<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
-----------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ------------------------
Commission file number 1-11601
-------------------
NATIONAL AUTO CREDIT, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1816760
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30000 Aurora Road, Solon, Ohio 44139
- --------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (216) 349-1000
------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report.
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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: 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 subsequent to the distribution of securities
under a plan confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the
latest practicable date: 28,519,332 shares as of November 30, 1996.
<PAGE> 2
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
October 31, 1996 and January 31, 1996 1
Consolidated Statements of Income - Three
and Nine Months Ended October 31, 1996 and 1995 2
Consolidated Statement of Stockholders'
Equity - Nine Months Ended October 31, 1996 3
Consolidated Statements of Cash Flows -
Nine Months Ended October 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE> 3
National Auto Credit, Inc. and Subsidiaries
Consolidated Balance Sheets
(Thousands of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,700 $ 1,665
Installment notes receivable,
net (Note B) 384,275 294,901
Property and equipment, net of
accumulated depreciation of
$5,958 and $4,959, respectively 9,384 9,175
Other assets 13,615 12,480
Assets related to discontinued
operations (Note F) 1,033 24,902
----------- ----------
$ 410,007 $ 343,123
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dealer holdbacks, net (Notes C and D) $ 80,753 $ 59,875
Self-insurance claims 6,318 12,712
Notes payable 13,354 13,354
Operating debt 41,646 3,546
Deferred and accrued
income taxes 11,125 17,379
Other liabilities 25,811 18,594
----------- ----------
179,007 125,460
----------- ----------
Commitments and Contingencies (Note E) -- --
Stockholders' Equity
Preferred stock - $.05 par value,
authorized 2,000,000 shares,
none issued -- --
Common stock - $.05 par value,
authorized 40,000,000 and 30,000,000
shares, issued 29,810,400 and
27,183,217 shares, respectively 1,491 1,359
Additional paid-in capital 165,275 128,133
Retained earnings, including cumulative
foreign currency translation loss
of $1,025 and $1,349, respectively 75,856 99,793
Treasury stock, at cost, 1,298,568
shares (11,622) (11,622)
----------- ----------
231,000 217,663
----------- ----------
$ 410,007 $ 343,123
=========== ==========
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE> 4
National Auto Credit, Inc. and Subsidiaries
Consolidated Statements of Income
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- ---------------------
1996 1995 1996 1995
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
REVENUE
Interest income $ 14,156 $ 10,745 $ 41,373 $ 27,155
Fee and other income 2,007 1,144 5,095 2,811
-------- -------- -------- --------
16,163 11,889 46,468 29,966
COSTS AND EXPENSES
Provision for credit losses 2,642 983 7,031 2,376
Operating 1,489 1,268 4,151 3,537
General and administrative 1,161 1,233 3,537 3,922
Interest 788 249 1,616 746
-------- -------- -------- --------
6,080 3,733 16,335 10,581
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 10,083 8,156 30,133 19,385
Provision for income taxes 3,419 2,980 10,637 7,011
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 6,664 5,176 19,496 12,374
DISCONTINUED OPERATIONS,
NET OF TAX (Note F)
Income (loss) from operations (5,459) (445) (6,861) 1,263
Loss on disposal of operations -- (212) -- (212)
-------- -------- -------- --------
(5,459) (657) (6,861) 1,051
-------- -------- -------- --------
NET INCOME $ 1,205 $ 4,519 $ 12,635 $ 13,425
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE
Continuing operations $ .23 $ .18 $ .68 $ .43
Discontinued operations (.19) (.02) (.24) .04
-------- -------- -------- --------
Total $ .04 $ .16 $ .44 $ .47
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000's) 28,504 28,397 28,490 28,334
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 5
National Auto Credit, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(In Thousands)
(Unaudited)
Nine Months Ended October 31, 1996
<TABLE>
<CAPTION>
Common Stock Foreign
-------------------- Additional Currency
Par Paid-In Retained Translation Treasury
Shares Value Capital Earnings Adjustment Stock Total
-------- ------- -------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 31, 1996 27,183 $ 1,359 $ 128,133 $ 101,142 $ (1,349) $ (11,622) $ 217,663
Net income 12,635 12,635
Stock issued under
benefit plans 38 3 380 383
