 2002. There were 245,000 stock options cancelled under this
Plan during Fiscal 2004. There were 373,352 shares available for future stock
awards or option grants at January 31, 2004. No options were granted under this
Plan in Fiscal 2004, 2003 and 2002.
56
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 13 - BENEFITS PLANS (CONTINUED)
A summary of all options granted, exercised, and cancelled by the 1993 Plan
were as follows:
Number of Exercise Price
Options Per Share
--------- --------------
Balance January 31, 2001 1,884,400 0.86
Granted -- --
Exercised -- --
Cancelled (9,400) 4.53
---------
Balance January 31, 2002 1,875,000 0.84
Granted -- --
Exercised -- --
Cancelled -- --
---------
Balance January 31, 2003 1,875,000 0.84
Granted -- --
Exercised -- --
Cancelled (245,000) 1.12
---------
Balance January 31, 2004 1,630,000 0.80
=========
The outstanding options expire at dates through the year 2010. A summary of
stock options outstanding and exercisable as of January 31, 2004 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------
Range of Weighted Average Weighted Average Weighted Average
Per Share Number Remaining Contractual Per Share Number Per Share
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
--------------- ----------- --------------------- ---------------- ----------- ----------------
$0.66 to $0.92 1,205,000 6.75 $0.68 1,205,000 $0.68
$1.03 to $1.15 350,000 5.4 1.04 350,000 1.04
$1.66 75,000 4.21 1.66 75,000 1.66
--------- ---------
Total 1,630,000 1,630,000
========= =========
57
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 13 - BENEFITS PLANS (CONTINUED)
2003 Restricted Stock Plan
As a consequence of the significant acquisitions consummated during Fiscal
2004, NAC sponsored a 2003 Restricted Stock Plan ("2003 Plan") that provides
stock grants to all employees. The 2003 Plan authorizes the grant of up to a
maximum of 400,000 restricted shares of Common Stock to employees of NAC. During
Fiscal 2004, there were 372,000 shares of Common Stock granted under the terms
of the plan. Each share granted is restricted and unregistered stock and each
award vests at the rate of 20% per year over a five year period. The underlying
shares may not be sold, transferred, pledged or otherwise disposed until they
vest. During the vesting period, unvested shares are voted by the manager of
each business unit. No shares were granted to executive officers or directors
under the 2003 Plan. For Fiscal 2004, NAC charged to deferred compensation
expense $119,000, a component of shareholders' equity, for the 2003 Plan grants.
The deferred compensation expense is amortized on a straight-line basis over the
5 year vesting period of the restricted Common Stock.
401(k) Savings and Profit Sharing Plan
As a consequence of NAC's acquisitions consummated during Fiscal 2004 NAC
maintained three employee defined contribution benefit programs under IRS Code
section 401(k) from the date of each acquisition to December 31, 2003. The three
employee benefit plans maintained were (i) NAC 401(k) Savings and Profit Sharing
Plan ("NAC 401k"), (ii) The Campus Group 401(k) Plan ("Campus 401k"), and (iii)
the OMI 401(K) Profit Sharing Plan ("OMI 401k"). Effective December 31, 2003,
NAC merged the Campus 401k and the OMI 401k plans into the NAC 401k (the "Plan
Merger") and all previously unvested balances for all active employees became
vested at December 31, 2003.
Prior to the Plan Merger, the Campus 401k covered substantially all The
Campus Group employees who have completed one year of service. The Campus 401k
allows eligible employees to contribute up to 50% of their compensation on a
pre-tax basis. The Campus 401k provides for a discretionary matching
contribution at the end of each plan year. Discretionary contributions under the
Campus 401k vest incrementally over 6 years. There were no discretionary
matching contributions for Fiscal 2004.
Prior to the Plan Merger, the OMI 401k covered substantially all OMI
employees who have completed one month of service. The OMI 401k allows eligible
employees to contribute up to 50% of the compensation on a pre-tax basis. OMI
matches 50% of the first 6% of the employees' contribution to a maximum of
$3,000 per annum. OMI matching contributions under the OMI 401k vest after 3
years of employment. For the period April 1, 2003 to December 31, 2003, NAC
charged to operations for OMI's matching contributions $13,000.
The NAC 401k covered substantially all NAC employees and as of December 31,
2003, all active employees who were covered under the Campus 401k, OMI 401k and
have completed 90 days of service. The NAC 401k allows eligible employees to
contribute up to 50% of their compensation on a pre-tax basis. Prior to December
31, 2003, NAC matched 50% of the first 4% of the employees' contribution and the
contributions vested incrementally over 6 years. Upon the Plan Merger, the NAC
401k provides a safe harbor matching contribution of (i) 100% of the first 3% of
the employee's contribution, (ii) 50% of the next 2% of the employees'
contribution for a maximum of 4% matching contribution and (iii) vesting for the
NAC matching contribution is immediate. The charge to operations for NAC's
contribution to the NAC 401k was $26,000, $11,000 and $8,000 for years ended
January 31, 2004, 2003 and 2002, respectively.
NAC does not provide post-retirement or post-employment benefits to its
employees.
58
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 14 - RELATED PARTY TRANSACTIONS
The Campus Group leases its corporate headquarters in Tuckahoe, New York
and its Bohemia, New York warehouse and distribution center from a former The
Campus Group shareholder. The leases expire in April 2010. The annual lease
commitment during the term is $175,000 per annum. NAC charged to operations rent
expense of $87,000 for the period August 1, 2003 to January 31, 2004.
Pursuant to the terms of The Campus Group Stock Purchase Agreement dated
July 31, 2003, NAC repaid certain loans and advances to former The Campus Group
Shareholders (see Note 2). Prior to NAC's acquisition, former shareholders of
The Campus Group loaned and advanced $1.3 million for the day-to-day working
capital needs of the business. NAC repaid in full the shareholder loans and
advances in periodic installments, as required, prior to January 31, 2004.
NAC contracted for investor relations and other financial advisory services
from Mallory Factor Inc. during Fiscal 2002. For Fiscal 2002, NAC paid Mallory
Factor Inc. $125,000. Effective April 2001, NAC consummated an agreement to
sub-lease its New York corporate headquarters from Mallory Factor Inc. Pursuant
to the terms of the Sublease Agreement, NAC subleases its 5,500 square foot New
York headquarters commencing April 1, 2001 and NAC issues all payments directly
to the landlord in accordance with the terms of the Master Lease. The sublease
agreement provides for an annual base rent of $199,000 and the term expires July
31, 2006. Mallory Factor, who was a member of NAC's Board of Directors from
December 2000 until January 2002, is a principal at Mallory Factor Inc.
During Fiscal 2002, NAC paid $69,000 to Automotive Personnel, LLC, for
outplacement services provided to the employees of NAC terminated as a part of
its then restructuring plan. The President of Automotive Personnel, LLC, was a
member of NAC's Board of Directors until December 2001.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Shareholder Complaints
On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the Director Defendants
breached their fiduciary duties to NAC, (ii) a judgment voiding an employment
agreement with James J. McNamara and rescinding a stock exchange agreement in
which NAC acquired ZoomLot Corporation ("ZoomLot"), (iii) a judgment voiding the
grant of stock options and the award of director fees allegedly related thereto,
(iv) an order directing the Director Defendants to account for alleged damages
sustained and profits obtained by the Director Defendants as a result of the
alleged various acts complained of, (v) the imposition of a constructive trust
over monies or other benefits received by the Director Defendants and (vi) an
award of costs and expenses.
59
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On August 16, 2001, NAC received a derivative complaint (the "Markovich
Complaint") filed by Levy Markovich ("Markovich"), a shareholder of NAC, with
the Court of Chancery of Delaware on or about August 16, 2001, against James J.
McNamara, John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald
Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC
as a nominal defendant. The Markovich Complaint principally seeks: (i) a
declaration that the Director Defendants have breached their fiduciary duties to
NAC, (ii) a judgment voiding an employment agreement with James J. McNamara and
rescinding a stock exchange agreement in which NAC acquired ZoomLot, (iii) a
judgment voiding the grant of options and the award of directors fees allegedly
related thereto, (iv) an order directing the Director Defendants to account for
alleged damages sustained and alleged profits obtained by the Director
Defendants as a result of the alleged various acts complained of, (v) the
imposition of a constructive trust over monies or other benefits received by the
directors, and (vi) an award of costs and expenses.
On August 31, 2001, NAC received a derivative complaint (the "Harbor
Complaint") filed by Harbor Finance Partners ("Harbor"), a shareholder of NAC,
with the Court of Chancery of Delaware on or about August 31, 2001, against
Thomas F. Carney, Jr., Mallory Factor, John A. Gleason, Donald Jasensky, William
S. Marshall, James J. McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C.
Garcia, and ZoomLot Corporation as Defendants and NAC as a nominal defendant.
