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NAC FIVE-YEAR BUSINESS PLAN
November 2000
Reviewed by:
Professor Stuart Diamond
Global Strategy Group
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CONTENTS
I. SUMMARY
II. HISTORY
III. CURRENT STATUS
IV. FINANCE INDUSTRY STRATEGIES
V. ALTERNATIVE INVESTMENT ACQUISITION STRATEGIES
VI. RECOMMENDATIONS
VII. APPENDIX A: STUART DIAMOND/GLOBAL STRATEGY GROUP
VIII. APPENDIX B: RELATED ARTICLES
Copyright Columbia Process Partners
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SUMMARY
The purpose of this business plan is to provide a basis for management's
decisions about the future of National Auto Credit, Inc. ("NAC or the Company")
during the course of the next five years.
NAC enjoys a unique position in the contemporary landscape of U.S. corporations.
The Company's previous operations have been concluded with a realistic plan to
fulfill remaining obligations. The Company is debt-free and a significant amount
of cash is available for immediate deployment. The ownership interest in motion
picture exhibition provides a highly energized platform for expansion in the
media business. An experienced group of individuals is dedicated to defining and
realizing new goals of profitability and increased shareholder value from
operations, investment and prudent management.
Current income is derived primarily from passive investments. The challenge for
NAC management is to expedite the decision process and seize new business
opportunities, while efficiently winding down the previous operations platform
and reducing the staff as positions become unnecessary.
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HISTORY
Subprime auto financing (and related services) has been NAC's sole business
since 1995 when the company sold its auto insurance replacement rental business,
Agency Rent-A-Car(1) to a subsidiary of Avis Inc. During the first quarter of
that year, NAC narrowed its focus further when it disposed of a dealership
operation that sold used cars retired from Agency's former fleet.
During the period from 1995 through March 1998, NAC's management team centered
around NAC Chairman and majority shareholder Sam Frankino. In January 1998, NAC
lost its longtime auditor Deloitte & Touche LLP, which resigned on the stated
basis that it could no longer rely on NAC management representations.
In January 1998, Frankino appointed a special committee of outside directors to
determine the cause of Deloitte's abrupt departure. In March 1998, NAC was named
as defendant in a shareholder lawsuit alleging that NAC had misrepresented the
adequacy of its reserves for fiscal 1998 which led investors to overpay for the
stock. Several days later the NYSE announced its intention to de-list the
company. Shortly thereafter, Mr. Frankino resigned from his position as Chairman
of the Board.
During an 8-month emergency clean-up period, the new Board of Directors
eliminated NAC's significant debt. The new Chairman, Jim McNamara, installed an
interim CEO and identified a short list of potential acquisition targets, which
he felt would limit the effects of broad economic changes and optimize NAC's
profitability. By November 1998, NAC (with the help of turnaround consultants,
Jay Alix) had become relatively stable and debt-free; and the Board had clear
insight into some of the operational and reporting mistakes which precipitated
the crises. In May 1999, the Board hired former General Electric Capital
Services executive, Allen Rice as President.
In September 1999, Mr. Frankino used his majority interest to reinstate himself
to the Board along with his daughter, son-in-law and six additional Board
members. This would have effectively given Frankino control of the Board.
NAC immediately filed a motion in Delaware alleging that Frankino's attempt to
take operational control of NAC was an effort aimed at covering up previous
financial improprieties. And, in fact, one month later, as part of an 18-month
investigation of the alleged accounting irregularities during the Frankino
tenure, the SEC issued a formal order of investigation and served subpoenas to a
number of Frankino's management team(2).
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(1) The company had changed its name from Agency Rent-A-Car Inc. to National
Auto Credit, Inc. in 1994.
(2) See article 1 in Appendix B
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Despite the investigation, in November 1999, the Court of Chancery of the State
of Delaware granted a summary judgment in favor of Frankino and directed that
his nominees become members of the Board(3).
Also in November, Frankino named one of his new Board members, David Huber, as
Chairman of NAC. Almost immediately, Mr. Huber announced his intention of
looking for buyers for NAC and he began readying the company for sale(4).
In April 2000, in an effort to diminish the company's dependence on its
faltering subprime financing efforts, NAC purchased a 50% ownership interest in
Angelika Film Center (AFC) from Reading Entertainment. AFC owns and operates a
multiplex cinema and cafe complex(5). The Angelika operations are profitable and
have historically returned about 11-13% with some volatility in the first
quarter of this year (although recent operating results have been
disappointing). NAC also purchased from Reading two separate and independent
options to acquire additional cinema assets owned by Reading in the United
States.
