SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
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 0-27944
PRIDE AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0157860
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
Pride House, Watford Metro Centre, Tolpits Lane, Watford, Hertfordshire,
WD1 8SB England
(Address of principal executive offices)
(800) 698-6590
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ].
The aggregate market value of the voting stock on February 12, 1997 (consisting
of Common Stock, $.001 par value per share) held by non-affiliates was
approximately $2,443,632.80, based upon the average bid and asked prices for
such Common Stock on said date ($1.89), as reported by a market maker. The
issuer's and its subsidiaries had on a consolidated basis, revenues of
$12,884,018 for its fiscal year ended November 30, 1996. On February 18, 1997,
there were 2,792,500 shares of Registrant's Common Stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
Pride Automotive Group, Inc., a Delaware corporation (the "Company") was
formed by Pride, Inc. ("Pride"), in March 1995 for the purpose of acquiring all
of the outstanding shares of common stock of Pride Management Services, Plc., an
English corporation ("PMS"), which has been accounted for as a "Reorganization."
Prior to the Reorganization, PMS was a wholly owned subsidiary of Pride.
Pride was incorporated as L.H.M. Corp. in the State of Delaware on May 10,
1988, as a "blank check" company for the purpose of seeking potential business
ventures through acquisition or merger. In April 1990, L.H.M. Corp. entered into
an Agreement and Plan of Reorganization with International Sportsfest, Inc.
("ISI"), a company formed to engage in establish sports expositions in sports
products such as clothing and sports related equipment. At such time L.H.M.
Corp. changed its name to ISI. ISI never engaged in any business operations. In
November 1992, the Company effected a 1 for 200 reverse split of its issued and
outstanding shares of Common Stock. In January 1994, ISI entered into an
Agreement and Plan of Reorganization with Pride Management Services, Plc.
("PMS"), an English corporation, whereby PMS became a wholly owned subsidiary of
ISI and ISI changed its name to Pride, Inc.
Pride also owns 100% of the capital stock of Watford Investments (Pty)
Limited ("WI"), a South African company, which was formed in March 1995. WI was
formed for the purpose of obtaining a 24% interest in Masonic Motors, an
automobile dealership in South Africa, which WI subsequently sold in September
1995. WI is an import and export company, which had minimal revenues from
operations in fiscal 1996 and no revenues from operations in fiscal 1995.
Pursuant to the terms and conditions of the Reorganization in March 1995,
between the Company, PMS and Pride, the Company issued 1,500,000 shares of its
Common Stock to Pride in exchange for all of the issued and outstanding shares
of PMS. In connection with the Reorganization and formation of the Company, PMS
became a wholly owned subsidiary of the Company which, prior to the Company's
initial public offering, was approximately 72.8% owned by Pride. PMS is a
holding company which has six wholly owned subsidiaries which engage in the
Company's operations. PMS's wholly-owned subsidiaries include; Pride Vehicle
Contracts Limited, Baker Vehicle Contracts Limited, Pride Vehicle Contracts (UK)
Limited, Pride Leasing Limited, Pride Vehicle Management Limited and Pride
Vehicle Deliveries Limited. These companies operate as one unit, with the same
management and facilities. Unless the context otherwise requires, all references
to the "Company" are to its wholly owned subsidiary, PMS and PMS's six wholly
owned subsidiaries. See "--Subsidiaries."
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Public Offering of Pride Automotive Group, Inc.
In April 1996, the Company completed an underwritten initial public
offering of its securities. The securities were registered with the Securities
and Exchange Commission ("SEC") pursuant to a registration statement on Form
SB-2. The initial public offering was declared effective by the SEC on April 24,
1996. In the offering, the Company sold 950,000 shares of its common stock to
the public at a price of $5.00 per share and 2,000,000 redeemable common stock
purchase warrants at a price of $.10 per warrant. The warrants are exercisable
at a price of $5.75 per share, subject to adjustment, beginning April 24, 1997
and expiring April 23, 2001. In connection therewith, the Company also granted
to the underwriter of the offering a warrant to purchase 95,000 shares of the
Company's common stock at a purchase price of $5.00 and 200,000 redeemable
common stock purchase warrants, each warrant exercisable to purchase one share
of common stock at a purchase price of $7.50 per share. Other than with respect
to the exercise price, the terms of the warrants granted to the underwriter are
identical to those described above. the Company's securities are currently
traded on the Nasdaq SmallCap Stock Exchange and the Boston Stock Exchange, Inc.
Acquisition of AC Car Group Limited
In November 1996, the Company, through its subsidiary AC Car Group
Limited, acquired all of the assets of AC Cars Limited ("AC Cars") and Autokraft
Limited ("Autokraft"), two companies incorporated under the laws of England and
Wales, respectively. AC Cars and Autokraft are specialty automobile
manufacturers that had been in administrative receivership since March 1996.
Business of AC Car Group Limited
AC Car Group Limited was incorporated in England and Wales on June 28,
1996, as Paradehaven Limited. The name was changed to AC Car Group Limited on
August 30, 1996.
AC Cars was formed in 1901 as Autocar & Accessories Limited and has
been in continuous operations ever since. AC Cars is Britain's oldest
independent manufacturer. Today, Autokraft and AC Cars manufacture and sell two
automobiles, the AC Cobra and the AC Ace.
The AC Cobra is a high-powered, hand built sports car with an aluminum
body. The automobile is manufactured today using the same traditional coach
building methods and original Cobra tooling which were used on the original
manufactured Cobras in the 1960s. Historically, in 1963 the AC Cobra caused a
sensation by racing along the MI motorway (England's first motorway) at 196
miles per hour, and by 1964, the 427 AC Cobra was listed in the Guinness Book of
Records as the fastest production car in the world. The AC Cobra sells for about
(pound)69,000 ($115,782).
In 1986, the AC Ace prototype was first displayed at the Birmingham
Motor show. The AC Ace was shown at the London Motor Show in the same year. In
1995, the AC Ace was shown to the North American public at the Detroit
Motorshow. When the AC Ace comes into production, it will sell for approximately
(pound)66,000 ($110,748). As of February 19, 1997, AC has produced approximately
fifty pre-production AC Aces. The AC Ace should go into its final production
stage in August 1997.
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Also in 1987, Ford Motor Company became a partner with Autokraft and AC
Cars. The AC Cobra is equipped with a Ford V8 engine. Currently, Ford Motor
Company owns the trademark to the name Cobra. However, Autokraft and AC Cars
used the name Cobra under a license arrangement with Ford Motor Company. When
they were placed in administrative receivership, the license arrangement with
Ford Motor Company was voided. After the Asset Acquisition, the Company
negotiated a licensing agreement with Ford Motor Company whereby the Company has
procured a three year license, commencing December 7, 1996, to continue to use
the name "Cobra" on its AC Cobra model.
Administrative Receivership
AC Cars has incurred losses in recent years as a result of design and
development costs incurred in bringing the AC Ace into production. Although most
of the development work is now complete and approximately fifty AC Aces have
been produced to date as pre-production vehicles, the expenses AC Cars and
Autokraft incurred in connection with the development of the Ace forced
Autokraft and AC Cars to seek additional capital investments so as to enable
them to both meet current production needs and increase future production
levels. Once it became clear to Autokraft and AC Cars' management that
additional funds were unlikely to be forthcoming in time to allow the businesses
to meet their financial obligations, coupled with their bankers indications that
they no longer had confidence in the current ownership, the Directors of the
businesses resolved to request their bankers to appoint Administrative
Receivers. Administrative receivers were appointed on March 7, 1996.
Development Projects and Enhancements
The Company, through AC, intends to continue to evaluate developing the
Cobra and the Ace's chassis to be compatible with other engines.
Marketing and Sales; License Arrangement
AC Cars has used very little, if any, print or other media advertising
with respect to the AC Ace. However, both the Cobra and the Ace have been the
subject of numerous magazine articles in automotive publications, and, as such,
have received extensive exposure.
As discussed above, AC Cars and Autokraft were using the name Cobra
under a license arrangement with Ford Motor Company. Although the arrangement
became void when the two companies were placed in receivership, the Company has
entered into a licensing arrangement with the Ford Motor Company whereby the
Company has procured a three year license to use the name "Cobra".
Whereas the Company is pleased that it has been able to procure a
licensing arrangement to continue to use the name "Cobra", the Company
anticipates that a significantly larger portion of its future marketing efforts
will concentrate on the venerable history and prestige associated with the name
"AC", which name the Company acquired outright as part of the Asset Acquisition.
The Company believes that the principal markets for sales of its
automobiles are the United States, Australia, Thailand, Germany and the United
Kingdom. The Company is in the process of negotiating
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distribution agreements in some of these important markets, including Australia
and the United Kingdom, while agreements and approvals in other key markets have
already been received. Although the Thailand distribution agreement became void
when AC Cars and Autokraft were placed in receivership, management of the
Company received verbal confirmation that the Thailand agreement will be
continued upon consummation of the Asset Acquisitions.
The AC Cobra is Type approved for sale in certain countries of the
European Economic Community ("EEC").
Trademarks
Acquired as part of the Asset Acquisitions was the rights to utilize
the "Ace" mark on sales of the Ace. The right to use the Cobra name was subject
to a license arrangement which was in place with Ford Motor Company, the owner
of the trademark just prior to the appointment of Receivers. As discussed above,
the Company has entered into a new license agreement with Ford Motor Company
whereby the Company has procured a three year license to use the name "Cobra".
Former management of Autokraft and AC Cars has advised the Company that it is
not aware of any actions attempting to invalidate or challenge its use of such
trademarks and that it has not received any notice or claims of infringement
regarding its trademarks.
Insurance
The Company and AC are in the process of purchasing products liability
insurance. However, there can be no assurance that such insurance will be
obtained, or that if obtained, that such insurance will be sufficient to cover
claims, if any, or that such insurance will continue to be available at
commercially reasonable terms. If the Company or AC are required to pay
uninsured claims, it would adversely affect the businesses of the Company and AC
and could cause a discontinuation of operations. The Company and AC do not carry
business interruption or key man insurance. See "Risk Factors."
Legal Proceedings
AC is not a party to any material litigation. Autokraft and AC Cars are
involved in legal proceedings, all of which are related to their being placed in
administrative receivership.
Properties
AC currently occupies premises on a four acre site at the Brooklands
Industrial Park in Surrey, England. The property comprises a factory, workshop,
showroom and office space. In all, the facility provides approximately 90,000
square feet of manufacturing area and 20,000 square feet of executive office
area. The Company has agreed to lease the premises currently occupied by AC for
a period of one year commencing December 1, 1996. The Company lease costs
approximately (pound)32,000 ($53,696) per month. AC has an option to purchase
the premises for the purchase price of (pound)5,200,000 ($8,725,600) during the
nine month period commencing December 1, 1996 and ending August 1, 1997.
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Employees
Autokraft and AC Cars together employed a total of 83 persons as of
March 7, 1996, the date the two companies were placed in receivership. The
Company retained approximately 31 of such employees upon completion of the Asset
Acquisition and has hired four additional employees to oversee the manufacturing
and marketing of the automobiles.
Business of Pride Management Services, Plc.
The Company engages in the business of leasing new automobiles to
businesses, servicing such automobiles during the lease term and remarketing the
automobiles upon the expiration of the lease. The Company's business strategy is
to (i) provide personal and attentive service to its clientele, (ii) lease
primarily to high-quality credit applicants in order to continue to build a
lease portfolio with low delinquency and credit loss rates, (iii) finance its
lease portfolio with competitive credit terms and (iv) manage its residual risk
relating to the Company's resale of automobiles after the expiration of the
lease term. The leasing, financing and servicing of the vehicles is described as
a "contract hire."
The Company purchases each automobile pursuant to the specifications of
its clients, finances the purchase and pays for all the maintenance and repairs
on the vehicle during the term of lease. Typically, the Company pays off the
purchase price of the vehicles during the term of the lease and then resells the
automobile at the end of the lease term.
Acquisitions
The Company has expanded its operations in the past several years
through acquisition. In May 1990, the Company formed Baker Vehicle Contracts
Limited ("Baker") to acquire certain assets, including the right to the name and
contracts of Baker Hire Limited, an English company. At the time of its
acquisition, Baker was a division of W.H. Baker Limited, which company had filed
for bankruptcy protection. Baker's vehicle leasing is primarily in Wales and the
southwest region of England. In December 1990, PMS was contracted to run the
business of County Contract Hire Limited ("County"), which at that time
comprised approximately 3,500 leased vehicles. In February 1992, the Company
purchased County from Berisford International Plc., an English public company,
pursuant to a stock purchase agreement, whereby PMS acquired all of the
outstanding shares of County and changed County's name to Pride Vehicle
Contracts (UK) Limited. In October 1994, the Company acquired certain assets of
Master Vehicle Contracts Limited ("Master"), an English company, pursuant to the
terms of an asset purchase agreement. The assets purchased included vehicles,
vehicle lease agreements and customer lists. At the time of the sale, Master was
in receivership, whereby the sale was entered into by PMS and the court
appointed receivers. In connection with this purchase, the Company acquired the
rights to use the name Master Vehicle Contracts Limited.
