1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
January 2, 2001 (December 15, 2000)
Date of Report (Date of Earliest Event Reported)
NATIONAL AUTO CREDIT, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-11601 34-1816760
(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation or Organization) File No.) 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)
NOT APPLICABLE
(Former name of former address, if changed from last report)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
ZOOMLOT TRANSACTION
On December 15, 2000, National Auto Credit, Inc., a Delaware
corporation ("NAC" or the "Company"), entered into a Merger Agreement and Plan
of Reorganization (the "Merger Agreement") to acquire ZoomLot Corporation, a
Delaware corporation, together with its subsidiaries (collectively, "ZoomLot").
The transaction is intended to be a tax-free reorganization for federal income
tax purposes with ZoomLot Corporation merging with and into ZLT Acquisition
Corp. ("ZLT"), a Delaware corporation and a wholly owned subsidiary of NAC, with
ZLT continuing as the surviving entity of the merger. As part of the merger, ZLT
changed its name to "ZoomLot Corporation" (hereinafter the survivor is referred
to as "ZLT/ZoomLot").
ZoomLot provides business-to-business e-commerce services to
independent or non-franchised used-car dealerships, financing and insurance
companies and other participants in the used-car industry. ZoomLot's services
are designed to enable such dealerships and lenders and insurance companies to
identify each other for the purpose of providing the used-car dealer's customers
with financing and insurance.
Under the terms of the Merger Agreement, NAC has agreed to issue to the
former ZoomLot shareholders 270,953 shares of its Series B preferred stock and
729,047 shares of its Series C preferred stock. Subject to certain conditions,
the shares of the Series B preferred stock will be convertible into, or will
automatically convert into, shares of NAC's common stock ("Common Stock") at the
ratio (subject to adjustment for stock splits and other anti-dilutive events) of
10 shares of Common Stock for each share of preferred stock. So long as at least
two hundred and five thousand (205,000) shares of Series B preferred stock are
issued and outstanding, the holders of shares of Series B preferred stock,
voting separately as a class, will be entitled to nominate and elect the lesser
of (i) two (2) members to the Board of Directors or (ii) a number of directors
that would represent one-sixth (1/6) of the entire membership of the Board; and
for so long as at least one hundred and ten thousand (110,000) shares of Series
B preferred stock are issued and outstanding, the holders of shares of Series B
preferred stock, voting separately as a class, shall be entitled to nominate and
elect one (1) member to the Board.
The shares of the Series C preferred stock are redeemable, at the
option of the holders or the option of NAC, for a price per share equal to the
greater of $15 or 10 times (subject to adjustment for stock splits and other
anti-dilutive events) the market price of NAC's common stock at the time of
redemption. The holders of the Series C preferred stock may redeem the shares
beginning on September 30, 2003, unless a "valuation event", as described below,
occurs earlier, in which case the shares of the Series C preferred stock become
redeemable upon the later of the occurrence of the "valuation event"or January
1, 2003. Additionally, of the 729,047 shares of Series C preferred stock issued,
666,667 shares are subject to forfeiture, as described below. Such 666,667
shares of Series C preferred stock would not become redeemable until they first
are no longer subject to forfeiture. No voting rights attach to the shares of
Series C preferred stock.
1
3
No dividend payments will be made with respect to any share of Common
Stock unless a dividend in an amount equal to ten (10) times the amount of the
dividend payable with respect to a share of Common Stock is paid with respect to
each share of the Series B and C preferred stock. Also, in the event of any
liquidation, dissolution or winding up of the Company, voluntary or involuntary,
the holders of shares of Series B and C preferred stock will be entitled to
receive an amount per share equal to ten (10) times the amount payable per share
of Common Stock upon such liquidation, dissolution or winding up.
The foregoing is a summary description of certain rights and
preferences of the Series B and C preferred stock and by its nature is
incomplete. It is subject to the more complete description set forth in the
Certificate of Designations of Series B and Series C preferred stock of National
Auto Credit, Inc. as set forth in a resolution duly adopted by the Board of
Directors of National Auto Credit, Inc. The Certificate of Designations is filed
with this Current Report as Exhibit 4.1.
Certain terms and characteristics of the Series B and C preferred stock
were established in order that the merger transaction not violate, or trigger
the termination of, a Stock Purchase and Standstill Agreement dated as of
November 3, 2000 between NAC and Reading Entertainment Inc. and certain of its
affiliates. As discussed below that agreement was, in a separate transaction,
terminated after the Merger Agreement was entered into between NAC and the
ZoomLot shareholders. As a result, the parties have had subsequent discussions
relating to modifying certain terms and characteristics of the Series B and/or C
preferred stock, as well as certain other terms and conditions of the merger
transaction, and management believes that certain of those terms and
characteristics are likely to be modified.
