UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2002
---------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 1-11601
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NATIONAL AUTO CREDIT, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1816760
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 Madison Avenue, 29th Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 644-1400
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( X ) No ( )
Indicate by check mark whether the registrant has filed all documents and
reports required by Sections 12, 13 or 15(d) of the Securities and Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes ( ) No ( )
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
Class Outstanding at June 12, 2002
----- ----------------------------
Common Stock, $0.05 par value 8,641,754
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Certified Public Accountants 1
Condensed Consolidated Balance Sheets as of
April 30, 2002 and January 31, 2002 2
Condensed Consolidated Statements of Operations for the
Three Months Ended April 30, 2002 and 2001 3
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Three Months Ended April 30, 2002 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended April 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 reviewed the accompanying condensed consolidated balance sheet of
National Auto Credit, Inc. and its subsidiaries as of April 30, 2002, the
related statements of stockholders' equity and comprehensive income for the
three-month period ended April 30, 2002 and the related statements of operations
and cash flows for each of the three-month periods ended April 30, 2002 and
2001. The financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
January 31, 2002, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for the year then
ended (not presented herein) and in our report dated April 9, 2002, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of January 31, 2002, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Grant Thornton LLP
Cleveland, Ohio
June 12, 2002
1
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
April 30, January 31,
2002 2002
------------- -------------
(unaudited)
ASSETS
Cash and cash equivalents $ 5,030 $ 6,122
Marketable securities (Note 2) 994 994
Investment in AFC (Note 3) 9,313 9,220
Property and equipment, net of accumulated depreciation
of $64, and $57, respectively 70 71
Income taxes refundable 3,507 3,507
Other assets 462 620
------------- -------------
$ 19,376 $ 20,534
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Self-insurance claims $ 761 $ 769
Accrued income taxes 697 697
Other liabilities 2,114 2,743
------------- -------------
Total liabilities 3,572 4,209
Commitments and contingencies (Note 4) - -
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock, $.05 par value;
authorized 40,000,000 shares; issued 39,377,589 and
39,377,589 shares, respectively 1,969 1,969
Additional paid-in capital 174,337 174,337
Retained deficit (136,867) (136,346)
Accumulated other comprehensive income (loss) (133) (133)
Treasury stock, at cost, 30,735,835 and 30,735,835
shares, respectively (23,502) (23,502)
------------- -------------
Total stockholders' equity 15,804 16,325
------------- -------------
$ 19,376 $ 20,534
============= =============
See accompanying notes to condensed consolidated financial statements.
2
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
April 30,
-------------------------------------
2002 2001
------------- --------------
Revenues
Interest income from investments $ 45 $ 140
Income from AFC investment 93 86
------------- --------------
Total revenues 138 226
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Costs and Expenses
General and administrative 841 1,436
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Total costs and expenses 841 1,436
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Loss from continuing operations
before income taxes (703) (1,210)
Provision for income taxes - -
------------- --------------
Loss from continuing operations (703) (1,210)
Income (loss) from discontinued operations, net of tax 182 (1,144)
------------- --------------
Net loss (521) (2,354)
Accretion of discount on redeemable preferred stock - (24)
------------- --------------
Net loss applicable to common stock $ (521) $ (2,378)
============= ==============
Basic and diluted earnings (loss) per share
Continuing operations $ (.08) $ (.10)
Discontinued operations .02 (.10)
------------- --------------
Net earnings (loss) per share $ (.06) $ (.20)
============= ==============
Weighted average number of shares outstanding
Basic and diluted 8,642 11,606
============= ==============
See accompanying notes to condensed consolidated financial statements.
3
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED APRIL 30, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Preferred Stock Common Stock
----------------- ------------------------- Additional
Par Par Paid-In Retained Treasury
Shares Value Shares Value Capital Deficit Stock
-------- -------- ------------- ----------- --------------- ------------- ------------
Balance at
January 31, 2002 - $ - 39,377,589 $ 1,969 $ 174,337 $ (136,346) $ (23,502)
Net loss (521)
Other comprehensive
income-unrealized loss
on marketable securities
-------- -------- ------------- ----------- --------------- ------------- ------------
Comprehensive income (loss)
Balance at
April 30, 2002 - $ - 39,377,589 $ 1,969 $ 174,337 $ (136,867) $ (23,502)
======== ======== ============= =========== =============== ============= ============
Accumulated
Other Comprehensive
Comprehensive Income
Income (Loss) Total (Loss)
--------------- ----------- ------------
Balance at
January 31, 2002 $ (133) $ 16,325
Net loss (521) $ (521)
Other comprehensive
income-unrealized loss
on marketable securities - - -
--------------- ----------- ------------
Comprehensive income (loss) $ (521)
============
Balance at
April 30, 2002 $ (133) $ 15,804
=============== ===========
See accompanying notes to condensed consolidated financial statements.