The Harbor Complaint principally seeks: (i) a judgment requiring the Director
Defendants to promptly schedule an annual meeting of shareholders within thirty
(30) days of the date of the Harbor Complaint; (ii) a judgment declaring that
the Director Defendants breached their fiduciary duties to NAC and wasted its
assets; (iii) an injunction preventing payment of monies and benefits to James
J. McNamara under his employment agreement with NAC and requiring Mr. McNamara
to repay the amounts already paid to him thereunder; (iv) a judgment rescinding
the agreement by NAC to purchase ZoomLot and refunding the amounts it paid; (v)
a judgment rescinding the award of monies and options to the directors on
December 15, 2000 and requiring the directors to repay the amounts they received
allegedly related thereto; (vi) a judgment requiring the defendants to indemnify
NAC for alleged losses attributable to their alleged actions; and (vii) a
judgment awarding interest, attorney's fees, and other costs, in an amount to be
determined.
On October 12, 2001, NAC received a derivative complaint filed by Robert
Zadra, a shareholder of NAC, with the Supreme Court of the State of New York on
or about October 12, 2001 against James J. McNamara, John A. Gleason, William S.
Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T. Zackaroff, Mallory Factor,
Thomas F. Carney, Jr., and NAC as Defendants. On or about May 29, 2002 the
complaint was amended to include class action allegations (the "Zadra Amended
Complaint"). The Zadra Amended Complaint contains allegations similar to those
in the Delaware actions concerning the Board's approval of the employment
agreement with James McNamara, option grants and past and future compensation to
the Director Defendants, and the ZoomLot transaction. The Amended Complaint
seeks (i) a declaration that as a result of approving these transactions the
Director Defendants breached their fiduciary duties to NAC, (ii) a judgment
enjoining defendants from proceeding with or exercising the option agreements; ,
(iii) rescission of the option grants to defendants, if exercised, (iv) an order
directing the Director Defendants to account for alleged profits and losses
obtained by the Director Defendants as a result of the alleged various acts
complained of, (v) awarding compensatory damages to NAC and the class, together
with prejudgment interest, and (vi) an award of costs and expenses.
60
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
NAC has vigorously defended against each of the respective claims made in
the Academy Complaint, Markovich Complaint, Harbor Complaint and the Zadra
Amended Complaint, as it believes that the claims have no merit. By order of the
Delaware Chancery Court on November 12, 2001, the Academy, Markovich and Harbor
Complaints were consolidated under the title "In re National Auto Credit, Inc.
Shareholders Litigation," Civil Action No. 19028 NC (Delaware Chancery Court)
("Delaware Consolidated Derivative Action") and the Academy Complaint was deemed
the operative complaint.
The parties in the New York action thereafter engaged in settlement
negotiations and the parties entered into a stipulation of settlement in
December 2002, proposing to settle all class and derivative claims. In January
2003, the New York Supreme Court entered an order which, among other things,
conditionally certified a class of shareholders for settlement purposes,
approved the form of notice of the proposed settlement, and scheduled a hearing
to approve the settlement. Notice of the proposed settlement was given to the
shareholders of the Company and members of the class as per the Court's order in
January and February 2003. Hearings on the proposed settlement were held on May
13, 2003 and October 15, 2003. Subsequent to the October 15, 2003 hearing, the
New York Supreme Court approved the terms of the proposed settlement and issued
the Court's written Order and Judgment in December 2003. Certain Plaintiffs in
the Delaware Consolidated Action have objected to the terms of the settlement
and have filed an appeal with the New York Appellate Court. As of April 16,
2004, no date has been set by the Appellate Court to review the appeal.
In the Delaware Consolidated Action, a motion to dismiss that Action was
also filed in 2002 and was denied by the Delaware court in January 2003. In
January 2004, NAC re-filed a motion to dismiss the Delaware Consolidated Action
based upon the New York Supreme Court's written Order and Judgment issued in
December 2003. The Delaware Court has previously stayed further proceedings in
the Consolidated Action pending issuance of the New York court's order. In April
2004, oral arguments were presented to the Delaware Court regarding NAC motion
to dismiss. As of April 16, 2004, no decision has been made by the Delaware
Court.
Self-Insurance Reserves for Property Damage and Personal Injury Claims.
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In Fiscal
1996, NAC disposed of its rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by NAC.
NAC maintained and continues to maintain self-insurance for claims relating
to bodily injury or property damage from accidents involving the vehicles rented
to customers by its discontinued automobile rental operations. NAC was, when
required by either governing state law or the terms of its rental agreement,
self-insured for the first $1.0 million per occurrence, and for losses in excess
of $5.0 million per occurrence, for bodily injury and property damage resulting
from accidents involving its rental vehicles. NAC was also self-insured, up to
certain retained limits, for bodily injury and property damage resulting from
accidents involving NAC vehicles operated by employees within the scope of their
employment. In connection therewith, NAC established certain reserves in its
financial statements for the estimated cost of satisfying those claims.
61
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
NAC is named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to Plaintiffs, passengers in the vehicle. Initially, the
Plaintiffs appeared to be recovering well from the injuries sustained. However,
subsequently plaintiff Simpson underwent an accident-related surgery on his back
for removal of a shunt, during which nerves in the spine were severed causing
paraplegia. The Plaintiffs are suing for damages resulting from their injuries
and the subsequent paraplegia suffered by plaintiff Simpson. The doctor and
hospital that performed the surgery were also named as defendants by Plaintiffs
and have been impleaded by NAC under a theory of medical malpractice. Damages
alleged in the complaint are not specified, although in discovery Plaintiffs
have indicated they are seeking millions of dollars in compensatory and other
damages. The matter is scheduled for trial during 2004.
NAC maintains a number of defenses relating to this matter. NAC has almost
exhausted its self-insured retention of $500,000 on this case and NAC attempted
to get its excess carrier, the TIG Insurance Company ("TIG"), to take over the
defense of this action and indemnify NAC up to the policy limits. However, as a
result TIG filed a suit (TIG Insurance Company v. Darrell Smith, Aaron Simpson
and NAC in the United States Court for the Northern District of Illinois) for a
declaratory judgment seeking a ruling that it has no liability as an "excess
insurer" of NAC in connection with the Smith and Simpson action and that under
Illinois law, NAC's (and thereafter TIG's) financial responsibility is capped at
an amount less than what the Plaintiffs are seeking in the state court action.
The federal court initially dismissed this complaint prior to NAC answering on
the grounds that the matter to be decided was premature as the original action
had not been resolved. TIG made a motion to have the court reconsider its
decision and NAC filed a response arguing that the court should take action on
this matter at this time. The Court granted TIG's motion and permitted the
action to proceed. NAC's answer was filed in May 2002. Thereafter, in August
2002, TIG filed a motion for summary judgment, asserting that NAC has no
liability to Smith and Simpson; that if NAC is liable, such liability is capped
in an amount far less that what Plaintiff is seeking in the state court action;
and that it also has no liability to NAC under its excess insurance policy. NAC
filed its own cross-motion for summary judgment, asserting that it has no
liability to Smith and Simpson; and that if there is any liability it is capped
under Illinois state law, or, if not capped, then TIG's excess insurance
coverage applies. Smith and Simpson filed their own cross-motion for summary
judgment, asserting that NAC is liable for Smith and Simpson's injuries and that
NAC's liability is not capped under Illinois law. On February 3, 2003, the Court
granted the motions of TIG and NAC for summary judgment, and denied the motion
for summary judgment of Smith and Simpson. The Court concluded that NAC bears no
financial responsibility to Smith and Simpson because, under the express terms
of the rental agreement at issue, Bennett was not a listed additional driver on
the underlying rental contract. The Court further concluded that TIG, as NAC's
excess insurance carrier, has no responsibility to defend or indemnify the
Bennett estate. Motions for reconsideration were filed by Smith and Simpson in
February and March but were denied by the Court. On April 11, 2003, Smith and
Simpson filed a Notice of Appeal of the Courts' decisions. The Company intends
to vigorously oppose this appeal.
Because of the uncertainties related to these two matters, as well as
several smaller legal proceedings involving NAC's former rental operations and
self-insurance claims, it is difficult to project with precision the ultimate
effect the adjudication or settlement of these matters will have on NAC. At
January 31, 2004 NAC had accrued $408,000 to cover all outstanding
self-insurance liabilities. As additional information regarding NAC's potential
liabilities becomes available, NAC will revise the estimates as appropriate.
62
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Litigation
In the normal course of its business, NAC is named as defendant in legal
proceedings. It is the policy of NAC to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate.