666,667 shares of the Series C preferred stock will be subject to
forfeiture under certain conditions. Specifically, one half of those shares will
be forfeited, if, by December 31, 2003, ZLT/ZoomLot has not achieved at least
$4.5 million in earnings before interest, taxes, depreciation and amortization
for a period of twelve (12) consecutive months. The remaining one-half of those
shares will be forfeited if, by December 31, 2003, ZLT/ZoomLot has failed to
achieve such earnings and has also failed to break even on a cash basis for a
minimum period of six (6) consecutive months. If, however, certain "valuation
events" should occur prior to December 31, 2003, those financial performance
objectives will be deemed to have been achieved. These valuation events
generally consist of (a) transaction that would involve an investment in
ZLT/ZoomLot or one of its subsidiaries of at least $10 million, where the
pre-investment valuation of ZLT/ZoomLot or any subsidiary of ZLT/ZoomLot is at
least $30 million, (b) a change in control of NAC or (c) the termination of the
key executives of ZLT/ZoomLot without cause. During the forfeiture period, the
stock will also be subject to a Lock-up, Standstill and Voting Agreement,
discussed below, as a result of which the shares will be transferable only on
the terms provided.
In addition, under the terms of the Merger Agreement, NAC agreed to
make at least $6.5 million in working capital available to ZLT/ZoomLot to
facilitate the continued development of ZLT/ZoomLot. The obligation to provide
this funding is conditioned on ZLT/ZoomLot meeting certain specified performance
and development criteria. NAC has also committed to advance funds to ZLT/ZoomLot
to enable it to repay approximately $5 million advanced to ZoomLot by
2
4
certain of its affiliates. The terms of the merger provide that the funds
advanced to ZLT/ZoomLot by NAC to repay the affiliate advances will be refunded
to NAC, with interest, by certain of the former ZoomLot shareholders if the
financial performance criteria referred to above are not met and the valuation
events referred to above do not occur by December 31, 2003.
ANCILLARY AGREEMENTS
A. Registration Rights Agreement
On December 15, 2000 the Company entered into a Registration Rights
Agreement (the "RRA") with the former shareholders of ZoomLot (the
"Shareholders"). Pursuant to the terms of the RRA, such Shareholders have been
granted certain registration rights with respect to the shares of NAC's stock
received or to be received by them in connection with the ZoomLot merger. The
foregoing is a summary description of certain terms and provisions of the RRA,
and by its nature is incomplete. The RRA is filed with this Current Report as
Exhibit 4.2.
B. Lockup, Standstill and Voting Agreement
On December 15, 2000, the Company entered into a Lockup, Standstill and
Voting Agreement (the "Voting Agreement") with the Shareholders. The Voting
Agreement generally provides, inter alia, that (i) until December 31, 2007
provided the Shareholders in the aggregate own beneficially in excess of 15% of
the votes that could be cast by the holders of all NAC's outstanding voting
stock each shareholder will vote all of his shares of voting securities issued
by NAC on each and every matter that is submitted to the shareholders of NAC in
the same proportions in which all other NAC Voting Shares voted on such matter
are voted; and (ii) until June 30, 2003, each Shareholder agrees to abide by
certain standstill and non-solicitation agreements; and (iii) until September
30, 2004 in the case of the forfeitable shares, and until June 30, 2002 in the
case of the non-forfeitable shares, each Shareholder also agrees not to sell or
otherwise dispose of any shares of NAC stock without the prior written consent
of NAC. The foregoing is a summary description of certain terms and provisions
of the Voting Agreement, and by its nature is incomplete. The Voting Agreement
is filed with this Current Report as Exhibit 4.3.
C. Employment Agreements
Certain of the key former ZoomLot employees were required to execute
Employment Agreements as a condition of the Merger.
ITEM 5. OTHER EVENTS
a) Repurchase of shares from Reading Entertainment Inc. and others.
On December 15, 2000, NAC, together with National Cinemas, Inc.,
entered into an agreement (the "Repurchase Agreement") with Reading
Entertainment, Inc., FA, Inc., Citadel
3
5
Holding Corporation and Craig Corporation (the "Reading Stockholders") for the
repurchase of 4,777,121 shares of NAC common stock for the sum of $8 million.
As part of the Repurchase Agreement, James J. Cotter and Scott A.
Braly resigned from the Board of Directors.
In addition, as part of the Repurchase Agreement, the terms or
restrictions contained in the November 3, 2000 Stock Purchase and Standstill
Agreement between NAC and the Reading Stockholders, which were still in or had
continuing effect were terminated.
