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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-14082
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ECKLER INDUSTRIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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FLORIDA 59-1469577
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5200 S. WASHINGTON AVENUE, TITUSVILLE, FLORIDA 32780 (407) 269-9680
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (ISSUER'S TELEPHONE
NUMBER)
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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CLASS A COMMON STOCK NASDAQ-SMALL-CAP MARKET AND
WARRANTS (1) BOSTON STOCK EXCHANGE
(1) REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
CLASS A COMMON STOCK WARRANTS (1)
(TITLE OF CLASS) (TITLE OF CLASS)
(1) REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM
405 OF REGULATION S-B CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENT TO THIS FORM 10-KSB. [ X ]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR $ 14,893,083
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THE AGGREGATE MARKET VALUE OF VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES OF THE REGISTRANT ON DECEMBER 16, 1996, WAS $8,368,500.
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AS OF NOVEMBER 30, 1996, 1,646,750 SHARES OF THE REGISTRANT'S CLASS A
COMMON STOCK WERE ISSUED AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES NO X
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ITEM 1. BUSINESS
GENERAL. The Company, also known as "Eckler's", was incorporated in
Florida in 1973. The Company is a major manufacturer and supplier of
aftermarket parts for Corvettes. The Company's marketing tool is its catalogue
offering approximately 17,000 items of Corvette maintenance and restoration
parts, accessories, and gift and apparel items. The Company entered into an
agreement with General Motors affording it a right of first refusal to purchase
Corvette parts discontinued from manufacture by GM and to acquire exclusive
rights to tooling for the discontinued parts. The Company and General Motors
are currently implementing the agreement which the Company anticipates will
result in substantial increases in sales revenue.
Until September 20, 1995, the Company had been a Subchapter S
Corporation wholly-owned by Ralph H. Eckler. On that date, the Company
converted to a C Corporation as a result of a private placement of $1,000,000 of
Class A Common and Preferred Stock. Further, in November 1995, the Company
became a public company upon the closing of its initial public offering of
840,000 Units, each Unit consisting of one share of Class A Common Stock and one
redeemable Class A Common Stock Purchase Warrant (the "Public Warrants") for
gross proceeds to the Company of $4,200,000. The Class A Common Stock and the
Public Warrants are separately tradable and are listed on the NASDAQ Small-Cap
Market and the Boston Stock Exchange.
Included in the Company's initial public offering were 360,000 Shares
of Class A Common Stock sold by Ralph H. Eckler, the Company's then majority
shareholder, for gross proceeds of $1,800,000, from which he repaid the Company
$570,000 representing the remaining outstanding balances of loans the Company
had in previous years made to Mr. Eckler and various entities owned by Mr.
Eckler.
As a result of the foregoing private and public financings, the
Company was able to decrease balances on long term debt, reduce trade payables,
increase inventory, complete advance royalty payments under the GM Agreement,
commence implementation of the GM Agreement, and purchase additional equipment.
Prior to the public financing, the Company experienced cash flow deficiencies
and was unable to meet many of its obligations as they became due. During that
time period, the Company made substantial loans and distributions to Mr. Eckler
and his affiliated entities for other projects resulting in a decrease in
inventory and sales. Although the Company anticipates increased sales volume
and a profitable level of operations, there is no assurance that the Company's
efforts will be successful. There are many events and factors impacting the
Company's business over which the Company has little or no control including,
without limitation, economic conditions generally affecting the public's ability
and willingness to purchase collectible vehicles and parts, delays in obtaining
product, and competitors' products. There can be no assurance that future
operations will be profitable or will satisfy future cash flow requirements.
See "Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PRODUCTS AND MARKETS. For the fiscal years ended September 30, 1996
and 1995, the Company's sales mix of its basic product lines was 48% and 50%,
respectively, for accessories; 40% and 38%, respectively, for restoration parts;
9% for maintenance items; and, 3% for gift and apparel items.
ACCESSORIES. The accessory items sold by the Company are primarily
those products that enhance the appearance and/or functionality of the Corvette.
These items can generally be readily installed by the end user and are typically
purchased by retail customers. Examples of popular accessory items include car
covers, floor mats, nosemasks, radios and car care products. The Company also
includes its manufactured, customized fiberglass parts in this category.
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RESTORATION PARTS. These parts are items that restore the Corvette to
its original condition. Such products may require certain skills and tools to
install and are purchased primarily by dealers and repair shops as opposed to
retail customers. Restoration parts include body panels, interior trim (seats,
seat covers, dash boards), wheels, emblems and moldings. Some
Company-manufactured fiberglass parts are included in this classification if the
part is manufactured to resemble the original part as opposed to custom made
parts which are considered accessories. The Company's management anticipates
this product line to increase substantially with the implementation of the
Company's license agreement with GM. Under that agreement, the Company is
licensed to manufacture, sell, distribute and market numerous parts discontinued
by GM which the Company can sell under the GM Restoration Parts trademark for
various Corvette model years. The model years of the Corvettes for which GM will
declare parts obsolete and whether a particular part for any model year is
declared obsolete are discretionary with GM. See "General Motors Agreement."
MAINTENANCE ITEMS. The Company offers an array of items which enable
Corvette owners to maintain their cars in optimum condition. These are items
that are generally considered do-it-yourself type products and are typically
purchased by retail customers. They include carburetors, valves, engine parts,
and chrome parts that enhance the overall appearance of the car.
GIFT AND APPAREL ITEMS. Such items include T-shirts, jackets, key
rings, clocks, cup holders, luggage and other novelty items. These products are
principally purchased by retail customers.
GENERAL MOTORS AGREEMENT. In December 1993, the Company entered into
a Reproduction and Service Part Tooling License Agreement with General Motors
Corporation, Service Parts Operations ("GM") (the "GM Agreement"). Under the
GM Agreement, the Company is licensed to manufacture, market, sell and
distribute a wide variety of Corvette automotive parts under the GM trademark
"GM Restoration Parts" for restoration of Corvettes, pursuant to which the
Company will pay GM royalties on licensed parts the Company sells. Corvette
restoration parts licensed by GM to the Company are parts that have been
discontinued by GM and include body panels, interior trim, convertible tops,
wheels, moldings, lights, brackets, grilles, headlight mechanisms, bumpers,
inner fenders and miscellaneous similar parts. Pursuant to the GM Agreement, the
Company is required to meet and maintain GM's quality standards for all licensed
Corvette parts manufactured and sold by the Company.
Due to the complexity of licensing such a broad range of parts, the
Company has been working closely with GM to implement the GM Agreement in
order to market the first group of licensed products to its existing customer
base and to the approximately 4,500 Chevrolet dealerships worldwide. The
initial term of the GM Agreement, as amended continues through December 31,
2001 with two consecutive five-year renewal options to December 31, 2011. As
consideration for the GM Agreement, the Company paid GM an advance of
$1,000,000 against future royalties on sales of licensed parts through
December 31, 1998 ("Advance Payment"). The renewal options are subject to the
Company making certain minimum net royalty payments to GM of at least
$750,000 during the 12 months immediately preceding the first renewal term
and at least $1,000,000 during the 12 months immediately preceding the second
renewal term.
For each twelve month period commencing January 1, 1999 through
December 31, 2001, and annually thereafter during any renewal term, the Company
is obligated to pay to GM a percentage royalty up to a maximum of 8% on net
sales, with a minimum of $500,000 annually in royalties for net sales of the
licensed parts (i.e., gross sales of licensed parts less quantity discounts and
returns for damaged goods); provided, however, if during the period December 1,
1993 through December 31, 1998 aggregate royalties of $1,000,000 are not
achieved, then the guaranteed minimum for the period January 1, 1999 to
December 31, 1999 shall be reduced (up to a maximum of $350,000) by an amount
equal to the difference
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between the $1,000,000 Advance Payment and actual royalties paid. The guaranteed
minimum royalties beginning after December 31, 1998 are payable in quarterly
installments.
GM LICENSED PARTS AND GM TOOLING. Based upon its discussions with GM,
the Company's management estimates that GM will be discontinuing thousands of
Corvette parts during the term of the GM Agreement. As each part covered by the
GM Agreement is discontinued by GM, the Company will also have the right of
first refusal to use the same tooling, when available, which GM and/or its
authorized suppliers have been using to produce the parts (provided there are no
pre-existing GM license agreements or written GM policies which conflict with or
prohibit such and that the tools are not common to other non-licensed, not yet
GM obsolete parts). If the Company elects to utilize the tooling, the Company
will in most cases have the option of submitting manufacturing requests to and
contracting with the present manufacturer where the tooling is housed to produce
the parts or to have the tooling moved to another manufacturer. The primary
expense in utilizing the tooling will be in relocating and refurbishing the
equipment, if necessary. In addition, in the event that the part is discontinued
and GM has maintained an inventory of a particular part, the Company will have a
right of first refusal to purchase the existing inventory on terms that the
Company believes are favorable. The Company believes that the purchase and
resale of this inventory will give the Company a substantial market advantage
for those particular parts insofar as the competition will not have access to
these particular parts utilizing the GM Restoration Parts trademark. In
connection with manufacturing and marketing the licensed parts, the GM Agreement
grants the Company a license to use the GM trademark, "GM Restoration Parts,"
and GM part numbers associated with the licensed parts. To date, GM has
identified various parts that are subject to the GM Agreement, and has
transferred to the Company various technology and tooling for certain parts
declared obsolete by GM. As a result of the Company's recent influx of capital,
the Company has commenced manufacturing such parts through third party
manufacturers and has commenced purchasing inventory of discontinued GM parts.
Although prior to the Company's IPO, it had not yet manufactured parts with GM
tooling nor purchased inventory of discontinued parts from GM, the Company had
sold parts from its own inventory under the GM Restoration Parts label since
1993.
BENEFITS. Among the benefits of this program, in addition to
utilization of the GM tooling as previously described, is the use of the
GM Restoration Parts trademark on each restoration part sold by the Company.
When GM discontinues a Corvette automotive part covered by the GM Agreement and
licenses the part to the Company, GM dealers, including Chevrolet dealerships,
upon inquiry about the discontinued part, will be directed to the Company for
that part through GM's computerized parts directory and the GM Restoration Parts
Reference Guide. As a result, the Company will have a built-in prospective
customer base with GM dealerships. In addition, independent body and repair
shops will also be able to purchase licensed Corvette Restoration Parts directly
from the Company.
CORVETTE MODEL YEARS. Under the GM Agreement, the Company is
presently licensed to sell a variety of discontinued parts for Corvettes for
various model years. The model years of the Corvettes for which GM will declare
parts obsolete and whether a particular part for any model year is declared
obsolete are discretionary with GM.
SALES, AND DISTRIBUTION METHODS. The Company typically generates its
revenues through three different mediums: catalog sales, showroom sales and
mail-in orders.
CATALOG. The Company markets its products primarily through the
distribution of the "Eckler's" catalog which markets approximately 17,000 items
and historically has generated most of the Company's revenues. The Company has
printed its catalog annually since 1972 and currently prints 400,000 catalogues
for distribution in February of each year. In each of February 1995 and
February 1996, the
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Company distributed over 290,000 copies of its catalog to existing and
prospective customers, both retail and wholesale. The remaining catalogues were
distributed pursuant to individual requests.
The Company's telemarketing staff is principally an inbound,
order-taking department. During the fiscal years ended September 30, 1995 and
1996, catalog sales accounted for approximately 93% of the Company's revenues.
The Company's sales force specializes in selling Corvette parts and accessories.
This group handles in excess of 600 inquiries daily and processes an average of
285 orders daily. Through the Company's Management Information System ("MIS"),
management is able to evaluate sales performance daily as well as track the
Company's total sales, back orders, inventory levels, price and product changes,
and other related statistics.
SHOWROOM SALES. For the fiscal years ended September 30, 1996 and
September 30, 1995, the Company generated approximately 6% of its total revenue
through its 5,000 square foot Titusville showroom where it displays over 3,000
items from its product line. Annually, more than 20,000 people visit the
Company's Titusville showroom.
OTHER ADVERTISING AND PROMOTIONS. In addition to its catalog, the
Company advertises in magazines and trade publications that are directed toward
the Corvette owner or dealer. The primary purpose of the ads is to introduce the
Company to new Corvette owners and shops who are not already familiar with the
Company name as well as promote actual product sales.
The Company also sponsors various promotional programs including a
program that matches a competitor's price if lower than the Company's, a
Restoration Club program pursuant to which customer-members are given discounts
on specified products, and an annual "Corvette Reunion" held at the Company's
main facilities where, during one weekend in September, thousands of Corvette
enthusiasts gather to participate in or view a Corvette car show and auction,
tour the Company's facilities, and purchase products sold by the Company and
various automotive parts vendors.
GEOGRAPHIC CONCENTRATION OF SALES. In fiscal years ended September
30, 1996 and September 30, 1995, domestic sales accounted for approximately 97%
of the Company's total, with the states of Florida, Pennsylvania, New Jersey,
New York, Indiana, Illinois, Ohio, Texas, Michigan and California constituting
approximately 50% of total sales. International sales accounted for 3% of total
sales in fiscal 1996 and 1995. The Company currently distributes parts in Japan,
and is increasing distribution of its products in Europe. To continue expanding
this market, the Company prints order blanks in three different foreign
languages (French, German, and Japanese) and has added the Language Line from
AT&T which allows access to interpreters in any language.
SOURCING AND PRODUCTION. A substantial majority of the Company's
products are obtained from many independent manufacturers who produce parts to
Corvette specifications to the extent such items are standard equipment on
Corvettes. In the case of accessories and gift and apparel items, such items
are purchased by the Company from various manufacturers and distributors.
In addition, the Company recently added to its product line the
GM restoration parts licensed to the Company under the GM Agreement. The Company
obtains the GM restoration parts by having them made by third party
manufacturers and by purchasing inventory of discontinued parts directly from
GM. In those cases where the Company has the restoration parts manufactured, the
Company selects manufacturers that can produce the restoration parts most
economically while meeting delivery requirements and maintaining product
quality. Through such relationships, the Company anticipates continuing sources
for the supply of its products, thereby accommodating variations in market
demand.
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The Company owns all of the tooling for its exclusive products, such
as Corvette fiberglass molds. All of the Company's manufacturing employees are
cross-trained to perform each production step for a particular product. In
addition, individual production stations can be easily retooled to respond to
market demands.
CERTAIN TRADEMARKS AND LICENSES. The Company does business under the
name of "Eckler's" which is a registered trademark of the Company in the United
States and Japan. In addition to the license granted to the Company under the
GM Agreement discussed above, the Company entered into the following license
agreements with GM.
TRADEMARK LICENSE AGREEMENT FOR ACCESSORIES. Effective October 3,
1992, the Company and General Motors Corporation, Service Parts Operations,
entered into a Trademark License Agreement pursuant to which the Company has
the non-exclusive right to use certain GM trademarks in connection with the
manufacture, sale, promotion and distribution of pre-approved accessory
items. Some of the licensed trademarks utilized by the Company for accessory
items are "CORVETTE," "VETTE," and Corvette body designs. For this right, the
Company pays GM a percentage royalty on net sales of licensed products, with
a guaranteed minimum of $7,500 annually. The agreement terminated on December
31, 1995, but was subject to renewal at the expiration date if the parties
mutually agree. The Company is in negotiations with GM and anticipates
renewing this agreement and incorporating it as part of the GM Licensed Parts
and Tooling Agreement.