Coincidental to the Angelika purchase, NAC filed another complaint against
Frankino in Delaware Chancery Court "for breach of fiduciary duty in his
capacity as director of the company." At the same time Frankino submitted a
written consent attempting to rescind any amendments to the by-laws made on or
after March 1, 2000 and seeking to remove eight directors including his
appointed Chairman, Mr. Huber(6). In May 2000, NAC announced it had sold
substantially all automobile retail installment loans remaining in its
portfolio(7).
In June 2000, Mr. Frankino agreed, in principle, to sell his controlling
interest back to NAC. On November 3, 2000, a definitive agreement providing for
the repurchase of Mr. Frankino's holdings in NAC was executed and closed upon.
On that same day, NAC executed an agreement with Reading Entertainment, Inc. to
reduce its holdings to 35% on a fully diluted basis and Reading agreed to
certain standstill and corporate governance agreements.
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(3) See Article 2 in Appendix B
(4) See Articles 3-4 in Appendix B.
(5) See Article 5 in Appendix B.
(6) See Article 6 in Appendix B.
(7) See Article 7 in Appendix B.
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CURRENT STATUS
The financial condition of the Company is very strong, with assets of
approximately $58MM, of which approximately $37MM is in cash equivalents and
marketable securities, and no outstanding debt.
There are no active operations of the Company. Loan portfolios relating to
subprime financing of automobiles are being sold and the majority of current
management and support personnel are engaged in the orderly disposition and
wind-up of these portfolio sales. Personnel exist in two categories:
General/Administrative and Operations.
General and administrative personnel include (a) Legal, with chief counsel, one
additional attorney, and support staff of three paralegals and two repossession
specialists, and (b) Finance and Accounting, representing a majority of the
remaining core group.
Operations support personnel are completing the work projects associated with
the remaining charged-off portfolio that is identified for sale. At the same
time, files for the previously sold portfolio are being warehoused. A majority
of the operations and collections personnel, together with the two repossession
specialists in the legal department, all will be discharged upon the successful
completion of the sale of the remaining charged-off portfolio receivables.
After the reorganization of the personnel categories, the staff that is
scheduled to continue working will be more than adequate to maintain the Company
until future operations, investments, or mergers/acquisitions would create
additional or alternative staffing needs.
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FINANCE INDUSTRY STRATEGIES
One option would be to restore the Company's financing activities in automobile
loans or related lending services. The auto finance options outlined below will
be repeatedly revisited during the course of the next five years to determine if
there are any fundamental market changes.
SUB-PRIME AUTO
This return to the "sub-prime" auto finance business would be the same sector
that the Company had performed in prior to its financial and legal problems. A
plan may be viable if the Company could determine a different and improved
approach to the origination and building of a portfolio, and the origination and
pass-through of receivables(8).
Significant challenges prevail in this approach, however. The "D" and "E"
subprime tiers are too risky for portfolios or receivables; portfolios
themselves are very volatile; assets can be sold only after seasoning and
usually at a discount; capital is locked up for long periods of time; the
Company would have to become a "dealer" and a "lender" to be successful (a "buy
here, pay here" concept); and the high expenses of setting up branches across
the Company are coupled with a lengthened profitability curve.
NON-PRIME AUTO
Alternatively, the Company could exit "sub-prime" auto financing and enter the
"non-prime" third party retail business, which operates at a level several tiers
above the "buy here, pay here" market. Operations would follow a similar
approach: to originate and build a portfolio, and to originate, pass through
and/or sell receivables.
Different complications would affect this choice of business plan. Portfolio
building would exhaust capital very quickly; costs for securitization would be
excessive; it requires maintaining a large collection and servicing operation;
and there are long-term risks associated with portfolios. The origination,
pass-through and/or selling of receivables is similarly not a desirable start-up
strategy because the costs, timing and lag in profitability may be prohibitive,
even though good relationships can be formed with lenders to purchase
receivables and VSI credit insurance can mitigate the short-term risk of
warehouse portfolio.
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(8) See Articles 8-10 in Appendix B.
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FINANCIAL SERVICES
In this scenario, the Company would reach beyond its historical base of
financing service and start an entirely new business in the sector, such as
mortgage banking or consumer finance.