Lease Commitments
NAC leases office and warehouse facilities in Indiana, Los Angeles, New
York, Ohio and Florida under leases expiring at various dates. NAC's ZoomLot
subsidiary, has subleased its office in Phoenix, AZ to an unaffiliated third
party for the remainder of its term which expires in September 2006 at a rate of
$253,000 per annum. In addition to the lease base rents, NAC is generally
required to pay increases over base period amounts for taxes and other operating
expense. At January 31, 2004, future minimum payments under noncancellable
operating leases, net of the effects of the sublease, are as follows:
Fiscal Year Amount
----------- ------
2005 $ 680
2006 647
2007 528
2008 348
2009 175
Thereafter 218
------
$2,596
======
NOTE 16 - SIGNIFICANT CLIENTS
Revenues for Fiscal 2004 were $7.1 million and are comprised principally of
revenues derived from the Acquired Companies operations, (i) OMI revenues of
$2.2 million for the ten month period ended January 31, 2004 and (ii) The Campus
Group revenues of $4.9 million for the six month period ended January 31, 2004.
As a consequence of the acquisitions, Pfizer Inc., Booz Allen Hamilton Inc. and
Cardinal Health, Inc. accounted for 18%, 13% and 13%, respectively of revenues
for Fiscal 2004. Since NAC revenues from its Acquired Companies are measured
from the date of each acquisition, such revenues are not necessarily fully
indicative of the results NAC may achieve in Fiscal 2005 when it consolidates
the Acquired Companies for the entire fiscal year. The loss of any one such
client could have a material adverse effect on NAC.
63
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited quarterly financial information for
Fiscal 2004, 2003 and 2002 (in thousands, except per share amounts):
Quarter
-------------------------------------
First Second Third Fourth
------- ------- ------- -------
FISCAL 2004
Total revenue(1) $ 330 $ 551 $ 3,051 $ 3,212
======= ======= ======= =======
Income (loss) from continuing operations(1) $ (659) $ (728) $ (319) $(1,677)
Discontinued operations, net of tax(1) (6) (6) 1 412
------- ------- ------- -------
Net income (loss) $ (665) $ (734) $ (318) $(1,265)
======= ======= ======= =======
Basic and diluted income (loss) earnings per share(2)
Continuing operations $ (.08) $ (.09) $ (.04) $ (.19)
Discontinued operations -- -- -- .05
------- ------- ------- -------
Net income (loss) per share $ (.08) $ (.09) $ (.04) $ (.14)
======= ======= ======= =======
FISCAL 2003
Total revenue(1) $ -- $ -- $ -- $ --
======= ======= ======= =======
Income (loss) from continuing operations(1) $ (703) $ (793) $ (780) $ 1,857
Discontinued operations, net of tax(1) 182 (36) (173) 337
------- ------- ------- -------
Net income (loss) $ (521) $ (829) $ (953) $ 2,194
======= ======= ======= =======
Basic and diluted income (loss) earnings per share(2)
Continuing operations $ (.08) $ (.10) $ (.09) $ .24
Discontinued operations .02 -- (.02) .04
------- ------- ------- -------
Net income (loss) per share $ (.06) $ (.10) $ (.11) $ .28
======= ======= ======= =======
FISCAL 2002
Total revenue(1) $ -- $ -- $ -- $ --
======= ======= ======= =======
Income (loss) from continuing operations(1) $(1,210) $(1,365) $(1,160) $(1,753)
Discontinued operations, net of tax(1) (1,144) (1,323) (6,787) 474
------- ------- ------- -------
Net income (loss) $(2,354) $(2,688) $(7,947) $(1,279)
======= ======= ======= =======
Basic and diluted income (loss) earnings per share(2)
Continuing operations $ (.10) $ (.12) $ (.10) $ (.13)
Discontinued operations (.10) (.11) (.58) .02
------- ------- ------- -------
Net income (loss) per share $ (.20) $ (.23) $ (.68) $ (.11)
======= ======= ======= =======
(1) Total revenue, loss from continuing operations and loss from discontinued
operations has been reclassified from prior quarters to conform to the
current presentation.
(2) The sum of the quarters do not equal year to date.
64
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ANGELIKA FILM CENTERS, LLC
December 25, 2003 and December 26, 2002
65
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ANGELIKA FILM CENTERS, LLC
We have audited the accompanying balance sheets of Angelika Film Centers, LLC (a
Delaware limited liability company) as of December 25, 2003 and December 26,
2002, and the related statements of income, members' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Angelika Film Centers, LLC as
of December 25, 2003 and December 26, 2002, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton
-----------------------------
Cleveland, Ohio
March 25, 2004
66
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
BALANCE SHEETS
(dollar amounts in thousands)
December 25, 2003 and December 26, 2002
DECEMBER 25, DECEMBER 26,
2003 2002
------------ ------------
ASSETS
Current Assets
Cash
Trade and other receivables $ 488 $ 1,099
Due from affiliates (Note E) 16 4
Concession inventories (Note A) 370 64
Prepaid expenses and other current assets 7 10
Total current assets 13 8
------ -------
894 1,185
Property, Equipment and Leasehold Improvements, net
(Note B) 1,409 1,524
Intangible With Definitive Life (Note A) 7,479 8,069
Deposits 89 89
------ -------
TOTAL ASSETS $9,871 $10,867
====== =======
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 525 $ 549
Due to affiliates (Note E) 85 151
Deferred income and other obligations 72 56
------ -------
Total current liabilities 682 756
Deferred Rental Obligations (Note C) 1,610 1,440
------ -------
Total liabilities 2,292 2,196
Commitments and Contingencies (Note D) -- --
Members' Equity (Note A) 7,579 8,671
------ -------
TOTAL LIABILITIES AND MEMBERS' EQUITY $9,871 $10,867
====== =======
The accompanying notes are an integral part of these financial statements.
67
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENTS OF INCOME
(dollar amounts in thousands)
For the years ended December 25, 2003 and December 26, 2002
DECEMBER 25, DECEMBER 26,
2003 2002
------------ ------------
Revenue
Theatre income $4,646 $5,028
Theatre concessions 595 576
Cafe concession sales 405 369
Rental and other income 145 59
------ ------
Total operating income 5,791 6,032
Operating costs and expenses
Film Rental 1,320 1,627
Operating costs 2,744 2,831
General and administrative expenses 176 116
Depreciation and amortization 850 699
------ ------
Total operating costs and expenses 5,090 5,273
------ ------
Income from operations 701 759
------ ------
Other income
Interest income -- 3
------ ------
Total other income -- 3
------ ------
Income before state and local tax expense 701 762
State and local income tax expense (Note A) 35 12
------ ------
NET INCOME $ 666 $ 750
====== ======
The accompanying notes are an integral part of these financial statements.
68
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENTS OF MEMBERS' EQUITY
(dollar amounts in thousands)
For the years ended December 25, 2003 and December 26, 2002
NATIONAL CITADEL READING
CINEMAS, FA CINEMAS, INTERNATIONAL
INC. INC. INC. INC. TOTAL
-------- ------- -------- ------------- -------
BALANCE AT DECEMBER 27, 2001 $4,260 $ 2,834 $ 1,427 $ -- $ 8,521
Transfer of interest in AFC (Note A) -- (2,834) (1,427) 4,261 --
Distribution to members (300) -- -- (300) (600)
Net income 375 -- -- 375 750
------ ------- ------- ------ -------
BALANCE AT DECEMBER 26, 2002 4,335 -- -- 4,336 8,671
Distribution to members (879) -- -- (879) (1,758)
Net income 333 -- -- 333 666
------ ------- ------- ------ -------
BALANCE AT DECEMBER 25, 2003 $3,789 $ -- $ -- $3,790 $ 7,579
====== ======= ======= ====== =======
The accompanying notes are an integral part of these financial statements.
69
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
For the years ended December 25, 2003 and December 26, 2002
DECEMBER 25, DECEMBER 26,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 666 $ 750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 850 699
Deferred rent expense 170 169
Changes in assets and liabilities associated with
operating activities:
Trade and other receivables (12) 3
Due to (from) affiliates (372) 435
Concessions inventories 3 (1)
Prepaid expenses and other current assets (5) 153
Accounts payable and accrued liabilities (24) (527)
Deferred income and other obligations 16 21
------- -------
Net cash provided by operating activities 1,292 1,702
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and
leasehold improvements (145) (1,084)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to members (1,758) (600)
------- -------
NET (DECREASE) INCREASE IN CASH (611) 18
Cash at beginning of year 1,099 1,081
------- -------
Cash at end of period $ 488 $ 1,099
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes $ 24 $ 12
======= =======
The accompanying notes are an integral part of these financial statements.
70
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
December 25, 2003 and December 26, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Angelika Film Centers LLC (AFC) is a Delaware limited liability company,
whose membership interest at December 25, 2003 is held 50% by Reading
International, Inc. (RDI) and 50% by National Cinemas, Inc. (NCI), a
wholly-owned subsidiary of National Auto Credit, Inc.
