<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) December 1, 1999
-------------------------------
Crown Group, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Texas 0-14939 63-0851141
- ---------------------------- ----------------------- -------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer Identification No.)
of incorporation)
</TABLE>
4040 North MacArthur Boulevard, Suite 100, Irving, Texas 75038
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (972) 717-3423
----------------------------
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
The financial statements of Smart Choice Automotive Group,
Inc. ("Smart Choice") as included in Appendix A of Part II,
Item 8 of Smart Choice's Form 10-K for the year ended December
31, 1998 as filed with the Securities and Exchange Commission
are hereby incorporated by reference into this Form 8-K/A
Amendment No. 1.
(b) Pro-Forma financial information.
The following pro-forma financial statements of Crown Group,
Inc. are hereby filed with this report:
Introduction to Pro-Forma Financial Information
Pro-Forma Consolidated Balance Sheet (unaudited) as of
October 31, 1999
Pro-Forma Consolidated Statement of Operations (unaudited)
for the year ended April 30, 1999
Pro-Forma Consolidated Statement of Operations (unaudited)
for the six months ended October 31, 1999
Notes to Pro-Forma Consolidated Financial Statements
(c) Exhibits:
24.1 - Consent of Independent Certified Public Accountants
99 - The following financial statements of Smart Choice
are filed herewith:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1998
and 1997
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
CROWN GROUP, INC.
By: /s/ Mark D. Slusser
------------------------------------
Mark D. Slusser
Chief Financial Officer
Dated: February 11, 2000
<PAGE> 4
CROWN GROUP, INC.
INTRODUCTION TO PRO-FORMA FINANCIAL INFORMATION
PURCHASE OF 70% OF SMART CHOICE
On December 1, 1999, pursuant to a definitive stock purchase agreement
negotiated at arms length, Crown Group, Inc. ("Crown") acquired a 70% voting and
economic interest in Smart Choice Automotive Group, Inc. ("Smart Choice")
directly from Smart Choice. The purchase price ("Purchase Price") consisted of
(i) $3.0 million cash, (ii) the conversion of $4.5 million of Smart Choice debt,
which Crown had contemporaneously acquired from a third party for approximately
$2.3 million cash, and (iii) the contribution of Crown's 85% interest in Paaco
Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively,
"Paaco"). In consideration for the Purchase Price Crown received 1,371,581.47
shares of Smart Choice Series E Convertible Preferred Stock, which is
convertible into 137,158,147 shares of Smart Choice common stock representing
70% of the ownership and voting rights of Smart Choice on an "as converted"
basis. The cash consideration paid by Crown was obtained from working capital.
Contemporaneously with Crown's purchase of a 70% interest in Smart Choice,
approximately $15.0 million of Smart Choice's outstanding debt and preferred
stock was converted into shares of common stock representing a 20.7% interest in
Smart Choice, and Smart Choice issued 4,898,505 shares of its common stock to a
third party for $1.0 million cash. In addition, the Paaco minority shareholders
exchanged their 15% interest in Paaco for shares of Smart Choice Series E
Convertible Preferred Stock representing a 5% voting and economic interest in
Smart Choice. Paaco is now a wholly-owned subsidiary of Smart Choice.
Excluding Paaco, Smart Choice operates eleven "buy-here pay-here" used car
dealerships in central Florida. Smart Choice's assets consist principally of (i)
finance receivables originated in the sale of used vehicles, and (ii) inventory.
PRO-FORMA FINANCIAL STATEMENTS
The following Pro-Forma Consolidated Balance Sheet of Crown as of October 31,
1999 gives effect to the above described transactions, as if such transactions
had occurred on that date.
The following Pro-Forma Consolidated Statement of Operations of Crown for the
year ended April 30, 1999 gives effect to the above described transactions, as
if such transactions had occurred at the beginning of the period (May 1, 1998).
Smart Choice's historical accounting year ends on December 31. Smart Choice's
operating results for the year ended April 30, 1999 have been derived by adding
(i) its operating results for the four months ended April 30, 1999, and
subtracting (ii) its operating results for the four months ended April 30, 1998,
from (iii) its operating results for the year ended December 31, 1998.
The following Pro-Forma Consolidated Statement of Operations of Crown for the
six months ended October 31, 1999 gives effect to the above described
transactions, as if such transactions had occurred at the beginning of the
period (May 1, 1999). Smart Choice's operating results for the six months ended
October 31, 1999 have been derived by adding (i) its operating results for the
one month ended October 31, 1999, and subtracting (ii) its operating results for
the four months ended April 30, 1999, from (iii) its operating results for the
nine months ended September 30, 1999.
The pro-forma information is based on the historical financial statements of
Crown and Smart Choice giving effect to the transactions described above and the
adjustments described in the accompanying Notes to Pro-Forma Consolidated
Financial Statements and may not be indicative of the results that actually
would have occurred had the transactions taken place on the dates indicated or
the results which may be obtained in the future.
P-1
<PAGE> 5
CROWN GROUP, INC.
PRO-FORMA CONSOLIDATED BALANCE SHEET
UNAUDITED
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Purchase
Debt and Accounting
Historical Historical Equity and Eliminating Pro-Forma
Crown Smart Choice Transactions Entries Consolidated
------------- -------------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 11,542 $ 885 $ (1,272)(1) $ 11,155
Accounts and other receivables, net 3,683 1,233 4,916
Mortgage loans held for sale, net 14,068 14,068
Finance receivables, net 100,201 77,783 $ (3,314)(4) 174,670
Inventory 7,229 10,496 17,725
Prepaid and other assets 4,672 1,093 (100)(3) 5,665
Property and equipment, net 26,707 6,919 1,062(5) 34,688
Investment in subsidiary 5,272(2) (5,272)(6)
Goodwill, net 9,498 5,263 8,820(6) 23,581
--------- --------- --------- -------- --------
$ 177,600 $ 103,672 $ 3,900 $ 1,296 $286,468
========= ========= ========= ======== ========
Liabiities and stockholders' equity:
Accounts payable $ 3,378 $ 6,389 $ 9,767
Accrued liabilities 6,041 10,995 17,036
Income taxes payable 7,117 7,117
Revolving credit facilities 78,662 80,026 158,688
Other notes payable 18,726 20,459 $ (13,507) (3) 25,678
Deferred sales tax 3,482 3,482
--------- --------- --------- -------- ---------
Total liabilities 117,406 117,869 (13,507) 221,768
--------- --------- --------- -------- ---------
Minority interests 1,200 $ 2,957 (6) 4,157
Contingent redemption of put options 1,549 1,549
Stockholders' equity:
Preferred stock 5,892 (5,892)(3)
Common stock and additional PIC 33,821 32,076 23,299(3) (55,375)(6) 33,821
Retained earnings 25,173 (53,714) 53,714(6) 25,173
---------- -------- --------- -------- --------
Total stockholders' equity 58,994 (15,746) 17,407 (1,661) 58,994
---------- -------- --------- -------- --------
$ 177,600 $103,672 $ 3,900 $ 1,296 $286,468
========== ======== ========= ======== ========
</TABLE>
See accompanying Notes to Pro-Forma Consolidated Financial Statements.
P-2
<PAGE> 6
CROWN GROUP, INC.
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Historical Pro-Forma
Crown Smart Choice Adjustments Consolidated
----------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 89,731 $ 79,851 $169,582
Rental income 2,635 2,635
Gain on sale of mortgage loans 4,407 4,407
Interest income 13,321 16,645 $ 678 (a) 30,644
Interest, fees, and rentals from CMN 694 694
Gaming and other 498 1,426 1,924
-------- -------- --------- ---------
111,286 97,922 678 209,886
-------- -------- --------- ---------
Costs and expenses:
Cost of sales 57,130 59,789 116,919
Selling, general and administrative 29,484 23,713 53,197
Provision for credit losses 15,498 14,711 30,209
Interest expense 6,766 9,856 (1,402)(b) 15,220
Depreciation and amortization 2,399 2,046 353 (c) 4,798
-------- -------- --------- ---------
111,277 110,115 (1,049) 220,343
-------- -------- --------- ---------
Other income:
Equity in earnings of unconsolidated subsidiaries 1,260 1,260
Gain on sale of securities, net 24,689 24,689
Other 433 433
-------- -------- --------- ---------
25,949 433 26,382
-------- -------- --------- ---------
Income (loss) before taxes and minority 25,958 (11,760) 1,727 15,925
interest
Provision for income taxes 9,001 9,001
Minority interests (551) (551)
(Income) loss from discontinued operations (1,220) (1,220)
Preferred stock dividends 615 (615)(d)
-------- -------- --------- ---------
Net income $ 17,508 $(11,155) $ 2,342 $ 8,695
======== ======== ========= =========
Earnings per share:
Basic - continuing $ 1.73 $ .74
Diluted - continuing $ 1.68 $ .72
Basic - discontinued $ .12
Diluted - discontinued $ .12
Weighted average number of shares outstanding:
Basic 10,096 10,096
Diluted 10,401 10,401
</TABLE>
See accompanying Notes to Pro-Forma Consolidated Financial Statements.
P-3
<PAGE> 7
CROWN GROUP, INC.