TRADEMARK LICENSING AGREEMENT FOR GIFT AND APPAREL ITEMS. Effective
October 14, 1992, the Company and Chevrolet Motor Division, General Motors
Corporation, entered into another Trademark Licensing Agreement pursuant to
which the Company has the non-exclusive right to use certain GM trademarks in
connection with the manufacture, sale, promotion and distribution of
pre-approved novelty, gift and apparel items. The Company pays GM a percentage
royalty on net sales of licensed products, with a guaranteed minimum of $1,500
annually. The agreement terminates April 30, 1997, but is subject to renewal at
the expiration date by mutual agreement.
COMPETITION. The Company competes directly with a number of local,
regional and national suppliers of aftermarket Corvette automotive parts. Some
of the Company's competitors have greater financial, marketing and other
resources than the Company. The Company has identified nine competitors, five of
which are located in the mid-west, one in California, one in Texas, one in
Pennsylvania and one in Virginia. Although the Company believes that its prices
are competitive for similar products, certain competitors may have greater
financial resources than the Company so as to permit more aggressive pricing.
The Company has over 500 product suppliers and purchased approximately
14% of its products from one supplier during the year ended September 30, 1996.
Of the Company's 95,000 customers, no single customer accounts for more than 5%
of total revenues during the Company's most recent fiscal year.
SEASONALITY. The Company has historically recorded losses during its
first and second fiscal quarters October 1 through March 31. Historically, the
Company's prime selling season has been March through August, and the largest
portion of the Company's revenues are realized in the third and fourth quarters
of the Company's fiscal year.
EMPLOYEES. As of November 30, 1996, the Company employed
approximately 73 individuals on a full-time basis.
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ITEM 2. PROPERTY.
The Company's main facilities are located at 5200 South Washington
Avenue, Titusville, Florida, on approximately 5.57 acres (the "Main Facility").
Three buildings comprise the Company's Main Facility as follows: one building of
approximately 33,000 square feet housing the Company's main office, showroom and
a warehouse; a building of approximately 29,750 square feet housing the
Company's manufacturing facilities where the Company manufactures Corvette body
parts; and a third building of approximately 24,825 square feet serving as an
additional warehouse and the Company's shipping and receiving department. The
Company also owns additional undeveloped acreage adjacent to its Main Facility,
comprising approximately 5.3 acres (the "Undeveloped Property").
The Main Facility and the Undeveloped Property are subject to a
mortgage and security agreement in favor of Barnett Bank, N.A., with an
outstanding principal balance of $2.4 million, which loan was obtained in
September, 1996 and which refinanced an existing mortgage on the Company's
property held by NationsBank. The Barnett Bank loan is also secured by the
Company's machinery, equipment, fixtures, and other personal property, including
trade names and is guaranteed by a stockholder of the Company. The loan bears
interest at 1.5% above the prime rate as periodically quoted by Barnett Bank.
Commencing in October, 1996, and monthly thereafter, until August 30, 1999, the
Company is obligated to make monthly payments of $13,333 principal plus interest
at the rate of 1.5% above the prime rate as quoted by Barnett Bank from time to
time. The loan matures on September 30, 1999, when the outstanding balance, and
accrued interest, is due and payable.
Concurrently with refinancing its mortgage debt in September, 1996,
the Company obtained a $1 million revolving line of credit from Barnett Bank.
Any outstanding principal will bear interest at 1.5% above the prime rate
quoted by Barnett Bank. Interest on the outstanding principal balance is paid
monthly and any unpaid principal balance, plus accrued and unpaid interest, is
due on demand. The outstanding principal balance of the line of credit as of
September 30, 1996 was $133,073, leaving an available line of credit of
$866,927. However, the total principal balance at any time outstanding on the
line of credit shall not exceed prior to or after a request for a draw or
advance, the lesser of (i) $1,000,000, or (ii) 70% of the Company's accounts
receivable that meet certain criteria, plus 50% of the Company's inventory that
meet certain criteria, plus 25% of work in process in molds. The line of credit
is secured by the Company's accounts receivable, and inventory.
Each of the mortgage loan and line of credit facility contain cross-
default provisions pursuant to which a default under one loan will trigger a
default under the terms of the other loan. Among other provisions of the
Company's loan agreements, there are restrictions upon the Company with respect
to additional borrowings, loans to related parties and lease commitments. Such
agreements also impose financial covenants requiring the Company to maintain
specified financial and operating ratios which include current, leverage,
tangible net worth and fixed charge ratios. At September 30, 1996, the Company
was in violation of the fixed charge ratio requirement. The bank has granted a
waiver through September 30, 1997. If the Company defaults under one of the
loans, Barnett Bank my accelerate the amounts due under both loans, which would
have a material adverse affect on the Company's business.
The Company leases approximately 10,680 square feet of one of its
buildings to Titusville Chevrolet-GEO, Inc., which utilizes the space as offices
and a service center. The lease is a one year lease commencing February 15,
1996 and is subject to renewal for two consecutive additional one year terms.
The annual rent for the first year is $31,020, and if renewed for a second and
third year, $43,020 and $53,020, respectively. The Company also leases to
Titusville Chevrolet-GEO, Inc. approximately 10,500 square feet of land pursuant
to a three-year land lease commencing on February 15, 1996. The annual rent
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for the first year is $12,000, and increased $500 per year for each of the
second and third years. Titusville Chevrolet-GEO, Inc., formerly owned by an
affiliate of Ralph H. Eckler, was sold to a third party unrelated to Mr. Eckler,
the Company or any of their affiliates.
LETTER OF INTENT FOR COMBINATION OF THE COMPANY WITH SMART CHOICE HOLDINGS, INC.
On October 28, 1996, the Company entered into a letter of intent
with Smart Choice Holdings, Inc. ("Smart Choice"), a newly organized,
privately held Delaware corporation for the purpose of combining the two
companies. On December 30, 1996, the parties executed a definitive agreement
and plan of merger. The parties anticipate closing the agreement on or about
January 13, 1997. The combination would be effected by the holders of Smart
Choice securities exchanging all of their securities for 6.5 million shares
of the Company's Class A Common Stock or its equivalent. To the extent the
Company does not have a sufficient number of Class Common Stock authorized,
unissued and unreserved, the Company will issue one-half share of the
Company's Class B Common Stock for every share of Class A Common Stock it is
unable to issue. The resulting company would be known as Smart Choice
Holdings, Inc. (or other name (previously defined as "Smart Choice Holdings")
which would be comprised of four divisions: Corvette parts and accessories
(the "Eckler Division"), new car sales, used car sales, insurance, auto
finance and leasing. The primary focus of the combined companies would be
the establishment of a network of neighborhood stores for the financed sales
of new and used cars, with a specific focus on sub-prime borrowers. The
combined companies would be acquiring various used car dealerships and
finance companies for purposes of offering a full-service package to
customers for one-stop transportation shopping encompassing automobiles,
warranties, service, financing, leasing and insurance. Although Smart Choice
Holdings, Inc. has entered into several purchase contracts, letters of intent
and/or oral agreements in principal to acquire certain new and used car sales
and finance companies, there can be no assurance that the acquisitions will
be successfully completed and closed. Further, there is no assurance that,
given the highly competitive nature of the industry and the need for
significant additional capital to fund the acquisitions, that the resultant
company will be successful in meeting its goals. However, the closing of the
merger is conditioned on Smart Choice's demonstration to the Company of its
ability to close certain identified acquisitions. The closing of the
transaction is also conditioned on a variety of other factors consistent with
transactions of similar nature. In connection with the proposed closing of
the merger and the acquisitions, Smart Choice is seeking a senior secured
"warehouse" credit facility of up to $20 million; subordinated debt of $7
million; and a debt "bridge" financing of $3 million which would be repaid at
the time of a public offering or at maturity. Smart Choice intends to offer
the lenders on these financings rights to acquire securities through the
grant of warrants and/or conversion features for the outstanding indebtedness.
As a result of the combination, the Company will be reorganized into a
holding company, known as Smart Choice Holdings, Inc. (previously defined as
"Smart Choice Holdings"), or other name designated by Smart Choice, that will
encompass four divisions: Corvette parts and accessories, new car sales, used
car sales, insurance, auto finance and leasing. The reorganized company will
operate as a division of Smart Choice Holdings (the "Eckler Division") and would
continue to be headquartered in Titusville, Florida. The primary focus of Smart
Choice Holdings would be the establishment of a network of neighborhood stores
for the financed sales of new and used cars, with a specific focus on sub-prime
borrowers. It is anticipated that the combined companies would acquire various
car dealerships and finance companies for purposes of offering a full-service
package to customers for one-stop transportation shopping encompassing
automobiles, warranties, service, financing, leasing and insurance.
The merger agreement provides for a stock for stock exchange whereby
the holders of Smart Choice's outstanding common stock and securities
convertible to common stock shall exchange their shares
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and/or rights to acquire Smart Choice stock for 6,500,000 shares of the
Company's Class A Common Stock or its equivalent. To the extent that there are
insufficient authorized, unissued and unreserved Class A shares, the Company
shall issue one-half shares of its Class B Common Stock for every share of Class
A Common Stock that is not able to issue as a result of such unavailability.
Thus, the Company's shareholders will become shareholders of the resulting
reorganized public company, Smart Choice Holdings.
The merger agreement also provides that upon the consummation of the
consolidation, to induce Ralph H. Eckler to assign to Smart Choice certain
warrants, options and other contract rights to acquire the Company's shares that
he holds (except for options he holds under the Company's stock option plans or
issued to him in his capacity as director), the Company shall issue to Ralph
Eckler 5 year options to acquire 100,000 shares of the Company's Class A Common
Stock at $8.75 per share and 5 year options to acquire 50,000 shares of the
Company's Class A Common Stock at $10.00 per share. In connection with the
assignment of Smart Choice of certain warrants, options and other contract
rights by Mr. Eckler, Smart Choice will agree to pay him $800,000 ($200,000 of
which will be payable on January 15, 1997, and the balance of which will be
payable upon the earlier of the completion of a secondary public offering or
April 30, 1997). Mr. Eckler's employment agreement will be modified pursuant to
which he will relinquish all existing salary and bonus provisions and in lieu
thereof, he would be entitled to an annual salary of $125,000 through September
30, 1998 and $150,000 for each fiscal year beginning October 1, 1998 and ending
September 30, 2002, and a performance bonus equal to 4% of the profits of the
Eckler division before deductions for interest, depreciation and, taxes. Mr.
Eckler would continued to serve as the Chairman of the Eckler Division; however,
representatives of Smart Choice would have the right to appoint new officers of
the new holding company. The new company would also indemnify Mr. Eckler
against liabilities arising as a result of his guarantees of various Company
loans. Mr. Eckler would continued to receive a 2% annual fee, payable
quarterly, calculated on the outstanding principal balance of loans to the
Company guaranteed by Mr. Eckler. See "Certain Transactions."
If the combination is consummated, the Board of Directors of the new
public company, Smart Choice Holdings, would be expanded to seven members, three
of whom would be appointed by the representatives of Smart Choice and three of
whom would be appointed by representatives of the Company, all of whom would in
turn appoint the seventh director.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any litigation or legal proceeding the
outcome of which would materially adversely affect the Company. There can be no
assurance that any future legal proceedings will not have a material adverse
effect on the Company's business, reputation or financial condition.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
MARKET INFORMATION. The Company's Class A Common Stock and Public
Warrants are listed on the NASDAQ SmallCap Market and the Boston Stock Exchange.
Since the Company has been listed on the NASDAQ SmallCap Market only since mid-
November 1995, quarterly information is provided for quarters sine that date.
High Low
---- ---
Class A Common Stock
December 31, 1995 3 15/32 3 1/8
8
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March 31, 1996 4 1/4 4 1/8
June 30, 1996 3 3/4 3 5/8
September 30, 1996 4 3 11/16
Warrants
December 31, 1995 5/8 7/16
March 31, 1996 9/16 9/16
June 30, 1996 21/32 19/32
September 30, 1996 23/32 21/32
The quotations represent prices between dealers in securities; they do
not include retail mark-ups, mark-downs, or commissions, and do not necessarily
represent actual transactions.
HOLDERS. As of November 30, 1996 there were approximately 111 holders
of record of the Class A Common Stock and 30 holders of record of Public
Warrants. The Company's management estimates that there are over 1,200
beneficial owners of the Company's Common Stock and 500 beneficial owners of the
Company's Public Warrants.
DIVIDENDS. Historically, the Company as an S Corporation periodically
paid cash distributions to its then sole shareholder. Upon becoming a C
Corporation, the Company has not declared or paid any cash dividends on its
common stock and has no present plans to pay cash dividends in the foreseeable
future and intends to retain earnings for the future operation and expansion of
the business. Any determination to declare or pay dividends in the future will
be at the discretion of the Company's Board of Directors and will depend upon
the Company's results of operations, financial condition, any contractual
restrictions, considerations imposed by applicable law and other factors deemed
relevant by the Board of Directors. Pursuant to an underwriting agreement
between the Company and Argent Securities, Inc. (the "Underwriter"), the
Underwriter has certain approval rights respecting the Company's issuance of
dividends until November 15, 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AS OF
SEPTEMBER 30, 1996 AND THE COMPANY'S RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1996, AND 1995 SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Sales increased $1,919,921 or 15% for the year ended September 30,
1996, compared to the same period in 1995 for several reasons. Increased
inventory allowed the Company to fill customer orders and decrease lost sales.
In addition, the Company instituted an aggressive marketing strategy which
included free shipping, guaranteed lowest price, and ten percent discount for
items not in stock.
Costs of sales increased $1,219,728 or 14% for the year September 30,
1996 compared to the same period in 1995 due primarily to the increase in sales.
Gross profit as a percentage of sales remained constant at 35% during the years
ended September 30, 1996 and 1995.
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Selling, general and administrative expenses increased by $1,312,742
or 31% compared to the same period in 1995. This resulted primarily from
increases in advertising costs associated with the production and mailing of the
Company's catalog, and the hiring of additional sales personnel in order to
increase sales. In addition, general overhead increased due to the compliance
and reporting requirements of being a public company.
Other expense consisted of interest income and expense and
miscellaneous income and expense at a net expense amount of $231,232 for the
year ended September 30, 1996 compared to $350,816 for the same period in 1995.
Interest expense decreased by $102,394, or 24%, for the year ended September 30,
1996 compared to the same period in 1995 primarily due to $900,000 in principal
reductions of long-term debt made during the first quarter of 1996.
Benefit from income taxes was $161,000 for the year ended September
30, 1996. This is mainly due to a decrease in net deferred tax liabilities as a
result of a net operating loss carry forward generated during fiscal 1996.
Taxes on income of $446,000 were provided for the year ended September 30, 1995
as a result of a net deferred tax liability recorded as a charge to earnings on
September 20, 1995 when the Company converted to a C Corporation.
In connection with the Company's completion of a private placement on
September 20, 1995, the excess of the $950,000 of cash paid and Class A Common
Stock issued (which was valued at $60,000) to redeem and convert the preferred
stock issued, over the private placement proceeds assigned to preferred stock
($363,265) is being accreted from the issuance date to the redemption date
(November 15, 1995). This resulted in a decrease in net earnings applicable to
common stock of $533,032 during the first quarter of 1996.
During the third quarter of 1996, the Company changed its method of
accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method. Under the current economic environment of
low inflation, the Company believes that the FIFO method will result in a
better measurement of operating results. This change has been applied
retroactively by restating the accompanying financial statements. This
change did not have a significant effect on results of operations for the
year ended September 30, 1996, nor is it anticipated that it will have a
material effect on future periods. The effect of the change on results of
operations for the year ended September 30, 1995 was $15,135.