Industry Overview
Companies have a variety of financing alternatives available to them in
acquiring the use of a new automobile, either through the purchase or lease of
such vehicle. In financing the purchase of a vehicle
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there are various loan alternatives including, fully amortizing, balloon
payment, no money down, low down payment and business equity loans. In terms of
leasing vehicles, there are various options including, payment schedules, term,
maintenance and repurchase rights. The primary benefit of leasing over
purchasing is that leasing typically provides a consumer with the opportunity to
acquire the use of a new automobile at a lower monthly payment than financing
the purchase of such vehicle, usually without a significant initial cash outlay,
and enables the return of the automobile without any further liability at the
end of the lease term. Companies which provide employees with automobile
transportation typically lease such vehicles and expense the costs.
The increase in new vehicle prices in relation to annual median family
income has been a contributing factor in the growth in the leasing and used
automobile markets. This has provided the Company with a further opportunity for
revenue growth through the resale of its vehicles after the term of the lease or
in the event there are defaults of the leases.
Business Objectives
The Company's primary goal is to expand its leasing and fleet
management operations, increase and obtain better terms with respect to the
financing of the vehicles it leases and to increase the profitability of its
vehicle remarketing program. The Company's strategy for continued growth is to
(i) increase lease origination by (a) increased name recognition, (b)
acquisition of similar companies or their assets, (c) the development, expansion
and retention of existing clients, and (d) the expansion into new geographic
markets, (ii) further develop and market its fleet management services, (iii)
increase and improve the terms of its financing arrangements, (iv) further
develop and increase the profitability of its used automobile remarketing
operations, and (v) lease primarily to high quality credit applicants in order
to continue to build a lease portfolio with low delinquency and credit loss
rates.
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Subsidiaries
The following table lists all the wholly owned subsidiaries of PMS, the
date of their formation and business operations. These companies operate as one
unit in conducting the business affairs of the Company.
<TABLE>
<CAPTION>
Date of
Name Formation Business Operations
<S> <C> <C>
Pride Vehicle Contracts
Limited 12/23/86 Conducts all administrative functions for the Company,
including paying salaries and all operational expenses of
the Company.
Baker Vehicle Contracts Limited 02/22/89 Vehicle leasing, primarily the business operations of Baker
Hire Contracts Limited, acquired in May 1990, which
operations are primarily in Wales and the south west region
of England.
Pride Vehicle Contracts 09/28/88 Vehicle leasing, acquired County Contract Hire Limited
(UK) Limited Hire Limited and Master Vehicle Contracts Limited in
February 1992 and March 1994, respectively.
Pride Leasing Limited 02/22/89 Owns property and a building in Croydon,
England, which is leased to an unaffiliated company.
Pride Vehicle Management 02/14/90 Operates the Company's fleet management services.
Limited
Pride Vehicle Deliveries 06/14/90 Provides vehicle distribution and collection services for
Limited all the Company's leasing operations.
</TABLE>
Leasing, Maintenance and Resale
The Company purchases each vehicle pursuant to its client's
specifications; finances its purchase and pays for all the maintenance on the
vehicle during the term of the lease. The Company usually finances the purchase
of each vehicle to correspond with the term of the lease, such that upon the
completion of the lease term the automobiles are fully paid. As of February 25,
1997, the Company had approximately 1,420 vehicles under lease.
The term of the leases average generally between 24 and 48 months, with
the average lease being 36 months. In addition to setting forth the lease term,
the amount of the rental payments and the mileage allowance, each lease requires
the lessee to pay all fees, taxes, fines and other costs relating to the use of
the vehicle. Generally, the lessee pays the first and last two months lease
payment in advance of the lease term. The lessee is required to maintain
liability and casualty insurance on each vehicle at specified limits and to name
the Company as an additional insured and loss payee. The Company will only
approve policies which have a maximum deductible of $500.
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The Company's sales policy emphasizes leasing to financially sound
clients and requires certain financial disclosures prior to executing any lease
agreement. Customer accounts are targeted from profitable, growing, medium-sized
corporate companies. For the years ended November 30, 1995 and 1996, the Company
had two unaffiliated customers, Westbury Homes Plc. and Campbell Distillers
Limited, which companies accounted for in the aggregate approximately 18% and
17%, respectively, of the Company's total revenues. For the three month period
ended February 29, 1995 and the two month period January 31, 1996, revenues from
these two unaffiliated customers aggregated 18% and 12%, respectively, of total
revenues. The Company also leases vehicles to the following local government
agencies; Swansea Council in Wales, Brent Council in London and Mid Glarmorgan
Council in Wales.
Each lease applicant must provide information regarding, among other
things, corporate history, length of time in business, ability to pay based both
on income level and certain debt to income ratios developed by the Company and
credit history, including comparable borrowing experience. Review of financial
statements, audited where obtainable allows for the independent verification of
the Company's financial position and past history. The foregoing procedures
provide the general basis for the Company's credit decisions, but the ultimate
determination is in the discretion of the Company's credit analysts.
Accordingly, certain of the leases entered into by the Company may not meet each
of the Company's credit guidelines.
The Company has servicing agreements with over 1,400 automotive
dealerships and independent service centers in its areas of operations. Since
all of the leased vehicles are new, there are warranties typically ranging from
12 to 36 months or 20,000 to 60,000 miles, which ever comes first, with the
average being 24 months or 40,000 miles. Also each lease has milage limitation
and additional fees for overages. Therefore, the Company does not incur
significant expenses for repairs. Maintenance is regularly performed on all
vehicles, pursuant to negotiated pricing schedules. No work is permitted to be
performed on any vehicle, unless performed by one of the Company's contracted
service centers with the prior consent of the Company.
The monthly lease payment which the Company charges its clients is
determined by a computer program which takes into account estimated service
costs, new vehicle pricing, manufacturer bonuses, rebates and options, potential
residual value at lease end as well as other variable information including
interest rates and other current anticipated future economic variables. The
client is responsible for maintaining its own insurance, of which the Company is
the beneficiary, in the event the vehicle is damaged.
The Company typically attempts to match the financing term with the
lease term, whereby at the end of the lease term the Company owns the
automobile. The Company does not currently perform repairs or refurbishing on
the returned vehicles, rather, the Company attempts to resell such vehicles
immediately upon their return in the same condition as they are returned in.
This enables the Company to increase its cash flow, though the Company believes
it could obtain higher prices for the used vehicles in the event minor repairs
were performed prior to resale. The Company manages its residual risk by
focusing on the leasing of vehicle models which it believes will have a broad
appeal in the used automobile market at the end of the lease term and by
utilizing multiple remarketing channels including, but not limited to used car
wholesalers and used car retailers. The Company upon pricing the lease of
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a new vehicle reviews the listed wholesale price as listed in several pricing
guides, predominantly the Current Auction Prices ("CAP") book, which gives the
current wholesale price of the model being leased. The Company currently
attempts to get at least 85% of the CAP listed wholesale price upon the resale
of the vehicle. The Company believes that with increased working capital and
cash flow from operations, the Company can make minor repairs and refurbishings
on the automobiles performed and seek higher prices on resales of up to 110% of
the wholesale price on popular models. The Company sells its used vehicles
through used automobile wholesalers and retailers, automobile auctions,
unaffiliated dealers and pursuant to sales to related parties of the lessees. In
the event the market for used automobiles decreases the models or conditions of
the vehicles returned to the Company decrease their resale value or vehicles are
returned pursuant to defaults in the lease agreements, such events may adversely
affect the Company's cash flow, profitability and business operations. See "--
Financing and Collections" and "-- Competition."
Fleet Management Services
In 1994, the Company opened its fleet management division, which
division manages the automobiles for certain of its corporate clients who choose
to own the vehicle(s) directly. Customarily, these clients purchase the
automobiles through the Company in order to take advantage of the Company's bulk
purchase discounts. The Company maintains these vehicles on behalf of such
clients pursuant to a monthly management fee, usually $15 per automobile and
disposes of the vehicles thereafter on behalf of the client. The client pays all
costs associated with the purchase, maintenance and resale of the automobiles.
The Company estimates that for the year ended November 30, 1996 less than 5% of
the Company's revenues were from fleet management services.
Suppliers
The Company purchases all of the automobiles that it leases to its
clients from automotive dealerships, usually several at a time. For the year
ended November 30, 1996 and two months ended January 31, 1997, General Motors
and Renault were the manufacturers of approximately 16.2% and 16.2%,
respectively and 11.7% and 11.7%, respectively, of the vehicles which it leased.
The Company does not depend on any individual dealership for the purchase of any
vehicle brand. The Company has no written agreements with any dealership it
purchases vehicles from, though it does receive yearly rebates from
manufacturers based on quantity of automobiles purchased. Management believes
that the price it pays and the terms it receives for the automobiles it
purchases are more favorable than it would receive if it was purchasing
automobiles on an individual basis. The Company believes that it will continue
to be able to purchase automobiles at competitive prices and terms into the
future.
A portion of the Company's profit margin is based on rebates received
directly from the automobile manufacturers on a yearly basis. The Company
receives a rebate on most vehicles purchased based upon the quantity of
automobiles purchased from said manufacturer each year. This rebate is usually
between $100 and $400 per vehicle. However, the Company has no assurances that
it will be able to acquire automobiles at favorable prices in the future or
receive such rebates in the future. No assurance can be given that an
uninterrupted and adequate supply of automobiles will be available to the
Company in the future, although, the Company believes that there are a
sufficient number of automobile dealerships, so that in the event any individual
or group of dealerships can no longer service the
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Company's needs, the Company will be able to find other dealerships at
competitive prices. In the event the Company cannot obtain the automobiles of
any specific manufacturer or automobiles in general or is not able to purchase
such automobiles on similar terms as is presently available to it, the Company
may be materially adversely affected.
Financing and Collections
The Company provides new automobiles to its clients pursuant to each
individual client's specifications, with personal and attentive service to
include all of its clients needs. The Company's sales representatives have
extensive experience in the automobile finance and leasing industry and work
closely with the clients to meet their driving and financial needs.
Since November 1992, when entering into new lease agreements, the
Company purchases the automobile, which usually requires a 10% down payment and
pays down the note on the purchase including principal and interest during the
term of the lease. Prior to November 1992, the Company would finance the
purchase of automobiles through promissory notes which required the payment of
interest during the term of the loan and the repayment of the principal in a
balloon payment at loan maturity which is the same as the end of the lease term.
This financing strategy enabled the Company to increase its cash flow during the
term of the lease, but the higher financing fees and interest expense reduced
the Company's profit on the resale of the vehicles.
The Company used $1,000,000 of the proceeds from its Public Offering to
purchase vehicles pursuant to customer orders. The automobiles purchased will be
subsequently utilized as a group as security for bank loans obtained by the
Company. The principal amount of such loans will typically be equal to 90% of
the value of the vehicles used as security. For example, if the Company
purchases separately 10 automobiles during a month, pursuant to customer orders,
at an aggregate purchase price of $200,000, the Company would seek a loan for
$180,000, with the 10 vehicles being used as security for the loan. The Company
believes that by obtaining loans on groups of vehicles instead of on an
individual basis it will be able to obtain better financing terms and reduced
financing costs, based on (i) the security for each loan is a group of vehicles
instead on one individual vehicle and (ii) there being less administrative and
closing costs incurred by the Company because there are fewer loans to process.
This process will be cyclical for the Company, whereby, the proceeds of the
loans will be used to purchase additional vehicles, pursuant to customer orders,
which vehicles will in turn be financed in groups.
The Company has asset funding lines to acquire revenue producing
vehicles with several institutions in England in the aggregate amount of
$18,200,000 of which the Company has borrowed approximately $11,000,000 as of
January 31, 1997. The increase in the Company's asset funding line is
attributable to the equity raised in the Company's initial public offering in
April 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." Under the lease
agreements, the lessees generally have no right to terminate their leases prior
to the end of their scheduled term. In the event that any lease terminates prior
to the end of its scheduled term (whether by way of default, the destruction or
theft of the vehicle), the lessee is liable to the Company for the amount by
which the lessee's default termination liability under the lease agreement
exceeds the realized value of such vehicle, which may be obtained through the
proceeds of
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the sale of the vehicle (including a sale following repossession) or the
proceeds of any applicable insurance on the vehicle. Under the terms of the
lease, the term "default termination liability" includes; (i) all payments due
under the lease agreement up to the termination date, inclusive of interest,
(ii) future rental payments due from termination date until the contracted lease
termination date, less maintenance and a 5% discount and (iii) the difference
between the amount received pursuant to the sale of the vehicle and the
estimated residual value, if such sale price is less than the estimated residual
value. Under its agreements with the lessee, the Company pays the sale or
insurance proceeds to its lender up to the amount of the then remaining balance
of the note payable related to the vehicle. Any shortfall is a credit loss and
is borne by the lessee, and any excess is retained by the Company.
The Company attempts to enhance the performance of its leases and
thereby minimize its financial risks by maintaining timely, consistent and
direct customer contact. When a default does occur, collections and
repossessions are handled by the Company's collection department. Upon a lease
payment default and after the passage of three days, the Company mails a written
notice to the defaulting customer and attempts to contact the customer directly
by phone. Once contact is established, the collection department will work with
the customer until the default is cured. If contact is not made or the default
is not satisfactorily cured, the Company will proceed to repossess the vehicle.
