AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1998
REGISTRATION STATEMENT NO. 333-59375
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SMART CHOICE AUTOMOTIVE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
FLORIDA 5515 59-1469577
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
GARY R. SMITH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SMART CHOICE AUTOMOTIVE GROUP, INC.
5200 SOUTH WASHINGTON AVENUE 5200 SOUTH WASHINGTON AVENUE
TITUSVILLE, FLORIDA 32780 TITUSVILLE, FLORIDA 32780
(407) 269-0834 (407) 269-0834
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES.) INCLUDING AREA CODE, OF AGENT FOR SERVICE.)
</TABLE>
---------------
COPIES TO:
LINDA L. GRIGGS, ESQ. M. HILL JEFFRIES, ESQ.
MARTIN T. SCHRIER, ESQ. PAUL J. NOZICK, ESQ.
THOMAS P. CONAGHAN, ESQ. R. DAVID PATTON, ESQ.
MORGAN, LEWIS & BOCKIUS LLP ALSTON & BIRD LLP
1800 M STREET, N.W. ONE ATLANTIC CENTER
WASHINGTON, D.C. 20036 1201 WEST PEACHTREE STREET
TELEPHONE: (202) 467-7000 ATLANTA, GEORGIA 30309-3424
FAX: (202) 467-7176 TELEPHONE: (404) 881-7000
FAX: (404) 881-4777
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
par value $.01 per share....... 2,875,000 $ 11.18 $32,142,500 $9,483
============================================================================================================
</TABLE>
(1) Includes 375,000 shares of Common Stock that may be purchased by the
Underwriters pursuant to an over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, and
equal to the average of the bid and asked price of the Common Stock on the
Nasdaq SmallCap Market on July 15, 1998 and adjusted to give effect to the
1-for-2 reverse stock split described herein.
(3) Previously paid to the Commission.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 21, 1998
PROSPECTUS
2,500,000 SHARES
[SMART CHOICE LOGO]
COMMON STOCK
----------------
All of the 2,500,000 shares of Common Stock offered hereby (the
"Offering") are being sold by Smart Choice Automotive Group, Inc. (the
"Company"). The Common Stock is listed on the Nasdaq SmallCap Market under the
symbol "SMCH." On August 17, 1998, the last reported bid price of the Common
Stock as reported on the Nasdaq SmallCap Market was $8.00 per share. See "Price
Range of Common Stock." The Company has applied for listing of the Common Stock
on the Nasdaq National Market under the symbol "SMCH."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ......... $ $ $
- --------------------------------------------------------------------------------
Total(3) .......... $ $ $
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $637,500.
(3) The Company has granted to the several Underwriters a 30-day option to
purchase up to 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
----------------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them and
subject to certain conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made on or about
September , 1998.
----------------
STEPHENS INC. CRUTTENDEN ROTH SOUTHEAST RESEARCH
INCORPORATED PARTNERS, INC.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER , 1998
<PAGE>
[PHOTOGRAPHS/MAP OF STORES/LOCATIONS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
This Prospectus includes statistical data regarding the retail automotive
industry. Unless otherwise indicated herein, such data is taken or derived from
information published by CNW Marketing/Research.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK
FACTORS." UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE "COMPANY" INCLUDE
SMART CHOICE AUTOMOTIVE GROUP, INC. AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE
SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO REFLECT
A 1-FOR-2 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK, WHICH WILL BE EFFECTED
PRIOR TO THE CONSUMMATION OF THE OFFERING AND (II) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
Smart Choice Automotive Group, Inc. currently operates 20 stores in
Florida that sell used cars under the "First Choice" brand name. The Company's
First Choice cars are three to six years old, have less than 80,000 miles and
have undergone thorough inspection, reconditioning and, as necessary, repair.
The Company also sells used cars that may not meet the First Choice criteria
through four additional stores in Florida that operate under the "Team" brand
name. Through its finance company subsidiary, the Company (referred to herein
as a "self-financed" retailer of used cars) provides financing for its
customers by originating retail automobile installment sales contracts secured
by the cars it sells ("finance receivables" or "finance contracts"). The
Company's customers typically have limited credit histories, low incomes and/or
past credit problems. The Company intends to expand primarily by opening
additional used car stores in Florida and extending its operations into other
areas of the southeastern United States. The Company's objective is to become
the leading self-financed retailer of used cars in the southeastern United
States.
Retail sales of new and used cars in the United States totaled
approximately $673 billion in 1997. Used cars represented approximately 75% of
cars sold in the United States and 55% of total sales in 1997, with
approximately 41 million used cars sold at an average price of $9,029 per unit.
Retail sales of used cars in Florida in 1997 totaled more than $24.4 billion
(over 2 million vehicles). Approximately 36% of Florida's used car sales in
1997 (not including sales of used cars at new car dealerships) occurred at
approximately 2,800 self-financed used car stores.
Management believes that the quality and reliability of the Company's
First Choice cars (i) reduce the probability of product failure (which
management believes is a leading cause of defaults on finance contracts in the
Company's industry), (ii) reduce losses on the Company's repossessions of cars
and (iii) define the First Choice brand. Due to the quality and reliability of
its First Choice cars, the Company is able to provide a 24 month/24,000 mile
service contract to its customers, which is underwritten by a third party. The
Company sells used cars at its First Choice stores for an average retail price
of approximately $9,500, including the service contract on all cars sold. The
Company's Team stores generally sell older and higher mileage cars than First
Choice cars. Team cars, which sell for an average retail price of approximately
$7,900, are primarily cars that have been repossessed by the Company, have been
traded in by customers or have not been sold at the First Choice stores within
approximately 180 days. Cars sold at Team stores are covered by a 12
month/12,000 mile service contract.