LIQUIDITY AND CAPITAL RESOURCES.
The following table sets forth the major components of the increase (decrease)
in cash:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------
1996 1995
---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY (USED FOR) OPERATIONS.................. $ (1,554) $ 551
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES........ 475 (144)
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES........ 1,331 ( 407)
--------- ---------
NET INCREASE IN CASH........................................ $ 252 $ -
--------- ---------
--------- ---------
</TABLE>
Cash provided by operating activities was significantly greater than
net loss for the year ended September 30, 1995. Included in net cash
provided by operating activities was net loss of $429,645 plus non-cash
adjustments of $747,170. Depreciation expense of $301,170 and deferred
income taxes of $446,000 represented the components of non-cash adjustments
during the fiscal year ended September 30, 1995.
Cash used by operating activities was significantly greater than net
loss for the year ended September 30, 1996. Included in net cash used for
operating activities was net loss of $315,430 plus non-cash adjustments of
$358,651. Depreciation expense of $372,979, loss on sale of assets of $160
and common stock, options, and warrants issued for consulting services of
$146,512 less deferred income tax benefit of $161,000 represented the
components of non-cash adjustments during the fiscal year ended September
30, 1996.
Inventory levels increased by $605,977 and decreased by $100,991 for
the years ended September 30, 1996 and 1995, respectively. The primary reason
for the changes in the levels of inventory was the Company's working capital
position. Prior to the initial public offering, the Company was unable to
replenish inventory, as needed, due to marginal working capital. This is also
the reason accounts payable decreased by $615,867 and increased by $273,583 for
the years ended September 30, 1996 and 1995, respectively.
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Cash used for investing activities exceeded cash provided by investing
activities by $143,719 for the year ended September 30, 1995, primarily due to
advances to affiliated companies in the amount of $143,339. The stockholder
repaid the outstanding balance on those advances in its entirety from proceeds
of the sale of certain of his shares in connection with the Company's initial
public offering.
Cash provided by investing activities exceeded cash used for investing
activities by $474,476 for the year ended September 30, 1996, primarily due to
repayments of notes and advances by affiliates in the amount of $561,850 during
the period.
Financing activities used cash of $407,309 for the year ended September 30,
1995. This resulted from the excess of repayments of long-term debt of
$387,017, payments on capital lease obligations of $46,375, deferred public
offering costs of $463,081, deferred financing costs of $61,500, and
distributions of S corporation earnings of $320,004 over proceeds from sale of
common stock of $211,905, proceeds of sale of preferred stock of $363,265, and
issuance of long term debt of $295,498.
Financing activities provided cash of $1,331,443 for the year ended
September 30, 1996. This resulted from the excess of proceeds from the sale of
common stock of $3,219,075, issuance of long-term debt of $17,467, and proceeds
from exercise of stock options of $131,000 over repayments of long-term debt of
$1,026,796, payments on capital lease obligations of $41,197, redemption of
preferred stock of $950,000, and dividends paid to preferred stockholders of
$18,106.
The Company had working capital at September 30, 1996 in the amount of
$1,251,130. The management of the Company has developed and implemented
strategies to meet future liquidity needs. These strategies include (i) an
initial public offering of the Company's Class A Common Stock which was
completed on November 15, 1995; (ii) refinancing of the Company's mortgage to
obtain more favorable terms, and arranging a revolving line of credit to finance
its seasonal increase in inventory and annual catalogue production costs, which
was accomplished in September, 1996; and, (iii) a tighter control on overall
costs. The Company's management believes that these actions, in addition to the
working capital position at September 30, 1996, will allow the Company to meet
its future liquidity needs.
In the past, the Company advanced funds to Mr. Eckler (its then sole
shareholder) for his use to invest in other, unrelated business ventures. Mr.
Eckler, through various entities, purchased real property and entered into
mortgage commitments with certain financial institutions. As a condition of the
mortgages, the Company was required to guarantee such loans. The Company funded
these advances through its working capital by reducing inventory levels. This
resulted in the Company's inability to adequately fill sales orders thereby
reducing sales and cash flow.
The Company renegotiated with various lenders to eliminate guarantees on
the related entities' loans. The Company further terminated lease contracts with
related entities thereby decreasing occupancy costs. The Company is no longer
advancing funds to Mr. Eckler or his affiliated entities. Mr. Eckler repaid
outstanding balances on loans from the Company to him and his affiliated
entities upon completion of the initial public offering. The Company does not
anticipate any new transactional activity between the Company and Mr. Eckler or
his affiliated entities. However, in the event any such transactions were
proposed, they would be subject to full disclosure to and authorization by a
majority of Board members or Board-appointed committee not having an interest in
the transaction, full disclosure to and approval of a majority of the
shareholders who do not have an interest in the
11
<PAGE>
transaction, or the transaction is fair and reasonable as to the Company under
Florida law at the time it is authorized by the Board or the shareholders.
Further, affiliated transactions having fair market values exceeding certain
statutory amounts are required to be approved by holders of two-thirds of the
voting shares other than the shares beneficially owned by the shareholder
interested in the transaction, unless the transaction is approved by majority
vote of disinterested directors.
In September 1996, the Company refinanced a $2.1 million NationsBank loan,
which was secured by the Company's real and personal property, matured on
October 1, 1997, and carried an interest rate of 3% above the prime rate quoted
by NationsBank. The Company's monthly interest payments under the NationsBank
note were $22,000 and an interim balloon payment of $750,000 was due in October
1996. In replacement thereof, the Company obtained a $2.4 million loan from
Barnett Bank, Inc. ("Barnett Bank") in September 1996, secured by the Company's
real and personal property, on terms the Company's management believes are more
favorable to the Company. The new Barnett Bank loan matures on September 30,
1999. The Company is obligated to make monthly payments of $13,333 principal
plus interest at the rate of 1.5% above the prime rate quoted by Barnett Bank
from time to time. After using the loan proceeds to pay off the NationsBank
loan in the amount of $2,197,623, a first mortgage on certain real property
owned by the Company in the amount of $130,902, and loan closing costs in the
amount of $54,009, the Company received net loan proceeds of $17,467.
In September 1996, the Company also obtained a $1 million revolving line of
credit from Barnett Bank. Any outstanding principal balance will bear interest
at 1.5% above the prime rate quoted by Barnett Bank. Interest is payable
monthly and any unpaid principal balance, plus accrued and unpaid interest, is
due on demand. After payment of closing costs in the amount of $133,073, the
Company had an available line of credit at September 30, 1996 of $866,927.
Included in the closing costs of $133,073 was approximately $130,000 to pay off
capital leases secured by computer equipment. However, the total principal
balance outstanding on the line of credit at any time shall not exceed, prior to
or after a request for draw or advance, the lesser of (i) $1,000,000, or (ii)
70% of the Company's accounts receivable that meet certain criteria, plus 50%
of the Company's inventory that meet certain criteria, and plus 25% of work in
process in molds.
The capital infusion from the Company's initial public offering permitted
the Company to commence increasing inventory levels to enhance more favorable
terms with its lenders and take advantage of quantity and cash discounts.
Similarly, the Company's management believes that the addition of the new line
of credit available from Barnett Bank will enhance the Company's management of
cash flow, and further facilitate the Company's ability to build inventory for
its peak marketing season and fund catalog production costs which will
approximate $950,000 annually. The Company believes that this will facilitate
improvement of its sales and gross margins. Prior to obtaining the line of
credit, the Company was required to utilize its own cash in the approximate
amount of $1,200,000 for costs associated with the publication and mailing of
its 1996 spring catalogue in preparation for its peak selling season. This
affected the Company's cash flow and Company's ability to keep on hand
sufficient inventory to meet product demand during the peak selling season. The
Company's management believes that the availability of the line of credit will
also further enhance the Company's ability to purchase and manufacture inventory
under the GM Agreement which will also result in an increase in sales and cash
flow. The Company believes that its refinancing of bank debt and the obtaining
of a revolving line of credit will provide the Company with sufficient cash to
meet its needs for the foreseeable future.
12
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S CORPORATION ELECTION
Effective October 1, 1989, the Company elected to become an S Corporation
for Federal and Florida income tax purposes. As such, the Company generally had
not been subject to Federal or certain state income taxes, but its income had
been taxable to its shareholder. The Company's status as an S Corporation was
terminated upon the closing of the Private Placement and the issuance of the
Class A Common and preferred stock on September 20, 1995.
The Board of Directors authorized distributions to the sole shareholder of
the Company in the amount of $320,004 for the year ended September 30, 1995.
SEASONALITY
The business of the Company is subject to seasonal fluctuations.
Historically, the business has realized a higher portion of its revenues in the
third and fourth quarters of the Company's fiscal year and the lowest portion of
its revenues in the first quarter. The business of the Company is particularly
dependent on sales to Corvette enthusiasts during the spring and summer months.
This is the time of year that Corvette enthusiasts are preparing for upcoming
car shows that are held in the late summer and early fall.
INFLATION
Although the effects of inflation on the Company cannot be accurately
determined, the Company believes that inflation has had a significant impact on
the Company's results of operations for the periods presented. Historically,
the Company has been generally unable to pass price increases on to customers
due to the competitive environment in which the Company operates. Management
believes it has been able to minimize the effect of inflation by decreasing its
operating costs, increasing its employee productivity and fully utilizing its
marketing capabilities.
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements: Page
Number
------
Report of Independent Certified Public Accountant F-2
Balance Sheet as of September 30, 1996 F-3
Statements of Operations for the years ended F-5
September 30, 1996 and 1995
Statements of Stockholders' Equity (Deficit) for the
years ended September 30, 1996 and 1995 F-6
Statements of Cash Flows for the years ended
September 30, 1996 and 1995 F-7
Summary of Significant Account Policies F-8
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Notes to Financial Statements F-12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 27, 1994, the Company executed an engagement letter with the
certified public accounting firm of BDO Seidman, LLP ("BDO") formalizing their
relationship, and detailing the scope of work to be performed by BDO for the
next fiscal year. After executing the letter agreement with BDO to serve as
independent auditors for the Company, the Company terminated its relationship
with the certified public accounting firm of Graham & Cottrill, P.A. ("G&C").
G&C's report on the Company's financial statements for the fiscal year ended
September 30, 1993, did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to audit scope, or accounting
principles. Since G&C was engaged by the Company in 1980 through the date of
G&C's dismissal, there were no disagreements with G&C on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
G&C, would have caused it to make a reference to the subject matter of the
disagreement in connection with its reports.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth the names, ages, and positions with the
Company of all of the officers and directors of the Company. Also set forth
below is information as to the principal occupation and background for each
person in the table.
NAME AGE POSITION AND OFFICE
---- --- -------------------
Ralph H. Eckler 54 President, Chief Executive Officer,
Secretary, Treasurer, Director and Founder
Donald A.
Wojnowski, Jr. 36 Director
Joseph Yossifon 50 Director
Ronald V. Mohr 45 Vice President of Finance and Administration,
Director
G. Edward Mills 52 Senior V.P. Operations
Michael G. Wilson 48 Vice President Sales and Marketing
Ernest Restina 38 Controller
Ralph H. Eckler has served as President, Chief Executive Officer and as a
Director of the Company since its inception in 1973. Prior thereto, Mr. Eckler
was the principal and served as the product designer to the Company's
predecessors which were Eckler's Corvette Shop (founded in 1961 in Illinois) and
Eckler's Corvette Custom Center (founded in 1966 in Illinois). Concurrent with
his management of the Company, Mr. Eckler also identified market opportunities
and established new business operations in the automotive, property management
and marine industries. Mr. Eckler has served as President and a director of
Eckler Service Center, Inc. since November 1990. Mr. Eckler has also served as
President and a director and is a majority shareholder of Eckler Enterprises,
Inc. since 1990, Eckler Development, Inc. since 1988, and Eckler Water Sports,
Inc. (a manufacturer of pleasure boats) since 1993.
14
<PAGE>
Ronald V. Mohr, a Director, since February 12, 1996, is Vice President of
Finance and Administration of the Company and has served as the Company's
Chief Financial Officer since June 1982. Prior to that time, Mr. Mohr had
eight years of financial and management experience. He was the sole
proprietor of Mohr Construction from 1980 to 1982, which primary business was
housing remodeling. From 1975 to 1980, Mr. Mohr served as Controller of Kusel
Equipment Company, a food processing equipment manufacturer located in
Watertown, Wisconsin, and from 1974 to 1975 he was a staff accountant at
Livesey Enterprises, a commercial developer located in Madison, Wisconsin.
Mr. Mohr obtained his B.B.A. in Accounting from the University of Wisconsin
in 1974.
Donald A. Wojnowski, Jr. has been a Director of the Company since February
12, 1996. Since 1992 he has been a stockbroker and registered principal of
Empire Financial Group, an NASD registered broker dealer. From 1987 to 1992,
Mr. Wojnowski was a stockbroker with Dean Witter Reynolds in Cocoa Beach,
Florida, and was a stockbroker in 1987 with Royall Alliance (Intergrated
Resources), located in Cocoa Beach, Florida, and from 1982 to 1987 he was a
stockbroker with E.F. Hutton & Co., located in Cocoa Beach, Florida.
Joseph Yossifon has been a Director of the Company since February 12, 1996
and since 1985 has been self-employed as an independent investor in real estate
and securities. From 1976 to 1985 he was the president of A-1-A Discounts, an
appliance retailer located in Orlando, Florida.
G. Edward Mills has been Senior Vice President of Operations for the
Company since April 1992 and is responsible for the Company's manufacturing,
engineering/tooling, warehousing, fulfillment requirements, and quality control
activities. From January 1973 to April 1992, Mr. Mills served as General Manager
for the Company. Before being hired by the Company in January 1973 as its
General Manager, Mr. Mills worked as a printer with Wagoner Printing Company
located in Illinois.
Michael G. Wilson has been Vice President of Marketing and Sales for the
Company since May 1981. Prior thereto, from January 1979 to May 1981, Mr. Wilson
was the Director of Advertising and Sales Promotion for Autotronic Controls
Corporation, an aftermarket automotive parts manufacturer, a division of General
Dynamics. Prior to his employment with Autotronic, Mr. Wilson spent two years
promoting convention sales for the City of El Paso, Texas. Mr. Wilson holds a
B.B.A. degree in Marketing from the University of Texas.
Ernest Restina has been the Company's Controller since November 1995.
Prior to his employment with the Company, from 1994 to 1995, Mr. Restina was a
senior accountant with Berman Shapiro Hopkins & Company, Certified Public
Accountants and business consultants, located in Merritt Island, Florida. From
1988 to 1994, he was a senior accountant with Retz Baker P.A., CPAs Titusville,
Florida. From 1986 to 1988, Mr. Restina served as Business Manager for Jon-Glenn
Chevrolet, Inc., Titusville, administering that firm's accounting, payroll and
inventory management system. Mr. Restina was General Manager and Vice President
of Bob Restina Chevrolet, Inc., Titusville, from 1983 to 1986. Mr. Restina is a
Certified Public Accountant and holds a B.S.B.A. degree in accounting from the
University of Central Florida.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's Common Stock, to file with the SEC and NASDAQ
initial reports of beneficial ownership and reports of changes of beneficial
ownership of Common Stock of the Company. Such persons are also required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file. To the Company's knowledge, based solely on a review of the
copies of such forms furnished to the Company during the fiscal year ended
September 30, 1996, or written representations that no Forms 5 were
required, during the fiscal year ended September 30, 1996, all Section 16(a)
filing requirements applicable to such individuals were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
Only Ralph H. Eckler, the Company's President and its chief executive
officer, received compensation in excess of $100,000 during the fiscal years
ended September 30, 1996 and 1995. Except as set forth in the table below, no
bonuses or other compensation were paid during the fiscal year ended
September 30, 1996.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OTHER ANNUAL
- --------------------------- ENDED 9/30 ------ ----- COMPENSATION
---------- ------------
Ralph H. Eckler, President (CEO) 1996 $100,000 -- --
1995 $105,776 -- --
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with its Chief Executive
Officer and President, Ralph H. Eckler, effective as of May 23, 1995. The term
of the agreement is seven years and is automatically renewable for two
successive two-year terms, unless notice of termination is given prior to a
renewal period. The agreement provides that Mr. Eckler shall receive an initial
annual base salary of $100,000. Such base salary increases to $150,000 for the
second and third years of the agreement, and to $175,000 and $200,000 for the
fourth and fifth years of the agreement, respectively. The base salary increases
to $250,000 for the sixth, seventh and any years subject to the automatic
renewal options. On each January 1, the annual base salary shall be increased to
reflect the change in the cost of living, based upon the change, from the
preceding January 1, in the Consumer Price Index for All Urban Consumers, as
published by the U.S. Bureau of Labor Statistics.
