<PAGE> 1
UNITED STATES
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 April 30, 1999
-------------------------
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
(State or other jurisdiction of
incorporation or organization)
34-1816760
(I.R.S. Employer Identification No.)
30000 Aurora Road, Solon, Ohio 44139
(Address of principal executive offices and zip code)
(440) 349-1000
(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 No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
class of common stock, as of the latest practicable date.
As of October 31, 1999, there were 28,617,333 shares of Common Stock,
$.05 par value, outstanding.
<PAGE> 2
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Report of Independent Certified Public Accountants 1
Condensed Consolidated Balance Sheets as of
April 30, 1999 and January 31, 1999 2
Condensed Consolidated Statements of Operations for the
Three Months Ended April 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE> 3
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
Solon, Ohio
We have reviewed the accompanying condensed consolidated balance sheet
of National Auto Credit, Inc. and its subsidiaries as of April 30, 1999, and the
related statements of operations and cash flows for each of the three-month
periods ended April 30, 1999 and 1998. The financial statements are the
responsibility of the Company's management.
We conducted our review 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 generally accepted accounting standards, 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 generally accepted accounting principles.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note E to these condensed consolidated financial statements,
certain conditions raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note E to these condensed consolidated financial statements. The condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of January 31, 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended (not presented herein) and in our report
dated June 30, 1999, we expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph concerning matters
that raise substantial doubt about the Company's ability to continue as a going
concern. In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of January 31, 1999, 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
September 2, 1999 (except for the last paragraph of Note C as to which the date
is December 2, 1999 and the first and seventh paragraphs of Note D as to which
the dates are October 12, 1999 and December 9, 1999, respectively)
1
<PAGE> 4
<TABLE>
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
April 30, January 31,
1999 1999
--------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 40,071 $ 32,109
Installment loans, net (Note B) 57,595 70,401
Property and equipment, net of accumulated depreciation
of $5,452 and $5,262, respectively 8,508 8,558
Affordable housing investments 10,609 10,270
Income taxes refundable 3,242 3,295
Other assets 2,030 2,659
-------- --------
TOTAL ASSETS $122,055 $127,292
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Self-insurance claims $ 4,432 $ 4,880
Accrued income taxes 6,490 6,510
Other liabilities 15,520 16,126
-------- --------
26,442 27,516
COMMITMENTS AND CONTINGENCIES (Note D) -- --
STOCKHOLDERS' EQUITY (Note C)
Preferred stock - $.05 par value,
authorized 2,000,000 shares, none issued -- --
Common stock - $.05 par value,
authorized 40,000,000 shares, issued 29,960,613 and
29,982,512 shares, respectively 1,499 1,500
Additional paid-in capital 166,149 166,168
Retained deficit (59,932) (55,789)
Treasury stock, at cost, 1,345,968 shares (12,103) (12,103)
-------- --------
95,613 99,776
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $122,055 $127,292
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
<TABLE>
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended
April 30,
------------------------
1999 1998
------- -------
<S> <C> <C>
REVENUE
Interest income $ 2,102 $ 5,279
Fees and other income 45 58
------- -------
Total 2,147 5,337
COSTS AND EXPENSES
Provision for credit losses 182 724
Operating 3,073 2,803
General and administrative 1,506 1,249
Litigation and non-recurring charges 1,954 2,068
Interest (income) expense (425) 1,668
------- -------
Total 6,290 8,512
------- -------
LOSS BEFORE INCOME TAXES (4,143) (3,175)
Provision for income taxes -- --
------- -------
NET LOSS $(4,143) $(3,175)
======= =======
BASIC AND DILUTED LOSS PER SHARE $ (0.14) $ (0.11)
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S)
Basic and Diluted 28,631 28,560
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
<TABLE>
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Three Months Ended
April 30,
---------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(4,143) $(3,175)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 337 354
Provision for credit losses 182 724
Changes in operating assets and liabilities:
Accrued income tax refundable 33 4,657
Other liabilities (372) (1,253)
Self-insurance claims (448) (1,144)
Other operating assets and liabilities, net 690 3,274
------- -------
Net cash (used in) provided by operating activities (3,721) 3,437
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on gross finance receivable 21,657 32,729
Purchase of loans (8,700) (6,296)
Purchase of other property and equipment (237) (144)
Purchase of affordable housing investments (1,017) (1,220)
------- -------
Net cash provided by investing activities 11,703 25,069
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on notes payable -- (15,677)
Stock issued under benefit plans (20) --
------- -------
Net cash used in financing activities (20) (15,677)
------- -------
Increase in cash and cash equivalents 7,962 12,829
Cash and cash equivalents at beginning of period 32,109 4,682
------- -------
Cash and cash equivalents at end of period $40,071 $17,511
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 13 $ 2,746
======= =======
Income taxes refunded $ 33 $ 4,657
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
include the accounts of National Auto Credit, Inc. and subsidiaries (the
"Company"), all of which are wholly-owned. 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 the Company's consolidated financial position, results of operations 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 the Company's consolidated
financial statements, including the notes thereto, appearing in the Company's
Annual Report on Form 10-K for the year ended January 31, 1999.
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.
Certain prior year amounts have been reclassified to conform to the
current presentation.
NOTE B - Installment Loans, Net
----------------------
The following table sets forth the components of and changes in the
gross finance receivable, unearned income, credit loss discount and allowance
for credit losses of the Company's net installment loans as of and for the three
months ended April 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Gross Credit Allowance Installment
Finance Unearned Loss for Credit Loans,
Receivable Income Discount Losses Net
---------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1999 $115,473 $(7,052) $(21,190) $(16,830) $ 70,401
Purchases 17,314 (985) (7,387) -- 8,942
Cash collected (23,668) -- -- -- (23,668)
Charge-offs (6,393) -- 3,455 2,938 --
Provision for credit losses -- -- -- (182) (182)
Interest income -- 2,102 -- -- 2,102
Reclassification -- 18 (18) -- --
Dealer fees charged -- -- -- -- --
-------- ------- -------- -------- --------
Balance, April 30, 1999 $102,726 $(5,917) $(25,140) $(14,074) $ 57,595
======== ======= ======== ======== ========
</TABLE>
5
<PAGE> 8
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - Installment Loans, Net (cont.)
----------------------
<TABLE>
<CAPTION>
Gross Credit Allowance Installment
Finance Unearned Loss for Credit Loans,
Receivable Income Discount Losses Net
---------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1998 $269,690 $(20,534) $(34,920) $(61,789) $152,447
Purchases 9,239 (171) (2,456) -- 6,612
Cash collected (39,196) -- -- -- (39,196)
Charge-offs (22,152) -- 7,232 14,920 --
Provision for credit losses -- -- -- (724) (724)
Interest income -- 5,279 -- -- 5,279
Reclassification -- -- -- -- --
Dealer fees charged -- -- -- (327) (327)
-------- -------- -------- -------- --------
Balance, April 30, 1998 $217,581 $(15,426) $(30,144) $(47,920) $124,091
======== ======== ======== ======== ========
</TABLE>
The balances at April 30, 1999 and 1998 include amounts related to
whole loans purchased by the Company, and to loan interests purchased under
sharing agreements with dealers, as follows (in thousands):
<TABLE>
<CAPTION>
Gross Credit Allowance Installment
Finance Unearned Loss for Credit Loans,
Receivable Income Discount Losses Net
---------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1999
Whole loans $ 35,787 $ (1,733) $(17,849) $ (182) $ 16,023
Loan interests 66,939 (4,184) (7,291) (13,892) 41,572
-------- -------- -------- -------- --------
Total $102,726 $ (5,917) $(25,140) $(14,074) $ 57,595
======== ======== ======== ======== ========
Balance, April 30, 1998
Whole loans $ -- $ -- $ -- $ -- $ --
Loan interests 217,581 (15,426) (30,144) (47,920) 124,091
-------- -------- -------- -------- --------
Total $217,581 $(15,426) $(30,144) $(47,920) $124,091
======== ======== ======== ======== ========
</TABLE>
The whole loans and the loans underlying the loan interests,
outstanding at April 30, 1999, generally have initial terms ranging from 12 to
48 months, with average initial terms and amounts of 38 months and $10,000,
respectively. At April 30, 1999 and 1998 the average remaining term was 19 and
24 months, respectively, and the percentage of loans which were greater than 120
days past due were 3.5% and 16.5%, respectively.