10% Stock dividend 2,589 129 36,762 (36,896) (5)
Foreign currency
translation 324 324
--------- --------- --------- --------- --------- --------- ---------
BALANCE,
OCTOBER 31, 1996 29,810 $ 1,491 $ 165,275 $ 76,881 $ (1,025) $ (11,622) $ 231,000
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 6
National Auto Credit, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
-----------------------
1996 1995
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,635 $ 13,425
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,613 15,670
Interest income on dealer advances (9,638) (6,196)
Provision for credit losses 7,031 2,376
Loss on sale of discontinued operations -- 212
Deferred income taxes (1,858) (11,496)
Changes in operating assets and liabilities:
Accounts receivable 1,315 4,263
Current income taxes payable (4,396) 7,176
Other liabilities 7,350 1,918
Self-insurance claims (6,394) (13,418)
Other operating assets and liabilities, net (1,225) 3,804
--------- ---------
Net cash provided by operating activities 7,433 17,734
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of discontinued operations -- 20,524
Principal collected on installment notes receivable 89,798 63,897
Proceeds from sale of rental automobiles 11,125 13,376
Purchase of dealership inventory (471) (10,204)
Advances to dealers and payments of dealer holdbacks (145,564) (96,639)
Other investing activities, net (1,088) (612)
--------- ---------
Net cash used in investing activities (46,200) (9,658)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on operating debt and notes payable 38,100 (8,961)
Payments to acquire treasury stock -- (786)
Stock issued under benefit plans 383 1,709
Other financing activities, net 319 (84)
--------- ---------
Net cash provided by (used in) financing activities 38,802 (8,122)
--------- ---------
Increase (decrease) in cash and cash equivalents 35 (46)
Cash and cash equivalents at beginning of period 1,665 398
--------- ---------
Cash and cash equivalents at end of period $ 1,700 $ 352
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,326 $ 900
========= =========
Income taxes paid $ 12,803 $ 13,032
========= =========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 7
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Summary of Significant Accounting Policies
------------------------------------------
GENERAL:
The accompanying consolidated financial statements include the
accounts of National Auto Credit, Inc. and its subsidiaries (the
Company).
The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended
October 31, 1996 are not necessarily indicative of the results
that may be expected for the year ended January 31, 1997. For
further information, refer to the financial statements and
footnotes thereto included in the Company's January 31, 1996
Annual Report on Form 10-K.
STOCKHOLDERS' EQUITY:
On March 25, 1996, the Company's Board of Directors declared a
10% stock dividend payable on April 30, 1996, to stockholders of
record on April 15, 1996. Earnings per share and weighted
average shares outstanding have been restated to reflect the 10%
stock dividend. In March 1996, the Board of Directors approved
an increase in the authorized common shares from 30,000,000 to
40,000,000 shares.
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform
with the current period presentation.
-5-
<PAGE> 8
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B - Installment Notes Receivable, Net
---------------------------------
The components of installment notes receivable, net are as
follows:
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
---------- ----------
(in thousands)
<S> <C> <C>
Gross installment notes receivable $ 456,529 $ 351,312
Unearned income (67,943) (53,833)
Allowance for loan losses (4,311) (2,578)
---------- ----------
Installment notes receivable, net $ 384,275 $ 294,901
========== ==========
</TABLE>
A summary of changes in gross installment notes receivable is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ ------------------
1996 1995 1996 1995
-------- ------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $423,330 $266,992 $351,312 $193,456
Contracts accepted 97,779 89,541 274,013 229,340
Cash collections (44,002) (32,251) (124,192) (86,778)
Charge-offs against:
Dealer holdbacks (15,895) (4,704) (33,727) (12,357)
Unearned income/allowance (4,683) (2,064) (10,877) (6,147)
-------- -------- -------- --------
Balance, end of period $456,529 $317,514 $456,529 $317,514
======== ======== ======== ========
</TABLE>
Installment notes receivable relate to the indirect consumer
financing of used automobiles. These notes generally have
initial terms ranging from 12 to 54 months with an average
initial term of 36 months and an initial gross amount of $9,500.