The Company will repossess the vehicle upon a determination that there is a risk
of not recovering the vehicle. In the event repossession is required, it
typically will take place within 20 days after the initial default. Pursuant to
English law, a company can repossess a vehicle for non payment in the event
payment is not received within two days of the due date, however, the Company's
lease agreements provide for a seven day grace period. No notice is required and
no demand for payment need be made prior to repossession. The Company, as the
vehicles owner, has all key numbers with respect to the vehicles it leases. In
the event the Company deems repossession necessary it sends an employee to
physically drive the vehicle away from the lessee. Repossessed vehicles are
offered by the Company at public sale, after the giving of notice, and sold by
the Company in a commercially reasonable manner. There were no repossessions of
vehicles in fiscal 1996 and there have been none to date in 1997. There were no
repossessions in fiscal 1995. Only one vehicle was repossessed during fiscal
1994.
Competition
The Company's business is highly competitive, with relatively
insignificant barriers to entry and with numerous firms competing for the same
customers. The Company is in direct competition with local (includes the city of
Hertfordshire and the surrounding areas), regional (includes London and the
surrounding areas) and national (includes all of the United Kingdom, inclusive
of England, Wales, Scotland and Northern Ireland) automotive leasing companies,
many of which have greater resources and more extensive distribution and
marketing than the Company. The largest leasing companies in direct competition
with the Company are Cowie Interleasing, a division of Cowie, Plc., and Lex
Vehicle Leasing Limited, each of which claim to have presently on lease
approximately 65,000 vehicles. As of February 25, 1997, the Company had 1,420
vehicles under lease. The Company also competes in the automobile financing
industry with providers of other forms of financing. Other competitors include
finance companies affiliated with automobile manufacturers, a variety of local,
regional and national finance companies, commercial banks, savings and loans,
and other consumer lenders such as industrial thrifts and credit unions. The
automobile leasing business is highly competitive and the Company
11
<PAGE>
competes for business on the basis of both pricing and service. The Company
believes that the main concern of the lessee or buyer of a new automobile is the
amount of the monthly payment and of any down payment. Many of the Company's
competitors have significantly greater financial, technical and marketing
resources and market share than the Company. Automobile finance companies
affiliated with automobile manufacturers, from time to time offer aggressive
leasing and financing programs at below market pricing to promote the sale of
certain vehicle models. Many of the national leasing companies have extensive
advertising campaigns which develop and reinforce brand recognition. In
addition, many of such manufacturers have agreements with vehicle leasing
entities to jointly advertise and market their products and services.
The used automobile sales business is highly competitive, with
competition coming from individuals, independent used automobile wholesalers and
dealerships and used automobile lots operated by new automobile dealers and
rental car companies.
Marketing and Sales
The sales policies of the Company have emphasized quality of business
rather than volume, both in its own new business contracts and its acquired
contracts. This controlled and conservative approach to growth allows the
Company to write what it considers to be good quality, profitable contract
hires. Customer service and satisfaction is then emphasized as a high priority,
to ensure that the group's premium pricing policies can be maintained for repeat
business.
Customer accounts are targeted from profitable, growing, medium-sized
corporate companies together with public sector referrals. The Company's credit
underwriting policies reflect this prudent approach, and ensure that the high
quality of the portfolio is maintained. The Company takes a balanced, portfolio
approach to risk management with a variety of company sizes to balance credit
risk against profit margin.
The Company executes a finance company standard hire purchase agreement
for each lease and the finance company takes a registered charge (security
interest) over the underlying agreement between the Company and its customer.
The security of the lender is further increased by the Company's down payment on
the vehicles and the monthly payments of principal and interest during the term
of the lease. The Company has all required liens and security interests
appropriately filed and recorded.
As part of its obligations, the Company performs all administrative
functions in the acquisition, registration and leasing of the automobile and
controls and pays for all required servicing of its vehicles. The Company
obtains appropriate vehicle registrations and titles for all lease vehicles,
tracks compliance with insurance requirements, negotiates and handles all claims
with insurance companies and remits all appropriate sales taxes on lease
payments to the taxing authority.
12
<PAGE>
Government Regulations
The Company is subject to regulation by the United Kingdom Department
of Trade and Industry (the "Department of Trade"). The Department of trade
establishes general rules and regulations with respect to the operation of a
business in the United Kingdom. The Department of Trade has not established any
regulations or licensing requirements specifically regulating the leasing of
automobiles to companies. There can be no assurances that such will be the case
in the future or that if licensing or other form of regulation is required in
order to engage in the Company's business that the Company will be successful in
obtaining such licenses or in meeting the requirements of such regulations. The
Department of Trade, in accordance with the credit agreement act, requires the
issuance of a license in order to lease vehicles to individuals, which license
the Company has obtained, however, the Company never has nor does it presently
intend to lease vehicles to individuals. In addition, the Company must also
comply with a wide range of other state and local rules and regulations
applicable to its business, including regulations covering labor relations,
safety standards, affirmative action and the protection of the environment.
Continued compliance with the broad regulatory network of the United Kingdom is
essential and costly and the failure to comply with such regulations may have an
adverse effect on the Company's operations.
In August 1995, the British Government passed a law allowing leasing
companies to be reimbursed by the Government for the value added tax "VAT" which
is added to all consumer goods including automobiles. The VAT tax is currently
at 17.5%. Reimbursement of the VAT tax will allow the Company to charge lower
lease rates.
Employees
As of January 31, 1997, the Company employed 50 full-time persons,
eight are in management (three of which are officers), eleven administrative,
three sales representative and two drivers. None of the employees are
represented by a union, and the Company considers employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains 6,000 square feet of executive office space in a
modern, free standing building at Pride House, Watford Metro Centre, Tolpits
Lane Watford Hertfordshire, WD1 8SB England. The building was purchased by PMS
in December 1992 at a cost of approximately $895,000. The annual cost of
servicing the building's mortgage and taxes is approximately $80,000 and
$18,000, respectively. Pride Leasing Limited owns a building in Croydon,
England, which it purchased in 1991 at a cost of approximately $825,000, which
it currently leases to an unaffiliated company. The lease term expires in 2004,
and generates gross income of approximately $80,000 per annum. The annual cost
of servicing that building's mortgage and taxes is estimated at $70,000 per
annum.
AC currently occupies premises on a four acre sight at the Brooklands
Industrial Park in Surrey, England. The property comprises a factory, workshop,
showroom and office space. In all, the facility provides approximately 90,000
square feet of manufacturing area and 20,000 square feet of executive
13
<PAGE>
office area. The Company has agreed to lease the premises currently occupied by
AC for a period of one year commencing December 1, 1996. The Company lease costs
approximately (pound)32,000 ($53,696) per month. AC has an option to purchase
the premises for the purchase price of (pound)5,200,000 ($8,725,600) during the
nine month period commencing December 1, 1996 and ending August 1, 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation which, if
decided adversely to the Company, would have a significant negative impact on
the business, income, assets or operation of the Company, and the Company is not
aware of any material threatened litigation which might involve the Company. In
England, the owner of the automobile is not considered liable for the acts of
the driver where there is a lease arrangement.
AC is not a party to any material litigation. Autokraft and AC Cars are
involved in legal proceedings, all of which are related to their being placed in
administrative receivership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security
holders during its fiscal year ended November 30, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.001 par value per share, is currently
traded on the SmallCap Market of the Nasdaq Stock Market. The following table
sets forth representative high and low closing prices by calendar quarters as
reported by a market maker, during the periods provided for herein. Quotations
represent prices between dealers, do not include resale mark-ups, mark-downs or
other fees or commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Public Warrants
Calendar Quarter Prices Prices
Ended Low High Low High
<S> <C> <C> <C> <C>
4/24/96 to 5/31/96 7 1/2 8 1/4 3 4 1/8
6/1/96 to 8/31/96 8 8 1/8 2 7/8 4
9/1/95 to 11/30/96 5 6 7/8 1 1/8 1 1/2
12/1/96 to 2/1/96 1 3/4 4 11/16 5/16 1 1/2
- ----------------------
</TABLE>
As of February 21, 1997, the number of registered holders of record of
the Common Stock, $.001 par value, of the Company was approximately 26, as
determined by the Company's stockholder records,
14
<PAGE>
and does not include beneficial owners at the Common Stock whose shares are held
in names of various security holders, dealers and clearing agencies. The Company
believes there are in excess of 400 beneficial holders of the Common Stock.
The Company has paid no dividends and has no present plan to pay
dividends. Payment of future dividends will be determined from time to time by
its board of directors, based upon its future earnings, if any, financial
condition, capital requirements and other factors. The Company is not presently
subject to any contractual or similar restriction on its present or future
ability to pay such dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of significant factors
which have affected the Company's financial position and operations during the
years ended November 30, 1996 and 1995.
Pride Automotive Group, Inc. (the "Company") was incorporated in the State of
Delaware in March 1995. Pursuant to the terms and conditions of a reorganization
agreement entered into in March 1995, the Company issued 1,500,000 shares of its
Common Stock to Pride, Inc. (an entity incorporated in the State of Delaware),
in exchange for all the issued and outstanding shares of PMS, thereby making the
Company a majority owned subsidiary of Pride and PMS a wholly-owned subsidiary
of the Company. PMS is the holding company for six wholly-owned subsidiaries,
operating as one unit, located in the United Kingdom. The consolidated financial
statements are based on the assumption that the Company and PMS were combined
for all periods presented, in a manner similar to the pooling of interests
method of accounting. PMS and its wholly-owned subsidiaries are located in the
United Kingdom and follow generally accepted accounting principles in the United
Kingdom. For purposes of the consolidated financial statements of the Company,
the statements have been converted to the generally accepted accounting
principles in the United States.
Pride, the Company's parent, is an entity reporting under the Exchange Act, and
its reports may be obtained and reviewed by either contacting the Company or the
Securities and Exchange Commission. Pride, Inc., on its own has virtually no
operations. As such, its financial viability is represented by the financial
statements of the Company. Pride was incorporated as L.H.M. Corp. in the State
of Delaware on May 10, 1988 as a "blank check" company, for the purpose of
seeking potential business ventures through acquisition or merger. In April
1990, L.H.M. Corp. entered into an Agreement and Plan of Reorganization with
International Sportsfest, Inc. ("ISI"), a company formed to engage in and
establish sports expositions in sports merchandise such as clothing and
equipment. ISI never engaged in any business operations. In January 1994, ISI
entered into an Agreement and Plan of Reorganization with PMS, whereby PMS
became a wholly-owned subsidiary of ISI and ISI changed its name to Pride, Inc.
Pride also owns 100% of the capital stock of Watford Investments, a South
African company with minimal operations. This Company was formed in March 1995.
The six wholly-owned subsidiaries of PMS are Pride Vehicle Contracts Limited,
Baker Vehicle Contracts Limited, Pride Vehicle Contracts (UK) Limited, Pride
Leasing Limited, Pride Vehicle Management Limited and Pride Vehicle Deliveries
Limited, which comprise the operations of the Company. Unless the context
otherwise requires, all references to the "Company" include its wholly-owned
subsidiary, PMS, and PMS's wholly-owned subsidiaries. These companies jointly
engage in the business of leasing new automobiles to businesses, servicing such
automobiles during the lease term and remarketing the automobiles upon the
expiration of the lease term, which arrangement is described as a "contract
hire." The Company purchases each vehicle pursuant to its clients'
specifications, finances its purchase and pays for all the maintenance on the
vehicle during the lease term.
The Company has servicing agreements with automobile dealers and service
centers, which specify pricing schedules for maintenance and repair work to be
performed, all of which require the prior consent of the Company. Typically, the
term of the loan corresponds with the term of the lease, whereby, upon the
completion of the lease term, the automobiles are fully paid and owned by the
Company. Upon the expiration of the lease, the Company remarkets the automobiles
through various distribution channels including, but not limited to, used car
wholesalers or used car retailers. Each client's monthly lease payment is
determined by a computer program which takes into account estimated service
costs, new vehicle pricing, manufacturer bonuses, rebates and options, potential
residual value at lease end, as well as other variable information including
interest rates and other current and anticipated future economic variables. The
monthly lease payments are usually sufficient to pay the financing and servicing
on the vehicles during the lease term, with the bulk of the profits, if any,
coming on the resale of the automobile.
<PAGE>
The Company's principal operations are conducted by PMS which reflects its
financial statements in British pounds. As a result, most assets and liabilities
of the foreign operations are translated into U.S. dollars using current
exchange rates in effect at the balance sheet date. Fixed assets and intangible
assets are translated at historical exchange rates. Revenue and expense accounts
are translated using an average exchange rate during the period except for those
expenses related to assets and liabilities which are translated at historical
exchange rates. These expenses include depreciation and amortization which are
translated at the rates existing at the time the asset was acquired. Any
resulting gains or losses due to the translation are reflected as a separate
item of stockholders' equity.
On November 29, 1996, the Company, through its newly formed majority owned
subsidiary AC Automotive Group, Inc. and its wholly-owned subsidiary AC Car
Group Limited (registered in the United Kingdom), acquired certain of the assets
of AC Cars Limited and Autokraft Limited. These two companies were engaged in
the manufacture and sale of specialty automobiles. The purchase price of
approximately $6,000,000 was financed by the sale of common stock and by loans.