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Historical Pro-Forma
Crown Smart Choice Adjustments Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 78,335 $ 29,635 $ 107,970
Rental income 2,230 2,230
Gain on sale of mortgage loans 2,439 2,439
Interest income 10,050 10,865 $ 358(a) 21,273
Gaming and other 1,032 209 1,241
------------ ------------ ------------ ------------
94,086 40,709 358 135,153
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 46,705 22,564 69,269
Selling, general and administrative 23,106 8,339 31,445
Provision for credit losses 12,719 9,490 22,209
Interest expense 5,075 4,725 (701)(b) 9,099
Depreciation and amortization 1,635 757 176 (c) 2,568
Restructuring charges 3,414 3,414
Write-off of goodwill 12,329 12,329
------------ ------------ ------------ ------------
89,240 61,618 (525) 150,333
------------ ------------ ------------ ------------
Other income:
Equity in earnings of unconsolidated subsidiaries 943 943
Gain on sale of securities, net 10,238 10,238
Other 140 140
------------ ------------ ------------ ------------
11,181 140 11,321
------------ ------------ ------------ ------------
Income (loss) before taxes and minority 16,027 (20,769) 883 (3,859)
interests
Provision for income taxes 6,010 6,010
Minority interests(168) (168) (168)
(Income) loss from discontinued operations 3,299 3,299
Preferred stock dividends 316 (316)(d)
------------ ------------ ------------ ------------
Net income (loss) $ 10,185 $ (24,384) $ 1,199 $ (13,000)
============ ============ ============ ============
Earnings (loss) per share:
Basic - continuing $ 1.03 $ (.98)
Diluted - continuing $ 0.99 $ (.98)
Basic - discontinued $ (.33)
Diluted - discontinued $ (.33)
Weighted average number of shares outstanding:
Basic 9,867 9,867
Diluted 10,278 9,867
</TABLE>
See accompanying Notes to Pro-Forma Consolidated Financial Statements.
P-4
<PAGE> 8
CROWN GROUP, INC.
NOTES TO PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
BALANCE SHEET
(1) To record cash transactions as follows:
<TABLE>
<S> <C>
Crown's purchase of a Smart Choice note from a third party $(2,272)
Crown's purchase of Smart Choice common stock (3,000)
Smart Choice's sale of common stock to Crown 3,000
Smart Choice's sale of common stock to third party 1,000
-------
$(1,272)
=======
</TABLE>
(2) To record Crown's initial investment in Smart Choice.
(3) To record Smart Choice's sale of common stock for cash and the
conversion of its debt and preferred stock into common stock as
follows:
<TABLE>
<S> <C>
Conversion of Smart Choice debt into common stock $ 13,507
Elimination of debt issuance costs associated with converted debt (100)
Conversion of Smart Choice preferred stock into common stock 5,892
Sale of common stock for cash 4,000
--------
$ 23,299
========
(4) To adjust net finance receivables to the present value of the amount
expected to be received less collection costs as follows:
Estimated collection costs $ (2,047)
Capitalized loan origination costs (1,267)
--------
$ (3,314)
========
</TABLE>
(5) To adjust real property to appraised value.
(6) To record (i) the contribution of Paaco into Smart Choice, (ii)
goodwill for the excess purchase price paid over the fair value of
Smart Choice net assets, and (iii) consolidating eliminating entries.
STATEMENT OF OPERATIONS
a - To record amortization of discount on finance receivable portfolio.
b - To eliminate interest expense associated with debt that was converted
to equity.
c - To record amortization of additional goodwill created in the
transactions.
d - To eliminate preferred stock dividends as a result of such preferred
stock being converted to common stock.
P-5
<PAGE> 9
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
99 Financial Statements of Smart Choice Automotive Group, Inc.
24.1 Consent of Independent Certified Public Accountants.
</TABLE>
<PAGE> 1
Exhibit 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Prospectuses constituting a
part of Registration Statements (S-8, Nos. 33-22590, 33-41960 and 33-59527)
relating to the 1986 Incentive Stock Option Plan; Registration Statements (S-8,
Nos. 33-71090 and 33-59519) relating to the 1991 Nonqualified Stock Option Plan;
and Registration Statement (S-8 No. 333-38475) relating to the 1997 Stock Option
Plan of our report dated April 12, 1999, relating to the consolidated financial
statements of Smart Choice Automotive Group, Inc. appearing in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 incorporated by
reference in Crown Group, Inc.'s filing on Form 8-K/A (Amendment No. 1 dated
February 11, 2000) filed with the Securities and Exchange Commission.
February 11, 2000 BDO Seidman, LLP
Orlando, Florida
<PAGE> 1
EXHIBIT 99
* Information regarding the computation of earnings per share is set forth in
the Notes to Consolidated Financial Statements.
APPENDIX "A"
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONTENTS
<TABLE>
<S> <C> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS F-1
Balance sheets F-3 - F-4
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7 - F-8
Summary of significant accounting policies F-9 - F-13
Notes to consolidated financial statements F-14 - F-48
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Smart Choice Automotive Group, Inc.
Titusville, Florida
We have audited the accompanying consolidated balance sheets of Smart Choice
Automotive Group, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smart Choice
Automotive Group, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
-------------------------
BDO Seidman, LLP
Orlando, Florida
April 12, 1999
F-2
<PAGE> 3
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,268,589 $ 1,066,949
Accounts receivable 1,206,710 1,773,124
Finance receivables:
Principal balances, net 79,342,835 40,084,412
Less allowance for credit losses (12,157,569) (6,857,265)
------------ -----------
Finance receivables, net 67,185,266 33,227,147
------------ -----------
Inventories, at cost 20,004,600 15,516,084
Land held for resale -- 1,050,000
Property and equipment, net 7,655,324 9,214,207
Notes receivable 425,000 46,280
Deferred financing costs, net of accumulated
amortization of $343,063 and $207,508 226,152 426,823
Goodwill, net of accumulated amortization of
$1,117,432 and $470,897 23,871,080 25,562,162
Prepaid expenses 1,263,858 1,008,229
Deposits and other assets 485,454 213,986
------------ -----------
$123,592,033 $89,104,991
------------ -----------
</TABLE>
F-3
<PAGE> 4
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank overdraft $ 3,112,930 $ --
Accounts payable 4,746,157 5,259,903
Accrued expenses 3,664,651 4,633,841
Line of credit, net of discount 63,612,433 31,229,600
Floor plans payable 8,701,968 8,287,092
Capital lease obligations 997,916 940,280
Notes payable 28,343,479 29,197,458
Other liabilities -- 94,913
------------ ------------
TOTAL LIABILITIES 113,179,534 79,643,087
------------ ------------
CONTINGENT REDEMPTION VALUE OF COMMON
STOCK PUT OPTIONS 1,539,148 2,840,000
REDEEMABLE CONVERTIBLE PREFERRED STOCK 10,000 4,941,834
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value, authorized
5,000,000 shares; issued and outstanding
595 shares 5,891,410 --
Common stock $.01 par value, authorized
50,000,000 shares; issued and outstanding
6,676,545 and 4,867,004 shares 66,765 48,670
Additional paid-in capital 30,054,488 21,317,126
Common stock notes receivable (115,200) --
Accumulated deficit (27,034,112) (19,685,726)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,863,351 1,680,070
------------ ------------
$123,592,033 $ 89,104,991
------------ ------------
</TABLE>
F-4
<PAGE> 5
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996 (a)
----------- ------------ ----------
<S> <C> <C> <C>
REVENUES:
Sales at used car stores $78,227,027 $ 35,279,228 $ --
Income on finance receivables 15,709,539 6,898,694 --
Income from insurance and training 1,448,261 1,177,903 --
----------- ------------ ----------
Total revenues 95,384,827 43,355,825 --
----------- ------------ ----------
COSTS AND EXPENSES:
Costs of sales at used car stores 57,233,088 25,639,741 --
Provision for credit losses 13,371,169 4,941,983 --
Costs of insurance and training 87,909 85,098 --
Selling, general and administrative
expenses 22,739,174 17,599,003 670,616
Compensation expense related to
employee and director stock options 215,875 4,649,702 --
Restructuring charges -- 2,117,906 --
----------- ------------ ----------
Total costs and expenses 93,647,215 55,033,433 670,616
----------- ------------ ----------
Income (loss) from operations 1,737,612 (11,677,608) (670,616)
----------- ------------ ----------
OTHER INCOME (EXPENSE):
Interest expense (8,751,661) (5,573,307) (33,172)
Other income (expense), net 777,574 (4,772) --
Abandoned public offering costs (1,062,962) -- --
----------- ------------ ----------
(9,037,049) (5,578,079) (33,172)
----------- ------------ ----------
NET LOSS FROM CONTINUING OPERATIONS (7,299,437) (17,255,687) (703,788)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 428,838 (1,392,918) --
----------- ------------ ----------
NET LOSS (6,870,599) (18,648,605) (703,788)
PREFERRED STOCK DIVIDENDS (477,787) (333,333) --
----------- ------------ ----------
NET LOSS APPLICABLE TO COMMON STOCK $(7,348,386) $(18,981,938) $ (703,788)
----------- ------------ ----------
BASIC AND DILUTED INCOME (LOSS) PER
COMMON SHARE:
Continuing operations $ (1.26) $ (3.97) $ (.26)
Discontinued operations .07 (.31) --
----------- ----------- ----------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.19) $ (4.28) $ (.26)
----------- ----------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 6,193,472 4,430,367 2,744,216
----------- ----------- ----------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
(a) PERIOD FROM INCEPTION (JUNE 21, 1996) THROUGH DECEMBER 31, 1996.