At October 31 and January 31, 1996, the average remaining note
term was 23 months. The notes are collateralized by the related
vehicles sold. Installment notes receivable are from customers
residing in all 50 states with no individual state accounting
for more than 10% of total installment notes receivable, except
for North Carolina with 12.6% and Texas with 12.1%.
Changes in the allowance for loan losses, which is provided for
earned but unpaid finance charges on the entire portfolio are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------- -------------------
1996 1995 1996 1995
--------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 3,570 $ 1,540 $ 2,578 $ 1,107
Provision for credit losses 1,941 751 4,085 1,751
Net charge-offs (1,200) (336) (2,352) (903)
-------- -------- -------- --------
Balance, end of period $ 4,311 $ 1,955 $ 4,311 $ 1,955
======== ======== ======== ========
</TABLE>
-6-
<PAGE> 9
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C - Dealer Holdbacks, Net
---------------------
Dealer holdbacks are the amounts payable to member dealers from
the acceptance of retail installment contracts, net of cash
advanced. The dealer holdbacks protect the Company from
potential losses associated with the installment contracts and
are not paid unless substantially all advances including those
on non-performing loans related to a particular dealer have been
recovered. The components of dealer holdbacks are as follows:
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
---------- -----------
(in thousands)
<S> <C> <C>
Dealer holdbacks $ 361,238 $ 274,927
Advances (293,480) (222,830)
--------- ----------
67,758 52,097
Dealer advance reserve 12,995 7,778
--------- ----------
Dealer holdbacks, net $ 80,753 $ 59,875
========= ==========
</TABLE>
A summary of changes in dealer holdbacks, net, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 74,106 $ 46,110 $ 59,875 $ 33,816
Additions to holdbacks 72,675 72,465 210,347 183,337
Advances disbursed (51,689) (60,166) (159,178) (153,583)
Charge-offs of non-
performing notes (15,895) (4,704) (33,727) (12,357)
Other 1,556 587 3,436 3,079
-------- -------- -------- --------
Balance, end of period $ 80,753 $ 54,292 $ 80,753 $ 54,292
======== ======== -------- ========
</TABLE>
The accrual of interest income is suspended once a note becomes
120 days contractually past due. These non-performing notes are
charged-off against the related dealer's holdback and then loan
loss reserves, if necessary. At October 31, 1996 and January 31,
1996 respectively, 17.7% and 17.0% of gross installment notes
receivable were non-performing and covered by the net dealer
holdbacks and 3.8% and 1.1% respectively, were covered by
unearned income/allowances for credit losses.
NOTE D - Dealer Advance Reserve
----------------------
The dealer advance reserve is maintained in the event the
holdback of a particular dealer portfolio is not sufficient to
ensure the recovery of any outstanding advances. The Company
assesses fees to dealers for the purpose of supplementing this
reserve. A summary of changes in the dealer advance reserve is
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $10,938 $ 5,648 $ 7,778 $ 2,376
Advance reserve fees 1,656 1,120 2,991 4,075
Provision for credit losses 701 232 2,946 625
Net charge-offs (300) (132) (720) (208)
------- ------- ------- -------
Balance, end of period $12,995 $ 6,868 $12,995 $ 6,868
======= ======= ======= =======
</TABLE>
-7-
<PAGE> 10
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - Commitments and Contingencies
-----------------------------
In the normal course of its business, the Company is named as
defendant in legal proceedings. It is the policy of the Company
to vigorously defend litigation and/or enter into settlements of
claims where management deems appropriate.