The acquisition involved the purchase of plant and equipment, the brand name,
inventories and an aircraft and has been recorded using the purchase method of
accounting.
Results of Operations - Years Ended November 30, 1996 and November 30, 1995:
Revenues for the year ended November 30, 1996 were approximately $12,884,000
compared to approximately $9,723,000 for the year ended November 30, 1995, an
increase of $3,161,000 or 32.5%. The primary reason for this increase was an
increase in revenues from contract hire income and from the sales of vehicles at
lease maturity, and an overall increase in the contract hire fleet size. There
was also an increase in the fleet management division.
The Company's cost of sales increased both in actual dollars and as a percent of
sales, when comparing the years ended November 30, 1996 and 1995. These costs
increased by approximately $2,945,000 or 40.3%. As a percent of sales, costs of
sales for 1996 were 79.5% versus 75.1% for 1995. Management believes that the
increase was primarily due to the continuation of the more prudent
(conservative) approach to estimating the residual values of vehicles thereby
increasing depreciation expense and costs of sales and reducing residual value
risk. This more conservative approach reduces the residual value of an auto
thereby increasing the amount of the auto to be depreciated. This approach will
therefore increase depreciation expense, which costs will reduce the income from
contract leasing. Since the residual value is now lower, the income from the
ultimate sale of the vehicle is now higher.
General and administrative expenses decreased from $2,036,000 for 1995 to
$1,802,000 for 1996 a decrease of $234,000 or 11.5%. As a percent of sales these
expenses represented 14.0% of sales for 1996 and 20.9% for 1995. Management
believes that the decrease in overhead costs relate to an aggressive costs
reduction program instituted by management during 1996 and 1995.
Interest expense increased when comparing the year ended November 30, 1996 to
1995 from $630,000 to $860,000, an increase of $230,000 or 36.5%. Management
attributes this increase to a higher volume of borrowings on hire purchase
contracts. The Company is continuously negotiating with various banking
institutions to obtain credit lines, all of which are secured by the vehicles
purchased.
(Loss) before taxes for the years ended November 30, 1996 and 1995, prior to
amortization of goodwill for the period ($635,000 and $631,000, respectively)
aggregated $20,000 and $239,000, respectively. This decrease in the net loss was
primarily due to the increased revenues as described above. For the year ended
November 30, 1996, the Company reflected a net loss of $654,998 or $.27 per
share. For the year ended November 30, 1995, the Company reported a net loss of
$870,145 or $.42 per share.
<PAGE>
Liquidity and Capital Resources
Due to the nature of the Company's business, namely contract leasing of motor
vehicles which are fixed long-term assets, the balance sheet has been prepared
on an unclassified basis. Accordingly, there is no classification of current
assets and current liabilities. At November 30, 1996 and 1995, the Company's
balance sheet reflected cash of $251,000 and $3,000, respectively, accounts
receivable of $2,022,000 and $1,241,000, respectively, and total assets of
$33,690,000 and $21,600,000, respectively. The principal reasons for the
increase in total assets are the acquisition described above, an increase in
contract higher vehicles available for lease and the proceeds from the Company's
initial public offering.
In December 1995, the Company completed a private placement offering selling 20
units, each unit consisting of 25,000 shares of Common Stock, at $6,000 per unit
for aggregate gross proceeds of $120,000 ($.24 per share).
In April 1996 the Company successfully completed an initial public offering of
its common stock, which yielded net proceeds to the Company of $2,166,000.
The Company's total assets as of November 30, 1996 and 1995 include intangible
assets of $11,700,000 and $10,300,000, respectively. These intangible assets
consist of the unamortized portion of the costs over net assets acquired in
acquisitions, which are being amortized over periods ranging from 10 to 20
years. When adjusted for these intangible assets, the net tangible book value of
the Company at November 30, 1996 and 1995 would be approximately $700,000 and
$1,150,000, respectively.
The Company had reflected convertible debt of $562,292 as of November 30, 1994.
These loans were to bear interest of 6% and were repayable five years from the
date of issue. The original debt, which was not convertible, arose at the time
PMS acquired one of its subsidiaries in 1992. The Company acquired this
subsidiary for $1 and assumed approximately $11,500,000 of net liabilities. The
acquisition resulted in goodwill of approximately $11,500,000. The ultimate
holder of the debt in 1994, was given the option of converting such loans into
shares of Pride, Inc.'s (the Company's parent) common stock at the end of such
period based upon their guarantee of the ultimate sales values of the related
revenue producing vehicles. This debtholder was the controlling shareholder of
the Company's parent at the time of this transaction.
During the year ended November 30, 1995, the Company determined with the
agreement of the debtholder, that the estimated ultimate sales values of the
vehicles were less than expected and it was agreed that the debt would be
written off against the debtholder guarantee. The balance of the debt, $562,292,
was therefore treated as an early extinguishment of debt. At the time of the
extinguishment, the debt outstanding was owed to a related party. In accordance
with APB No. 26, extinguishment transactions between related entities should be
treated as capital transactions. Accordingly, the gain on the extinguishment was
added to additional paid-in capital.
<PAGE>
During the year ended November 30, 1995, the Company generated cash flows from
operating aggregating approximately $1,752,000. During the year ended November
30, 1996, the Company utilized $234,000 of cash flows from operations. The
utilization of cash in 1996 was primarily due to currency translation
adjustments.
Investing activities reflect uses of cash for the years ended November 30, 1996
and 1995 of $8,759,000 and $2,526,000, respectively. These uses of cash are the
result of the purchases of fixed assets (primarily revenue producing vehicles)
net of the proceeds received from the sale of vehicles at lease expiration dates
and the acquisition described above.
In order to replenish its fleet of revenue producing vehicles, annually, the
Company is required to purchase from 300 to 400 new vehicles at an average cost
of approximately $25,000 each. At the time of purchase, the Company typically
makes a cash deposit of approximately 10% and finances the balance. The Company
has funding lines with several financing institutions for this purpose which
aggregate approximately $18,200,000 at November 30, 1996. At November 30, 1996,
there was approximately $11,000,000 outstanding under these lines. These lines
are typically open for between 24 and 60 months depending on the terms, the most
important term being the interest rate. Therefore, the principal amount of the
Company's current credit lines is constantly changing. Since the Company's
funding lines are asset based (secured by the vehicles purchased), there is
generally no difficulty obtaining funding lines, however, the Company is
continuously seeking to find the best terms and rates. Typically financing
institutions authorize credit lines with a fixed interest rate, which line is to
be open for a certain period of time. During the term of the line, the Company
may draw down on such line in order to finance the purchase of vehicles to
lease. When the time for drawing down on the line expires, the Company can no
longer draw down on such line to finance additional vehicles, however, the
amount drawn is repaid pursuant to the terms of such line.
For the year ended November 30, 1996, the Company provided cash from financing
activities of approximately $9,240,000 primarily as a result of an IPO
($2,200,000) and the financing needed to acquire new vehicles ($11,500,000) net
of the amounts utilized to pay hire purchase contract financing ($6,100,000).
For fiscal 1995, the Company provided cash for financing activities ($759,000)
primarily due to financing provided by bank lines of credit plus the increases
in financing of new vehicles ($3,262,000) net of the amounts needed to reduce
hire purchase contract financing ($3,496,000).
Other than the annual acquisitions of revenue producing vehicles as mentioned
above, there are no material planned capital expenditures at the present time.
The Company believes that its cash flow from operations, and its available
funding lines for the acquisition of revenue producing vehicles will be
sufficient for at least the ensuing 12 month period.
This report contains forward-looking statements and information that is based on
management's beliefs and assumptions, as well as information currently available
to management. When used in this document, the words "anticipate, " "estimate,"
"expect," "intend," and similar expressions are intended to identify forward-
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should the underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated or expected.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements between registrant and the firm of
Civvals, Chartered Accountants and Registered Auditors on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Alan Lubinsky 38 President, Secretary and
Chairman of the Board
Peter Dixon 52 Vice President, Treasurer
and Director
Ivan Averbuch 41 Chief Financial Officer and Director
</TABLE>
Alan Lubinsky. Mr. Lubinsky has been the President and a director of the
Company since its inception in March 1995. Mr Lubinsky has been the President,
Secretary and director of Pride, Inc since January 14, 1994. Mr. Lubinsky has
been the Chairman and Managing Director of Pride Management Services, Plc
("PMS") since its inception in 1988. Mr. Lubinsky has 18 years experience in the
motor vehicle industry in positions of executive management.
Peter Dixon Mr. Dixon has been the Vice President, Treasurer and a director
of the Company since its inception in March 1995. Mr. Dixon has been the Vice
President, Treasurer and a director of Pride, Inc. since January 14, 1994. Mr.
Dixon has experience in corporate finance, investment banking, and manufacturing
industries. From April 1990 to present, Mr. Dixon has been a director of
Kingsland Community Services Limited, and Kingsland Developments Limited,
companies which own and lease properties. From February 1990 to present, Mr.
Dixon has been a director of Snuggledown of Norway (UK) Limited, a distribution
of camping goods. His executive positions have included being the managing
director of the securities division of Den Norske Bank from 1986 to 1990 and
Chairman of several subsidiaries at Berisford International Plc from 1977 to
1986 and from December 1990 to August 1992. From August 1994 to August 1995, Mr.
Dixon was a director of Welpac Plc, a company which was a distributor of
hardware.
Ivan Averbuch Mr. Averbuch has been a director and the Chief Financial
Officer of the Company since December 1995. Mr. Averbuch has been the Chief
Financial Officer of the of Pride, Inc. since December 1995. From September 1987
to November 1995, Mr. Averbuch was employed at Kessel
16
<PAGE>
Feinstein, a member firm of Grant Thorton International, an accounting firm. In
January 1989, Mr. Averbuch was promoted to audit manager and appointed as a
partner in October 1992.
The directors of the Company are elected annually by the shareholders
and hold office until the next annual meeting of shareholders, or until their
successors are elected and qualified. The Executive officers are elected
annually by the board of directors, serve at the discretion of the board of
directors and hold office until their successors are elected and qualified.
Vacancies on the board of directors may be filled by the remaining directors.
As permitted under Delaware Corporation Law, the Company's certificate
of incorporation eliminates the personal liability of the directors to the
Company or any of its shareholders for damages for breaches of their fiduciary
duty as directors. As a result of the inclusion of such provision, stockholders
may be unable to recover damages against directors for actions taken by them
which constitute negligence or gross negligence or that are in violation of
their fiduciary duties. The inclusion of this provision in the Company's
Certificate of Incorporation may reduce the likelihood of derivative litigation
against directors and other types of shareholder litigation.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who beneficially own more
than ten percent of a registered class of the Company's equity securities to
file reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater than
ten percent beneficial owners also are required by rules promulgated by the SEC
to furnish the Company with copies of all Section 16(a) forms they file. Based
solely upon a review of the copies of such forms furnished to the Company, the
Company has been informed that all officers, directors or greater than 10%
shareholders have stated that they have filed such reports as is required
pursuant to Section 16(a) during the 1996 fiscal year. The Company has no basis
to believe that any other required filing by any of the above indicated
individuals has not been made.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, paid by Pride Vehicle Contracts Limited during the years ended
November 30, 1996, 1995 and 1994. The Company did not incur any compensation
expenses during such period.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
(a) (b) (c) (d) (e)
Name and Principal Other Annual Options/
Position (1) Year Salary($) Bonus($) Compensation($)(2) SARS
- ------------------------ ---- --------- ------ ------------------ ------
Alan Lubinsky
<S> <C> <C> <C> <C> <C>
President, Secretary 1996 $160,000 - $30,000 100,000(3)
and Chairman of the Board 1995 $137,750 - 30,000 -
1994 $135,000 - 30,000 -
</TABLE>
(1) All of the Company's administrative functions, including the payment of
salaries, are performed by Pride Vehicle Contracts Limited, since the Company's
operations run basically as one operation. The Company believes that it is
easier and cost effective to operate in this manner. The Company plans on
continuing this practice in the future.
(2) Includes contributions to the Company's pension plan of $18,000 in each
of 1996, 1995 and 1994, respectively, and the cost of an automobile and expenses
of $12,000 annually.
(3) Alan Lubinsky entered into an employment agreement with PAG in August
1995. The agreement is for a term of three years, and pays Mr. Lubinsky an
annual salary of $160,000 per annum with 10% yearly escalations, subject to
adjustment by PAG's board of directors. Pursuant to the agreement, Mr. Lubinsky
received stock options under PAG's Senior Management Incentive Plan to purchase
100,000 shares at $5.50 per share. These options vest at the rate of 33 1/3% per
annum commencing August 1996.
18
<PAGE>
Stock Options
The following table sets forth certain information concerning the grant
of stock options made during the year ended November 30, 1996, under the
Company's 1995 Senior Management Incentive Plan.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Individual Grants
(a) (b) (c) (d) (e)
% of Total
# of Securities Options/SAR's
underlying Granted to
Options/SAR's Employees in Exercise or Base
Name Granted(1) Fiscal Year Price ($/SH) Expiration Date
<S> <C> <C> <C> <C>
Alan Lubinsky 100,000 100% $5.50 8/01/08
</TABLE>
(1) Alan Lubinsky entered into an employment agreement with PAG in August
1995. The agreement is for a term of three years, and pays Mr. Lubinsky
an annual salary of $160,000 per annum with 10% yearly escalations,
subject to adjustment by PAG's board of directors. Pursuant to the
agreement, Mr. Lubinsky received stock options under PAG's Senior
Management Incentive Plan to purchase 100,000 shares at $5.50 per
share. These options vest at the rate of 33 1/3% per annum commencing
August 1996. See "Employment Agreements".