The Company also manufactures and sells Corvette parts and accessories
through its subsidiary Eckler Industries, Inc. ("Eckler's"), owns two new car
dealerships in Florida, sells insurance and provides dealer training services.
3
<PAGE>
In late 1997, management undertook a comprehensive evaluation of its
business to improve earnings and address the Company's operational and
liquidity needs. As a result, management made a decision to emphasize used car
sales, which typically have higher gross margins than new car sales.
Accordingly, in December 1997, the Company terminated all plans to acquire or
open new car dealerships and began to focus on achieving operational
efficiencies at the Company's used car stores, all of which had been acquired
or opened during 1997. In addition, the Company implemented overhead reductions
and other cost saving procedures, made various management changes, completed a
detailed analysis of the quality of its finance receivables portfolio and began
a restructuring of its debt obligations. These efforts have led to
substantially improved results in the first and second quarters of 1998.
BUSINESS STRATEGY
The Company intends to become the leading self-financed retailer of used
cars in the southeastern United States by capitalizing on its operating
strengths and executing the growth strategy described below.
OPERATING STRENGTHS
SELL RELIABLE, QUALITY CARS. The Company sells reliable, quality used
cars. Management believes that product failure is a leading cause of defaults
on finance contracts in the self-financed used car industry. Generally, the
Company's First Choice cars are models having a good or superior reputation for
quality and reliability, are three to six years old and have less than 80,000
miles. In addition, First Choice and Team used cars have undergone a
comprehensive 110 point inspection, reconditioning and, as necessary, repair at
the Company's reconditioning facilities. Due to the quality, reliability,
condition and age of First Choice cars, the Company is able to provide a 24
month/24,000 mile service contract to its customers, which is underwritten by a
third party, on all First Choice cars. Cars sold at Team stores, which are
generally older and higher mileage cars, are covered by a similar 12
month/12,000 mile service contract. The third-party service contracts allow the
Company's customers to have their cars repaired nationally by any one of
approximately 375,000 ASE (Automotive Service Excellence) certified
technicians.
UTILIZE CENTRALIZED CREDIT APPROVAL AND STRICT UNDERWRITING PRACTICES. The
Company separates the credit approval function and sales process for its used
cars. Credit review and approval is conducted by experienced finance personnel
at the Company's headquarters, distinct from the sales function. The Company's
credit underwriting process strictly adheres to objective underwriting
standards that have resulted in improved collection experience since February
1997. Underwriting criteria include employment continuity, ties to the local
community, ability to make monthly payments and names, addresses and phone
numbers of a sufficient number of persons who can verify the credit application
information and would likely know where the applicant could be found in the
event a collection problem arises. The Company regularly reviews its collection
results to assess the effectiveness of its underwriting standards.
APPLY RIGOROUS COLLECTION PRACTICES. The Company diligently and
proactively pursues the collection of its finance receivables while maintaining
a professional, customer-friendly atmosphere. The Company utilizes proven
techniques in the collection process, including telephone calls, letters and
various alternative payment mechanisms to facilitate payment. The Company's
collection policy includes telephoning a borrower if the borrower's payment is
one day late. The Company generally begins repossession procedures when the
customer is two payments past due. Management believes that one of the reasons
the Company generally experiences lower losses on defaults than its competitors
is because the Company acts quickly to repossess cars on which defaults occur.
As of June 30, 1998, 94.7% of the Company's finance receivables were current.
4
<PAGE>
MAXIMIZE RECOVERY ON REPOSSESSIONS. Management believes that the Company
generally experiences lower losses on repossessions than other lenders in the
self-financed used car industry due to (i) the quality of the cars it sells,
(ii) the timeliness of its repossessions and (iii) its ability to remarket
repossessions. The Company believes that its purchasing and reconditioning
expertise result in cars that maintain their quality and value at the time of
repossession. In addition, the speed with which the Company repossesses cars
results in a repossessed car in better condition. Finally, the Company
reconditions and remarkets approximately 70% of its repossessions through its
Team stores, rather than through auctions (where cars are generally sold at
lower prices). These practices allowed the Company to recover 53.2% (on a
retail basis) of the principal amount of loans charged off for the six month
period ended June 30, 1998.
INCREASE OPERATING EFFICIENCY. Since late 1997, in an effort to increase
operating efficiency by reducing administrative costs and enhancing
administrative functions, the Company has combined certain administrative
functions, such as accounting, treasury, insurance, employee benefits,
strategic marketing and legal support. The Company intends to further increase
its operating efficiency in such areas as advertising, reconditioning, raising
capital and purchasing and transporting inventory.
EMPLOY INTEGRATED MANAGEMENT INFORMATION SYSTEMS. Each used car store is
linked to an integrated computer-based management information system (the
"MIS") that allows the Company to obtain "real time" information on its
operations. The Company uses the MIS to transmit data between its headquarters
and its stores, to evaluate store performance daily, monitor inventory, sales,
costs and customer payments and facilitate the Company's underwriting and
collection of its finance contracts.
PROMOTE FIRST CHOICE BRAND. The Company believes that its First Choice
brand is synonymous with quality cars and customer service. By seeking to
maintain continuity in the appearance of its store locations, the Company
expects to promote its name recognition. The Company attempts to maintain a
consistency between its facilities and its marketing materials through the use
of standardized logos and a white, blue and yellow color theme. The Company
recognizes that the purchase of a car is one of the most significant purchases
that many of its customers will make. Consequently, the Company focuses on
providing professional service, convenient locations and a diverse inventory
selection. The Company provides to customers value-added programs such as its
service contract, rapid turnaround for credit decisions, financing and
convenient financing pre-qualification. By developing customer loyalty, the
Company seeks to generate repeat and referral business.
AVOID THIRD PARTY FINANCE RECEIVABLES. As part of its operating
philosophy, the Company only originates and services finance receivables on
used cars sold at its used car stores and new car dealerships. The Company does
not intend to purchase third party finance receivables. See "Business--Financing
Customers with Impaired Credit."
