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, 1997
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 24, 1998
(consisting of Common Stock, $.001 par value per share) held by non-affiliates
was approximately $4,455,546.80 based upon the average bid and asked prices for
such Common Stock on said date ($3.34) as reported by a market maker. The
issuer's and its subsidiaries had on a consolidated basis, revenues of
$17,459,275 for its fiscal year ended November 30, 1997. On February 24, 1998,
there were 2,822,500 shares of Registrant's Common Stock outstanding.
<PAGE>
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 and 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, ISI 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 1997.
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."
<PAGE>
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 592,500 shares of its common stock to
the public at a price of $5.00 per share and 2,300,000 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 underwriters of the offering, Mason Hill & Co., Inc. and the Thornwater
Group, Inc., warrants to purchase an aggregate of 95,000 shares of the Company's
common stock at a purchase price of $7.50 and 200,000 redeemable common stock
purchase warrants at a price of $0.15 per warrant, 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 Market and the Boston Stock
Exchange, Inc.
On January 12, 1998, the Company filed a registration statement on Form
SB-2 with the SEC, to register 1,000,000 shares of the Company's Common Stock.
In connection therewith, the Company has entered into a letter of intent with
Mason Hill & Co., Inc., an NASD broker-dealer, to underwrite such securities a
firm commitment basis. A condition to such commitment requires the Company to
grant to Mason Hill, warrants to purchase an aggregate of 100,000 shares of the
Company's common stock at 120% of the public offering price. The Company has
applied to have the additional securities being underwritten in that offering
listed on the Nasdaq SmallCap Stock Market, Inc. and the Boston Stock Exchange.
Additionally, the Company has agreed to register 170,000 shares of Common Stock
on such registration statement, which shares were issued in connection with the
Company's December 1996 private placement (the "Private Placement Shares"). The
Private Placement Shares will not be underwritten by Mason Hill & Co., Inc.
There can be no assurance that the public offering described herein will be
completed.
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.
2
<PAGE>
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 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
3
<PAGE>
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.
Subsidiaries
The following is a list of the PMS subsidiaries, their dates of formation
and their business operations:
<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 and Master
(UK) Limited Vehicle Contracts Limited in February 1992 and March 1994,
respectively.
Pride Leasing Limited 02/22/89 Owned property and a building in Croydon, England, which was sold
in November 1997.
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 all the
Limited 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 January 1,
1998, the Company had approximately 1,477 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
4
<PAGE>
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.
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, 1996 and 1997, the Company
had two unaffiliated customers, Westbury Homes Plc. and Campbell Distillers
Limited, which companies accounted for in the aggregate approximately 15% and
7%, respectively, of the Company's 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 mileage 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
5
<PAGE>
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 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, 1997 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 years
ended November 30, 1996 and November 30, 1997, General Motors and Ford were the
manufacturers of approximately 20% and 20%, respectively and 16% and 17%,
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
6
<PAGE>
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 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 has asset funding lines to acquire revenue producing
vehicles with several institutions in England in the aggregate amount of
$23,667,500 of which the Company has borrowed approximately $18,342,778 as of
November 30, 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 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.
7
<PAGE>
As of August 31, 1997, the Company's line of credit with its bank
expired. In February 1998, the Company entered into a new agreement with the
bank. This new line of credit of $7,202,500, is payable on demand and is secured
by all assets of the Company other than building and revenue-producing vehicles
which are already pledged (see Notes 6b and 7 to the Notes to the Financial
Statements). Interest is payable at rates between 2% and 4% in excess of the
bank's base rate (7 1/2% at November 30, 1997). This facility has to be reduced
by $837,500 by March 31, 1998 and a further $921,250 by December 31, 1998. The
agreement is due for review November 1998.
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. In 1997, there were eight repossessions, however six of
those repossessions were re-leased. There have been none to date in 1998. 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 county
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 January 1, 1998, the Company had 1,477
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 competes for
business on the basis of both pricing and service. The Company believes that the
main
8
<PAGE>
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.
9
<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 allowed the Company to charge lower lease
rates.
Employees
As of January 1, 1998, the Company employed 20 full-time persons, six
are in management (three of which are officers), eight administrative, four
sales representative and two drivers. None of the employees are represented by a
union, and the Company considers employee relations to be good.
Properties
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 owned a building in Croydon,
England, which it purchased in 1991 at a cost of approximately $825,000. The
Company sold this property in November 1997 for $400,000.
10
<PAGE>
Pending Litigation
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.
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, AC Car Group Limited manufactures and sell two
automobiles, the Superblower (a continuation of 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 ($115,644).
In 1994, the AC Ace prototype was first displayed at the London Motor
show. 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)75,000 ($125,700). As of January 1, 1998, AC has produced approximately
fifty pre-production AC Aces. The Company expects the AC Ace should enter into
its final production stage in January 1998.
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 new licensing agreement with Ford Motor Company whereby the Company
has procured a three year license,
11
<PAGE>
commencing December 7, 1996, to continue to use the name "Cobra" on its AC
Cobra model. Notwithstanding the foregoing, the "Cobra" has been recently
updated and has been renamed the AC "Superblower."
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 new licensing arrangement with the Ford Motor Company whereby the
Company has procured a three year license to use the name "Cobra," terminating
in December 1999.
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, Germany and the United Kingdom.
The Company is in the process of negotiating 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.
12
<PAGE>
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.
Products Liability Insurance
At present, AC maintains product liability insurance through Lloyds of
London. The limit of the indemnity is (pound)2,000,000 ($3,520,000) for each
instance. Although AC has procured this insurance policy, there can be no
assurance that it will be able to maintain such insurance, 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 AC is unable to maintain
products liability insurance for the automobiles that it manufactures, it would
adversely affect the business of AC and could potentially cause it to
discontinue operations. 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. Although the Company acquired the assets of AC Cars
and Autokraft and does not believe that it will have any exposure to liability
claims for automobiles built by AC Cars and Autokraft, there can be no assurance
that the Company is correct in such belief. Any such claim relating to new
automobiles built by AC or to automobiles built by AC Cars and Autokraft could
have an adverse effect on the Company.
13
<PAGE>
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 had agreed to lease the premises currently occupied by AC for
a period of one year commencing December 1, 1996. The Company's lease costs
approximately (pound)32,000 ($53,632) per month. AC exercised its option to
purchase the premises for the purchase price of (pound)5,200,000 ($8,715,200) in
July 1997. AC then sold the property for (pound)5,600,000 ($9,385,600) and
entered into a 15 year lease for 39,000 square feet of the property at the rate
of (pound)18,000 ($30,200) per month.