Represents incentive stock options granted under the Company's 1995
Senior Management Incentive Plan (the "Plan"). Options granted under
the Plan are intended to qualify as incentive stock options under the
Internal Revenue Code of 1986, as amended. Under the terms of the Plan,
options may be granted to officers, key employees, directors and
consultants of the Company until September 2005. Options granted to
directors, who are not officers or employees, or to consultants, do not
qualify as incentive stock options. The option price per share may not
be less than the fair market value of the Company's shares on the date
the option is granted. However, options granted to persons owning more
than 10% of the Company's Common Stock may not have a term in excess of
five years and may not have an option price of less than 110% of the
fair market value per share of the Company's shares on the date the
option is granted. See "--1995 Senior Management Incentive Plan".
19
<PAGE>
The following table contains information with respect to employees of
the Company concerning options held as of November 30, 1996
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Value of
Number of Unexercised In-
Unexercised The-Money
Options/SAR's at Options/SAR's
FY-End (#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
Alan Lubinsky 0 0 33,333/66,667 0
</TABLE>
(1) As of February 20, 1997, the average of the prior day's closing bid and
ask price was $2.63. Since the exercise price of the Options ($5.50) is greater
than the current average price, the Company believes the Options have no value.
Employment Agreements
Alan Lubinsky entered into an employment agreement with the Company in
August 1995. The agreement is for a term of three years, and pays Mr. Lubinsky
an annual salary of $160,000 per annum with 10% yearly escalations, subject to
adjustment by the Company's board of directors. Pursuant to the terms of his
employment agreement, Mr. Lubinsky will devote all his business time to the
affairs of the Company and Pride. Pursuant to the agreement, Mr. Lubinsky
received stock options under the Company's Senior Management Incentive Plan to
purchase 100,000 shares at $5.50 per share. These options vest at the rate of 33
1/3% per annum commencing August 1996. The agreement restricts Mr. Lubinsky from
competing with the Company for a period of one year after the termination of his
employment.
Ivan Averbuch entered into an employment agreement with the Company in
September 1995, for a term of 24 months, commencing December 1, 1995. The
agreement is automatically extendable for an additional 24 months, subject to
cancellation by either the Company or Mr. Averbuch on 90 days written notice.
Pursuant to the terms of the agreement, Mr. Averbuch is to receive an annual
salary of $55,000 per annum, with an annual increase of 10% per annum, subject
to review by the Company's board of directors.
Senior Management Incentive Plan
In September 1995, the board of directors adopted the Senior Management
Incentive Plan (the "Management Plan"), which was adopted by written stockholder
consent. The Management Plan provides for the issuance of up to 300,000 shares
of the Company's Common Stock in connection with the issuance of stock options
and other stock purchase rights to executive officers, key employees and
consultants.
20
<PAGE>
The adoption of the Management Plan was prompted by its desire to
provide the board with sufficient flexibility regarding the forms of incentive
compensation which the Company will have at its disposal in rewarding executive
officers, key employees and consultants who render significant services to the
Company and its subsidiaries. The board of directors intends to offer key
personnel equity ownership in the Company through the grant of stock options and
other rights pursuant to the Management Plan to enable the Company to attract
and retain qualified personnel without unnecessarily depleting the Company's
cash reserves. The Management Plan is designed to augment the Company's existing
compensation programs and is intended to enable the Company to offer to its as
well as its subsidiaries executives, key employees and consultants a personal
interest in the Company's growth and success through awards of either shares of
Common Stock or rights to acquire shares of Common Stock.
The Management Plan is intended to attract and retain executive
officers, key employees and consultants whose performance is expected to have a
substantial impact on the Company's and its subsidiaries long-term profit and
growth potential by encouraging and assisting those persons to acquire equity in
the Company. It is contemplated that only those who perform services of special
importance to the Company will be eligible to participate under the Management
Plan. A total of 300,000 shares of Common Stock will be reserved for issuance
under the Management Plan. It is anticipated that awards made under the
Management Plan will be subject to three-year vesting periods, although the
vesting periods are subject to the discretion of the Administrator.
Unless otherwise indicated, the Management Plan is to be administered
by the board of directors or a committee of the board, if one is appointed for
this purpose (the board or such committee, as the case may be, shall be referred
to in the following description as the "Administrator"). Subject to the specific
provisions of the Management Plan, the Administrator will have the discretion to
determine the recipients of the awards, the nature of the awards to be granted,
the dates such awards will be granted, the terms and conditions of awards and
the interpretation of the Management Plan, except that any award granted to any
employee of the Company who is also a director of the Company shall also be
subject, in the event the persons serving as members of the Administrator of
such plan at the time such award is proposed to be granted do not satisfy the
requirements regarding the participation of "disinterested persons" set forth in
Rule 16b-3 ("Rule 16b-3") promulgated under the Exchange Act, to the approval of
an auxiliary committee consisting of not less than two individuals who are
considered "disinterested persons" as defined under Rule 16b-3. As of the date
hereof, the Company has not yet determined who will serve on such auxiliary
committee, if one is required. The Management Plan generally provides that,
unless the Administrator determines otherwise, each option or right granted
under a plan shall become exercisable in full upon certain "change of control"
events as described in the Management Plan. If any change is made in the stock
subject to the Management Plan, or subject to any right or option granted under
the Management Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Administrator will make appropriate
adjustments to such plans and the classes, number of shares and price per share
of stock subject to outstanding rights or options. Generally, the Management
Plan may be amended by action of the board of directors, except that any
amendment which would increase the total number of shares subject to such plan,
extend the duration of such plan, materially increase the benefits accruing to
participants under such plan, or would change the category of persons who can be
eligible for awards under such plan must be
21
<PAGE>
approved by affirmative vote of a majority of stockholders entitled to vote. The
Management Plan permits awards to be made thereunder until September, 2005.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan. The Management Plan provides
for four types of awards: stock options, incentive stock rights, stock
appreciation rights (including limited stock appreciation rights) and restricted
stock purchase agreements, as described below.
Stock Options. Options granted under the Management Plan may be either
incentive stock options ("ISOs") or options which do not qualify as ISOs
("non-ISOs"). ISOs may be granted at an option price of not less than 100% of
the fair market value of the Common Stock on the date of grant, except that an
ISO granted to any person who owns capital stock representing more than 10% of
the total combined voting power of all classes of Common Stock of the Company
("10% stockholder") must be granted at an exercise price of at least 110% of the
fair market value of the Common Stock on the date of the grant. The exercise
price of the non-ISOs may not be less than 85% of the fair market value of the
Common Stock on the date of grant. Unless the Administrator determines
otherwise, no ISO or non-ISO may be exercisable earlier than one year from the
date of grant. ISOs may not be granted to persons who are not employees of the
Company. ISOs granted to persons other than 10% stockholders may be exercisable
for a period of up to ten years from the date of grant; ISOs granted to 10%
stockholders may be exercisable for a period of up to five years from the date
of grant. No individual may be granted ISOs that become exercisable in any
calendar year for Common Stock having a fair market value at the time of grant
in excess of $100,000. Non-ISOs may be exercisable for a period of up to 13
years from the date of grant. In connection with the Company's entering into an
employment agreement with its president, Alan Lubinsky, Mr. Lubinsky received
100,000 stock options to purchase shares of Common Stock. See "Management
Employment Agreement."
Payment for shares of Common Stock purchased pursuant to the exercise
of stock options shall be paid in full in cash, by certified check or, at the
discretion of the Administrator, (i) by promissory note combined with cash, (ii)
by shares of Common Stock having a fair market value equal to the total exercise
price or (iii) by a combination of (i) and (ii) above. The provision that
permits the delivery of already owned shares of stock as payment for the
exercise of an option may permit "pyramiding". In general, pyramiding enables a
holder to start with as little as one share of common stock and, by using the
shares of common stock acquired in successive, simultaneous exercises of the
option, to exercise the entire option, regardless of the number of shares
covered thereby, with no additional cash or investment other than the original
share of Common Stock used to exercise the option.
Upon termination of employment or consulting services, an optionee will
be entitled to exercise the vested portion of an option for a period of up to
three months after the date of termination, except that if the reason for
termination was a discharge for cause, the option shall expire immediately, and
if the reason for termination was for death or permanent disability of the
optionee, the vested portion of the option shall remain exercisable for a period
of twelve months thereafter.
Incentive Stock Rights. Incentive stock rights consist of incentive stock
units equivalent to one share of Common Stock in consideration for services
performed for the Company. Each incentive stock
22
<PAGE>
unit shall entitle the holder thereof to receive, without payment of cash or
property to the Company, one share of Common Stock in consideration for services
performed for the Company or any subsidiary by the employee, subject to the
lapse of the incentive periods, whereby the Company shall issue such number of
shares upon the completion of each specified period. If the employment or
consulting services of the holder with the Company terminate prior to the end of
the incentive period relating to the units awarded, the rights shall thereupon
be null and void, except that if termination is caused by death or permanent
disability, the holder or his/her heirs, as the case may be, shall be entitled
to receive a pro rata portion of the shares represented by the units, based upon
that portion of the incentive period which shall have elapsed prior to the death
or disability.
Stock Appreciation Rights (SARs). SARs may be granted to recipients of
options under the Management Plan. SARs may be granted simultaneously with, or
subsequent to, the grant of a related option and may be exercised to the extent
that the related option is exercisable, except that no general SAR (as
hereinafter defined) may be exercised within a period of six months of the date
of grant of such SAR and no SAR granted with respect to an ISO may be exercised
unless the fair market value of the Common Stock on the date of exercise exceeds
the exercise price of the ISO. A holder may be granted general SARs ("general
SARs") or limited SARs ("limited SARs"), or both. General SARs permit the holder
thereof to receive an amount (in cash, shares of Common Stock or a combination
of both) equal to the number of SARs exercised multiplied by the excess of the
fair market value of the Common Stock on the exercise date over the exercise
price of the related option. Limited SARs are similar to general SARs, except
that, unless the Administrator determines otherwise, they may be exercised only
during a prescribed period following the occurrence of one or more of the
following "Change of Control" transactions: (i) the approval of the Board of
Directors of a consolidation or merger in which the Company is not the surviving
corporation, the sale of all or substantially all the assets of the Company, or
the liquidation or dissolution of the Company; (ii) the commencement of a tender
or exchange offer for the Company's Common Stock (or securities convertible into
Common Stock) without the prior consent of the Board; (iii) the acquisition of
beneficial ownership by any person or other entity (other than the Company or
any employee benefit plan sponsored by the Company) of securities of the Company
representing 25% or more of the voting power of the Company's outstanding
securities; or (iv) if during any period of two years or less, individuals who
at the beginning of such period constitute the entire Board cease to constitute
a majority of the Board, unless the election, or the nomination for election, of
each new director is approved by at least a majority of the directors then still
in office.
The exercise of any portion of either the related option or the tandem
SARs will cause a corresponding reduction in the number of shares remaining
subject to the option or the tandem SARs, thus maintaining a balance between
outstanding options and SARs.
Restricted Stock Purchase Agreements. Restricted stock purchase
agreements provide for the sale by the Company of shares of Common Stock at
prices to be determined by the Board, which shares shall be subject to
restrictions on disposition for a stated period during which the purchaser must
continue employment with the Company in order to retain the shares. Payment can
be made in cash, a promissory note or a combination of both. If termination of
employment occurs for any reason within six months after the date of purchase,
or for any reason other than death or by retirement with the consent of the
23
<PAGE>
Company after the six-month period but prior to the time that the restrictions
on disposition lapse, the Company shall have the option to reacquire the shares
at the original purchase price.
Restricted shares awarded under the Management Plan will be subject to
a period of time designated by the Administrator (the "restricted period")
during which the recipient must continue to render services to the Company
before the restricted shares will become vested. The Administrator may also
impose other restrictions, terms and conditions that must be fulfilled before
the restricted shares may vest.
Upon the grant of restricted shares, stock certificates registered in
the name of the recipient will be issued and such shares will constitute issued
and outstanding shares of Common Stock for all corporate purposes. The holder
will have the right to vote the restricted shares and to receive all regular
cash dividends (and such other distributions as the Administrator may
designate), if any, which are paid or distributed on the restricted shares, and
generally to exercise all other rights as a holder of Common Stock, except that,
until the end of the restricted period: (i) the holder will not be entitled to
take possession of the stock certificates representing the restricted shares and
(ii) the holder will not be entitled to sell, transfer or otherwise dispose of
the restricted shares. A breach of any restrictions, terms or conditions
established by the Administrator with respect to any restricted shares will
cause a forfeiture of such restricted shares.
