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.
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<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.
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<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) and extraordinary loss on sale of fixed assets of $455,000
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.
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<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
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$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.
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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.
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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.
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<PAGE>
PART III
<PAGE>
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.
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<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 Food Group Pty Ltd.
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.
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