GROWTH STRATEGY
In order to become the leading self-financed retailer of used cars in the
southeastern United States, the Company intends to open additional First Choice
and Team stores both in geographic markets where the Company currently operates
and in new markets. The choice of store locations in new and existing markets
is based upon the presence of a suitable customer base. The Company's criteria
for opening additional used car stores in existing markets include sufficient
projected incremental sales volume, reconditioning capacity, geographic media
coverage and market share. The Company believes that significant expansion
opportunities satisfying these criteria are available within its existing
markets.
The Company's criteria for opening used car stores in new markets include
the adequacy of radio and television coverage, demographic makeup of the market
(including income level and age of population), availability of qualified
managers, access to an adequate supply of quality used cars and availability of
appropriate store locations. Initially, the stores in new markets will rely
upon access to the
5
<PAGE>
Company's existing used car inventory at nearby stores and reconditioning
facilities. As a new market matures, the Company will open a reconditioning
center with sufficient capacity to support growth.
The Company maintains its principal executive offices at 5200 South
Washington Avenue, Titusville, Florida 32780 and its telephone number is (407)
269-0834.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby .................... 2,500,000 shares
Common Stock to be outstanding immediately
after the Offering ............................ 9,053,756 shares(1)
Use of proceeds ................................ Repayment of outstanding debt, which will provide
the Company with increased borrowing capacity for
future expansion. See "Use of Proceeds."
Nasdaq SmallCap Market symbol .................. "SMCH"
Proposed Nasdaq National Market symbol ......... "SMCH"(2)
</TABLE>
- ----------------
(1) Excludes 375,000 shares of Common Stock that may be sold by the Company
upon exercise of the Underwriters' over-allotment option. Also excludes as
of June 30, 1998 (i) 1,117,100 shares of Common Stock issuable upon exercise
of stock options outstanding at June 30, 1998 with a weighted average
exercise price of $9.28 per share, (ii) 878,770 shares of Common Stock
issuable upon exercise of warrants with a weighted average exercise price of
$12.00, (iii) 903,302 shares of Common Stock issuable upon conversion of
approximately $9.5 million of convertible debt at an average conversion
price of $10.48 per share and (iv) 535,012 shares of Common Stock issuable
upon conversion of convertible preferred stock. See "Management" and
"Description of Capital Stock."
(2) The Company has applied for listing of the Common Stock on the Nasdaq
National Market.
6
<PAGE>
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
PREDECESSORS(1) THE COMPANY(1)
--------------------- -------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------
PRO FORMA
1995 1996 1996 1997 1997(2)
---------- ---------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Sales at used car stores ............................ $ 27,521 $ 33,867 $ -- $ 35,279 $ 43,259
Income on finance receivables(3) .................... 4,614 5,949 -- 6,899 8,764
Sales at new car dealerships(4) ..................... -- -- -- 9,863 23,803
Sales of Corvette parts and accessories ............. 12,973 14,893 -- 15,385 16,238
Income from insurance and training .................. -- -- -- 1,178 1,183
-------- -------- ------- ---------- ----------
Total revenues ....................................... 45,108 54,709 -- 68,604 93,247
Total costs of sales ................................. 31,960 40,867 -- 49,490 69,280
Selling, general and administrative expenses ......... 10,902 12,565 671 24,708 29,830
Compensation expense related to employee
stock options ....................................... -- -- -- 4,650 4,650
Restructuring charges ................................ -- -- -- 2,118 2,118
-------- -------- ------- ---------- ----------
Income (loss) from operations ........................ 2,246 1,277 (671) (12,362) (12,631)
Interest expense ..................................... (2,012) (2,402) (33) (6,455) (7,386)
Other income (expense) ............................... (368) 261 -- 168 465
-------- -------- ------- ---------- ----------
Net income (loss) .................................... (134) (864) (704) (18,649) (19,552)
Net income (loss) applicable to common stock (134) (864) (704) (18,982) (19,885)
Net income (loss) per common share:
Basic ............................................... -- -- $ (0.26) $ (4.28) $ (4.32)
Diluted ............................................. -- -- (0.26) (4.28) (4.32)
Supplemental(5) ..................................... -- -- -- -- --
Weighted average common shares outstanding
during period:
Basic ............................................... -- -- 2,744 4,430 4,604
Diluted ............................................. -- -- 2,744 4,430 4,604
<CAPTION>
THE COMPANY(1)
---------------------
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1998
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Sales at used car stores ............................ $ 11,789 $ 40,603
Income on finance receivables(3) .................... 1,723 6,942
Sales at new car dealerships(4) ..................... -- 14,349
Sales of Corvette parts and accessories ............. 7,972 10,411
Income from insurance and training .................. 651 426
-------- --------
Total revenues ....................................... 22,135 72,731
Total costs of sales ................................. 14,461 50,118
Selling, general and administrative expenses ......... 10,020 15,082
Compensation expense related to employee
stock options ....................................... 3,215 --
Restructuring charges ................................ -- --
-------- --------
Income (loss) from operations ........................ (5,561) 7,531
Interest expense ..................................... (1,748) (4,032)
Other income (expense) ............................... 43 609
-------- --------
Net income (loss) .................................... (7,266) 4,108
Net income (loss) applicable to common stock (7,266) 3,944
Net income (loss) per common share:
Basic ............................................... $ (1.73) $ 0.68
Diluted ............................................. (1.73) 0.66
Supplemental(5) ..................................... -- 0.60
Weighted average common shares outstanding
during period:
Basic ............................................... 4,199 5,790
Diluted ............................................. 4,199 6,841
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY(1)
---------------------------------------------
AS OF AS OF
DECEMBER 31, JUNE 30,
1997 1998
-------------- ----------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED(6)
---------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables--principal balances ......... $39,597 $ 62,205 $ 62,205
Inventories ..................................... 15,516 17,950 17,950
Total assets .................................... 89,105 116,218 116,218
Total debt ...................................... 69,654 86,244 68,281
Redeemable convertible preferred stock .......... 4,942 10 10
Total stockholders' equity ...................... 4,520 20,933 38,896
</TABLE>
(FOOTNOTES ON NEXT PAGE)
7
<PAGE>
- ----------------
(1) On January 28, 1997, the Company, which was then named Eckler Industries,
Inc., and was operating exclusively in the Corvette parts and accessories
business, acquired Smart Choice Holdings, Inc. ("SCHI") in a transaction
accounted for as an acquisition of Eckler's by SCHI (the "Predecessor
Acquisition"). Accordingly, the financial statements of the Company for
the period from June 21, 1996 to January 28, 1997 are those of SCHI, which
was incorporated on June 21, 1996 and was a development stage company
prior to the Predecessor Acquisition. Eckler's changed its name to Smart
Choice Automotive Group, Inc. after the Predecessor Acquisition. From the
date of the Predecessor Acquisition through February 14, 1997, the Company
acquired three automotive sales and finance companies. Together with
Eckler's, these companies are treated as predecessors of the Company (the
"Predecessors"). The financial data for the Predecessors are presented on
a combined basis. Such data is not comparable to that of the Company. See
Note 1 to the Company's Consolidated Financial Statements.