The agreement also provides for stock options that will enable Mr. Eckler
to acquire Class A Common Stock of the Company annually. The exercise of the
stock options is contingent upon the Company achieving either a specified
earnings per share level or a specified stock price level (the "performance
threshold"), for the corresponding fiscal year-end. Commencing with the fiscal
year ended September 30, 1996 and at each of the six fiscal year ends
thereafter, provided the performance threshold is met, Mr. Eckler may acquire,
in specified annual increments, Class A Common Stock aggregating over such seven
year period a total of (a) 160,000 shares at an exercise price of $2.50 per
share, and (b) 320,000 shares at an exercise price of $5.00 per share. The
stock option grants are cumulative. Accordingly, for the year in which the
Company attains either of the performance thresholds, stock options for prior
years not previously granted shall be granted in addition to the stock options
granted for the applicable year. None of these options were earned as of
September 30, 1996. See the table under "Management and Employee Stock Option
Plans-Chief Executive Officer Stock Option Plan."
As additional compensation, Mr. Eckler may participate in a management
bonus pool ("Bonus Pool") to be established by the Company. Certain other
officers of the Company may also participate in the Bonus Pool. It is
anticipated that up to ten percent (10%) of the Company's annual pre-tax
profit will be paid into the Bonus Pool. The Board of Directors will
determine the allocation of Bonus Pool funds, if any. There was no bonus
pool during fiscal 1996. Further, Mr. Eckler will receive annual fixed
bonuses payable in quarterly installments, provided the Company achieves
either of the above-mentioned performance thresholds. The annual bonus shall
be $200,000 for the fiscal year ended September 30, 1996, and $250,000 for
each of the fiscal years ended September 30, 1997 through September 30, 2002.
The performance thresholds were not met during fiscal year 1996, and no bonus
was recorded.
The agreement contains a covenant pursuant to which Mr. Eckler will not
compete with the Company during the term of the agreement and for two years
following termination of the agreement.
The
16
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foregoing agreement will be substantially modified subject to the closing of
the Company's acquisition of Smart Choice Holdings, Inc. See under item 2,
"Letter of Intent for Combination of the Company with Smart Choice Holdings,
Inc."
RETIREMENT AND SAVINGS PLAN.
The Company has a Retirement and Savings Plan (the "401(k) Plan") for the
benefit of eligible employees. Pursuant to the 401(k) Plan, employees may elect
to contribute a percentage of their salaries to the 401(k) Plan subject to
certain limits. The 401(k) Plan permits, but does not require additional
matching contributions and profit sharing contributions to the 401(k) Plan by
the Company on behalf of all eligible participants in the Plan. The Company's
contributions vest over seven years .During the fiscal years ended September 30,
1996 and 1995, the Company made no contributions to the 401(k) Plan for its
employees.
MANAGEMENT AND EMPLOYEE STOCK OPTION PLANS
COMBINED QUALIFIED AND NON-QUALIFIED STOCK OPTION PLAN. The Company
maintains a Combined Qualified and Non-Qualified Employee Stock Option Plan
(the "Combined Plan" or the "Plan"). The purpose of the Combined Plan is to
enable the Company to encourage key employees, directors and consultants to
contribute to the success of the Company by granting "incentive stock options"
(as defined in Section 422 of the Internal Revenue Code ("ISOs"), as well as
non-qualified stock options ("NQSOs").
The Combined Plan provides for administration by the Board of Directors or
a committee appointed by the Board of Directors (the "Committee") which
determines in its discretion, among other things, the recipients of grants,
whether a grant will consist of ISOs or NQSOs or a combination thereof, and the
number of shares to be subject to such options. The Combined Plan provides for
the granting of ISOs to purchase Class A Common Stock at an exercise price to be
determined by the Board of Directors or the Committee of not less than the fair
market value of the Class A Common Stock on the date the option is granted.
NQSOs may be granted with an exercise price to be determined by the Board of
Directors or the Committee.
The total number of shares with respect to which options may be granted
under the Combined Plan is 475,000. ISOs may not be granted to an individual to
the extent that in the calendar year in which such ISOs first become exercisable
the shares subject to such ISOs have a fair market value on the date of grant in
excess of $100,000. No option may be granted under the Plan after August 24,
2005 and no option may be outstanding for more than ten years after its grant.
Additionally, no ISO can be granted with a term of more than five years to a
shareholder owning 10% or more of the combined voting power of all classes of
stock of the Company.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Class A Common
Stock (based on the fair market value of the Class A Common Stock on the date
prior to exercise), or in a combination of both. Subject to certain exceptions,
options may be exercised any time up to three months after termination of the
holder's employment.
The Combined Plan may be terminated or amended at any time by the Board of
Directors, except that, shareholder approval will be necessary for material
modifications such as any material increase of the number of shares authorized
for issuance under the Plan or a material change in the requirements of Plan
eligibility.
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There are currently outstanding options for 140,000 shares of the Company's
Common Stock issued to employees and officers under the Combined Plan, of which
options for 95,000 shares are exercisable at $2.50 per share from August 25,
1997 to August 25, 2000, options for 25,000 shares are exercisable at $3.00 to
$3.30 per share commencing in January 1997 and terminating in July 2001, and
options for 20,000 shares are exercisable at $3.00 to $3.30 per share commencing
in April 1997 and terminating in October 2001.
NON-QUALIFIED STOCK OPTION PLAN. The Company also established a
non-qualified stock option plan in 1995 for the purpose of granting options to
management employees. The Company reserved 35,000 shares of its Class A Common
Stock for issuance pursuant to such options, all of which are subject to options
granted to executive officers of the Company. The options expire on August 25,
2000 and are first exercisable on August 25, 1997 at an exercise price of
$2.50 per share.
CHIEF EXECUTIVE OFFICER STOCK OPTION PLAN. Ralph Eckler's employment
agreement (as previously described), provides Mr. Eckler with stock options that
will enable Mr. Eckler to acquire stock of the Company annually until 2002. The
granting of the stock options is contingent upon the Company achieving either a
specified earnings per share level or a specified stock price level (the
"performance threshold") for the corresponding fiscal year-end. Commencing with
fiscal year ended September 30, 1996 and at each of the six fiscal year ends
hereafter, provided the performance threshold is met for the corresponding
years, Mr. Eckler may acquire the number of shares at the corresponding exercise
prices as follows:
FYE 9/30 NO. SHARES EXERCISE PRICE
-------- ---------- PER SHARE
---------
1996 .............................. 10,000 $2.50
20,000 $5.00
1997 .............................. 15,000 $2.50
30,000 $5.00
1998 .............................. 20,000 $2.50
40,000 $5.00
1999 .............................. 25,000 $2.50
50,000 $5.00
2000 .............................. 30,000 $2.50
60,000 $5.00
2001 .............................. 30,000 $2.50
60,000 $5.00
2002 .............................. 30,000 $2.50
60,000 $5.00
The stock options are cumulative. Accordingly, for any year in which the
Company attains either of the performance thresholds, stock options for prior
years not previously granted shall be granted in addition to the stock options
granted for the applicable year. The Company has reserved 480,000 shares of its
Class A Common Stock for issuance under Mr. Eckler's employment agreement.
OTHER OPTIONS. Until September 30, 2002, all future grants of options to
directors, officers and employees of the Company shall be at exercise prices of
at least 85% of the fair market value of the stock at the time of grant. In
July 1996, the Company granted stock options outside of its stock option plans
to Ralph H. Eckler (for 200,000 shares of Common Stock) and to Argent
Securities, Inc., the Company's
18
<PAGE>
Underwriter for its initial public offering and a consultant (for 200,000 shares
of Common Stock). The exercise price of both options is $2.88 per share,
representing the last trade as quoted by Nasdaq on the date of grant. Mr.
Eckler's option is exercisable commencing in January 1997 and expires in July
2001. Argent's option is currently exercisable and expires in July 2001. The
Company also issued options to its independent directors which is discussed
under "Director Compensation," below.
DIRECTOR COMPENSATION. The Company compensates its directors in the form
of stock options for shares of the Company's Class A Common Stock. In calendar
1996, each director received options for 20,000 shares (for an aggregate of
80,000 shares). The options are exercisable at $3.00 per share (except for
Ralph Eckler's options which are exercisable at $3.30 per share), commencing in
January 1997 and expiring in July 2001 as to 40,000 shares, and commencing in
April 1997 and expiring in October 2001 as to the remaining 40,000 shares. The
options granted to Ralph Eckler and Ronald Mohr, employee-directors of the
Company, were issued under the Company's Combined Plan. In addition each
director, with the exception of Ralph Eckler received $1,000 for out of
pocket expenses relating to their duties.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted
during the fiscal year ended September 30, 1996 to those persons named in the
preceding Summary Compensation Table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Numbers of % of Total
Securities Options Granted
Underlying to Employees in Exercise Price
Name Options Granted Fiscal Year ($/share) Expiration Date
- ---- --------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Ralph H. Eckler 10,000(1) 4.4% $3.30 7/25/2001
Ralph H. Eckler 200,000(2) 88.9% $2.88 7/18/2001
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Granted under the Company's Combined Plan.
(2) Granted independently of the Combined Plan.
-----------------
AGGREGATED OPTIONS IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning the value of
unexercised stock options at September 30, 1996 for those persons named in the
Summary Compensation Table.
19
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options at fiscal
Shares Acquired Value Options at Fiscal Year End Year End
Name on Exercise # Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --------------- ----------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Ralph H. Eckler -- -- 0/245,000 0/$283,500 (1)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The dollar value was calculated by determining the difference between the
fair market value at fiscal year-end of the Class A Common Stock underlying
the options and the exercise prices of the options. The last sale price of
a share of the Company's Class A Common Stock on September 30, 1996 as
reported by Nasdaq was $4.00.
CONSULTING AGREEMENTS.
In August 1994, the Company retained the consulting services of
Greyhouse Services Corporation ("Greyhouse") in connection with certain of the
Company's activities, including but not limited to the renegotiation of the
Company bank loans and related obligations, and the Company's reorganization and
operational matters relating thereto. The agreement provides for payment at the
rate of $150 per hour, not to exceed $7,500 per month without prior approval of
the Company through May 31, 1998. The compensation arrangement includes an
option to purchase 100,000 shares of Class A Common Stock of the Company at a
per share exercise price of $2.50, exercisable until August 29, 1997. The
option includes certain "piggy back" registration rights. Pursuant to a
shareholder voting agreement, Greyhouse granted to Ralph H. Eckler its proxy to
vote all shares acquired by Greyhouse, if any, under the option.
The Company entered into a consulting agreement with the underwriters
of its initial public offering, Argent Securities, Inc. ("Argent") on March 31,
1995, pursuant to which various executive and staff personnel of Argent provides
financial and investor relation services, public relation services and corporate
communications services for a period of three years at the rate of $4,166 per
month. Monthly payments accrued until November 15, 1995. At that time, the
payment terms were amended to provide for payment in three installments of
$50,000 each on November 15, 1995 (paid upon closing of the initial public
offering), January 15, 1996 and April 1, 1996. The agreement includes certain
provisions regarding the payment of out of pocket expenses, indemnification of
Argent, and arbitration. Argent acted as the Company's underwriter for its
initial public offering. Argent received an option to acquire 84,000 units (the
"Unit Purchase Option"), exercisable during a four year period commencing
November 15, 1996 at an exercise price of $6.00 per unit. Each unit consists of
one share of Class A Common Stock and one underwriter's warrant for one share of
Class A Common Stock exercisable at $6.50 per share. Argent has certain
"piggyback" and demand registration rights with respect to the Class A Common
Stock and Underwrtiers' Warrants underlying the Unit Purchase Option for a
period of four years commencing November 9, 1996.
In January 1996, the Company entered into a marketing services
agreement with an independent consultant for consulting services regarding
on-going relations with market makers, brokers and shareholders in the
after-market. The Company paid for such services with 62,000 shares of Class A
Common Stock (valued at $3.50 per share, which approximated the then market
price) which shares were
20
<PAGE>
issued pursuant to a Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on January 18, 1996.
In July 1996, the Company entered into a financial consulting services
agreement with another independent consultant regarding on-going public
relations with existing and potential market makers, analysts, brokers, the
media; services in connection with shareholder communications and meetings; the
enlistment of additional market makers; and various other services in connection
with public relations activities in connection with the Company's management and
products. The Company agreed to pay compensation in the form of 35,000 shares
of Class A Common Stock and options to purchase an additional 275,000 shares of
Class A Common Stock at exercise prices ranging from $3.00 per share (which
approximated the then market price) to $4.00 per share. The consulting
agreement was terminated in October 1996 and the Company issued a total of
105,000 shares of Class A Common Stock to the consultant pursuant to the
consulting agreement and exercise of stock options, which shares were issued
pursuant to a Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on August 28, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The follow table sets forth information with respect to the number of
shares of Class A Common Stock beneficially owned by (i) each director of the
Company, (ii) the executive officer named in the "Summary Compensation Table"
(the "Named Officer"), (iii) all directors and officers of the Company as a
group and (iv) each shareholder known by the Company to be a beneficial owner of
more than 5% of any class of the Company's voting securities as of November 30,
1996. The Company believes that except as otherwise noted, each individual
named has sole investment and voting power with respect to the shares of Common
Stock indicated as beneficially owned by such individual. As of November 30,
1996, one stockholder was known by the Company to beneficially own five percent
(5%) or more of the outstanding voting securities of the Company.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Name of Individual or Number Amount and Nature of
of Persons in Group Beneficial Ownership(1)(2) Percentage of Class(2)
------------------- -------------------- -------------------
<S> <C> <C>
Ralph H. Eckler 1,336,000(3)(4) 44.79%
Ronald V. Mohr 20,000(5) *
Donald A. Wojnowski, Jr. 10,000(6) *
Joseph Yossifon 10,000(6) *
All Directors and Executive
Officers as a group (7 persons) 1,406,000(7) 48.36%
*Less than 1%.
- --------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of calculating beneficial ownership percentages, 2,667,500
shares of Class A Common Stock were deemed outstanding, which includes
1,020,750 shares of Class A Common Stock issuable upon conversion of
510,375 shares of outstanding Class B Common Stock on a 2 for 1 basis.
However, for purposes of calculating Mr. Eckler's percentage ownership and
that of officers and directors as a group, 2,767,500 shares were deemed
outstanding which includes the 100,000 Shares of Class A
21
<PAGE>
Common Stock issuable upon exercise of the Consultant Option for which Mr.