F-5
<PAGE> 6
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------- ----------------------------
NUMBER NUMBER
OF OF PAR
SHARES VALUE SHARES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, June 21, 1996 (date of inception) -- $ -- -- $ --
Issuance of founders' shares -- -- 2,744,216 27,442
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 -- -- 2,744,216 27,442
Common stock issued for acquisitions -- -- 2,055,476 20,555
Contribution and retirement of common stock -- -- (165,714) (1,657)
Common stock options granted to employees and directors -- -- -- --
Common stock options and warrants granted to lenders and consultants -- -- -- --
Treasury stock purchased and retired -- -- (1,000) (10)
Issuance of common stock for professional services -- -- 8,965 90
Issuance of common stock for conversion of debt -- -- 221,257 2,212
Exercise of common stock options and warrants, net -- -- 3,804 38
Convertible debt issued at a discount -- -- -- --
Common stock issued by stockholders for cancellation of common
stock options granted by the Company -- -- -- --
Contribution to capital -- -- -- --
Contingent liability of put options -- -- -- --
Preferred stock dividend -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1997 -- -- 4,867,004 48,670
Issuance of common stock for conversion of debt -- -- 343,943 3,439
Issuance of common stock for conversion of preferred stock and accrued
dividends -- -- 1,398,962 13,990
Issuance of common stock for services -- -- 4,547 45
Exercise of common stock options, net -- -- 71,250 713
Purchase and retirement of treasury stock -- -- (9,161) (92)
Modification to conversion price of debt -- -- -- --
Common stock warrants granted to preferred stockholders -- -- -- --
Common stock options granted to directors -- -- -- --
Decrease in contingent liability of put options -- -- -- --
Preferred stock dividends -- -- -- --
Issuance of preferred stock, net 595 5,891,410 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 595 $ 5,891,410 6,676,545 $ 66,765
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK
PAID-IN NOTES ACCUMULATED
CAPITAL RECEIVABLE DEFICIT TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, June 21, 1996 (date of inception) $ -- $ -- $ -- --
Issuance of founders' shares (21,474) -- -- 5,968
Net loss -- -- (703,788) (703,788)
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 (21,474) -- (703,788) (697,820)
Common stock issued for acquisitions 14,393,325 -- -- 14,413,880
Contribution and retirement of common stock 1,657 -- -- --
Common stock options granted to employees and directors 3,809,826 -- -- 3,809,826
Common stock options and warrants granted to lenders and consultants 1,957,953 -- -- 1,957,953
Treasury stock purchased and retired (13,580 -- -- (13,590
Issuance of common stock for professional services 99,716 -- -- 99,806
Issuance of common stock for conversion of debt 1,767,844 -- -- 1,770,056
Exercise of common stock options and warrants, net 41,638 -- -- 41,676
Convertible debt issued at a discount 827,685 -- -- 827,685
Common stock issued by stockholders for cancellation of common
stock options granted by the Company 800,000 -- -- 800,000
Contribution to capital 159,203 -- -- 159,203
Contingent liability of put options (2,840,00) -- -- (2,840,000)
Preferred stock dividend 333,333 -- (333,333) --
Net loss -- -- (18,648,60) (18,648,60)
------------ ------------ ------------ ------------
BALANCE, December 31, 1997 21,317,126 -- (19,685,72) 1,680,070
Issuance of common stock for conversion of debt 1,494,277 -- -- 1,497,716
Issuance of common stock for conversion of preferred stock
and accrued dividends 5,042,066 -- -- 5,056,056
Issuance of common stock for services 36,331 -- -- 36,376
Exercise of common stock options, net 403,634 (115,200) -- 289,147
Purchase and retirement of treasury stock (93,808 -- -- (93,900
Modification to conversion price of debt 83,333 -- -- 83,333
Common stock warrants granted to preferred stockholders 254,802 -- -- 254,802
Common stock options granted to directors 215,875 -- -- 215,875
Decrease in contingent liability of put options 1,300,852 -- -- 1,300,852
Preferred stock dividends -- -- (477,787) (477,787)
Issuance of preferred stock, net -- -- -- 5,891,410
Net loss -- -- (6,870,599) (6,870,599)
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 $ 30,054,488 $ (115,200) $ (27,034,11) $ 8,863,351
------------ ------------ ------------ ------------
</TABLE>
F-6
<PAGE> 7
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996(a)
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,870,599) $(18,648,605) $ (703,788)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation 725,107 445,311 2,132
Amortization 1,489,089 1,239,929 2,249
Gain on disposal of property and equipment 95,324 (8,166) --
Impairment of goodwill 1,045,847 -- --
Write-down of inventory 1,094,096 -- --
Provision for credit losses 13,371,169 4,941,983 --
Compensation expense related to stock options 215,875 4,649,702 --
Issuance of common stock for services and interest 36,376 374,806 4,968
Stock options and warrants issued to consultants, lenders and others 254,802 1,296,863 --
Modification to conversion price of debt 83,333 -- --
Cash provided by (used for), net of effect of acquisitions:
Accounts receivable 172,514 (662,488) (25,000)
Inventories (5,582,612) (5,969,719) --
Prepaid expenses (255,629) 679,663 --
Accounts payable (513,746) 2,668,636 438,890
Accrued expenses and other liabilities (1,064,103) 3,048,563 183,314
------------ ------------ ------------
Net cash provided by (used for) operating activities 4,296,843 (5,943,522) (97,235)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in finance receivables (47,329,288) (13,600,550) --
Cash for acquisitions, net of cash acquired -- (7,927,844) --
Advances to acquired companies prior to acquisition -- (4,230,761) --
Purchase of property and equipment (1,148,386) (1,356,644) (24,586)
Increase in notes receivable (425,000) -- (400,000)
Repayments of notes receivable 46,280 530,420 --
Proceeds from disposal of property and equipment 3,253,354 24,425 --
Other (293,572) (21,981) (244,101)
------------ ------------ ------------
Net cash used for investing activities (45,896,612) (26,582,935) (668,687)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 5,891,410 4,554,812 387,022
Proceeds from sale of common stock -- -- 1,000
Proceeds from exercise of common stock options and warrants 289,147 1,800 --
Purchase of treasury stock -- (13,590) --
Increase (decrease) in bank overdraft 3,112,930 (82,884) 82,884
Proceeds from line of credit borrowings 32,300,000 16,462,090 --
Proceeds from floor plan notes payable 414,876 4,201,467 --
Proceeds from notes payable 7,096,690 14,163,892 322,000
Repayment of notes payable (6,647,539) (5,271,154) --
Proceeds from capital lease obligations -- 251,722 --
Repayments of capital lease obligations (258,880) (67,402) --
Payments of dividends (353,566) -- --
Deferred financing costs (43,659) (607,347) (26,984)
------------ ------------ ------------
Net cash provided by financing activities 41,801,409 33,593,406 765,922
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 201,640 1,066,949 --
CASH AND CASH EQUIVALENTS, beginning of year 1,066,949 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,268,589 $ 1,066,949 $ --
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
(a) PERIOD FROM INCEPTION (JUNE 21, 1996) THROUGH DECEMBER 31, 1996.
F-7
<PAGE> 8
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Smart Choice
Automotive Group, Inc. and its wholly-owned subsidiaries (the "Company").
All significant intercompany accounts and transactions have been eliminated
in consolidation.
CONCENTRATION OF CREDIT RISK
The Company provides sales finance services in connection with the sale of
used cars to individuals residing primarily in Central and South Florida.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
REVENUE RECOGNITION
Income on finance receivables is recognized using the interest method.
Direct loan origination costs are deferred and charged against finance
income over the life of the related installment sales contract as an
adjustment of yield.
Revenue from the sale of cars is recognized upon delivery, when the sales
contract is signed and the agreed-upon down payment has been received.
Parts and accessories sales are recognized upon shipment of products to
customers.
F-8
<PAGE> 9
FINANCE RECEIVABLES
The Company originates installment sales contracts from its Company
dealerships. Finance receivables consist of contractually scheduled
payments from installment sales contracts net of unearned finance charges,
direct loan origination costs and an allowance for credit losses. The
Company follows the provisions of Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases."
Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over
the original term of the related installment sales contract. Direct loan
origination costs represent the unamortized balance of costs incurred in
the origination of contracts at the Company's dealerships.
ALLOWANCE FOR CREDIT LOSSES
The allowance for uncollectible finance receivables is maintained at a
level which, in management's judgment, is adequate to absorb potential
losses inherent in the loan portfolio. The amount of the allowance is based
on management's evaluation of the collectibility of the loan portfolio,
which all originated in the State of Florida, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, collateral values and economic conditions. Because
of uncertainties associated with regional economic conditions, collateral
values and future cash flows on impaired loans, it is reasonably possible
that management's estimate of credit losses inherent in the loan portfolio
and the related allowance may change materially in the near term. However,
the amount of change that is reasonably possible cannot be estimated. The
allowance for uncollectible finance receivables is increased by a provision
for loan losses, which is charged to expense. Repossessed vehicles are
recorded as inventory at the lower of estimated net realizable value or the
related loan balances. The difference between the balance of the
installment contract and the amount recorded as inventory for the
repossessed vehicle is charged to the allowance for credit losses.
F-9
<PAGE> 10
PRESENTATION OF REVENUES AND COST OF REVENUES
The prices at which the Company sells its used cars and the interest rate
that it charges to finance these sales take into consideration that the
Company's primary customers are high-risk borrowers. The provision for
credit losses reflects these factors and is treated by the Company as a
cost of both the future finance income derived on the contract receivables
originated by the Company as well as a cost of the sale of the cars
themselves. Accordingly, unlike traditional car dealerships, the Company
does not present gross profit margin in its statement of operations
calculated as sales of cars less cost of cars sold.
INVENTORY
Inventory consists of new and used vehicles and vehicle parts and
accessories. Vehicle reconditioning costs are capitalized as a component of
inventory cost. The cost of new and used vehicles sold is determined on a
specific identification basis. Vehicle parts and accessories are valued at
the lower of first-in, first-out (FIFO) cost or market. Repossessed
vehicles are valued at the lower of estimated net realizable value or the
related loan balance.
F-10
<PAGE> 11
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the assets by the straight-line method.
GOODWILL
Goodwill represents acquisition costs in excess of the fair value of net
tangible assets of businesses purchased. These costs are being amortized
over 40 years on a straight-line basis. Goodwill is evaluated for
impairment when events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable. The Company uses an
estimate of the related undiscounted operating income over the remaining
life of goodwill in measuring whether it is recoverable. During the year
ended December 31, 1998, the Company recorded a total write-down of
goodwill of $1,045,847 from an asset sale and an impairment charge.
DEFERRED FINANCING COSTS
Deferred financing costs include costs related to obtaining debt financing
and are being amortized over the term of the debt.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. Measurement of deferred income tax is based on enacted tax
rates and laws that will be in effect when the differences are expected to
reverse, with the measurement of deferred income tax assets being reduced
by available tax benefits not expected to be realized.