(2) Pro Forma Statement of Operations Data reflect the Predecessors and
additional significant companies acquired by the Company during 1997 as if
such acquisitions had occurred on January 1, 1997.
(3) Income on finance receivables consists of income related to used cars sold
at the Company's used car stores.
(4) Sales at new car dealerships include sales of new and used cars, sales of
parts and accessories, revenues from service, and finance and insurance
commissions.
(5) Supplemental net income per common share for the six months ended June 30,
1998 is based upon the weighted average number of shares of Common Stock
used in the calculation of diluted net income per share increased by the
number of shares (2,245,313) whose sale in the Offering is estimated to
yield proceeds needed to reduce borrowings by $18.0 million and reduce
interest expense by approximately $1.0 million. See "Use of Proceeds."
(6) Gives effect to the sale of 2,500,000 shares of Common Stock offered hereby
at an assumed public offering price of $8.00 per share and the initial
application of the estimated net proceeds thereof in the manner described
in the "Use of Proceeds" as of June 30, 1998.
8
<PAGE>
<TABLE>
<CAPTION>
PREDECESSORS THE COMPANY
--------------------- -------------------------------------
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores ..................................... * * 20 10 24
Average number of used cars sold per store per period ......... * * 188 122 185
Number of used cars sold per period ........................... * * 3,750 1,096 4,435
Average selling price per car ................................. * * $ 9,408 $ 10,756 $ 9,155
Gross profit(1) as a percentage of total sales ................ * * 27.3% 32.4% 35.0%
Finance Receivables:
Principal balance outstanding (000s) ........................... * * $39,597 $ 33,286 $62,205
Allowance for credit losses as a percentage of
principal balance outstanding ................................ * * 17.3% 19.0% 15.0%
Principal balance of contracts originated during
the period (000s) ............................................ $15,560 $24,937 $27,687 $ 7,842 $35,276
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days ................................. * * 4.0% 5.9% 2.2%
Principal balances over 60 days ............................... * * 4.9% 6.1% 3.1%
------- ------- ------- --------- -------
Total over 31 days ............................................ * * 8.9% 12.0% 5.3%
New Car Dealerships(2):
Gross profit(1) as a percentage of total sales ................ * * 12.6% * 12.3%
Corvette Parts and Accessories:
Gross profit(1) as a percentage of total sales ................ * * 33.7% 38.4% 35.9%
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE
MONTHS ENDED
-------------------------
MAR. 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................. 8 10
Average number of used cars sold per store ............. 52 68
Number of used cars sold per quarter ................... 416 680
Average selling price per car .......................... $ 11,503 $ 10,300
Gross profit(1) as a percentage of total sales ......... 29.2% 34.7%
Finance Receivables:
Number of contracts outstanding ......................... 2,146 6,505
Principal balance outstanding (000s) .................... $ 23,711 $ 33,286
Allowance for credit losses as a percentage of
principal balance outstanding ......................... 15.8% 19.0%
Principal balance of contracts originated during
the period (000s) ..................................... $ 2,932 $ 4,910
Delinquencies as a percentage of contracts
outstanding:
Principal balances 31-60 days .......................... 7.5% 5.9%
Principal balances over 60 days ........................ 6.7% 6.1%
-------- --------
Total over 31 days ..................................... 14.2% 12.0%
New Car Dealerships(2):
Gross profit(1) as a percentage of total sales ......... * *
Corvette Parts and Accessories:
Gross profit(1) as a percentage of total sales ......... 37.5% 38.8%
<CAPTION>
AS OF OR FOR THE THREE MONTHS ENDED
-----------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1998 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................. 16 20 22 24
Average number of used cars sold per store ............. 82 67 105 88
Number of used cars sold per quarter ................... 1,317 1,337 2,316 2,119
Average selling price per car .......................... $ 8,308 $ 9,386 $ 9,432 $ 8,852
Gross profit(1) as a percentage of total sales ......... 39.7% 11.7% 36.7% 33.1%
Finance Receivables:
Number of contracts outstanding ......................... 6,616 6,857 7,787 9,036
Principal balance outstanding (000s) .................... $35,767 $39,597 $51,146 $ 62,205
Allowance for credit losses as a percentage of
principal balance outstanding ......................... 17.1% 17.3% 16.6% 15.0%
Principal balance of contracts originated during
the period (000s) ..................................... $ 9,093 $10,752 $16,686 $ 18,590
Delinquencies as a percentage of contracts
outstanding:
Principal balances 31-60 days .......................... 5.0% 4.0% 2.7% 2.2%
Principal balances over 60 days ........................ 5.9% 4.9% 3.4% 3.1%
------- ------- ------- --------
Total over 31 days ..................................... 11.0% 8.9% 6.1% 5.3%
New Car Dealerships(2):
Gross profit(1) as a percentage of total sales ......... 12.2% 12.8% 11.5% 13.3%
Corvette Parts and Accessories:
Gross profit(1) as a percentage of total sales ......... 33.6% 21.1% 35.9% 35.8%
</TABLE>
- ----------------
* Information not available for this period.