RDI is the result of the merger on December 31, 2001 of F.A. Inc. (FA),
Reading Entertainment, Inc. (RDGE), parent company of FA, and Craig
Corporation (CRG) and Citadel Cinemas, Inc. (CCI) and other wholly-owned
subsidiaries of Citadel Holding Corporation (Citadel). Citadel then changed
its name to RDI. As a result, following the merger, RDI held a 50% combined
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.
Fiscal Year
AFC's fiscal year ends on the last Thursday of December. Each of the twelve
months ended December 25, 2003 and December 26, 2002 contained 52 weeks.
Unless stated otherwise, references herein are to the AFC's fiscal years.
Cash and Cash Equivalents
AFC considers all highly liquid investments and money market accounts with
the original maturities of three months or less to be cash equivalents.
Concession Inventories
Inventories are comprised of concession goods and are stated at lower of
cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
which range from 7 to 12 years for leasehold improvements, furniture,
fixtures and equipment. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated
useful lives of the related improvements.
71
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 25, 2003 and December 26, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
AFC is a limited liability company; therefore, no federal income taxes have
been provided for its operations. Any 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).
Intangible With Definitive Life
AFC originally recorded $11,810,000 as an intangible in conjunction with an
asset acquisition during fiscal year 1996. AFC licenses the use of the name
"Angelika" under a licensing agreement. The Company had an independent
appraisal, which was used to determine the fair value of assets acquired.
The Company is amortizing the intangible on a straight-line basis over a
twenty-year period. Accumulated amortization of the intangible is
$4,331,000 and $3,741,000 at December 25, 2003 and December 26, 2002,
respectively.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses were
approximately $297,000 and $249,000 for the years ended December 25, 2003
and December 26, 2002, respectively.
Fair Value Financial Instruments
The Company has various financial instruments including cash and cash
equivalents, trade and other receivables and accounts payable and accrued
liabilities. These instruments are short-term in nature and the Company has
determined that their carrying values approximate estimated fair values.
Impairment of Long-Lived Assets
Effective January 1, 2002, AFC adopted SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. In accordance with this
statement, AFC reviews the carrying value of its long-lived assets (other
than goodwill) whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. If indicators of impairment
exist, AFC would determine whether the estimated undiscounted sum of the
future cash flows of such assets is less than its carrying amount. If less,
an impairment loss would be recognized based on the excess of the carrying
amount of such assets over their respective fair values. AFC would
determine the fair value by using quoted market prices, if available, for
such assets; or if quoted market prices are not available, AFC would
discount the expected estimated future cash flows. No impairment was
recorded during the 12 months ended December 25, 2003 and December 26,
2002.
72
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 25, 2003 and December 26, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Estimates
The preparation of financial statements and the accompanying notes thereto,
in conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the respective reporting periods. Actual
results could differ from those estimates.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46)
to provide guidance on when an investor should consolidate another entity
from which they receive benefits or are exposed to risks when those other
entities are not controlled based on traditional voting interests or they
are thinly capitalized. This statement was subsequently revised by FIN 46
(revised December 2003) (FIN 46R) in December 2003. This revision clarified
some of the provisions of FIN 46. The provisions of FIN 46R are effective
beginning December 15, 2003 for public entities that have interests in
structures that are considered special-purpose entities and March 15, 2004
for all other types of variable interest entities. The adoption of FIN 46R
did not have an effect on AFC's financial position or results of
operations.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 25, 2003 and December 26, 2002, a summary of property,
equipment and leasehold improvements is as follows (in thousands):
DECEMBER 25, DECEMBER 26,
2003 2002
------------ ------------
Leasehold improvements $1,297 $ 532
Furniture, fixtures and equipment 994 537
Construction in progress -- 1,077
------ ------
2,291 2,146
Less accumulated depreciation 882 622
------ ------
Property, equipment and
leasehold improvements, net $1,409 $1,524
====== ======
73
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 25, 2003 and December 26, 2002
NOTE C - LEASE COMMITMENTS
AFC leases a theater under a non-cancelable operating lease which matures
in August 2026. Rental expense was $864,000 and $855,000, including noncash
rent of $169,000, for the years ended December 25, 2003 and December 26,
2002, respectively. At December 25, 2003, future minimum rental commitments
for the next five years were as follows (in thousands):
2004 $ 657
2005 657
2006 692
2007 741
2008 741
Thereafter 16,804
-------
Total minimum lease payments $20,292
=======
AFC has scheduled rent increases under the theater lease. The accompanying
statement of operations reflects rent expense on a straight-line basis over
the term of the theater lease. Deferred rental obligations of $1,610,000
and $1,440,000 are reflected in the accompanying balance sheets as of
December 25, 2003 and December 26, 2002, respectively.
NOTE D - COMMITMENTS AND CONTINGENCIES
AFC has been involved in various lawsuits. The ultimate outcome of these
lawsuits is not always determinable; however, in the opinion of management,
based in part upon advice of counsel, the amount of losses that might be
sustained, if any, would not materially affect the financial position of
AFC.
NOTE E - RELATED PARTY TRANSACTIONS
Citadel operates and manages the Angelika Film Centers pursuant to a
management agreement (the Agreement). Citadel operates the theater in
accordance with the terms of the Agreement entered into with the AFC in
August 1996. This Agreement was assigned to Citadel from an affiliate
effective June 1, 2000.
Citadel is to be paid an annual management fee of $125,000 and a bonus fee
contingent on the attainment of certain income levels (as defined in the
Agreement). Management and bonus fee expense amounted to the base fee of
$125,000 for the years ended December 25, 2003 and December 26, 2002.
74
ANGELIKA FILM CENTERS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 25, 2003 and December 26, 2002
NOTE E - RELATED PARTY TRANSACTIONS - Continued
AFC's leasehold interest for the Angelika Theater is guaranteed by both the
Reading Company and Reading Entertainment, Inc. through the day prior to
the 15th anniversary of the lease commencement.
At December 25, 2003, AFC had an aggregate payable balance of $279,000 to
Citadel. This amount is comprised of monies collected by those affiliated
entities for gift certificates and credit card purchases offset by amounts
paid by Citadel on behalf of AFC. At December 26, 2002, AFC had an
aggregate receivable balance of $87,000 due from 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.
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants due to disagreements on
accounting and financial disclosure during the 24 months prior to January 31,
2004.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report, we carried out,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer (the "Certifying
Officers"), an evaluation of the effectiveness of our "disclosure controls and
procedures" (as the term is defined under the Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Act of 1934, as amended (the "Exchange Act")).
Based on this evaluation, the Certifying Officers have concluded that our
disclosure controls and procedures are effective to ensure that material
information is recorded, processed, summarized and reported by management on a
timely basis in order to comply with our disclosure obligations under the
Exchange Act, and the rules and regulations promulgated thereunder.
Further, there were no changes in our internal controls over financial
reporting during the fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of NAC, as of April 30, 2004 are as
follows:
Name Age Position
--------------------- --- --------------------------------------------------
James J. McNamara 55 Chairman of the Board and
Chief Executive Officer
Robert V. Cuddihy, Jr 44 Chief Financial Officer, Secretary and Treasurer
John A. Gleason 55 Director
Donald Shek 54 Director
Henry Y. L. Toh 46 Director
JAMES J. McNAMARA has been Chairman of the Board and Chief Executive
Officer since November 2000. Mr. McNamara has been a Director of NAC since
February 1998 and previously served as its Chairman from April 1998 to November
1999. Mr. McNamara has also been President of Film Management Corporation (a
film company) since 1995, and he has been President and Chief Executive Officer
of Celebrity Entertainment, Inc. (an entertainment company) since 1992. Mr.
McNamara was Chairman of the Board and Chief Executive Officer of Princeton
Media Group, Inc. (a magazine publisher) from 1994 to 1998. A subsidiary of
Princeton Media Group, Inc. and Celebrity Entertainment, Inc. each effected an
assignment of their respective assets for the benefit of creditors in 1998.
76
ROBERT V. CUDDIHY, JR. has been NAC's Chief Financial Officer and Treasurer
since September 2001. Mr. Cuddihy has been NAC's Secretary since January 2003.
Mr. Cuddihy was an independent financial consultant to NAC from May 2001 to
August 2001. From July 1987 to March 2001, Mr. Cuddihy was the Chief Financial
Officer of HMG Worldwide Corporation, a company engaged in in-store marketing
and retail store fixturing design and manufacture, and also served as a Director
from February 1998 to May 2001. HMG Worldwide Corporation effected an assignment
of their assets for the benefit of creditors in 2002. From July 1981 to July
1987, Mr. Cuddihy was with KPMG Peat Marwick, Certified Public Accountants,
where he last served as a senior audit manager.
JOHN A. GLEASON has been a Director of NAC since April 2000. Mr. Gleason
previously served as Director of NAC from February 1998 to September 1999. From
1995 to 1998, Mr. Gleason served on NAC's Dealer Advisory Board, serving as
Chairman of such panel from 1996 to 1998. Mr. Gleason has been the President and
principal of Automax, Inc., an independent car dealership since 1987. Mr.