Employees
At the time of their acquisition, Autokraft and AC Cars together
employed a total of 83 persons. The Company retained approximately 31 of such
employees upon completion of the Asset Acquisition and has hired 12 additional
employees to oversee the manufacturing and marketing of the automobiles.
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 owned a building in Croydon,
England, which it purchased in 1991 at a cost of approximately $825,000. The
Company sold this property in November 1997 for $400,000.
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 had agreed to lease the premises currently occupied by AC for
a period of one year commencing December 1, 1996. The Company's lease costs
approximately (pound)32,000 ($53,632) per month. AC exercised its option to
purchase the premises for the purchase price of (pound)5,200,000 ($8,715,200) in
July 1997. AC then sold the property for $9,385,600 and entered into a 15 year
lease for 39,000 square feet of the property at the rate of $30,200 per month.
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.
14
<PAGE>
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. Although the Company acquired the assets of AC Cars
and Autokraft and does not believe that it will have any exposure to liability
claims for automobiles built by AC Cars and Autokraft, there can be no assurance
that the Company is correct in such belief. Any such claim relating to new
automobiles built by AC or to automobiles built by AC Cars and Autokraft could
have an adverse effect on the Company.
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, 1997.
15
<PAGE>
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
1996
<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
9/1/96 to 11/30/96 5 6 7/8 1 1/8 1 1/2
12/1/96 to 2/28/97 1 3/4 4 11/16 5/16 1 1/2
1997
03/01/97 - 05/31/97 2 2 1/2 5/16 5/8
06/01/97 - 08/31/97 1 1/4 2 5/16 5/16 3/8
09/01/97 - 11/30/97 2 1/4 3 1/2 13/32 13/32
12/01/97 - 02/24/98 2 7/8 3 1/2 5/32 17/32
- ----------------
</TABLE>
(1) The Company effected an initial public offering of its Common Stock and
Warrants on April 24, 1996.
As of February 24, 1998, there were 31 holders of record of the
Company's Common Stock, although the Company believes that there are
approximately 1,000 additional beneficial owners of shares of Common Stock held
in street name. As of February 24, 1998, the number of outstanding shares of the
Company's Common Stock was 2,822,500.
As of February 24, 1998, there were 10 holders of the Company's
Warrants, although the Company believes that there are approximately 400
additional beneficial owners of the Company's Warrants held in street name. As
of February 9, 1998, the number of outstanding Warrants was 2,300,000.
16
<PAGE>
On February 17, 1998 the Company received a letter from Nasdaq informing
the Company that it did not comply with recently amended Nasdaq continued
listing criteria which required the Company to have minimum net tangible assets
of at least $2,000,000, two independent directors and an audit committee, a
majority of which are independent directors. The Company was granted until
February 23, 1998 to comply with such requirements.
On February 12, 1998, the Board of Directors of AC Automotive Group, Inc.
authorized the issuance of 6,633,000 shares of its common stock to Erwood
Holdings, Inc., a company affiliated with Alan Lubinsky, the President, Chief
Executive Officer and a Director of the Company and AC Automotive Group, Inc.,
for aggregate consideration of $6,633. In addition, on such date AC Automotive
Group, Inc. authorized the issuance of 176,520, 176,520 and 88,260 shares of its
common stock to Beth-Anne Kinsley, Victor and Marion Durchhalter and Bridget
Staff, respectively, for consideration of $177, $177 and $89, respectively.
Beth-Anne Kinsley, Victor and Marion Durchhalter and Bridget Staff were all
prior shareholders of AC Automotive Group, Inc. and are all associated persons
of Mason Hill & Co., Inc., the broker/dealer which effected the initial public
offering of the Company's securities and the subsequent private offering of the
Company's securities, the proceeds from which (the private offering) were
utilized by the Company to complete the AC asset acquisition.
The foregoing issuance of shares reduced the ownership of AC Automotive
Group, Inc. by the Company to under 50%. Accordingly, future financial
statements of the Company will be issued on an unconsolidated basis. Footnote 18
to the Company's Financial Statements has been prepared to show the effect of
the share issuance described herein. See "Financial Statements."
On February 25, 1998 Ivan Averbuch resigned as a Director of the Company
and on the same date the board of directors elected Ian Satill, to fill such
vacancy.
On February 25, 1998, the Board of Directors resolved to form an audit
committee in order to comply with current Nasdaq corporate governance
requirements. The Audit Committee is comprised of the three directors of the
Company, two of whom (Ian Satill and Alan Edgar) are believed by the Board of
Directors to be independent.
Although the Company is of the belief that it is now in compliance with
Nasdaq requirements for a continued listing of its securities on the Nasdaq
SmallCap system, there can be no assurance that it is correct in such belief.
The Company expects to receive a ruling from Nasdaq shortly on its listing
compliance. See "Certain Transactions."
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.
17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 1997 and 1996.
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.
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 majority of 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.
18
<PAGE>
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.
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 was recorded using the purchase method of
accounting (see also Note 18b - notes to financial statements).
Results of Operations - Years Ended November 30, 1997 and November 30, 1996:
Contract Hire/Fleet Management
Revenues, including those from other group companies, for the year
ended November 30, 1997 were approximately $17,294,000 compared to approximately
$12,884,000 for the year ended November 30, 1996, an increase of $4,410,000 or
34%. The primary reason for this 34% increase was due to an increase in revenues
from contract hire, sale of vehicles at lease maturity and the selling of
vehicles at low margins to take advantage of dealer bonuses.
For the year ended November 30, 1997, 550 new vehicles were acquired as
against 385 in the year ended November 30, 1996. The average monthly rental of
new contracts written was $541 per vehicle as against an average of $569 per
vehicle for the previous year. The average monthly rental is dependent on the
type of vehicle being rented and the terms of the contract.
19
<PAGE>
For the year ended November 30, 1997, 153 vehicles were disposed of on
termination of contracts at an average profit of $1,529 per vehicle. For the
year ended November 30, 1996, 157 vehicles were disposed of on termination of
contracts at an average profit of $2,233 per vehicle. The average profit per
disposal is dependent on the type of vehicle sold and current market value of
vehicles.
As of November 30, 1997, 1,740 vehicles were under lease and management
compared to 1,409 vehicles as at November 30, 1996.
Cost of sales increased in actual dollars and as a percent of sales,
when comparing the years ended November 30, 1997 and 1996. These costs increased
by approximately $3,193,000 or 31%, which is less than the increase in revenues.
As a percent of sales, cost of sales for 1997 was 77.7% versus 79.5% for 1996.