6
<PAGE> 9
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - Stockholder's Equity
--------------------
On May 10, 1999, the Company entered into an Option Agreement with an
unaffiliated stockholder to purchase 2,849,630 shares of the Company's common
stock at a price of $1.50 per share. The Company acquired the option by paying
the stockholder $1,000,000, which was paid on May 12, 1999, all of which will be
credited toward the aggregate exercise price payable by the Company upon any
exercise of its option. On June 24, 1999, the option was extended for an
additional 45 days (the "First Extension") until August 8, 1999. In
consideration for the First Extension, the Company paid $500,000, $250,000 of
which will be credited toward the aggregate exercise price payable by the
Company upon any exercise of its option. On August 8, 1999, the option was
extended for an additional 120 days (the "Second Extension"). In consideration
for the Second Extension, the Company paid $1,000,000, $750,000 of which will be
credited toward the aggregate exercise price payable by the Company upon any
exercise of its option.
On November 22, 1999, the Board of Directors of the Company approved
the exercise of its option. On December 2, 1999, the Company exercised such
option and paid the unaffiliated stockholder an additional $2,274,445 for the
2,849,630 shares subject to option, which amount equals the product of 2,849,630
and the $1.50 per share exercise price, less the $2,000,000 in aggregate credits
to which the Company became entitled under the Option Agreement, the First
Extension and the Second Extension.
NOTE D - Commitments and Contingencies
-----------------------------
The Company and certain of its former officers and directors have been
named as defendants in eleven purported class action lawsuits which were filed
in the United States District Court for the Northern District of Ohio. The
actions allege fraud and other violations of the federal securities laws. The
actions were consolidated on October 16, 1998, and discovery is presently stayed
pending the courts rulings on various outstanding motions. The consolidated
action seeks money damages as the result of various alleged frauds and
violations of the Securities Exchange Act of 1934, including misrepresentations
about the adequacy of the Company's allowance for credit losses and its loan
underwriting practices. The Company has accrued $3,000,000 to defend against
this action. On October 12, 1999, the Hon. Patricia Hemann, United States
Magistrate Judge, issued a report and recommendation (the "Report") to the Hon.
Solomon Oliver, United States District Judge, recommending that the motions to
dismiss filed by the Company and the other defendants be granted. Plaintiffs
have filed an objection to the Magistrate's Report with the District Court. The
Company has responded to this objection. Although the Company intends to
vigorously defend itself, the ultimate outcome of these actions, including the
range of loss, if any, cannot presently be predicted, and the Company has not
recorded any provision for any damages that may result from these actions. An
unfavorable resolution of these actions could have a material adverse effect on
the Company's financial position, results of operations and liquidity.
The Securities and Exchange Commission, the United Sates Attorney for
the Northern District of Ohio, and the Federal Bureau of Investigation are
investigating the issues raised as the result of the resignation of Deloitte &
Touche LLP. The Company is cooperating fully with the investigations. The
ultimate outcome of these investigations on the Company cannot presently be
predicted. An unfavorable resolution of any of these investigations could have a
material adverse effect on the Company's financial position, results of
operations and liquidity.
Following the resignation of Deloitte & Touche LLP, the Company
instituted investigations of its previous financial reporting and underwent
changes in management. Included in the results of operations for the three
months ending April 30, 1999 and 1998, respectively, are the following costs (in
thousands):
7
<PAGE> 10
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - Commitments and Contingencies (cont.)
-----------------------------
<TABLE>
<CAPTION>
Three Months Ended
April 30,
--------------------
1999 1998
------ ------
<S> <C> <C>
Legal fees relating to defending litigation $ 735 $ 663
Crisis management consulting 550 833
Costs of special investigation 53 456
Fees for special independent audits 341 105
Financing, loan waiver and prepayment fees 275 --
Other -- 11
------ ------
Total $1,954 $2,068
====== ======
</TABLE>
As of April 30, 1999 the Company has accrued $3,000,000 for the future
costs of defending the stockholder litigation and responding to the regulatory
investigations.
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
in all states during the period from February 1, 1993 through September 30,
1995. On January 15, 1998, the Company reached an agreement in principle with
the Department of Labor to settle the matter in all states for approximately
$2,700,000 including civil penalties, interest and related payroll taxes. The
formal agreement was completed on September 11, 1998. The Company accrued
$2,720,000 in January 1998 for this settlement. The Company made its final
payment as directed by the Department of Labor regarding the settlement of this
issue in July 1999.
On June 7, 1999, Sam J. Frankino, the former Chairman of the Company's
Board of Directors and its majority stockholder, instituted two separate civil
actions against the Company in the Delaware Court of Chancery. The first of
these actions sought to compel the Company to hold an annual meeting of
stockholders for the election of directors. The second of these actions sought
to inspect the Company's stockholder list materials and other of its books and
records in connection with such annual meeting. On June 21, 1999, the Company
resolved both of these actions by stipulation, agreeing to hold an annual
meeting of stockholders on September 15, 1999 and agreeing to make available to
Mr. Frankino the stockholder list and other materials he had requested.
On August 30, 1999, Sam J. Frankino instituted a civil action against
the Company and its current Board of Directors in the Delaware Court of
Chancery, seeking a declaratory judgment confirming that the Company's existing
bylaw not permitting stockholders to act by written consent is not valid and
that he validly elected seven designees to the Company's Board of Directors. On
September 17, 1999, the plaintiff moved for summary judgment regarding his
claims for a declaration that he (i) validly amended the Company's bylaws to
expand the number of directors from six to thirteen and (ii) duly elected seven
of his nominees to fill these newly-created seats on the Board. On that date,
the plaintiff also moved for a protective order regarding defendants' discovery
requests and for an order striking the defendants' affirmative defenses. On
September 28, 1999, the Company and the other defendants cross-moved for summary
judgment and opposed all motions filed by the plaintiff. The Court of Chancery
heard argument on the motions for summary judgment on October 7, 1999. On
November 5, 1999, the Court of Chancery granted plaintiff's motion for summary
judgment and denied the cross motion for summary judgment filed by the Company
and the other defendants. On November 12, 1999, the Court of Chancery denied the
defendants' motion for a stay pending appeal. Plaintiff's nominees were seated
as directors. Certain individual director defendants are appealing the Court of
Chancery's summary judgment rulings on an expedited basis. On December 3, 1999,
the parties to the appeal agreed to the dismissal of the Company
8
<PAGE> 11
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - Commitments and Contingencies (cont.)
-----------------------------
as a party-appellant. On December 6, 1999, Messrs. Cohen and Rice agreed to
dismiss their participation in the appeal. See Item 5. Other Information. On
December 9, 1999, the Delaware Supreme Court affirmed the judgement of the
Delaware Court of Chancery.
In addition, 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.
NOTE E - Going Concern
-------------
The accompanying unaudited condensed consolidated financial statements
have been prepared on a going concern basis, which contemplates the realizations
of assets and the settlement of liabilities, including commitments and
contingent liabilities, in the normal course of business. The Company incurred
net losses in the first three months of fiscal 2000, and for the fiscal years
ended January 31, 1999 and 1998. During 1998 and 1999 the Company did not comply
with certain covenants of its loan agreements. The Company was able to obtain
waivers and extensions and in fiscal 1999 completed the repayment of all of its
operating debt. However, to date the Company has been unable to obtain new debt
financing. Additionally, the Company is a defendant in significant stockholder
litigation and is the subject of certain regulatory investigations. These
factors raise substantial doubts about the Company's ability to continue as a
going concern.
The Company may pursue new debt, or equity financing, for use in
funding its operations and the settlement of its liabilities. However, the
Company's pending litigation and other factors may make obtaining such financing
difficult. Additionally, the Company will examine the sale of non-operating
assets as a source of capital. There can be no assurance that capital will be
obtained from these sources. In the interim, or absent obtaining such capital,
the Company will restrict its purchase of new loans to the cash flows available
from the collections of its existing loans after the use of the cash flows to
pay operating expenses and existing liabilities. The Company had a cash balance
of approximately $45,500,000 as of August 31, 1999, and it believes that such
cash and the cash flows from the collection of existing loans will be sufficient
for it to pay operating expenses, existing liabilities, and make some level of
new loan purchases, over the next twelve months. However, there can be no
assurance that this plan will be successful. Additionally, the restrictions on
the purchase of new loans inherent in such a plan would cause the size of the
Company's investments in loans, and its interest income therefrom, to decline
over time.