This repurchase transaction was completed on December 28, 2000.
b) New Directors/Resignation of Directors
The following Directors resigned from NAC's Board of Directors: Philip
A. Sauder, James J. Cotter, Scott A. Braly and David L. Huber. None of the four
departing directors resigned because of a disagreement with NAC on any matter
relating to NAC's operations, policies or practices. Two new Directors were also
added to the Board of Directors: Mallory Factor and Thomas F. Carney, Jr.
c) Employment Agreement with James J. McNamara
On December 15, 2000, NAC's Board of Directors approved an employment
agreement, effective as of November 3, 2000, with James J. McNamara. Under the
terms of that agreement, Mr. McNamara is employed as Chief Executive Officer
until December 31, 2003, with a base salary of $500,000 per year and an annual
bonus of at least $250,000, which may be increased based on NAC's achievement of
certain performance milestones. Mr. McNamara has also received a lump-sum
payment of $750,000 as a signing bonus and compensation for past services
rendered to the Company and he will be entitled to an additional bonus in the
amount of $1,000,000 in the event that NAC's Common Stock is listed on the
NASDAQ Stock Market, the American Stock Exchange or the New York Stock Exchange.
The employment agreement also provides Mr. McNamara with a grant of NAC Common
Stock and options, with staggered vesting, to purchase an additional 750,000
shares of NAC Common Stock and for certain payments in the event of a
termination without cause by NAC or a termination for good reason by Mr.
McNamara.
Mr. McNamara also holds the title of Chairman of the Board of Directors
of the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Financial statements follow on pages 6 to 19 of this report.
4
6
(B) PRO FORMA FINANCIAL INFORMATION
Pro forma financial information follows on pages 20 to 26 of this
report.
(C) EXHIBITS
2 Merger Agreement and Plan of Reorganization by and
among ZLT Acquisition Corp. ("ZLT"), a Delaware
corporation and a wholly owned subsidiary of NAC;
ZoomLot Corporation, a Delaware corporation,
including all of its subsidiaries (collectively,
"ZoomLot"); and (each of the following, a
"Shareholder" and all of the following together,
collectively, the "Shareholders") Ernest C. Garcia
II, Verde Reinsurance Company, Ltd., a Nevis Island
corporation, Ernie Garcia III 2000 Trust, Brian
Garcia 2000 Trust, Ray Fidel, Steven Johnson, Mark
Sauder, EJMS Investors Limited Partnership, an
Arizona limited partnership, Colin Bachinsky, Chris
Rompalo,Donna Clawson, Mary Reiner, and Kathy Chacon*
4.1 Certificate of Designations of Series B and C
Preferred Stock of National Auto Credit, Inc.*
4.2 Registration Rights Agreement*
4.3 Lockup, Standstill and Voting Agreement*
10.1 Employment Agreement between NAC and James J.
McNamara*
99.1 Stock Purchase and Standstill Agreement by and among
Reading Entertainment, Inc., FA, Inc., Citadel
Holding Corporation, Craig Corporation, and National
Auto Credit;*
--------
*Indicates previously filed.
5
7
Consolidated Financial Statements and Report of
Independent Certified Public Accountants
ZOOMLOT CORPORATION
AND SUBSIDIARIES
November 30, 2000
6
8
C O N T E N T S
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 8
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET 9
CONSOLIDATED STATEMENTS OF OPERATIONS 10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT 11
CONSOLIDATED STATEMENTS OF CASH FLOWS 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13
7
9
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ZoomLot Corporation
We have audited the accompanying consolidated balance sheet of ZoomLot
Corporation and Subsidiaries as of November 30, 2000, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the nine months and eleven months then ended. These financial statements are the
responsibility of the Company 's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ZoomLot
Corporation and Subsidiaries as of November 30, 2000, and the consolidated
results of their operations and their consolidated cash flows for the nine
months and eleven months then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Los Angeles, California
January 13, 2001
8
10
ZOOMLOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 2000
ASSETS
Cash and cash equivalents $ 211,531
Accounts receivable 40,309
Contracts held for sale 386,045
-----------
Total current assets 637,885
Property and equipment, net 617,067
Other assets 25,499
-----------
$ 1,280,451
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Accrued expenses and other liabilities $ 441,213
Note payable to affiliate 4,739,999
-----------
Total current liabilities 5,181,212
-----------
Commitments --
Stockholders' deficit:
Preferred stock; $.001 par value, 1,000,000 shares authorized,
no shares issued or outstanding --
Common stock; $.001 par value, 1,000,000 shares authorized,
100,000 shares issued and outstanding 100
Additional paid-in capital 9,900
Accumulated deficit (3,910,761)
-----------
Total stockholders' deficit (3,900,761)
-----------
$ 1,280,451
===========
The accompanying notes are an integral part of this statement.