F-11
<PAGE> 12
IMPAIRMENT OF LONG-LIVED ASSETS
Assets are evaluated for impairment when events change or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When any such impairment exists, the related assets will be
written down to fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
LOSS PER COMMON SHARE
Loss per common share is based upon the weighted average number of common
shares outstanding during each period. Potential common shares for 1998,
1997 and 1996 have not been included since their effect would be
antidilutive. Potential common shares as of December 31, 1998 include
1,895,375 stock options, warrants exercisable for 919,070 shares, 1,117,135
shares underlying the convertible debt and 536,745 shares underlying the
convertible preferred stock.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to confirm with the current year presentation.
F-12
<PAGE> 13
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered
into derivatives contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of
the new standard on July 1, 1999 to affect its consolidated financial
statements.
In June 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires costs of start-up activities and
organizational costs, as defined, to be expensed as incurred. The Company
does not expect adoption of the new SOP on January 1, 1999 to materially
affect its consolidated financial statements.
F-13
<PAGE> 14
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Acquisitions
Smart Choice Automotive Group, Inc. (the "Company"), formerly named "Eckler
Industries, Inc.," operates new car dealerships and used car stores in
Florida and underwrites, finances, and services retail installment
contracts generated from the sale of used cars by its dealerships. The
Company also operates an insurance division as well as Eckler's, a supplier
of Corvette parts and accessories.
On January 28, 1997, pursuant to an Agreement and Plan of Merger dated
December 30, 1996 (the "Agreement"), Eckler Industries, Inc.("EII")
acquired all of the issued and outstanding shares of common stock of Smart
Choice Holdings, Inc.("SCHI") in exchange for 1,463,969.5 shares of EII
Class A and 788,162 shares of EII Class B, common stock. Under the terms of
the Agreement, the shareholders of SCHI obtained approximately 64% of the
voting rights of EII. Although EII was the parent of SCHI following the
transaction, the transaction was accounted for as a purchase of EII by SCHI
(a reverse acquisition in which SCHI is considered the acquirer for
accounting purposes), since the shareholders of SCHI obtained a majority of
the voting rights in EII as a result of the transaction. Accordingly, the
financial statements of the Company for the periods prior to January 28,
1997 are those of SCHI. The purchase price for EII was
F-14
<PAGE> 15
computed by valuing the outstanding shares of common stock of EII (the
equivalent of 1,378,750 shares) at $6.75 or $9,306,563 and acquisition
costs of $100,119.
SCHI was incorporated on June 21, 1996 and was a development-stage
corporation prior to January 28, 1997. On August 16, 1996, SCHI acquired
the stock of First Choice Auto Finance, Inc. ("FCAF"). On January 28, 1997,
in addition to the acquisition of EII, SCHI acquired the stock of Florida
Finance Group, Inc. ("FFG"), Dealer Insurance Services, Inc. ("DIS") and
Dealer Development Services, Inc. ("DDS"). FFG underwrites, finances and
services automobile retail installment contracts and was based in St.
Petersburg, Florida prior to moving to the Company headquarters in
Titusville, Florida. FCAF was incorporated on March 22, 1994 and had no
significant operations or assets until it acquired the assets of Suncoast
Auto Brokers, Inc. ("SAB"), and Suncoast Auto Brokers Enterprises, Inc.
("SABE") on January 28, 1997. FCAF, based at the Company headquarters in
Titusville, Florida, now operates the three used vehicle lots in St.
Petersburg and Tampa, previously operated by SAB and SABE. DIS was based in
Tampa, Florida and provided insurance services for automobile dealers. DDS
was based in Tampa and provided consulting services and training programs
to automobile dealers. During 1998, DDS had no operations, and the related
goodwill of $794,852 was recorded as an impairment charge. In September
1998, the net assets of DIS were sold back to the original seller for
$425,000 in the form of a note receivable from the buyer. A portion of the
DIS goodwill of $250,995 was written off in connection with the sale of the
net assets and a net gain of $201,814 was recorded. The DIS operations
began focusing on providing credit life, warranty protection and auto
insurance to the Company's used car customers. The purchase price of FFG
was $1,181,008 notes
F-15
<PAGE> 16
due to the seller, 142,857 shares of common stock valued at $6.75 per share
($964,285) and acquisition costs of $40,643. The purchase price of DDS and
DIS was $781,000 notes due to the sellers and acquisition costs of $24,561.
On February 12, 1997, the Company acquired the stock of Liberty Finance
Company ("Liberty"). On the same date, FCAF acquired the stock of Wholesale
Acquisitions, Inc. ("WA"), and Team Automobile Sales and Finance, Inc.
("Team"). FFG services the receivables purchased from Liberty, and FCAF
operates the five used vehicle lots previously operated by WA and Team in
Orlando, Florida. The outstanding capital stock of Liberty and affiliates
was acquired for $1,500,000 notes due to the seller, the equivalent of
176,078 shares of common stock valued at $6.75 per share ($1,188,527) and
$109,249 in acquisition costs.
On February 14, 1997, FCAF acquired the assets of Palm Beach Finance and
Mortgage Company ("PBF") and Two Two Five North Military Corp. d/b/a
Miracle Mile Motors ("MMM"). FFG services the receivables purchased from
PBF, and FCAF operates the used vehicle lot previously operated by MMM
located in West Palm Beach, Florida. The net assets of PBF and MMM were
acquired for $3,050,000 cash, $1,473,175 notes due to the seller, 142,857
shares of common stock valued at $6.75 per share ($964,285) and $53,299 in
acquisition costs.
On June 27, 1997, the Company acquired the assets of Strata Holdings, Inc.
("SHI") and Ready Finance, Inc. ("RFI"). FCAF operates the three used
vehicle lots previously operated by SHI in West Palm Beach, Florida and FFG
services the finance receivables purchased from RFI. The net assets of SHI
and RFI were acquired for $5,000,000 cash, $4,880,089 notes due to the
seller and $27,271 in acquisition costs.
F-16
<PAGE> 17
On June 30, 1997, the Company acquired the assets of Roman Fedo, Inc.
("FEDO") and Fedo Finance, Inc. ("FFI"). FCAF operates the used vehicle lot
previously operated by FEDO in West Palm Beach, Florida, and FFG services
the finance receivables purchased from FFI. The assets of FEDO were
acquired for $268,000 cash, 112,500 shares of common stock valued at $9.00
per share ($1,012,500) and $8,741 in acquisition costs.
On August 21, 1997, the Company acquired the assets of Jack Winters
Enterprises, Inc. ("Winters"). These assets consisted of a retail
automobile dealership located in Stuart, Florida for Volvo automobiles and
other consumer vehicles. The business is being operated by First Choice
Stuart 2, Inc., a 100%-owned subsidiary of the Company and is doing
business as Motorcars of Stuart. The purchase price of Winters was $442,500
cash, $1,200,000 notes due the seller, 9,161 shares of common stock valued
at $10.25 per share ($93,900) and acquisition costs of $49,540.
On August 29, 1997, the Company acquired the stock of B&B Enterprises Inc.
("B&B"). B&B operates a retail automobile dealership located in Stuart,
Florida for Nissan automobiles and other consumer vehicles. The business is
being operated by First Choice Stuart 1, Inc., a 100%- owned subsidiary of
the Company and is doing business as Stuart Nissan. The purchase price of
B&B was 43,273 shares of common stock valued at $12.625 per share
($546,322) and acquisition costs of $55,385.
The acquisitions described above have been accounted for using the purchase
method of accounting, and accordingly, the purchase prices have been
allocated to the assets purchased and the liabilities assumed based upon
the fair values at the dates of acquisition. The excess of the
F-17
<PAGE> 18
purchase prices over the fair values of the net assets acquired was
approximately $26,000,000 and has been recorded as goodwill, which is being
amortized on a straight-line basis over 40 years.
The operating results of the significant acquired businesses have been
included in the consolidated statement of operations from the dates of
acquisition. The following pro forma information has been prepared assuming
certain of the acquisitions above, which were deemed to be significant
acquisitions, had taken place at the beginning of the respective periods.
The pro forma information includes adjustments for interest expense that
would have been incurred to finance the purchases, additional depreciation
based on the fair value of property acquired and the amortization of
intangibles arising from the transactions. The pro forma financial
information includes the activities of discontinued operations (see Note
19) and is not necessarily indicative of the results of operations as they
would have been had the transactions been effected on the assumed dates.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
------------- ------------
UNAUDITED
<S> <C> <C>
Total revenues $ 93,247,492 $90,158,113
Net loss applicable to common stock (19,884,913) (3,803,046)
Basic loss per common share (4.32) (1.34)
</TABLE>
The results of operations of the insignificant acquisitions were not
material to the Company's consolidated results of operations.
F-18
<PAGE> 19
2. FINANCE RECEIVABLES
The following is a summary of principal balances, net as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Contractually scheduled payments $ 113,651,628 $ 55,107,232
Less: unearned finance charges (35,127,485) (15,510,342)
------------- -------------
Principal balances 78,524,143 39,596,890
Add: loan origination costs 818,692 487,522
------------- -------------
Principal balances, net 79,342,835 40,084,412
Less: allowance for credit losses (12,157,569) (6,857,265)
------------- -------------
Finance receivables, net $ 67,185,266 $ 33,227,147
------------- -------------
</TABLE>
Finance receivables consist of sales of used cars under installment sale
contracts with maturities that generally do not exceed 48 months. The
receivables bear interest at rates ranging from 25.0% to 29.9% and are
collateralized by the vehicles sold. The Company holds title to the
vehicles until full contract payment is made. Finance receivables are
pledged as collateral under a line of credit agreement (see Note 5).