Some realities of the financing world need to be recognized, however. Mortgage
banking has undergone tremendous changes in the recent two or more years. In
1998, the secondary market collapsed, which severely affected liquidity for
these companies; certain key large companies failed due to aggressive accounting
treatment of "gain on sale" which was deemed necessary to demonstrate
profitability; meaningful access to the secondary market is mandatory for
success; and yield spread premiums have been cut in half in this past two-year
period. Consumer finance companies are obviously profitable, however costs to
set up operations are capital intensive and the break-even curve is at least 18
to 24 months.
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ALTERNATIVE SYNERGISTIC INVESTMENT ACQUISITION STRATEGIES
A different option for the Company going forward would be to follow a business
plan of growth and profitability using current assets and strengths as tools to
build a new corporate enterprise. Such a plan may include business activities
that the Company has participated in historically, but this would not be
mandatory. An open, analysis-driven model would broaden the scope of
consideration for the Company in choosing to acquire, merge with or form other
alliances with operating entities whose maturity, profitability and likelihood
of success could become the engines of new growth, strength, and restored
shareholder value for NAC.
Acquisitions would enable NAC to continue the investment of the Company's assets
into operations that demonstrate success. The Company's cash and management
strengths can be leveraged to generate immediate cash flow and profitability.
This plan could be an excellent strategy to utilize current excess liquidity,
focusing on small companies with solid performance numbers that are in need of
additional capital for growth or expansion into new products or territories. The
targets would be both private and public companies that have the capability to
generate a minimum of 15% return on investment annually and NAC would require
majority ownership. NAC stock could be preserved in these transactions because
of the strength of the Company's cash position for direct acquisition.
Ultimately, NAC's bottom line could be improved significantly in a relatively
short period of time, and the greater cash flow and profits translate directly
to NAC share values. In addition an overall acquisition strategy will be
revisited over the next five years as shifting market conditions change the
Company's value assessment criteria.
Mergers provide a related strategy: NAC would target a company that shows
excellent current performance and strong market growth potential, but needs
additional capital to achieve its business initiatives. It is likely, while
searching for and identifying acquisition candidates, that the Company may find
mid-size enterprises in need of additional liquidity. NAC's cash position and
management approach would be attractive to such entities. NAC could use the
opportunity to quickly increase share price at the time of merger, thus
leveraging its cash strength in the transaction. NAC shareholders would benefit
from absorption into operations based on the calculation of "stock exchange
ratio." NAC management would continue to support and guide the newly merged
organization toward success through efficiencies, capital structuring and growth
by expansion and, possibly, additional acquisitions. The prospect and reality of
substantial net earnings would be realized in a strong market multiple for
NAC's share price.
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Targets for acquisitions or mergers would be identified and analyzed by the
current leadership based on business priorities that recognize NAC's strengths
of cash and management structure.
The range and scope of possible operating companies, as merger or acquisition
targets would include a variety of business sectors: finance, media, and
Internet commerce would form the initial areas of interest for the search. A
prospective model of a first transaction would be the expansion of the Angelika
platform to roll-up troubled exhibitors(9) or to acquire operations in media.
This example could apply to a desirable target in other industries as well. The
Company's acquisition strategy targets companies in two stages of development:
o Development stage companies with projected profitability tied to
immediate capital needs
o Operating companies, which represent consolidation and growth
opportunities
The Company will also consider making minority investments in companies. This
will be contemplated in cases where NAC is looking for a toehold from which to
acquire more of the target in stages, and where the minority investment itself
offers a strong return.
Any of the aforementioned scenarios will only be effected in cases where there
is true synergy. NAC is looking for opportunities in which it believes it has
Directors, advisors and relationships, which will add value to the target or
investment.
INVESTMENT OPPORTUNITIES: TARGET BREAKDOWN
The current volatile marketplace is rife with opportunities for a company in
NAC's enviable position. These opportunities fall into five categories:
1. Investment in or Purchase of Development Stage Companies With Capital
Needs
Until, the end of the first quarter of this year, Wall Street was
liberally financing start-up companies with big ideas and big
capital/infrastructure needs. Many of these concerns have spent many
millions of dollars in development and build-out funds, only to see
financing dry up just prior to the company's ability to capitalize on
its investment. Companies falling into this category are often
available at a tiny fraction of the cost of its
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(9) See Articles 11-13 in Appendix B.
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initial financing. Yet in many cases they have created assets worth
many times the value of the initial ideas, which precipitated their
initial public or private placement offerings. These entities represent
unique opportunities for a company, like NAC, with available cash.