Eckler holds a voting proxy.
(2) In accordance with Rule 13d-3 promulgated under the Exchange Act, the
percentage calculations were made on the basis of the amount of outstanding
securities plus, for each person or group, any securities that person or
group has the right to acquire within 60 days pursuant to options,
warrants, conversion privileges or other rights. If the directors or
officer does not own shares, or options or warrants exercisable within the
next 60 days, percentage ownership is deemed to be zero.
(3) Includes 495,375 shares of Class B Common Stock as though converted on a 2
for 1 basis into Class A Common Stock for a total of 990,750 shares of
Class A Common Stock. Mr. Eckler previously owned 555,000 Class B Shares
but on March 29, 1996, made a capital contribution to the Company of 47,000
Class B shares. Mr. Eckler also converted 12,625 Class B shares into
25,250 Class A shares for purposes of pledging such shares to a bank as
security for a personal obligation. Mr. Eckler's 495,375 Shares of Class B
Common Stock are subject to a Lock-Up Agreement between him, the Company,
and Argent Securities, Inc., the Company's Underwriter for its initial
public offering. Also includes (i) 5,000 shares of Class A Common Stock
issuable upon exercise of a warrant, (ii) 210,000 shares of Class A Common
Stock underlying options which become exercisable within the next 60 days;
and (iii) 100,000 shares of Class A Common Stock underlying a currently
exercisable Consultant Option for which Ralph H. Eckler holds a voting
proxy as to all such shares. Does not include 45,000 Class A Shares
subject to options which are not exercisable within the next 60 days.
(4) All of Mr. Eckler's Class B shares are subject to a lock-up agreement with
Argent Securities, Inc. from 2 to 5 years, which shares may be released
incrementally over the term of the lock-up agreement if certain performance
targets are met. Those shares not incrementally released will be subject
to a proxy to be given to Argent if the targets are not met. Any proxy
held by Argent would expire on September 30, 2000. The effect of the banks
exercising their rights under their respective pledge agreements and Argent
exercising its rights under the lock-up agreement at a subsequent date may
result in a change in control of the Company.
(5) Includes 5,000 Class A Shares issuable upon exercise of a warrant and
10,000 shares underlying an option that is exercisable within the next 60
days. Does not include 37,500 Class A Shares subject to options which are
not exercisable within the next 60 days.
(6) Represents 10,000 shares of Class A Common Stock underlying an option
exercisable within the next 60 days. Does not include stock options for
10,000 Class A Shares which are not exercisable within the next 60 days.
(7) The Company's executive officers were subject to one-year lock-up
agreements between them and the Company pursuant to which they could not
sell, encumber or otherwise transfer any securities of the Company owned by
them until November 9, 1996. The agreement provides that for a period of
six months after such date, the sales price for any shares sold by them
shall not be less than $7.50 per share.
LOCK-UP AGREEMENTS
Ralph H. Eckler and Argent entered into an Amended and Restated
Lock-Up Letter Agreement dated October 12, 1995 (the "Lock-Up Agreement") which
places certain restrictions on the transferability of Mr. Eckler's shares of
Class B Common Stock and the Class A Common Stock into which it is
22
<PAGE>
convertible. Under the agreement, approximately 60% of his Class B shares are
subject to a two-year absolute lock-up subject to incremental release annually
commencing in 1997 if certain cumulative earnings per share or price per share
targets are met. Mr. Eckler's remaining shares of Class B Common Stock are
subject to five year lock-up subject to incremental release each year if the
Company meets certain criteria based on gross sales, earnings and price earnings
ratio calculations. Those shares not incrementally released under the Lock-Up
Agreement will be subject to a proxy to be held by Argent in the event that the
performance targets are not met. However, any such proxies shall expire on
September 30, 2000. The Lock-Up Agreement permitted Mr. Eckler to transfer
15,000 of his Class B shares to a former spouse, which transaction was effected
in January 1996.
Further, Mr. Eckler and certain other executive officers of the
Company are subject to a one-year lock-up agreement with the Company under which
they may not sell or otherwise transfer any securities of the Company until
November 9, 1996. The Agreement also provides for the six month period after
November 9, 1996, they may not sell any securities of the Company for less than
$7.50 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
GUARANTEE OF BANK LOANS TO AFFILIATES. The Company guaranteed certain
leases and/or bank loans made to various entities owned and controlled by
Ralph H. Eckler. The Company was released from various leases and guaranties in
September 1995 and March 1996, pursuant to agreements among the banks, Ralph H.
Eckler and various affiliates of Mr. Eckler.
(i) SUNBANK LOAN. At September 30, 1990, under the terms of a
master lease, the Company became a guarantor of a loan by SunBank to Eckler
Enterprises, (a general partnership, of which Mr. Eckler and Eckler Enterprises,
Inc. are the partners), and Eckler Development, Inc., which owned and operated
commercial property in Titusville, Florida. In connection with the loan, the
Company guaranteed the payment of rental income of up to $165,120 per year less
any amounts received under subleases. In September 1995, the Company was
released from all obligations under the master lease. As part of his agreement
with SunBank, Mr. Eckler assumed certain obligations and in connection therewith
pledged 25,250 Class A Shares (which were converted from 12,625 of his Class B
Shares).
(ii) FIRST UNION LOAN. The Company guaranteed a loan from
First Union National Bank of Florida ("First Union") to Eckler Development, Inc.
("Eckler Development"), which loan encumbered Eckler Development's commercial
property in Titusville. The Company had also entered into a warehouse lease
with Eckler Development, Inc. pursuant to which it leased 20,000 square feet of
space from Eckler Development, Inc. for $9,500 per month. Pursuant to an
agreement among First Union, Ralph H. Eckler and various Eckler-affiliated
entities, the guaranty of the Company and the warehouse lease were terminated
and the Company was released from any obligations thereunder.
(iii) NATIONSBANK LOAN. The Company guaranteed a loan made by
NationsBank of Florida, N.A. ("NationsBank") to Eckler Properties, Inc., which
owned commercial property adjacent to the Company's main facility, which
commercial property housed a GM car dealership owned and operated by an entity
owned by Ralph H. Eckler. The approximate amount of the original loan was
$850,000 with a remaining balance as of August 31, 1995 of approximately
$780,000. The dealership franchise was sold in October 1995 and the real estate
securing the NationsBank loan was sold in March 1996. Upon closing the sale of
the real property, the bank released a lien it held on 120,000 shares of Mr.
Eckler's Class B Common Stock and released the Company from its guaranty.
23
<PAGE>
LOAN FROM ECKLER INDUSTRIES, INC. RETIREMENT AND SAVINGS PLAN. On
October 22, 1992, the Company borrowed $265,000 at an interest rate of 8% per
annum from Eckler Industries, Inc.'s Retirement and Savings Plan secured by a
first mortgage on real property owned by the Company located adjacent to the
Company's headquarters in Titusville, Florida. The loan was amortized over three
years and the final payment was made in October 1995.
OTHER TRANSACTIONS WITH AFFILIATES. Until February 1996, the Company
sold products to Eckler Service Center, Inc., a Company wholly owned by Ralph H.
Eckler ("Service Center"), which specialized in mechanical work on and
restoration of Corvettes. Transactions with Service Center were conducted at
arm's length and accounted for approximately $60,000 to $70,000 in orders from
the Company annually. Service Center also leased approximately 6,800 square
feet from the Company at its Main Facility at a monthly rental of $1,587.46 per
month, subject to annual increases of four percent (4%). However, in February
1996, Mr. Eckler sold Service Center to Titusville Chevrolet-GEO, Inc., the
dealership that acquired the automobile dealership and real property from
affiliates of Mr. Eckler. The Company leases certain space and land to
Titusville Chevrolet-Geo, Inc. Titusville Chevrolet-GEO, Inc. is not related to
Mr. Eckler, the Company or any of their affiliates. See "Business-Property."
During the fiscal year ended September 30, 1995, the Company provided
engineering services to and manufactured fiberglass boat hulls and decks for
Eckler Water Sports, Inc., a corporation owned by Ralph H. Eckler. The revenue
from these transactions during such time period approximated $112,213.
For approximately 18 months, to August 1995, the Company leased 20,000
square feet of warehouse space in Titusville from Eckler Development, Inc.,
owned by Ralph H. Eckler, at a monthly rent of approximately $9,500. The lease
was terminated in September 1995. See "Certain Transactions - First Union Loan."
The Company acquired certain undeveloped property (approximately 1.7
acres) from Ralph H. Eckler in 1995. The property was subject to a note and
first mortgage in favor of the original seller in the principal amount of
$130,000, payable interest only at 10% per annum, which note was paid in full
from the loan proceeds from a refinancing of the Company's property. The
property was also subject to a second mortgage in favor of Ralph H. Eckler in
the principal amount of $33,873, which mortgage was paid off in 1996.
In prior years the Company had made various loans and advances to Mr.
Eckler and his affiliated entities. Prior to the closing of the Company's
initial public offering, there remained an outstanding balance of $570,000 which
was paid in full by Mr. Eckler from the proceeds he received as a selling
shareholder in the initial public offering.
In calendar 1995, the Company received $205,000 in respect of loans
made by various investors to Ralph H. Eckler (the "Investor Loans") who in turn
loaned the funds to the Company. Of that amount, $55,000 was loaned by certain
officers of the Company. In November 1995, the Company issued an aggregate of
27,500 restricted Class A Shares and warrants for an aggregate of 27,500 Class A
Shares to Messrs. Ralph H. Eckler, Ronald V. Mohr, G. Edward Mills, Michael G.
Wilson and Robert M. Eckler in respect of cancellation of obligations owed by
the Company to them in the aggregate amount of $55,000. The warrants became
exercisable on November 9, 1996 at $6.00 per share. The remaining $150,000 of
the Investor Loans was made by a private investor not affiliated with the
Company or its officers or directors, and was converted into 75,000 Class A
shares and warrants for 75,000 Class A shares, which warrants became exercisable
as of March 15, 1996 at $6.00 per share. The warrants provide that the
Company's Board of directors may change the exercise price from time to time.
To encourage investment in the
24
<PAGE>
Company and increase working capital, on October 9, 1996, the Company's Board of
Directors approved a decrease in the exercise price of the warrants to $3.63 per
share, the closing bid price reported by Nasdaq on such date. All of the
investors exercised their warrants on December 31, 1996.
Effective November 15, 1995, pursuant to Ralph H. Eckler's employment
agreement with the Company, he is paid a 2% annual fee, payable quarterly, which
fee is based on the outstanding principal of loans of the Company which he has
personally guaranteed. During the fiscal year ended September 30, 1996, Mr.
Eckler was paid $38,459 in such fees.
TRANSACTIONS WITH UNDERWRITER. The Company entered into an
underwriting agreement with Argent Securities, Inc. ("Argent"), the Underwriter
of it initial public offering which closed on November 15, 1995. The
underwriting agreement provides that the Company will pay to Argent a warrant
solicitation fee (the "Warrant Solicitation Fee") equal to 5% of the exercise
price of the Public Warrants exercised beginning November 9, 1996. Such Warrant
Solicitation Fee will be paid to Argent if (a) the market price of the Class A
Common Stock on the date that any Public Warrant is exercised is greater than
the exercise price of the Public Warrant; (b) the exercise of such Public
Warrant was solicited by Argent; ( c) prior specific written approval for
exercise is received from the customer if the Public Warrant is held in a
discretionary account; (d) disclosure of this compensation agreement is made
prior to or upon the exercise of such Public Warrant; (e) solicitation of the
exercise is not in violation of Rule 10b-6 of the Exchange Act; (f) Argent
provided bona fide services in exchange for the Public Warrant Solicitation Fee;
and (g) Argent has been specifically designated in writing by the holders of the
Public Warrants as the broker. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, Argent will be prohibited
from engaging in any market making activities or solicited brokerage activities
with respect to the Company's securities for the period from nine business days
prior to any solicitation of the exercise of any Public Warrant or nine business
days prior to the exercise of any Public Warrant based on a prior solicitation
until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right Argent may have to receive
such a fee for the exercise of the Public Warrants following such solicitation.
As a result, Argent, a market maker for the Company's registered securities, may
be unable to continue to provide a market for the Securities during certain
periods while the Public Warrants are exercisable.
Argent has been given certain "piggyback" and demand registration
rights with respect to the Class A Common Stock and warrants underlying the Unit
Purchase Option for a period of four years commencing November 9, 1996. The
exercise of any such registration rights by Argent may result in dilution to the
interest of the Company's shareholders, hinder efforts by the Company to arrange
future financing of the Company and/or have an adverse effect on the market
price of the Securities.
The Company has agreed with Argent that for a period of 24 months
commencing November 9, 1995, it will not issue or sell, directly or indirectly,
any shares of its capital stock, or sell or grant options, warrants or rights to
purchase any shares of its capital stock, without the written consent of Argent,
except for issuance pursuant to (i) the Company's initial public offering, (ii)
the exercise of the Unit Purchase Option and the warrants issuable thereunder,
(iii) outstanding convertible securities or contractual obligations existing on
November 9, 1995, and (iv) the grant of options and the issuance of shares
issued upon exercise of options to be granted under the Company's Stock Option
Plans; provided however, during such 24-month period, the Company may issue
securities in certain circumstances, including an acquisition, merger or similar
transaction pursuant to which the Company issues restricted securities, which do
not have registration rights which are effective during such 24-month period.
The Company has granted Argent a three-year preferential right with respect to
future financing relating to the offering of the Company's securities.
25
<PAGE>
Under the terms of the lock-up agreement between Ralph H. Eckler and
Argent, Mr. Eckler's 495,375 Class B shares (990,750 Class A Shares on an as
converted basis) are subject to lock-up for periods ranging from two to five
years, subject to incremental release annually if and when certain performance
targets are met. Those shares not released will be subject to a proxy to be
held by Argent in the event that the performance targets are not met. However,
any such proxy expires on September 30, 2000. See "Security Ownership of
Certain Beneficial Owners and Management Lock-Up Agreements."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation SB are included in
Exhibits to this Report as follows:
<TABLE>
<CAPTION>
EXHIBIT
LIST EXHIBIT DESCRIPTION PAGE NUMBER OR INCORPORATED BY REFERENCE TO:
- ---- ------------------- --------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Exhibit 3.1 to Form SB-2 Registration
Incorporation of the Company Statement, filed on September 1, 1995,
File No. 33-96520-A
3.2 Amended and Restated By-Laws of Exhibit 3.2 to Form SB-2 Registration
the Company Statement, filed on September 1, 1995,
File No. 33-96520-A
3.2.1 Amendment No. 1 to Amended and Exhibit 3.2.1 to Amendment No. 2 to Form
Restated Bylaws SB-2 Registration Statement, filed on
November 6, 1995, File No. 33-96520-A
4.1 Specimen of Class A Common Stock Exhibit 4.2.1 to Amendment No. 2 to Form
Certificate SB-2 Registration Statement, filed on
November 6, 1995, File No. 33-96520-A
4.2 Specimen of Class B Common Stock Exhibit 4.2.2 to Amendment No. 1 to Form
Certificate SB-2 Registration Statement, filed on
October 13, 1995, File No. 33-96520-A
4.3 Specimen of Warrant Certificate Exhibit 4.4 to Amendment No. 2 to Form
SB-2 Registration Statement, filed on
November 6, 1995, File No. 33-96520-A
4.4 Warrant Agreement between the Exhibit 4.5 to Amendment No. 2 to Form
Company and American Stock SB-2 Registration Statement, filed on
Transfer & Trust Company, as November 6, 1995 File No. 33-96520-A
Warrant Agent, dated November 9,
1995
26
<PAGE>
4.5 Form of Nonredeemable Stock Exhibit 4.6 to Amendment No. 2 of Form
Purchase Warrant SB-2 Registration Statement, filed on
November 6, 1995, File No. 33-96520-A
4.6 Stock Purchase Warrant in favor of Exhibit 10.20 to Annual Report on Form
Ralph H. Eckler dated November 15, 10KSB, filed on January 16, 1997, File No.