The Company's existing liabilities include the accrual of estimates of
the costs to defend the pending stockholder litigation, and to respond to the
pending regulatory investigations. Such matters represent contingent
liabilities. The ultimate outcome of these matters, including the timing of
their resolution, cannot presently be predicted, and accordingly no provision
has been recorded for any damages that may result from these matters. The
Company intends to vigorously defend the stockholder litigation and to cooperate
fully with the investigations. However, the need to devote significant cash
flows to satisfy any damages resulting from these matters would have a
significant adverse effect on the Company's continued operations.
As a result of these factors the Company's continuation as a going
concern will ultimately depend on its ability to (i) obtain new debt or equity
financing or other sources of capital which can be invested to achieve
profitable operations through growth in interest income (resulting from growth
in investments in loans) and the control of expenses, and (ii) resolve the
pending litigation and regulatory investigations on terms satisfactory to the
Company. The unaudited financial statements do not include any adjustments
relating to the recoverability of assets or the amount or settlement of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
National Auto Credit, Inc., through NAC, Inc., a wholly-owned
subsidiary, invests in sub-prime used automobile consumer loans, which take the
form of installment loans collateralized by the related vehicle. The Company
purchases such loans, or interests in pools of such loans (collectively "loan
investments"), from member dealers. The Company performs the underwriting and
collection functions for all loans it purchases in whole, and also performs such
functions where the member dealer had sold to the Company, and retained for
itself, interests in a pool of loans. The Company's operations enable member
dealers to provide used car purchase financing to customers who have limited
access to more traditional consumer credit sources that might otherwise be
unable to obtain financing. As of April 30, 1999, the Company had a network of
approximately 1,000 dealers located throughout the United States.
The loans in which the Company invests are high risk, in that the
borrowers are individuals with below average credit quality, and the collateral
is subject to loss, damage, significant declines in value and difficulties of
repossession. Accordingly, each individual loan has a significant risk of not
performing in accordance with its contractual terms. The business in which the
Company participates relies on mitigating this risk by acquiring large numbers
of loans, thus reducing the exposure to the risk of the default on any one
particular loan, and on reasonably estimating the credit losses to be incurred
and setting loan purchase prices accordingly. An inability to reasonably predict
the future performance of loans being purchased, or to set loan purchase prices
that properly reflect those estimates, can significantly increase the risk of
material losses from the business of investing in sub-prime used automobile
loans.
For the first three months of fiscal 2000 ending April 30, 1999, the
Company incurred a net loss of $4,143,000, primarily as the result of a 59.8%
decline in revenues to $2,147,000 and the incurrence of costs of $1,954,000
associated with certain litigation and non-recurring charges, as discussed
below. The decline in revenues was principally due to the reduction in the size
of the Company's loan portfolio. During fiscal 1999 the Company revised the
manner in which it conducted its loan investment operations in light of the
level of credit losses the Company experienced in fiscal 1997 through fiscal
1999. The Company developed a dealer scoring model to allow it to evaluate its
dealers and selectively market its new programs to a smaller number of dealers
viewed as more likely to be the source of higher quality loans. The Company's
lack of external financing sources since the repayment of its debt in November
1998 limited its ability to purchase new loans to the cash available from the
collections from its existing loan portfolio after the use of those cash flows
to pay operating expenses and existing liabilities. These factors led to a
decline in the number of dealers enrolled in the Company's program and to a
decline in the number of loans added.
As of April 30, 1999, the Company has obtained no external sources of
financing, and is operating on internally generated cash flows, which resulted
from excess of collections on installment loans over the investment in new loans
as the Company reduced the size of its operations. The Company's purchases of
loans will be limited to the cash available from the collections from its
existing loan portfolio after the use of those cash flows to pay operating
expenses and existing liabilities.
As discussed elsewhere herein, on January 16, 1998, Deloitte & Touche
LLP, the Company's former independent auditors, resigned, advising the Company
that information had come to its attention that led it to no longer be able to
rely on the representations of the then management of the Company. Following the
resignation of Deloitte & Touche LLP, the Board of Directors formed a special
committee to investigate, with the assistance of special independent legal,
accounting and auditing experts, the basis for Deloitte & Touche LLP's decision
to resign as the Company's auditors and to review certain of the Company's
accounting records and financial reporting. As a result of that investigation, a
second investigation conducted by a successor special committee, and Grant
Thornton LLP's reaudit of the fiscal 1997 financial statements, the Company
determined that its previously issued fiscal 1995, 1996 and 1997 financial
statements required restatement to correct accounting that resulted from the
failure of the Company to properly consider
10
<PAGE> 13
information available at the time those financial statements were prepared,
including information that may not have been considered due to certain errors or
irregularities in certain accounting or corporate records. The fiscal 1995, 1996
and 1997 financial statements were restated, as reported in the consolidated
financial statements appearing in the Company's Annual Report on Form 10-K for
the year ended January 31, 1999.
The Company and certain of its former officers and directors have been
named as defendants in eleven purported class action lawsuits which were filed
in the United States District Court for the Northern District of Ohio. The
actions allege fraud and other violations of the federal securities laws. The
actions were consolidated on October 16, 1998, and discovery is presently stayed
pending the courts rulings on various outstanding motions. The consolidated
action seeks money damages as the result of various alleged frauds and
violations of the Securities Exchange Act of 1934, including misrepresentations
about the adequacy of the Company's allowance for credit losses and its loan
underwriting practices. The Company has accrued $3,000,000 to defend against
this action. On October 12, 1999, the Hon. Patricia Hemann, United States
Magistrate Judge, issued a report and recommendation (the "Report") to the Hon.
Solomon Oliver, United States District Judge, recommending that the motions to
dismiss filed by the Company and the other defendants be granted. Plaintiffs
have filed an objection to the Magistrate's Report with the District Court. The
Company has responded to this objection. Although the Company intends to
vigorously defend itself, the ultimate outcome of these actions, including the
range of loss, if any, cannot presently be predicted, and the Company has not
recorded any provision for any damages that may result from these actions. An
unfavorable resolution of these actions could have a material adverse effect on
the Company's financial position, results of operations and liquidity.
The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities, including commitments and contingent liabilities, in the normal
course of business. The Company incurred losses from continuing operations in
fiscal 1998 and 1999, and continues to incur losses in the current year (fiscal
year 2000). To date the Company has been unable to obtain new debt financing.
Additionally, the Company is a defendant in significant stockholder litigation,
and the Securities and Exchange Commission, the United States Attorney for the
Northern District of Ohio and the Federal Bureau of Investigation are
investigating the issues raised as the result of the resignation of Deloitte &
Touche LLP. These factors raise substantial doubts about the Company's ability
to continue as a going concern.
The Company may pursue new debt, or equity financing, for use in
funding its operations and the settlement of its liabilities. However, the
Company's pending litigation and other factors may make obtaining such financing
difficult. Additionally, the Company will examine the sale of non-operating
assets as a source of capital. There can be no assurance that capital will be
obtained from these sources. In the interim, or absent obtaining such capital,
the Company will restrict its purchase of new loans to the cash flows available
from the collections of its existing loans after the use of those cash flows to
pay operating expenses and existing liabilities. The Company has a cash balance
of approximately $52,000,000 as of October 31, 1999, and it believes that such
cash and the cash flows from the collection of existing loans will be sufficient
for it to pay operating expenses, existing liabilities, and make some level of
new loan purchases, over the next twelve months. However, there can be no
assurance that this plan will be successful. Additionally, the restrictions on
the purchase of new loans inherent in such a plan would cause the size of the
Company's investments in loans, and its interest income therefrom, to decline
over time.
The Company's existing liabilities include the accrual of estimates of
the costs to defend the pending stockholder litigation, and to respond to the
pending regulatory investigations. Such matters represent contingent
liabilities. The ultimate outcome of these matters, including the timing of
their resolution, cannot presently be predicted, and accordingly no provision
has been recorded for any damages that may result from these matters. The
Company intends to vigorously defend the stockholder litigation, and to
cooperate fully with the investigations. However, the need to devote significant
cash flows to satisfy any damages resulting from these matters would have a
significant adverse effect on the Company's continued operation.