4
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
April 30,
-----------------------
2002 2001
-------- --------
Cash flows from operating activities
Net loss $ (521) $ (2,354)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss (income) from discontinued operations (182) 1,144
Depreciation and amortization 7 147
Stock compensation -- (116)
Changes in operating assets and liabilities:
Accrued income tax -- 5
Other liabilities (439) (923)
Other operating assets and liabilities, net 65 243
-------- --------
Net cash used in operating activities (1,070) (1,854)
-------- --------
Cash flows from investing activities
Principal collected on loans -- 80
Proceeds from sale of loans -- 313
Change in contracts in progress (77) 456
Proceeds from sale of assets held for sale -- 30
Purchase of property and equipment (6) (66)
-------- --------
Net cash provided by (used in) investing activities (83) 813
-------- --------
Decrease in cash and cash equivalents from
continuing operations (1,153) (1,041)
(Decrease) increase in cash and cash equivalents from
discontinued operations 61 (1,028)
Cash and cash equivalents at beginning of period 6,122 12,444
-------- --------
Cash and cash equivalents at end of period $ 5,030 $ 10,375
======== ========
Supplemental disclosures of cash flow information
Interest paid $ -- $ --
======== ========
Income taxes paid (refund) $ -- $ (5)
======== ========
See accompanying notes to condensed consolidated financial statements.
5
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
General
-------
The accompanying unaudited condensed consolidated financial statements
include the accounts of National Auto Credit, Inc. and Subsidiaries ("NAC"). The
financial statements are unaudited, but in the opinion of management, reflect
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of NAC's consolidated financial position, results of
operations, stockholders' equity and comprehensive income, and cash flows for
the periods presented.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and with the rules of the Securities and Exchange
Commission applicable to interim financial statements, and therefore do not
include all disclosures that might normally be required for interim financial
statements prepared in accordance with generally accepted accounting principles.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with NAC's consolidated financial statements, including the
notes thereto, appearing in NAC's Annual Report on Form 10-K for the year ended
January 31, 2002. The results of operations for the three months ended April 30,
2002 are not necessarily indicative of the operating results for the full year.
The preparation of financial statements and the accompanying notes thereto,
in conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the respective reporting periods. Actual results could differ from those
estimates.
Discontinued Operations
-----------------------
In the fourth quarter of Fiscal 2002, NAC completed a strategic review of
its investment in ZoomLot, acquired December 15, 2000 and the development of its
e-commerce services. NAC's strategic review included evaluating the evolving
market conditions of the used car dealer and financing industries, the start-up
nature of the ZoomLot operations, the current market demand for and penetration
of ZoomLot's e-commerce solution to electronically link eligible used car
dealers and their qualified customers with available used car lenders and
financing terms, current operating losses and forecasts of future operating
results and strategic opportunities available to ZoomLot. As a result of this
review, management of NAC determined that it was unable to predict, with the
requisite degree of certainty, when or whether ZoomLot would achieve positive
cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated steps to
discontinue e-commerce operations. Additionally, as a consequence of NAC's
decision to discontinue its ZoomLot e-commerce operations, NAC also formally
exited the sub-prime used automobile consumer finance business effective
December 31, 2001. 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. Subsequent to December 31, 2001, NAC is engaged principally
in the movie exhibition segment.
NAC is evaluating various additional strategic business alternatives,
including, but not limited to, the purchase of one or more existing businesses
or the entry into one or more businesses.
Certain fiscal 2002 amounts have been reclassified to conform with fiscal
2003 presentations.
6
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
New Accounting Pronouncements
-----------------------------
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets.
SFAS 141 is effective for all business combinations completed after June 30,
2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of SFAS
142. Major provisions of these Statements and their effective dates for NAC are
as follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001;
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability;
o Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective February 1, 2002,
all previously recognized goodwill and intangible assets with
indefinite lives will no longer be subject to amortization;
o Effective February 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator; and
o All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
NAC adopted SFAS 141 and 142 effective February 1, 2002. NAC previously
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. As a
result of NAC's adoption of SFAS 141 and SFAS 142, for the three months ended
April 30, 2002, NAC discontinued this monthly charge to earnings.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record to the fair value of the
liability for an asset retirement obligation in the period in which it is
incurred. The amount initially recorded as the asset retirement obligation is
based upon the estimated present value of the retirement costs to be incurred,
and is capitalized as a part of the asset. The obligation is subsequently
accreted for the passage of time by charges to interest expense, and the
capitalized costs are amortized as part of depreciation expense related to the
asset. The asset retirement obligation is also continually re-estimated, with
changes in its present value caused by changes in the estimated retirement cost
recorded as adjustments to the carrying amount and subsequent depreciation of
the asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002
and was adopted by NAC effective February 1, 2002. At the time of adoption,
there was no material impact to NAC's financial statements.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
with the exception of impairment and disposal issues related to goodwill and
other intangible assets that are not amortized. SFAS 144 also supersedes the
accounting and reporting provisions of Accounting Principles Board Opinion No.
(APB) 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains many of the fundamental
recognition and measurement provisions of SFAS 121, and also retains the
requirement in APB 30 to separately identify
7
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
and report discontinued operations. However, SFAS 144 extends the APB 30
reporting requirements for discontinued operations to components of an entity
that have either been disposed of or classified as assets held for sale that may
not have qualified as segments under APB 30, as a result of which operating
results that previously were not classified as discontinued operations may be
treated as such upon the adoption of SFAS 144. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and was adopted by NAC effective
February 1, 2002. At the time of adoption, there was no material impact to NAC's
financial statements.
NOTE 2 - MARKETABLE SECURITIES
Marketable securities at April 30, 2002 are summarized as follows (in
thousands):
Gross Unrealized
-------------------------------
Cost Gains Losses Fair Value
------------- ------------- ------------- -------------
Equity securities - mutual funds $ 1,127 $ - $ (133) $ 994
All marketable securities were classified as available for sale.
