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, 1998
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)
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Delaware 98-0157860
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
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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 19, 1999
(consisting of Common Stock, $.001 par value per share) held by non-affiliates
was approximately $2,918,116 based upon the average bid and asked prices for
such Common Stock on said date ($2.18) as reported by a market maker. The
issuer's and its subsidiaries had on a consolidated basis, revenues of
$13,102,000 for its fiscal year ended November 30, 1998. On February 19, 1999,
there were 2,822,500 shares of Registrant's Common Stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
Pride Automotive Group, Inc., a Delaware corporation (the "Company") was
formed by Pride, Inc. ("Pride"), in March 1995 for the purpose of acquiring all
of the outstanding shares of common stock of Pride Management Services, Plc., an
English corporation ("PMS"), which has been accounted for as a "Reorganization."
Prior to the Reorganization, PMS was a wholly owned subsidiary of Pride.
Pride was incorporated as L.H.M. Corp. in the State of Delaware on May 10,
1988, as a "blank check" company for the purpose of seeking potential business
ventures through acquisition or merger. In April 1990, L.H.M. Corp. entered into
an Agreement and Plan of Reorganization with International Sportsfest, Inc.
("ISI"), a company formed to engage in 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.
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, prior to the
Asset Disposition (as hereinafter defined) engaged 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 operated as one unit, with the same management and facilities.
Unless the context otherwise requires, all references to the "Company" are to
its wholly owned subsidiary, PMS and PMS's six wholly owned subsidiaries. See
"--Subsidiaries."
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Public Offering of Pride Automotive Group, Inc.
In April 1996, the Company completed an underwritten initial public
offering of its securities. The securities were registered with the Securities
and Exchange Commission ("SEC") pursuant to a registration statement on Form
SB-2. The initial public offering was declared effective by the SEC on April 24,
1996. In the offering, the Company sold 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.
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 entered into a letter of intent with Mason
Hill & Co., Inc., an NASD broker-dealer, to underwrite such securities a firm
commitment basis.
Although the Company has filed a Registration Statement for the offer and
sale of additional securities to raise capital and pay down loans to note
holders and creditors, the Company does not believe that such Offering will be
completed because of the limited operations of the Company and its current
financial condition. Accordingly, the Company expects to withdraw its
Registration Statement upon completion of an acquisition (of which there can be
no assurance), although it retains the option to proceed with the offering on
term as filed or as may be modified at the discretion of the Company. See
"Proposed Acquisition of Digital Mafia Enterprises, LLC."
Prior to February 19, 1999, the Company's securities were traded on the
Nasdaq SmallCap Stock Market and the Boston Stock Exchange, Inc. On February 19,
1999, both Nasdaq and the Boston Stock Exchange halted trading in the Company's
securities upon dissemination by the Company of news that it had executed a
letter of intent to acquire a company known as Digital Mafia Entertainment, LLC.
("DME"). Shortly thereafter, the Company received notice from Nasdaq that it was
being delisted for, among other things, failure to maintain tangible book value
of at least $2,000,000.
Business of Pride Management Services, Plc.
Prior to November 1998, the Company engaged 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. In November 1998,
PMS and its subsidiaries entered into an agreement with Newcourt Automotive
Services, Ltd. ("Newcourt) to sell it substantially all of their leasing
portfolios for the sum of approximately $14,763,000. The portfolio sold had been
carried on the books of the Company at a value of approximately $17,851,000. PMS
currently maintains leases on approximately 100 vehicles,
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although it intends to discontinue its leasing operations by the end of
calendar year 1999. The sale of such assets was deemed necessary by PMS due to
pressure from its lenders. The sale of the leasing portfolios and operating
losses reduced the Company net tangible assets to a level which caused the
NASDAQ SmallCap market to delist the Company's securities.
Employees
As of March 23, 1999, the Company employed 5 full-time persons, 3 are in
management (2 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.
Pending Litigation
The Company has been sued in New York by a noteholder to recover the sum of
$95,000 which the noteholder loaned to the Company in connection with its
November 1996 private offering. In addition to the foregoing, the Company is
currently in default on another $1,520,000 of notes due to holders which
acquired such notes from the Company in or about November 1996 in connection
with the Company's private offering. The proceeds of such private offering were
used to acquire the assets of AC Cars Limited and Autokraft Limited.Inasmuch as
the Company has limited liquidity as at the date hereof, any judgement against
the Company would have a significant negative impact on the Company.
Acquisition of AC Car Group Limited
In November 1996, the Company, through its subsidiary AC Automotive Group
Limited ("Automotive"), 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.
The Asset Purchase was financed by a private placement, whereby the Company
issued an aggregate of approximately $1,615,000 of promissory notes and 170,000
shares of Common Stock to Holders. Mason Hill acted as placement agent in such
private placement. Additionally, Mason Hill loaned the Company $100,000 of which
$29,000 has been repaid. Interest and principal due under the Notes are
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currently in default and the Company lacks the liquidity and capital resources
to repay same. The Company's 16% equity interest in Automotive is valued at
approximately $4,048,460 as at the date hereof.
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.
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, 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,
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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. This is when AC Cars and Autokraft were put up for
sale which resulted in the acquisition by AC Car Group Limited.
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.
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.
The AC Cobra is Type approved for sale in certain countries of the European
Economic Community ("EEC").
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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.
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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
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.
The Company has been sued in New York by a noteholder to recover the sum of
$95,000 which the noteholder loaned to the Company in connection with its
November 1996 private offering. In addition to the foregoing, the Company is
currently in default on another $1,520,000 of notes due to holders which
acquired such notes from the Company in or about November 1996 in connection
with the Company's private offering. The proceeds of such private offering were
used to acquire the assets of AC Cars Limited and Autokraft Limited.Inasmuch as
the Company has limited liquidity as at the date hereof, any judgement against
the Company would have a significant negative impact on the Company.
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Proposed Acquisition of Digital Mafia Enterprises, LLC
PMS is winding down its operations and has a negative net worth. The
Company has proposed selling PMS to its parent company, Pride, for nominal
consideration (ie, $1.00) together with its interest in Automotive. Although
Automotive has a book value in excess of $4,000,000, Pride refused to acquire
PMS, with its negative book value, without acquiring the 16% interest in
Automotive. The Company is of the opinion that PMS is of no commercial value and
is agreeing to dispose of same to Pride to allow Pride to sell off the remaining
assets and attempt to minimize any additional losses to lenders of PMS. The
disposition of PMS and Automotive is subject to shareholder approval and will
not be effected unless and until the Company completes its intended acquisition
of Digital Mafia Enterprises, LLC. ("DME").
In light of the foregoing, Management has been searching for a business
opportunity for the Company. The opportunity to acquire DME was presented to the
Company by Mason Hill. Mason Hill has agreed to act as the Company's investment
bankers in connection with such acquisition opportunity and will be compensated
therefor. On February 19, 1999, the Company entered into a letter of intent to
acquire 100% of the capital stock of Digital in exchange for 7,400,000 shares of
the Company's common stock. After receiving a notice of delisting from NASDAQ,
the Company and DME renegotiated the terms of the acquisition, and agreed to
double the number of shares being issued to DME to 14,800,000 in exchange for
100% of the issued and outstanding capital stock of DME. If the Acquisition is
completed, the Company will have 20,790,500 shares of its common stock issued
and outstanding (assuming the conversion of all of the Notes by the Holders).