Gleason has been the President of New Franklin, Inc., an automobile finance
consulting firm, since 1992 and has been a partner in Coslar Properties LLC, a
real estate firm, since 1995.
DONALD SHEK has been a Director of NAC since December 2003. Mr. Shek has
been a financial consultant in private practice since January 1998. From 1993 to
2002, Mr. Shek was a Registered Representative for the Financial West Group, a
NASD broker/dealer.
HENRY Y. L. TOH has been a Director of NAC since December 1998. Mr. Toh is
also a Director of two other public companies, Acceris Communications, Inc.,
formerly I-Link Incorporated (an Internet telephone company), since 1992 and
Teletouch Communications, Inc. (a paging and telecom services provider) since
December 2001. Mr. Toh has been the principal officer of Four M. International,
Inc. (a private investment entity) since 1992. Mr. Toh is also a director of
Crown Financial Group, Inc., an NASD Broker/Dealer, since March 2004. Mr. Toh
was also a Director of Bigmar, Inc, a pharmaceutical company, from 2002 to
February 2004.
Audit Committee
The Audit Committee of NAC is comprised of two independent members of the
NAC Board of Directors, Mr. Toh and Mr. Shek. Mr. Toh and Mr. Shek qualify to
serve as a financial expert on the Audit Committee.
Code of Ethics
Prior to the acquisitions of The Campus Group and OMI, NAC did not maintain
a written code of ethics due to the size of the company and the nature of its
operations. As a result of NAC's recent acquisitions, NAC's management has
initiated the development of a written code of ethics to be adopted by the Board
of Directors prior to January 31, 2005.
77
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
all NAC officers and directors, and persons who own more than ten percent of a
registered class of NAC equity securities, to file reports of ownership and
changes in ownership of equity securities of NAC with the SEC and any applicable
stock exchange. Officers, directors and greater than ten percent stockholders
are required by SEC regulation to furnish NAC with copies of all Section 16(a)
forms that they file. Based solely upon a review of Forms 3, 4, and 5 furnished
to NAC pursuant to the Exchange Act during Fiscal 2004 and Fiscal 2003, NAC
believes that none of its officers, directors and greater than 10% beneficial
owners failed to file such Forms on a timely basis during the most recent fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows all compensation paid by NAC for the fiscal years
ended January 31, 2004, 2003 and 2002 to (i) any persons who served as Chief
Executive Officer or President of NAC during Fiscal 2004 and (ii) the
individuals, other than persons who served as the Chief Executive Officer, who
served as an executive officer of NAC at January 31, 2004 and whose income
exceeded $100,000.
---------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
--------------------------------------------- ------------------------------------------------
Awards
------------------------------------------------
Number of
Securities
Name and Principal Other Annual Restricted Stock Underlying All Other
Position Fiscal Year Salary Bonus Compensation Awards(2) Options/SARs Compensation(1)
---------------------------------------------------------------------------------------------------------------------------
James J. McNamara, 2004 $500,000 $250,000 $ -- -- -- $87,740
Chairman and CEO 2003 $500,000 $250,000 $ -- -- -- $89,913
2002 $500,000 $250,000 $ -- -- -- $68,740
---------------------------------------------------------------------------------------------------------------------------
Robert V. Cuddihy, Jr. 2004 $265,000 $ 27,500 $ 54,400 200,000 $22,045
Chief Financial Officer 2003 $265,000 $ 15,000 $ -- -- -- $13,662
Secretary & Treasurer(2,3) 2002 $ 16,666 $ 16,666 $ 77,500 -- -- $ --
---------------------------------------------------------------------------------------------------------------------------
Robert Dixon 2004 $ -- $ -- $ -- -- -- $ --
Chief Financial Officer(4) 2003 $ -- $ -- $ -- -- -- $ --
2002 $ -- $ -- $198,479 -- -- $ --
---------------------------------------------------------------------------------------------------------------------------
Sean P. Maroney 2004 $ -- $ -- $ -- -- -- $ --
Director of Financial 2003 $ -- $ -- $ -- -- -- $ --
Reporting(5) 2002 $ 79,312 $ -- $ 89,365 -- -- $ --
---------------------------------------------------------------------------------------------------------------------------
Raymond Varcho 2004 $ -- $ -- $ -- -- -- $ --
Secretary(6) 2003 $ -- $ -- $ -- -- -- $ --
2002 $141,916 $ -- $141,653 -- -- $ --
---------------------------------------------------------------------------------------------------------------------------
(*) Employees who were Directors did not receive any additional compensation for
serving on the Board of Directors.
(1) "All Other Compensation" includes aggregate stock awards pursuant to
employment agreements, executive life and disability insurance, vision, 401(k)
match, executive plan medical premiums and auto allowances paid.
(2) The amounts included in "Other Annual Compensation" and "Restricted Stock
Awards" for Fiscal 2004 represents the fair market value and the number of
shares, respectively, of restricted Common Stock awarded Mr. Cuddihy during
Fiscal 2004.
78
(3) Mr. Cuddihy became an employee of NAC in September 2001. For Mr. Cuddihy,
the amount in "All Other Compensation" for Fiscal 2002 includes amounts paid to
Mr. Cuddihy for services he performed for NAC as an independent consultant from
May 2001 to September 2001.
(4) Mr. Dixon, a consultant to NAC, provided financial services to NAC from
February 2001 to November 2001. Additionally, Mr. Dixon served in the capacity
of NAC's principal financial officer until September 2001.
(5) Mr. Maroney was NAC's Director of Financial Reporting until April 2001. For
Mr. Maroney, the amount in "All Other Compensation" includes amounts paid to Mr.
Maroney pursuant to a severance arrangement with NAC.
(6) Mr. Varcho was NAC's internal corporate counsel and corporate Secretary
until April 2001. For Mr. Varcho, the amount in "All Other Compensation"
includes amounts paid to Mr. Varcho pursuant to a severance arrangement with
NAC.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NAC's Board of Directors did not grant options during Fiscal 2004 to any
Executive Officers of NAC.
------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
January 31, 2004 (#) at January 31, 2004 ($)
Shares Acquired Value -------------------------- --------------------------
Name and Principal Position on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------
James McNamara -- -- 750,000 -- -- --
Chairman and CEO
-----------------------------------------------------------------------------------------------------------------
Robert V. Cuddihy, Jr. -- -- -- -- -- --
Chief Financial Officer,
Secretary and Treasurer
------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
There were no exercises of options or stock appreciation rights by officers
or directors during Fiscal 2004.
79
EMPLOYMENT AGREEMENTS
Employment Agreement with James J. McNamara
On December 15, 2000, NAC's Board of Directors approved an Employment
Agreement, effective as of November 3, 2000, with James J. McNamara. Under the
terms of that agreement, Mr. McNamara shall be employed as Chief Executive
Officer for an initial term of three years, until December 31, 2003, with a base
salary of $500,000 per year. In the event that NAC should achieve certain
performance objectives established by the Board of Directors, Mr. McNamara will
also receive a target cash bonus of $250,000, which may also be increased by the
Board if the Board believes it appropriate to reward the Chief Executive
Officer's performance for that year. During Fiscal 2004, as a result of Mr.
McNamara's efforts in (i) consummating the acquisitions of The Campus Group and
OMI, (ii) the development of the financial structure for financing each of the
acquisitions and (iii) the completion of NAC's exit from its discontinued
operations as well as other factors, Board of Directors approved a bonus of
$250,000.
Following the initial three-year term, the Employment Agreement has been
automatically extended on a month-to-month basis and may be cancelled with 90
days prior notice given by either party. NAC may terminate the Employment
Agreement at any time for cause, and Mr. McNamara may terminate at any time in
his discretion.
The employment agreement also grants Mr. McNamara the right to options to
purchase an additional 750,000 shares of NAC Common Stock with an exercise price
equal to the average of the closing bid prices of the Common Stock on the OTCBB
for the five trading days preceding December 16, 2000 or $.664, which also may
be exercised by means of cashless exercise. Such options shall have a term of 10
years from the date of grant; and shall be fully vested and be exercisable as
follows: (a) options with respect to 250,000 shares shall vest and be
exercisable immediately; (b) options with respect to 250,000 shares shall vest
and be exercisable on and after December 15, 2001; and (c) options with respect
to 250,000 shares shall vest and be exercisable on and after December 15, 2002;
provided, however, that upon a change of control, as defined in the Employment
Agreement, all options that have not yet vested and become exercisable shall be
deemed to have vested and have become exercisable as of the time immediately
preceding such change of control. Further, the options shall be issued under a
qualified omnibus long-term incentive plan that will provide for incentive stock
options pursuant to the Internal Revenue Code of 1986, as amended (the "Code").