NOTE 3 - INVESTMENT IN AFC
On April 5, 2000, NAC, through its wholly-owned subsidiary National
Cinemas, Inc., acquired a 50% membership interest in Angelika Film Center, LLC
("AFC"). AFC is the owner and operator of the Angelika Film Center, which is a
multiplex cinema and cafe complex in the Soho District of Manhattan in New York
City.
AFC is currently owned 50% by NAC and 50% by Reading International, Inc.
("Reading"). The articles and bylaws of AFC provide that for all matters subject
to a vote of the members, a majority is required, except that in the event of a
tie vote, the Chairman of Reading shall cast the deciding vote.
NAC uses the equity method to account for its investment in AFC. NAC's
initial investment exceeded its share of AFC's net assets and that portion of
the investment balance is accounted for in a manner similar to goodwill. AFC
uses a December 31 year-end for financial reporting purposes. NAC reports on a
January 31 year-end, and for its fiscal quarters ending April 30, July 31,
October 31 and January 31 records its pro-rata share of AFC's earnings on the
basis of AFC's fiscal quarters ending March 31, June 30, September 30, and
December 31, respectively. For the three months ended April 30, 2002 and 2001,
NAC recorded income of $93,000 and $154,000, respectively, representing its
share of AFC's net income (loss). Additionally, for the three months ended April
30, 2001, prior to the adoption of SFAS 141 and SFAS 142, NAC recorded
amortization expense of $68,000 as a reduction of its income from its investment
in AFC. As a result of NAC's adoption of SFAS 141 and 142, this amortization
charge was discontinued in Fiscal 2003.
8
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - INVESTMENT IN AFC (CONTINUED)
Summarized income statement data for AFC for the three months ended March
31, 2002, and 2001, respectively, is as follows (in thousands):
Three Months Ended March 31,
----------------------------
2002 2001
--------- ---------
Revenues $ 1,627 $ 2,035
Film rental 478 742
Operating costs 718 742
Depreciation and amortization 173 173
General and administrative expenses 71 70
--------- ---------
1,440 1,727
--------- ---------
Net income $ 187 $ 308
========= =========
NAC's proportionate share of net income $ 93 $ 154
Amortization expense -- (68)
--------- ---------
Income from investment in AFC $ 93 $ 86
========= =========
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Shareholder Complaints
----------------------
On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the Director Defendants
breached their fiduciary duties to NAC, (ii) a judgment voiding an employment
agreement with James J. McNamara and rescinding a stock exchange agreement in
which NAC acquired ZoomLot Corporation, (iii) a judgment voiding the grant of
stock options and the award of director fees allegedly related thereto, (iv) an
order directing the Director Defendants to account for alleged damages sustained
and profits obtained by the Director Defendants as a result of the alleged
various acts complained of, (v) the imposition of a constructive trust over
monies or other benefits received by the Director Defendants and (vi) an award
of costs and expenses.
On August 16, 2001, NAC received a complaint (the "Markovich Complaint")
filed by Levy Markovich ("Markovich"), a shareholder of NAC, with the Court of
Chancery of Delaware on or about August 16, 2001, against James J. McNamara,
John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC as a nominal
defendant. The Markovich Complaint principally seeks: (i) a declaration that the
Director Defendants have breached their fiduciary duties to NAC, (ii) a judgment
voiding an employment agreement with James J. McNamara and rescinding a stock
exchange agreement in which NAC acquired ZoomLot Corporation, (iii) a judgment
voiding the grant of options and the award of directors fees allegedly related
thereto, (iv) an order directing the Director Defendants to account for alleged
damages sustained and alleged profits obtained by the Director Defendants as a
result of the alleged various acts complained of, (v) the imposition of a
constructive trust over monies or other benefits received by the directors, and
(vi) an award of costs and expenses.
9
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On August 31, 2001, NAC received a complaint (the "Harbor Complaint") filed
by Harbor Finance Partners ("Harbor"), a shareholder of NAC, with the Court of
Chancery of Delaware on or about August 31, 2001, against Thomas F. Carney, Jr.,
Mallory Factor, John A. Gleason, Donald Jasensky, William S. Marshall, James J.
McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C. Garcia, and ZoomLot
Corporation as Defendants and NAC as a nominal defendant. The Harbor Complaint
principally seeks: (i) a judgment requiring the Director Defendants to promptly
schedule an annual meeting of shareholders within thirty (30) days of the date
of the Harbor Complaint; (ii) a judgment declaring that the Director Defendants
breached their fiduciary duties to NAC and wasted its assets; (iii) an
injunction preventing payment of monies and benefits to James J. McNamara under
his employment agreement with NAC and requiring Mr. McNamara to repay the
amounts already paid to him thereunder; (iv) a judgment rescinding the agreement
by NAC to purchase ZoomLot and refunding the amounts it paid; (v) a judgment
rescinding the award of monies and options to the directors on December 15, 2000
and requiring the directors to repay the amounts they received allegedly related
thereto; (vi) a judgment requiring the defendants to indemnify NAC for alleged
losses attributable to their alleged actions; and (vii) a judgment awarding
interest, attorney's fees, and other costs, in an amount to be determined.
On October 12, 2001, NAC received a complaint (the "Zadra Complaint") filed
by Robert Zadra, a shareholder of NAC, with the Supreme Court of the State of
New York on or about October 12, 2001 against James J. McNamara, John A.
Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, Thomas F. Carney, Jr., and NAC as Defendants. The
Zadra Complaint seeks (i) a declaration that the Director Defendants have
breached their fiduciary duties to NAC, (ii) a judgment voiding the grant of
options and the award of directors fees, (iii) a judgment voiding an employment
agreement with James J. McNamara, (iv) an order directing the Director
Defendants to account for alleged damages sustained and alleged profits obtained
by the Director Defendants as a result of the alleged various acts complained
of, and (v) an award of costs and expenses.
NAC intends to vigorously defend each of the respective claims made in the
Academy Complaint, Markovich Complaint, Harbor Complaint and Zadra Complaint, as
it believes that the claims have no merit. By order of the Delaware Chancery
Court on November 12, 2001, the Academy, Markovich and Harbor Complaints were
consolidated and the Academy Complaint was deemed the operative complaint. A
motion to dismiss the Academy Complaint has been filed but has not yet been
decided. NAC also intends to vigorously defend the Zadra Complaint. A motion to
dismiss the Zadra Complaint also has been filed. As each of these litigation
matters are in a very early stage, no prediction is made with respect to their
respective ultimate outcomes.
10
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Self-Insurance Reserves for Property Damage and Personal Injury Claims.
------------------------------------------------------------------------
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In Fiscal
1996, NAC disposed of its rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by NAC.
NAC maintained and continues to maintain self-insurance for claims relating
to bodily injury or property damage from accidents involving the vehicles rented
to customers by its discontinued automobile rental operations. NAC was, when
required by either governing state law or the terms of its rental agreement,
self-insured for the first $1.0 million per occurrence, and for losses in excess
of $5.0 million per occurrence, for bodily injury and property damage resulting
from accidents involving its rental vehicles. NAC was also self-insured, up to
certain retained limits, for bodily injury and property damage resulting from
accidents involving NAC vehicles operated by employees within the scope of their
employment. In connection therewith, NAC established certain reserves in its
financial statements for the estimated cost of satisfying those claims.
NAC is named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to passengers in the vehicle. Initially, the Plaintiffs
appeared to be recovering well from the injuries sustained. However,
subsequently plaintiff Simpson underwent an accident-related surgery on his back
for removal of a shunt, during which nerves in the spine were severed causing
paraplegia. The Plaintiffs are suing for damages resulting from their injuries
and the subsequent paraplegia suffered by plaintiff Simpson. The doctor and
hospital that performed the surgery were also named as defendants by Plaintiffs
and have been impleaded by NAC under a theory of medical malpractice. Damages
alleged in the complaint are not specified, although in discovery Plaintiffs
have indicated they are seeking millions of dollars in compensatory and other
damages. The matter is scheduled for trial during 2003. NAC maintains a number
of defenses relating to this matter. NAC has almost exhausted its self-insured
retention of $500,000 on this case and NAC attempted to get its excess carrier,
the Transamerica Insurance Company ("TIC"), to take over the defense of this
action and indemnify NAC up to the policy limits. However, as a result TIC has
filed a suit (TIC Co. v. Darrell Smith, Aaron Simpson and NAC in the United
States Court for the Northern District of Illinois) for a declaratory judgment
seeking a ruling that it has no liability as an "excess insurer" of NAC in
connection with the Smith and Simpson action and that under Illinois law, NAC's
(and thereafter TIC's) financial responsibility is capped at an amount for less
than what the Plaintiffs are seeking in the state court action. The federal
court initially dismissed this complaint prior to NAC answering on the grounds
that the matter to be decided was premature as the original action had not be
resolved. TIC made a motion to have the court reconsider its decision and NAC
has filed a response arguing that the court should take action on this matter at
this time. The Court granted TIC's motion and has permitted the action to
proceed. NAC's answer was filed in May 2002.
Because of the uncertainties related to these two matters, as well as
several smaller legal proceedings involving NAC's former rental operations and
self-insurance claims, it is difficult to project with precision the ultimate
effect the adjudication or settlement of these matters will have on NAC. At
April 30, 2002 NAC had accrued $761,000 to cover all outstanding self-insurance
liabilities. As additional information regarding NAC's potential liabilities
becomes available, NAC will revise the estimates as appropriate.
11
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - 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.
NOTE 5 - 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. As a result of these decisions, both the e-commerce
and automobile financing segments have been classified as discontinued
operations.
Discontinued Operations
-----------------------------------------------------
Auto Auto
E-Commerce Financing Rental Total
---------- ---------- -------- ----------
THE THREE MONTHS ENDED APRIL 30, 2002
Revenue $ -- $ 7 $ -- $ 7
Operating expense -- -- -- --
General and administrative (expenses) income -- (11) 186 175
---------- ---------- ---------- ----------
-- (11) 186 175
---------- ---------- ---------- ----------
Income (loss) before income taxes -- (4) 186 182
Provision (benefit) for income taxes -- -- -- --
---------- ---------- ---------- ----------
Income (loss) from discontinued operations -- (4) 186 182
Gain (loss) on disposal of operations, net of tax -- -- -- --
---------- ---------- ---------- ----------
Income (loss) from discontinued operations $ -- $ (4) $ 186 $ 182
========== ========== ========== ==========
THE THREE MONTHS ENDED APRIL 30, 2001
Revenue $ 226 $ -- $ -- $ 226
Operating (expense) income (1,669) (94) -- (1,763)
General and administrative (expenses) income -- 393 -- 393
---------- ---------- ---------- ----------
(1,669) 299 -- (1,370)
---------- ---------- ---------- ----------
Income (loss) before income taxes (1,443) 299 -- (1,144)
Provision (benefit) for income taxes -- -- -- --
---------- ---------- ---------- ----------
Income (loss) from discontinued operations (1,443) 299 -- (1,144)
Gain (loss) on disposal of operations, net of tax -- -- -- --
---------- ---------- ---------- ----------
Income (loss) from discontinued operations $ (1,443) $ 299 $ -- $ (1,144)
========== ========== ========== ==========
12
ITEM 2.