General and administrative expenses increased from $1,802,000 for 1996
to $1,858,000 for 1997, an increase of $56,000 or 3%. As a percent of sales
these expenses represented 11% of sales for 1997 and 14% for 1996. Management
believes that they can continue to increase revenues whilst keeping general and
administration costs under control.
Interest expense increased from $860,000 in 1996 to $1,747,000 in 1997.
Management attributes this increase to the large increase in new business
written and the associated increase in funding of vehicles, providing financial
support to AC Cars (see below) and the costs associated with the raising of
finances to fund the acquisition of AC Cars.
The loss on sale of fixed assets resulted from the sale of a property
to the tenant who exercised their option to purchase. The loss amounted to
approximately $455,000.
Income (loss) before taxes for the years ended November 30, 1997 and
1996, prior to amortization of goodwill for the period ($632,000 and $635,000,
respectively) aggregated $256,000 and ($20,000), respectively.
AC Cars
The Company, on November 29, 1996, through its newly formed 70% owned
subsidiary, AC Automotive Group, Inc. and its wholly-owned subsidiary AC Car
Group Limited, completed the acquisition of certain assets of AC Cars Limited
and Autokraft Limited. These two companies are engaged in the manufacture and
sale of sports cars among which the famous AC Cobra sells for approximately
$100,000 each.
The Company acquired the business out of administrative receivership
and for most of the year has devoted most of its resources to resurrecting
operations. This has involved upgrading of production facilities, improving
efficiency, appointing new dealerships, installing systems and controls and
appointing new management where necessary. New dealerships have been appointed
in the United Kingdom and a distributor has been appointed in Australia. The
Company has embarked on a program to bring the new AC Ace Sports car into
production in the last quarter of 1997.
20
<PAGE>
Revenues, including those from other group companies, for the year
ended November 30, 1997, were approximately $1,633,000. Other income of $701,000
resulted mainly from the sale of the option to purchase the property occupied by
the operation.
Cost of sales amounted to approximately $1,573,000 on the above
revenues.
General and administration expenses amounted to approximately $2,589,000. Rent
and property taxes of approximately $865,000 and salaries of $282,000 accounted
for 44% of the above costs.
Depreciation of plant, machinery, tooling, equipment and fixtures
amounted to approximately $400,000.
Interest amounted to approximately $462,000 for the year. Interest was
incurred on a bank line of credit of $195,000, on bank debt of $80,000 and on
acquisition debt of $187,000.
The Hurricane aircraft which was acquired as part of the assets at
acquisition, was disposed of at a loss of approximately $299,000.
AC Cars is in a developmental stage and certain specific expenses have
been classified as research and development costs. These costs relate to
research and development incurred on the manufacture and distribution of the AC
Cobra and AC Ace and are separately disclosed. Management believes it is more
prudent to write off these costs immediately as they occur. Research and
development costs amounted to approximately $983,000 for the current year.
(Loss) before tax for the year ended November 30, 1997 on the AC
business aggregated $4,111,000.
In February 1998, subsequent to the end of the Company's current fiscal
year, AC Automotive issued additional shares to certain individuals and an
entity affiliated with the Company's President for aggregate cash of $6,776,
thereby diluting the Company's ownership in this subsidiary to 20%. See Note 18b
of Notes to the Financial Statements for additional information.
Consolidated
For the year ended November 30, 1997, the Company reported a net loss
of $4,455,400 or $1.59 per share. For the year ended November 30, 1996, the
Company reported a net loss of $600,622 or $.25 per share.
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, 1997 and 1996, the
Company's balance sheet reflected cash of $77,000 and $251,000, respectively,
accounts receivable of
21
<PAGE>
$2,002,000 and $2,022,000, respectively, and total assets of $40,301,000 and
$33,690,000, respectively. The principal reason for the increase in total assets
is an increase in contract hire vehicles available for lease.
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
approximately $2,166,000.
The Company's total assets as of November 30, 1997 and 1996 include
intangible assets of approximately $9,090,000 and $9,722,000, 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, 1997 and 1996 would be approximately
$1,680,000 (negative) $2,235,000, respectively.
During the years ended November 30, 1997 and 1996, the Company
generated cash flows from operating activities aggregating approximately
$1,572,000 and $489,000, respectively. Investing activities reflect uses of cash
for the years ended November 30, 1997 and 1996 of $11,911,000 and $8,759,000,
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 $23,677,500 at November 30, 1997. At
November 30, 1997, there was approximately $18,342,000 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.
22
<PAGE>
For the year ended November 30, 1997, the Company provided cash from
financing activities ($10,208,000) primarily due to financing provided by bank
lines of credit ($4,012,000) plus the increases in financing of new vehicles
($19,492,000) net of the amounts needed to reduce hire purchase contract
financing ($12,185,000). For fiscal 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).
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.
23
<PAGE>
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.
24
<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 with the Company
<S> <C> <C>
Alan Lubinsky 39 President, Secretary, and Chairman of
the Board of Directors
Ivan Averbuch 42 Chief Financial Officer and
Treasurer
Allan Edgar 51 Director
Ian Satill 39 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 been the Chairman and
Managing Director of AC Car Group Limited since July 1996. Mr. Lubinsky has been
the President, Chairman and director of AC Automotive Group, Inc. since its
inception in 1996. Mr. Lubinsky has 19 years experience in the motor vehicle
industry in positions of executive management.
Ivan Averbuch Mr. Averbuch has been the Chief Financial Officer of the
Company since December 1995. Mr. Averbuch was a director of the Company from
December 1995 until February 1998. Mr. Averbuch has been the Chief Financial
Officer of Pride, Inc. since December 1995. Mr. Averbuch has been the Financial
Director of AC Car Group Limited since July 1996. Mr. Averbuch has been the
Chief Financial Officer and Director of AC Automotive Group, Inc. since its
inception in 1996. From September 1987 to November 1995, Mr. Averbuch was
employed at Kessel 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.
25
<PAGE>
Allan Edgar Mr. Edgar has been a director of the Company since May 1997.
Mr. Edgar has been a director of AC Automotive Group, Inc. since its inception
in 1996. Mr. Edgar has been the Marketing Director of Hyatt Hotels & Resorts for
Europe, Africa and the Middle East since 1990. Mr. Edgar has extensive
experience in the automobile industry, including positions at Hertz Rent-a-Car,
Volkswagen Interent, and Leyland Motor Corporation.
Ian Satill Mr. Satill has been a director of the Company since February
1998. From June 1996 until present, Mr. Satill has been the Group Managing
Director of Rustlers Management.