This includes approximately 728,000 shares being issued in lieu of debt and
costs of $364,000 and 740,000 shares of common stock being issued to Mason Hill
for its investment banking services in connection with the Digital Transaction
and this Offering. The proposed acquisition of DME is subject to shareholder and
director approval by both companies and requires that a significant portion of
the $1,615,000 of noteholders convert their debt to equity.
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, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to February 19, 1999, the Company's securities were traded on the
Nasdaq SmallCap Stock Market and the Boston Stock Exchange, Inc. On February 19,
1999, both Nasdaq and the Boston Stock Exchange halted trading in the Company's
securities upon dissemination by the Company of news that it had executed a
letter of intent to acquire a company known as Digital Mafia Entertainment, LLC.
("DME"). Shortly thereafter, the Company received notice from Nasdaq that it was
being delisted for, among other things, failure to maintain tangible book value
of at least $2,000,000.
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.
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Common Stock Warrants
Calendar Period Low High Low High
1996
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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 81/8 2 7/8 4
9/1/95 to 11/30/96 5 67/8 1 1/8 1 1/2
12/1/96 to 2/29/96 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 - 02/28/98 27/8 3 1/2 5/32
1998
03/01/98 - 5/31/98 3 7/16 4 1/2 5/16 3/4
06/01/98 - 8/31/98 37/8 3 7/8 5/16 3/4
09/01/98 - 11/30/98 2 3 7/16 5/16 3/4
12/01/98 - 01/11/99 2 2 7/16 3/8 7/16
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(1) The Company effected an initial public offering of its Common Stock and
Warrants on April 24, 1996.
As of February 19, 1999, 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 19, 1999, the number of outstanding shares of the Company's Common
Stock was 2,822,500.
As of February 19, 1999, 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
19, 1999, the number of outstanding Warrants was 2,300,000.
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, 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 then 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.
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.
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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, 1998 and 1997.
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 an 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 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 purpose and pays for all the
maintenance on the vehicle during the lease term.
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The Company has servicing agreements with automobile dealers and service
centres, 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, user 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 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 an liabilities which are translated at historical
exchange rates. These expenses include depreciation and amortisation 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 December 11, 1998, the Company, through its subsidiary, Pride Management
Services Plc, completed the sale of a large portion of its leasing assets (see
Note 3-Subsequent Event). Pride Management Services Plc, through its
subsidiaries, continues to service the remaining contract hire agreements.
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. The purchase price of approximately
$6,000,000 was financed by the sale of common stock and by loans. The
acquisition involved the purpose of plant and equipment, the brand name,
inventories and an aircraft and was recorded using the purchase method of
accounting.
On February 12, 1998, following restructure of AC Automotive Group, Inc,
the ownership of AC Automotive Group, Inc, by the Company was reduced to 16%
(see Note 1- Description of Company). The Company's investment in AC Automotive
Group, Inc, is therefore being reported under the cost method of accounting.
On February 19, 1999, the Company executed a letter of intent to acquire
all the issued and outstanding capital stock of Digital Mafia Entertainment, LLC
("DME"), in exchange for the issuance of 7,400,000 shares in Pride Automotive
common stock. In addition, the Company also announced that it will, at the same
time, sell its shares in Pride Management Services Plc, to Pride, Inc, its
majority shareholder, for a nominal value.
12
<PAGE>
On March 12, 1999, the Company was notified by NASDAQ that the Company's
securities would be delisted from the Nasdaq Small Cap Market effective March
19, 1999, since the Company's financial condition does not meet the requirements
for continual inclusion of such securities. The Company is in the process of
appealing this decision. After receiving a notice of delisting from NASDAQ, the
Company and DME renegotiated the terms of the acquisition, and agreed to double
the number of shares being issued to DME to 14,800,000 in exchange for 100% of
the issued and outstanding capital stock of DME. If the Acquisition, which is
subject to shareholder and board of director approval by both the Company and
Digital, is completed, the Company will have 20,790,500 shares of its common
stock issued and outstanding (assuming the conversion of all of the Notes by the
Holders). This includes approximately 728,000 shares being issued in lieu of
debt and costs of $364,000 and 740,000 shares of common stock being issued to
Mason Hill for its investment banking services in connection with the Digital
Transaction and this Offering.
In addition, the Company had agreed to sell PMS to its parent company,
Pride, for nominal consideration (ie, $1.00) as part of the transaction, in
order to remove such entity, with its negative book value, from the financial
statements of the Company. However, in light of the delisting and the
renegotiated terms of the DME acquisition, Pride advised the Company that it
would not acquire PMS unless it could also acquire the Company's 16% its
interest in Automotive. The proposed acquisition of DME is subject to
shareholder and director approval by both companies and requires that a
significant portion of the $1,615,000 of noteholders convert their debt to
equity.
13
<PAGE>
RESULT OF OPERATIONS -
YEARS ENDED NOVEMBER 30, 1998 AND NOVEMBER 30, 1997
The following discusses the results of operations of the contract hire and
fleet management operations of the Company. The Consolidated Statement of
Operations for November 30, 1997 included the consolidated results of AC
Automotive Group, Inc.
Contract hire income for the year ended November 30, 1998 was approximately
$8,329,000 compared to approximately $8,410,000 for the year ended November 30,
1997, a decrease of $81,000. The main reason for this small decrease is that
there was an overall decrease in the contract hire fleet of 88 vehicles over the
year which gave rise to the decrease in revenues.
Fleet management and other income for the year ended November 30, 1998 was
approximately $470,000 compared to approximately $1,076,000 for the year ended
November 30, 1997, a decrease of $606,000. This decrease is mainly due to a
decrease of 385 vehicles managed and loss of rental income from property
disposed at the end of 1997.
Vehicle sales for the year ended November 30, 1998 was approximately
$4,302,000 compared to approximately $6,762,000 for the year ended November 30,
1997. This decrease was mainly due to reduction in sale of vehicles at low
margins to take advantage of dealer bonuses.
For the year ended November 30, 1998, 194 new vehicles were acquired as
against 550 in the year ended November 30, 1997. The average monthly rental of
new contracts written was $675 as against an average of $541 per vehicle for the
previous year. The average monthly rental is dependant on the type of vehicle
being rented and the terms of the contract.
For the year ended November 30, 1998, 284 vehicles were disposed of on
termination of contracts. 152 vehicles were disposed of at an average net profit
of $2,830 and 132 vehicles were disposed of at an average net loss of $3,191 per
vehicle. 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. The average
profit per disposal is dependent on the type and the current market value of
vehicles sold, as well as any additional termination income that accrues on
termination of the contract.
As of November 30, 1998, 1,265 vehicles were under lease and management
compared to 1,740 vehicles as at November 30, 1997.
Cost of sales including depreciation, decreased by approximately $3,146,000
or 16% when comparing the years ended November 30, 1998 and 1997. This decrease
is less than the 19% decrease in revenues. As a percentage of sales, cost of
sales for 1998 was 85.5% versus 82.6% for 1997.