F-19
<PAGE> 20
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 6,857,265 $ --
Balance at dates of acquisitions -- 5,627,937
Loans charged off, net of recoveries (8,070,865) (3,712,655)
Provision for credit losses 13,371,169 4,941,983
------------ ------------
Balance at end of year $ 12,157,569 $ 6,857,265
------------ ------------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------------
USEFUL LIFE 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 1,177,091 $ 1,177,091
Buildings and improvements 10-40 years 4,421,271 4,263,930
Leasehold improvements 7-39 years 1,043,221 708,009
Machinery and equipment 3-7 years 946,796 909,197
Molds 5-10 years 408,712 310,305
Office equipment and furniture 3-8 years 4,239,758 3,542,413
Transportation equipment 3-10 years 134,946 2,482,521
Signs 7 years 251,201 152,234
------------ ------------ ------------
12,622,996 13,545,700
Less accumulated depreciation 4,967,672 4,331,493
------------ ------------
$ 7,655,324 $ 9,214,207
------------ ------------
</TABLE>
Property and equipment is pledged as collateral under a line of credit
agreement and various notes payable (see Notes 5 and 6).
F-20
<PAGE> 21
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accrued compensation $ 1,157,793 $ 855,806
Accrued interest 829,114 411,913
Accrued professional fees 337,984 897,837
Accrued restructuring charges 415,412 1,101,266
Accrued taxes and other 924,348 1,367,019
------------ ------------
$ 3,664,651 $ 4,633,841
------------ ------------
</TABLE>
The Company has a revolving line of credit with a lender which allows the
Company to borrow the lesser of $100,000,000 or 55% of certain eligible
accounts receivable at prime plus 2.5%. Interest is payable monthly with
all of the outstanding principal due December 2001. The line of credit is
collateralized by substantially all the assets of Florida Finance Group,
Inc. and is guaranteed by Smart Choice Holdings, Inc.; Smart Choice
Automotive Group, Inc.; and First Choice Auto Finance, Inc. The balance at
December 31, 1998 and 1997 under this line of credit was $63,700,000 and
$31,400,000, respectively, and represents the maximum amount available
under the line of credit at these dates. Unamortized debt discount was
$87,567 and $170,400 at December 31, 1998 and 1997, respectively. The line
of credit agreement contains various financial and operating covenants. As
F-21
<PAGE> 22
of December 31, 1998, the Company was in violation of the net income
requirement. The Lender waived compliance with this covenant through
January 1, 2000.
5. LINE OF CREDIT
The following summarizes certain information about the borrowings under the
line of credit:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Maximum amount outstanding at any month
end $ 65,941,239 $ 31,681,590
Average amount outstanding during the
period 49,591,667 21,921,484
Weighted average interest rate during the
period 10.97% 11.45%
------------ ------------
</TABLE>
Interest rates ranged from 10.25% to 11.50% and 11.25% to 11.50% and
interest expense was $5,373,239 and $2,235,954 for the years ended December
31, 1998 and 1997, respectively.
F-22
<PAGE> 23
6. NOTES PAYABLE Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
------------ -----------
<S> <C> <C>
10% term notes payable, interest payable semiannually, unpaid principal and
interest due April 2000 or upon the sale of all or substantially all of the
outstanding stock or assets of Eckler Industries, Inc. or the completion of
a public offering in which the Company realizes at least $10 million in
gross proceeds, collateralized by substantially all of the assets as well as
all of the issued and outstanding stock of Eckler Industries, Inc. and
guaranteed by Smart Choice Automotive Group, Inc. $ 7,000,000 $ --
Notes payable issued in connection with various acquisitions, interest ranging
from 9% to 12%, payable through June 2002. 4,776,695 6,029,146
12% unsecured convertible note payable, interest payable quarterly, unpaid
principal and interest due May 2002, convertible at a rate of one share of
common stock for every $15.00 of outstanding principal, conversion price
adjustable upon the occurrence of certain events. 4,000,000 4,000,000
12% convertible note payable, net of discount, interest payable quarterly,
unpaid principal and interest due June 2000, originally convertible at a
rate of one share of common stock for every $12.00 of outstanding principal,
conversion price adjustable upon the occurrence of certain events. On
December 31, 1997, the conversion price was adjusted to 90% of the market
price of the Company's common stock. Accordingly, $282,506 of interest
expense has been recorded for the year ended December 31, 1997 for the
difference between the conversion price of the note payable and the fair
market value of the Company's common stock on the date of adjustment. 3,418,125 3,025,125
Prime + 1.5% (9.25% at December 31, 1998) mortgage note payable, principal
payments of $14,405 plus interest payable monthly, outstanding principal and
interest due July 2001, collateralized by property and equipment of Eckler
Industries, Inc. and guaranteed by Eckler Industries, Inc. 2,306,903 2,500,000
Variable rate installment loan payable, principal and interest payable
monthly, outstanding principal and interest due December 2009,
collateralized by certain property of the Company, repaid in 1998. -- 2,199,900
Various unsecured notes payable to investors bearing interest at rates ranging
from 10%-16%, interest payable monthly, outstanding principal balances due
through December 2001. 1,270,507 1,699,142
10% term note payable, interest payable monthly, outstanding principal due
upon the earlier of April 2000, or the sale or transfer of all or
substantially all of the outstanding stock or assets of Eckler Industries,
Inc., collateralized by substantially all of the assets as well as all of
the issued and outstanding capital stock of Eckler Industries, Inc. and
guaranteed by Smart Choice Automotive Group, Inc. 1,500,000 1,500,000
9% unsecured convertible notes payable, interest and principal due June 2000,
convertible at a rate of one share of common stock for each $17.50 of
principal, $800,000 was repaid in 1998. 467,601 1,267,601
8% convertible debentures, net of discount (see below) -- 965,784
12% unsecured convertible note payable, interest and principal due June 2000,
convertible at a rate of one share of common stock for each $17.50 of
principal. 600,000 1,031,008
Prime plus 1.75% (9.5% at December 31, 1998) notes payable, principal of
$16,871 plus interest payable monthly, unpaid principal and interest due at
various dates through July 2003, secured by substantially all the assets of
First Choice Stuart 1, Inc. and guaranteed by First Choice Auto Finance,
Inc. and Smart Choice Holdings, Inc. The notes are subject to various
financial and operating covenants. As of December 31, 1998, the Company was
in violation of the working capital and cash requirements. The lender has
waived these violations through January 1, 2000. 759,818 894,173
8% note payable, principal and interest of $10,010 payable monthly through
June 2007, collateralized by certain property of the Company. 739,062 797,488
Prime (7.75% at December 31, 1998) unsecured convertible subordinated
debenture, net of discount, interest payable quarterly, unpaid principal and
interest due December 31, 2000, originally convertible at the rate of one
share of common stock for every $18.00 of outstanding principal, conversion
price adjustable upon the occurrence of certain events. On March 6, 1998,
the conversion price was adjusted to 90% of the market price of the
Company's common stock. Accordingly, $83,333 of interest expense has been
recorded for the difference between the conversion price of the debenture
and the fair market value of the Company's common stock on the date of
adjustment. This debenture was converted in March 1999 into 398,799 shares
of common stock. 715,263 697,895
Prime plus 1% unsecured note payable, interest payable monthly, outstanding
principal repaid in 1998. -- 600,000
7.75% note payable, principal and interest of $8,683 payable monthly through
December 2003, secured by certain real property of the Company, repaid in
1998. -- 498,923
12% convertible debentures (see below) 340,000 410,000
Prime plus 1% note payable, interest payable monthly, principal due upon
demand, repaid in 1998. -- 300,000
Various notes payable bearing interest at rates from 6% to 12%, principal and
interest payable through April 2011. 199,505 274,023
10% unsecured note payable, interest payable monthly, outstanding principal
repaid in 1998. -- 257,250
Prime plus 1% (8.75% at December 31, 1998) unsecured convertible subordinated
note payable, interest payable quarterly, unpaid principal and interest due
June 1999, originally convertible at a rate of one share of common stock for
every $15.00 of outstanding principal, conversion price adjustable upon the
occurrence of certain events. On December 31, 1997, the conversion price was
adjusted to 90% of the market price of the Company's common stock.
Accordingly, $20,179 of interest expense has been recorded for the year
ended December 31, 1997 for the difference between the conversion price of
the note payable and the fair market value of the Company's common stock on
the date of issuance. This note was converted in March 1999 into 132,933
shares of common stock. 250,000 250,000
------------ -----------
Total notes payable $ 28,343,479 $29,197,458
------------ -----------
</TABLE>
F-23
<PAGE> 24
Aggregate maturities of notes payable over future years are as follows:
1999 - $3,118,952; 2000 - $14,405,735; 2001 - $2,737,175; 2002 -
$7,528,895; 2003 - $167,342; thereafter - $385,380.
Unamortized debt discount was $116,610 and $611,196 at December 31, 1998
and 1997, respectively.
8% CONVERTIBLE DEBENTURES
The unsecured convertible debentures bear interest at 8%. Interest is
payable monthly, and all outstanding principal is due April 1999. The
debentures were convertible from December 14, 1997 through April 15, 1998
at a conversion price equal to 66 2/3% of the average closing bid price of
the Company's common stock for the five trading days immediately preceding
the conversion date. Accordingly, $525,000 of interest expense was recorded
for the year ended December 31, 1997 for the difference
F-24
<PAGE> 25
between the conversion price of the debentures and the fair market value of
the Company's stock at the time of issuance. The interest rate and
conversion price are both adjustable upon the occurrence of certain events.
During the year ended December 31, 1998, $965,784 of the debentures was
converted into 276,523 shares of common stock.
12% CONVERTIBLE DEBENTURES
The convertible debentures bear interest at 12% and were due on November
19, 1997. The debentures were convertible prior to November 19, 1997 into
the Company's common stock at a rate of one share of common stock for each
$10.00 of outstanding principal. Additionally, holders of the debentures
who did not convert prior to the maturity date received, for each $20,000
debenture, a warrant to purchase 600 shares of the Company's common stock
at $6.00 per share. The warrants are immediately exercisable and expire
five years from the date of issuance. During 1998, the maturity date of the
convertible debentures was extended to January 1999 and the interest rate
was increased to 15%.