The directors of the Company are elected annually by the stockholders and
hold office until the next annual meeting of stockholders, 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 stockholders 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 stockholder 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 1997 fiscal year, except Alan Lubinsky did not file a Form 4
with respect to the receipt of stock options in May 1997. Mr. Lubinsky has
stated that he intends on filing a Form 5 to rectify the situation. Neither Ivan
Averbuch nor Allan Edgar filed a Form 4 with respect to the receipt of stock
options in May 1997. Messrs. Averbuch and Edgar have stated that they intend to
file Form 5's to rectify the situation. The Company has no basis to believe that
any other required filing by any of the above indicated individuals has not been
made.
26
<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, 1997, 1996 and 1995. 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
Position (1) Year Salary($) Bonus($) Compensation($)(2)
- ----------------------- ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
Alan Lubinsky 1997 $176,000 - $30,000 (3)(4)
President, Secretary 1996 $160,000 - $30,000
and Chairman of the Board 1995 $137,750 - $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 1997, 1996 and 1995, 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.
(4) In May 1997, Mr. Lubinsky received stock options under PAG's Senior
Management Incentive Plan to purchase 43,234 shares at $2.54 per share. These
options vest at the rate of 33 1/3% per annum commencing May 1998.
27
<PAGE>
Stock Options
The following table sets forth certain information concerning the grant of
stock options made during the year ended November 30, 1997, under the Company's
1995 Senior Management Incentive Plan.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
====================================================================================================================================
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
# of Securities Options/SAR's
underlying Granted to
Options/SAR's Employees in Exercise or Base
Name Granted(1) Fiscal Year Price ($/SH) Expiration Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alan Lubinsky (1) 33,333 35.5% $5.50 8/01/08
- ------------------------------------------------------------------------------------------------------------------------------------
Alan Lubinsky (2) 43,234 46.1% $2.54 5/29/02
- ------------------------------------------------------------------------------------------------------------------------------------
Ivan Averbuch (2) 8,647 9.2% $2.31 5/29/10
- ------------------------------------------------------------------------------------------------------------------------------------
Allan Edgar (2) 8,647 9.2% $2.31 5/29/10
====================================================================================================================================
</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 $5.50 per share. These options vest at
the rate of 33 1/3% per annum commencing August 1996. See "Employment
Agreements".
Represents incentive stock options granted under the Company's 1995 Senior
Management Incentive Plan (the "Plan"). Options granted under the Plan are
intended to qualify as incentive stock options under the Internal Revenue
Code of 1986, as amended. Under the terms of the Plan, options may be
granted to officers, key employees, directors and consultants of the
Company until September 2005. Options granted to directors, who are not
officers or employees, or to consultants, do not qualify as incentive stock
options. The option price per share may not be less than the fair market
value of the Company's shares on the date the option is granted. However,
options granted to persons owning more than 10% of the Company's Common
Stock may not have a term in excess of five years and may not have an
option price of less than 110% of the fair market value per share of the
Company's shares on the date the option is granted. See "--1995 Senior
Management Incentive Plan".
(2) On May 30, 1997, the Company issued these options to Messrs. Lubinsky,
Averbuch and Edgar pursuant to the terms of the Company's 1995 Senior
Management Incentive Plan. These options vest at the rate of 33 1/3% per
annum commencing May 30, 1998.
28
<PAGE>
The following table contains information with respect to employees of the
Company concerning options held as of November 30, 1997
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
================================================================================================================================
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised In-
Unexercised The-Money
Options/SAR's at Options/SAR's
FY-End (#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable Unexercisable(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alan Lubinsky 0 0 66,667/33,333 0
================================================================================================================================
</TABLE>
(1) As of February 24, 1998, the average of the prior day's closing bid and
ask price was $3.19. 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.
29
<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
30
<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."
In May 1997, Mr. Lubinsky, Mr. Averbuch and Mr. Edgar were issued 43,234,
8,647 and 8,647 options, respectively, to purchase shares of the Company's
Common Stock pursuant to the Company's Senior Management Incentive Plan.
In January 1998, Mr. Lubinsky, Mr. Averbuch and Mr. Edgar were issued
29,137, 5,000 and 5,000 options, respectively, to purchase shares of the
Company's Common Stock pursuant to the Company's Senior Management Incentive
Plan.
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.
31
<PAGE>
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 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.
32
<PAGE>
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
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".
33
<PAGE>
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.
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.
34
<PAGE>
ITEM 11. PRINCIPAL STOCKHOLDERS
The following table sets forth certain information at February 24, 1998,
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 53.1%
c/o Pride House
Watford Metro Centre
Tolpits Lane
Watford Hertordshire
WD1 8SB England
Alan Lubinsky (1) 1,566,667 54.2%
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
Allan Edgar - *
c/o Pride House
Watford Metro Centre
Tolpits Lane
Watford Hertordshire
WD1 8SB England
35
<PAGE>
Ian Satill - *
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) 1,566,667 54.2%
</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 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."
(2) Includes shares issuable upon the exercise of options granted to Mr.
Lubinsky (i) pursuant to the terms of his 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.
36
<PAGE>
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, which was paid in April 1996.
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.
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 $7.50 and 200,000 redeemable common stock purchase
warrants at a purchase price of $0.15 per warrant, 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 Automotive
Group, Inc., purchased all the assets of AC Cars Limited and Autokraft Limited.
In December 1996, the Company consummated a private placement offering,
whereby the Company sold 18.5 units, each unit comprised of a 10% promissory
note in the amount of 10,000 shares of Common Stock at a purchase price of
$100,000 per unit. In connection with such offering, AC sold an aggregate of
1,028,700 shares to three affiliates of the Underwriter for aggregate
consideration of $1,030. Such persons currently own an aggregate of 14% of the
capital stock of AC. In addition, the Underwriter loaned the Company the sum of
$100,000, $71,000 of which remains outstanding.
37
<PAGE>
On February 17, 1998 the Company received a letter from NASDAQ informing
the Company that it did not comply with recently amended NASDAQ continued
listing criteria which required the Company to have minimum net tangible assets
of at least $2,000,000, two independent directors and an audit committee, a
majority of which are independent directors. The Company was granted until
February 23, 1998 to comply with such requirements.
On February 12, 1998, the Board of Directors of AC Automotive Group, Inc.
authorized the issuance of 6,633,000 shares of its common stock to Erwood
Holdings, Inc., a company affiliated with Alan Lubinsky, the President, Chief
Executive Officer and a Director of the Company and AC Automotive Group, Inc.,
for aggregate consideration of $6,633. In addition, on such date AC Automotive
Group, Inc. authorized the issuance of 176,520, 176,520 and 88,260 shares of its
common stock to Beth-Anne Kinsley, Victor and Marion Durchhalter and Bridget
Staff, respectively, for consideration of $177, $177 and $89, respectively.