(1) Reflects the difference between sales and cost of sales.
(2) Includes sales of used and new cars, sales of parts and accessories,
revenues from service, and finance and insurance commissions.
9
<PAGE>
RISK FACTORS
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"PROJECT," "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE EACH SUCH STATEMENT WAS MADE.
FORWARD-LOOKING STATEMENTS MAY INCLUDE, BUT NOT BE LIMITED TO, PROJECTIONS OF
REVENUES, INCOME OR LOSS, PLANS FOR ACQUISITIONS AND EXPANSION, INTEGRATION OF
NEW OPERATIONS, FINANCING NEEDS, INDUSTRY TRENDS, CONSUMER DEMAND AND LEVELS OF
COMPETITION. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN,
CONTEMPLATED BY OR UNDERLYING ANY SUCH FORWARD-LOOKING STATEMENTS. STATEMENTS
CONTAINED IN THIS "RISK FACTORS" SECTION, IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," IN THE NOTES TO THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND ELSEWHERE IN THIS PROSPECTUS
DESCRIBE FACTORS, AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE SUCH
DIFFERENCES.
LIMITED COMBINED OPERATING HISTORY
The Company has been a self-financed used car retailer since January 1997.
Thus, the Company has only a limited history of operations as a combined entity
upon which to base its results of operations or prospects. The Company should
be evaluated in light of the risks, expenses and difficulties frequently
encountered by similar companies in early stages of operations. Further, the
historical financial results of the companies considered by the Company to be
its predecessors (the "Predecessors") are presented on a different basis than
the historical financial results of the Company and, therefore, may not be
indicative of the Company's future operating results or financial condition.
HISTORY OF LOSSES
The Company incurred a net loss of approximately $18.6 million for 1997,
reflecting the costs of integration of the acquired companies, development of
the Company's infrastructure, compensation expense related to stock options,
restructuring charges related to the settlement of various employment and
consulting agreements and costs related to acquisitions that were not
completed. Although the Company has experienced growth in revenues since
January 1997 subsequent to the Predecessor Acquisition and recorded net income
for the six months ended June 30, 1998, there can be no assurance that growth
and profitability can be sustained. The Company's ability to maintain
profitability and positive cash flow while implementing its business strategy
will depend on a number of factors, including its ability to: (i) assimilate
and manage past and future expansion, (ii) expand revenue generating operations
while not proportionately increasing its administrative overhead, (iii)
originate finance contracts with an acceptable level of credit risk, (iv)
obtain sufficient financing with acceptable terms to fund expansion, (v) adapt
to the increasingly competitive market in which it operates, (vi) obtain and
purchase adequate supplies of cars, and (vii) collect its finance receivables.
There can be no assurance that the Company will be successful in maintaining or
increasing revenues, earnings or positive cash flows in the future. Any such
failure could have a material adverse effect on the Company's financial
condition, results of operations or cash flows. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ABILITY TO MANAGE GROWTH; RISKS ASSOCIATED WITH EXPANSION AND CHANGES IN
BUSINESS
The Company's future growth will depend in large part on its ability to
open additional used car stores, manage expansion, control costs in its
operations, integrate acquisitions into existing operations, underwrite and
collect finance receivables without significant losses, develop the human
resources necessary to support rapid growth and establish and maintain the
infrastructure necessary to execute its
10
<PAGE>
business plan. While the Company is presently focusing on internal expansion, a
significant portion of the Company's growth historically has resulted from
acquisitions of existing used car dealerships and related businesses, including
used car finance companies that lend primarily to credit-impaired customers.
The Company will continue to consider selected acquisitions under appropriate
circumstances. See "Business--Growth Strategy."
The Company's growth has placed significant demands on all aspects of the
Company's business, including its management, administrative, operational,
financial reporting and other systems personnel. Additional growth by the
Company may further strain the Company's systems and resources, and there can
be no assurance that the Company's systems, resources, procedures and controls
will be adequate to support further expansion of the Company's operations. As
growth continues, the Company will review its management infrastructure,
systems and financial controls, new store locations and any acquired used car
dealership operations and make adjustments or complete reorganizations as
appropriate. Additionally, from time to time, the Company may consider the
disposition of certain non-core operating units. Unforeseen capital and
operating expenses, liabilities, barriers to entry in the markets in which the
Company has little or no prior experience, or other difficulties, complications
and delays frequently encountered in connection with the expansion and
integration of operations could inhibit the Company's growth. In order for the
Company to recognize the full benefits of a significant acquisition, it will
need to integrate the acquisition with its administrative, finance, sales,
personnel and marketing organizations.
The Company's ability to continue to grow its used car business will also
be dependent upon, among other things, the Company's ability to attract and
retain competent management, the availability of capital to fund expansion and
the availability of suitable store locations and, to a lesser extent, suitable
acquisition candidates. The Company intends to finance expansion through a
combination of its available cash resources, borrowings from financial
institutions and, in appropriate circumstances, the issuance of equity and/or
debt securities. Expansion will have a significant effect on the Company's
financial position and could cause substantial fluctuations in the Company's
quarterly and yearly operating results. Acquisitions are also likely to result
in the recording of significant goodwill and intangible assets on the Company's
financial statements, the amortization of which would reduce reported earnings
in subsequent years. In addition, the issuance of additional shares of Common
Stock in connection with acquisitions may substantially dilute the interests of
existing shareholders.