From time to time, the Board may, in its discretion, increase Mr. McNamara's
base salary and grant additional options to Mr. McNamara, on such terms as the
Board determines.
The Agreement also provides for certain payments in the event of a
termination without cause by NAC or a termination for good reason by Mr.
McNamara as follows: NAC will pay to Mr. McNamara one dollar ($1) less than the
amount that would constitute an "excess parachute payment" under Code Section
280G of the Internal Revenue Code. NAC shall pay to Mr. McNamara such amount in
lump sum cash payment as soon as practicable following the effective date of
such termination. NAC shall also continue to provide Mr. McNamara with all
employee benefits and perquisites, which he was participating in or receiving at
the effective date of termination (or if greater, at the end of the prior year)
for two years following termination.
If it is determined by reason of any payment, or the occurrence of an
option vesting, pursuant to the terms of the Employment Agreement (or upon any
other plan, agreement or program) upon a Change in Control, as defined in the
Employment Agreement (collectively "the Payment"), the Executive would be
subject to the excise tax imposed by Code Section 4999 (the "Parachute Tax"),
then Mr. McNamara shall be entitled to receive an additional payment or payments
(a "Gross-Up Payment") in an amount such that, after payment by Mr. McNamara of
all taxes (including any Parachute Tax) imposed upon the Gross-Up Payment, Mr.
McNamara will retain an amount of the Gross-Up Payment equal to the Parachute
Tax imposed upon the Payment.
80
Employment Agreement with Robert V. Cuddihy, Jr.
Effective December 31, 2001, NAC consummated an employment agreement with
Robert V. Cuddihy, Jr. Under the terms of the agreement, Mr. Cuddihy shall be
employed as Chief Financial Officer and Treasurer for an initial term of three
years, until December 31, 2004, with a base salary of $240,000 per year and a
minimum annual bonus of $25,000 per year. Mr. Cuddihy is also entitled to NAC
employee benefits of health insurance, 401-K plan and related programs.
Following the initial three year term, the agreement will automatically renew
for consecutive year-long terms unless 90 days prior written notice is given by
either party. In the event that the agreement is terminated by NAC without
cause, Mr. Cuddihy shall receive one year compensation in the form of severance
compensation.
As a consequence of Mr. Cuddihy's performance in Fiscal 2004 in (i)
performing due diligence for each acquisition, (ii) assisting in developing
acquisition structure, documentation and integration programs and (iii) managing
day-to-day finance and administration activities of NAC and its newly acquired
businesses, Mr. Cuddihy was awarded a bonus of $27,500 in cash and 200,000
shares of restricted Common Stock valued at $54,400.
1993 EQUITY INCENTIVE PLAN
NAC's 1993 Equity Incentive Plan (the "Plan") provides for the grant of
Incentive Options, Non-Qualified Options, Stock Appreciation Rights, Restricted
Stock Appreciation Rights, Restricted Stock and Common Stock (all of which are
sometimes collectively referred to as "Awards") to the Executive Officers
referred to in the cash compensation table as well as to other employees of NAC
and its subsidiaries and any former employee of NAC eligible to receive an
assumed or replacement award or award settlement. Awards may be granted singly,
in combination or in tandem. In addition, Awards may be made in combination, or
in tandem with, in replacement of, or as the payment for grants or rights under
any other compensation plan of the NAC, including the Option Plan or the plan of
any acquired entity.
The total number of shares available for options or awards granted under
this Plan is 2,200,000 shares. No options were granted under this Plan in Fiscal
2004, 2003 or 2002. There were 42,848 shares of restricted Common Stock
cancelled under this Plan during Fiscal 2002. There were 245,000 stock options
cancelled under this Plan during Fiscal 2004. There were 373,352 shares
available for future stock awards or option grants at January 31, 2004. The
shares to be issued under the Plan may be authorized and unissued shares,
treasury shares or a combination thereof. The Compensation Committee (the
"Committee") administers the Plan. The Committee is comprised of three
non-employee Directors, all of whom must be "disinterested persons" as defined
under the Plan.
Any compensation income realized by a participant with respect to any Award
granted under the Plan shall be subject to withholding by NAC of income,
employment or other taxes required by federal, state, local or foreign law. The
Committee may in its discretion satisfy the withholding requirement by causing
the entity or subsidiary employing the participant to withhold the appropriate
amount of any and all of such taxes from any other compensation otherwise
payable to such participant.
81
2003 Restricted Stock Plan
As a consequence of the significant acquisitions consummated during Fiscal
2004, NAC sponsored a 2003 Restricted Stock Plan ("2003 Plan") that provides
stock grants to all employees. The 2003 Plan authorizes the grant of up to a
maximum of 400,000 restricted shares of Common Stock to employees of NAC. During
Fiscal 2004, there were 372,000 shares of Common Stock granted under the terms
of the plan. Each share granted is restricted and unregistered stock and each
award vests at the rate of 20% per year over a five year period. The underlying
shares may not be sold, transferred, pledged or otherwise disposed until they
vest. During the vesting period, unvested shares are voted by the manager of
each business unit. No shares were granted to executive officers or directors
under the 2003 Plan. For Fiscal 2004, NAC charged to deferred compensation
expense $119,000, a component of shareholders' equity, for the 2003 Plan grants.
The deferred compensation expense is amortized on a straight-line basis over the
5 year vesting period of the restricted Common Stock.
REMUNERATION OF DIRECTORS
The Board of Directors, pursuant to the terms of the proposed settlement
with shareholders, reduced their annual compensation from $55,000 per annum to
$15,000 per annum effective October 1, 2003. Non-employee directors serving on
the audit committee of the Board are also entitled to additional compensation of
$5,000 per annum. The Board of Directors are also entitled to reimbursement for
all reasonable fees and expenses incurred in connection with the performance of
services on behalf of the Company. Fees and expenses shall be reimbursed upon
submission to the Company of appropriate documentation for such fees and
expenses in accordance with then-current Company policy.
Due to the substantial issues faced by NAC during Fiscal 2002, Fiscal 2003
and Fiscal 2004, including (i) the sale and disposition of NAC's automobile loan
portfolio, (ii) the issues raised by various auto rental, auto finance and
shareholder litigation and settlements, (iii) the purchase of the 50% interest
in the Angelika Film Centers, LLC interest along with the subsequent agreements
made in December 2000 with Reading and its subsidiaries, (iv) the purchase of
ZoomLot and the subsequent consummation of the Exchange Agreement with the
former ZoomLot shareholders, (v) managing NAC's acquisition due diligence and
related investment analysis activities, (vi) the acquisition of OMI and (vii)
the acquisition of The Campus Group, various members of the Board of Directors
were required to devote substantial time to the affairs of NAC.
Amounts paid to Directors in Fiscal 2004 aggregated $130,416 for services
rendered during the period as follows:
Director Amount Director Status
-------------------- ------- -----------------------------------------
James J. McNamara(1) $ -- Director
John A. Gleason 45,000 Director
Donald Shek 2,083 Director
Henry Y.L. Toh 48,333 Director
William S. Marshall 35,000 Discontinued as a Director September 2002
(1) Directors who are also employees of NAC do not receive any additional
compensation for serving on the Board of Directors.
82
PERFORMANCE GRAPH
The following graph compares the yearly change in NAC's cumulative total
shareholder return on its Common Stock (based on the market price of NAC's
Common Stock) with the cumulative total return of the S&P 600 Small Cap Index,
the Russell 2000 Index, Reading International, Inc. (a theatre and real estate
concern) and AMC Entertainment, Inc. (a theatre concern).
2/1/99 1/31/00 1/31/01 1/31/02 1/31/03 1/31/04
------ ------- ------- ------- ------- -------
National Auto Credit, Inc. 100 119 32 16 16 68
S&P 600 Small Cap Index 100 109 131 134 108 159
Russell 2000 Index 100 116 119 113 87 136
AMC Entertainment, Inc. 100 56 32 64 47 88
Reading International, Inc. 100 72 56 50 105 161
For purposes of the above table, NAC is compared to both AMC Entertainment,
Inc. and Reading International Inc. as each company is engaged principally in
the operations of various film theatres. NAC's current operations are comprised
principally of its investment in the Angelika Film Center LLC and corporate
communication as a consequence of is acquisitions of The Campus Group and OMI
during Fiscal 2004.
83
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 30, 2004
with respect to: (1) all persons known by NAC to be the beneficial owners of
five percent or more of Common Stock; (2) each executive officer and director;
and (3) all executive officers and directors of NAC as a group.