11
<PAGE> 14
As a result of these factors the Company's continuation as a going
concern will ultimately depend on its ability to (i) obtain new debt or equity
financing or other sources of capital which can be invested to achieve
profitable operations through growth in interest income (resulting from growth
in the investments in loans) and the control of expenses, and (ii) resolve the
pending litigation and regulatory investigations on terms satisfactory to the
Company. The financial statements do not include any adjustments relating to the
recoverability of assets or the amount or settlement of liabilities that might
be necessary should the Company be unable to continue as a going concern.
RESULTS OF OPERATIONS
- ---------------------
Interest Income: The Company's loan investments result from purchases
of installment loans at discounts from the face or contractual amount. Those
discounts reflect both (i) an element of interest income that the Company seeks
to earn on its investment in the loans, and (ii) the Company's assessment, at
the time of purchase, that a portion of the loans it purchases are impaired in
that the loans will not be repaid in accordance with their contractual terms.
At the time of purchase, the Company groups loans into loan pools that
it believes will have common future cash flow characteristics, on the basis of
possessing similar contractual and risk characteristics. Loans are initially
recorded at the cost to purchase the loans, adjusted for any net loan
origination fees and related direct incremental loan origination costs. At the
time of purchase, the Company's net initial investment in the loans is recorded
by establishing as the "gross finance receivable" the contractual cash flows
(including contractual interest) to which the Company is entitled, which is
offset by the difference between the gross finance receivable and the net
initial investment, which is segregated into two components: (i) unearned
income, which represents the difference between the net initial investment and
the Company's estimate of the future cash flows from the gross finance
receivable and (ii) a credit loss discount, which represents the difference
between the Company's estimate of the future cash flows from the gross finance
receivable and its contractual cash flows.
Unearned income is recognized as income over the life of the loans on
the interest method, using for each pool of loans the interest rate that
reflects the difference between the Company's net investment in the loans and
its estimate of the future cash flows therefrom as determined at the time of the
loan purchase. The Company's net investment in each loan pool includes its net
initial investment, any interest income recognized but not yet collected,
reduced by collections and any previously recorded allowance for credit losses.
The following sets forth certain information concerning the Company's
investments in and purchases of loans for fiscal 1997 through fiscal 2000:
<TABLE>
<CAPTION>
Number of
Installment Gross Loans Number of Enrolled Average Contracts
Loans, Net In Force(1) Contracts Number of Contract Purchased
Balance as of (In Millions) (In Millions) Outstanding Dealers Purchased During Periods
- ------------------------ ------------- ------------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1997 $283.5 $494.2 70,000 3,100 $9,900 38,000
January 31, 1998 $152.4 $347.8 52,000 3,000 $8,600 30,000
April 30, 1998 $124.1 $278.3 43,900 2,900 $9,800 1,300
January 31, 1999 $ 70.4 $124.3 24,000 900 $8,900 6,000
April 30, 1999 $ 57.6 $107.0 20,800 1,000 $8,700 2,000
</TABLE>
(1) Gross loans in force represents the total contractual payments (including
payments representing future interest) receivable from the installment loans
which the Company owns, or in which the Company owns an interest through the
purchase of an interest under sharing arrangements with dealers. The amount
includes payments that, if collected, will be remitted to the dealers under
these sharing arrangements. While not a measure of the Company's loan assets
under generally accepted accounting principles, the Company views gross loans in
force as a measure of the level of its activities and the activities of its
competitors.
12
<PAGE> 15
Interest income declined to $2,102,000 for the first three months of
fiscal 2000 from $5,279,000 for the first three months of fiscal 1999,
representing a decline of 60.2%. The decline is principally attributable to a
53.6% decrease in the size of the Company's total net loan investments, (i.e.,
the gross finance receivables less the unearned income, credit loss discount and
allowance for credit losses). Interest income declined at a rate slightly
greater than the decline in the size of the Company's total loan investment. The
Company's effective yield on its loans, calculated as interest income as a
percentage of the total net investments in loans declined from 15.3% for the
three months ended April 30, 1998 to 13.1% for the first three months of fiscal
2000 ended April 30, 1999. The effective yield declined in fiscal 2000 because
of the Company's more selective approach to loan underwriting, which meant
paying generally higher percentages of the loans' face or contractual amount for
higher quality loans, and the use of more conservative estimates of future loan
cash flows, reflecting the deterioration in the collection history experienced
in 1998. Each of these factors reduced the amount of the initial loan discount
attributed to unearned income, and thus the interest yield. At April 30, 1999,
the Company's total net loan investment of $57,595,000 has a weighted-average
yield of 11.8%.
Provision for Credit Losses: The Company's methodology for determining
the allowance for credit losses is to group loans into pools with similar
characteristics and to assess the recoverability of its loan investments on the
basis of the present value of the expected future cash flows, as discussed in
Statement of Financial Accounting Standards ("SFAS") 114 (as amended by SFAS
118), "Accounting by Creditors for Impairment of a Loan." On a continual basis
the Company reviews its estimates of future cash flows for its loan pools. Such
estimates are revised to reflect changes in historical collection rates,
charge-off rates, loan delinquencies and other economic indicators that serve as
the basis for predicting future loan performance. The Company's net investment
in each loan pool is compared to the present value of the revised estimate of
future cash flows, discounted using the rate at which the Company is recognizing
interest income on that pool of loans. Where the estimated cash flows have been
revised downward and, as a result, such a comparison reflects an excess of the
investment over the present value of the future cash flows, the Company records
an allowance for credit losses by a charge to expense, and also reduces unearned
income by a reclassification to the credit loss discount so that future interest
income will reflect the same original annual interest rate on the net investment
in the loan pool. In those instances where a revised estimate of future cash
flows indicates an increase in estimated cash flows over the previous estimate,
the Company first reverses into income any previously recorded provision for
credit losses, and then increases the rate at which future interest income is
recognized by a reclassification from the credit loss discount to unearned
income.
The provision for credit losses was $182,000 for the first three months
of fiscal 2000 as compared to $724,000 for the first three months of fiscal
1999. At April 30, 1999, the allowance for credit losses was 19.6% of the
Company's net investment in loans, before the allowance, as compared to 27.9% at
April 30, 1998. In determining the allowance for credit losses, the Company used
weighted average estimates of the future cash flows from its loans, expressed as
a percentage of the contractual amounts receivable, which was approximately 57%
at April 30, 1999 and 1998. The allowance for credit losses as a percentage of
the net investment in the loans before the allowance declined from April 30,
1998 to April 30, 1999 as the result of the change in the Company's charge-off
policy. Effective November 1, 1998, the Company revised its charge-off policy to
charge-off loans as uncollectible at the earlier of (i) the repossession sale of
the collateral, or (ii) a loan becoming 180 days contractually past due.
Previously the Company's policy was to charge-off loans when they became 270
days past due on a recency basis. The change in the charge-off policy, while
affecting the amount of gross finance receivables, the allowance for credit
losses and the credit loss discount, did not have any material affect on the net
loss for the three month period ended April 30, 1999.
Operating Expenses: Operating expenses include sales and marketing
costs, collection costs and other operating costs. Operating expenses increased
to $3,073,000 for the first three months of fiscal 2000 from $2,803,000 for the
first three months of fiscal 1999. As a percentage of revenues, operating
expenses increased to 143.1% for the first three months of fiscal 2000 from
52.5% for the first three months of fiscal 1999 due principally to the decline
in revenues.
13
<PAGE> 16
The majority of the costs that comprise operating expenses are variable
in nature and will generally increase and decrease with the level of the
Company's loan purchase and collection activities. However, changes in the size
of the Company's loan portfolio will not immediately allow personnel reductions
in certain functions and the magnitude and timing of reductions in operating
expenses will generally be less, and later, than declines in revenues. Although
operating expenses are expected to generally vary with revenues, for the three
months ended April 30, 1999 operating expenses increased, despite a decline in
revenues, principally as the result of personnel costs remaining consistent with
the prior year amounts. Personnel costs did not decline in the first quarter of
fiscal 1999 because, as of that time, the Company had not yet completed the
fiscal 1999 audit and other tasks necessary to assess its current status and
accordingly formulate its future operating plans. Operating costs for the first
quarter of fiscal 1999 were also increased by costs associated with the
installation of upgraded computer and information systems. Management believes
operating expenses will begin to decrease as the effect of personnel reductions,
increased efficiencies and other reductions in operating expenses are initiated.
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 increased to $1,506,000 for the first three months of
fiscal 2000 from $1,249,000 for the first three months of fiscal 1999, but
increased as a percentage of revenues, due to the decline in revenues, to 70.1%
for the first three months of fiscal 2000 from 23.4% for the first three months
of fiscal 1999.