F-25
<PAGE> 26
7. FLOOR PLANS PAYABLE Floor plans payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
$3,350,000 floor plan line of credit, variable interest rate, interest payable
monthly, principal balance payable at the earlier of the time a vehicle is sold or
360 and 180 days from the time a vehicle is floored for new and used vehicles,
respectively, guaranteed by Smart Choice Automotive Group, Inc., collateralized by
vehicle inventory floored. The line of credit agreement contains certain financial
ratio covenants. $ 3,007,827 $ 3,285,165
$3,750,000 floor plan line of credit, interest at prime plus 1.5% (9.25% at December
31, 1998), interest payable monthly, principal balance payable the earlier of (i) 48
hours from the time of sale of a vehicle or within 24 hours from the time payment is
received from the purchaser of the vehicle or (ii) upon demand, collateralized by
all inventory, fixed assets, holdback reserves, manufacturers' rebates, incentive
payments and intangible assets of First Choice Auto Finance, Inc., guaranteed by
Smart Choice Automotive Group, Inc. 3,190,739 2,659,968
$3,000,000 floor plan line of credit, interest at prime plus 1% (8.75% at December 31,
1998), interest payable monthly, principal payable upon sale of floored vehicle,
guaranteed by Smart Choice Automotive Group, Inc., collateralized by certain assets
of First Choice Stuart 1, Inc. The line of credit is subject to various financial
and operating covenants. As of December 31, 1998 and December 31, 1997, the Company
was in violation of certain of the covenants. The lender has waived these covenants
through January 1, 2000. 2,503,402 2,341,959
----------- -----------
Total $ 8,701,968 $ 8,287,092
----------- -----------
</TABLE>
F-26
<PAGE> 27
8. INCOME TAXES
The components of deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 2,910,000 $ 3,476,000
Accounts receivable 4,672,000 2,589,000
Stock options 1,901,000 1,805,000
Charitable contribution carryforwards 303,000 523,000
Compensation and accrued vacation 915,000 423,000
Depreciation and amortization 626,000 243,000
Inventory and other 103,000 149,000
Warranty reserve 235,000 93,000
------------ ------------
Gross deferred income tax assets 11,665,000 9,301,000
Valuation allowance (11,665,000) (9,301,000)
------------ ------------
Total deferred income tax assets $ -- $ --
------------ ------------
</TABLE>
The Company's valuation allowance increased by approximately $2,364,000 and
$9,063,000 for the years ended December 31, 1998 and 1997, respectively,
which represents the effect of changes in the temporary differences and net
operating losses. The Company has recorded a valuation allowance to state
its deferred tax assets at estimated net realizable value due to the
uncertainty related to realization of these assets through future taxable
income.
At December 31, 1998, the Company had unused federal tax net operating
losses (NOLs) to carry forward against future years' taxable income of
approximately $8,557,000 expiring in various amounts through 2018. As a
result of certain acquisitions, the use of approximately $1,141,000 of the
NOLs will be limited each year under the provisions of Section 382 of the
Internal Revenue Code of 1986, as amended, and the provisions of Treasury
Regulation 1.1502-21 regarding separate return limitation years.
9. Committments and Contingencies
LEASES
The Company conducts its operations partially from leased facilities. These
leases are classified as operating leases and expire on various dates
through 2005.
F-27
<PAGE> 28
The Company also leases equipment under capital leases which expire on
various dates through 2003. The total capitalized cost for this equipment
is $1,304,807 and $1,004,961 with accumulated depreciation of $509,444 and
$116,015 as of December 31, 1998 and 1997, respectively.
As of December 31, 1998, future minimum lease payments under capital leases
and future minimum rental payments required under operating leases that
have AND initial or remaining noncancelable lease terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- -------------
<S> <C> <C>
1999 $ 368,993 $ 2,257,000
2000 351,203 1,848,000
2001 280,355 1,702,000
2002 189,936 1,158,000
2003 1,737 670,000
Thereafter -- 804,000
------------- -------------
1,192,224 $ 8,439,000
------------- -------------
Less amount representing interest 194,308
-------------
Present value of net minimum
lease payments $ 997,916
-------------
</TABLE>
F-28
<PAGE> 29
Rental expense for the years ended December 31, 1998 and 1997 was
approximately $2,742,000 and $1,524,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements expiring at various
dates through the year 2002. As of December 31, 1998, the Company's total
noncancellable obligation under all employment agreements is approximately
$2,222,000.
LITIGATION
During March 1999, certain shareholders of the Company filed two punitive
class action lawsuits against the Company and certain of the Company's
current and former officers and directors in the United States District
Court for the Middle District of Florida (collectively, the "Securities
Actions"). The Securities Actions purport to be brought by plaintiffs in
their individual capacity and on behalf of the class of persons who
purchased or otherwise acquired Company publicly traded securities between
April 15,1998 and February 26, 1999. These lawsuits were filed following
the Company's announcement on February 26, 1999 a preliminary determination
had been reached that the net income for the year ended December 31, 1998
announced on February 10, 1999 was likely overstated in a material
undetermined amount at that time. Each of the complaints assert claims for
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 of the Securities and Exchange Commission as well as a claim for the
violation of Section 20(a) of the Exchange Act. The plaintiffs allege that
the defendants prepared and issued deceptive and materially false and
misleading statements to the public which caused plaintiffs to purchase
Company securities at artificially inflated prices. The plaintiffs seek
unspecified damages. The Company intends to contest these claims
vigorously. The Company cannot predict the ultimate resolution of these
actions at this time, and there can be no assurance that the litigation
will not have a material adverse impact on the Company's financial
condition and results of operations.
F-29
<PAGE> 30
The Company is involved in other legal and administrative proceedings and
claims of various types. While any litigation contains an element of
uncertainty, based upon the opinion of the Company's legal counsel,
management presently believes that the outcome of such proceedings or
claims which are pending or known to be threatened will not have a material
adverse effect on the Company's financial position or results of operations
since the Company has accrued sufficient amounts to cover the costs
expected to be incurred in settlement of these actions.
ENVIRONMENTAL MATTERS
Some of the Company's past and present operations involve activities which
are subject to extensive and changing federal and state environmental
regulations and can give rise to environmental issues. As a result, the
Company is from time to time involved in administrative and judicial
proceedings and administrative inquiries related to environmental matters.
Based on advice of counsel, management believes that the outcome of these
matters will not have a material impact on the Company's financial
position.
10. Redeemable Convertible Preferred Stock
During December 1996 and January 1997, the Company sold 395,000 shares of
Series A redeemable convertible preferred stock. Proceeds from these
offerings, net of offering costs, were approximately $977,000. The
liquidation preference of each preferred share is $2.00. Upon the
completion of an initial public offering of the Company that raises a
minimum of $20 million in gross proceeds, each preferred share will be
converted automatically into the higher of: (i) one share of the Company's
$.01 par value common stock or (ii) that number of shares of common stock
having a value (as measured by a public offering sale price) equal to
$9.00. The holders of the Series A shares may require, by a two-thirds vote
of the issued and outstanding Series A shares, that the Company offer to
redeem the Series A shares at any time after September 30, 1998. The
F-30
<PAGE> 31
redemption price will equal $2.00 per share. As of December 31, 1998, all
of these Series A shares had been exchanged for 526,500 shares of common
stock of the Company.
On September 30, 1997, the Company completed an offering of 300 units of
Series A redeemable convertible preferred stock and warrants at $10,000 per
unit. Proceeds from the offering, net of offering costs, were approximately
$2,965,000. Each unit consists of one share of Series A redeemable
convertible preferred stock and one warrant to acquire 150 shares of common
stock for each preferred share purchased at a price equal to $16.20 per
share. The warrants expire five years after the date of issuance. The
preferred stock is convertible into shares of common stock at a conversion
price which, at the option of the buyer, is either fixed at a rate of 135%
of the market price of common stock on the date of issuance of the
preferred stock, or floating at a rate of 100% of the market price of the
common stock if converted during the period 90 days after the issuance of
the preferred stock and 90% of the market price if converted at any time
after that 90-day period. Accordingly, since none of the preferred stock
was converted 90 days after issuance, a preferred stock dividend of
$333,333 ($.08 per share) has been recorded for the year ended December 31,
1997 for the difference between the discounted conversion price of the
preferred stock and the fair market value of the Company's common stock at
the time of issuance. The preferred stock is redeemable at the option of
the buyer upon the occurrence of certain events at a price per share that
is also dependent upon the occurrence of certain events.
On December 10, 1997, the Company issued an additional 100 units of the
Series A redeemable convertible preferred stock and associated warrants for
net proceeds of $1,000,000. Each unit consists of one share of Series A
redeemable convertible preferred stock and one warrant to acquire 150
shares of common stock for each preferred share purchased at a price equal
to $10.46 per share. The warrants expire five years after the date of
issuance. The preferred stock has features identical to that of the Series
A redeemable convertible preferred stock issued on September 30, 1997. As
of December 31, 1998, all but one share of Series A redeemable convertible
preferred stock issued in September 1997 and December 1997 had been
converted into 872,462 shares of common stock.
F-31
<PAGE> 32
11. Preferred Stock
In May 1998, the Company sold to a private investment group 220 shares of
the Company's Series B convertible preferred stock for $10,000 per share.
Proceeds from this offering, net of offering costs, were approximately
$2,200,000. The Series B convertible preferred stock accrues dividends at a
rate of 11% per year and is convertible into common stock at a conversion
rate of $10.00 per share. After November 5, 1999, the Company may, at its
option, redeem the Series B convertible preferred stock for $10,000 per
share. In connection with the issuance of the Series B convertible
preferred stock, the Company agreed to certain limitations on the issuance
of additional shares of preferred stock by the Company.
In June 1998, the Company sold to a private investment group 24.98 shares
of the Company's Series C convertible preferred stock for $10,000 per
share. Proceeds from this offering, net of offering costs, were
approximately $249,800. The Series C convertible preferred stock accrues
dividends at a rate of 11.0% per year and is convertible into common stock
at a conversion rate of $11.18 per share. After December 2, 1999, the
Company may, at its option, redeem the Series C convertible preferred stock
for $10,000 per share. In connection with the issuance of the Series C
convertible preferred stock, the Company agreed to certain limitations on
the issuance of additional shares of preferred stock by the Company.