9
11
ZOOMLOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months Eleven months
ended ended
November 30, November 30,
2000 2000
----------- -----------
Revenues:
Contract placement fees $ 114,184 $ 114,184
Other 1,060 1,060
----------- -----------
115,244 115,244
----------- -----------
Operating expenses:
Selling and marketing 1,185,531 1,207,446
General and administrative 2,327,110 2,541,381
Depreciation and amortization 52,082 88,292
----------- -----------
Total operating expenses 3,564,723 3,837,119
----------- -----------
Loss from operations (3,449,479) (3,721,875)
Interest expense 186,691 188,886
----------- -----------
Net loss $(3,636,170) $(3,910,761)
=========== ===========
The accompanying notes are an integral part of these statements.
10
12
ZOOMLOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Common Stock Total
---------------------------- Additional Accumulated Stockholders'
Shares Amount Paid-in Capital Deficit Deficit
----------- ----------- ----------- ----------- -----------
Nine months ended November 30, 2000
Balances at March 1, 2000 -- $ -- $ -- $ (274,591) $ (274,591)
Issuance of common stock 100,000 100 9,900 -- 10,000
Net loss for the period -- -- -- (3,636,170) (3,636,170)
----------- ----------- ----------- ----------- -----------
Balances at November 30, 2000 100,000 $ 100 $ 9,900 $(3,910,761) $(3,900,761)
=========== =========== =========== =========== ===========
Eleven months ended November 30, 2000
Balances at January 1, 2000 -- $ -- $ -- $ -- $ --
Issuance of common stock 100,000 100 9,900 -- 10,000
Net loss for the period -- -- -- (3,910,761) (3,910,761)
----------- ----------- ----------- ----------- -----------
Balances at November 30, 2000 100,000 $ 100 $ 9,900 $(3,910,761) $(3,900,761)
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
11
13
ZOOMLOT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months Eleven months
ended ended
November 30, November 30,
2000 2000
----------- -----------
Cash flows from operating activities:
Net loss $(3,636,170) $(3,910,761)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 52,082 88,292
Increase in accounts receivable (40,309) (40,309)
Increase in contracts held for sale (386,045) (386,045)
Increase in other assets (25,499) (25,499)
Increase in accrued expenses and other liabilities 441,213 441,213
----------- -----------
Net cash provided by operating activities (3,594,728) (3,833,109)
----------- -----------
Cash flows from investing activities:
Expenses paid by an affiliate in exchange for
note payable 4,465,408 4,739,999
Purchase of property and equipment (669,149) (705,359)
----------- -----------
Net cash provided by investing activities 3,796,259 4,034,640
Cash flows from financing activities:
Issuance of common stock 10,000 10,000
----------- -----------
Net increase in cash and cash equivalents 211,531 211,531
Cash and cash equivalents at beginning of period -- --
----------- -----------
Cash and cash equivalents at end of period $ 211,531 $ 211,531
=========== ===========
The accompanying notes are an integral part of these statements.
12
14
ZOOMLOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2000
NOTE A - ORGANIZATION, PURPOSE AND ACQUISITION
ZoomLot Corporation and subsidiaries (the "Company") was formed in May 2000
for the purpose of acquiring the internet-based operations of Cygnet Dealer
Finance, Inc. ("CDF"), an affiliated company. The Company acquired these
operations from CDF on July 1, 2000. Prior to that date, the Company, which
commenced operations in January 2000, was operated as a division of CDF.
These consolidated financial statements reflect the results of operations,
financial position, changes in stockholders' deficit and cash flows of the
Company as if the Company were a separate entity operating the acquired
assets for all periods presented. The consolidated financial statements have
been prepared using the historical basis in the assets and liabilities and
historical results of operations of the Company.
The Company and CDF share common management, certain personnel, and
facilities. In connection with the acquisition of the internet-based
business from CDF, the Company and CDF entered into a management services
contract whereby the Company will provide management services and be
responsible for substantially all operating expenses of CDF in exchange for
a monthly management fee equivalent to .625% (7.5% annually) of managed
assets. The Company considers this management fee as reimbursement of
general and administrative operating expenses. Therefore, such amounts are
treated as a reduction to general and administrative expenses in the
accompanying consolidated statements of operations. For each of the nine
month and eleven month periods ended November 30, 2000, management fees
totaled $686,638. For the period from January 1, 2000 through June 30, 2000,
general corporate overhead related to the Company's corporate headquarters
and common support functions has been allocated to the Company, to the
extent such amounts are applicable to the Company. However, the costs of
these services charged to the Company are not necessarily indicative of the
costs that would have been incurred if the Company had performed these
functions as a stand-alone entity.
The Company provides a business-to-business, internet-based marketplace
primarily to independent or non-franchised used-car dealerships, financing
and insurance companies and other participants in the used-car industry in
the United States of America. The Company collects information related to
the sale of used cars and their related retail installment contracts (loans)
and compares these contracts and related credit information to the
underwriting criteria of the lenders that participate in the network.