Name and Address of Number of Shares Approximate
Beneficial Owner(1) Beneficially Owned Percentage of Class(2)
----------------------------------- ------------------ ----------------------
James McNamara(3) 2,885,075 29.4%
555 Madison Ave 29th Floor
New York, New York 10022
John A. Gleason(4) 245,000 2.6%
555 Madison Ave 29th Floor
New York, New York 10022
Donald Shek . -- --
555 Madison Ave 29th Floor
New York, New York 10022
Henry Y. L. Toh(4) 245,000 2.6%
555 Madison Ave 29th Floor
New York, New York 10022
Robert V. Cuddihy, Jr. 200,000 2.2%
555 Madison Ave 29th Floor
New York, New York 10022
Campus Family 2000 Trust(5) 1,883,333 17.2%
42 Oak Avenue
Tuckahoe, New York 10707
All executive officers and 3,575,075 34.7%
Directors as a group (5 persons)(6)
(1) Pursuant to rules promulgated under the Exchange Act of 1934, an individual
is considered to beneficially own shares of Common Stock if he or she
directly or indirectly has or shares (i) voting power, which includes the
power to vote or direct the voting of shares; or (2) investment power,
which includes the power to dispose or direct the disposition of the
shares. Unless otherwise noted, NAC believes that all of such shares are
owned of record by each individual named as beneficial owner and that such
individual has sole voting and dispositive power with respect to the shares
of Common Stock owned by each of them. Such person's percentage ownership
is determined by assuming that the options or convertible securities that
are held by such person, and which are exercisable within 60 days from the
date hereof, have been exercised or converted, as the case may be.
(2) Based on 9,052,614 shares outstanding as of April 30, 2004.
(3) Includes 2,135,075 shares of stock and vested options to purchase 750,000
shares of Common Stock.
84
(4) Includes 245,000 shares issuable upon exercise of options.
(5) Pursuant to the terms of the $2.8 million Convertible Promissory Note
outstanding at January 31, 2004, the holder has the option to convert the
note into Common Stock at the rate of $1.50 per share for an aggregate of
1,883,333 shares of Common Stock if fully converted.
(6) Includes 2,335,075 shares outstanding and 1,124,000 shares issuable upon
exercise of options.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth, as of January 31, 2004, with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of NAC are authorized for issuance.
NUMBER OF
SECURITIES
REMAINING
NUMBER OF AVAILABLE FOR FUTURE
SECURITIES TO BE ISSUANCE UNDER
ISSUED UPON WEIGHTED-AVERAGE EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION
OUTSTANDING OUTSTANDING PLANS (EXCLUDING
OPTIONS, WARRANTS OPTIONS, WARRANTS SECURITIES REFLECTED
AND RIGHTS AND RIGHTS IN COLUMN (A))
PLAN CATEGORY ( A ) ( B ) ( C )
---------------------------------- ----------------- ----------------- --------------------
Equity compensation plans approved
by security holders 1,630,000 $0.80 373,352
Equity compensation plans not
approved by security holders -- -- 28,000
--------- ----- -------
Total 1,630,000 $0.80 401,352
--------- ----- -------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
85
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
Audit fees were for professional services rendered for the audit of our
annual financial statements on Form 10-K for Fiscal 2004 and Fiscal 2003, the
reviews of the financial statements included in our quarterly reports on Form
10-Q for Fiscal 2004 and Fiscal 2003 and services in connection with our
statutory and regulatory filings for Fiscal 2004 and Fiscal 2003. NAC charged to
operations $150,000 and $90,000 for audit fees for Fiscal 2004 and Fiscal 2003,
respectively
Audit-Related Fees
Audit related fees were for assurance and related services rendered that
are reasonably related to the audit and reviews of our financial statements for
Fiscal 2004 and Fiscal 2003, exclusive of the Audit Fees above. These fees
include benefit plans and audits, assistance with registration statements and
comfort letters and consents not performed directly in connection with audits.
NAC charged to operations $7,000 and $7,000 for audit related fees for Fiscal
2004 and Fiscal 2003, respectively
Tax Fees
Tax fees were for services related to tax compliance, consulting and
planning services rendered during Fiscal 2004 and Fiscal 2003 and included
preparation of tax returns, review of restrictions on net operating loss
carryforwards and other general tax services. NAC charged to operations $103,000
and $100,000 for Fiscal 2004 and Fiscal 2003, respectively.
All Other Fees
NAC did not incur fees for any services, other than the fees disclosed
above relating to audit, audit-related and tax services, rendered during Fiscal
2004 and Fiscal 2003.
Audit and Non-Audit Service Pre-Approval Policy
In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and
the rules and regulations promulgated thereunder, the Audit Committee has
adopted an informal approval policy that it believes will result in an effective
and efficient procedure to pre-approve services performed by the independent
auditor.
Audit Services. Audit Services include the annual financial statement audit
(including quarterly reviews) and other procedures required to be performed by
the independent auditor to be able to form an opinion on our financial
statements. The Audit Committee may pre-approve specified annual audit services
engagement terms and fees and other specified audit fees. All other audit
services must be specifically pre-approved by the Audit Committee. The Audit
Committee monitors the audit services engagement and may approve, if necessary,
any changes in terms, conditions and fees resulting from changes in audit scope
or other items.
Audit-Related Services. Audit-related services are assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements which historically have been provided to us by the
independent auditor and are consistent with the SEC's rules on auditor
independence. The Audit Committee may pre-approve specified audit-related
services within pre-approved fee levels. All other audit-related services must
be pre-approved by the Audit Committee.
Tax Services. The Audit Committee may pre-approve specified tax services
that the Audit Committee believes would not impair the independence of the
auditor and that are consistent with SEC rules and guidance. All other tax
services must be specifically approved by the Audit Committee.
86
All Other Services. Other services are services provided by the independent
auditor that do not fall within the established audit, audit-related and tax
services categories. The Audit Committee may pre-approve specified other
services that do not fall within any of the specified prohibited categories of
services.
Procedures. All requests for services to be provided by the independent
auditor, which must include a detailed description of the services to be
rendered and the amount of corresponding fees, are submitted to the Chief
Financial Officer. The Chief Financial Officer authorizes services that have
been pre-approved by the Audit Committee. If there is any question as to whether
a proposes service fits within a pre-approved service, the Audit Committee chair
is consulted for a determination. The Chief Financial Officer submits requests
or applications to provide services that have not been pre-approved by the Audit
Committee, which must include an affirmation by the Chief Financial Officer and
the independent auditor that the request or application is consistent with the
SEC's rules on auditor independence, to the Audit Committee (or its chair or any
of its other members pursuant to delegated authority) for approval.
87
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DOCUMENTS FILED AS PART OF THIS REPORT:
(a)(1) The following statements are included in Part II, Item 8:
Financial Statements of the Company
Report of Independent Certified Public Accountants
Financial Statements:
Consolidated Balance Sheets - as of
January 31, 2004 and 2003
Consolidated Statements of Operations -
Years Ended January 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) -
Years Ended January 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows -
Years Ended January 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements -
Years Ended January 31, 2004, 2003 and 2002
Financial Statements of AFC
Report of Independent Certified Public Accountants
Financial Statements:
Balance Sheets as of December 25, 2003 and December 26, 2002
Statements of Operations for the years ended
December 25, 2003 and December 26, 2002
Statements of Members' Equity for the years ended
December 25, 2003 and December 26, 2002
Statements of Cash Flows for the years ended
December 25, 2003 and December 26, 2002
Notes to Financial Statements for the years ended
December 25, 2003 and December 26, 2002
88
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONT.)
(a)(2) The following financial statement schedule for the years ended January
31, 2004, 2003 and 2002 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).
89
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONT.)
3.2 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Special Rights and the
Qualifications, Limitations, Restrictions, and Other
Distinguishing Characteristics of the Series A Convertible
Preferred Stock of National Auto Credit, Inc., dated as of April
5, 2000 (incorporated by reference to Exhibit 10.3 of the Current
Report on Form 8-K filed on April 20, 2000, File No. 1-11601).
3.3 Amended and Restated Bylaws of National Auto Credit, Inc. dated
April 5, 2000 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 2000,
SEC File No. 1-11601).
3.4 Certificate of Designations of Series B and C Preferred Stock of
National Auto Credit, Inc. dated as of December 15, 2000
(incorporated by reference to Exhibit 4.1 of the Current Report on
Form 8-K filed January 2, 2001, SEC File No. 1-11601).
3.5 Certificate of Designation for the Series D Junior Participating
Preferred Stock (incorporated by reference to the Company's
Current Report on Form 8-K, dated October 9, 2001, SEC File No.
1-11601).
4.1 Specimen Stock Certificate - National Auto Credit, Inc.
(incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1996, SEC File No.
1-11601).
4.2 Specimen Series C redeemable preferred stock Certificate -
National Auto Credit, Inc. (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 2001, SEC File No. 1-11601).