General and administration expenses increased from approximately $1,958,000
to $1,973,000, an increase of $115,000 or 6%. Management believe that this
increase was acceptable in a difficult trading environment.
14
<PAGE>
Interest expense increased from $1,747,000 in 1997 to $2,307,000 in 1998,
an increase of $560,000. Management attributes this increase to the effect of
funding for a full year, the 550 new vehicles acquired in 1997 and the increased
cost of the increasing bank line of credit. After the completion of the sale of
a substantial portion of the contracts and related assets on December 11, 1998,
the Company decided to write off the intangibles.
Loss for the years ended November 30, 1998 and 1997, prior to amortization
and write off of goodwill for the period ($9,075,000 and $632,000 respectively)
aggregated ($2,379,000) and ($198,000).
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. As at November 30, 1998 and 1997, the
Company's balance sheet reflected cash of $52,000 and $77,000 respectively,
accounts receivable of $1,486,000 and $2,002,000 respectively, and total assets
of $27,122,000 and $40,300,000 respectively. The principal reason for the
decrease in total assets is due to the deconsolidation of the assets in AC
Automotive Group, Inc, after the change in ownership and control.
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 proceeds of $120,000 ($0.24 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.
During the years ended November 30, 1998 and 1997, the Company generated
cash flows from operating activities aggregating approximately $4,086,000 and
$1,571,000 respectively. Investing activities reflect uses of cash for the years
ended November 30, 1998 and 1997 of $2,488,000 and $11,911,000 respectively.
These uses of cash are the result of the purchase of fixed assets (primarily
revenue producing vehicles) net of the proceeds from sale of vehicles at lease
expiration dates and the acquisition described above.
For the year ended November 30, 1998, the Company utilized cash from
financing activities of $1,913,000. This was due to financing provided by bank
lines of credit ($966,000) and increases in financing of new vehicles
($6,888,000) net of the amounts to reduce hire purchase financing ($9,757,000)
and long term debt ($10,000). For fiscal 1997, the Company provided cash from
financing activities ($10,208,000) primarily due to financing provided by
banking lines of credit ($4,012,000) plus increases in financing of new vehicles
($19,492,000) net of amounts needed to reduce hire purchase contract financing
($12,185,000) and debts ($1,207,000) and the net proceeds from the sale of stock
($96,000).
The Company has incurred losses from operations of $11,475,629 and
$4,455,400 for the years ended November 30, 1998 and 1997.
15
<PAGE>
The losses for the year ended November 30, 1997 includes a loss of
$4,111,664 incurred by its then subsidiary, AC Car Group Limited. The equity
held in this Company has since been diluted and the Company's accounts are
therefore no longer consolidated.
The losses for the year ended November 30, 1998 includes $8,444,147 from
the writing off of the goodwill related to the subsidiary, Pride Management
Services Plc, as substantially all of its assets were sold on December 11, 1998
(see Note 3).
The circumstances described above, together with the material events
discussed in Note 3 to the financial statements, which took place subsequent to
November 30, 1998, and the restated proforma balance sheets after these events,
raise substantial doubts about the Company's ability to continue as a going
concern.
Management plans in regard to this matter were described in a press release
issued on February 19, 1999. In this press release, it was announced that the
Company had executed a Letter of Intent to acquire all of the issued and
outstanding capital stock of Digital Mafia Entertainment, LLC, in exchange for
the issuance of 7,400,000 shares in Pride Automotive common stock. In addition,
the Company also announced that it will, at the same time, sell its ownership of
Pride Management Services to Pride, Inc, its majority shareholder, for nominal
value. At this time, the these sales has not been consummated. As set forth
hereinabove, the terms of said transaction have been renegotiated to increase
the number of shares being issued to DME to 14,800,000.
Management is also attempting to raise capital for the purpose of meeting
the Company's financial obligations until such time as the Contract of Sale
described above is consummated. If this raising of capital is unsuccessful, then
the Company will not have sufficient cash on hand to meet its current
obligations. The financial statements do not include any adjustments that might
result from this uncertainty.
There are no material planned capital expenditure.
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 word "anticipate",
"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.
16
<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.
17
<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>
<S> <C> <C>
Name Age Position with the Company
Alan Lubinsky 40 President, Secretary, and
Chairman of the Board of
Directors
Ivan Averbuch 43 Chief Financial Officer and
Treasurer
Allan Edgar 52 Director
Ian Satill 40 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.
18
<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. The Company does
not believe that all officers, directors or greater than 10% shareholders have
filed such reports as is required pursuant to Section 16(a) during the 1998
fiscal year, although the Company, its officers and directors have undertaken to
file Form 5's to identify options which have been issued during fiscal 1998 and
to use their best efforts cause such forms to be filed on a timely basis in the
future.
19
<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, 1998, 1997 and 1996. The Company did not incur any compensation
expenses during such period.
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Name and Principal Other Annual
Position (1) Year Salary($) Bonus($) Compensation($)(2)
<S> <C> <C> <C> <C>
Alan Lubinsky 1998 $176,000 - $30,000
President, Secretary 1997 $176,000 - $30,000 (3)(4)
and Chairman of the Board 1996 $160,000 - $30,000
</TABLE>
(1) All of the Company's administrative functions, including the payment of
salaries, are performed by Pride Vehicle Contracts Limited, since the
Company's operations run basically as one operation. The Company believes
that it is easier and cost effective to operate in this manner. The
Company plans on continuing this practice in the future.
(2) Includes contributions to the Company's pension plan of $18,000 in each of
1998, 1997 and 1996, 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 the Company's board of directors. 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. Although Mr. Lubinsky's employment agreement terminated in August
1998, the Company has continued his employment on the terms as same
existed upon termination of the employment agreement.
(4) In May 1997, Mr. Lubinsky received stock options under PAG's Senior
Management Incentive Plan to purchase 43,234 shares at $2.54 per share.
These options vest at the rate of 33 1/3% per annum commencing May 1998.
20
<PAGE>
Stock Options
The following table sets forth certain information concerning the grant of
stock options made during the year ended November 30, 1998, under the Company's
1995 Senior Management Incentive Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
====================================================================================================================================
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
# of Securities Options/SAR's
underlying Granted to
Options/SAR's Employees in Exercise or Base
Name Granted(1) Fiscal Year Price ($/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 $5.50 per share. These options vest at
the rate of 33 1/3% per annum commencing August 1996. See "Employment
Agreements".
Represents incentive stock options granted under the Company's 1995 Senior
Management Incentive Plan (the "Plan"). Options granted under the Plan are
intended to qualify as incentive stock options under the Internal Revenue
Code of 1986, as amended. Under the terms of the Plan, options may be
granted to officers, key employees, directors and consultants of the
Company until September 2005. Options granted to directors, who are not
officers or employees, or to consultants, do not qualify as incentive
stock options. The option price per share may not be less than the fair
market value of the Company's shares on the date the option is granted.
However, options granted to persons owning more than 10% of the Company's
Common Stock may not have a term in excess of five years and may not have
an option price of less than 110% of the fair market value per share of
the Company's shares on the date the option is granted. See "--1995 Senior
Management Incentive Plan".
