David Huber, the new CEO of National Auto Credit Inc., has signed up for a tough job: Get the troubled subprime lender cleaned up and dressed for sale.
Huber, 41, has been CEO since November. He was brought in from Goshen Fidelity, a privately held subprime auto lender in Bloomington, Ill., where he was CEO.
He knows that clearing National's decks will take some doing.
'About all I have done since I've been here is massive cost-cutting,' Huber said in a telephone interview. 'But if you were going to sell your house, you would want to make sure first that your house was in order, and that is what we are in the process of doing.'
One factor in National's favor is its low debt. It paid off its outstanding debts in November 1998 with proceeds from a $34.9 million tax refund.
But the company has had no outside lender since November 1998. It is living off a $53.6 million pile of cash it had on hand as of Nov. 30, 1999, plus whatever it collects from its auto loans.
National Auto Credit's troubles bubbled into the open two years ago. Its sale would turn the last page on a chapter that made the rest of the topsy-turvy subprime sector look tame.
On Jan. 12, 1998, National's independent auditors, Deloitte & Touche LLP, informed the company that current and former employees had complained about 'potentially improper activities that may affect the company's financial accounting records.'
(There was no love lost between the company and some employees. In 1997, the company paid $5.6 million to settle an employee lawsuit filed five years earlier seeking back pay for overtime.)
Four days after its warning, Deloitte & Touche resigned the account and issued a damning statement: The auditors said they 'could no longer rely on management's representations.'
At the eye of the storm is Sam Frankino, founder, chairman and majority shareholder. Even though he is 75 and officially retired, Frankino still owns 55 percent of the company he founded in 1969. And Frankino nominated the ruling majority of a new board of directors, including Huber.
Frankino declined to be interviewed for this article, but the company's financial details are on file with the Securities and Exchange Commission. Those records portray a company bleeding red ink and mired in lawsuits. National, Frankino, and other former company officers are defendants in shareholder lawsuits accusing the company of misleading investors about the company's financial health. And the company is under investigation by the FBI, the company discloses in the SEC documents.
Indeed, Huber's appointment capped a court battle in which Frankino regained control of the board of directors.
Frankino 'temporarily vacated' the chairman's job for five weeks in early 1998. He briefly resumed his position, then officially retired in March 1998, according to company records.
Last year the board of directors hired Allen Rice, an executive at GE Capital Services Inc., as president. Rice resigned at the end of 1999, but has a consulting agreement through July 2000.
Frankino sued National Auto Credit last year to force the company to hold an annual shareholders meeting to elect directors and to allow him to inspect the books. The company agreed to hold the meeting in September 1999, and Frankino successfully backed seven candidates, expanding the board from six members to 13 and giving himself control over a majority of seats.
His nominees took their posts in November, and on Dec. 9, 1999, the Delaware Supreme Court shot down a request from the lame duck management that would have prevented the new board from taking over.
While the court battle lasted, the company took public potshots at Frankino. A press release in November 1999 said Frankino wanted to retake operational control of the company 'to inhibit investigations into alleged financial improprieties that occurred while Mr. Frankino was chairman.'
The company that Frankino again dominates has fallen a long way from its heyday. The stock, which traded above $17 per share on the New York Stock Exchange in 1995, is quoted at around 68 cents now on the over-the-counter market. It was delisted by the Big Board in November 1998.
According to its SEC filing, the company had 70,000 contracts outstanding and 3,100 dealers enrolled Jan. 31, 1997. As of Oct. 31, 1999, it says, it had 15,100 contracts outstanding and 600 dealers enrolled.
National also has restated three years of financial results, citing higher allowances for credit losses and other factors. For instance, a reported profit of $19.3 million for the fiscal year ended Jan. 31, 1997, was restated to a profit of $7.2 million.
Over the last three years, higher than expected losses have forced several rivals to restate their earnings, sometimes from a profit to a loss.
For the nine months ending Oct. 31, 1999, the company reported a net loss of $10 million compared with a year-earlier loss of $11.3 million. Revenue fell 59.5 percent to $5.4 million.
Amid its other problems last year, National also fought off a hostile takeover bid by shareholder Ernest Garcia, chairman of Ugly Duckling Corp., the used-car chain. That cost National Auto Credit about $4.3 million to buy out Garcia's shares.
But all of that happened before Huber took over. 'At this point,' he says, 'all we are trying to do is maximize shareholder value.'