1995 1-14082
4.7 Stock Purchase Warrant in favor of Exhibit 10.21 to Annual Report on Form
Ronald V. Mohr dated November 15, 10KSB, filed on January 16, 1997, File No.
1995 1-14082
4.8 Stock Purchase Warrant in favor of Exhibit 10.22 to Annual Report on Form
G. Edward Mills dated November 15, 10KSB, filed on January 16, 1997, File No.
1995 1-14082
4.9 Stock Purchase Warrant in favor of Exhibit 10.23 to Annual Report on Form
Robert M. Eckler dated November 15, 10KSB, filed on January 16, 1997, File No.
1995 1-14082
4.10 Stock Purchase Warrant in favor of Exhibit 10.24 to Annual Report on Form
Michael G. Wilson dated November 10KSB, filed on January 16, 1997, File No.
15, 1995 1-14082
10.1 Trademark License Agreement dated Exhibit 10.17 to Amendment No. 1 to Form
effective October 14, 1992 between SB-2 Registration Statement, filed on
the Company and Chevrolet Motor October 13, 1995, File No. 33-96520-A
Division, General Motors Corporation
10.2 Trademark License Agreement dated Exhibit 10.2 to Amendment No. 1 to Form
effective October 3, 1992 between the SB-2 Registration Statement, filed on
Company and General Motors October 13, 1995, File No. 33-96520-A
Corporation
10.3.1 Reproduction and Service Parts Exhibit 10.3.1 to Amendment No. 1 of
Tooling License Agreement dated Form SB-2 Registration Statement, filed on
December 22, 1993 between the October 13, 1995, File No. 33-96520-A
Company and Service Parts
Operation, General Motors
Corporation ("GM License
Agreement")*
10.3.2 First Amendment to GM License Exhibit 10.3.2 to Amendment No. 1 of
Agreement, dated July 29, 1994 Form SB-2 Registration Statement, filed on
October 13, 1995, File No. 33-96520-A
10.3.3 Second Amendment to GM License Exhibit 10.3.3 to Amendment No. 1 of
Agreement, dated January 31, 1995* Form SB-2 Registration Statement, filed on
27
<PAGE>
October 13, 1995, File No. 33-96520-A
10.3.4 Third Amendment to GM License Exhibit 10.3.4 to Amendment No. 1 of
Agreement, dated February 14, 1995 Form SB-2 Registration Statement, filed on
October 13, 1995, File No. 33-96520-A
10.3.5 Fourth Amendment to GM License Exhibit 10.3.5 to Amendment No. 1 of
Agreement, dated May 1, 1995 Form SB-2 Registration Statement, filed on
October 13, 1995, File No. 33-96520-A
10.3.6 Fifth Amendment to GM License Exhibit 10.3.6 to Amendment No. 1 of
Agreement, dated June 15, 1995 Form SB-2 Registration Statement, filed on
October 13, 1995, File No. 33-96520-A
10.3.7 Sixth Amendment to GM License Exhibit 10.3.7 to Amendment No. 1 of
Agreement, dated July 31, 1995 Form SB-2 Registration Statement, filed on
October 13, 1995, File No. 33-96520-A
10.3.8 Seventh Amendment to GM License Exhibit 10.3.8 to Amendment No. 1 of
Agreement, dated September 12, 1995 Form SB-2 Registration Statement, filed on
October 13, 1995, File No. 33-96520-A
10.4.1 Eckler Industries, Inc. Retirement and Exhibit 10.4.1 to Form SB-2 Registration
Savings Plan and Trust Agreement, as Statement, filed on September 1, 1995, File
Amended and Restated on No. 33-96520-A
September 14, 1992
10.4.2 Amendment No. 1 to Eckler Exhibit 10.4.2 to Form SB-2 Registration
Industries, Inc. Retirement and Statement, filed on September 1, 1995, File
Savings Plan Trust Agreement dated No. 33-96520-A
March 28, 1994
10.5 Lease Agreement dated September 1, Exhibit 10.5 to Form SB-2 Registration
1991 between the Company, as Statement, filed on September 1, 1995, File
Owner, and Eckler Service No. 33-96520-A
Center, Inc., as Tenant
10.6 Eckler Industries, Inc. Non-Qualified Exhibit 10.6 to Form SB-2 Registration
Stock Option Plan Statement, filed on September 1, 1995, File
No. 33-96520-A
10.7 Eckler Industries, Inc. 1995 Exhibit 10.7 to Form SB-2 Registration
Combined Qualified and Statement, filed on September 1, 1995, File
Non-Qualified Employee Stock No. 33-96520-A
Option Plan
10.8 Amended and Restated Employment Exhibit 10.8 to Form SB-2 Registration
Agreement dated effective May 23, Statement, filed on September 1, 1995,
1995 between the Company and File No. 33-96520-A
Ralph H. Eckler
28
<PAGE>
10.9 Consulting Services Agreement dated Exhibit 10.9 to Amendment No. 1 of Form
effective August 29, 1994 between the SB-2 Registration Statement, filed on
Company and Greyhouse Services
Corporation
10.10.1 Stock Option Agreement dated Exhibit 10.10.1 to Amendment No. 1 of
effective August 29, 1994 between the Form SB-2 Registration Statement, filed on
Company and Greyhouse Services October 13, 1995, File No. 33-96520-A
Corporation
10.10.2 Amendment No. 1 to Stock Option Exhibit 10.10.2 to Amendment No. 1 of
Agreement dated October 10, 1995 Form SB-2 Registration Statement, filed on
between the Company and Greyhouse October 13, 1995, File No. 33-96520-A
Services Corporation
10.10.3 Shareholder's Voting Agreement Exhibit 10.10.3 to Amendment No. 1 of
between the Company, Ralph H. Form SB-2 Registration Statement, filed on
Eckler and Greyhouse Services October 13, 1995, File No. 33-96520-A
Corporation dated October 10, 1995
10.11 Amended and Restated Lock-Up Exhibit 10.14 to Amendment No. 2 to Form
Letter Agreement by Ralph H. Eckler SB-2 Registration Statement, filed on
to Argent Securities, Inc., dated November 6, 1995, File No. 33-96520-A
October 12, 1995
10.12 Registration Rights Agreement by and Exhibit 10.15 to Amendment No. 1 to Form
among the Company and each of the SB-2 Registration Statement, filed on
Purchasers referred to in Schedule I October 13, 1995, File No. 33-96520-A
thereto, dated September 20, 1995
10.13.1 Consulting Agreement with Argent Exhibit 10.16 to Form SB-2 Registration
Securities, Inc. dated March 31, 1995, Statement, filed on September 1, 1995, File
together with assignment thereof to No. 33-96520-A
the Company dated effective as of
July 28, 1995
10.13.2 Amendment to Consulting Agreement Exhibit 10.16.1 to Amendment No. 1 to
dated October 10, 1995 by and Form SB-2 Registration Statement, filed on
between Argent Securities, Inc. and October 13, 1995, File No. 33-96520-A
the Company
10.13.3 Second Amendment to Consulting Exhibit 10.16.2 Amendment No. 2 to Form
Agreement dated November 6, 1995 SB-2 Registration Statement, filed on
by and between Argent Securities, November 6, 1995, File No. 33-96520-A
Inc. and the Company
10.14 Unit Purchase Option Agreement Exhibit 1.2 to Amendment No. 2 to Form
between the Company and Argent SB-2 Registration Statement, filed on
Securities, Inc. and Certificate dated November 6, 1995, File No. 33-96520-A
29
<PAGE>
November 15, 1995
10.15 Marketing Service Agreement Exhibit 10.1 to Form S-8 Registration
between the Company and Richard Statement, filed on January 18, 1996, File
Flanigan dated January 8, 1995 No. 333-382.
10.16 Lease Agreement between the Exhibit 10.21 to Post Effective Amendment
Company and Titusville Chevrolet- No. 1 to Form SB-2 Registration Statement,
Geo, Inc. dated March 4, 1996 filed on April 10, 1996, File No. 33-96520-
A
10.17 Lease Agreement between the Exhibit 10.22 to Post-Effective Amendment
Company and Titusville Chevrolet- No. 1 to Form SB-2 Registration Statement,
GEO, Inc. Dated March 4, 1996 filed on April 10, 1996, File No. 33-96520-
A
10.18 Financial Public Relations Consulting Exhibit 10.1 and 10.1.1 to Form S-8
Agreement and related Stock Option Registration Statement filed on August 28,
Agreement between the Company and 1996, File No. 333-10921
Gerald A. Larder dated July 25, 1996
10.19 Loan Agreement between the Exhibit 10.19 to Post-Effective Amendment
Company and Barnett Bank, N.A. No. 2 to Form SB-2 Registration Statement,
dated September 30, 1996 filed on November 14, 1996, File No. 33-
96520-A
10.20 Mortgage and Security Agreement Exhibit 10.20 to Post-Effective Amendment
between the Company and Barnett No. 2 to Form SB-2 Registration Statement,
Bank, N.A. dated September 30, filed on November 14, 1996, File No. 33-
1996. 96520-A
10.21 Promissory Note in the amount of Exhibit 10.21 to Post-Effective Amendment
$2,400,000 from the Company in favor No. 2 to Form SB-2 Registration Statement,
of Barnett Bank, N.A. dated September filed on November 14, 1996, File No. 33-
30, 1996. 96520-A
10.22 Line of Credit Loan Agreement between Exhibit 10.22 to Post-Effective Amendment
the Company and Barnett Bank, N.A. No. 2 to Form SB-2 Registration Statement,
dated September 30, 1996. filed on November 14, 1996, File No. 33-
96520-A
10.23 Security Agreement between the Exhibit 10.23 to Post-Effective Amendment
Company and Barnett Bank, N.A. dated No. 2 to Form SB-2 Registration Statement,
September 30, 1996. filed on November 14, 1996, File No. 33-
96520-A
30
<PAGE>
10.24 Promissory Note in the amount of Exhibit 10.24 to Post-Effective Amendment
$1,000,000 in favor of Barnett Bank, No. 2 to Form SB-2 Registration Statement,
N.A. dated September 30, 1996 filed on November 14, 1996, File No. 33-
96520-A
10.25 Termination of Consulting Agreement Exhibit 10.25 to Post-Effective Amendment
dated October 28, 1996 No. 2 to Form SB-2 Registration Statement,
filed on November 14, 1996, File No. 33-
96520-A
10.26 Agreement and Plan of Merger Exhibit 2.1 to Form 8-K Current report filed
dated December 30, 1996, by on December 31, 1996, File No. 1-14082
and between Eckler Industries, Inc.,
Smart Choice Holdings, Inc., Eckler
Acquisition Corporation, Ralph Eckler,
Thomas E. Conlon and Gerald C. Parker.
16 Letter on change in certifying accountant Filed Herewith
27 Financial Data Schedules Filed Herewith
</TABLE>
- -----------
*The Company was granted confidential treatment by the SEC of portions of
Exhibits 10.3.1 and 10.3.3 Accordingly, portions thereof were omitted and
filed separately.
(b) Reports on Form 8-K.
A current report on Form 8-K, item 5 was filed by Eckler Industries, Inc.
on October 29, 1996.
31
<PAGE>
ECKLER INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-2
Balance Sheet as of September 30, 1996 F-3
Statements of Operations for the years ended
September 30, 1996 and 1995 F-5
Statements of Stockholders' Equity (Deficit) for the
years ended September 30, 1996 and 1995 F-6
Statements of Cash Flows for the years ended
September 30, 1996 and 1995 F-7
Summary of Significant Accounting Policies F-8
Notes to Financial Statements F-12
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Eckler Industries, Inc.
We have audited the accompanying balance sheet of Eckler Industries, Inc. as of
September 30, 1996 and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the two years in the period ended
September 30, 1996. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Eckler Industries, Inc. as of
September 30, 1996 and the results of its operations and its cash flows for each
of the two years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for inventories in 1996.
BDO Seidman, LLP
Orlando, Florida
November 19, 1996, except for Note 13,
which is as of December 30, 1996
F-2
<PAGE>
EKLER INDUSTRIES, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash $ 251,997
Accounts receivable - trade, less allowance for possible
losses of $9,608 (Note 6) 168,047
Note receivable 94,000
Inventories (Notes 2 and 6) 1,438,895
Prepaid expenses (Note 3) 874,694
Deferred tax asset (Note 5) 116,000
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,943,633
- -------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation and amortization (Notes 4, 6 and 7) 2,539,316
- -------------------------------------------------------------------------------
OTHER ASSETS:
Prepaid royalty expense (Note 3) 745,054
Prepaid consulting fees (Note 3) 269,291
Other 97,397
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS 1,111,742
- -------------------------------------------------------------------------------
$ 6,594,691
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
F-3
<PAGE>
ECKLER INDUSTRIES, INC.