2. Investment in or Purchase of Operating Companies in Need of Strategic
Operating Capital
The recent long stretch of bull market created opportunities for
mergers and acquisitions within and across industries. Some of these
transactions were well-considered but overpriced. This would often
leave the aggregate company with a large stable of strategic assets but
not enough operating capital to capitalize on the critical mass
achieved. In addition companies that experienced accelerated growth
during the past several years, may also find themselves with a strong
business model but strapped for cash. These situations offer the
potential for a very strong return on investment.
3. Investment in or Purchase of Operating Companies Looking to Expand
Scope, Products or Services
Current market conservatism has hurt some companies looking to fund
strategic expansions. Some of these companies have solid performance
histories but are lacking the necessary capital or liquidity to finance
enhancements or development necessary for growth. In some of these
cases strong bricks and mortar or low-tech concerns are seeking the
necessary capital to automate their operations or to add a "virtual"
operating system. In other cases, companies are seeking to acquire
critical mass during an era of aggregation. NAC will seek industry
experts and strategic due diligence to evaluate these opportunities.
4. Establishment of Wholly-Owned Business Enterprises
5. Investment in or Acquisition of Hard Assets
All of the aforementioned opportunities will be evaluated based on their ability
to be accretive to shareholder value. All will be subject to careful scrutiny
and stringent due diligence.
Due to the fact the Company currently has limited operations, there are no
financial projections included herein. However, as the company enters into
mergers and/or acquisitions, financial projections for the five-year business
plan will be revisited.
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MANAGEMENT AND RELATED STRENGTHS
NAC's current management and Board of Directors have skill sets and vast
networks of long-term business associations, which will be brought to bear on
the Company's investment strategies going forward. The Company will take an
integrated approach to planning and executing an investment and acquisition to
insure that NAC will be in a position to enhance the value of the target and
therefore enhance its own shareholder value with its executive core competencies
and business relationships. In addition to core competencies in finance and
entertainment-related arenas, NAC's management, Directors and associations
could add real value to communications concerns, technology-driven entities and
a variety of additional targets.
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RECOMMENDATIONS
NAC maintains a strong position in the present business world through its two
principal assets, a strong cash position with no outstanding debt, together with
an active and aggressive team of reorganization engineers. Implementing these
assets as tools for growth in a business plan for the future covers a wide range
of choices. The Company's history may enable similar operations to be revived.
Certainly, automobile financing will remain as a major business element of the
economy and the advantages of electronic technology will continue to offer
methods of profitable operations in such lending areas. However, the re-entry
into sub-prime or non-prime lending, even with the added momentum of Internet
methods to expand and improve such an enterprise, remains too risky and limited
for probable success at the level the Company could achieve.
The strategy that favors greatest growth and profitability is merger and
acquisition(10). Application of the Company's current talents for search and
analysis will provide a menu of choices in several business areas. In the
present economy, identifying an operating entity with strong history, excellent
market prospects and need for capital should be a prescription that can be
filled with many different possibilities.
The Angelika example demonstrates the results that can be obtained by launching
an expanded plan from an ownership base that produces geometric results. Whether
through media, finance, new technologies, other businesses or a combination of
business, NAC can implement its strongest strategy for growth and renewed
profitability through merger and acquisition. Prospective results can be
achieved in a practical time period so that the combined goal of stability,
strength and shareholder value will be achieved. These results will be analyzed
and reviewed during the course of this five-year period and adjusted with those
three goals in mind.
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(10) See Articles 13-15 in Appendix B.
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APPENDIX A
STUART DIAMOND/GLOBAL STRATEGY GROUP (PLAN REVIEW)
Stuart Diamond has taught and advised on negotiation and cultural diversity to
corporate and government leaders in many countries, including Eastern Europe,
former Soviet Republics, China, Latin America, the Middle East, Canada, South
Africa and the United States. He holds an M.B.A. with honors from Wharton
Business School, ranked #1 by Business Week and where he is currently a
professor with courses on negotiation and entrepreneurship. For six of the last
seven semesters, his negotiation course has been the most popular in the school
and he has won multiple teaching awards. He has taught negotiation at Harvard
Law School, from which he holds a law degree and is a former Associate Director
of the Harvard Negotiation Project. He has directed a negotiation consulting
firm in Cambridge, MA.
Mr. Diamond is president of Global Strategy Group, which advises largely
emerging economies on attracting and negotiating foreign investment and devising
strategies, structures and marketing to compete effectively on an international
scale: essentially the skills of planning and persuasion. He advises senior
government and corporate officials on building internal coalitions and harmony,
to be more effective and competitive in an environment of constant change. He
has analyzed competitive and persuasive strategies for organizations as
different as Price Waterhouse, the Government of Colombia, a $16 billion
petrochemical company in China and scientists in Ukraine. He advises U.S. and
foreign companies on developing more effective communications and media
relations, strategic focus, problem-solving, creative options, and persuading
vendors and customers. He is an expert in cross-cultural negotiation and has
advised on the subject to some of the world's leading companies.