Beth-Anne Kinsley, Victor and Marion Durchhalter and Bridget Staff were all
prior shareholders of AC Automotive Group, Inc. and are all associated persons
of Mason Hill & Co., Inc., the broker/dealer which effected the initial public
offering of the Company's securities and the subsequent private offering of the
Company's securities, the proceeds from which (the private offering) were
utilized by the Company to complete the AC asset acquisition.
The foregoing issuance of shares reduced the ownership of AC Automotive
Group, Inc. by the Company to under 50%. Accordingly, future financial
statements of the Company will be issued on an unconsolidated basis. Footnote 18
to the Company's Financial Statements has been prepared to show the effect of
the share issuance described herein. See "Financial Statements."
On February 25, 1998 Ivan Averbuch resigned as a Director of the Company
and on the same date the board of directors elected Ian Satill, to fill such
vacancy.
On February 25, 1998, the Board of Directors resolved to form an audit
committee in order to comply with current Nasdaq corporate governance
requirements. The Audit Committee is comprised of the three directors of the
Company, two of whom (Ian Satill and Allan Edgar) are believed by the Board of
Directors to be independent.
Although the Company is of the belief that it is now in compliance with
Nasdaq requirements for a continued listing of its securities on the Nasdaq
SmallCap system, there can be no assurance that it is correct in such belief.
The Company expects to receive a ruling from Nasdaq shortly on its listing
compliance.
For a description of the Company's employment agreements, see "Executive
Compensation - Employment Agreements."
All future transactions between the Company and any officer, director or 5%
stockholder will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent
disinterested directors of the Company.
38
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part
II, Item 8:
<TABLE>
<CAPTION>
<S> <C> <C>
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-6
</TABLE>
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.
39
<PAGE>
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>
40
<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 27th day of February, 1998.
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 2/27/98
ALAN LUBINSKY of the Board of Directors (Principal Date
Executive Officer)
/s/ Ivan Averbuch Chief Financial Officer, 2/27/98
IVAN AVERBUCH Vice President and Treasurer Date
/s/ Allan Edgar Director 2/27/98
ALLAN EDGAR Date
/s/ Ian Satill Director 2/27/98
IAN SATILL 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, 1997 and 1996 F - 3
Consolidated Statements of Operations for the Years Ended November 30, 1997 and 1996 F - 4
Consolidated Statement of Changes in Shareholders' Equity for the Two Years in the
Period Ended November 30, 1997 F - 5
Consolidated Statements of Cash Flows for the Years Ended November 30, 1997 and 1996 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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations
for the two years in the period ended November 30, 1997 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.
MARBEL ARCH HOUSE
66-68 SEYMOUR STREET
LONDON W1H 5AH CIVVALS
UNITED KINGDOM FEBRUARY 20, 1998 CHARTERED ACCOUNTANTS
F - 2
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ASSETS (Note 6a) -
<TABLE>
<CAPTION>
November 30,
1997 1996
---------------- -----------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 77,354 $ 250,699
Accounts receivable - net (Notes 2c and 3) 2,002,365 2,022,011
Inventories (Note 2d) 1,248,360 1,022,655
Property, revenue producing vehicles and equipment - net
(Notes 2e, 4, 6b and 7) 27,882,350 20,671,854
Intangible assets - net (Note 2f) 9,090,156 9,722,363
------------- --------------
TOTAL ASSETS $40,300,585 $33,689,582
=========== ===========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
LIABILITIES:
Bank line of credit (Note 6a) $ 6,976,699 $ 2,964,465
Accounts payable 1,758,764 624,953
Accrued liabilities and expenses (Note 5) 865,977 490,915
Bank debt (Note 6b) 695,782 1,002,571
Obligations under hire purchase contracts (Note 7) 18,341,778 11,034,951
Other liabilities (Note 8) 52,707 33,560
Acquisition debt payable (Note 9) 4,198,500 5,098,470
------------- -------------
TOTAL LIABILITIES 32,890,207 21,249,885
------------ ------------
MINORITY INTEREST IN SUBSIDIARY (Note 16) - 482,486
-------------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)
SHAREHOLDERS' EQUITY (Notes 10 and 11):
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued
or outstanding - -
Common stock, $.001 par value, 10,000,000 shares authorized 2,822,500
and 2,652,500 shares issued and outstanding in 1997 and 1996, respectively 2,823 2,653
Additional paid-in capital 13,582,795 13,487,388
Deferred financing costs (Note 10) (141,500) -
Retained earnings (deficit) (5,857,987) (1,402,587)
Foreign currency translation (Note 2h) (175,753) (130,243)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 7,410,378 11,957,211
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $40,300,585 $33,689,582
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
November 30,
1997 1996
---------------- -----------
REVENUES (Notes 2i and 13):
<S> <C> <C>
Contract hire income $ 8,410,366 $ 6,286,677
Sale of vehicles 7,090,027 5,839,080
Fleet management and other income 1,076,650 758,261
Service and spare parts revenue 180,990 -
Other income (Note 15a) 701,242 -
----------------------------
TOTAL REVENUE 17,459,275 12,884,018
------------ ------------
COSTS AND EXPENSES:
Cost of sales 10,336,360 7,946,686
Depreciation 3,946,635 2,295,164
General and administrative expenses 3,540,130 1,802,111
Amortization of goodwill 632,207 634,813
Interest and other financing costs 2,209,150 860,242
Research and development 982,580 -
Loss on sale of fixed assets (Note 4) 753,933 -
----------------------------
22,400,995 13,539,016
LOSS BEFORE MINORITY INTERESTS (4,941,720) (654,998)
Minority interest in net loss of consolidated subsidiaries (Note 16) 486,320 54,376
-------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,455,400) (600,622)
Provision for income taxes (Notes 2g and 12) - -
----------------------------------
NET LOSS $ (4,455,400) $ (600,622)
============ =============
LOSS PER COMMON AND DILUTIVE COMMON
EQUIVALENT SHARE (NOTE 2j):
Net loss before minority interests $(1.76) $(.27)
Minority interest in net loss of subsidiaries .17 .02
--------- ------
NET LOSS PER SHARE $(1.59) $(.25)
======= =====
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 2j) 2,801,075 2,405,760
========= =========
</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>
Additional Deferred Retained Foreign Total
Common Paid-in Financing Earnings Currency Shareholders'
Shares Stock Capital Costs (Deficit) Translation Equity
----------- ------------ ---------------------------- --------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 1,
1995 1,560,000 $1,560 $11,741,922 $ - $ (801,965) $ 609,349 $11,550,866
Private offering of
common stock (Note 10) 500,000 500 119,500 - - - 120,000
Shares and warrants sold
in initial public offering
(Note 10) 592,500 593 2,165,336 - - - 2,165,929
Adjustment for minority
interest (Note 16) - - (539,370) - - - (539,370)
Foreign currency
translation adjustment - - - - - (739,592) (739,592)
Net loss for the year ended
November 30, 1996 - - - - (600,622) - (600,622)