General and administrative expenses are more fixed in nature than
operating expenses and are not expected to vary as directly with revenues. The
increase in general and administrative costs in the first quarter fiscal 2000,
as compared to 1999, was due to an increase in professional services offset by
lower personnel and occupancy costs.
Litigation and Non-Recurring Charges: As previously discussed,
following the resignation of Deloitte & Touche LLP, the Company instituted
investigations of its previous financial reporting, and underwent changes in
management. Included in the results of operations for the first three months of
fiscal 2000 and 1999, respectively, are the following costs related to the
investigations and management changes (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
April 30,
--------------------
1999 1998
------ ------
<S> <C> <C>
Legal fees relating to defending litigation $ 735 $ 663
Crisis management consulting 550 833
Costs of special investigations 53 456
Fees for special independent audits 341 105
Financing, loan waiver and prepayment fees 275 --
Other -- 11
------ ------
Total $1,954 $2,068
====== ======
</TABLE>
As of April 30, 1999 the Company has accrued $3,000,000 for the future
costs of defending the stockholder litigation and responding to the regulatory
investigations.
Interest (Income) Expense: Interest expense decreased to zero for the
first three months of fiscal 2000 from $1,668,000 for the first three months of
fiscal 1999 as a result of the Company's level of outstanding debt, which went
from an average of $75,787,000 in fiscal 1999 to zero in fiscal 2000. During the
current fiscal year, the Company invested its cash balances into short-term
marketable securities to generate income of $425,000, net of bank charges.
14
<PAGE> 17
Income Taxes: Due to net operating losses and the availability of net
operating loss carryforwards, the Company's effective income tax rate was 0% for
the three-month periods ended April 30, 1999 and April 30, 1998. The Company 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first three months of fiscal year 2000, the Company used
$3,721,000 from operating activities as the Company's payments for operating,
general and administrative and litigation and non-recurring expenses continue to
exceed interest income from the declining portfolio balance. The Company
generated $11,703,000 in cash flows from investing activities principally as the
result of $12,957,000 of cash flows from the net reduction in the size of its
loan portfolio. The cash flows generated by these sources were used to finance
the negative operating cash flows and retain a cash balance of $40,071,000 at
April 30, 1999.
During the first three months of fiscal 1999, the Company generated
$3,437,000 in cash flows from operations, and additionally generated $26,433,000
of cash flows from the net reduction in the size of its loan portfolio. The
$3,437,000 of cash flows from operations included the benefit of a net refund of
$4,657,000 of previously paid income taxes generated by the carryback of the
Company's 1998 losses.
The Company believes that the cash on hand of approximately $52,000,000
at October 31, 1999, plus cash flows from loan collections, will be sufficient
to fund its activities through January 31, 2000. However, as previously
discussed, the Company's lack of external financing sources will limit its
ability to purchase new loans to the net cash available from the collections
from its existing loan portfolio after paying operating expenses and existing
liabilities, including costs associated with pending civil litigation and
investigations. Such limitations may have an adverse impact on the Company's
liquidity and results of operations.
YEAR 2000
- ---------
The "Year 2000" issue involves the ability of computer systems to
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.
The Company has conducted a review of its computer systems, and has
identified the remedial actions necessary to make its systems Year 2000
compliant. The remedial actions that have been identified as necessary are
currently underway. In the Company's view, such remedial actions are not
complex, and accordingly the Company believes that it will not encounter
significant difficulties in completing the steps and achieving Year 2000
compliance in time to train employees and test systems before the end of
calendar 1999. The costs of Year 2000 compliance, which are being expensed as
incurred, are not expected to be material. However, there can be no guarantee
that the Company will not encounter unexpected Year 2000 compliance problems
that will adversely affect its operations.
The Company has also reviewed its exposure to the risk that significant
providers of goods and services might not achieve Year 2000 compliance. In
particular, the Company would be at risk to adverse effects on its operations if
the financial institutions which process the Company's disbursements and loan
cash collections were unable to achieve Year 2000 compliance. The Company has
initiated formal communications with those institutions, and on the basis of
those communications believes that it is unlikely that its operations will be
adversely affected by the lack of Year 2000 compliance by these entities.
However, there can be no guarantee that one of the Company's significant
providers of goods and services will not encounter Year 2000 compliance problems
which will adversely affect the Company.
15
<PAGE> 18
OTHER
- -----
The Company's exposure to the risks of inflation is generally limited
to the potential impact of inflation on the operating and general and
administrative expenses. To date, inflation has not had a material adverse
impact on the Company.
The Company does not utilize futures, options or other derivative
financial instruments.
FORWARD-LOOKING STATEMENTS
- --------------------------
The preceding paragraphs contain forward-looking comments that are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These comments are subject to, and the actual
future results may be impacted by, the cautionary limitations and factors
outlined in the following narrative comments.
Forward-looking statements are inherently subject to various risks and
uncertainties with respect to expectations for future periods. The risks and
uncertainties include future developments concerning the Company's relationships
with the dealers from which it purchases loans, the availability of capital and
other factors which may affect the volume of loan purchases by the Company, the
Company's collection experience, the impact of competition, adverse changes in
applicable laws and regulations, adverse changes in economic conditions and
adverse developments or effects of the litigation or investigations now pending.
Significant changes concerning any of these factors could cause future results
to be materially different that any future results discussed in any
forward-looking comments contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like virtually all commercial enterprises, the Company can be exposed
to the risk ("market risk") that the cash flows to be received or paid relating
to certain financial instruments could change as a result of changes in interest
rate, exchange rates, commodity prices, equity prices and other market changes.
The Company does not engage in trading activities and does not utilize
interest rate swaps or other derivative financial instruments or buy or sell
foreign currency, commodity or stock indexed futures or options. Accordingly,
the Company is not exposed to market risk from these sources.
The Company's loan portfolio is comprised of fixed rate financing
agreements with high credit risk consumers. The rates on these loan agreements
cannot be increased for changes in market conditions, and accordingly these
loans are not subject to market risk.
As of April 30, 1999 the Company has no interest bearing debt, and
accordingly no market risk associated with increases in interest costs resulting
from changes in market rates.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its former officers and directors have been
named as defendants in eleven purported class action lawsuits which were filed
in the United States District Court for the Northern District of Ohio. The
actions allege fraud and other violations of the federal securities laws. The
actions were consolidated on October 16, 1998, and discovery is presently stayed
pending the courts rulings on various outstanding motions. The consolidated
action seeks money damages as the result of various alleged frauds and
violations of the Securities Exchange Act of 1934, including misrepresentations
about the adequacy of the Company's allowance for credit losses and its loan
underwriting practices. The Company has accrued $3,000,000 to defend against
this action. On October 12, 1999, the Hon. Patricia Hemann, United States
Magistrate Judge, issued a report and recommendation (the "Report") to the Hon.
Solomon Oliver, United States District Judge, recommending that the motions to
dismiss filed by the Company and the other defendants be granted. Plaintiffs
have filed an objection to the Magistrate's Report with the District Court. The
Company has responded to this objection. Although the Company intends to
vigorously defend itself, the ultimate outcome of these actions, including the
range of loss, if any, cannot presently be predicted, and the Company has not
recorded any provision for any damages that may result from these actions. An
unfavorable resolution of these actions could have a material adverse effect on
the Company's financial position, results of operations and liquidity.
The Securities and Exchange Commission, the United States Attorney for
the Northern District of Ohio and the Federal Bureau of Investigation are
investigating the issues raised as the result of the resignation of Deloitte &
Touche LLP. The Company is cooperating fully with the investigations. The
ultimate outcome of these investigations on the Company cannot presently be
predicted. An unfavorable resolution of any of these investigations could have a
material adverse effect on the Company's financial position, results of
operations and liquidity.
On June 7, 1999, Sam J. Frankino, the former Chairman of the Company's
Board of Directors and its majority stockholder, instituted two separate civil
actions against the Company in the Delaware Court of Chancery. The first of
these actions sought to compel the Company to hold an annual meeting of
stockholders for the election of directors. The second of these actions sought
to inspect the Company's stockholder list materials and other of its books and
records in connection with such annual meeting. On June 21, 1999, the Company
resolved both of these actions by stipulation, agreeing to hold an annual
meeting of stockholders on September 15, 1999 and agreeing to make available to
Mr. Frankino the stockholder list and other materials he had requested.