In a prior career, Mr. Diamond was a journalist, including at The New York
Times, where he won the Pulitzer Prize as a part of a team investigating the
crash of the space shuttle. He covered many major crises including the Bhopal
chemical leak in India, the Three Mile Island nuclear accident in Pennsylvania
and the Chernobyl nuclear accident in the former Soviet Union.
Mr. Diamond was an executive of a Wall Street energy futures brokerage firm, for
which he negotiated a multimillion-dollar sale. He has worked at the law firm of
Sullivan & Cromwell and the investment bank of Morgan Stanley. He founded or
directed entrepreneurial ventures in medical technology, information services
and marketing of high-tech products. He has advised on environmental
regulations, privatization laws and intellectual property protection in emerging
markets, from Chile to Kuwait. He has persuaded and has worked for the
President's office in Bolivia, Colombia and Nicaragua. He has persuaded 3,000
people in the jungles of Bolivia to stop growing illicit coca and to start
growing bananas, which are
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exported to Argentina. Recently he co-founded a B2B dotcom, i-Luxury.com.
Mr. Diamond has written 2 books, 2 documentary films and more than 4,000
published articles, including 109 appearing on page 1 of The New York Times. He
has appeared on Today and Good Morning America and lectured widely about the
problems and prospects of emerging markets, and international business
challenges in an environment of change.
He has taught negotiation and communications at Wharton and Columbia Business
Schools, and negotiation at New York University, the University of Southern
California, University of California at Berkeley and Penn Law School.
Participants in his courses have included managers from leading U.S. and foreign
companies, including IBM, AT&T, Chase Bank, Exxon, Honda, Merrill Lynch, Salomon
Brothers, Hewlett-Packard, Japan Airlines, Daewoo, BASF, General Electric,
Prudential and Kodak, as well as executives and leaders from a broad range of
disciplines, including medicine, law, high technology, manufacturing, energy,
chemicals, politics, information and biotechnology. His course has been named
the #1 elective in the NYU Executive MBA Program and receives the highest
student ratings among MBA courses at Columbia Business School. He has taught
extensively in the Wharton Executive Program, where his negotiation courses have
often received the highest ratings in the program.
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APPENDIX B
RELATED ARTICLES
NAC History
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1. "SEC Issues Subpoenas in National Auto Credit Probe," Dow Jones News
Service, October 12, 1999.
2. "Court Allows Sam Frankino to Retake Control of National Auto Credit," PR
Newswire, November 8, 1999.
3. "National Auto Names Huber Chairman," Dow Jones News Service, November 22,
1999.
4. "National CEO's Task: Shore up, Sell," Automotive News. January 24, 2000.
5. "National Auto Credit Announces Purchase," PR Newswire, April 10, 2000.
6. "National Auto At Odds Again With Majority Shareholder," The Cleveland Plain
Dealer, April 13, 2000.
7. "National Auto Credit Sells Loans," The Cleveland Plain Dealer, May 17,
2000.
Sub Prime Lending
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8. "Computer Rating System Helps Subprime Firm," Automotive News, February 22,
1999.
9. "AmeriCredit Corp. Leading the Pack of High-risk Lenders," Fort Worth
StarTelegram, August 12, 2000.
10. "Shrinking Field: Remaining Subprime Lenders Celebrate Surviving Industry
Meltdown," Automotive News, March 22, 1999.
Film Exhibition Industry
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11."Profile: Increasing Debt Problems for Movie Theaters," NPR: Weekend Edition,
May 27, 2000.
12."Added Movie Screens Tend to Dim Theaters' Profit Pictures...," Los Angeles
Times, June 20, 2000.
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13. "Multiplex Theaters Reeling from Sluggish Summer," The Cleveland Plain
Dealer, August 28, 2000.
Acquisition Strategies
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14. "Search for Synergies," The Economic Times, May 7, 2000.
15. "Winning Strategies: IT Execs Move from Tech Clean-up to Deal-making in
Acquisition Landscape," InfoWorld, October 16, 2000.
16. "The Ties That Bind In Roll-Up Plays That Work," Mergers & Acquisitions: The
Dealmakers Journal, June 1, 1999.
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