The Company's finance receivables portfolio has grown rapidly since the
Company's inception and such growth is expected to continue. This growth
creates the risk that the Company's provision for credit losses will not be
sufficient to cover actual losses on the portfolio. The Company's failure to
maintain a sufficient provision for credit losses could have a material adverse
effect on the Company's financial condition, results of operations or cash
flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Credit Losses."
The diversion of management's attention required by the integration of
multiple stores, as well as any other difficulties which may be encountered in
the transition and integration process, could have a material adverse effect on
the financial condition, results of operations or cash flows of the Company.
There can be no assurance that the Company will successfully open additional
used car stores, or identify suitable acquisition candidates or that
acquisitions will be consummated on acceptable terms or that the Company will
be able to integrate successfully the expanded operations or manage the related
increase in personnel.
HIGH RISK OF DEFAULTS ON RECEIVABLES PORTFOLIO
The self-financed used car business sells to customers that typically have
limited credit histories, low incomes and/or past credit problems (generally
referred to herein as "credit-impaired customers"). Such customers cannot,
generally, obtain a loan from a local financial institution or from the credit
facilities of a major automobile manufacturer (e.g., General Motors Acceptance
Corporation or Ford Motor Credit Company). One industry report estimated that
between 5% and 40% of any group of
11
<PAGE>
loans made to credit-impaired customers will default during the life of that
particular group. Consequently, the Company's finance contracts have a higher
probability of delinquency and default and, as a result, greater servicing
costs than loans made to consumers who pose lesser credit risks. The Company's
profitability depends in part upon its ability to properly evaluate the
creditworthiness of credit-impaired customers and efficiently service its
loans. There can be no assurance that satisfactory credit performance of the
Company's customers will be maintained or that the rate of future defaults
and/or losses will be consistent with prior experience or at levels that will
allow the Company to achieve profitability. Most borrowers' ability to remit
payments in accordance with the terms of their loans is dependent on their
continued employment. An economic downturn resulting in increased unemployment
could cause a significant rise in delinquencies and defaults, which could have
a material adverse effect on the Company's financial condition, results of
operations or cash flows. Moreover, increases in the delinquency and/or loss
rates in the Company's loan portfolio could adversely affect the Company's
ability to obtain or maintain its financing sources. See "Business--Financing
Customers with Impaired Credit" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Credit Losses."
UNSEASONED LOAN PORTFOLIO
Due to the growth of the Company's loan portfolio during the last twelve
months, a significant portion of the loan portfolio is unseasoned. Accordingly,
delinquency and loss rates in the portfolio will most likely fluctuate
unpredictably. Cars that serve as collateral will, in most cases, be worth less
than the unamortized principal and interest charges. The resale prices of used
cars will affect the amount realized following repossession of collateral.
Further, the Company may also incur significant legal costs prior to
repossessing a financed vehicle or reselling such vehicle after repossession.
The Company does not intend to purchase insurance to protect against loan
defaults or make up the difference between the principal amount remaining on a
defaulted loan and the net proceeds realized on the resale of a repossessed
vehicle that secured such defaulted loan. There is no assurance that loans made
by the Company to its customers will ultimately be repaid, which would result
in the Company having to write off such loans and would materially and
adversely affect the Company's financial condition, results of operations or
cash flows. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Credit Losses."
HIGH LEVERAGE
The Company is highly leveraged. On June 30, 1998, the Company's total
indebtedness was approximately $95 million, or 82% of its total assets. A
substantial portion of such debt is collateralized by the Company's finance
contracts, automobile inventory and certain property, plant and equipment. The
Company's substantial leverage could have adverse consequences, including: (i)
limiting its ability to obtain additional financing, (ii) requiring the Company
to use substantial portions of operating cash flow to meet interest and
principal repayment obligations, (iii) exposing the Company to interest rate
fluctuations due to floating interest rates on certain borrowings, (iv)
increasing the Company's vulnerability to changes in general economic
conditions and competitive pressures and (v) limiting the Company's ability to
capitalize on potential growth opportunities. In addition, the Company's loan
agreements contain certain covenants that limit, among other things, the
Company's ability to engage in certain mergers and acquisitions, incur
additional indebtedness or further encumber its assets, pay dividends or make
other distributions. The covenants also require the Company to meet certain
financial tests. A default under the Company's borrowing agreements could have
a material adverse effect on the Company's financial condition, results of
operations or cash flows. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
SUBSTANTIAL NEED FOR ADDITIONAL CAPITAL
The Company will require additional capital in order to fund its
expansion. If adequate funds are not available on terms acceptable to the
Company, the Company may be required to significantly curtail
12
<PAGE>
its expansion plans. Historically, the Company has funded most of its capital
expenditures for the opening of new stores through the issuance of debt and
preferred stock, which, in many cases, is convertible into shares of Common
Stock. The Company's ability to fund the planned expansion of its store base is
directly related to the continued availability of these and other funding
sources.