On August 30, 1999, Sam J. Frankino instituted a civil action against
the Company and its current Board of Directors in the Delaware Court of
Chancery, seeking a declaratory judgment confirming that the Company's existing
bylaw not permitting stockholders to act by written consent is not valid and
that he validly elected seven designees to the Company's Board of Directors. On
September 17, 1999, the plaintiff moved for summary judgment regarding his
claims for a declaration that he (i) validly amended the Company's bylaws to
expand the number of directors from six to thirteen and (ii) duly elected seven
of his nominees to fill these newly-created seats on the Board. On that date,
the plaintiff also moved for a protective order regarding defendants' discovery
requests and for an order striking the defendants affirmative defenses. On
September 28, 1999, the Company and the other defendants cross-moved for summary
judgment and opposed all motions filed by the plaintiff. The Court of Chancery
heard argument on the motions for summary judgment on October 7, 1999. On
November 5, 1999, the Court of Chancery granted plaintiff's motion for summary
judgment and denied the cross motion for summary judgment filed by the Company
and the other defendants. On November 12, 1999, the Court of Chancery denied the
defendants' motion for a stay pending appeal. Plaintiff's nominees were seated
as directors. Certain individual director defendants appealed the Court of
Chancery's summary judgment rulings on an expedited basis. On December 3, 1999,
the parties to the appeal agreed to the dismissal of the Company as a
party-appellant. On December 6, 1999, Messrs. Cohen and Rice agreed to dismiss
their participation in the appeal. See Item 5. Other Information. On December 9,
1999, the Delaware Supreme Court affirmed the judgement of the Delaware Court of
Chancery.
17
<PAGE> 20
In addition, in the normal course of its business, the Company is named
as defendant in legal proceedings. It is the Company's policy to vigorously
defend litigation and or enter into settlements of claims where management deems
appropriate.
ITEM 5. OTHER INFORMATION
On September 15, 1999, the Company held its annual stockholders meeting
at which Sam J. Frankino and William J. Dodero were elected to the Board of
Directors. Below are the results of the election:
<TABLE>
<CAPTION>
Election of Directors Votes For Votes Withheld Abstentions Broker Non-votes
- --------------------- --------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
John A. Gleason 11,550,026 179,455 -- --
William S. Marshall 11,528,688 200,793 -- --
Sam J. Frankino 16,147,539 -- -- --
William J. Dodero 16,147,539 -- -- --
</TABLE>
The stockholders also ratified the selection of Grant Thornton LLP,
Cleveland, as the Company's independent auditors for the fiscal year ending
January 31, 2000. Below are the results of the vote:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C> <C>
Independent Auditors 27,797,226 61,697 18,097
</TABLE>
As of November 12, 1999, following the denial by the Court of Chancery
of the State of Delaware of the Company's application for a stay of the Court's
judgment in favor of Sam Frankino, the Directors of the Board of Directors of
the Company consisted of the following individuals:
Richard Cohen David Huber Allen Rice
Lorraine Dodero Donald Jasensky Phillip Sauder
William Dodero William Maund Terry Sweitzer
Sam Frankino James McNamara Henry Toh
Peter Zacharoff
The Company announced on November 12, 1999 that Allen Rice had resigned
from his employment as President of the Company.
At a meeting of the newly expanded Board of Directors of the Company
held on November 22, 1999, David L. Huber was elected Chairman of the Board and
Chief Executive Officer of the Company, replacing the incumbent. In addition, at
this meeting, the Board of Directors rescinded authority from any Board
committees over the management of the business and affairs of the Company
(without affecting the Special Committee's investigative authority relating to
Deloitte & Touche LLP's resignation); resolved that certain expenditures of
Company funds over $10,000 shall require the approval of the full Board of
Directors; reduced the remuneration of Directors to $1,000 per meeting and
eliminated any remuneration for attendance at committee meetings; resolved to
discontinue the Company's participation as a party-appellant in the appeal
pending the Supreme Court of the State of Delaware captioned Frankino v.
Gleason, et. al., No. 534, 1999; and resolved to commence a search for a
financial consultant for the purpose of identifying and evaluating potential
corporate transactions which would enhance stockholder value including, without
limitation, the sale of all or part of the Company.
18
<PAGE> 21
Messrs. Cohen and Rice resigned from the Board effective December 7,
1999 although Mr. Cohen will continue as Interim Chief Financial Officer through
the earlier of December 31, 1999 or until the Company's Forms 10-Q are completed
for the second and third quarters of fiscal 2000. Mr. Rice has agreed to act as
a Company consultant until July 15, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
--------
3(d) Amended and Restated By-Laws of National Auto Credit,
Inc. dated August 30, 1999.
27 Financial Data Schedule
b) Reports on Form 8-K
-------------------
None.
19
<PAGE> 22
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 10, 1999 By: /s/ David L. Huber
--------------------- ---------------------------------
David L. Huber
Chairman of the Board and
Chief Executive Officer
By: /s/ Richard M. Cohen
---------------------------------
Richard M. Cohen
Interim Chief Financial
Officer (Principal
Financial and Accounting Officer)
20
<PAGE> 1
AMENDED AND RESTATED BY-LAWS OF NATIONAL AUTO CREDIT, INC.
Incorporated Under the Laws of the State of Delaware
ARTICLE I.
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the
corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. OTHER OFFICES. The corporation may also have
offices at such other places both within and without the State of Delaware as
the board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II.
FISCAL YEAR - STOCKHOLDERS
Section 1. FISCAL YEAR. The first fiscal year of the
corporation shall end January 31, 1996 and thereafter commence on the first day
of February each year and end on the last day of January unless changed from
time to time by action of the board of directors.
Section 2. ANNUAL MEETING. The annual meeting of the
stockholders for the election of directors and for the transaction of any other
proper business, shall be held at such date and time during the first eight
months of each calendar year as shall be determined by the board of directors.
If no earlier date is determined by the board of directors, the annual meeting
shall be held on the fourth Tuesday in August of each year, if not a legal
holiday under the laws of the State where such meeting is to be held and if a
legal holiday under the laws of such State, then on the next succeeding business
day not a legal holiday under the laws of such State.
<PAGE> 2
Section 3. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise provided by statute
or by the Certificate of Incorporation, may be called at any time by the
chairman of the board, or the president, or any vice president, or secretary,
and shall be called by the president or secretary at the request in writing of a
majority of the directors, or at the request in writing of stockholders owning a
majority in amount of the entire capital stock of the corporation issued and
outstanding and entitled to vote. Any such request shall state the purpose or
purposes of the proposed meeting.
Section 4. PLACE OF MEETINGS. All meetings of the stockholders
for the election of directors shall be held at such place either within or
without the State of Delaware as shall be designated from time to time by the
board of directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within or
without the State of Delaware, as shall be stated in the notice of such meeting.
Section 5. NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Written
notice of the annual meeting or a special meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be given to each stockholder entitled to vote at such meeting not less
than ten (10) nor more than fifty (50) days before the date of the meeting.
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the notice. When a meeting is adjourned to another time
or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days or if a new record date is fixed for the adjourned
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<PAGE> 3
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 6. STOCKHOLDERS' LIST. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 7. QUORUM AND ADJOURNMENTS. At such meeting of the
stockholders, except as otherwise provided by statute or by the Certificate of
Incorporation, the holders of a majority of the issued and outstanding shares of
each class of stock entitled to vote thereat, present in person or represented
by proxy, shall be necessary and sufficient to constitute a quorum for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented.
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<PAGE> 4
Section 8. VOTING. When a quorum is present or represented at
any meeting, the vote of the holders of a majority of the shares of stock having
voting power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of the statutes or of the Certificate of Incorporation or of these
By-Laws a different vote is required, in which case such express provision shall
govern and control the decision of such question.
Section 9. PROXIES. At each meeting of the stockholders, each
stockholder shall, unless otherwise provided by the Certificate of
Incorporation, be entitled to one vote in person or by proxy for each share of
stock held which has voting power upon the matter in question, but no proxy
shall be voted after three years from its date, unless the proxy provides for a
longer period.
Section 10. ACTION OF STOCKHOLDERS WITHOUT A MEETING. No
corporate action may be taken by consent of the stockholders. Whenever the vote
of stockholders is required or permitted to be taken for or in connection with
any corporate action, whether by any provision of the statutes or of the
Certificate of Incorporation or otherwise, such corporate action may only be
taken at a duly called and noticed meeting of stockholders.