On June 15, 1992, former employees of the Company filed a class
action lawsuit in the United States District Court for the
Northern District of California. Their complaint alleged that
the Company violated certain sections of the California Labor
Law relating to the payment of overtime. On June 16, 1995, the
court issued a finding of partial liability against the Company.
Notices and claim forms were mailed to class members during the
period from January through March 1996. On September 16, 1996,
the Company entered into an Enforceable Settlement Agreement
which was approved by the court on November 21, 1996. Pursuant
to its terms, damages, penalties and interest were paid to the
plaintiffs in the amount of $5.6 million and an additional $1.2
million was paid for plaintiff's attorneys fees. The Company had
paid $1 million in June 1996, pursuant to an interim order for
the payment of plaintiff's attorneys fees. The Company had
previously accrued $2 million for potential liability with
regard to the above settlement.
In December 1995, the U.S. Department of Labor notified the
Company of its investigation of the Company's pay practices
concerning its former employees during the period from February
1993 through September 1995. The Department of Labor's
investigation is still in its early stages and, as such,
potential liability, if any, cannot be estimated by the Company
at this time.
NOTE F - Discontinued Operations
-----------------------
In the third quarter of fiscal 1996, the Company disposed of its
rental fleet business through the sale of certain assets and
through certain leases to a subsidiary of Avis, Inc. All
liabilities related to the discontinued rental car business,
principally, self-insurance claims and deferred taxes, were
retained by the Company.
During the first quarter of fiscal 1997, the Company
discontinued its dealership operations. At October 31, 1996, all
vehicles have been disposed of and all dealership locations have
been closed.
As discussed in Note E, a settlement of its class action lawsuit
reduced discontinued pre-tax earnings for the three months ended
October 31, 1996 by $4.8 million or $.17 per share. Additional
legal fees related to this lawsuit, additional litigation
expenses and the loss on the sale of the remaining rental cars
were also recognized during the current year's third quarter.
-8-
<PAGE> 11
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - Discontinued Operations (cont.)
-----------------------
The assets and operating results of both the rental car and
dealership operations segments for all periods presented have
been restated to reflect discontinuation.
Summarized asset data related to discontinued operations is as
follows:
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
---------- -----------
(in thousands)
<S> <C> <C>
Accounts receivable, net $ 179 $ 1,494
Rental automobiles, net of
accumulated depreciation of
$10,458 at January 31, 1996 -- 14,403
Dealership inventory 69 5,794
Other property and equipment, net 12 419
Other assets 773 2,792
-------- --------
$ 1,033 $ 24,902
======== ========
</TABLE>
Summarized results of discontinued operations are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ ------------------
1996 1995 1996 1995
-------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenue $ 773 $23,411 $13,644 $99,800
Cost of goods sold and
operating expenses 963 17,574 13,241 71,895
General and administrative 8,014 6,166 10,798 24,841
Interest -- 135 -- 275
-------- ------- ------- -------
8,977 23,875 24,039 97,011
-------- ------- ------- -------
Income (loss) before
income taxes (8,204) (464) (10,395) 2,789
Provision (benefit) for
income taxes (2,745) (19) (3,534) 1,526
-------- ------- ------- -------
Income (loss) from
operations (5,459) (445) (6,861) 1,263
Loss on disposal of
operations,net of tax -- (212) -- (212)
-------- ------- ------- -------
Net income (loss) $ (5,459) $ (657) $(6,861) $ 1,051
======== ======= ======= =======
</TABLE>
-9-
<PAGE> 12
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Overview
--------
National Auto Credit, Inc., (the Company) had income from continuing
operations of $6.7 million or $.23 per share for the quarter ended October 31,
1996, a 28.7% increase compared to $5.2 million or $.18 per share for the
quarter ended October 31, 1995.