13
15
ZOOMLOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk
Revenues from one customer accounted for approximately 86.0% of revenues for
the nine months ended November 30, 2000 and eleven months ended November 30,
2000. The Company's accounts receivable and contracts held for sale from
this customer totaled $34,125 and $343,253 at November 30, 2000 which
approximated 84.7% and 88.9% of total accounts receivable and contracts held
for sale at November 30, 2000, respectively.
A significant portion of the used car dealers who submit retail installment
contracts for aggregation are concentrated in Florida, Texas, South Dakota
and North Carolina. Consequently, an adverse change in the general economic
conditions in those states affecting the volume of used car sales could have
an adverse effect on the Company.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Principles of Consolidation
The consolidated financial statements include the financial statements of
ZoomLot Corporation and its wholly-owned subsidiaries. All significant
intercompany balances have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest-earning money market accounts.
14
16
ZOOMLOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Revenue Recognition
Contract placement fee revenue is generated principally from the
transmission of retail installment loan applications and the acquisition of
these contracts from used car dealers by various finance companies. Revenue
is recognized upon notification from the finance company that the contracts
have been purchased, which may take up to one month after the retail
installment loan application is transmitted.
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs totaled
$979,798 for the nine months and eleven months ended November 30, 2000.
Contracts Held for Sale
Under arrangements with two customers, the Company underwrites contracts to
the specifications of the customers and acquires retail installment
contracts that meet the requisite criteria directly from used car dealers.
The contracts are then sold to the customers. The customers are required to
repurchase all of the contracts the Company purchases on their behalf for
the cost of the contract plus the contract placement fee. Contracts held for
sale represent those contracts that have yet to be repurchased by the
customers as of November 30, 2000 and are recorded at cost.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to seven years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the shorter
of the lease term or the estimated useful lives of the related improvements.
The Company follows the provisions of Statement of Position No. 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which provides guidance regarding when software
developed or obtained for internal use should be capitalized. SOP 98-1
requires that certain costs incurred during the application development
stage be capitalized, while costs incurred during the preliminary project
stage and post-implementation/operation stage should be expensed as
incurred. Capitalized costs are amortized over the estimated lives of the
related applications, which lives range from 2 to 5 years.
15
17
ZOOMLOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
For the period prior to incorporation, income taxes on the divisional
operations were calculated as if the division was a stand alone corporation.
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
NOTE C - PROPERTY AND EQUIPMENT
A summary of property and equipment as of November 30, 2000 follows:
Computer and telecommunication equipment $199,432
Software development costs 406,358
Furniture and fixtures 98,468
Leasehold improvements 1,101
--------
705,359
Less accumulated depreciation and amortization (88,292)
--------
Property and equipment, net $617,067
========
16
18
ZOOMLOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2000
NOTE C - PROPERTY AND EQUIPMENT - Continued
Depreciation and amortization expense relating to property and equipment
totaled $52,082 and $88,292 for the nine months and eleven months ended
November 30, 2000, respectively.
NOTE D - NOTE PAYABLE TO AFFILIATE
Note payable to affiliate represents advances from the Company's affiliate,
Cygnet Capital Corporation, to fund the working capital requirements of the
Company. Interest is payable monthly and the entire note is due on July 1,
2001.
The note bears interest at 10% per annum. Interest expense totaled $186,691
and $188,886 for the nine months and eleven months ended November 30, 2000,
respectively. These amounts were accrued as of November 30, 2000 and are
included in the note payable to affiliate. (See Note H - Subsequent Event).
NOTE E - INCOME TAXES
There is no current income tax provision or benefit for the nine months and
eleven months ended November 30, 2000, respectively as the Company has
generated net operating losses for income tax purposes for which there is no
carryback potential. There is no deferred provision or benefit for income
taxes recorded as the Company is in a net deferred tax asset position for
which a full valuation allowance has been recorded due to uncertainty of
realization.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
November 30, 2000 are presented below:
Deferred tax assets:
Net operating loss carryforwards $ 835,000
Less valuation allowance (783,196)
-------------
Net deferred tax assets 51,804
Deferred tax liabilities:
Property and equipment (51,804)
--------------
Total gross deferred tax liabilities (51,804)
--------------
Net deferred tax asset (liability) $ --
==============
17
19
ZOOMLOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2000
NOTE E - INCOME TAXES - Continued
The Company has net operating loss carryforwards of approximately $2.0
million available at November 30, 2000. These net operating loss
carryforwards begin to expire in 2015. As a consequence of the Company's
ownership change as defined in Section 382 of the Internal Revenue Code, the
Company's net operating loss carryforwards generated prior to the ownership
change may be subject to annual limitations which could reduce or defer the
utilization of these losses. (See Note H).
NOTE F - LEASE COMMITMENTS
The Company leases certain office space and equipment from unrelated
entities under various operating leases which expire through October 2001.