In June 1998, the Company sold to a private investment group 350 shares of
the Company's Series D convertible preferred stock for $10,000 per share.
Proceeds from this offering, net of offering costs, were approximately
$3,441,600. The Series D convertible preferred stock accrues dividends at a
rate of 11.0% per year for five years, after which the rate increases to
20% per year. The Series D convertible preferred stock is convertible into
common stock at a conversion rate of $12.00 per share. After June 22, 2001,
the Company may, at its option, redeem the Series D convertible preferred
F-32
<PAGE> 33
stock for $10,000 per share. In connection with the issuance of the Series
D convertible preferred stock, the Company agreed to certain limitations on
the issuance of additional shares of preferred stock by the Company.
12. Contingent Redemption Value of Put Options
In connection with the acquisitions in January and February 1997
("Predecessor Acquisition"), two founding stockholders of SCHI each
received 588,695 shares of common stock of the Company in exchange for
shares of SCHI common stock. Each of the two founding stockholders were
also beneficiaries under two trusts, the Management Trust and the Finance
Trust. As part of the Predecessor Acquisition, these trusts received a
total of 710,000 shares of common stock in exchange for the SCHI common
stock. The founding stockholders have the sole right to receive any
proceeds of the sale of the common stock held by the trusts.
The trusts shall, after the first to occur of the satisfaction of the
purposes of the trusts and the exercise or expiration of all options
granted with respect to the shares of the Company's common stock on
February 15, 2007, cause shares of common stock held by the trust to be
purchased by the Company (the "Put Options"). The purchase price per share
for the Finance Trust is $4.00 and for the Management Trust is the average
of the closing market price for 20 days immediately preceding the date of
the trustees' notice regarding such purchase by the Company. Accordingly,
the redemption value of the Put Option of $1,539,148 and $2,840,006 as of
December 31, 1998 and 1997, respectively represents the options' price
multiplied by the number of shares under option, and is presented in the
accompanying consolidated balance sheet as "Contingent Redemption Value of
Common Stock Put Options." The decrease in the redemption value of
$1,300,852 during 1998 was recorded as additional paid-in capital.
Options were granted to employees and lenders under these trusts. The
trusts will receive the proceeds, if any, from the exercise of these
options. Since these options were not granted by the Company and their
exercise will not result in the issuance of any additional common stock,
they have been excluded from the tables included in Note 13.
F-33
<PAGE> 34
13. Capital Stock
INCREASE IN PAR VALUE AND STOCK SPLIT
In March 1997, the Company authorized an increase in the par value of its
common stock from $.001 to $.01. On July 23, 1998, the Board of Directors
authorized a 1-for-2 reverse stock split with respect to the common stock.
All common share information included in the accompanying financial
statements has been retroactively adjusted to give effect to the increase
in par value and the reverse stock split.
STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been recognized for
options granted to employees at exercise prices which equal or exceed the
market price of the Company's common stock at the date of grant. Options
granted at exercise prices below market prices are recognized as
compensation cost measured as the difference between market price and
exercise price at the date of grant.
Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting
for Stock-Based Compensation," requires the Company to provide pro forma
information regarding net income and earnings per share as if compensation
cost for the Company's employee stock options had been determined in
accordance with the fair market value based on the method prescribed in FAS
123. The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended December
31, 1998 and 1997, respectively: no dividend yield, an expected life of 5.0
and 4.9 years; expected volatility of 75% and 61%, and a risk-free interest
rate of 5.6% and 6%.
F-34
<PAGE> 35
Under the accounting provisions of FAS 123, the Company's net loss
applicable to common stock and loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss applicable to common
stock from continuing operations
As reported $ (7,777,224) $ (17,589,020) $ (703,788)
Pro forma (7,998,224) (21,177,799) (703,788)
Basic loss per common share from
continuing operations
As reported $ (1.26) $ (3.97) $ (.26)
Pro forma (1.29) (4.76) (.26)
Net loss applicable to common stock
As reported $ (7,348,386) $ (18,981,938) $ (703,788)
Pro forma (7,569,386) (22,570,717) (703,788)
Basic loss per common share
As reported $ (1.19) $ (4.28) $ (.26)
Pro forma (1.22) (5.09) (.26)
------------- ------------- -------------
</TABLE>
The following table summarizes information about employee plan and non-plan
stock option activity for the periods ended December 31, 1998, 1997 and
1996:
F-35
<PAGE> 36
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
EXERCISE OPTIONS
SHARES PRICE GRANTED
------------ ---------------- ----------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 -- $ -- $ --
Acquired in merger 87,500 5.32 --
Granted, at market value 419,000 9.78 5.56
Granted, above market value 15,000 13.00 7.10
Granted, below market value 25,000 8.14 5.06
Exercised (6,250) 5.00 --
Forfeited (1,500) 9.76 --
------------ ------------ ------------
Outstanding, December 31, 1997 538,750 9.12 --
Granted, at market value 909,200 8.17 5.27
Exercised (5,000) 5.50 --
Forfeited (104,575) 9.39 --
------------ ------------ ------------
Outstanding, December 31, 1998 1,338,375 $ 8.47 $ --
------------ ------------ ------------
</TABLE>
At December 31, 1998 and 1997, a total of 413,250 and 301,250 options were
exercisable at a weighted-average exercise price of $7.34 and $8.48,
respectively.
The following table summarizes information about non-plan stock option
activity issued to non-employees for the periods ended December 31, 1998,
1997 and 1996:
F-36
<PAGE> 37
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
EXERCISE OPTIONS
SHARES PRICE GRANTED
------------ ---------------- ----------------
<S> <C> <C> <C>
Outstanding - inception -- $ -- $ --
Granted, above market value 145,000 9.50 --
------------ ------------ ------------
Outstanding, December 31, 1996 145,000 9.50 --
Acquired in merger 522,000 7.62 --
Granted, at market value 116,250 10.12 5.16
Granted, above market value 150,000 16.34 4.56
Forfeited (340,000) 7.58 --
Expired (20,000) 10.00 --
------------ ------------ ------------
Outstanding, December 31, 1997 573,250 10.82 --
Granted, at market value 43,750 6.34 4.16
Granted, above market value 6,250 8.75 5.42
Exercised (66,250) 5.69 --
------------ ------------ ------------
Outstanding, December 31, 1998 557,000 $ 10.14 $ --
------------ ------------ ------------
</TABLE>
At December 31, 1998, 1997 and 1996, a total of 532,000, 498,250 and
131,000 options were exercisable at a weighted-average exercise price of
$10.17, $10.28 and $9.84, respectively.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
F-37
<PAGE> 38
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER EXERCISE REMAINING NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- ---------------- ----------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
**
$3.38 to $ 5.00 254,250 $ 4.10 3.9 years 156,250 $3.96
$6.00 to $ 8.50 96,975 7.59 3.7 years 32,500 7.15
$9.00 to $13.00 987,150 9.68 4.0 years 224,500 9.72
- ---------------- ------------ -------- ---------- ----------- ----------
1,338,375 $ 8.47 413,250 $7.34
------------ -------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
NON-EMPLOYEE & NONPLAN OPTIONS
------------------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
$3.52 to $6.00 127,500 $ 5.24 3.0 years 127,500 $ 5.24
$8.75 to $13.00 379,500 10.82 3.2 years 354,500 10.90
$17.50 50,000 17.50 3.0 years 50,000 17.50
----------- ------ ------- -------
557,000 $10.14 532,000 $ 10.17
----------- ------ ------- -------
</TABLE>
COMMON STOCK OPTIONS ISSUED - COMPENSATION
During the years ended December 31, 1998 and 1997, compensation expense of
$215,875 and $3,809,826 was recognized on common stock options granted to
employees and directors, respectively.
COMMON STOCK OPTIONS ISSUED - CONSULTANTS
During the year ended December 31, 1997, options granted to consultants
were valued at $607,700 in accordance with FAS 123.
F-38
<PAGE> 39
COMMON STOCK ISSUED - PROFESSIONAL FEES
During the year ended December 31, 1997, the Company issued 8,965 shares of
common stock as payment for professional services. The shares were valued
at $99,806, which represents the fair value of the stock on the date of
issuance.
COMMON STOCK OPTIONS AND WARRANTS ISSUED - LENDERS
During 1997, the Company entered into various agreements with lending
institutions and issued options and warrants to purchase 236,250 shares of
the Company's common stock at exercise prices ranging from $4.00 to $24.00
per share. The options and warrants expire at various dates ranging from
December 1999 through August 2002. During 1998, the exercise price of
certain of the options and warrants was reduced pursuant to the provisions
of the individual option and warrant agreements.
The above common stock options and warrants were valued at $1,350,253 in
accordance with the provisions of FAS 123. This amount was recorded as debt
discount and is being amortized over the life of the related debt. Interest
expense related to these options and warrants was $577,419 and $466,979 for
the years ended December 31, 1998 and 1997, respectively.
COMMON STOCK WARRANTS ISSUED - PREFERRED STOCKHOLDERS
During the year ended December 31, 1998, the Company issued common stock
warrants to purchase 40,000 shares of common stock at exercise prices
ranging from $10.46 to $16.20 per share to certain of its preferred
stockholders. The warrants were valued at $254,802 in accordance with the
provisions of FAS 123. This amount was recorded as penalty expense and is
included as selling, general and administrative expenses in the
accompanying consolidated statements of operations.
F-39
<PAGE> 40
COMMON STOCK ISSUED - DEBT CONVERSION
During the year ended December 31, 1998, the Company issued 343,943 shares
of common stock in conversion of debt amounting to $1,497,716.
During the year ended December 31, 1997, the Company issued 221,257 shares
of common stock in conversion of debt amounting to $1,770,056.