Revenue for the quarter ended October 31, 1996 was $16.2 million versus
$11.9 million in the third quarter of the prior year. For the nine months ended
October 31, 1996, income from continuing operations was $19.5 million or $.68
per share, a 57.6% increase from the $12.4 million or $.43 per share earned in
the prior year.
Revenue and earnings benefited in the first nine months of fiscal 1997 from
an increase of $105.2 million in gross installment notes receivable to $456.5
million at October 31, 1996 from $351.3 million at January 31, 1996 and a 43.8%
increase from the $317.5 million at October 31, 1995.
The Company anticipates further increases in revenue and earnings
consistent with the planned growth in the receivables portfolio which should
approach $500 million by the end of this fiscal year.
Continuing Operations
---------------------
Revenue
- -------
Interest and fee income generated by the Company increased 35.9% from $11.9
million for the quarter ended October 31, 1995 to $16.2 million for the quarter
ended October 31, 1996 and 55.1% from $30.0 million to $46.5 million for the
nine month periods then ended. This revenue growth is primarily attributable to
the growth in the gross installment notes receivable portfolio and in NAC's
enrolled dealer base as follows:
<TABLE>
<CAPTION>
Gross Installment Number of
Notes Receivable Number of Enrolled
Balance as of: (in millions) Contracts Dealers
- ---------------- ----------------- ---------- --------
<S> <C> <C> <C>
January 31, 1994 $ 93.2 12,900 900
October 31, 1994 169.2 24,900 1,300
January 31, 1995 193.5 28,400 1,400
October 31, 1995 317.5 48,300 2,100
January 31, 1996 351.3 53,000 2,300
October 31, 1996 456.5 65,300 2,900
</TABLE>
The average annualized yield on the portfolio decreased from 17.4% for the
quarter ended October 31, 1995 to 15.1% for the quarter ended October 31, 1996
and from 16.7% to 16.1% for the nine month periods then ended. This decrease is
primarily attributable to the increase in the average initial term of contracts
included in the installment notes receivable portfolio from 34 months at year
end to 36 months at October 31, 1996 and contributing to a lesser degree is the
increase in non-performing contracts.
-10-
<PAGE> 13
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue (cont.)
- -------
Fee income includes principally warranty commissions and late fees. Revenue
from these sources increased 75.4% and 81.3% for the three and nine month
comparative periods primarily as market penetration of contracts accepted with
warranty sales improved. Warranty penetration increased from 41% to 56% and from
40% to 53% for the three and nine months ended October 31, 1995 and 1996,
respectively. Additionally, the collection of late fees has increased
proportionally to the growth in the loan portfolio.
Earlier in fiscal 1997, management introduced low cost floor planning for
selected member dealers, expanded field sales presence to 27 markets and
initiated the NAC Credit Master Program. Management is again planning expansion
of the field sales organization to serve a total of 32 markets by the end of
February 1997. Low cost floor planning has been expanded and continues to give
the Company a competitive edge. The NAC Credit Master Program presently has 130
participating member dealers with new membership continuing to grow. In
addition, the Company is in the process of hiring remarketers to act as our
representatives at auctions throughout the country in order to maximize proceeds
from repossessions.
Provision for Credit Losses
- ---------------------------
The provision for credit losses was $2.6 million for the three months ended
October 31, 1996 as compared to $1.0 million for the same period in the prior
year. For the nine months ended October 31, 1996, this expense was $7.0 million
as compared to $2.4 million for the same period a year ago. The increase in the
provision for credit losses is attributable to the increase in the size and
aging of the portfolio.
The provision for credit losses together with fees contractually charged to
member dealers is added to either the allowance for loan losses or the dealer
advance reserve. Management continually evaluates these allowances for credit
losses using a variety of criteria to determine their adequacy. However, since
there is no precise method for accurately determining losses they could vary
from current estimates.