The leases require monthly rental payments aggregating approximately
$23,000. Rent expense totaled $156,186 and $179,391 for the nine months and
eleven months ended November 30, 2000, respectively.
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of
November 30, 2000 follows:
Year ending
November 30, Amount
------------ --------
2001 $287,035
2002 61,681
2003 43,266
--------
$391,982
========
NOTE G - RETIREMENT PLAN
Employees of the Company are eligible to participate in a qualified 401(k)
retirement plan (defined contribution plan) subject to the eligibility
criteria of the plan. The plan covers substantially all employees having no
less than three months of service, have attained the age of 21, and work at
least 1,000 hours per year. Participants may voluntarily contribute to the
plan up to the maximum limits established by Internal Revenue Service
regulations. The Company will match 25% of the first 6% of participants'
contributions. Participants are immediately vested in the amount of their
direct contributions and vest over a five-year period, as defined by the
plan, with respect to the Company's contribution. Pension expense for the
nine months and the eleven months ended November 30, 2000, was $10,300 and
$13,000, respectively.
18
20
ZOOMLOT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
November 30, 2000
NOTE H - SUBSEQUENT EVENT
On December 15, 2000, the shareholders of the Company entered into a Merger
Agreement and Plan of Organization resulting in the sale of 100% of the
common stock of the Company to National Auto Credit, Inc. In connection
therewith, National Auto Credit, Inc. provided $7.0 million in additional
stockholders' equity to the Company, a portion of which was used to repay
the note payable to affiliate. In addition, National Auto Credit, Inc. is
required to contribute an additional $4.5 million in working capital to the
Company as may be necessary from time to time through December 31, 2003.
19
21
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
As discussed elsewhere herein, on December 15, 2000, National Auto
Credit, Inc., ("NAC" or the "Company"), entered into a Merger Agreement and Plan
of Reorganization to acquire ZoomLot Corporation, together with its subsidiaries
(collectively, "ZoomLot"). The transaction is intended to be a tax-free
reorganization for federal income tax purposes with ZoomLot Corporation merging
with and into ZLT Acquisition Corp. ("ZLT"), a Delaware corporation and a wholly
owned subsidiary of NAC, with ZLT continuing as the surviving entity of the
merger. As part of the merger, ZLT changed its name to "ZoomLot Corporation"
(hereinafter the survivor is referred to as "ZLT/ZoomLot").
Under the terms of the Merger Agreement, NAC has agreed to issue to the
former ZoomLot shareholders 270,953 shares of its Series B preferred stock and
729,047 shares of its Series C redeemable preferred stock, each at $.50 par
value. Subject to certain conditions, the shares of the Series B preferred stock
will be convertible into, or will automatically convert into, shares of NAC's
common stock at the ratio (subject to adjustment for stock splits and other
anti-dilutive events) of 10 shares of Common Stock for each share of preferred
stock.
The shares of the Series C preferred stock are redeemable, at the
option of the holders or the option of NAC, for a price per share equal to the
greater of $15 or 10 times (subject to adjustment for stock splits and other
anti-dilutive events) the market price of NAC's common stock at the time of
redemption. The holders of the Series C preferred stock may redeem the shares
beginning on September 30, 2003, unless a "valuation event", as described
elsewhere herein, occurs earlier, in which case the shares of the Series C
preferred stock become redeemable upon the later of the occurrence of the
"valuation event" or January 1, 2003. Additionally, of the 729,047 shares of
Series C preferred stock issued, 666,667 shares are subject to forfeiture, as
described elsewhere herein. Such 666,667 shares of Series C preferred stock
would not become redeemable until they first are no longer subject to
forfeiture. The remaining 62,380 shares of Series C preferred stock are not
subject to forfeiture.
ZoomLot provides business-to-business e-commerce services to
independent or non-franchised used-car dealerships, financing and insurance
companies and other participants in the used-car industry. ZoomLot's services
are designed to enable such dealerships and lenders and insurance companies to
identify each other for the purpose of providing the used-car dealer's customers
with financing and insurance.
The acquisition was accounted for using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16"). Under APB 16, the tangible assets,
identifiable intangible assets and liabilities of the acquired company are
recorded at their fair value, and the excess of the purchase price over the fair
value of the net (of liabilities) tangible and identifiable intangible assets is
recorded as goodwill. Additionally, under the purchase method of accounting the
operating results of the
20
22
acquired company are included in the consolidated results of operations from the
date of the acquisition.