Upon expiration of the applicable restricted period and the
satisfaction of any other applicable conditions, all or part of the restricted
shares and any dividends or other distributions not distributed to the holder
(the "retained distributions") thereon will become vested. Any restricted shares
and any retained distributions thereon which do not so vest will be forfeited to
the Company. If prior to the expiration of the restricted period a holder is
terminated without cause or because of a total disability (in each case as
defined in the Management Plan), or dies, then, unless otherwise determined by
the Administrator at the time of the grant, the restricted period applicable to
each award of restricted shares will thereupon be deemed to have expired. Unless
the Administrator determines otherwise, if a holder's employment terminates
prior to the expiration of the applicable restricted period for any reason other
than as set forth above, all restricted shares and any retained distributions
thereon will be forfeited.
Accelerating of the vesting of the restricted shares shall occur, under
the provisions of the Management Plan, on the first day following the occurrence
of any of the following: (a) the approval by the stockholders of the Company of
an "Approved Transaction"; (b) a "Control Purchase"; or (c) a "Board Change".
An "Approved Transaction" is defined as (A) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted into
cash, securities or other property other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (B) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (C) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.
24
<PAGE>
A "Control Purchase" is defined as circumstances in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation or other entity (other than the Company or any employee benefit plan
sponsored by the Company) (A) shall purchase any Common Stock of the Company (or
securities convertible into the Company's Common Stock) for cash, securities or
any other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board of Directors, or (B) shall become the "beneficial
owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing twenty-five percent
(25%) or more of the combined voting power of the then outstanding securities of
the Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors (calculated
as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire
the Company's securities).
A "Board Change" is defined as circumstances in which, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board shall cease for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
a majority of the directors then still in office.
25
<PAGE>
ITEM 11. PRINCIPAL STOCKHOLDERS
The following table sets forth certain information at February 1997,
with respect to the beneficial ownership of Common Stock by (i) each person
known by the Company to be the owner of 5% or more of the outstanding Common
Stock; (ii) by each director; (iii) and by all officers and directors as a
group. Except as otherwise indicated below, each named beneficial owner has sole
voting and investment power with respect to the shares of Common Stock listed.
<TABLE>
<CAPTION>
Number of Percentage of
Name Shares Share Ownership
<S> <C> <C>
Pride, Inc. 1,500,000 53.7%
c/o Pride House
Watford Metro Centre
Tolpits Lane
Watford Hertordshire
WD1 8SB England
Alan Lubinsky (1) 1,600,000 54.3%
c/o Pride House
Watford Metro Centre
Tolpits Lane
Watford Hertordshire
WD1 8SB England
Peter Dixon - *
c/o Pride House
Watford Metro Centre
Tolpits Lane
Watford Hertordshire
WD1 8SB England
Ivan Averbuch - *
c/o Pride House
Watford Metro Centre
Tolpits Lane
Watford Hertordshire
WD1 8SB England
All officers and
Directors as a group
(4 persons) (1)(2)(3) 1,600,000 54.3%
</TABLE>
(1) New World Finance, Limited, which is wholly owned by a trust of which
family members of Mr. Lubinsky are the beneficiaries, owns approximately 52.6%
of the outstanding shares of Pride, Inc. and may be considered the beneficial
owner of the shares of the Company owned by Pride, Inc. The trustee is Elfin
Trust Company Limited, located on the
26
<PAGE>
Island of Guernsey, Channel Islands. Although Mr. Lubinsky disclaims
beneficial ownership of the shares owned by New World Finance, Limited, it may
be expected that such entity will vote its respective shares in favor of
proposals espoused by Mr. Lubinsky. See "Executive Compensation - Employment
Agreement."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of the acquisition of County in 1992, the Company
paid $1 and assumed approximately $11,500,000 of net liabilities. These
liabilities were purchased by New World Finance Limited within thirty days of
the acquisition. New World Finance Limited ("New World") is a company which is
wholly owned by New World Trust, the beneficiaries of which are members of Mr.
Lubinsky's family. This debt accrued interest at 6% and was repayable five years
from the date of issuance. This debt was converted in March 1992 into a
convertible note, which was convertible into shares of common stock of PMS at
$1.50 per share. In March 1992, New World converted approximately $5,250,0000 of
the note into 3,500,000 shares of PMS. In March 1993, New World converted
approximately $3,750,000 of the note into 2,500,000 shares of PMS. In January
1994, pursuant to the reorganization of Pride and PMS, Pride acquired all the
shares of PMS from New World, and issued shares of common stock of Pride, in
return. In September 1994, the right to convert the note into shares of PMS, was
converted into the right to purchase shares of common stock of Pride, at a price
to be determined by the board of directors of Pride, as of each conversion date.
In addition, New World guaranteed to PMS that the sale proceeds of vehicles
acquired from County would be at least equal to the residual value shown on the
books of County as of the date of the acquisition. Mr. Lubinsky did not vote on
the conversion price of any of the following conversions. In September 1994, New
World converted $1,125,000 into 281,250 shares of common stock of Pride, Inc. In
October 1994, New World converted $400,000 into 114,285 shares of common stock
of Pride, Inc. In January 1995, New World converted $155,000 into 155,000 shares
of common stock of Pride, Inc.
In August 1995, the Company determined, with the agreement of New
World, that the estimated ultimate sales values of the vehicles were less than
expected and it was agreed that the note ($562,292) be written off and canceled
against the New World guarantee.
In March 1995, Pride formed the Company in the State of Delaware and
reorganized its corporate structure by exchanging all of its shares of PMS for
1,500,000 shares of the Company's Common Stock, making PMS a wholly owned
subsidiary of the Company.
In March 1995, the Company issued 60,000 shares of its Common Stock to
Lampert & Lampert, counsel to the Company for fees and expenses of $500.
In July 1995, PMS entered into a loan agreement with the Company's
president, whereby PMS borrowed approximately $232,500. The loan is payable on
demand and accrues interest at the rate of 2.5% over the Midland Bank base rate.
The principal balance of such loan was $117,034 as of February 29, 1996. The
principal amount of the loan, including accrued interest thereon, will be paid
from the proceeds of this Offering. "Use of Proceeds."
In December 1995, the Company consummated a private placement offering,
whereby the Company sold 20 units, each unit comprised 25,000 shares of Common
Stock at a purchase price of $6,000 per unit.
27
<PAGE>
In April 1996, the Company consummated an initial public offering,
whereby the Company sold 950,000 shares of its common stock at a purchase price
of $5.00 per share and 2,000,000 redeemable common stock purchase warrants at a
price of $0.10 per warrant. The warrants are exercisable at a price of $5.75 per
share, subject to adjustment, beginning April 24, 1997 and expiring April 23,
2001. In connection therewith, the Company also granted to the underwriter of
the offering a warrant to purchase 95,000 shares of the Company's common stock
at a purchase price of $5.00 and 200,000 redeemable common stock purchase
warrants, each warrant exercisable to purchase one share of common stock at a
purchase price of $7.50 per share. Other than with respect to the exercise
price, the terms of the warrants granted to the underwriter are identical to
those described above. The Company's securities are currently traded on the
Nasdaq SmallCap Stock Exchange and the Boston Exchange.
In November 1996, the Company, through its subsidiary AC Car Group
Limited, purchased all the assets of AC Cars Limited and Autokraft Limited.
For a description of the Company's employment agreements, see "Executive
Compensation - Employment Agreements."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part
II, Item 8:
1) Independent Auditors Reports F-1
2) Balance Sheets F-2
3) Statements of Operations F-3
4) Statement of Stockholders' Equity F-4
5) Statements of Cash Flows F-5
6) Notes to Financial Statements F-7
FINANCIAL STATEMENT SCHEDULES
(b) During the 1996 fiscal year, the Company filed Reports on Form 8-K on
each of the following date:
(i) Form 8-K dated September 5, 1996 with respect to the purchase
of a AC Cars Limited and Autokraft Limited.
(c) The exhibits designated with an asterisk have previously been filed
with the Commission in connection with Pride, Inc.'s Report on Form 8-K, dated
January 13, 1994, PAG's Registration Statement on Form SB-2 dated January 12,
1996 (33-296-NY) and PAG's Report on Form 8-K dated September 5, 1996, pursuant
to 17 C.F.R. ss.230.411, are incorporated by reference herein.
<TABLE>
<CAPTION>
<S> <C>
2.1* - Agreement and Plan of Reorganization dated effective as of January
13, 1994.
3.1* - Amendment to the Certificate of Incorporation of the Company dated January
15, 1994.
3.2* - By-Laws of the Company.
10.2* - Employment Agreement with Alan Lubinsky.
10.3* - Employment Agreement with Ivan Averbuch.
10.5* - Loan Agreement between PMS and Alan Lubinsky.
10.6* - Form of Service Agreement.
10.7* - Asset purchase agreement between Pride Vehicle Contracts (UK)
Limited and Master Vehicle Contracts, Limited.
10.8* - Form of Hire Purchase Agreement.
10.9* - Mortgage on Pride House, Watford Metro Centre.
10.10* - Mortgage on Croydon, England property.
10.11* - Lease agreement with respect to the Croydon, England property.
10.12* - Form of Agreement to purchase all of the assets of AC Cars Limited and
Autokraft Limited.
24.1* - Letter from Mark H. Sternberg, with respect to the change in
accountants [incorporated by reference to Exhibit 7(a)(1) of the Amendment
to the Report on Form 8-K/A dated June 6, 1994].
24.2* - Letter from Lazar, Levine & Company, Certified Public Accountants,
with respect to the change in accountants [incorporated by reference to
Exhibit 4(a)(v) of the Report on Form 8-K dated November 14, 1994].
</TABLE>
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 26th day of February, 1997.
PRIDE AUTOMOTIVE GROUP, INC.
/s/ Alan Lubinsky
ALAN LUBINSKY, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Alan Lubinsky President, Secretary and Chairman 2/26/97
ALAN LUBINSKY of the Board of Directors (Principal Date
Executive Officer)
/s/ Ivan Averbuch Chief Financial Officer 2/26/97
IVAN AVERBUCH Date
/s/ Peter Dixon Vice-President, Treasurer and 2/26/97
PETER DIXON Director (Principal Financial Officer) Date
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Nos
<S> <C>
Independent Auditors' Report F - 2
Financial Statements:
Consolidated Balance Sheets as of November 30, 1996 and 1995 F - 3
Consolidated Statements of Operations for the Years Ended November 30, 1996 and 1995 F - 4
Consolidated Statement of Changes in Shareholders' Equity for the Two Years in the
Period Ended November 30, 1996 F - 5
Consolidated Statements of Cash Flows for the Years Ended November 30, 1996 and 1995 F - 6
Notes to Consolidated Financial Statements F - 7
</TABLE>
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Pride Automotive
Group, Inc. and subsidiaries as of November 30, 1996 and 1995 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the two years in the period ended November 30, 1996. These
consolidated financial statements are the responsibility of the Corporation'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 Kingdom which are substantially the same as those followed in the
United States. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. 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 above mentioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Corporation as of November 30, 1996 and 1995 and the results of their operations
for the two years in the period ended November 30, 1996 in conformity with
accounting principles generally accepted in the United States of America.
Our audits also include the translation of British pounds into United States
dollars for amounts included in the consolidated financial statements. In our
opinion, such translation has been made in conformity with the basis stated in
Note 2(h) of the notes to the consolidated financial statements.