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Auto Credit, Inc. (the "Company" or "NAC") began operations in
1969 and was incorporated in Delaware in 1971. Through and including December
31, 2001, NAC's operations were conducted principally through three operating
segments, (i) the e-commerce segment, which is comprised of ZoomLot
Corporation's ("ZoomLot") development of e-commerce services to facilitate the
process by which used car dealerships, lenders and insurance companies
communicate and complete the transactions between them that are needed to
provide used car dealers' customers with financing, insurance and other
services, (ii) the movie exhibition segment, which is comprised of the
activities of Angelika Film Center LLC ("AFC") and (iii) the automobile
financing segment.
In the fourth quarter of Fiscal 2002, NAC completed a strategic review of
its investment in ZoomLot, acquired December 15, 2000, and the development of
its e-commerce services. NAC's strategic review included evaluating the evolving
market conditions of the used car dealer and financing industries, the start-up
nature of the ZoomLot operations, the current market demand for and penetration
of ZoomLot's e-commerce solution to electronically link eligible used car
dealers and their qualified customers with available used car lenders and
financing terms, current operating losses and forecasts of future operating
results and strategic opportunities available to ZoomLot. As a result of this
review, management of NAC determined that it was unable to predict, with the
requisite degree of certainty, when or whether ZoomLot would achieve positive
cash flows.
As a consequence of NAC's strategic review and determination, effective
December 31, 2001, NAC suspended its ZoomLot operations and initiated the steps
to discontinue its e-commerce. 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. As a result
of these decisions both the e-commerce and the automobile financing operations
were classified as a discontinued operations as of January 31, 2002.
Throughout the first quarter of fiscal 2003 and as of June 12, 2002, NAC
had no external source of financing, and has operated on its existing cash
balances. NAC continues to pursue its plan of examining new business
opportunities, which may be pursued through the investment in, or acquisition of
existing operating businesses or other means. At April 30, 2002 NAC has cash and
marketable securities of $6.0 million, which together with any cash flow derived
from its investment in AFC, will be used to pursue such opportunities.
Additionally, NAC will continue to pursue reduction in operating expenses and
explore new debt or equity financing (for which there can be no assurance NAC
will obtain such financing) as means of supplementing the resources available to
pursue new opportunities.
13
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2002 AS COMPARED TO
THE THREE MONTHS ENDED APRIL 30, 2001
Interest Income from Investments: Interest income from investments is
principally the interest earned on NAC's investments in marketable securities,
commercial paper and money market accounts. Interest income from these
investments was $45,000 for the three months ended April 30, 2002 as compared to
$140,000 for the three months ended April 30, 2001. The decrease was primarily
due to the decrease in the weighted average investment balances for the three
months ended April 30, 2002.
Income from AFC Investment: NAC accounts for its investment in AFC using
the equity method. For the three months ended April 30, 2002 and 2001, NAC
recorded income of $93,000 and $154,000, respectively, representing NAC's share
of AFC's net income for the three months ended March 31, 2002 and 2001,
respectively. Additionally, for the three months ended April 30, 2001, prior to
the adoption of SFAS 141 and SFAS 142, NAC recorded amortization expense of
$68,000 as a reduction of its income from its investment in AFC. As a result of
NAC's adoption of SFAS 141 and 142, this amortization charge was discontinued in
Fiscal 2003.
The following sets forth summarized operating results for AFC (in
thousands):
Three Months Ended March 31,
-----------------------------
2002 2001
---------- ----------
Revenues $ 1,627 $ 2,035
Film rental 478 742
Operating costs 718 742
Depreciation and amortization 173 173
General and administrative expenses 71 70
---------- ----------
1,440 1,727
---------- ----------
Net income $ 187 $ 308
========== ==========
NAC's proportionate share of net income $ 93 $ 154
Amortization expense -- (68)
---------- ----------
Income from investment in AFC $ 93 $ 86
========== ==========
14
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
AFC's revenues decreased $408,000 for the three months ended March 31, 2002
as compared to the three months ended March 31, 2001, principally as a result of
the net effects of a 27.6% decrease in attendance and, partially offset by, an
11.8% increase in average ticket prices. The attendance, and at times the ticket
prices, at AFC will vary depending on audience interest in, and the popularity
of the films it exhibits and other factors. Film rental, as a percentage of
revenue, decreased 7.1% to 29.4% from 36.5% for the three months ended March 31,
2002 and 2001, respectively. Film rental expense generally is a factor of a
fixed percentage rental rate per film multiplied by the number of tickets sold.
AFC experiences fluctuations in film rental expense, as a percentage of revenue,
depending upon the rental rate per film and the popularity of the film.
Operating costs, as a percent of revenue, were 44.1% for the three months ended
March 31, 2002 as compared to 36.5% for the three months ended March 31, 2001
due principally to a decrease in revenues. The nature of AFC's operating costs
tend to generally be more fixed overhead related costs and advertising expenses.