In recording the acquisition of ZoomLot, NAC has:
- recorded the 270,953 shares of Series B preferred
stock issued at a value of $5.34 per share (an
aggregate of $1,447,000), reflecting the average
price of NAC's common stock for the five days
subsequent to the execution of the Merger Agreement
of $.534 and the conversion ratio of one share of
Series B preferred stock for 10 shares of NAC's
common stock;
- recorded the 62,380 shares of Series C preferred
stock issued and not subject to forfeiture at a value
of $9.89 per share (an aggregate of $617,000),
representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to
be payable on September 30, 2003. Between the
acquisition date and September 30, 2003 the carrying
amount of the Series C preferred stock, which is
classified as redeemable preferred stock on NAC's
consolidated balance sheet, will be accreted to the
redemption value of $15 per share. Additionally, the
amount of the periodic accretion, which will reduce
net income in computing earnings per share, will be
adjusted if the redemption price becomes greater than
$15 per share as the result of an increase in the
price of NAC's common stock to over $1.50 per share,
and the rate of accretion will be accelerated if a
"valuation event" occurs, making the Series C
preferred stock redeemable earlier than September 30,
2003.
- recorded the 666,667 shares of Series C preferred
stock issued but subject to forfeiture at a value of
$9.53 per share (an aggregate of $6,353,000),
representing the present value at an annual discount
rate of 15% of the $15 per share redemption value to
be payable on December 31, 2003. However, because the
shares are subject to forfeiture unless certain
conditions are met or events occur, they represent
"contingent consideration" under APB 16. As a result,
although the shares have legally been issued, their
value has not been included in the determination of
goodwill, and instead is reflected as a reduction of
the carrying amount of redeemable preferred stock
("redeemable preferred stock subject to forfeiture").
The value of any shares of Series C preferred stock
that become no longer subject to forfeiture will be
added to goodwill, on the basis of the present value
of their redemption value at that time, at such time
as the event or condition eliminating the forfeiture
occurs.
- determined that the fair value of ZoomLot's tangible
assets and liabilities approximated their historical
recorded amounts, and accordingly has recorded the
entire excess of the purchase price over ZoomLot's
historical stockholders' deficit as goodwill.
21
23
The components and allocation of the purchase price were as follows (in
thousands):
Components of purchase price:
Series B preferred stock $ 1,447
Series C preferred stock:
Shares not subject to forfeiture 617
Shares subject to forfeiture 6,353
Contingent purchase price:
Series C shares subject to forfeiture (6,353)
Transaction costs 612
--------------
Total purchase price $ 2,676
==============
Allocation of purchase price:
Historical net deficit of ZoomLot $ (3,901)
Goodwill 6,577
--------------
Total $ 2,676
==============
The accompanying pro forma condensed consolidated financial statements
are presented to illustrate the effects of the transaction described above. The
pro forma condensed consolidated balance sheet is based on the Company's
historical consolidated balance sheet as of October 31, 2000 and the
consolidated balance sheet of ZoomLot as of November 30, 2000, and assumes that
the transaction took place on October 31, 2000. The pro forma condensed
consolidated statement of operations for the nine months ended October 31, 2000
is based on the consolidated statement of operations for NAC for the nine months
ended October 31, 2000 and the consolidated statement of operations for ZoomLot
for the nine months ended November 30, 2000, and assumes that the transaction
took place on February 1, 2000. ZoomLot began operations in January 2000, and
accordingly a pro forma condensed consolidated statement of operations for NAC's
year ended January 31, 2000 has not been presented.
In accordance with the rules of the Securities and Exchange Commission,
the pro forma condensed consolidated statement of operations includes only the
results of continuing operations.
The accompanying pro forma condensed consolidated financial statements
does not purport to be indicative of the operating results or financial position
that would have been attained had the transaction been consummated at the dates
indicated, nor of the future operating results or financial position of the
Company following the acquisition. The pro forma combined condensed financial
statements should be read in conjunction with the unaudited financial
information included in the Company's Form 10-Q for the period ended October 31,
2000 and the audited financial statements of ZoomLot for the period ended
November 30, 2000 included herein.
22
24
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 31, 2000
(IN THOUSANDS)
(UNAUDITED)
NAC ZoomLot Pro Forma
Oct. 31, 2000 Nov. 30, 2000 Adjustments Pro Forma
-------------- --------------- ------------- ---------------
ASSETS
Cash and cash equivalents $ 74,599 $ 212 $ (4,740) (2) $ 70,071
Marketable securities 8,295 8,295
Installment loans, net - -
Investment in AFC 9,985 9,985
Property and equipment, net 895 617 1,512
Assets held for sale 6,138 6,138
Income taxes refundable 3,663 3,663
Other assets 1,217 451 1,668
Goodwill $ 6,577 (1) 6,577
-------------- --------------- ---------------
TOTAL ASSETS $ 104,792 $ 1,280 $ 107,909
============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Self-insurance claims $ 1,678 $ 1,678
Accrued income taxes 2,298 2,298
Other liabilities 12,774 $ 441 $ 612 (1) 13,827
Note payable to affiliate 4,740 (4,740) (2) -
-------------- --------------- ---------------
16,750 5,181 17,803
REDEEMABLE PREFERRED STOCK 617 (1) 617
STOCKHOLDERS' EQUITY
Preferred stock - 135 (1) 135
Common stock 1,836 1,836
Additional paid-in capital 173,073 1,312 (1) 174,385
Retained deficit (79,972) (79,972)
Accumulated other comprehensive income (57) (57)
Treasury stock (6,838) (6,838)
Net assets of ZoomLot (3,901) $3,901 (1) -
---------------
-------------- ---------------
88,042 (3,901) 89,489
-------------- --------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 104,792 $ 1,280 $ 107,909
============== =============== ===============
See Notes to Condensed Consolidated Pro Forma Financial Statements.