(2) On May 30, 1997, the Company issued these options to Messrs. Lubinsky,
Averbuch and Edgar pursuant to the terms of the Company's 1995 Senior
Management Incentive Plan. These options vest at the rate of 33 1/3% per
annum commencing May 30, 1998.
21
<PAGE>
The following table contains information with respect to employees of the
Company concerning options held as of November 30, 1998
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
================================================================================================================================
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised In-
Unexercised The-Money
Options/SAR's at Options/SAR's
FY-End (#) at FY-End($)
Shares Acquired Value Realized($) Exercisable/ Exercisable/
Name on Exercise (#) Unexercisable Unexercisable(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alan Lubinsky 0 0 66,667/33,333 0
================================================================================================================================
</TABLE>
(1) As of February 19, 1999, the average of the prior day's closing bid and
ask price was $____. 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. Although Mr. Lubinsky's
employment agreement terminated in August 1998, the Company has continued his
employment on the terms as same existed upon termination of the employment
agreement. 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.
22
<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
23
<PAGE>
can be eligible for awards under such plan must be 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,
24
<PAGE>
regardless of the number of shares covered thereby, with no additional cash or
investment other than the original share of Common Stock used to exercise the
option.
Upon termination of employment or consulting services, an optionee will be
entitled to exercise the vested portion of an option for a period of up to three
months after the date of termination, except that if the reason for termination
was a discharge for cause, the option shall expire immediately, and if the
reason for termination was for death or permanent disability of the optionee,
the vested portion of the option shall remain exercisable for a period of twelve
months thereafter.
Incentive Stock Rights. Incentive stock rights consist of incentive stock
units equivalent to one share of Common Stock in consideration for services
performed for the Company. Each incentive stock 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.
25
<PAGE>
The exercise of any portion of either the related option or the tandem SARs
will cause a corresponding reduction in the number of shares remaining subject
to the option or the tandem SARs, thus maintaining a balance between outstanding
options and SARs.
Restricted Stock Purchase Agreements. Restricted stock purchase agreements
provide for the sale by the Company of shares of Common Stock at prices to be
determined by the Board, which shares shall be subject to restrictions on
disposition for a stated period during which the purchaser must continue
employment with the Company in order to retain the shares. Payment can be made
in cash, a promissory note or a combination of both. If termination of
employment occurs for any reason within six months after the date of purchase,
or for any reason other than death or by retirement with the consent of the
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".
26
<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.
27
<PAGE>
ITEM 1PRINCIPAL STOCKHOLDERS
The following table sets forth certain information at February 19, 1999,
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. 1,425,000 50.4%
c/o Pride House
Watford Metro Centre
Tolpits Lane
Watford Hertordshire
WD1 8SB England
Alan Lubinsky (1) 1,425,000 50.4%
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
28
<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) 1,425,000 50.4%
</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 50.4% 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) Excludes 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.
29
<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.
Between December 1996 and March 1997, the Company consummated a private
placement offering, whereby the Company sold 17 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
approximately 5% of the capital stock of AC. In addition, the Underwriter loaned
the Company the sum of $100,000, $71,000 of which remains outstanding.
30
<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, and is now in compliance.
On February 12, 1998, the Board of Directors of Automotive authorized the
issuance of 6,130,000 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 Automotive, for aggregate consideration of
$6,130. Such shares have been subsequently transferred from Erwood Holdings,
Inc. to Durnover, Ltd., another company with which Mr. Lubinsky is affiliated.
In addition, on such date Automotive 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. After the foregoing issuances, there was a total of
10,000,000 shares of Automotive authorized, issued and outstanding. See "Risk
Factors" and "Certain Relationships and Related Transactions."
On March 1998, the Board of Directors of Automotive authorized a one for
four reverse split of its common stock and issued (1) 525,000 shares of its
common stock to Durnover Ltd., an entity affiliated with Alan Lubinsky, for
aggregate consideration of $526; (ii) 651,000 shares of its common stock to the
Company for aggregate consideration of $2,248,460 which consideration was paid
by the capitalization of debt of $2,248,460 owed by Automotive to the Company.
On March 31, 1998, the Board of Directors of Automotive authorized the following
issuance of its common stock (i) 2,352,000 shares of its common stock to Michael
Hall for $2,352, (ii) 514,500 shares of its common stock to Kingsbury Company,
Ltd. for $514.50, (iii) 367,500 shares of its common stock to ACL (1996) Ltd.
and a further 367,500 shares of its common stock to Autokraft for a total
consideration of $1,675,000, which consideration was paid by the capitalization
of debt of $1,675,000 owed by Automotive to ACL and Autokraft. In connection
with such share issuances, Michael Hall and Kingsbury Company, Ltd. loaned the
sum of (pound)1,000,000 ($1,630,000) and (pound)500,000 ($825,000) to AC
respectively.
In October 1997, Alan Lubinsky loaned AC the sum of (pound)100,000
($163,000), which note is payable on demand and accrues interest at the rate of
2% over the base lending rate in England. Mr. Lubinsky has made additional loans
to AC and Automotive since such date interest free. The balance on such loans as
at the date hereof is approximately (pound)20,000 ($32,600) (exclusive of the
October 1997 (pound)100,000 ($163,000) loan which remains outstanding). The
(pound)20,000 ($32,600) loan is due on demand and is interest free.
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 1
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.
31
<PAGE>
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.
In August and September 1998, Pride sold an aggregate of 75,000 shares of
the Company's common stock under Rule 144. The Company realized gross proceeds
of $239,375 from such sales. Approximately $220,000 of such proceeds were loaned
to by Pride to Automotive. Such loan is interest free and payable on demand.
In November 1998, PMS and its subsidiaries entered into an agreement with
Newcourt Automotive Services, Ltd. ("Newcourt) to sell it substantially all of
their leasing portfolios for the sum of approximately $14,763,000. The portfolio
sold had been carried on the books of the Company at a value of approximately
$17,851,000. The Company currently maintains leases on approximately 100
vehicles, although it intends to discontinue its leasing operations by the end
of calendar year 1999.
The Company has entered into a Distribution Agreement with AC pursuant to
which it will act as AC's sole distributor in all of the European Community
Countries, the United States, Canada, Australia, South Africa and Asia (with the
exception of Japan). The Distribution Agreement permits AC to engage dealers in
the foregoing territories to sell AC vehicles. See "Business" and "Risk
Factors."
On January 7, 1999, the Company issued to Pride a Special Warrant which
will entitle Pride to purchase up to 2,500,000 shares of the Company's common
stock at an exercise price of $2.20 each during the twenty-four month period
commencing with the date of this Prospectus. If the Special Warrant was to be
exercised in full by Pride, it would result in Pride owning in excess of 50% of
the issued and outstanding common stock of the Company and would enable Pride to
control the Company. See "Risk Factors" and "Description of Securities".
For a description of the Company's employment agreements, see "Executive
Compensation - Employment Agreements."
Transactions referenced herein between Management, the Company and/or its
subsidiaries present conflicts of interest for Management. There can be no
assurance that Management resolved such conflicts of interest in the past or
that it will be able to avoid or resolve conflicts of interest in the future.
There can further be no assurance that prior transactions between the Company,
its subsidiaries and Management were on terms no less favorable than could be
obtained from independent third parties, although Management represents herein
that it will attempt to resolve future conflicts of interest, if any in a manner
such that 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. See "Risk Factors."