MARBLE ARCH HOUSE
66-68 SEYMOUR STREET
LONDON W1H 5AF CIVVALS
UNITED KINGDOM FEBRUARY 14, 1997 CHARTERED ACCOUNTANTS
F - 2
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ASSETS (Note 6(a) -
<TABLE>
<CAPTION>
November 30,
1996 1995
------------- -----------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 250,699 $ 3,377
Accounts receivable (Notes 2c and 3) 2,022,011 1,241,167
Inventories (Note 2d) 1,022,655 31,137
Property, revenue producing vehicles and equipment - net (Notes 2e, 4, 6 and 7) 18,681,638 9,924,318
Intangible assets - net (Note 2f) 11,712,578 10,340,396
Deferred offering costs - 59,940
-------------------- ---------------
TOTAL ASSETS $33,689,581 $21,600,335
=========== ===========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
LIABILITIES:
Bank line of credit (Note 6a) $ 2,964,465 $ 1,093,680
Accounts payable 624,953 1,291,368
Accrued liabilities and expenses (Note 5) 490,915 358,892
Bank debt (Note 6b) 1,002,571 1,070,492
Obligations under hire purchase contracts (Note 7) 11,034,951 5,578,565
Loans payable - directors (Note 9) - 123,668
Other liabilities (Note 8) 33,560 532,804
Acquisition debt payable (Note 10) 5,098,470 -
---------------------------
TOTAL LIABILITIES 21,249,885 10,049,469
------------ ------------
MINORITY INTEREST IN SUBSIDIARY (Note 18) - -
----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 17)
SHAREHOLDERS' EQUITY (Notes 11, 12 and 19):
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued
or outstanding - -
Common stock, $.001 par value, 10,000,000 shares authorized 2,652,500
and 1,560,000 shares issued and outstanding in 1996 and 1995, respectively 2,653 1,560
Additional paid-in capital 14,026,758 11,741,922
Retained earnings (deficit) (1,456,963) (801,965)
Foreign currency translation (Note 2h) (132,752) 609,349
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 12,439,696 11,550,866
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $33,689,581 $21,600,335
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
November 30,
1996 1995
--------- -----------
REVENUES (Notes 2i and 14):
<S> <C> <C>
Contract hire income $ 6,286,677 $ 4,723,539
Sale of vehicles 5,839,080 4,629,860
Fleet management and other income 758,261 369,657
-------------- --------------
TOTAL REVENUE 12,884,018 9,723,056
------------- -------------
COSTS AND EXPENSES:
Cost of sales 10,241,850 7,297,331
General and administrative expenses 1,802,111 2,035,529
Amortization of goodwill 634,813 630,718
Interest and other 860,242 629,623
-------------- --------------
13,539,016 10,593,201
(LOSS) BEFORE PROVISION FOR INCOME TAXES (654,998) (870,145)
Provision for income taxes (Notes 2g and 13) - -
NET (LOSS) $ (654,998) $ (870,145)
============= =============
(LOSS) PER COMMON SHARE (Note 2j) $(.27) $(.42)
===== =====
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 2j) 2,405,760 2,060,000
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Additional Retained Foreign Total
(As Restated Common Paid-in Earnings Currency Shareholders'
- See Note 1) Stock Capital (Deficit) Translation Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1994 1,500,000 $1,500 $11,119,690 $ 68,180 $ 407,768 $11,597,138
Compensatory stock (Note 11) 60,000 60 59,940 - - 60,000
Early extinguishment of debt
with related party (Note 16) - - 562,292 - - 562,292
Foreign currency translation
adjustment - - - - 201,581 201,581
Net loss for the year ended
November 30, 1995 - - - (870,145) - (870,145)
Balance at November 30, 1995 1,560,000 1,560 11,741,922 (801,965) 609,349 11,550,866
Private offering of common stock
(Note 11) 500,000 500 119,500 - - 120,000
Shares and warrants sold in
initial public offering (Note 11) 592,500 593 2,165,336 - - 2,165,929
Foreign currency translation
adjustment - - - - (742,101) (742,101)
Net loss for the year ended
November 30, 1996 - - - (654,998) - (654,998)
BALANCE AT
NOVEMBER 30, 1996 2,652,500 $2,653 $14,026,758 $(1,456,963) $(132,752) $12,439,696
========= ====== =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
November 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) $ (654,998) $ (870,145)
Adjustments to reconcile net (loss) to net cash (utilized) provided by
operating activities:
Depreciation and amortization 2,354,942 1,852,825
Amortization of goodwill 594,735 630,718
Extinguishment of debt with related party - 562,292
(Gain) loss on disposal of fixed assets (119,030) 229,563
Compensatory stock - 60
Provision for maintenance costs (18,524) (176,302)
Foreign currency translation (742,101) 201,581
Changes in assets and liabilities:
(Increase) in accounts receivable (599,753) (236,681)
(Increase) decrease in inventories (93,794) 111,382
(Decrease) increase in accounts payable, accrued expenses and bank overdraft (955,172) (553,388)
-------------- -------------
Net cash (utilized) provided from operating activities (233,695) 1,751,905
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (9,858,724) (3,433,132)
Acquisition of assets in new subsidiary (969,279) -
Proceeds from sale of fixed assets 2,068,601 906,727
-------------- --------------
Net cash (utilized) by investing activities (8,759,402) (2,526,405)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank lines of credit 1,870,785 1,093,680
Funds received from sale of common stock 2,285,929 -
Loans received from officers - 232,500
Loans repaid to officers (304,759) (108,832)
Loans repaid to affiliate - (132,147)
Principal payments of long term debt (67,921) (92,375)
Proceeds from hire purchase contract funding 11,530,175 3,262,390
Principal repayments of hire purchase contract funding (6,073,790) (3,495,819)
------------- -------------
Net cash provided from financing activities 9,240,419 759,397
------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 247,322 (15,103)
Cash and cash equivalents, beginning of year 3,377 18,480
---------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 250,699 $ 3,377
============= ==============
</TABLE>
SUPPLEMENTAL INFORMATION:
(i) In November 1996, the Company acquired certain of the assets of AC Cars
Limited aggregating $6,067,749 and incurred debt obligations
aggregating $5,098,470.
(ii) The loss on the disposal of fixed assets resulted from the sale of
certain non-revenue producing assets whereby the proceeds were less
than the carrying value.
See notes to consolidated financial statements.
F - 6
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 1 - DESCRIPTION OF COMPANY:
Pride Automotive Group, Inc. (the "Company") was incorporated in
the State of Delaware in March 1995. Pursuant to the terms and
conditions of a reorganization in March 1995, the Company issued
1,500,000 shares of its common stock to Pride, Inc. (an entity
incorporated in the State of Delaware), thereby making the
Company a majority owned subsidiary of Pride Inc., in exchange
for all of the issued and outstanding shares held by Pride, Inc.,
of Pride Management Services Plc (PMS), a consolidated group of
operating companies located in the United Kingdom which are
engaged in the leasing of motor vehicles primarily on contract
hire to local authorities and selected corporate customers
throughout the United Kingdom. This exchange of stock resulted in
PMS becoming a wholly owned subsidiary of the Company. The
Company, its subsidiary PMS and PMS's subsidiaries are referred
to as the "Company" unless the context otherwise requires. The
accompanying consolidated financial statements are based on the
assumption that the Company and PMS were combined for all periods
presented, in a manner similar to the pooling of interests method
of accounting.
On November 29, 1996, the Company, through its newly formed
majority owned subsidiary, AC Automotive Group Inc. and its
wholly owned subsidiary AC Car Group Limited (registered in the
United Kingdom), completed the acquisition of certain assets (see
Note 10) of AC Cars Limited and Autokraft Limited. These two
companies were engaged in the manufacture and sale of specialty
automobiles. The purchase price of approximately $6,067,000 is
being financed with the proceeds of a private offering of the
Company's common stock, (see Note 19) and by loans. The
acquisition has been recorded using the purchase method of
accounting. (See also Notes 2f and 10).
The following unaudited pro-forma results of operations assume
the acquisition occurred as of March 1, 1996 (amounts in millions
except per share data):
<TABLE>
<CAPTION>
<S> <C>
Revenues $14.2
Net loss (1.8)
Earnings per common share $(.75)
</TABLE>
The pro-forma financial information, which is only available
beginning March 1, 1996, is not necessarily indicative of the
operating results that would have occurred had the acquisition
been consummated as of March 1, 1996, nor are they necessarily
indicative of future operating results. This is because AC Cars
Limited and Autokraft Limited were in administrative receivership
in the United Kingdom and this severely restricted the ability of
the companies to manufacture and market their products. The
Company has made the United States Securities and Exchange
Commission aware of the fact that financial information is not
available for prior periods.
F - 7
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PMS, the operating group of companies, which is located in the
United Kingdom, follows generally accepted accounting principles
in the United Kingdom. For purposes of these consolidated
financial statements, the Company has converted to the generally
accepted accounting principles of the United States.
(a) Basis of Consolidation and Presentation:
The consolidated financial statements include the accounts of the
Company (Pride Automotive Group, Inc.), its' wholly owned
subsidiary Pride Management Services Plc and its' wholly owned
subsidiaries, and its' majority owned subsidiary AC Automotive
Group, Inc. and its' wholly owned subsidiary. All material
intercompany balances and transactions have been eliminated.
Due to the nature of the Company's business, contract leasing of
motor vehicles (revenue producing assets) which are treated as
non-current fixed assets, the balance sheet is reflected on an
unclassified basis. Accordingly, current assets and current
liabilities are not reflected separately on the face of the
balance sheet.
(b) Use of Estimates:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results could
differ from those estimates, management does not expect such
variances, if any, to have a material effect on the financial
statements.
(c) Concentration of Credit Risk/Fair Value:
Financial instruments that potentially subject the Company to
concentrations of credit risk in accordance with SFAS No 105
consist principally of accounts receivable. The Company believes
however, that risks associated with accounts receivable are
limited due to its large customer base and the fact that it
leases vehicles to companies in many industries.
The carrying amounts of cash and cash equivalents, trade
receivables, other assets, accounts payable and debt obligations
approximate fair value.
F - 8
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(d) Inventories:
Inventories include vehicles which are no longer being leased to
customers and which are temporarily being held for resale at cost
less accumulated depreciation, which approximates net realizable
value.
The inventories of AC Automotive Group, Inc. and its subsidiary
consist of finished goods, work in progress and spare parts of
specialty automobiles and are stated at the lower of cost,
(first-in, first-out method) or market. Market is considered as
net realizable value.
As of November 30, 1996 and 1995 inventories consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------------- ------
<S> <C> <C>
Cars held for resale $ 124,932 $31,137
Finished goods 75,510 -
Work-in-progress 684,305 -
Spare parts 137,908 -
$1,022,655 $31,137
========== =======
</TABLE>
(e) Fixed Assets and Depreciation:
Fixed assets are stated at cost less depreciation. Depreciation
is provided on all assets at rates calculated to write off the
cost of each asset over its estimated useful life, as follows:
Building and improvements 50 years straight-line
basis Revenue producing vehicles 3-6 years
straight-line basis Furniture and fixtures 4
years double declining basis Machinery and
equipment 4 years double declining basis Aircraft
4 years double declining basis
Maintenance and repairs are charged to operations and major
improvements are capitalized. Upon retirement, sale of other
disposal, the associated cost and accumulated depreciation of the
asset are eliminated from the accounts and any resulting gain or
loss is included in operations.
F - 9
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Intangible Assets:
Intangible assets consist primarily of goodwill which arose in
connection with the acquisition of certain subsidiaries of PMS.
Goodwill is being amortized over a period of 10-20 years on a
straight-line basis. Accumulated amortization as of November 30,
1996 and 1995 aggregated $2,990,626 and $2,355,813, respectively.
In November 1996, the Company acquired certain of the assets of
AC Cars Limited and Autokraft Limited (see Note 1 above). The
purchase price exceeded the tangible net assets acquired by
$2,006,995. This amount was assigned to the brand name and
various contracts with suppliers and customers and is to be
amortized over 20 years on a straight-line basis.
The Company periodically reviews the valuation and amortization
of goodwill and other intangibles to determine possible
impairment by evaluating events and circumstances that might
indicate an inability to recover the carrying amount. Such
evaluation is based on analysis, including profitability,
projections and cash flows that incorporate the impact on
existing Company business.
(g) Income Taxes:
The Company conducts all of its operating activities in the
United Kingdom (UK). As such, they are subject to taxation in the
UK based upon that country's tax statutes. Under UK taxation
rules, provision is made for taxation deferred as a result of
material timing differences between the incidence of income and
expenditures for taxation and accounting purposes, using the
liability method, only to the extent that there is reasonable
probability that a liability or asset will crystallize in the
near future. See also Note 13 regarding SFAS No 109 - Accounting
for Income Taxes.
(h) Foreign Currency Translation:
The Company's principal operations are conducted by PMS which
reflects its financial statements in British pounds. As a result,
most assets and liabilities of the foreign operations are
translated into US dollars using current exchange rates in effect
at the balance sheet date. Fixed assets and intangible assets are
translated at historical exchange rates. Revenue and expense
accounts are translated using an average exchange rate during the
period except for those expenses related to assets and
liabilities which are translated at historical exchange rates.
These include depreciation and amortization which are translated
at the rates existing at the time the asset was acquired. Any
resulting gains or losses due to the translations are reflected
as a separate item of shareholders' equity.
F - 10
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(i) Income Recognition:
Contract hire income of leased vehicles is recognized as
operating leases over the period of the contract in accordance
with SFAS No 13 - Accounting for Leases and the related
amendments and interpretations. Income from the sale of
previously leased vehicles, is reflected at the time of sale of
the vehicle. Fleet management revenues and miscellaneous income
are reflected on the accrual basis over the term that the
services are provided.
(j) Earnings Per Share:
Earnings per share are computed based upon the weighted average
shares and common equivalent shares outstanding. The shares
issued in connection with the reorganization (see Note 1), the
shares issued in lieu of compensation for legal services and the
shares sold during the year ended November 30, 1996 in a private
offering (see Note 11), have been treated as outstanding for all
periods presented, in accordance with the guidelines of the
Securities and Exchange Commission. Common stock equivalents have
been excluded from the computation since the results would be
anti-dilutive.
(k) Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
(l) Lease Agreements:
The Company leases vehicles with terms generally ranging from two
to four years. The following table shows the future minimum lease
payments of existing leases to be received, net of related costs
(see also Note 7):
<TABLE>
<CAPTION>
<S> <C> <C>
November 30, 1997 $ 5,103,977
November 30, 1998 4,390,779
November 30, 1999 2,634,819
November 30, 2000 1,007,729
-------------
Total minimum lease payments receivable
net of executory costs $13,137,304
</TABLE>
(m) Accounting Changes:
As permitted by SFAS 123, Accounting for Stock-Based
Compensation, which becomes effective for the Company as of
December 1, 1996, and which encourages companies to record
expense for stock options and other stock-based employee
compensation awards based on their fair value at date of grant,
the Company will continue to apply its current accounting policy
under Accounting Principles Board Opinion No. 25 and will include
the necessary disclosures in its fiscal 1997 financial
statements.
F - 11
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- ----------
<S> <C> <C>
Trade receivables $1,192,949 $ 955,437
Lease maintenance receivables 330,902 69,182
Value added tax 102,114 97,707
Due from related companies 95,125 -
Other 300,921 118,841
------------ ------------
$2,022,011 $1,241,167
</TABLE>
Included in the above trade receivables is $59,002 due on a long term basis
as of November 30, 1996.