23
25
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NAC ZoomLot
Nine Months Ended Nine Months Ended Pro Forma
Oct. 31, 2000 Nov. 30, 2000 Adjustments Pro Forma
----------------- ----------------- ------------- ------------
REVENUE
Interest income from loans $ 404 $ 404
Interest income from investment 3,518 3,518
Income from AFC investment 233 233
Other income 123 $ 115 238
----------------- ----------------- ------------
Total 4,278 115 4,393
COSTS AND EXPENSES
Provision for credit losses (1,183) (1,183)
Loss on sale of loans 1,709 1,709
Operating 1,577 3,564 5,141
General and administrative 3,904 3,904
Litigation and non-recurring charges 6,290 6,290
Gain on sale of property (2,868) (2,868)
Write-down of assets held for sale 874 874
Write-off of option 500 500
Interest expense 187 $ (56)(3) 131
Amortization of goodwill 1,644 (4) 1,644
----------------- ----------------- ------------
Total 10,803 3,751 16,142
----------------- ----------------- ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (6,525) (3,636) (11,749)
Benefit for income taxes - - -
----------------- ----------------- ------------
LOSS FROM CONTINUING OPERATIONS (6,525) (3,636) (11,749)
Accretion of discount on redeemable
preferred stock $ 69 (5) 69
----------------- ----------------- ------------
LOSS FROM CONTINUING OPERATIONS
APPLICABLE TO COMMON STOCK $ (6,525) $ (3,636) $ (11,818)
================= ================= ============
LOSS FROM CONTINUING OPERATIONS PER SHARE
Basic and diluted $ (.20) $ (.36)
================= ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000's)
Basic and diluted 32,623 32,623
================= ============
See Notes to Pro Forma Condensed Consolidated Financial Statements
24
26
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - BASIS OF PRESENTATION
Reference is made to the "Introduction" at page 20.
Note B - PRO FORMA ADJUSTMENTS
The pro forma adjustments to the condensed consolidated balance sheet
are as follows:
(1) To reflect the issuance of the Series B and Series C preferred
stock to acquire ZoomLot, and the allocation of the purchase price
under the purchase method of accounting. The components and
allocation of the purchase price are as follows (in thousands):
Components of purchase price:
Series B preferred stock $ 1,447
Series C preferred stock:
Shares not subject to forfeiture 617
Shares subject to forfeiture 6,353
Contingent purchase price:
Series C shares subject to forfeiture (6,353)
Transaction costs 612
----------------
Total purchase price $ 2,676
================
Allocation of purchase price:
Historical net deficit of ZoomLot $ (3,901)
Goodwill 6,577
----------------
Total $ 2,676
================
25
27
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note B - PRO FORMA ADJUSTMENTS (Cont.)
The balance of redeemable preferred stock reflected on the pro
forma condensed consolidated balance sheet after the pro forma
adjustments is comprised of the following:
Series C preferred stock - 62,380 $ 617
shares issued and not subject to forfeiture
Series C preferred stock - 666,667 6,353
shares issued but subject to forfeiture
Redeemable preferred stock subject to forfeiture (6,353)
-------
Redeemable preferred stock $ 617
=======
(2) To reflect ZoomLot's elimination of its note payable to an
affiliate with funds advanced to it by NAC.
The pro forma adjustments to the condensed consolidated statement
of operations are as follows:
(3) To eliminate the interest expense relating to a ZoomLot note
payable to affiliate that was repaid with the proceeds of an
advance from NAC.
(4) To reflect the amortization of the goodwill recorded in the
acquisition. The goodwill applicable to NAC's acquisition of
ZoomLot will be amortized on a straight-line basis over three
years.
(5) To record the accretion of the discount recorded in recording
the issuance of the Series C preferred stock not subject to
forfeiture on the basis of the present value of its September
30, 2003 redemption value.
26
28
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.
Dated: March 5, 2001 NATIONAL AUTO CREDIT, INC.
(Registrant)
By:/s/ James J. McNamara
-----------------------------
James J. McNamara
Chief Executive Officer
27