32
<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:
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
FINANCIAL STATEMENT SCHEDULES
(b) During the 1998 fiscal year, the Company filed Reports on Form 8-K on
each of the following date:
(i) Form 8-K dated March 13, 1998.
(c) The exhibits designated with an asterisk have previously been filed
with the Commission in connection with Pride, Inc.'s Report on Form 8-K, dated
January 13, 1994, PAG's Registration Statement on Form SB-2 dated January 12,
1996 (33-296-NY) and PAG's Report on Form 8-K dated September 5, 1996, pursuant
to 17 C.F.R. ss.230.411, are incorporated by reference herein.
<TABLE>
<CAPTION>
<S> <C>
2.1* - Agreement and Plan of Reorganization dated effective as of January
13, 1994.
3.1* - Amendment to the Certificate of Incorporation of the Company dated January
15, 1994.
3.2* - By-Laws of the Company.
10.2* - Employment Agreement with Alan Lubinsky.
10.3* - Employment Agreement with Ivan Averbuch.
10.5* - Loan Agreement between PMS and Alan Lubinsky.
10.6* - Form of Service Agreement.
10.7* - Asset purchase agreement between Pride Vehicle Contracts (UK)
Limited and Master Vehicle Contracts, Limited.
10.8* - Form of Hire Purchase Agreement.
10.9* - Mortgage on Pride House, Watford Metro Centre.
10.10* - Mortgage on Croydon, England property.
10.11* - Lease agreement with respect to the Croydon, England property.
10.12* - Form of Agreement to purchase all of the assets of AC Cars Limited and
Autokraft Limited.
24.1* - Letter from Mark H. Sternberg, with respect to the change in
accountants [incorporated by reference to Exhibit
7(a)(1) of the Amendment to the Report on Form 8-K/A
dated June 6, 1994].
24.2* - Letter from Lazar, Levine & Company, Certified Public Accountants,
with respect to the change in accountants [incorporated by reference to Exhibit
4(a)(v) of the Report on Form 8-K dated November 14, 1994].
</TABLE>
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, this 26th day of March, 1999.
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.
/s/ Alan Lubinsky President, Secretary and Chairman 2/26/99
ALAN LUBINSKY of the Board of Directors (Principal Date
Executive Officer)
/s/ Ivan Averbuch Chief Financial Officer, 2/26/99
IVAN AVERBUCH Vice President and Treasurer Date
/s/ Allan Edgar Director 2/26/99
ALLAN EDGAR Date
/s/ Ian Satill Director 2/26/99
IAN SATILL Date
35
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, 1998 and 1997 F - 3
Consolidated Statements of Operations for the Years Ended November 30, 1998 and 1997 F - 4
Consolidated Statement of changes in Shareholders' Equity for the Years Ended November 30, 1998 and 1997 F - 5
Consolidated Statements of Cash Flows for the Years Ended November 30, 1998 and 1997 F - 6
Notes to Consolidated Financial Statements F - 7 to 21
</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, 1998 and 1997 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, 1998.
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, 1998 and 1997 and the results of their
operations for the two years in the period ended November 30, 1998 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company had incurred losses of $11,475,629 and
$4,455,400 for the years ended November 30, 1998 and 1997, respectively. This,
together with the sale of assets, the restated balance sheets after this sale,
and the delisting of the Company's shares from the Nasdaq Small Cap Market as
discussed in Note 3 to the financial statements, raises substantial doubts about
the Company's ability to continue as a going concern. Management's plans
regarding these matters are also discussed in Note 2. As discussed in Note 3,
the restated proforma balance sheets show that there was an excess of
liabilities over assets on December 11, 1998. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
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 4(h) of the notes to the consolidated financial statements.
MARBLE ARCH HOUSE
66-68 SEYMOUR STREET
LONDON W1H 5AF CIVVALS
UNITED KINGDOM MARCH 22, 1999 CHARTERED ACCOUNTANTS
F - 2
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ASSETS (Note 8a) -
<TABLE>
<CAPTION>
November 30, 1998 November 30, 1997
------------------------ -----------------------
$ $
ASSETS:
<S> <C> <C>
Cash and cash equivalents 52,693 77,354
Accounts receivable (Notes 4c and 5) 1,486,053 2,002,365
Inventories (Note 4d) - 1,248,360
Property, revenue producing vehicles and equipment - net 21,535,087 27,882,350
(Notes 4e, 6, 6b and 9)
Intangible assets - net (Note 4f) - 9,090,156
Investment in affiliate (Note 18) 4,048,460 -
------------------------ -----------------------
TOTAL ASSETS 27,122,293 40,300,585
======================== =======================
- LIABILITIES AND SHAREHOLDERS' EQUITY -
LIABILITIES:
Bank line of credit (Note 8a) 6,264,245 6,976,699
Accounts payable 551,924 1,758,764
Accrued liabilities and expenses (Note 7) 1,738,304 865,977
Bank debt (Note 8b) 685,428 695,782
Obligations under hire purchase contracts (Note 9) 15,231,850 18,341,778
Other liabilities (Note 10) 217,119 52,707
Acquisition debt payable (Note 11) 1,686,000 4,198,500
-----------------------
------------------------
TOTAL LIABILITIES 26,374,870 32,890,207
------------------------ -----------------------
MINORITY INTEREST IN SUBSIDIARY (Note 18) - -
------------------------ -----------------------
COMMITMENTS AND CONTINGENCIES (Notes 15 and 17)
SHAREHOLDERS' EQUITY (Notes 3, 12 and 13):
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
2,822,500 shares issued and outstanding in 1998 and 1997 respectively 2,823 2,823
Additional paid-in capital 14,122,165 13,582,795
Deferred financing costs (Note 12) (88,600) (141,500)
Retained earnings (deficit) (13,570,826) (5,857,987)
Accumulated other comprehensive income (Note 4h) 281,861 (175,753)
------------------------ -----------------------
TOTAL SHAREHOLDERS' EQUITY 747,423 7,410,378
------------------------ -----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 27,122,293 40,300,585
======================== =======================
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
November 30, 1998 November 30, 1997
------------------------ -----------------------
$ $
REVENUES (Notes 4i and 15):
<S> <C> <C>
Contract hire income 8,329,498 8,410,366
Sale of vehicles 4,302,757 7,090,027
Fleet management and other income 470,388 1,076,650
Service and spare parts revenue - 180,990
Other income - 701,242
------------------------ -----------------------
13,102,643 17,459,275
------------------------ -----------------------
EXPENSES:
Cost of sales 6,475,102 10,336,360
Depreciation 4,726,206 3,946,635
General and administrative expenses 1,973,618 3,540,130
Amortization of goodwill 630,718 632,207
Interest and other financing costs 2,328,481 2,209,150
Research and development - 982,580
Loss on sale of fixed assets (Note 6) - 753,933
Write off of intangibles (Notes 3 and 4f) 8,444,147 -
------------------------ -----------------------
24,578,272 22,400,995
------------------------ -----------------------
LOSS BEFORE MINORITY INTERESTS (11,475,629) (4,941,720)
Minority interest in net loss of consolidated subsidiaries (Note 18) - 486,320
LOSS BEFORE PROVISION FOR INCOME TAXES (11,475,629) (4,455,400)
Provision for income taxes (Notes 4g and 14) - -
------------------------ -----------------------
NET (LOSS) (11,475,629) (4,455,400)
======================== =======================
LOSS PER COMMON AND DILUTIVE COMMON EQUIVALENT SHARE (Note 4j)
Net loss before minority interests (4.07) (1.76)
Minority interest in net loss of subsidiaries - .17
------------------------ -----------------------
NET LOSS PER SHARE (4.07) (1.59)
======================== =======================
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 4j)