General and Administrative: General and administrative expenses include
costs of executive, accounting and legal personnel, occupancy, legal,
professional, insurance and other general corporate overhead costs. General and
administrative expenses decreased $595,000 to $841,000 for the three months
ended April 30, 2002 from $1.4 million for the three months ended April 30,
2001. The decrease in general and administrative costs for the three months
ended April 30, 2002 was primarily due to a decrease in personnel costs and
professional services, which declined as a result in the contraction of NAC's
operations.
Income Taxes: Due to net operating losses and the availability of net
operating loss carryforwards, NAC's effective income tax rate was zero for the
three month period ended April 30, 2002 and April 30, 2001. NAC has provided a
full valuation allowance against its net operating loss carryforward and other
net deferred tax asset items due to the uncertainty of their future realization.
DISCONTINUED OPERATIONS
E-commerce Operations: For the three months ended April 30, 2001, NAC's
e-commerce operations incurred an operating loss of $1.4 million, reflecting
revenues of $226,000 and expenses of $1.7 million. Included in the expenses of
$1.7 million were non-cash charges of $572,000 for the amortization of the
goodwill arising in the December 2000 acquisition of ZoomLot. The remaining
expenses of $1.1 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 and Auto Rental: For the three months ended April 30,
2002, NAC's automobile financing and rental operations generated operating
income of $182,000, comprised of net proceeds from an insurance settlement of
$186,000 and $4,000 in net general and administrative expenses. For the three
months ended April 30, 2001, NAC's automobile financing and rental operations
generated operating income of $299,000, comprised of net proceeds of $313,000
from the sale of previously charged-off loans less other net general and
administrative expenses of $14,000.
15
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended April 30, 2002 and 2001, NAC used $1.1 million
and $1.9 million, respectively, for operating activities as NAC's payments for
operating and general and administrative expenses exceeded income from
investments and NAC's proportionate share of income from AFC. NAC funded the
negative operating cash flows and negative cash flows from discontinued
operations from its existing cash balances.
NAC believes that the available cash and cash equivalents and marketable
securities totaling $6.0 million at April 30, 2002, and the investment income
therefrom, the collection of the income tax refund of $3.5 million and any cash
distributions from its investment in AFC will be sufficient to pay operating
expenses, existing liabilities, and fund its activities through the next twelve
months as NAC explores new strategic business alternatives. As discussed in Note
4 of Notes to Condensed Consolidated Financial Statements, NAC is presently a
defendant or nominal defendant in various derivative shareholder complaints and
various litigation matters relating to NAC's discontinued auto finance and auto
rental businesses. Although NAC intends to vigorously defend each of the claims,
each of these litigations are in a very early stage, and no prediction can be
made with respect to their ultimate outcomes. An adverse outcome could have a
material adverse effect on NAC's liquidity, financial condition or results of
operations. Additionally, as previously discussed, NAC's lack of external
financing sources may limit its ability to pursue strategic business
alternatives being considered by NAC's Board of Directors. Such limitations may
have an adverse impact on NAC's financial position, results of operations and
liquidity.
NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets.
SFAS 141 is effective for all business combinations completed after June 30,
2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of SFAS
142. Major provisions of these Statements and their effective dates for NAC are
as follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1, 2001;
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability;
o Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective February 1, 2002,
all previously recognized goodwill and intangible assets with
indefinite lives will no longer be subject to amortization;
o Effective February 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator; and
o All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
16
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
NAC adopted SFAS 141 and 142 effective February 1, 2002. NAC previously
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. As a
result of NAC's adoption of SFAS 141 and SFAS 142, for the three months ended
April 30, 2002, NAC discontinued this monthly charge to earnings.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record to the fair value of the
liability for an asset retirement obligation in the period in which it is
incurred. The amount initially recorded as the asset retirement obligation is
based upon the estimated present value of the retirement costs to be incurred,
and is capitalized as a part of the asset. The obligation is subsequently
accreted for the passage of time by charges to interest expense, and the
capitalized costs are amortized as part of depreciation expense related to the
asset. The asset retirement obligation is also continually re-estimated, with
changes in its present value caused by changes in the estimated retirement cost
recorded as adjustments to the carrying amount and subsequent depreciation of
the asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002
and was adopted by NAC effective February 1, 2002. At the time of adoption,
there was no material impact to NAC's financial statements.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
with the exception of impairment and disposal issues related to goodwill and
other intangible assets that are not amortized. SFAS 144 also supersedes the
accounting and reporting provisions of Accounting Principles Board Opinion No.
(APB) 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 retains many of the fundamental
recognition and measurement provisions of SFAS 121, and also retains the
requirement in APB 30 to separately identify and report discontinued operations.
However, SFAS extends the APB 30 reporting requirements for discontinued
operations to components of an entity that have either been disposed of or
classified as assets held for sale that may not have qualified as segments under
APB 30, as a result of which operating results that previously were not
classified as discontinued operations may be treated as such upon the adoption
of SFAS 144. SFAS 144 is effective for fiscal years beginning after December 15,
2001, and was adopted by NAC effective February 1, 2002. At the time of
adoption, there was no material impact to NAC's financial statements.
OTHER
NAC's exposure to the risks of inflation is generally limited to the
potential impact of inflation on its operating and general and administrative
expenses. To date, inflation has not had a material adverse impact on NAC.