BALANCE SHEET
(CONTINUED)
- -------------------------------------------------------------------------------
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 6) $ 133,073
Accounts payable 983,127
Accrued wages 106,366
Other accrued expenses 300,243
Current maturities of long-term debt (Note 7) 167,414
Obligations under capital leases 2,280
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,692,503
- -------------------------------------------------------------------------------
LONG-TERM DEBT, less current maturities (Note 7) 2,245,819
DEFERRED INCOME TAXES (Note 5) 401,000
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 4,339,322
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (Notes 9 and 10):
Class A common stock; $.01 par value; 10,000,000 shares
authorized; 1,641,750 issued and outstanding 16,417
Class B common stock; $.01 par value; 5,000,000 shares
authorized; 510,375 issued and outstanding 5,104
Additional paid-in capital 3,077,251
Accumulated deficit (843,403)
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,255,369
- -------------------------------------------------------------------------------
$ 6,594,691
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
F-4
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended September 30, 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 14,893,083 $ 12,973,162
COST OF SALES 9,648,505 8,428,777
- -------------------------------------------------------------------------------------------------
Gross profit 5,244,578 4,544,385
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,489,776 4,177,034
- -------------------------------------------------------------------------------------------------
Income (loss) from operations (245,198) 367,351
- -------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (332,195) (434,589)
Interest income 16,467 6,050
Miscellaneous 84,496 77,723
- -------------------------------------------------------------------------------------------------
(231,232) (350,816)
- -------------------------------------------------------------------------------------------------
Income (loss) before taxes on income (476,430) 16,535
TAXES ON INCOME (BENEFIT) - DEFERRED (Note 5) (161,000) 446,000
- -------------------------------------------------------------------------------------------------
NET LOSS (315,430) (429,465)
ACCRETION OF REDEMPTION VALUE OF REDEEMABLE
PREFERRED STOCK (Note 9) (533,032) (113,703)
PREFERRED STOCK DIVIDENDS (18,106) (3,288)
- -------------------------------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCK $ (866,568) $ (546,456)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
LOSS PER SHARE $ (.34) $ (.26)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PRO FORMA (UNAUDITED):
Historical income before taxes on income $ 16,535
Pro forma taxes on income (Note 5) 5,622
- -------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 10,913
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PRO FORMA EARNINGS PER SHARE $ .01
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES AND
SHARE EQUIVALENTS OUTSTANDING $ 2,532,309 $ 2,117,500
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
--------------------- -------------------- ADDITIONAL RETAINED
NUMBER PAR NUMBER PAR PAID-IN EARNINGS
OF SHARES VALUE OF SHARES VALUE CAPITAL (DEFICIT)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1994,
as previously reported 200,000 $ 2,000 650,000 $6,500 $ 156,504 $(313,701)
Prior period adjustment to reflect change in
method of accounting for inventories (Note 2) - - - - - 120,395
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, September 30, 1994, as restated 200,000 2,000 650,000 6,500 156,504 (193,306)
Conversion of Class B shares into
Class A shares 160,000 1,600 (80,000) (800) (800) -
Dividends - - - - - (320,004)
Transfer of accumulated deficit as of
September 20, 1995 as a result of
conversion from an S Corporation
to a C Corporation - - - - (1,079,643) 1,079,643
Accretion of redemption value of
redeemable preferred stock (Note 9) - - - - - (113,703)
Net loss - - - - - (429,465)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, September 30, 1995 360,000 3,600 570,000 5,700 (923,939) 23,165
Initial public offering, net of offering
costs (Note 10) 840,000 8,400 - - 2,747,594 -
Release of Class A common stock
subject to rescission (Note 9) 140,000 1,400 - - 210,505 -
Conversion of redeemable preferred stock into
Class A common stock (Note 9) 12,000 120 - - 59,880 -
Conversion of investor notes into Class A
common stock (Note 7) 102,500 1,025 - - 203,975 -
Issuance of Class A common stock for
consulting services (Note 10) 87,000 870 - - 301,443 -
Dividends on preferred stock - - - - - (18,106)
Contribution and retirement of Class B shares - - (47,000) (470) 470 -
Accretion of redemption value of redeemable
preferred stock (Note 9) - - - - - (533,032)
Conversion of Class B shares into
Class A shares 25,250 252 (12,625) (126) (127) -
Exercise of Class A common stock options 75,000 750 - - 224,250 -
Issuance of stock options and warrants
for consulting services (Note 10) - - - - 253,200 -
Net loss - - - - - (315,430)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, September 30, 1996 1,641,750 $16,417 510,375 $5,104 $3,077,251 $(843,403)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
F-6
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (315,430) $ (429,465)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 372,979 301,170
Loss on sale of assets 160 -
Common stock, options and warrants issued for consulting services 146,512 -
Deferred income taxes (benefit) (161,000) 446,000
Cash provided by (used for):
Accounts receivable (59,387) 70,892
Inventories (605,977) 100,991
Prepaid expenses (87,966) (45,547)
Accounts payable (615,867) 273,583
Royalties payable (175,000) (175,000)
Accrued expenses (52,946) 8,404
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (1,553,922) 551,028
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes and advances to affiliates 561,850 (143,339)
Purchases of property, plant and equipment (66,660) (23,303)
Proceeds from disposal of property and equipment 3,600 -
Decrease (increase) in other assets (24,314) 22,923
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 474,476 (143,719)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 17,467 295,498
Principal payments of long-term debt (1,026,796) (387,017)
Payments on capital lease obligations (41,197) (46,375)
Proceeds from sale of common stock 3,219,075 211,905
Proceeds from sale of preferred stock - 363,265
Redemption of preferred stock (950,000) -
Proceeds from exercise of stock options 131,000 -
Deferred public offering costs - (463,081)
Deferred financing costs - (61,500)
Dividends (18,106) (320,004)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 1,331,443 (407,309)
- ------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 251,997 -
CASH, beginning of year - -
- ------------------------------------------------------------------------------------------------------
CASH, end of year $ 251,997 $ -
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
FINANCIAL STATEMENTS.
F-7
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
INVENTORIES Inventories are valued at the lower of first-in,
first-out (FIFO) cost or market.
PREPAID EXPENSES The Company capitalizes catalog costs and amortizes
AND ROYALTIES the costs on the straight-line method over the life of
the catalog which is usually one year. Total catalog
costs expensed during the years ended September 30,
1996 and 1995 were approximately $1,207,000 and
$907,000, respectively.
Prepaid consulting fees are amortized on the straight-
line method over the terms of the consulting
agreements, which range from three to five years.
The Company amortizes the cost of advance royalties
paid under the GM agreement when sales of GM products
are made at rates specified in the agreement (see Note
3).
PROPERTY, PLANT Property, plant and equipment are stated at cost.
AND EQUIPMENT Depreciation is computed over the estimated useful
lives of the assets by the straight-line method for
financial reporting and by accelerated methods for
income tax purposes.
REVENUE Sales are recognized upon shipment of products to
RECOGNITION customers.
INCOME TAXES Through September 20, 1995, the Company, with the
consent of its stockholder, elected under certain
provisions of the Internal Revenue Code to be treated
as an S Corporation. Effective with the completion of
the private placement of securities (see Note 9), the
Company automatically revoked this election.
Upon terminating the S Corporation election, the
Company was required to adopt Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes" which requires, among other things, a
liability approach to calculating deferred income
taxes. This method uses an asset and liability approach
that requires the recognition of deferred tax assets
and liabilities for the expected future tax
consequences of events that have been recognized in the
Company's financial statements or tax returns.
Measurement of deferred income tax is based on enacted
tax laws including
F-8
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
tax rates, with the measurement of deferred income tax
assets being reduced by available tax benefits not
expected to be realized. The effect of adopting SFAS
109 was a charge to deferred tax expense of $447,300
resulting from temporary differences at September 20,
1995, the date of the revocation of the Company's S
election.
LOSS PER Loss per share of Class A common stock is based on net
SHARE loss applicable to common stock and the weighted
average number of shares of Class A common stock and
common stock equivalents outstanding during each period
after giving retroactive effect to the Company's
recapitalization discussed in Note 10. Shares of Class
B common stock become convertible into shares of Class
A common stock on a 1-for-2 basis and are considered to
be Class A common stock equivalents. Options and
warrants have been excluded from the loss per share
calculation since their effect is antidilutive.
PRO FORMA TAXES ON INCOME
AMOUNTS
Pro forma adjustments are presented to reflect a
provision for income taxes based upon pro forma income
before taxes as if the Company had been a C Corporation
for the period from October 1, 1994 through
September 20, 1995 (see Note 5).
EARNINGS PER SHARE
Pro forma earnings per share of Class A common stock is
based on pro forma net income and the weighted average
number of shares of Class A common stock and common
stock equivalents outstanding during each period after
giving retroactive effect to the Company's
recapitalization discussed in Note 10. Shares of Class
B common stock become convertible into shares of Class
A common stock on a 1-for-2 basis and are considered to
be Class A common stock equivalents.
Pursuant to the requirements of SEC Staff Accounting
Bulletin No. 83, common shares issued by the Company
during the twelve months immediately preceding the
initial public offering (242,500 shares) at a price
below the initial public offering price plus the number
of common shares subject to the
F-9
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
grant of common stock options and warrants and
convertible preferred stock issued during such period
(375,000 shares) having exercise or conversion prices
below the initial public offering price have been
included in the calculation of the shares used in
computing pro forma loss per share as if they were
outstanding for the period from October 1, 1994 through
November 15, 1995, the date of the initial public
offering (see Note 10).
RECENT ACCOUNTING The FASB has issued SFAS No. 121, "Accounting for the
PRONOUNCEMENTS Impairment of Long-Lived Assets and Long-Lived Assets
Being Disposed of," which provides guidance on how and
when impairment losses are recognized on long-lived
assets. This statement, when adopted, is not expected
to have a material impact on the Company.
The FASB has issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair
value based method of accounting for stock-based
compensation plans. Adoption of this statement is
required for all transactions entered into after
December 15, 1995 with non-employees. For stock-based
compensation issued to employees, this statement
provides a choice to either adopt the fair value based
method of accounting or continue to apply APB Opinion
No. 25, which would require only disclosure of the pro
forma net income and earnings per share, determined as
if the fair value based method had been applied. The
Company plans to continue to apply APB Opinion No. 25
when adopting this statement, and accordingly, this
statement is not expected to have a material impact on
the Company for stock-based compensation issued to
employees.
USE OF The preparation of financial statements in conformity
ESTIMATES 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.
F-10
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosures about Fair Value of Financial
INSTRUMENTS Instruments," requires disclosure of fair value
information about financial instruments. Fair value
estimates discussed herein are based upon certain
market assumptions and pertinent information available
to management as of September 30, 1996.
The respective carrying value of certain on-balance-
sheet financial instruments approximated their fair
values. These financial instruments include cash, trade
receivables, accounts payable and accrued expenses.
Fair values were assumed to approximate carrying values
for these financial instruments since they are short
term in nature and their carrying amounts approximate
fair values or they are receivable or payable on
demand. The fair value of the Company's note payable
and long-term debt is estimated based upon the quoted
market prices for the same or similar issues or on the
current rates offered to the Company for debt of the
same remaining maturities.
RECLASSIFICATIONS Certain items in the financial statements of 1995 have
been reclassified to conform to 1996 presentation.
F-11
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF Eckler Industries, Inc. (the Company) is an aftermarket
OPERATIONS supplier of Corvette automotive parts and accessories
throughout the United States. The Company has four
basic product lines which include accessories, Corvette
restoration parts, maintenance items and gift and
apparel items. The Company purchased approximately 14%
of its products from one supplier during the year ended
September 30, 1996.
2. INVENTORIES Inventories consist of the following:
------------------------------------------------------
Raw materials and supplies $ 56,948
Work in progress 42,761
Finished goods 27,900
------------------------------------------------------
Total manufactured inventories 127,609
Inventory purchased for resale 1,311,286
------------------------------------------------------
$1,438,895
------------------------------------------------------
------------------------------------------------------
During the third quarter of 1996, the Company changed
its method of accounting for inventories from the
last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method. Under the current economic
environment of low inflation, the Company believes that
the FIFO method will result in a better measurement of
operating results. This change has been applied
retroactively by restating the accompanying financial
statements. This change did not have a significant
effect on results of operations for the year ended
September 30, 1996, nor is it anticipated that it will
have a material effect on future periods. The effect of
the change on results of operations for the year ended
September 30, 1995 was $15,135.
F-12
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. PREPAID Prepaid expenses consist of the following:
EXPENSES
------------------------------------------------------
Prepaid royalties $ 844,429
Catalog costs 499,121
Prepaid consulting fees 468,195
Other prepaid expenses 77,294
------------------------------------------------------
1,889,039
Less noncurrent portion of prepaid
consulting fees (269,291)
Less noncurrent portion of prepaid
royalties (745,054)
------------------------------------------------------
$ 874,694
------------------------------------------------------
------------------------------------------------------
On December 22, 1993, the Company entered into a
reproduction and service part tooling licensing
agreement (the "GM Agreement") with General Motors
Corporation ("GM"), whereby the Company has the right
to use the licensed GM trademarks, technology and tools
to manufacture, sell, distribute and market GM parts
solely for the restoration or repair of older model GM
vehicles. The GM Agreement became effective December 1,
1993 and, as amended, expires December 31, 1998. The
Company has the right to two successive five-year
renewal terms, subject to the satisfaction of certain
minimum royalty payment requirements during the
12-month period preceding each renewal date. The terms
of the GM Agreement provide that the Company pay a
nonrefundable advance royalty in the amount of
$1,000,000, of which $825,000 was paid as of
September 30, 1995 and the remaining $175,000 was paid
on November 15, 1995. The maximum royalty rate to be
paid by the Company is 8% of net sales of licensed GM
parts.
For each 12-month period from January 1, 1999 through
December 31, 2001, and annually thereafter during any
renewal term, the Company is obligated to pay to GM a
minimum of $500,000 annually in royalties for net sales
of the licensed parts. However, if during the period
from December 1, 1993 through December 31, 1998
aggregate royalties of $1,000,000 are not achieved,
then the guaranteed minimum for the period January 1,
1999 to December 31, 1999 shall be reduced (up to a
maximum of $350,000) by an amount equal to the
difference between the $1,000,000 advance payment and
actual royalties paid.
F-13
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. PROPERTY, PLANT Property, plant and equipment consist of the following:
AND EQUIPMENT
USEFUL
LIVES
------------------------------------------------------
Land $ 641,699
Buildings and improvements 10 - 40 years 2,685,253
Machinery and equipment 3 - 7 years 557,592
Molds 5 - 10 years 310,305
Equipment under capital
leases 5 years 318,683
Vehicles 3 - 7 years 113,180
Furniture and fixtures 3 - 8 years 338,019
Computer hardware and
software 4 - 5 years 1,515,171
------------------------------------------------------
6,479,902
Less accumulated depreciation
and amortization 3,940,586
------------------------------------------------------
$2,539,316
------------------------------------------------------
------------------------------------------------------
Substantially all of the assets listed above have been
pledged as collateral under the mortgage note payable
(see Note 7).
Depreciation expense for the years ended September 30,
1996 and September 30, 1995 was $247,932 and $283,445,
respectively. Accumulated amortization on equipment
under capital leases was $259,957 as of September 30,
1996.
5. TAXES ON Effective as of the closing date of the private
INCOME placement, September 20, 1995, the Company converted
to a C corporation. Prior to this date, the Company
had elected to be taxed as an S corporation pursuant
to the Internal Revenue Code with the consent of its
stockholder. Under this arrangement, the stockholder
included the taxable income of the corporation in
his individual tax return.
F-14
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company accounts for income taxes under the
provisions of Financial Accounting Standards No. 109
(SFAS 109), "Accounting for Income Taxes." Under the
provisions of SFAS 109, a net deferred tax liability of
$447,300 was recorded as of September 20, 1995 as a
charge to earnings. The pro forma provision for income
taxes for 1995 represents the estimated income taxes
that would have been reported had the Company been
subject to income taxes for the period from October 1,
1994 through September 20, 1995.
Deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and
their reported amounts in the financial statements. The
components of the net deferred tax assets and
liabilities consist of the following:
------------------------------------------------------
Deferred tax assets:
Provision for bad debts $ 4,000
Accrued vacation 30,000
Stock options 39,000
Deferred compensation 20,000
Net operating loss carryforward 190,000
------------------------------------------------------
Gross deferred tax assets - current 283,000
Less current portion of deferred
tax liabilities (167,000)
------------------------------------------------------
Net deferred tax assets - current $ 116,000
------------------------------------------------------
------------------------------------------------------
Deferred tax liabilities:
Depreciation $ (368,000)
Prepaid catalog costs (167,000)
LIFO reserve (33,000)
------------------------------------------------------
Gross deferred tax liabilities (568,000)
Less current portion (167,000)
------------------------------------------------------
Net deferred tax liabilities - long-term $ (401,000)
------------------------------------------------------
------------------------------------------------------
F-15
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. NOTE The Company has a $1,000,000 line of credit with a bank
PAYABLE which had an outstanding balance of $133,073 at
September 30, 1996. Advances on the credit line carry
an interest rate of prime plus 1.5% (9.75% at
September 30, 1996). The loan is due on demand and is
collateralized by accounts receivable and inventory.
The line of credit contains the same restrictions and
covenants as described in Note.