2,822,500 2,801,075
======================== =======================
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGE IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Common Additional Deferred Retained Accumulated Totalr
Stock Paid-In Financing Earnings Other Shareholders
Capital Costs (Deficit) Comprehensive Equity
Income
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
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 12)
170,000 170 95,407 -- -- -- 95,577
Deferred financing costs
(Note 12) .................. -- -- -- (141,500) -- (141,500)
Foreign currency translation
adjustment
-- -- -- -- -- (45,510) (45,510)
Net Loss for the 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
Deferred financing costs
(Note 12) .................. -- -- 52,900 -- -- 52,900
Adjustment - AC Car Group
Limited
-- -- 539,370 -- 3,762,790 -- 4,302,160
Foreign currency translation
adjustment
-- -- -- -- -- 457,614 457,614
Net loss for the year ended
November 30, 1998
-- -- -- -- (11,475,629) -- (11,475,629)
-----------
BALANCE AT NOVEMBER 30, 1998
2,822,500 2,823 14,122,165 (88,600) (13,570,826) 281,861 747,423
===========
</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, 1998 November 30, 1997
------------------------ -----------------------
$ $
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) (11,475,629) (4,455,400)
Adjustments to reconcile net (loss) to net cash provided by operating activities:
Minority interest in net loss of subsidiary - (486,320)
Depreciation and amortization 4,726,206 3,946,635
Amortization of goodwill 9,074,865 632,207
Deferred financing costs 52,900 (141,500)
Loss on disposal of fixed assets 715,694 753,933
Changes in assets and liabilities:
Decrease in accounts receivable 427,540 19,646
(Decrease) increase in inventories 132,369 (225,705)
Increase in accounts payable, accrued expenses 432,587 1,528,020
------------------------ -----------------------
Net cash provided from operating activities 4,086,532 1,571,516
------------------------ -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (6,726,057) (16,494,724)
Proceeds from sale of fixed assets 4,237,204 4,583,660
------------------------ -----------------------
Net cash (utilized) by investing activities (2,488,853) (11,911,064)
------------------------ -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank lines of credit 966,558 4,012,234
Net proceeds from sale of stock - 95,577
Payment of acquisition debt - (899,970)
Principal payment of long term debt (10,354) (306,789)
Proceeds from hire purchase contract funding 6,887,945 19,491,763
Principal repayments of hire purchase contract funding (9,757,781) (12,184,936)
------------------------ -----------------------
Net cash provided from financing activities (1,913,632) 10,207,879
------------------------ -----------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 291,292 (41,676)
------------------------ -----------------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (24,661) (173,345)
Cash and cash equivalents, beginning of year 77,354 250,699
------------------------ -----------------------
CASH AND CASH EQUIVALENTS END OF YEAR 52,693 77,354
======================== =======================
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
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 its newly formed
majority owned subsidiary, AC Automotive Group Inc. and its
wholly owned subsidiary AC Car Group Limited (registered in the
United Kingdom), completed the acquisition of certain assets 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' common stock and
by loans. The acquisition was recorded using the purchase method
of accounting.
On February 12, 1998, the board of Directors of AC
Automotive Group, Inc. authorized the issuance of 6,130,000
shares of its common stock to Erwood Holdings, Inc., a company
affiliated with Alan Lubinsky, the President and Chief Executive
Officer and director of the Company and AC Automotive Group, Inc,
for aggregate consideration of $6130. In addition, 441,300 shares
were issued to other unrelated parties for aggregate
consideration of $443. Following further restructure and the
foregoing issuance of shares, the ownership of AC Automotive
Group, Inc. by the Company has been reduced to 16%. Due to the
change in ownership percentage, the Company does not believe that
it still has the ability to exercise significant influence over
AC Automotive Group, Inc. Accordingly, consolidation is not
considered appropriate. The Company's investment in AC Automotive
Group, Inc., is therefore being reported under the cost method of
accounting (see also Note 18).
See Note 3 regarding the Company's sale of substantially all
of its leasing assets, subsequent to the balance sheet date.
NOTE 2 -
The Company has incurred losses from operations of
$11,475,629 and $4,455,400 for the years ended November 30, 1998
and 1997.
The losses for the year ended November 30, 1997 includes a
loss of $4,111,664 incurred by its then subsidiary, AC Car Group
Limited. The equity held in this Company has since been diluted
and the Company's accounts are therefore no longer consolidated.
F - 7
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 2 - BASIS OF PRESENTATION (Continued):
The losses for the year ended November 30, 1998 includes
$8,444,147 from the writing off of the goodwill related to the
subsidiary, Pride Management Services Plc, as substantially all
of its assets were sold on December 11, 1998 (see Note 3).
The circumstances described above, together with the
material events discussed in Note 3 to the financial statements,
which took place subsequent to November 30, 1998, and the
restated proforma balance sheets after these events, raise
substantial doubts about the Company's ability to continue as a
going concern.
Management plans in regard to this matter were described in
a press release issued on February 19, 1999. In this press
release, it was announced that the Company had executed a Letter
of Intent to acquire all of the issued and outstanding capital
stock of Digital Mafia Entertainment, LLC, in exchange for the
issuance of 7,400,000 shares in Pride Automotive common stock. In
addition, the Company also announced that it will, at the same
time, sell its ownership of Pride Management Services to Pride,
Inc, its majority shareholder, for nominal value. At this time,
the these sales has not been consummated.
Management is also raising capital for the purpose of
meeting the Company's financial obligations until such time as
the Contract of Sale described above is consummated. If this
raising of capital is unsuccessful, then the Company will not
have sufficient cash on hand to meet its current obligations. The
financial statements do not include any adjustments that might
result from this uncertainty.
NOTE 3 - SUBSEQUENT EVENT:
(a) Sale of Assets:
On December 11, 1998, the Company, through its subsidiary,
Pride Management Services Plc, completed the sale of
substantially all its leasing assets, leaving approximately 13%
of its revenue producing vehicles after the sale (see also Note 2
which discusses the sale of the Company's shares in Pride
Management Services Plc to Pride, Inc.
The consideration paid was $14,763,680 against a balance
sheet value of $17,851,023.
As a condition of sale, hire purchase creditors were paid
$14,537,000 in full and final settlement of the debt outstanding
on the leased assets sold against a balance sheet value of
$13,127,303 at an early settlement penalty of $1,409,697.
In addition, the bank line of credit was restructured as
follows. Upon completion of the sale, $1,815,000 was repaid to
the bank. The balance of $4,449,245 has been converted into two
loans; Loan A for $1,485,000 and Loan B for $2,964,245
respectively.