Non-performing loans as a percent of the gross installment notes receivable
portfolio are expected to increase as the portfolio matures and the average age
of contracts in the portfolio increases. Because the Company provides financing
to sub-prime rated customers, many of whom have limited access to financing
through traditional sources of consumer credit, the non-performing percentages
are considered by the Company to be reasonable and also lower than those of its
competitors. The risk of loss to the Company is mitigated by a security interest
in the vehicles sold, dealer holdbacks and loan loss reserves. During the third
quarter of fiscal 1997, the collection staff was increased by approximately 30%
from the second quarter of fiscal 1997 and is expected to continue to increase.
Management expects the build up in the collection staff to increase customer
contacts and cash collections.
-11-
<PAGE> 14
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Expenses
- ------------------
Operating expenses were $1.5 million in the third quarter of fiscal 1997 as
compared to $1.3 in the prior year. Operating expenses as a percent of revenue
for the quarters ended October 31, 1996 and 1995 decreased to 9.2% from 10.7%,
respectively, and for the nine month periods then ended decreased to 8.9% from
11.8%.
The percentage breakdown of NAC's operating expenses for the three month
periods ended October 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Salaries and benefits 65.5% 65.7%
Professional services 4.6 5.0
Supplies 7.5 8.6
Telephone 6.5 4.5
Travel 1.7 2.3
Advertising 1.7 1.7
Rent and utilities 2.3 2.5
Depreciation 3.4 2.4
Operating and licensing fees 3.9 3.6
Maintenance 2.4 3.0
Other .5 .7
----- -----
Total 100.0% 100.0%
===== =====
</TABLE>
The decrease in operating expenses as a percent of revenue for both the
quarter and year to date periods is due primarily to the impact of the growth of
the portfolio and the resulting economies of scale gained from the Company's
centralized operations as well as the development and installation of new data
processing systems such as the Fair, Isaac and Company credit evaluation system
and an increase in dealer fees to offset costs.
General and Administrative
- --------------------------
General and administrative expenses for both the three and nine month
periods ended October 31, 1996 and 1995 as a percentage of total revenue
decreased from 10.4% and 13.1%, respectively, in fiscal 1996 to 7.2% and 7.6%,
respectively, in the current year. This decrease is due to the planned
elimination of certain expenses through the Company's streamlining efforts since
the sale of its rental business as well as the fixed nature of the majority of
these expenses and the benefit derived from increased revenue.
Interest
- --------
Interest expense increased from the prior year for both the three and nine
month periods ended October 31, 1996 as average operating debt increased. There
was also a slight increase in the effective borrowing rate from 5.9% for the
three months ended October 31, 1995 to 6.1% for the same period in 1996 while
both nine month periods remained constant at 6.0%.
-12-
<PAGE> 15
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
- ------------
The provision for income taxes increased to $3.4 million from $3.0 million
for the quarters ended October 31, 1996 and 1995, and to $10.6 million from $7.0
million for the nine months then ended, respectively. This change is primarily
attributable to the increase in pre-tax income, partially offset by a decrease
in the effective tax rate. The effective tax rate for continuing operations
decreased to 33.9% from 36.5% for the quarters ended October 31, 1996 and 1995.
The tax rate decreased to 35.3% from 36.2% for the nine months ended October 31,
1996 and 1995 respectively. This decrease in rate, for both the quarter and year
to date , is attributable to a decrease in the Company's overall state tax rate.
The lower state tax rate recorded in the third quarter reflects the reduced
state tax burden we expect due to our rapidly changing presence in various state
tax jurisdictions.
Discontinued Operations
- -----------------------
During the third quarter of fiscal 1996, the Company discontinued
automobile rental operations through the sale of certain assets and through
certain leases to a subsidiary of Avis, Inc. During the first quarter of fiscal
1997, the Company discontinued its dealership operations. At October 31, 1996,
all inventory vehicles have been disposed of and all dealership locations have
been closed. The assets and operating results of both rental and dealership
operations have been restated to reflect discontinuation.
The Company recently announced a settlement of its previously disclosed
class action lawsuit (refer to Note E to the consolidated financial statements).