ARTICLE III.
BOARD OF DIRECTORS
Section 1. NUMBER OF DIRECTORS. The number of directors
constituting the whole board shall be thirteen (13), and no vacancy shall be
deemed to exist in the board unless the number of directors in office falls
below that number. No decrease in the number of
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<PAGE> 5
directors shall shorten the term of any incumbent director. Directors may, but
need not, be stockholders.
Section 2. ELECTION OF DIRECTORS. The directors shall be
elected at the annual meeting of stockholders, or if not so elected, at a
special meeting of stockholders called for that purpose. Directors shall hold
office for a term of three years and shall be divided into three classes so that
approximately one-third of the board shall stand for election at each annual
meeting of stockholders. At the annual meeting of stockholders in 1996, and at
each annual meeting thereafter, approximately one-third of the membership of the
board shall be elected for three year terms. If the number of directors is
changed, any increase or decrease in directors shall be apportioned among the
classes so as to maintain all classes as nearly equal in number as possible and
any individual director elected to any class shall hold office for a term which
shall coincide with the term of such class. At any meeting of stockholders at
which directors are to be elected, only persons nominated as candidates shall be
eligible for election, and the candidates receiving the greatest number of votes
shall be elected. Nominations for the election of directors may be made by the
board of directors. Nominations for election of directors may also be made by
any stockholder entitled to vote for the election of directors, by notice in
writing, delivered or mailed, postage prepaid, to the secretary of the
corporation not less than fourteen nor more than fifty days prior to any meeting
of the stockholders called for the election of directors. Each such notice shall
set forth the name, age, business address, residence address and principal
occupation or employment of each nominee proposed in such notice, and the number
of shares of stock of the corporation which are beneficially owned by such
nominee. The chairman of the meeting at which directors are to be elected may,
if the facts warrant, determine that a nomination was not made in accordance
with the foregoing
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<PAGE> 6
procedure and, if the chairman should so determine, the defective nomination
shall be disregarded.
Section 3. VACANCIES. A resignation from the board of
directors shall be deemed to take effect immediately or at such other time as
the director may specify. When one or more directors shall resign from the
board, effective at a future date, a majority of the directors then in office,
including those who have resigned, although less than a quorum, shall have the
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective. Newly created
directorships resulting from an increase in the number of directors and
vacancies occurring in the board for any reason may be filled by vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director, at any meeting of the board. A director elected to fill
a vacancy shall be elected to hold office until the expiration of the term of
the class to which he or she has been elected and until a successor shall be
duly elected or qualified or until his or her earlier death, resignation or
removal.
Section 4. ANNUAL MEETING. After each annual election of
directors, on the same day the board of directors may meet for the purpose of
organization, the election of officers and the transaction of other business at
the place where the annual meeting of the stockholders for the election of
directors is held. Notice of such meeting need not be given. Such meeting may be
held at any other time or place which shall be specified in a notice given as
hereinafter provided for special meetings of the board of directors or in a
consent and waiver of notice thereof signed by all the directors.
Section 5. REGULAR MEETINGS. Regular meetings of the board of
directors may be held at such places (within or without the State of Delaware)
and at such times as the board
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<PAGE> 7
shall by resolution determine. If any day fixed for a regular meeting shall be a
legal holiday at the place where the meeting is to be held, then the meeting
which would otherwise be held on that day shall be held at such place at the
same hour and on the next succeeding business day not a legal holiday. Notice of
regular meetings need not be given.
Section 6. SPECIAL MEETINGS. Special meetings of the board of
directors shall be held whenever called by the president, or by any vice
president, or by any two of the directors. Notice of each such meeting shall be
mailed to each director, addressed to such director at his or her residence or
usual place of business, at least three (3) days before the day on which the
meeting is to be held, or shall be sent to such director by telegraph, cable or
wireless so addressed, or shall be delivered personally or by telephone, at
least 24 hours before the time the meeting is to be held. Each such notice shall
state the time and place (within or without the State of Delaware) of the
meeting but need not state the purposes thereof, except as otherwise provided by
statute or by these By-Laws. Notice of any meeting of the board need not be
given to any director who shall be present at such meeting; and any meeting of
the board shall be a legal meeting without any notice thereof having been given,
if all of the directors then in office shall be present thereat.
Section 7. QUORUM. Except as otherwise provided by statute or
by these By-Laws, a majority of the total number of directors (or the closest
whole number thereto) shall be required to constitute a quorum for the
transaction of business at any meeting, and the affirmative vote of a majority
of the directors present at a meeting at which a quorum is present shall be
necessary for the adoption of any resolution or the taking of any other action.
In the absence of a quorum, the director or directors present may adjourn any
meeting from time to time until a quorum be had. Notice of any adjourned meeting
need not be given.
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<PAGE> 8
Section 8. TELEPHONE COMMUNICATIONS. Members of the board of
directors or any committee thereof may participate in a meeting of such board or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this subsection shall constitute
presence in person at such meeting.
Section 9. ACTION OF DIRECTORS WITHOUT A MEETING. Any action
required or permitted to be taken at any meeting of the board of directors or of
any committee thereof may be taken without a meeting if all members of the board
or of such committee, as the case may be, consent thereto in writing and such
written consent is filed with the minutes or proceedings of the board or such
committee.
Section 10. COMPENSATION. Directors, as such, shall not
receive any stated salary for their services, but by resolution of the board of
directors a fixed sum and expenses of attendance, if any, may be allowed for
attendance at such regular and special meeting of the board or of any committee
thereof. Nothing herein contained shall be construed so as to preclude any
director from serving the corporation in any other capacity, or from serving any
of its stockholders, subsidiaries or affiliated corporations in any capacity,
and receiving compensation therefor.
Section 11. COMMITTEES. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, each committee to consist of two or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee who may replace any absent or disqualified member at any
meeting of the committee. Any such committee, to the extent provided in the
resolution, shall have and may exercise the powers of the board of directors in
the management
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<PAGE> 9
of the business and affairs of the corporation, and may authorize the seal of
the corporation to be affixed to all papers which may require it; provided,
however, that in the absence or disqualification of any member of such committee
or committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the board of directors to act
at the meeting in the place of any such absent or disqualified member. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 12. INDEMNIFICATION. The corporation shall indemnify
any person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation or
served any other enterprise at the request of the corporation, against any and
all expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred in connection with such action,
suit or proceeding, in any circumstances, and to the full extent, permitted by
Section 145 of the Delaware Corporation Law, any amendment thereto, or any law
of similar import.
ARTICLE IV.
NOTICES
Section 1. NOTICES. Whenever under the provisions of the
statutes or of the Certificate of Incorporation or of these By-Laws, notice is
required to be given to any director
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<PAGE> 10
or stockholder, it shall not be necessary that personal notice be given, and
such notice may be given in writing, by mail, addressed to such director or
stockholder, at such director or stockholder's address as it appears on the
records of the corporation or at his or her residence or usual place of
business, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegraph, cable or wireless, and such
notice shall be deemed to be given when the same shall be filed, or in person or
by telephone, and such notice shall be deemed to be given when the same shall be
delivered.
Section 2. WAIVER OF NOTICE. Whenever any notice is required
to be given under the provisions of the statutes or of the Certificate of
Incorporation or of these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE V.
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be
a chairman of the board, a president, one or more vice presidents, a secretary,
and a treasurer. Any two or more offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers shall be elected
by the board of directors and each shall hold office at the pleasure of the
board of directors until a successor shall have been duly elected and qualified,
or until such officer's death, or until such officer resigns or has been removed
in the manner hereinafter provided.
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<PAGE> 11
Section 3. OTHER OFFICERS. In addition to the officers named
in Section 1 of this Article, the corporation may have such other officers and
agents as may be deemed necessary by the board of directors. Such other officers
and agents shall be appointed in such manner, have such duties and hold their
offices for such terms, as may be determined by resolution of the board of
directors.
Section 4. RESIGNATION. Any officer may resign at any time by
giving written notice of resignation to the board of directors, to the president
or to the secretary of the corporation. Any such resignation shall take effect
at the time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 5. REMOVAL. Any officer may be removed, either with or
without cause, by action of the directors.
Section 6. VACANCY. A vacancy in any office because of death,
resignation, removal or any other cause shall be filled by the board of
directors.