Based upon past experience, the Company has deemed that no allowance for
uncollectible accounts receivable is necessary.
NOTE 4 - FIXED ASSETS AND DEPRECIATION:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------------- -----------
<S> <C> <C>
Buildings and improvements $ 1,719,415 $ 1,719,415
Revenue producing vehicles 17,282,095 11,989,192
Furniture, fixtures, plant and equipment 2,247,430 519,753
Aircraft 1,331,493 -
----------------------------
22,580,433 14,228,360
Less: accumulated depreciation (including
$3,388,495 and $3,853,753 of accumulated
depreciation on revenue producing vehicles,
for 1996 and 1995, respectively) 3,898,795 4,304,042
------------- -------------
$18,681,638 $ 9,924,318
=========== ============
</TABLE>
Depreciation expense for the years ended November 30, 1996 and
1995 aggregated $2,295,164 and $2,415,117, respectively.
One of the buildings owned by Pride Management is not currently
being utilized by the Company. This building is being leased to
an unrelated party at an annual rent of approximately $80,000 per
annum.
F - 12
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 5 - ACCRUED LIABILITIES AND EXPENSES:
Accrued liabilities and expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -------
<S> <C> <C>
Taxes other than income taxes $418,082 $333,586
Miscellaneous accrued expenses 72,833 25,306
---------- ----------
$490,915 $358,892
======== ========
</TABLE>
NOTE 6 - BANK LOANS/LINE OF CREDIT:
(a) The Company has a $2,684,800 line of credit with a bank at an
interest rate of 3% in excess of the base rate (6% as of November
30, 1996). This line of credit is payable on demand and is
secured by all assets of the Company other than revenue producing
vehicles and buildings which are already pledged (see Notes 6b
and 7). As of November 30, 1996, the bank had granted a temporary
increase to $2,965,000 at similar terms.
(b) At November 30, 1996, bank loans consisted of $1,002,571 due to
two banks at rates of 3% and 5% in excess of the banks' base rate
(6% as of November 30, 1996). These loans are secured by the
freehold properties (buildings) owned by Pride Management and its
subsidiaries, and mature in 2001 and 2017.
The scheduled principal payments of this bank debt as of November
30, 1996 are as follows:
For the Year Ended November 30,
1997 $ 98,890
1998 98,890
1999 98,890
2000 98,890
2001 98,890
Thereafter 508,121
-----------
$1,002,571
NOTE 7 - HIRE PURCHASE CONTRACTS/EQUIPMENT FINANCING:
The Company has funding lines with several financing institutions
in the United Kingdom in the aggregate amount of approximately
$18,200,000 as of November 30, 1996. These funding lines are
utilized to acquire revenue producing vehicles, which vehicles
collateralize the outstanding obligations.
F - 13
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 7 - HIRE PURCHASE CONTRACTS/EQUIPMENT FINANCING (Continued):
Assets (revenue producing vehicles) obtained under hire purchase
contracts are capitalized as fixed assets and depreciated over
their useful lives. The obligations under such agreements, which
mature at various dates within five years from inception, are
reflected separately on the balance sheet net of finance charges
which are charged to the periods to which they apply. At November
30, 1996, obligations under hire purchase contracts are as
follows:
For the Year Ended November 30,
1997 $ 4,951,662
1998 3,977,882
1999 1,878,445
2000 226,962
--------------
$11,034,951
The annual interest rates on these obligations range from 7.25%
to 15.6%.
NOTE 8 - OTHER LIABILITIES:
At November 30, 1996 and 1995 other liabilities consisted of
$33,560 and $532,804, respectively due to other creditors at
interest rates approximating the current market rates and
repayable on a demand basis.
NOTE 9 - RELATED PARTY TRANSACTIONS:
At November 30, 1995, the Company was indebted to its President
in the aggregate amount of $123,668. These unsecured loans were
repayable on demand at an interest rate of 2 1/2% in excess of
the base lending rate (6.75% at November 30, 1995) of the
Company's bank. The loan was repaid during the year ended
November 30, 1996.
NOTE 10 - ACQUISITION DEBT PAYABLE:
As of November 30, 1996, acquisition debt payable (see Note 1) consisted of
the following:
Unsecured notes payable on demand after October 31, 1999; interest payable
quarterly at 8% per annum $1,678,000
Notes payable in 18 monthly installments of $46,611 plus interest at 2%
above the base rate 839,000
Other short-term notes payable (see Note 19) 2,581,470 -----------
$5,098,470
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 11 - COMMON STOCK/RECAPITALIZATION:
In March 1995, the Company issued 1,500,000 shares of common
stock in connection with a reorganization (see Note 1).
In March 1995, the Company issued 60,000 shares of common stock
in lieu of compensation for legal services rendered.
In December 1995, the Company completed a private placement
offering selling 20 units, each unit consisting of 25,000 shares
of common stock, at $6,000 per unit for aggregate gross proceeds
of $120,000.
In April 1996 the Company successfully completed an initial
public offering ("IPO") of its common stock whereby it sold
592,500 shares of common stock at a price of $5.00 per share and
2,300,000 common stock purchase warrants at a price of $.10 per
warrant. This offering yielded net proceeds of approximately
$2,166,000.
The warrants are exercisable at a price of $5.75 per share,
subject to adjustment, one year from the date of the offering,
for a period of four years. The warrants are redeemable by the
Company at any time commencing one year from the date of its
prospectus, upon 30 days notice, at a redemption price of $.05
per warrant.
In addition, the Company entered into a consulting agreement with
one of the Under- writers as a financial consultant for a period
of two years at a monthly fee of $2,500 payable in full at the
closing of the offering. The Underwriters have also been granted
warrants to acquire 95,000 shares of Common Stock and 200,000
warrants at 150% of the public offering prices or $7.50 per share
and $.15 per Warrant, respectively.
NOTE 12 - STOCK OPTION PLANS:
In September 1995, the board of directors adopted the 1995 Senior
Management Incentive Plan (the "Management Plan") which was
adopted by shareholder consent. The Plan provides for the
issuance of up to 300,000 shares of the Company's common stock in
connection with the issuance of stock options and other stock
purchase rights to executive officers and other key employees.
As of November 30, 1996, the Company had granted options to
purchase 100,000 shares of common stock at an exercise price of
$5.50 per share, none of which had been exercised as of that
date. These options are exercisable over a five year period
pursuant to a three year vesting schedule (331/3% per annum)
beginning in August 1996.
See also Note 2(m) re: Accounting Changes.
F - 15
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 13 - INCOME TAXES:
The provisions for United Kingdom income taxes utilizing the
requirements of SFAS No 109 consisted of the following for the
years ended November 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------- ---------
<S> <C> <C>
Current tax expense $ 763,350 $ 860,000
Deferred tax expense 174,650 -
Investment tax credits on vehicles (938,000) (860,000)
--------- ----------
$ - $ -
=============== ==========
</TABLE>
At November 30, 1996, investment tax credits being carried over
to future periods aggregated approximately $11,904,000.
The components of the deferred tax asset, pursuant to SFAS No.
109, as of November 30, 1996 and 1995, respectively, are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Operating loss carryforward $ 52,000 $ 23,000
Valuation allowance (52,000) (23,000)
-------- ---------
$ - $ -
</TABLE>
The Company has available operating losses carryforwards for tax
purposes aggregating approximately $148,000 as of November 30,
1996, which may result in a deferred tax asset. The Company has
recognized this asset but has provided a valuation allowance for
the full amount since there is no assurance that such losses will
be utilized in the near future.
NOTE 14 - ECONOMIC DEPENDENCY:
For the years ended November 30, 1996 and 1995, the Company had
two unaffiliated customers, which accounted for an aggregate of
approximately 17% (1995 - 18%) and 12% (1995 - 15%) respectively,
of the Company's total revenues.
The Company purchases all of the automobiles that it leases to
its clients from automotive dealerships, usually several at a
time. The Company does not depend on any one dealership for its
purchase of automobiles and does not have any written agreements
with any of the dealerships it purchases vehicles from. The
Company believes that it will continue to be able to purchase
automobiles at competitive prices and terms into the future.
F - 16
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 15 - PENSION PLAN:
PMS and its' subsidiaries have a fully insured defined
contribution plan for all of its eligible employees.
Contributions to the plan, which are discretionary, for the years
ended November 30, 1996 and 1995 amounted to $33,264 and $55,817,
respectively.
NOTE 16 - CONVERTIBLE DEBT:
The Company had reflected convertible debt of $562,292 as of
November 30, 1994. These loans were to bear interest at 6% and
were repayable five years from date of issue. The original debt,
which was not convertible, arose at the time PMS acquired one of
its subsidiaries in 1992. The Company acquired this subsidiary
for $1 and assumed approximately $11,500,000 of net liabilities.
This acquisition resulted in goodwill of approximately
$11,500,000. The ultimate holder of the debt, in 1994, was given
the option of converting such loans into shares of Pride Inc.'s
(the Company's parent) common stock at the end of such period,
based upon their guarantee of the ultimate sales values of the
related revenue producing vehicles. The debt holder was the
controlling shareholder of the Company's parent at the time of
this transaction.
During the year ended November 30, 1995, the Company determined,
with the agreement of the debt holder, that the estimated
ultimate sales values of the vehicles were less than expected and
it was agreed that the debt would be written off against the debt
holder's guarantee. The balance of the debt, $562,292, was
therefore treated as an early extinguishment of debt. At the time
of extinguishment, the debt outstanding was owed to a related
party. In accordance with APB No 26, extinguishment transactions
between related entities should be treated as capital
transactions. Accordingly, the gain on the extinguishment was
added to additional paid-in capital.
NOTE 17 - COMMITMENTS:
(a) Leases:
The Company has entered into a one-year lease agreement for the
manufacturing facility being utilized for its new subsidiary at a
cost of approximately $54,000 per month. The Company has an
option to purchase this facility at a cost of $8,700,000, through
August 1997. This lease expires in December 1997.
(b) Employment Agreements:
In August 1995, the Company entered into an employment agreement
with its President/Chairman of the Board of Directors. This
three-year agreement provides for an annual salary of $160,000
with annual escalations of 10% and also contains certain
non-compete restrictions. This employee was also granted 100,000
stock options (see Note 12).
F - 17
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
NOTE 17 - COMMITMENTS (Continued):
(b) Employment Agreements (continued):
In September 1995, the Company entered into an employment
agreement with an officer/director for a period of twenty four
months commencing December 1, 1995. This agreement is
automatically extendable for a further twenty four month period
and provides for an annual salary of $55,000, subject to review
by the Board of Directors.
(c) Rental Income:
The Company leases one of its owned facilities to an unaffiliated
company. The lease, which expires in 2004, provides for rental
income of approximately $80,000 per annum. The annual cost of
servicing the mortgage and real estate taxes on this building
approximates $70,000.
NOTE 18 - MINORITY INTEREST IN SUBSIDIARY:
The Company owns 70% of AC Automotive Group, Inc. ("AC Group").
As of November 30, 1996, losses applicable to the minority
shareholders exceeded their interest in AC Group, which was
reduced to zero, and as such, excess losses were charged against
the operations of the Company. Future earnings attributable to
the minority interest in AC Group, if any, will first be credited
to the operations of the Company, to the extent that such excess
losses were previously absorbed by the Company.
NOTE 19 - SUBSEQUENT EVENT:
In December 1996, the Company completed a private placement of 14
units, each unit consisting of a 10% promissory note in the
amount of $95,000 and 10,000 shares of the Company's common stock
for an aggregate price of $100,000 per unit. The gross proceeds
of $1,400,000 were used to satisfy a portion of the debt owed re:
the acquisition of AC Car Group (see Notes 1 and 10).
In December 1996, the Company also entered into a loan agreement
with its bank for $755,000, with interest payable at 8% per
annum, secured by a first lien on the aircraft owned by the
Company as a result of the acquisition described in Note 1. This
loan is to be repaid from the proceeds of the sale of the
aircraft.
F - 18
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
EXHIBIT 27
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATIONS S-X
The schedule contains summary financial information extracted from the
consolidated financial statements for the year ended November 30, 1996 and is
qualified in its entirety by reference to such statements.
<TABLE>
<CAPTION>
<S> <C>
Period type 12 Mos.
Fiscal year end Nov. 30, 1996
Period start Dec. 01, 1995
Period end Nov. 30, 1996
Cash 250,699
Securities 0
Receivables 2,022,011
Allowances 0
Inventory 1,022,655
Current assets 0
PP&E 22,580,433
Depreciation 3,898,795
Total assets 33,689,581
Current liabilities 0
Bonds 0
Common 2,653
Preferred mandatory 0
Preferred 0
Other SE 12,437,043
Total liability and equity 33,689,581
Sales 12,884,018
Total revenues 12,884,018
CGS 10,241,850
Total costs 10,241,850
Other expenses 0
Loss provision 0
Interest expense 860,242
Income pretax (654,998)
Income tax 0
Income continuing (654,998)
Discontinued 0
Extraordinary 0
Changes 0
Net income (654,998)
EPS primary (.27)
EPS diluted (.27)
</TABLE>
- Exhibit 27 -
