NowAuto Explains Fiscal 2007 Loss

TEMPE, Ariz. — NowAuto Group reported lower revenue for the year; however officials attributed the downturn to stricter underwriting criteria that were implemented to strengthen business in the long run.

Revenue for the company's fiscal 2007 came in at $6,944,021, compared with $11,683,865, a decrease of about 40 percent from prior year's level. Officials said this was due primarily to the previously announced closure of an unprofitable vehicle auction business and lower retail sales caused by stricter underwriting and credit criteria initiated during the fiscal year.

Despite the lower revenues, executives said their gross margin increased to 39.4 percent for the fiscal year from 31.6 percent thanks to higher finance income and higher-margin vehicle sales.

Now Auto reported a net loss of $0.23 per share for the year, compared with a loss of $0.05 last year. Officials said the net loss was caused primarily by two factors: charging off about $1.5 million of bad debt expense; and incurring a ten-fold increase in interest expense over the prior year as a result of a full-year operating under a new credit facility initiated in March 2006.

Before interest expense and charge-offs, the company said it experienced a slight profit.

Continuing on, the NowAuto said current assets increased about 27 percent, while NowAuto achieved an improved current ratio, both as a result of increased finance contracts along with a 22-percent reduction in current liabilities.

"Fiscal 2007 was a demanding year for NowAuto as we made a hard, but ultimately necessary decision to institute stricter underwriting and contract management criteria and practices, thereby causing the company to purge accounts that did not meet the new, stricter criteria," explained Scott Miller, chief executive officer. While such a move significantly affected profitability, it created a more stable portfolio for future quarters."

He went on to say, "We also made significant strides in fiscal 2007. Starting in the fourth quarter of fiscal 2007, NowAuto switched its retail emphasis from sales to capital leases, a change that we believe will have positive impact in the future."

Miller pointed out that leasing has two advantages: Cash flow is improved because sales tax is due only on monies received verses the full amount due immediately, and the vehicle is titled differently making it a little easier should the company need to retake possession of the vehicle.

Faith Forbis, chief financial officer, explained, "Accounting for leases is different though the results are similar. Instead of the principle balance of the note being reflected as an asset, the balance in notes receivable is the total of all remaining payments.

"This is offset by a deferred revenue liability account, which represents the interest that will be recognized over the life of the lease. The two netted together is the approximate equivalent of a principle balance," she continued.

Miller added, "While we are excited about the move to capital leases, we are pleased more by the management we now have at the store level. We now have, for perhaps the first time, highly experienced and trained management at each of our stores.

"Since so much of our success depends upon what happens at the store level, it is vitally important that NowAuto have store managers experienced and trained not only in sales and marketing, but in underwriting criteria as well. This is a challenging combination to develop, but we believe we now have such management in place," he stated.

"Another integral aspect of our business is the dollar amount NowAuto typically finances its customers," said Theodore Valenzuela, chief operating officer. "For that reason, we have made a concerted effort beginning in fiscal 2008 to reduce the average retail price of our vehicles.

"Our target for fiscal 2008 is an average price in fiscal 2008 that is 15 percent lower than in prior years, thereby reducing the customers' contract burden and our per-contract exposure," he said. "The key of course is to accomplish this without compromising the quality of the vehicles we offer. That is why we have already begun to substantially upgrade our vehicle reconditioning operations."

"As difficult as fiscal 2007 was, it was also a year of improvement in all aspects of our business," said Miller. "Going forward, we at NowAuto believe the combination of experienced and trained management along with better customer pricing will improve sales. Our new emphasis on capital leases will also benefit our customers as well as NowAuto.

"Enhanced reconditioning operations will mean continuing to provide reliable transportation to our customers. Improved quantitative criteria combined with more proactive contract management processes should, combined with all these other measures, result in a more stable and growing portfolio and thereby more positive financial results," he concluded.

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