The operation of used car dealerships and finance companies is capital
intensive. The Company requires capital to: (i) acquire and maintain
inventories of cars and parts, (ii) originate finance contracts, (iii) purchase
and maintain service equipment and (iv) maintain its facilities. The Company
finances the purchase of all of its used car inventory and leases most of the
properties on which it conducts business. Consequently, the Company incurs
significant operating, borrowing and fixed occupancy costs. Should the
Company's expansion plans require additional funding or should its capital
requirements exceed current estimates, the Company could be required to seek
additional financing in the future. There can be no assurance that the Company
will be able to raise such financing when needed or on acceptable terms. As a
result, the Company may be forced to reduce or delay additional expenditures or
otherwise delay, curtail or discontinue some or all of its operations. Further,
if the Company is able to access additional capital through borrowings, such
debt will increase the already substantial debt obligations of the Company,
which could have a material adverse effect on the Company's financial
condition, results of operations or cash flows. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The terms of the Company's financing transactions are affected by a number
of other factors which are beyond the control of the Company, including among
others, conditions in the securities and finance markets generally, prevailing
interest rates and prevailing economic conditions. If additional funds are
raised by issuing equity securities, dilution to the holders of Common Stock
may result.
HIGHLY COMPETITIVE MARKET
The market for financing credit-impaired customers is highly competitive.
The Company's competitors include local, regional and national automobile
dealers, used car finance companies and other sources of financing for
automobile purchases, many of which are larger and have greater financial and
marketing resources than the Company. Historically, commercial banks, savings
and loan associations, credit unions, captive finance subsidiaries of
automobile manufacturers and other consumer lenders, many of which have
significantly greater resources than the Company, have not competed for
financing for credit-impaired used car buyers. To the extent that such lenders
expand their activities in the credit-impaired market, the Company's financial
condition, results of operations or cash flows could be materially and
adversely affected. During the past two years, several companies, including
large, well-capitalized public companies, have devoted considerable resources
to acquisitions in the Company's market for credit-impaired customers.
The Company also competes with franchised dealers, individual used car
dealerships, as well as individual buyers and sellers of used cars. Industry
wide gross profit margins on sales of cars generally have been declining, and
the used car market faces increasing competition from non-traditional sources
such as independent leasing companies, brokers, buying services, Internet
companies and used car superstores. Some of the recent market entrants may be
capable of operating on smaller gross margins than the Company. There can be no
assurance that the Company will be able to maintain or increase its size
relative to that of its competitors or to increase profit margins in the face
of increased competition. The Company expects that there will be increasing
competition in the acquisition of other used car dealerships as industry
participants become larger. See "Business--Self-Financed Used Car Stores."
The Company continues to manufacture and sell parts and accessories for
Corvettes, certain of which are manufactured pursuant to a Reproduction and
Service Part Tooling License Agreement (the "GM Agreement") between the Company
and General Motors Corporation ("GM"). The GM Agreement does not prohibit the
Company's competitors from manufacturing and selling parts that are comparable
to those manufactured and sold by the Company. In addition, the GM Agreement
expires in December 1999 and there can be no assurance that it will be renewed,
or if renewed, that the terms of such renewal will be favorable to the Company.
See "Business--Corvette Parts and Accessories."
13
<PAGE>
SENSITIVITY TO INTEREST RATES
A substantial portion of the Company's finance contract income results
from the difference between the rate of interest it pays on the funds it
borrows and the rate of interest it earns pursuant to the finance contracts in
its portfolio. While the finance contracts that the Company services bear
interest at fixed rates, the Company's indebtedness generally bears interest at
floating rates. In the event the Company's interest expense increases, the
Company would seek to compensate for such increases by raising the interest
rates on its new finance contracts or by raising the retail sales prices of its
cars. To the extent the Company is unable to do so because of legal limitations
or otherwise, the net margins on the Company's finance contracts would
decrease, thereby adversely affecting the Company's financial condition,
results of operations or cash flows. See "--Regulation and Litigation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have varied in the past and may vary
significantly in the future. Factors causing fluctuations in operating results
include, among other things, seasonality in car purchases, changes in pricing
policies by the Company and its competitors, changes in operating expenses,
changes in the Company's strategy, personnel changes, the failure, delay and
expense in making the Company's software, systems and networks Year 2000
compliant, the effect of acquisitions and general economic factors. In
addition, the Company's sales of used cars and Corvette parts and accessories
are seasonal. The Company has limited or no control over many of these factors.
As a result, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indicative of future performance. Due to all of these factors, it is
likely that in some future period the Company's results of operations will fall
below market expectations. This would likely negatively impact the Company's
financial condition, results of operations or cash flows and cause the price of
the Common Stock to decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
BUSINESS CYCLES
Sales of motor vehicles historically have been cyclical, fluctuating with
general economic cycles. During economic downturns, the automotive retailing
industry tends to experience the same periods of decline and recession as those
experienced in the general economy. The Company believes that the industry is
influenced by general economic conditions and particularly by consumer
confidence, employment rates, the level of personal discretionary spending,
interest rates and credit availability. There can be no assurance that the
industry will not experience sustained periods of declines in car sales in the
future. Any such declines would have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
POTENTIAL ADVERSE EFFECT OF ECONOMIC SLOWDOWN
The Company's business is directly related to sales of used cars, which
are affected by employment rates, prevailing interest rates and other general
economic conditions. A future economic slowdown or recession could lead to
increased delinquencies, repossessions and credit losses that could hinder the
Company's business and planned expansion. Due to the Company's focus on
credit-impaired customers, its actual rate of delinquencies, repossessions and
credit losses on finance contracts could be higher under adverse conditions
than those experienced in the automobile finance industry in general. Economic
changes are uncertain and weakness in the economy could have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
GEOGRAPHIC CONCENTRATION
The Company's car sales and financing operations are presently
concentrated in the central and southeast regions of Florida. An economic
slowdown or recession, a change in the regulatory or legal
14
<PAGE>
environment, natural disasters or other adverse conditions in Florida could
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
SOURCING USED CARS
The Company acquires a significant amount of its used car inventory
through auctions and, to a lesser extent, from other sources, including
wholesalers and trade-ins at the Company's franchised new car stores. Some of
the auctions for cars are open only to the franchised dealers of specific
manufacturers. Accordingly, there can be no assurance that sufficient inventory
will continue to be available to the Company or will be available at comparable
costs, particularly if changes occur in the type of used cars that are sold in
auctions closed to the Company or if competitive pressures increase as a result
of new entrants into the Company's market. Any reduction in available inventory
or increase in inventory wholesale costs that cannot be reflected in retail
market prices could have a material adverse effect on the Company's financial
condition, results of operations or cash flows. See "Business--Self-Financed
Used Car Stores."