Section 7. CHAIRMAN OF THE BOARD. The chairman of the board
shall be the chief executive officer of the corporation, shall preside at all
meetings of stockholders and of the board of directors, shall have general
control and management of the business affairs and policies of the corporation,
and shall see that all orders and resolutions of the board of directors are
carried into effect. Except where by law the signature of the president is
required, the chairman of the board shall possess the same power as the
president to sign all certificates, contracts, and other instruments of the
corporation. During the absence or disability of the president, the chairman of
the board shall exercise all the powers and discharge all of the duties of the
president. The chairman shall have such other powers and
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<PAGE> 12
perform such other duties as from time to time may be conferred or imposed upon
the chairman by the board of directors.
Section 8. PRESIDENT. The president of the corporation shall
be the chief operating officer of the corporation. During the absence or
disability of the chairman of the board, the president shall exercise all of the
powers and discharge all of the duties of the chairman of the board. The
president shall possess power to sign all certificates, contracts and other
instruments of the corporation. The president shall, in the absence of the
chairman of the board, preside at all meetings of the stockholders and of the
board of directors. The president shall perform all such other duties as are
incident to the office of president or are properly required by the board of
directors.
Section 9. VICE PRESIDENT. In the event of the absence or
disability of the chairman of the board and the president, the vice president,
or, in case there shall be more than one vice president, the vice president
designated by the board of directors, shall perform all the duties of the
president, and when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the president. Except where by law the signature of
the president is required, each of the vice presidents shall possess the same
power as the president to sign all certificates, contracts, obligations and
other instruments of the corporation. Any vice president shall perform such
other duties and may exercise such other powers as from time to time may be
assigned by these By-Laws or by the board of directors or by the president.
Section 10. SECRETARY. The secretary shall, if present, act as
secretary of, and keep the minutes of, all the proceedings of the meetings of
the stockholders and of the board of directors and of any committee of the board
of directors in one or more books to be kept for
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<PAGE> 13
that purpose; shall perform such other duties as shall be assigned by the
president or the board of directors; and, in general, shall perform all duties
incident to the office of secretary.
Section 11. TREASURER. If required by the board of directors,
the treasurer shall give a bond for the faithful discharge of the duties of the
treasurer, in such sum and with such surety or sureties as the board of
directors shall determine. The treasurer shall keep or cause to be kept full and
accurate records of all receipts and disbursements in the books of the
corporation and shall have the care and custody of all funds and securities of
the corporation. The treasurer shall disburse the funds of the corporation as
may be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all transactions performed as
treasurer and shall perform such other duties as may be assigned by the chairman
of the board or the board of directors; and, in general, shall perform all
duties incident to the office of treasurer.
Section 12. CONTROLLER. The controller, if such office is
created by the board, shall be the chief accounting officer of the corporation.
The controller shall keep or cause to be kept all books of account and
accounting records of the corporation and shall keep and maintain, or cause to
be kept and maintained, adequate and correct accounts of the properties and
business transactions of the corporation. The controller shall prepare or cause
to be prepared appropriate financial statements for the corporation and shall
perform such other duties as may be assigned by the chairman of the board or the
board of directors; and, in general, shall perform all duties incident to the
office of controller.
Section 13. SALARIES. The salaries of the officers shall be
fixed from time to time by the board of directors or by the chairman of the
board. Any such decision by the chairman of the board shall be final unless
expressly overruled or modified by action of the
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<PAGE> 14
board of directors, in which event such action of the board of directors shall
be conclusive of the matter. Nothing contained herein shall preclude any officer
from serving the corporation in any other capacity, including that of director,
or from serving any of its stockholders, subsidiaries or affiliated corporations
in any capacity and receiving a proper compensation therefor.
ARTICLE VI.
LOANS, CHECKS, DEPOSITS, ETC.
Section 1. GENERAL. All checks, drafts, bill of exchange or
other orders for the payment of money, issued in the name of the corporation,
shall be signed by such person or persons and in such manner as may from time to
time be designated by the board of directors, which designation may be general
or confined to specific instances.
Section 2. LOANS AND EVIDENCES OF INDEBTEDNESS. No loan shall
be contracted on behalf of the corporation, and no evidence of indebtedness
shall be issued in its name, unless authorized by the board of directors. Such
authorization may be general or confined to specific instances. Loans so
authorized by the board of directors may be effected at any time for the
corporation from any bank, trust company or other institution, or from any firm,
corporation or individual. All bonds, debentures, notes and other obligations or
evidences of indebtedness of the corporation issued for such loans shall be
made, executed and delivered as the board of directors shall authorize. When so
authorized by the board of directors any part of or all the properties,
including contract rights, assets, business or good will of the corporation,
whether then owned or thereafter acquired, may be mortgaged, pledged,
hypothecated or conveyed or assigned in trust as security for the payment of
such bonds,
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<PAGE> 15
debentures, notes and other obligations or evidences of indebtedness of the
corporation, and of the interest thereon, by instruments executed and delivered
in the name of the corporation.
Section 3. BANKING. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such banks, trust companies or other depositories as the board of directors
may authorize. The board of directors may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these By-Laws, as it may deem expedient. For the purpose of
deposit and for the purpose of collection for the account of the corporation,
checks, drafts and other orders for the payment of money which are payable to
the order of the corporation shall be endorsed, assigned and delivered by such
person or persons and in such manner as may from time to time be authorized by
the board of directors.
Section 4. SECURITIES HELD BY THE CORPORATION. Unless
otherwise provided by resolution adopted by the board of directors, the chairman
of the board, the president or any vice president may from time to time appoint
an attorney or attorneys, or an agent or agents, to exercise in the name and on
behalf of the corporation the powers and rights which the corporation may have
as the holder of stock or other securities in any other corporation to vote or
to consent in respect of such stock or other securities; and the chairman of the
board, the president, or any vice president may instruct the person or persons
so appointed as to the manner of exercising such powers and rights, and the
chairman of the board, the president, or any vice president may execute or cause
to be executed in the name and on behalf of the corporation and under its
corporate seal, or otherwise, all such written proxies, powers of attorney or
other written instruments as the chairman of the board, the president, or any
vice-
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<PAGE> 16
president may deem necessary in order that the corporation may exercise such
powers and rights.
ARTICLE VII.
SHARES AND THEIR TRANSFER
Section 1. SHARE CERTIFICATES. Every stockholder shall be
entitled to have a certificate certifying the number of shares of stock of the
corporation owned by him, signed by, or in the name of the corporation by the
chairman of the board or the president or a vice president and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of the
corporation (except that when any such certificate is countersigned by a
transfer agent other than the corporation or its employee of by a registrar
other than the corporation or its employee the signatures of any such officers
may be facsimiles). If the corporation shall be authorized to issue more than
one class of stock or more than one series of any class, the designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except in the
case of restrictions on transfers of securities which are required to be noted
on the certificate, in lieu of the foregoing requirements, there may be set
forth on the face or back of the certificate which the corporation shall issue
to represent such class or series of stock, a statement that the corporation
will furnish without charge to each stockholder who so requests the
designations, preferences and relative, participating, optional or other special
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<PAGE> 17
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 2. LOST, STOLEN OR DESTROYED CERTIFICATES. The board
of directors may direct a new certificate or certificates to be issued in place
of any certificate or certificates theretofore issued by the corporation alleged
to have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his or her legal representative, to advertise
the same in such manner as it shall require and/or give the corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 3. TRANSFERS. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 4. RECORD DATES. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the
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<PAGE> 18
purpose of any other lawful action, the board of directors may fix, in advance,
a record date, which shall not be less than ten (10) days before the date of
such meeting, nor more than sixty (60) days prior to such meeting or to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
Section 5. PROTECTION OF CORPORATION. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
ARTICLE VIII.
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of
the corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE IX.
MISCELLANEOUS
Except as otherwise provided herein, these By-Laws may be
altered, added to, amended or repealed as follows: (a) at any meeting of the
stockholders by affirmative vote of a
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<PAGE> 19
majority in interest of each class of stock outstanding and entitled to vote
thereat, provided notice of the proposed alteration, addition, amendment or
repeal shall have been given in the notice of such meeting; or (b) by the board
of directors, except with respect to any provision of which by law, the
Certificate of Incorporation or By-Laws requires action by the stockholders. Any
Bylaw adopted by the board of directors may be amended or repealed by the
stockholders, as provided in this Section.
Dated as of: August 30, 1999
* * * * * * * * * END OF BY-LAWS * * * * * * * * *
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,143)
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