Loan A of $1,485,000 is repayable by July 31, 1999, in the
event of which Loan B of $2,964,245 will be forgiven.
F - 8
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 3 - SUBSEQUENT EVENT:
(a) Sale of Assets (Continued):
In the event that Loan A is not repaid by July 31, 1999, the
full amount outstanding on the two loans is repayable on demand.
As a result of the sale, the Company has decided to write
off its related goodwill, which had a carrying value of
$8,444,147.
The following is a condensed proforma balance sheet of the
Company assuming this sale occurred as of November 30, 1998.
<TABLE>
<CAPTION>
Assets Exhibit 1 Exhibit 2
--------- ---------
<S> <C> <C>
Cash $ 1,048,727 $ 1,048,727
Accounts receivable - net 1,486,059 1,486,059
Fixed assets - net (Note 6) 4,148,582 4,148,582
Intangible assets - net (Note 4f) - -
Investment in affiliate 4,048,460 4,048,460
------------- -------------
Total Assets $10,731,828 $10,731,828
=========== ===========
Liabilities and Shareholders Equity
Bank line of credit (Note 8a) - -
Accounts payable 551,923 551,923
Accrued liabilities and expenses (Note 7) 4,206,305 4,206,305
Bank debt (Note 8a) 5,134,673 2,170,428
Obligations under hire purchase contracts (Note 9) 2,104,547 2,104,547
Loans payable 65,109 65,109
Other liabilities 268,367 268,367
Acquisition debt payable 1,686,000 1,686,000
------------ ------------
Total Liabilities 14,016,924 11,052,679
Shareholders equity (deficit) ( 3,285,096) ( 320,851)
------------ -------------
$10,731,828 $10,731,828
</TABLE>
Exhibit 2 assumes that the bank conditions will be met and
the outstanding loan balance of $2,964,245 will be forgiven.
(b) Nasdaq Small Cap Market Listing:
On March 12, 1999, the Company was notified by NASDAQ that
the Company's securities would be delisted from the Nasdaq Small
Cap Market effective March 19, 1999, since the Company's
financial condition does not meet the requirements for continual
inclusion of such securities. The Company is in the process of
appealing this decision.
F - 9
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 4 - 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 for 1997 its' majority owned subsidiary AC
Automotive Group, Inc. and its' wholly owned subsidiary. All
material intercompany balances and transactions have been
eliminated.
Due to the nature of the Company's business, contract
leasing of motor vehicles (revenue producing assets) which are
treated as non-current fixed assets, the balance sheet is
reflected on an unclassified basis. Accordingly, current assets
and current liabilities are not reflected separately on the face
of the balance sheet.
(b) Use of Estimates:
In preparing financial statements in accordance with
generally accepted accounting principles, management makes
certain estimates and assumptions, where applicable, that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results could
differ from those estimates, management does not expect such
variances, if any, to have a material effect on the financial
statements.
(c) Concentration of Credit Risk/Fair Value:
Financial instruments that potentially subject the Company
to concentrations of credit risk in accordance with SFAS No 105
consist principally of accounts receivable. The Company believes
however, that risks associated with accounts receivable are
limited due to its large customer base and the fact that it
leases vehicles to companies in many industries.
The carrying amounts of cash and cash equivalents, trade
receivables, other assets, accounts payable and debt obligations
approximate fair value.
(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 as of November 30, 1997 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. The Company did not have any inventory as of
November 30, 1998.
F - 10
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(d) Inventories (Continued):
As of November 30, 1998 and 1997, inventories consisted of
the following:
<TABLE>
<CAPTION>
November 30, November 30,
1998 1997
<S> <C> <C>
Cars held for resale $ - $ 132,369
Finished goods - 90,784
Work-in-progress - 502,500
Spare parts - 522,707
---------- ---------
$ - $1,248,360
=================== ==========
</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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
Maintenance and repairs are charged to operations and major
improvements are capitalized. Upon retirement, sale or 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) Intangible Assets:
Intangible assets consisted primarily of goodwill which
arose in connection with the acquisition of certain subsidiaries
of PMS. Goodwill has been amortized over a period of 10-20 years
on a straight-line basis. Accumulated amortization as of November
30, 1998 and 1997 aggregated $4,253,551 and $3,622,833
respectively.
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.
F - 11
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Intangible Assets (Continued):
On December 11, 1998, the Company, through its subsidiary
Pride Management Services Plc, completed the sale of
substantially all its leasing assets (see Note 3). Accordingly,
the Company has decided to write off its related goodwill, which
had a carrying value of $8,444,147.
(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 14 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.
(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 (after sale as
discussed in Note 3) to be received, net of related costs (see
also Note 9):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
November 30, 1999 $560,640
November 30, 2000 160,666
November 30, 2001 66,581
November 30, 2002 11,277
----------
Total minimum lease payments receivable net of executory costs $799,164
========
</TABLE>
F - 12
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(j) Earnings 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 12), 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 the period ending after December 15,
1997. The Company has adopted SFAS 128 for the year ending
November 30, 1998, and accordingly restated prior periods.
(k) Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
(l) 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
123. No compensation expense is recognized pursuant to the
Company's stock option plans under SFAS 123 which is consistent
with prior treatment under APB No 25.
(m) New Accounting Pronouncements:
SFAS No 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 has adopted
these standards effective for the year ended November 30, 1998.
See also Earnings (Loss) Per Share.
F - 13
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(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. Due to the subsequent event described in Note
3, 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 5 - ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
Accounts receivable consist of the following:
November 30, November 30,
1998 1997
<S> <C> <C>
Trade receivables - net of allowance for doubtful
accounts of $NIL and $80,486 for 1998 and 1997,
respectively $ 638,001 $ 639,109
Lease maintenance receivables - 943,261
Value added tax 919 138,555
Due from related companies 478,532 83,219
Other 368,601 198,221
------------ ------------
$1,486,053 $2,002,365
</TABLE>
F - 14
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 6 - FIXED ASSETS AND DEPRECIATION:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
November 30, November 30,
1998 1997
<S> <C> <C>
Buildings and improvements $ 784,599 $ 820,160
Revenue producing vehicles 26,880,979 27,612,291
Furniture, fixtures, plant and equipment 576,270 4,670,067
------------ -----------
28,241,848 33,102,518
Less: accumulated depreciation (including
$6,130,673 and $4,263,115 of accumulated
depreciation on revenue producing vehicles,
for 1998 and 1997 respectively) 6,706,761 5,220,168
------------- -------------
$21,535,087 $27,882,350
=========== ===========
Depreciation expense for the years ended November 30, 1998 and
1997 aggregated $4,726,206 and $4,681,932, respectively.
On December 11, 1998, the Company sold a substantial portion of
its assets (see Note 3) at a loss of $3,087,343. The fixed
assets and depreciation after this transaction were:-
Buildings and improvements $ 784,599
Revenue producing vehicles 3,976,641
Furniture, fixtures, plant and equipment 576,270
-----------
5,337,510
Less: accumulated depreciation (including
$612,840 of accumulated depreciation on
revenue producing vehicles) 1,188,928
$4,148,582
</TABLE>
NOTE 7 - ACCRUED LIABILITIES AND EXPENSES:
<TABLE>
<CAPTION>
Accrued liabilities and expenses consist of the following:
November 30, November 30,
1998 1997
<S> <C> <C>
Taxes other than income taxes $1,350,195 $438,289
Miscellaneous accrued expenses 388,109 427,688
------------ ---------
$1,738,304 $865,977
On December 11, 1998, the Company sold a substantial portion of
its assets (See Note 3) and as a result, incurred sales taxes.