---------------- ----------------------------------------------------------- ------------------------------
Balance at
November 30, 1996 2,652,500 2,653 13,487,388 - (1,402,587) (130,243) 11,957,211
Private offering of
common stock (Note 10) 170,000 170 95,407 - - - 95,577
Deferred financing
costs (Note 10) - - - (141,500) - - (141,500)
Foreign currency
translation adjustment - - - - - (45,510) (45,510)
Net loss for year ended
November 30, 1997 - - - - (4,455,400) - (4,455,400)
-------------- --------------------------------------------------------- ---------------- ------------
BALANCE AT
NOVEMBER 30, 1997 2,822,500 $2,823 $13,582,795 $(141,500) $(5,857,987) $(175,753) $ 7,410,378
========= ====== =========== ========= =========== ========= ============
</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,
1997 1996
---------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) $ (4,455,400) $ (600,622)
Adjustments to reconcile net (loss) to net cash provided by operating activities:
Minority interest in net loss of subsidiary (486,320) (54,376)
Depreciation and amortization 3,946,635 2,295,164
Amortization of goodwill 632,207 634,813
Deferred financing costs (141,500) -
Loss (gain) on disposal of fixed assets 753,933 (119,030)
Provision for maintenance costs - (18,524)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 19,646 (599,753)
(Increase) in inventories (225,705) (93,794)
Increase (decrease) in accounts payable, accrued expenses and bank overdraft 1,528,020 (955,172)
--------------- -------------
Net cash provided from operating activities 1,571,516 488,706
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (16,494,724) (9,858,724)
Acquisition of assets in new subsidiary - (969,279)
Proceeds from sale of fixed assets 4,583,660 2,068,601
-------------- -------------
Net cash (utilized) by investing activities (11,911,064) (8,759,402)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank lines of credit 4,012,234 1,870,785
Net proceeds from sale of stock 95,577 2,285,929
Loans repaid to officers - (304,759)
Payment of acquisition debt (899,970) -
Principal payments of long term debt (306,789) (67,921)
Proceeds from hire purchase contract funding 19,491,763 11,530,175
Principal repayments of hire purchase contract funding (12,184,936) (6,073,790)
------------ -------------
Net cash provided from financing activities 10,207,879 9,240,419
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (41,676) (722,401)
--------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (173,345) 247,322
Cash and cash equivalents, beginning of year 250,699 3,377
-------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 77,354 $ 250,699
============== =============
</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, 1997 AND 1996
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.
On November 29, 1996, the Company, through a 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 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 was financed with the
proceeds of a private offering of the Company's common stock, and
by loans. The acquisition was recorded using the purchase method
of accounting.
The following unaudited pro-forma results of operations, for the
year ended November 30, 1996, assume the acquisition occurred as
of March 1, 1996 (amounts in millions except per share data). 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.
Revenues $14.2
Net loss (1.8)
Earnings per common share $(.75)
See also Note 18b regarding Subsequent Events.
F - 7
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
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 majority 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.
Certain reclassifications have been made to the 1996 financial
statements to conform to the presentation used in 1997.
(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, 1997 AND 1996
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, 1997 and 1996 inventories consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------------- ---------
<S> <C> <C>
Cars held for resale $ 132,369 $ 124,932
Finished goods 90,784 75,510
Work-in-progress 502,500 684,305
Spare parts 522,707 137,908
------------ ------------
$1,248,360 $1,022,655
</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, 1997 AND 1996
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,
1997 and 1996 aggregated $3,622,833 and $2,990,626, respectively.
In November 1996, the Company acquired certain of the assets of
AC Cars Limited and Autokraft Limited (see Note 1). The purchase
price exceeded the tangible net assets acquired by $16,780. This
amount was assigned to the brand name and is being 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 12 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, 1997 AND 1996
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.
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, 1998 $ 7,504,475
November 30, 1999 5,072,831
November 30, 2000 2,152,957
November 30, 2001 418,979
--------------
Total minimum lease payments receivable
net of executory costs $15,149,242
</TABLE>
(j) Earnings (Loss) Per Share:
Earnings per share are computed based upon the weighted average
shares and common equivalent shares outstanding. The shares sold
during the year ended November 30, 1996 in a private offering
(see Note 10), 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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 - Earnings Per Share ("SFAS 128"), which
changes the method for calculating earnings per share. SFAS 128
requires the presentation of "basic" and "diluted" earnings per
share on the face of the income statement. SFAS 128 is effective
for financial statements for periods ending after December 15,
1997. The Company will adopt SFAS 128 for the year ending
November 30, 1998, and accordingly restate prior periods, as
early adoption is not permitted. SFAS 128 is not expected to
materially differ from primary or fully diluted earnings per
share as previously reported.
(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.
F - 11
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(l) Stock Based Compensation:
SFAS No. 123 "Accounting for Stock Based Compensation", effective
December 1996, requires the Company to either record compensation
expense or to provide additional disclosures with respect to
stock awards and stock option grants made after December 31,
1994. The accompanying Notes to Consolidated Financial Statements
include the disclosures required by SFAS No. 123. No compensation
expense is recognized pursuant to the Company's stock option
plans under SFAS No. 123 which is consistent with prior treatment
under APB No. 25.
(m) New Accounting Pronouncements:
SFAS 130 "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997 and early adoption is
permitted. This statement prescribes standards for reporting
comprehensive income and its components. The Company will adopt
these standards effective for the year ending November 30, 1998.
See also Earnings (Loss) Per Share.
(n) Impact of the Year 2000 Issue:
The year 2000 issue is the result of computer programs being
written using two digits rather than four to designate the
applicable year. Accordingly, any of the Company's computer
programs that utilize date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This
could potentially result in a system failure or miscalculations
causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or
engage in other similar normal business activities.