NAC does not utilize futures, options or other derivative financial
instruments.
17
FORWARD-LOOKING STATEMENTS
Various statements made in this Item 2 and elsewhere in this Quarterly
Report on Form 10-Q concerning the manner in which NAC intends to conduct its
future operations, and potential trends that may impact its future results of
operations, are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. NAC may be unable to realize its plan
and objectives due to various important factors, including, but not limited to,
the failure of the Board of Directors to promptly determine what strategic
business plan NAC should pursue, the failure of NAC to implement any such plan
due to its inability to identify suitable acquisition candidates or its
inability to obtain the financing necessary to complete any desired
acquisitions, or any adverse outcome of the pending shareholder actions or other
litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like virtually all commercial enterprises, NAC can be exposed to the risk
("market risk") that the cash flows to be received or paid relating to certain
financial instruments could change as a result of changes in interest rate,
exchange rates, commodity prices, equity prices and other market changes.
NAC does not engage in trading activities and does not utilize interest
rate swaps or other derivative financial instruments or buy or sell foreign
currency, commodity or stock indexed futures or options. Accordingly, NAC is not
exposed to market risk from these sources.
NAC's automobile loan portfolio was comprised of fixed rate financing
agreements with high credit risk consumers. The rates on these financing
agreements cannot be increased for changes in market conditions, and accordingly
these loans were not subject to market risk.
As of April 30, 2002, NAC has no interest-bearing debt, and accordingly no
market risk associated with increases in interest costs resulting from changes
in market rates.
18
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Shareholder Complaints
----------------------
On July 31, 2001, NAC received a derivative complaint (the "Academy
Complaint") filed by Academy Capital Management, Inc. ("Academy"), a shareholder
of NAC, with the Court of Chancery of Delaware, on or about July 31, 2001,
against James J. McNamara, John A. Gleason, William S. Marshall, Henry Y.L. Toh,
Donald Jasensky, Peter T. Zackaroff, Mallory Factor, and Thomas F. Carney, Jr.
(the "Director Defendants") and names NAC as a nominal defendant. The Academy
Complaint principally seeks: (i) a declaration that the Director Defendants
breached their fiduciary duties to NAC, (ii) a judgment voiding an employment
agreement with James J. McNamara and rescinding a stock exchange agreement in
which NAC acquired ZoomLot Corporation, (iii) a judgment voiding the grant of
stock options and the award of director fees allegedly related thereto, (iv) an
order directing the Director Defendants to account for alleged damages sustained
and profits obtained by the Director Defendants as a result of the alleged
various acts complained of, (v) the imposition of a constructive trust over
monies or other benefits received by the Director Defendants and (vi) an award
of costs and expenses.
On August 16, 2001, NAC received a complaint (the "Markovich Complaint")
filed by Levy Markovich ("Markovich"), a shareholder of NAC, with the Court of
Chancery of Delaware on or about August 16, 2001, against James J. McNamara,
John A. Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, and Thomas F. Carney, Jr. and NAC as a nominal
defendant. The Markovich Complaint principally seeks: (i) a declaration that the
Director Defendants have breached their fiduciary duties to NAC, (ii) a judgment
voiding an employment agreement with James J. McNamara and rescinding a stock
exchange agreement in which NAC acquired ZoomLot Corporation, (iii) a judgment
voiding the grant of options and the award of directors fees allegedly related
thereto, (iv) an order directing the Director Defendants to account for alleged
damages sustained and alleged profits obtained by the Director Defendants as a
result of the alleged various acts complained of, (v) the imposition of a
constructive trust over monies or other benefits received by the directors, and
(vi) an award of costs and expenses.
On August 31, 2001, NAC received a complaint (the "Harbor Complaint") filed
by Harbor Finance Partners ("Harbor"), a shareholder of NAC, with the Court of
Chancery of Delaware on or about August 31, 2001, against Thomas F. Carney, Jr.,
Mallory Factor, John A. Gleason, Donald Jasensky, William S. Marshall, James J.
McNamara, Henry Y. L. Toh, Peter T. Zackaroff, Ernest C. Garcia, and ZoomLot
Corporation as Defendants and NAC as a nominal defendant. The Harbor Complaint
principally seeks: (i) a judgment requiring the Director Defendants to promptly
schedule an annual meeting of shareholders within thirty (30) days of the date
of the Harbor Complaint; (ii) a judgment declaring that the Director Defendants
breached their fiduciary duties to NAC and wasted its assets; (iii) an
injunction preventing payment of monies and benefits to James J. McNamara under
his employment agreement with NAC and requiring Mr. McNamara to repay the
amounts already paid to him thereunder; (iv) a judgment rescinding the agreement
by NAC to purchase ZoomLot and refunding the amounts it paid; (v) a judgment
rescinding the award of monies and options to the directors on December 15, 2000
and requiring the directors to repay the amounts they received allegedly related
thereto; (vi) a judgment requiring the defendants to indemnify NAC for alleged
losses attributable to their alleged actions; and (vii) a judgment awarding
interest, attorney's fees, and other costs, in an amount to be determined.
19
On October 12, 2001, NAC received a complaint (the "Zadra Complaint") filed
by Robert Zadra, a shareholder of NAC, with the Supreme Court of the State of
New York on or about October 12, 2001 against James J. McNamara, John A.