4.3 Rights Agreement, dated as of September 26, 2001, between the
Company and American Stock Transfer & Trust Company, which
included the form of Certificate of Designation for the Series D
Junior Participating Preferred Stock as Exhibit "A", the form of
Rights Certificate as Exhibit "B" and the Summary of Rights to
Purchase Preferred Stock as Exhibit "C" (incorporated herein by
reference to the Company's Current Report on Form 8-K, dated
October 9, 2001, SEC File No. 1-11601).
10.1* National Auto Credit, Inc. 1983 Stock Option Plan (incorporated by
reference to the Company's Post Effective Amendment No. 2 to Form
S-8 as filed on October 1, 1987, File No. 2-93984).
10.2 Form of Directors' Indemnification Agreement dated July 2, 1986
(incorporated by reference to Exhibit 10(f) of the Company's
Annual Report of Form 10-K for fiscal year ended January 31, 1988,
File No. 0-12201).
10.3* National Auto Credit, Inc. 1993 Equity Incentive Plan
(incorporated by reference to the Company's Form S-8 Registration
Statement as filed on December 28, 1993, File No. 33-51727).
90
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONT.)
10.4* National Auto Credit, Inc. 401(k) Savings and Retirement Plan and
Trust (incorporated by reference to the Company's Form S-8
Registration Statement as filed on December 28, 1993, File No.
33-51727).
10.5 Purchase Agreement among National Auto Credit, Inc., National
Cinemas, Inc., FA, Inc. and Reading Entertainment, Inc., dated as
of April 5, 2000 (incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K filed on April 20, 2000, File No.
1-11601).
10.6 Registration Rights Agreement, dated as of April 5, 2000
(incorporated by reference to Exhibit 10.2 of the Current Report
on Form 8-K filed on April 20, 2000, File No. 1-11601).
10.7 Registration Rights Agreement, dated as of December 15, 2000
(incorporated by reference to Exhibit 4.2 to the Company's Form
8-K filed January 2, 2001, SEC File No. 1-11601).
10.8 Lockup, Standstill and Voting Agreement, dated as of December 15,
2000, (incorporated by reference to Exhibit 4.3 of the Current
Report on Form 8-K filed January 2, 2001, SEC File No. 1-11601).
10.9* Employment Agreement between NAC and James J. McNamara dated as
of December 15, 2000 (incorporated by reference to Exhibit 10.1
of the Current Report on Form 8-K filed January 2, 2001, SEC File
No. 1-11601).
10.10 Agreement for Purchase and Sale of Limited Liability Partnership
Interests (exhibits to Form 8-K filed January 28, 2002, SEC File
No. 1-11601).
10.11 Exchange and Repayment Agreement dated January 31, 2002 by and
among National Auto Credit, Inc., Cygnet Capital Corporation,
Verde Reinsurance Company Ltd, Ernie Garcia III 2000 Trust, Brian
Garcia 2000 Trust, EJMS Investors Limited Partnership, Ernest C.
Garcia II, Ray Fidel, Steven P. Johnson, Mark Sauder, Colin
Bachinsky, Chris Rompalo, Donna Clawson, Mary Reiner, and Kathy
Chacon (exhibit to Form 8-K filed February 4, 2002, SEC File No.
1-11601).
10.12* Separation Agreement from NAC for Raymond A. Varcho dated as of
April 25, 2001 (exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q file June 15, 2001, SEC File No. 1-11601).
10.13* Employment Agreement between Robert V. Cuddihy, Jr. and the
Company dated December 31, 2001 (exhibit to the Annual Report on
Form 10-K filed May 13, 2002, SEC File No. 1-11601).
10.14 Merger Agreement and Plan of Reorganization between the Company,
ORA/Metro Incorporated and Mr. Dean R. Thompson dated as of April
1, 2003 (exhibit to the Annual Report on Form 10-K filed April
30, 2003, SEC File No. 1-11601).
10.15* Employment Agreement and Non-Competition and Non-Solicitation
Agreement between OMI Communications, Inc. and Mr. Dean R.
Thompson dated as of April 1, 2003 (exhibit to the Annual Report
on Form 10-K filed April 30, 2003, SEC File No. 1-11601).
91
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONT.)
10.16* Non-Negotiable Promissory Note between the Company and Mr. Dean
R. Thompson dated as of April 1, 2003 (exhibit to the Annual
Report on Form 10-K filed April 30, 2003, SEC File No. 1-11601).
10.17 Registration Rights Agreement between the Company and Mr. Dean R.
Thompson dated as of April 1, 2003 (exhibit to the Annual Report
on Form 10-K filed April 30, 2003, SEC File No. 1-11601).
10.18 Stock Purchase Agreement between the Company, Campus Group
Companies, Inc., Audience Response Systems, Inc., Interactive
Conferencing Network, Inc. and Multi-Video Services, Inc. and
Steven Campus, the Campus Family 2000 Trust and the Trust
Established Under the Will of Nancy Campus (the "Campus Group
Shareholders") dated July 31, 2003 (exhibit to Form 8-K filed
August 1, 2003, SEC File No. 1-11601).
10.19 Lock-up, Standstill and Voting Agreement between the Company and
The Campus Group Shareholders dated July 31, 2003 (exhibit to
Form 8-K filed August 1, 2003, SEC File No. 1-11601).
10.20 Registration Rights Agreement between the Company and the Campus
Family 2000 Trust dated July 31, 2003 (exhibit to Form 8-K filed
August 1, 2003, SEC File No. 1-11601).
10.21* Employment Agreement, Non-Competition and Non-Solicitation
Agreement between The Campus Group and Steven Campus dated July
31, 2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No.
1-11601).
10.22 Amendment to Lease [Tuckahoe Premises] between the Campus Group
Companies, Inc. and the Campus Family 2000 Trust dated July 31,
2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No.
1-11601).
10.23 Amendment to Lease [Bohemia Premises] between the Campus Group
Companies, Inc. and the Campus Family 2002 Trust dated July 31,
2003 (exhibit to Form 8-K filed August 1, 2003, SEC File No.
1-11601).
10.24 Surety Agreement between The Campus Group and The Campus Group
Shareholders dated July 31, 2003 (exhibit to Form 8-K filed
August 1, 2003, SEC File No. 1-11601).
10.25 Security Agreement between The Campus Group and The Campus Group
Shareholders dated July 31, 2003 (exhibit to Form 8-K filed
August 1, 2003, SEC File No. 1-11601).
10.26 Pledge Agreement The Campus Group and the Campus Group
Shareholders dated July 31, 2003 (exhibit to Form 8-K filed
August 1, 2003, SEC File No. 1-11601).
10.27 Non-Negotiable Promissory Notes between the Company and The
Campus Group Shareholders dated July 31, 2003 (exhibit to Form
8-K filed August 1, 2003, SEC File No. 1-11601).
92
10.28 Non-Negotiable Convertible Promissory Note between the Company
and the Campus Family 2000 Trust dated July 31, 2003 (exhibit to
Form 8-K filed August 1, 2003, SEC File No. 1-11601).
21 Subsidiaries of National Auto Credit, Inc. at January 31, 2004.
23 Consent of Independent Certified Public Accountants.
31.1 Certification of Principal Executive Officer required under
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer required under
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. 1350 as adopted under Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Principal Financial Officer pursuant to 18
U.S.C. 1350 as adopted under Section 906 of the Sarbanes-Oxley
Act of 2002
Items above indicated with an asterisk (*) are management contracts or
compensatory plans or arrangements
(B) REPORTS ON FORM 8-K
None.
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, National Auto Credit, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
National Auto Credit, Inc.
Registrant
Date May 11, 2004 By: /s/ James J. McNamara
------------------------------
James J. McNamara
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities as indicated on May 11, 2004.
Principal Financial and
Principal Executive Officer Accounting Officer
By: /s/ James J. McNamara By: /s/ Robert V. Cuddihy, Jr.
--------------------- ---------------------------------
James J. McNamara Robert V. Cuddihy, Jr.
Chairman of the Board and Chief Financial Officer and Treasurer
Chief Executive Officer
Directors:
/s/ John A. Gleason /s/ Donald Shek
------------------------- -------------------------------------
John A. Gleason Donald Shek
/s/ James J. McNamara /s/ Henry Y. L. Toh
------------------------- -------------------------------------
James J. McNamara Henry Y. L. Toh
94
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, 2004
Allowance for doubtful accounts $ -- $ 23 $70 $ 18(a) $ 75
Self-insurance claims $518 $ -- $-- $110(b) $408
Year ended January 31, 2003
Self-insurance claims $769 $ -- $-- $251(c) $518
Year ended January 31, 2002
Self-insurance claims $970 $463 $-- $664(b) $769
(a) Includes $70,000 provision for doubtful accounts at the date of each
acquisition The Campus Group and OMI during Fiscal 2004.
(b) Cash disbursements related to self-insured claims.
(c) Includes $51,000 cash disbursements related to self-insurance claims and a
$200,000 reduction in the estimated liability based upon current estimates of
outstanding claims.
95