COMMON STOCK - INCENTIVE PLAN
During 1998, the Company's Board of Directors and stockholders approved the
1998 Executive Incentive Compensation Plan (the "Plan"). This Plan provides
for grants of stock options, stock appreciation rights, restricted stock,
deferred stock dividend equivalents and other forms of stock-based and non
stock-based compensation. The Plan provides that up to 750,000 shares of
the Company's common stock may be granted as awards under the Plan.
STOCK WARRANTS
At December 31, 1998, the Company had the following stock warrants
outstanding:
<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING EXERCISE
EXPIRATION DATE SHARES PRICE
---------- -----------
<S> <C> <C>
December 31, 1999 35,000 $ 4.00
November 8, 2000 6,250 $ 12.00
November 14, 2000 642,000 $ 13.00
March 30, 2001 10,000 $ 8.40
August 29, 2002 26,250 $ 4.75
September 30, 2002 45,000 $ 16.20
November 19, 2002 16,560 $ 6.00
December 10, 2002 15,000 $ 10.46
December 24, 2002 45,000 $ 8.00
December 30, 2002 600 $ 6.00
January 29, 2003 37,410 $ 10.00
June 1, 2003 10,001 $ 10.46
June 1, 2003 29,999 $ 16.20
---------
919,070
---------
</TABLE>
F-40
<PAGE> 41
At December 31, 1998, 919,070 of the warrants were exercisable.
SHARES RESERVED
At December 31, 1998, the Company has reserved approximately 11,985,000
shares of common stock for future issuance under all of the above
arrangements, the convertible debt and the convertible preferred stock.
14. Restructuring Charge
During the fourth quarter of 1997, after all acquisitions were completed,
the Company implemented a restructuring program (the "Program") designed to
enhance overall competitiveness and efficiency through the reduction of
operating costs. The Program resulted in a charge to operations of
$2,117,906. The charge consists primarily of costs related to employment
contract terminations and severance pay. At December 31, 1998 and 1997,
approximately $415,000 and $1,101,266 related to disputed employment
termination claims was included in accrued expenses.
15. Retirement Benefit Plan
The Company sponsors a defined contribution pension plan for all employees
meeting certain eligibility requirements. The plan provides for voluntary
employee contributions and contributions by the Company to be determined at
the discretion of the Board of Directors. The Company made no contribution
to the plan for the years ended December 31, 1998 and 1997.
F-41
<PAGE> 42
16. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash paid for interest $ 8,611,127 $ 4,228,339
------------ ------------
Noncash investing and financing activities:
Notes payable and capital lease obligations
incurred in connection with the purchase of
property and equipment $ 316,516 $ 3,722,670
Notes payable issued in connection with
acquisitions -- 11,015,272
Modification to conversion price of debt 83,333 --
Increase (decrease) in contingent liability of
put options (1,300,852) 2,840,000
Common stock issued in connection with
acquisitions -- 14,413,880
Common stock issued for conversion of debt 1,497,716 1,770,056
Common stock options granted to employees and
directors 215,875 3,809,826
Common stock options and warrants issued to
consultants, lenders and others 254,802 1,957,953
Common stock issued for services 36,376 99,806
Common stock issued by stockholders for
cancellation of common stock options granted
by the Company -- 800,000
Common stock issued for stock notes receivable 115,200 --
Contribution to capital by stockholder -- 159,203
Debt discount on convertible debt -- 827,685
Common stock issued for conversion of
preferred stock and accrued dividends 4,931,835 --
Purchase of treasury stock for reduction of
accounts receivable and acquisition debt 93,900 --
------------ ------------
</TABLE>
F-42
<PAGE> 43
17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to
determine such amounts:
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of
judgment and, therefore, cannot be determined with precision. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
instrument. Changes in assumptions could significantly affect these
estimates.
Since the fair value is estimated as of December 31, 1998, the amounts that
will actually be realized or paid in settlement of the instruments could be
significantly different.
CASH AND CASH EQUIVALENTS
The carrying amount is assumed to be the fair value because of the
liquidity of these instruments.
F-43
<PAGE> 44
FINANCE RECEIVABLES, NET
The carrying amount is assumed to be the fair value because of the relative
short maturity and repayment terms of the portfolio as compared to similar
instruments.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value because of the short maturity
of these instruments.
NOTES PAYABLE
The terms of the Company's notes payable approximates the terms in the
market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
18. SEGMENT INFORMATION
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise
and Related Information." SFAS 131 requires that public enterprises report
certain information about reporting segments in financial statements. It
also requires the disclosure of certain information regarding services
provided, geographic areas of operation and major customers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intercompany revenues are
market based. The Company evaluates performance based on operating earnings
of the respective business units.
The Company's continuing operations are classified into two reportable
segments. The used car stores segment operates a network of 26 used car
stores in Florida. The Company primarily sells used vehicles to
payment-sensitive non-prime customers who, most likely, would be unable to
purchase a vehicle without financing through the Company's financing
services segment. These segments exclude the activities of the discontinued
operations (see Note 18).
<PAGE> 45
The following table shows certain financial information by reportable
segment as of and for the years ended December 31, 1998, 1997 and 1996 and
excludes the operations of the discontinued segments:
<TABLE>
<CAPTION>
USED CAR FINANCING CORPORATE DISCONTINUED
STORES SERVICES AND OTHER OPERATIONS COMBINED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1998
Revenue from external customers $ 78,227,027 $ 15,709,539 $ 1,448,261 $ -- $ 95,384,827
Intercompany revenues -- 5,434,451 -- -- 5,434,451
Operating income (loss) 4,411,292 4,933,046 (7,606,726) -- 1,737,612
Depreciation and amortization 181,377 69,469 1,690,551 272,799 2,214,196
Interest expense 300,527 5,629,078 2,822,056 -- 8,751,661
Abandoned public offering costs -- -- 1,062,962 -- 1,062,962
Identifiable assets 15,918,151 66,174,394 16,913,961 24,585,527 123,592,033
Capital expenditures 447,039 266,709 409,155 341,999 1,464,902
1997
Revenue from external customers $ 35,279,228 $ 6,898,694 $ 1,177,903 $ -- $ 43,355,825
Intercompany revenues -- 2,310,962 -- -- 2,310,962
Operating income (loss) 71,502 3,028,598 (14,777,708) -- (11,677,608)
Depreciation and amortization 41,709 8,078 1,270,695 364,758 1,685,240
Compensation expense related to
options -- -- 4,649,702 -- 4,649,702
Restructuring charges -- -- 2,117,906 -- 2,117,906
Interest expense 153,405 2,902,039 2,517,863 -- 5,573,307
Identifiable assets 10,273,420 34,763,399 18,719,167 25,349,005 89,104,991
Capital expenditures (exclusive of
acquisitions) 1,494,370 178,238 3,182,884 223,822 5,079,314
1996
Revenue from external customers $ -- $ -- $ -- $ -- $ --
Operating income (loss) -- -- (670,616) -- (670,616)
Depreciation and amortization -- -- 4,381 -- 4,381
Interest expense -- -- 33,172 -- 33,172
Identifiable assets -- -- 716,290 -- 716,290
Capital expenditures -- -- 24,586 -- 24,586
------------- ------------- ------------- ------------- -------------
</TABLE>
F-45
<PAGE> 46
19. DISCONTINUED OPERATIONS
In January 1999, management of the Company made a decision to discontinue
the operations of the new car dealerships segment and the parts and
accessories segment in order to focus the Company's continuing operations
exclusively on the retail sale of used cars through its used car stores, as
well as the financing of the used cars sold. The new car dealerships
segment operates two new car dealerships in Florida. The parts and
accessories segment sells and distributes Corvette parts and accessories
throughout the United States, primarily through its extensive catalog.
These two segments are expected to be sold during 1999 at a net gain.
Revenues of the discontinued operations were $46,499,679 and $25,247,834
during 1998 and 1997, respectively. Consolidated interest that is not
attributable to other operations of the Company was allocated to
discontinued operations based upon net assets of the discontinued
operations to the total net assets of the consolidated Company. The amount
of interest allocated to discontinued operations was $584,587 and $487,989
during 1998 and 1997, respectively.
F-46
<PAGE> 47
The net assets of the discontinued operations included in the December 31,
1998 and 1997 consolidated balance sheets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 448,596 $ 489,509
Accounts receivable 857,293 854,382
Inventories 6,776,414 7,602,221
Notes receivable -- 46,280
Prepaid expenses 960,582 666,512
Property and equipment, net 4,187,687 4,098,723
Goodwill, net 11,286,075 11,580,303
Other assets 68,880 11,075
Accounts payable (1,405,617) (1,663,149)
Accrued expenses (625,187) (696,467)
Notes payable (3,066,721) (5,189,282)
Floor plans payable (5,511,229) (5,627,123)
Capital lease obligations (147,817) (234,381)
------------- -------------
Net assets of discontinued operations $ 13,828,956 $ 11,938,603
------------- -------------
</TABLE>
F-47
<PAGE> 48
20. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998 and 1997, the Company recorded the
following adjustments:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Expense costs of abandoned public offering $ 1,062,962 $ 479,406
Restructuring charge -- 2,117,906
Expense related to stock options, warrants and
beneficial conversion feature 554,010 1,405,087
Increase in allowance for credit losses and
other adjustments to finance receivables 3,314,012 --
Inventory write-downs 1,094,096 --
Write-down of goodwill from asset sale and
impairment 1,045,847 --
------------- -------------
</TABLE>
The effect of the above 1998 fourth quarter adjustments on previous
quarters is as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, SEPTEMBER 30,
1998 1998
------------- -------------
<S> <C> <C>
Quarterly adjustment $ 1,115,783 $ 3,661,616
------------- -------------
Net income (loss) applicable to common stock:
As reported $ 2,355,206 $ 1,627,992
As restated 1,239,423 (2,033,624)
Basic earnings (loss) per share:
As reported $ 0.36 $ 0.25
As restated 0.19 (0.34)
As reported $ 0.36 $ 0.23
As restated 0.17 (0.34)
------------- -------------
</TABLE>
F-48