The Company had already planned on upgrading its computer
software to increase operational efficiencies and information
analysis. In conjunction with this upgrade, the Company will
ensure that the new systems properly utilize dates that go beyond
December 31, 1999. The cost of this upgrade project, as it
relates to the Year 2000 issue, is not expected to have a
material effect on the operations of the Company and will be
funded through operating cash flows.
NOTE 3 - ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
Accounts receivable consist of the following:
1997 1996
<S> <C> <C>
Trade receivables - net of allowance for doubtful
accounts of $80,486 and $0, for 1997 and 1996,
respectively $ 639,109 $1,192,949
Lease maintenance receivables 943,261 330,902
Value added tax 138,555 102,114
Due from related companies 83,219 95,125
Other 198,221 300,921
------------ ------------
$2,002,365 $2,022,011
</TABLE>
F - 12
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 4 - FIXED ASSETS AND DEPRECIATION:
<TABLE>
<CAPTION>
Fixed assets consist of the following:
1997 1996
---------------- -----------
<S> <C> <C>
Buildings and improvements $ 820,160 $ 1,719,415
Revenue producing vehicles 27,612,291 17,282,095
Furniture, fixtures, plant and equipment 4,670,067 4,641,388
Aircraft - 927,751
-------------------- ---------------
33,102,518 24,570,649
Less: accumulated depreciation (including
$4,263,115 and $3,388,495 of accumulated
depreciation on revenue producing vehicles,
for 1997 and 1996, respectively) 5,220,168 3,898,795
------------- -------------
$27,882,350 $20,671,854
</TABLE>
Depreciation expense for the years ended November 30, 1997 and
1996 aggregated $3,946,635 and $2,295,164, respectively.
One of the buildings owned by Pride Management was being leased
to an unrelated party at an annual rent of approximately $80,000
per annum. In November 1997, the tenant exercised an option to
purchase the building for approximately $400,000.
NOTE 5 - ACCRUED LIABILITIES AND EXPENSES:
<TABLE>
<CAPTION>
Accrued liabilities and expenses consist of the following:
1997 1996
----------- -------
<S> <C> <C>
Taxes other than income taxes $438,289 $418,082
Miscellaneous accrued expenses 427,688 72,833
--------- ----------
$865,977 $490,915
======== ========
</TABLE>
F - 13
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 6 - BANK LOANS/LINE OF CREDIT:
(a) As of August 31, 1997, the Company's line of credit with its bank
expired. In February 1998, subsequent to the balance sheet date,
the Company entered into a new agreement with the bank. This new
line of credit of $7,202,500, is payable on demand and is secured
by all assets of the Company other than building and
revenue-producing vehicles which are already pledged (see Notes
6b and 7). Interest is payable at rates between 2% and 4% in
excess of the bank's base rate (7 1/2% at November 30, 1997).
This facility has to be reduced by $837,500 by March 31, 1998 and
a further $921,250 by December 31, 1998. The agreement is due for
review in November 1998.
(b) At November 30, 1997, other bank loans consisted of $695,782
payable at a rate of 3% in excess of the bank's base rate
($1,002,571 due to two banks at rates of 3% and 5% in excess of
the banks' base rate as of November 30, 1996). This loan is
secured by the freehold property (building) owned by Pride
Management and its subsidiaries, and matures in 2017.
The scheduled principal payments of this bank debt as of November
30, 1997 are as follows:
For the Year Ended November 30,
1998 $ 84,058
1999 84,058
2000 84,058
2001 84,058
2002 84,058
Thereafter 275,492
--------
$695,782
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
$23,667,500 as of November 30, 1997. These funding lines are
utilized to acquire revenue producing vehicles, which vehicles
collateralize the outstanding obligations.
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, 1997, obligations under hire purchase contracts are as
follows:
For the Year Ended November 30,
1998 $ 8,860,849
1999 7,060,375
2000 2,372,636
2001 47,918
--------------
$18,341,778
The annual interest rates on these obligations range from 9% to
11%.
F - 14
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 8 - OTHER LIABILITIES:
At November 30, 1997 and 1996 other liabilities consisted of
$52,707 and $33,560, respectively, due to other creditors at
interest rates approximating the current market rates and are
repayable on a demand basis.
NOTE 9 - ACQUISITION DEBT PAYABLE:
Acquisition debt payable (see Note 1) consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------
<S> <C> <C>
Unsecured notes payable on demand after May 31, 1998; interest
payable quarterly at 2% above the
base rate 837,500 839,000
Unsecured notes payable on demand after May 31,
1998; interest payable at 10% per annum (see Note 10) 1,615,000 -
Unsecured notes payable on demand after October 31,
1999; interest payable quarterly at 8% per annum $1,675,000 $1,678,000
Other short-term notes payable 71,000 2,581,470
------------- -----------
$4,198,500 $5,098,470
</TABLE>
NOTE 10 - COMMON STOCK/RECAPITALIZATION:
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.
F - 15
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 10 - COMMON STOCK/RECAPITALIZATION (Continued):
In addition, the Company entered into a consulting agreement with
one of the Underwriters 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.
In 1997, the Company completed a private placement of 17 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 notes are payable on
the earlier of 18 months from the date of issuance or a closing
of an underwritten public offering of the Company's (or any of
its subsidiaries) securities (see Note 18a). The promissory notes
are classified as acquisition debt (see also Note 9).
The Company has reflected deferred financing costs based upon the
difference between the deemed fair value of the shares and the
market value at the time of issuance. These costs will be
recognized as additional interest expense over the term of the
notes.
NOTE 11 - 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.
During the year ended November 30, 1996, the Company granted
options to purchase 100,000 shares of common stock at an exercise
price of $5.50 per share (fair value of $2.60), none of which has
been exercised to 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.
In May 1997, the Company granted an aggregate of 60,528 options
to three employees exercisable at $2.54 per share. These options
vest at the rate of 331/3% per annum commencing May 1998.
The Company applies APB 25 and related Interpretations in
accounting for the Management Plan. Accordingly, no compensation
cost has been recognized for the Management Plan. Had
compensation cost of the Management Plan been determined using
the fair value-based method, as defined in SFAS 123 (see Note
2m), the Company's net earnings (loss) and earnings (loss) per
share would have been adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996
--------------- --------
<S> <C> <C>
Net earnings (loss):
As reported $(4,455,400) $(600,622)
Pro forma (4,745,000) (906,622)
Earnings (loss) per share:
As reported (1.59) (.25)
Pro forma (1.69) (.38)
</TABLE>
F - 16
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 11 - STOCK OPTION PLANS (Continued):
The fair value of each option grant was estimated on the date of
the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1997 and 1996;
respectively; expected volatility of 1.2% and 1.1%, respectively;
risk-free interest rate of 6.5%; and expected lives of 3 to 5
years.