Subsequent to this settlement, the Company paid a total of $6.8 million of which
the Company had previously accrued $2.0 million. The remaining $4.8 million was
recorded as a charge to pre-tax income for discontinued operations during the
three months ended October 31, 1996. Additional expense items in the third
quarter of fiscal 1997 were additional legal fees, additional litigation
expenses and the loss on the sale of the remaining rental vehicles resulting in
a loss from discontinued operations of $5.5 million compared to $.4 million for
the same three month period in fiscal 1996. The Company had previously expensed
and paid an interim order for plaintiff's attorneys fees in the second quarter
of fiscal 1997 for $1.0 million.
The Company is planning an actuarial study for its self-insurance claims
relating to rental automobiles in the fourth quarter of fiscal 1997 consistent
with past practices. The results of this study, while unable to predict due to
the uncertainties inherent in this process, will be reflected in the fourth
quarter.
-13-
<PAGE> 16
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds include net cash provided by
operating activities, collections on installment notes receivable, bank
financing and proceeds from the sale of rental automobiles. The funds generated
from the sale of rental automobiles had ceased by the third quarter of fiscal
1997.
External sources of funds available to the Company at October 31, 1996
consisted of $72 million in unsecured uncommitted short-term bank lines of
credit and $50 million in an unsecured committed bank facility, neither of which
have compensating balance requirements. The committed bank facility expires on
May 27, 1997. Outstanding borrowings at October 31, 1996 amounted to $39.0
million from the uncommitted lines and $16.0 from the committed facility.
The Company believes it has sufficient internal and external sources of
funds available to meet its current obligations, to fund current operating and
capital requirements as necessary, and to finance short-term growth. Management
is finalizing plans for a private debt offering and has received a BBB rating
from Duff & Phelps in the process. This offering, coupled with the existing debt
facilities, will support the planned growth of the portfolio through fiscal
1998.
The ratio of operating debt to total capital was 14.7% at October 31,
1996 and 1.5% at January 31, 1996. It is anticipated that debt levels will
increase through the end of this fiscal year primarily to fund dealer advances
associated with the increased growth in new installment contracts.
-14-
<PAGE> 17
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
Exhibit
Number Exhibit Description
------ -------------------
27 Financial Data Schedule
Electronically filed with the Securities and
Exchange Commission pursuant to Item 601(c) of Regulation S-K.
b) Reports on Form 8-K
-------------------
On November 6, 1996, a Form-8K was filed announcing the
proposed settlement of the previously disclosed class
action lawsuit filed by former employees of the Company
with regards to the payment of overtime.
-15-
<PAGE> 18
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: December 12, 1996 By:/s/ Robert J. Bronchetti
---------------------- ------------------------
Robert J. Bronchetti
President and
Chief Executive Officer
and Director
By: /s/ Davida S. Howard
--------------------
Davida S. Howard
Vice President-Finance and
Controller (Principal Financial
and Accounting Officer)
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-1-1996
<PERIOD-END> OCT-31-1996
<CASH> 1,700
<SECURITIES> 0
<RECEIVABLES> 388,586
<ALLOWANCES> 4,311
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 15,342
<DEPRECIATION> 5,958
<TOTAL-ASSETS> 410,007
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 1,491
0
0
<OTHER-SE> 229,509
<TOTAL-LIABILITY-AND-EQUITY> 410,007
<SALES> 0
<TOTAL-REVENUES> 46,468
<CGS> 0
<TOTAL-COSTS> 4,151
<OTHER-EXPENSES> 3,537
<LOSS-PROVISION> 7,031
<INTEREST-EXPENSE> 1,616
<INCOME-PRETAX> 30,133
<INCOME-TAX> 10,637
<INCOME-CONTINUING> 19,496
<DISCONTINUED> (6,861)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,635
<EPS-PRIMARY> .44
<EPS-DILUTED> 0
</TABLE>