The accrued liabilities and expenses after this transaction
were:-
Taxes other than income taxes $3,360,323
Miscellaneous accrued expenses 824,507
$4,184,830
</TABLE>
F - 15
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 8 - BANK LOANS/LINE OF CREDIT:
As of November 30, 1998 the Company was in negotiation with
its bankers regarding the settlement of outstanding lines of
credit in the amount of $6,264,245. As a result of these
negotiations, the line of credit was restructured as follows:-
<TABLE>
<CAPTION>
<S> <C>
Payable on completion of sale of assets on
December 11, 1998 as described in Note 3 $1,815,000
Payable on July 31, 1999 1,485,000
---------
3,300,000
To be forgiven if July 31, 1999 installment
is paid on time 2,964,245
$6,264,245
</TABLE>
At November 30, 1998, bank loans consisted of $685,428
payable at a rate of 3% in excess of the bank's base rate. This
loan is secured by the freehold property owned by Pride
Management Services and its subsidiaries and matures in 2017.
The scheduled principal payments of this bank debt as of
November 30, 1998 are as follows:
For the Year Ended November 30,
1999 $ 77,043
2000 77,043
2001 77,043
2002 77,043
2003 77,043
thereafter 300,213
---------
$685,428
NOTE 9 - HIRE PURCHASE CONTRACTS/EQUIPMENT FINANCING:
The Company has funding lines with several financing
institutions in the United Kingdom in the aggregate amount of
approximately $15,500,000 as of November 30, 1998. 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, 1998, obligations under hire purchase contracts were
$15,231,850.
F - 16
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 9 - HIRE PURCHASE CONTRACTS/EQUIPMENT FINANCING (Continued):
As a result of the sale of assets on December 11, 1998, as
described in Note 5, $13,127,303 of the hire purchase contracts
was repaid at an early settlement penalty of $1,409,697. The
balance of hire purchase contracts after this settlement was
$2,104,547.
NOTE 10 - OTHER LIABILITIES:
At November 30, 1998 and 1997 other liabilities consisted of
$217,119 and $52,707, respectively due to other creditors, at
interest rates approximating the current market rates and
repayable on a demand basis.
NOTE 11 - ACQUISITION DEBT PAYABLE:
The acquisition debt payable (see Note 1) consisted of the
following:
<TABLE>
<CAPTION>
November 30, November 30,
1998 1997
<S> <C> <C> <C>
Unsecured notes payable on demand after
May 31, 1998; interest payable quarterly at
2% above the base rate $ - $ 837,500
Unsecured notes payable on demand after
May 31, 1998; interest payable at 10% per
annum (see Note 12) 1,615,000 1,615,000
Unsecured notes payable on demand after
October 31, 1999; interest payable quarterly
at 8% per annum - 1,675,000
Other short-term notes payable 71,000 71,000
------------- -----------
$1,686,000 $4,198,500
========== ==========
</TABLE>
F - 17
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 12 - COMMON STOCK:
In December 1995, the Company completed a private placement
offering selling 20 units, each unit consisting of 25,000 shares
of common stock, at $6,000 per unit for aggregate gross proceeds
of $120,000.
In April 1996 the Company successfully completed an initial
public offering ("IPO") of its common stock whereby it sold
592,500 shares of common stock at a price of $5.00 per share and
2,300,000 common stock purchase warrants at a price of $.10 per
warrant. This offering yielded net proceeds of approximately
$2,166,000.
The warrants are exercisable at a price of $5.75 per share,
subject to adjustment, one year from the date of the offering,
for a period of four years. The warrants are redeemable by the
Company at any time commencing one year from the date of its
prospectus, upon 30 days notice, at a redemption price of $.05
per warrant.
In addition, the Company entered into a consulting agreement
with one of the 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 price 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. These promissory notes are
classified as acquisition debt (see also Note 11).
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 13 - 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 had
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.
F - 18
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 13 - STOCK OPTION PLANS (Continued):
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 applied 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
4l), the Company's net earnings (loss) and earnings (loss) per
share would have been adjusted to the pro forma amounts indicated
below:-
<TABLE>
<CAPTION>
November 30, November 30,
1998 1997
Net earnings (loss):
<S> <C> <C>
As reported $(11,475,629) $(4,455,400)
Pro forma (11,636,147) (4,745,000)
Earnings:
As reported (4.07) (1.59)
Pro forma (4.12) (1.69)
</TABLE>
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 1998 and
1997; respectively; expected volatility of 1% and 1.2%
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 14 - INCOME TAXES:
The Company has available operating losses carry forwards
for tax purposes aggregating approximately $9,000,000 as of
November 30, 1998, 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, 1998 and 1997, respectively, are as
follows:
<TABLE>
<CAPTION>
November 30, November 30,
1998 1997
<S> <C> <C>
Operating loss carry forward $ 3,000,000 $1,709,000
Valuation allowance (3,000,000) (1,709,000)
---------- ---------
$ - $ -
=================== =================
</TABLE>
F - 19
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 15 - ECONOMIC DEPENDENCY:
For the years ended November 30, 1998 and 1997, the Company
had two unaffiliated customers, which accounted for an aggregate
of approximately 15% (1997 17%) and 6% (1997 7%) 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.
NOTE 16 - 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, 1998 and 1997 amounted to $80,384 and $65,726,
respectively.
NOTE 17 - COMMITMENTS:
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 provided 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 13). This agreement was not renewed upon
expiration and the employee is currently earning an annual salary
of $82,500.
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 extendible for a further twenty four month period
and provides for an annual salary of $55,000, subject to review
by the Board of Directors. As at November 30, 1998, the annual
salary amounted to $76,000.
F - 20
<PAGE>
PRIDE AUTOMOTIVE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
NOTE 18 - MINORITY INTEREST IN SUBSIDIARIES:
The Company owned 70% of AC Automotive Group, Inc. ("AC
Group") through November 30, 1997. 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 of $482,486. For the y ear ended November 30, 1998,
losses applicable to the minority shareholder exceeded its
interest. Accordingly, such losses were charged against the
operations of the company. In February 1998, AC Automotive Group,
Inc. issued additional shares to certain individuals and an
entity affiliated with the Company President for an aggregate
consideration of $6,573. Following further restructure the
ownership of AC Automotive Group, Inc. by the Company has been
reduced to 16%. Due to the change in ownership percentage, the
Company does not believe that it still has the ability to
exercise significant influence over AC Automotive Group, Inc. and
accordingly, consolidation is not considered appropriate.
The Company's investment in AC Automotive Group, Inc. is
therefore being reported under the cost method of accounting. As
a result of this change, the assets and liabilities were removed,
causing an adjustment in shareholders' equity of $4,302,160.
The carrying value, which approximates to the Directors'
assessment of fair value, of the investment in AC Automotive
Group, Inc is made up of: 16% of equity $4,048,460
F - 21