Gleason, William S. Marshall, Henry Y. L. Toh, Donald Jasensky, Peter T.
Zackaroff, Mallory Factor, Thomas F. Carney, Jr., and NAC as Defendants. The
Zadra Complaint seeks (i) a declaration that the Director Defendants have
breached their fiduciary duties to NAC, (ii) a judgment voiding the grant of
options and the award of directors fees, (iii) a judgment voiding an employment
agreement with James J. McNamara, (iv) an order directing the Director
Defendants to account for alleged damages sustained and alleged profits obtained
by the Director Defendants as a result of the alleged various acts complained
of, and (v) an award of costs and expenses.
NAC intends to vigorously defend each of the respective claims made in the
Academy Complaint, Markovich Complaint, Harbor Complaint and Zadra Complaint, as
it believes that the claims have no merit. By order of the Delaware Chancery
Court on November 12, 2001, the Academy, Markovich and Harbor Complaints were
consolidated and the Academy Complaint was deemed the operative complaint. A
motion to dismiss the Academy Complaint has been filed but has not yet been
decided. NAC also intends to vigorously defend the Zadra Complaint. A motion to
dismiss the Zadra Complaint also has been filed. As each of these litigation
matters are in a very early stage, no prediction is made with respect to their
respective ultimate outcomes.
Self-Insurance Reserves for Property Damage and Personal Injury Claims.
------------------------------------------------------------------------
NAC, under the names Agency Rent-A-Car, Inc. ("ARAC"), Altra Auto Rental
and Automate Auto Rental, previously engaged in the rental of automobiles on a
short-term basis, principally to the insurance replacement market. In Fiscal
1996, NAC disposed of its rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by NAC.
NAC maintained and continues to maintain self-insurance for claims relating
to bodily injury or property damage from accidents involving the vehicles rented
to customers by its discontinued automobile rental operations. NAC was, when
required by either governing state law or the terms of its rental agreement,
self-insured for the first $1.0 million per occurrence, and for losses in excess
of $5.0 million per occurrence, for bodily injury and property damage resulting
from accidents involving its rental vehicles. NAC was also self-insured, up to
certain retained limits, for bodily injury and property damage resulting from
accidents involving NAC vehicles operated by employees within the scope of their
employment. In connection therewith, NAC established certain reserves in its
financial statements for the estimated cost of satisfying those claims.
NAC is named as defendant in a self-insurance action Darrell Smith and
Aaron Simpson ("Plaintiffs") v. John J. Bennett, ARAC, Country Mutual Insurance
Company and Atlanta Casualty Insurance Company in Cook County (State) Court of
Illinois. This matter arises out of an incident in which an ARAC car renters'
son, while driving the rental vehicle, was involved in a fatal accident and with
serious injuries to passengers in the vehicle. Initially, the Plaintiffs
appeared to be recovering well from the injuries sustained. However,
subsequently plaintiff Simpson underwent an accident-related surgery on his back
for removal of a shunt, during which nerves in the spine were severed causing
paraplegia. The Plaintiffs are suing for damages resulting from their injuries
and the subsequent paraplegia suffered by plaintiff Simpson. The doctor and
hospital that performed the surgery were also named as defendants by Plaintiffs
and have been impleaded by NAC under a theory of medical malpractice. Damages
alleged in the complaint are not specified, although in discovery Plaintiffs
have indicated they are seeking millions of dollars in compensatory and other
damages. The matter is scheduled for trial during 2003. NAC maintains a number
of defenses relating to this matter. NAC has almost exhausted its self-insured
retention of $500,000 on this case and NAC attempted to get its excess carrier,
the Transamerica Insurance Company ("TIC"), to take over the defense of this
action and
20
indemnify NAC up to the policy limits. However, as a result TIC has filed a suit
(TIC Co. v. Darrell Smith, Aaron Simpson and NAC in the United States Court for
the Northern District of Illinois) for a declaratory judgment seeking a ruling
that it has no liability as an "excess insurer" of NAC in connection with the
Smith and Simpson action and that under Illinois law, NAC's (and thereafter
TIC's) financial responsibility is capped at an amount for less than what the
Plaintiffs are seeking in the state court action. The federal court initially
dismissed this complaint prior to NAC answering on the grounds that the matter
to be decided was premature as the original action had not be resolved. TIC made
a motion to have the court reconsider its decision and NAC has filed a response
arguing that the court should take action on this matter at this time. The Court
granted TIC's motion and has permitted the action to proceed. NAC's answer was
filed in May 2002.
Because of the uncertainties related to these two matters, as well as
several smaller legal proceedings involving NAC's former rental operations and
self-insurance claims, it is difficult to project with precision the ultimate
effect the adjudication or settlement of these matters will have on NAC. At
April 30, 2002 NAC had accrued $761,000 to cover all outstanding self-insurance
liabilities. As additional information regarding NAC's potential liabilities
becomes available, NAC will revise the estimates as appropriate.
Other Litigation
-----------------
In the normal course of its business, NAC is named as defendant in legal
proceedings. It is the policy of NAC to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - None
b) Reports on Form 8-K - None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL AUTO CREDIT, INC.
Date: June 12, 2002 By: /s/ James J. McNamara
--------------------- ---------------------------------------
James J. McNamara
Chairman of the Board and Chief
Executive Officer
By: /s/ Robert V. Cuddihy, Jr.
---------------------------------------
Robert V. Cuddihy, Jr.
Chief Financial Officer