The effects of applying SFAS 123 in the above pro forma
disclosures are not necessarily indicative of future amounts.
Additionally, future amounts are likely to be affected by the
number of grants awarded since additional awards are generally
expected to be made at varying amounts.
NOTE 12 - INCOME TAXES:
The Company has available operating losses carryforwards for tax
purposes aggregating approximately $5,028,000 as of November 30,
1997, 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.
The components of the deferred tax asset, pursuant to SFAS No.
109, as of November 30, 1997 and 1996, respectively, are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------- --------
<S> <C> <C>
Operating loss carryforward $1,709,000 $ 52,000
Valuation allowance (1,709,000) (52,000)
----------- ---------
$ - $ -
================= =======
</TABLE>
NOTE 13 - ECONOMIC DEPENDENCY:
For the years ended November 30, 1997 and 1996, the Company had
two unaffiliated customers, which accounted for an aggregate of
approximately 17% (1996 - 17%) and 7% (1996 - 12%) 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 - 17
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 14 - 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, 1997 and 1996 amounted to $65,726 and $33,264,
respectively.
NOTE 15 - COMMITMENTS:
(a) Leases:
In November 1996, the Company 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, with
an option to purchase this facility at a cost of $8,700,000,
through August 1997. In August 1997, the Company sold this option
to purchase for $673,750 and negotiated a new lease for a smaller
portion of this facility at an approximate cost of $31,000 per
month.
(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 11).
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
subject to review by the Board of Directors. For the year ended
November 30, 1997, the annual salary amounted to $71,000
(c) Rental Income:
The Company leased one of its owned facilities to an unaffiliated
company for an annual rental of approximately $80,000 per annum.
The annual cost of servicing the mortgage and real estate taxes
on this building was approximately $70,000. In November 1997,
this property was sold for $400,000 (see Note 4).
F - 18
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 16 - MINORITY INTEREST IN SUBSIDIARIES:
The Company owns 70% of AC Automotive Group, Inc. ("AC Group") -
see Note 1. As of November 30, 1996, the Company reflected a
charge of $539,370 to additional paid-in capital in order to
properly reflect the minority interest liability at $482,486. For
the year ended November 30, 1997, losses applicable to the
minority shareholder exceeded its interest, accordingly, such
losses were charged against the operations of the Company. Future
earnings attributable to the minority interests, if any, will
first be credited to the operations of the Company to the extent
that such losses were previously absorbed by the Company (see
also Note 18b).
NOTE 17 - BUSINESS SEGMENT INFORMATION:
The Company's operations have been classified into two business
segments; Contract Hire and Leasing and Automobile Manufacture.
The Contract Hire and Leasing is the business of Pride Management
Services Plc and its subsidiaries and utilizes the resale of
automobiles at the end of the contracts. The Automobile
manufacturer is the business of AC Car Group Limited. This
segment began operations in December 1996.
Summarized financial information by business segment for the
years ended November 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- -----------
<S> <C> <C>
Revenue:
Pride Management Services Plc $16,249,338 $12,884,018
AC Car Group Limited 1,209,937 -
--------------------------
$17,459,275 $12,884,018
Income (Loss) Before Minority Interests:
Pride Management Services Plc $ (830,056) $ (654,998)
AC Car Group Limited (4,111,664) -
------------- -------------
$ (4,941,720) $ (654,998)
============ =============
Total Assets:
Pride Management Services Plc $35,686,989 $27,680,689
AC Car Group Limited 4,613,596 6,008,893
------------- --------------
$40,300,585 $33,689,582
Depreciation and Amortization:
Pride Management Services Plc $ 4,155,846 $ 2,929,977
AC Car Group Limited 422,996 -
----------------------------
$ 4,578,842 $ 2,929,977
============ ===========
Capital Expenditures:
Pride Management Services Plc $15,298,608 $ 8,002,360
AC Car Group Limited 1,196,116 1,856,364
------------- -------------
$16,494,724 $ 9,858,724
=========== ============
</TABLE>
F - 19
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 18 - SUBSEQUENT EVENTS:
(a) In January 1998, the Company filed a Form SB-2 with the
Securities and Exchange Commission, registering for the sale of
1,000,000 shares of common stock. The estimated net proceeds from
this offering is expected to be $4,100,000. The Company intends
to use these proceeds to repay existing debt.
(b) In February 1998, AC Automotive issued additional shares to
certain individuals and an entity affiliated with the Company's
President for aggregate cash of $7,076, thereby diluting the
Company's ownership in this subsidiary to 20%. The following
condensed pro-forma balance sheet assumes this dilution occurred
as of November 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash $ 76,516
Accounts receivable - net 4,200,035
Inventory 132,369
Fixed assets - net 24,489,646
Intangible assets - net 9,074,865
Investment in affiliate 1,800,000
-------------
$39,773,431
Liabilities and Shareholder's Equity:
Bank line of credit $ 5,297,687
Accounts payable and accrued expenses 2,022,057
Bank debt 695,782
Obligations under hire purchase contracts 18,341,778
Loans payable 1,738,703
Shareholders' equity 11,677,424
------------
$39,773,431
</TABLE>
The following pro forma statement of operations assumes the
disposition occurred at the beginning of the year ended November
30, 1997:
Revenue $16,249,338
Expenses 17,079,394
Net loss (830,056)
Loss per share (.30)
The pro-forma financial information is not necessarily indicative
of the results that would have occurred had this dilution
occurred as of the dates indicated above nor are they necessarily
indicative of future operating results.
F - 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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, 1997 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> nov-30-1997
<PERIOD-END> nov-30-1997
<CASH> 77,354
<SECURITIES> 0
<RECEIVABLES> 2,082,851
<ALLOWANCES> 80,486
<INVENTORY> 1,248,360
<CURRENT-ASSETS> 0
<PP&E> 33,102,518
<DEPRECIATION> 5,220,168
<TOTAL-ASSETS> 40,300,585
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 2,823
<OTHER-SE> 7,407,555
<TOTAL-LIABILITY-AND-EQUITY> 40,300,585
<SALES> 16,758,033
<TOTAL-REVENUES> 17,459,275
<CGS> 14,282,995
<TOTAL-COSTS> 14,282,995
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,209,150
<INCOME-PRETAX> (4,455,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,455,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,455,400)
<EPS-PRIMARY> (1.59)
<EPS-DILUTED> (1.59)
</TABLE>