7. LONG-TERM Long-term debt consists of the following:
DEBT
------------------------------------------------------
Prime plus 1.5% (9.75% at
September 30, 1996) mortgage
note payable due in monthly
principal installments of $13,333
plus interest through September 1999,
at which time the remaining
principal is due; collateralized
by substantially all property and
equipment of the Company and
guaranteed by a stockholder of
the Company $ 2,400,000
Other 13,233
------------------------------------------------------
2,413,233
Less current maturities 167,414
------------------------------------------------------
$ 2,245,819
------------------------------------------------------
------------------------------------------------------
The aggregate amount of the maturities of long-term
debt maturing in future years is as follows:
--------------------------------------
1997 $ 167,414
1998 165,819
1999 2,080,000
--------------------------------------
--------------------------------------
LOAN COVENANTS
Among other provisions of the Company's loan
agreements, there are restrictions upon the Company
with respect to additional borrowings, loans
F-16
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to related parties and lease commitments. Such
agreements also impose financial covenants requiring
the Company to maintain specified financial and
operating ratios which include current, leverage,
tangible net worth and fixed charge ratios. At
September 30, 1996, the Company was in violation of the
fixed charge ratio requirement. The bank has granted a
waiver through September 30, 1997.
INVESTOR NOTES
Through September 1995, the Company issued convertible
investor notes to an outside investor and to its
officers and controller in the amount of $205,000. The
interest rate on these notes was 12%. Under the terms
of these notes, as amended, upon closing of the IPO,
the holders of such notes converted their notes into
102,500 shares of Class A common stock and 102,500
warrants to purchase shares of Class A common stock at
120% of the IPO price.
8. RETIREMENT The Company sponsors a defined contribution pension
BENEFIT PLAN 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 September 30, 1996 and 1995.
9. PRIVATE On September 20, 1995, the Company completed a private
PLACEMENT placement of $1,000,000 of securities consisting of 40
units. Each unit consisted of 2,500 shares of preferred
stock, par value $10 per share with cumulative
dividends at 12% per annum, and 3,500 shares of the
Company's Class A common stock, par value $.01 per
share. Proceeds from this offering, net of offering
costs, were approximately $575,170. Of this amount,
$353,265 was assigned to the preferred stock sold, and
$211,905 was assigned to the common stock sold.
Cumulative dividends in arrears as of September 30,
1995 amounted to $3,288. Concurrent with the IPO
discussed in Note 10, the Company commenced an offer of
rescission (which expired December 9, 1995) to all
purchasers who purchased units in the private
placement. Holders of such units were offered the right
to rescind their purchases and receive a refund of the
price paid by them plus interest at 12% per annum in
exchange for the
F-17
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
return to the Company of their Class A common stock and
preferred stock. No purchasers accepted the rescission
offer.
At the completion of the Company's IPO, the Company had
the option to call the preferred stock sold in the
private placement. The Company exercised this option,
in which case the investor could either (i) require the
Company to redeem his/her 2,500 shares of preferred
stock for $25,000 plus any cumulative dividend or (ii)
convert his/her 2,500 shares of preferred stock into
6,000 shares of Class A common stock. In either event,
the investor would keep the 3,500 shares of Class A
common stock that comprise a part of the unit. Two
investors converted 5,000 shares of preferred stock
into 12,000 shares of Class A common stock, and the
remaining holders of preferred stock required the
Company to redeem their shares. Cumulative dividends
paid amounted to $18,106. The excess of the fair value
of the $1,000,000 of consideration issued over the
private placement proceeds assigned to the preferred
stock ($353,265) has been accreted from the issuance
date to the redemption date (November 15, 1995) and
reduces net earnings applicable to common stock during
that period.
10. CAPITAL STOCK RECAPITALIZATION
In September 1995, the Company issued 200,000 shares of
Class A common stock and 650,000 shares of Class B
common stock to its stockholder in exchange for all
previously outstanding shares of common stock. The
financial statements give retroactive effect to this
recapitalization. Shares of Class B common stock are
entitled to the same rights as Class A shares on a
2-for-1 basis. Class B shares become convertible into
Class A shares on a 1-for-2 basis. The dates upon which
conversion of the Class B shares may be made range from
24 to 60 months from November 15, 1995, the date of
completion of the initial public offering.
INITIAL PUBLIC OFFERING
On November 15, 1995, the Company completed its initial
public offering of 1,200,000 units consisting of its
Class A common stock and warrants at $5 per unit. Each
unit consisted of one share of Class A common stock and
one
F-18
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
warrant to purchase one share of Class A common stock
at a price equal to $6.50 per share. The Company sold
840,000 shares of Class A common stock and 1,200,000
warrants and received approximately $2,756,000 in
proceeds, net of offering costs. Three hundred sixty
thousand (360,000) shares of the Class A common stock
included in the units were sold by a stockholder, and
the Company received none of the proceeds from the sale
of such shares. However, the stockholder used
approximately $570,000 of the proceeds from the sale of
such shares to repay amounts owed to the Company. The
Company used these proceeds to purchase additional
inventory, reduce accounts and notes payable and redeem
preferred stock issued in the private placement (see
Note 9). The underwriter was granted an option to
purchase 84,000 units at $6 per unit, exercisable for a
period of four years, commencing one year after the
effective date of the Registration Statement.
STOCK WARRANTS
As of September 30, 1996, the Company had the following
common stock warrants outstanding:
CLASS A
COMMON STOCK
EXERCISE SHARES ISSUABLE
EXPIRATION DATE PRICE UPON EXERCISE
-------------------------------------------------------
March 14, 2000 $3.88 75,000
November 8, 2000 $3.88 27,500
November 14, 2000 $6.50 1,284,000
March 30, 2001 $4.20 20,000
At September 30, 1996, 95,000 of the warrants were
exercisable.
During the year ended September 30, 1996, compensation
expense of $49,200 was recognized, in accordance with
SFAS 123, on Class A common stock warrants granted to
non-employees and was recorded as additional paid-in
capital.
F-19
<PAGE>
EKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NON-PLAN STOCK OPTIONS
The Company has granted stock options to certain
consultants, key employees and directors of the Company
which were not issued under stock option plans. These
options are exercisable over various terms as
determined by the consulting agreements and the
Company's Board of Directors. Changes in non-plan
options outstanding are as follows:
OPTION PRICE
SHARES PER SHARE
- --------------------------------------------------------------------------------
BALANCE, September 30, 1994 - $ -
Granted 100,000 $ 2.50
-------
BALANCE, September 30, 1995 100,000 $ 2.50
Granted 779,000 $2.88 - $6.00
Exercised (75,000) $3.00
Canceled (200,000) $3.75 - $4.00
--------
BALANCE, September 30, 1996 604,000 $2.50 - $6.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total shares reserved at September 30, 1996 604,000
Options exercisable at September 30, 1996 384,000
- --------------------------------------------------------------------------------
During the year ended September 30, 1996,
compensation expense of $204,000 was recognized, in
accordance with SFAS 123, on Class A common stock
options granted to non-employees and was recorded as
additional paid-in capital.
EMPLOYEE STOCK OPTION PLAN
Effective August 25, 1995, the Company adopted the
1995 Employee Combined Qualified and Non-Qualified
Employee Stock Option Plan (the "Combined Plan"),
pursuant to which 475,000 shares of Class A common
stock have been reserved for issuance upon the
exercise of options designated
F-20
<PAGE>
EKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
as either "incentive stock options" or as
"non-qualified stock options." These options may be
granted to employees and consultants of the Company at
terms stated in each option agreement. Changes in
options outstanding under this plan are summarized as
follows:
OPTION PRICE
SHARES PER SHARE
- --------------------------------------------------------------------------------
BALANCE, September 30, 1994 - $ -
Options granted 100,000 $ 2.50
-------
BALANCE, September 30, 1995 100,000 $ 2.50
Options granted 25,000 $3.00 - $3.30
Options canceled (5,000) $ 2.50
-------
BALANCE, September 30, 1996 120,000 $2.50 - $3.30
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Options available for grant at September 30, 1996 355,000
Total shares reserved at September 30, 1996 475,000
Options exercisable at September 30, 1996 -
- --------------------------------------------------------------------------------
MANAGEMENT STOCK OPTION PLAN
The Company established a non-qualified stock option
plan in 1995 for the purpose of granting options to
certain management employees. The Company reserved
35,000 shares of its Class A common stock for issuance
pursuant to such options, all of which are subject to
options granted to certain executives on August 25,
1995. The options are exercisable for five years at an
exercise price of $2.50 per share (which the Company
believes approximated fair value at the date of grant)
and are subject to a 24-month exercise restriction.
STOCK ISSUED TO NON-EMPLOYEES
The Company issued 87,000 shares of Class A common
stock to two consultants which were valued at the fair
value of the stock on the date of issuance.
F-21
<PAGE>
EKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SHARES RESERVED
At September 30, 1996, the Company has reserved Class A
common stock for future issuance under all of the
following arrangements:
- --------------------------------------------------------------------------------
Warrants 1,406,500
Conversion of Class B common stock 1,020,750
Non-plan stock options 604,000
Employee stock option plan 475,000
Management stock option plan 35,000
Employment agreement (see Note 12) 480,000
- --------------------------------------------------------------------------------
4,021,250
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11. SUPPLEMENTAL
CASH FLOW
INFORMATION
YEAR ENDED SEPTEMBER 30, 1996 1995
- --------------------------------------------------------------------------------
Cash paid for interest $ 369,619 $ 374,360
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Non-cash investing and financing activities:
Land acquired through assumption of
mortgage payable $ - $ 163,873
Assets acquired through obligation under capital
capital leases and note payable to stockholder 126,920 20,860
Accretion of redemption value of redeemable
preferred stock 533,032 113,703
Conversion of investor notes 205,000 -
Conversion of preferred stock 60,000 -
Issuance of common stock options and
warrants for consulting services 555,513 -
Retirement of existing notes payable and capital
leases through issuance of notes payable 2,430,237 -
Market value of Class B common stock
contributed to the Company and retired 405,375 -
Issuance of common stock for note receivable 94,000 -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-22
<PAGE>
EKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. COMMITMENTS LEASES
AND
CONTINGENCIES The Company leased approximately 20,000 square feet of
warehouse space in an industrial park located in
Titusville, Florida from Eckler Development, Inc., a
corporation that is wholly owned by the Company's
principal stockholder. The lease had an expiration date
of January 31, 1998 and monthly rent of $9,499. Rent
expense for the year ended September 30, 1995 amounted
to $62,727. As a part of the settlement with the bank
on August 30, 1995, under foreclosure proceedings, the
lease was terminated, and the Company was released from
the lease obligation.
The Company leased approximately 6,800 square feet of
warehouse space to Eckler Service Center, Inc., a
corporation that is wholly owned by the Company's
principal stockholder. The lease had a term of five
years and expired on August 31, 1996. The initial rent
for the building was $1,440 per month, subject to
annual increases at the rate of four percent (4%).
Rental income for the year ended September 30, 1995
amounted to $19,050. The lease was terminated during
1996, and no rental income was recognized for the year
ended September 30, 1996.
LITIGATION
The Company is involved in 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.
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.
F-23
<PAGE>
EKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with
its President and CEO effective May 23, 1995. The term
of the agreement is seven years and is automatically
renewable for two successive two-year terms, unless
notice of termination is given prior to a renewal
period. The agreement provides that the employee shall
receive an annual base salary of $100,000 with
increases to $150,000 for the second and third years of
the agreement and to $175,000 and $200,000 for the
fourth and fifth years of the agreement, respectively.
The base salary increases to $250,000 for the sixth,
seventh and any years subject to the automatic renewal
options.
The agreement also provides the employee with incentive
stock options to acquire 160,000 and 320,000 shares of
the Company's Class A common stock at exercise prices
of $2.50 and $5.00 per share, respectively. These
options accumulate annually at varying amounts for the
first seven years following the closing of the IPO (see
Note 10) and are "earned" contingent upon the Company
achieving either a specified earnings per share level
or a specified stock price level (the "performance
threshold") for the corresponding fiscal year end. To
the extent that the common stock's fair market value
exceeds the exercise prices at the grant dates,
compensation expense will be recorded. None of these
options were earned as of September 30, 1996.
In addition, the employee will receive annual fixed
bonuses which shall be paid quarterly, provided the
Company achieves either of the above-mentioned
performance thresholds. The annual bonuses shall be
$250,000 for each of the fiscal years ending
September 30, 1996 through September 30, 2002. The
performance thresholds were not met during fiscal 1996,
and no bonus was recorded.
CONSULTING AGREEMENTS
The Company entered into a consulting agreement dated
as of August 29, 1994 with a financial consultant. The
agreement provides for payment at the rate of $150 per
hour. The agreement further provides for minimum
payments of $7,500 per month commencing June 1, 1995
through May 31, 1998 and a grant of 100,000 stock
options.
The agreement also includes certain provisions
regarding the payment of out-of-pocket expenses,
indemnification of the underwriter and arbitration.
F-24
<PAGE>
EKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. SUBSEQUENT
EVENT On December 30, 1996, the Company entered into an
Agreement and Plan of Merger with Smart Choice
Holdings, Inc. Under the terms of the Agreement, the
Company will issue 6,500,000 shares of Class A common
stock in exchange for all outstanding shares of Smart
Choice Holdings, Inc. The merger is subject to certain
conditions and is expected to be consummated in January
1997. If completed, the merger will be accounted for as
a purchase.
F-25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on January 13, 1997.
ECKLER INDUSTRIES, INC.
By: /s/ Ralph H. Eckler
--------------------------------------
Ralph H. Eckler
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Ralph H. Eckler President, Chief Executive January 13, 1997
- -------------------- Officer, Secretary, Treasurer
Ralph H. Eckler and Director
/s/ Ronald V. Mohr Vice President of Finance January 13, 1997
- ------------------- and Administration
Ronald V. Mohr (principal financial officer)
/s/ Donald A. Wojnowski, Jr. Director January 13, 1997
- ----------------------------
Donald A. Wojnowski, Jr.
/s/ Joseph Yossifon Director January 13, 1997
- --------------------
Joseph Yossifon
/s/ Ernest Restina Controller January 13, 1997
- -------------------
Ernest Restina
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
- -------------- ------------------- -----------
16 Letter on change in certifying accountant Page _____
27 Financial Data Schedules Page _____
<PAGE>
GRAHAM & COTTRILL, P.A.
Certified Public Accountants
350 E. Pine Street
Orlando, Florida 32801
-----------
(407) 843-1681
(800) 342-2720
FACSIMILE (407) 423-3156
January 8, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Eckler Industries, Inc.
File Ref. No.: 759-07
------
We were previously the principal accountant for Eckler Industries, Inc.
and, under the date of December 3, 1993, we reported on financial statements of
Eckler Industries, Inc. for the year ended September 30, 1993. On December 27,
1994, our appointment as principal accountant was terminated. We have read the
statements of Eckler Industries, Inc. included under changes in accountants in
the Company's Form 10KSB for the fiscal year ended September 30, 1996 and we
agree with such statements.
/s/ Graham & Cottrill
Graham & Cottrill, P.A.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-KSB FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 252
<SECURITIES> 0
<RECEIVABLES> 178
<ALLOWANCES> 10
<INVENTORY> 1,439
<CURRENT-ASSETS> 2,944
<PP&E> 6,480
<DEPRECIATION> 3,941
<TOTAL-ASSETS> 6,595
<CURRENT-LIABILITIES> 1,693
<BONDS> 2,246
0
0
<COMMON> 21
<OTHER-SE> 2,234
<TOTAL-LIABILITY-AND-EQUITY> 6,595
<SALES> 14,893
<TOTAL-REVENUES> 14,893
<CGS> 9,648
<TOTAL-COSTS> 9,648
<OTHER-EXPENSES> 5,490
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 332
<INCOME-PRETAX> (476)
<INCOME-TAX> (161)
<INCOME-CONTINUING> (315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (315)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