RISKS RELATED TO GOODWILL
As of June 30, 1998, the Company's total assets were approximately $116
million, of which approximately $25 million, or approximately 22% of total
assets, was goodwill. Goodwill is the excess of cost over fair market value of
net assets acquired. There can be no assurance that the value of such goodwill
will ever be realized by the Company. The Company's goodwill is being amortized
on a straight-line basis over a period of 40 years, which will produce an
annual charge to operations of approximately $650,000. The Company will
evaluate on a regular basis whether events and circumstances have occurred
which indicate that the carrying amount of goodwill warrants revision or may
not be recoverable. Any future determination requiring the write-off of a
significant portion of unamortized goodwill could adversely affect the
Company's financial condition.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following this Offering could adversely affect the market price of the
Common Stock. Upon completion of this Offering, the Company will have
outstanding 9,053,756 shares of Common Stock, of which 5,104,050 shares of
Common Stock have been registered for resale on registration statements on Form
S-3. Further, a total of 1,335,100 shares of Common Stock have been reserved for
issuance under the Company's employee compensation plans and certain outstanding
option agreements and will be registered for resale on Form S-8 in the near
future. The Company also had outstanding, as of June 30, 1998, convertible
notes, public and non-public warrants, convertible preferred stock, and certain
other rights to acquire a total of 2,379,183 shares of Common Stock, of which
all but approximately 680,012 shares of Common Stock have been registered for
resale on registration statements on Form S-3, including 600,000 shares
underlying publicly traded warrants. The beneficial owners of 660,012 shares of
Common Stock, issuable upon conversion of currently outstanding convertible
preferred stock and debt have registration rights that allow them to cause the
Company to register their shares for sale under certain circumstances. All
executive officers and directors, as well as certain principal shareholders, of
the Company are subject to lock-up agreements expiring 180 days after the date
of this Prospectus with respect to a total of 1,810,519 shares of Common Stock.
Sales of substantial amounts of Common Stock, or the availability of substantial
amounts of Common Stock for future sale, could adversely affect the prevailing
market price of the Common Stock. See "Management," "Stock Ownership," "Shares
Eligible for Future Sale" and "Underwriting."
15
<PAGE>
DILUTION TO NEW INVESTORS
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the pro forma as adjusted net tangible book value of
their shares in the amount of $7.18 per share. If the Company issues additional
shares of Common Stock in the future, including shares which may be issued
pursuant to earn-out arrangements, exercises of options and warrants, the terms
of convertible securities and future acquisitions, purchasers of Common Stock
in the Offering will experience further dilution in the net tangible book value
per share of the Common Stock to the extent such additional shares are issued
at prices below the price to the public in the Offering. See "Dilution."
REGULATION AND LITIGATION
The Company's business is subject to extensive federal, state and local
regulation and supervision. Such regulation, among other things, requires the
Company to limit interest rates, fees and other charges related to finance
contracts, make specified disclosures to consumers and adhere to strict limits
in the repossession and selling of collateral. Such regulations exist primarily
for the benefit of consumers, rather than for the protection of dealers or
finance companies and could limit the Company's discretion in operating its
business. Noncompliance with any applicable statutes or regulations could
result in the suspension or revocation of any license at issue, as well as the
imposition of civil fines and criminal penalties.
Currently, the Company's used car sales activities are conducted and its
finance contracts have been originated in Florida, where existing statutes
limit the interest rate which a lender may charge on consumer finance
contracts. Before the Company expands its operations to states other than
Florida, the Company must consider the impact of usury laws in those states. To
the extent that the interest rates and fees charged by the Company are limited
by the application of maximum allowable interest rates and charges that in the
future may be lower than those currently charged by the Company, the Company's
financial condition, results of operations or cash flows may be adversely
affected. See "Business--Regulation, Supervision and Licensing."
In addition, due to the consumer-oriented nature of the automobile finance
industry, used car dealerships are frequently named as defendants in litigation
involving alleged violations of federal and state consumer lending or other
laws and regulations. There can be no assurance that the Company will not
become subject to such litigation in the future. A significant judgment against
the Company could have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends on the continued services of the
Company's key management personnel as well as the Company's ability to attract
additional members to its management team with experience in the used car sales
and financing industries. The unexpected loss of the services of any of the
Company's key management personnel, or an inability to attract new management
when necessary, could have a material adverse effect upon the Company's
financial condition, results of operations or cash flows.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and may continue to be
subject to wide fluctuations in response to, among other things,
quarter-to-quarter variations in operating results, changes in earnings
estimates by analysts, market conditions in the industry and general economic
conditions. Further, the stock market from time to time experiences significant
price and volume fluctuations which may be unrelated to the operating
performance of particular companies. Factors such as the foregoing could have a
material adverse effect on the price of the Common Stock and there can be no
assurance that the price of the Common Stock will not decline below the price
to the public in the Offering.
16
<PAGE>
ENVIRONMENTAL RISKS
The Company is subject to federal, state and local laws, ordinances and
regulations which establish various health and environmental quality standards,
and liability related thereto, and provide penalties for violations of those
standards. Under certain laws and regulations, a current or previous owner or
operator of real property may be liable for the cost of removal and remediation
of hazardous or toxic substances or wastes on, under, in or emanating from such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances or wastes. Certain laws, ordinances and regulations may impose
liability on an owner or operator of real property where on-site contamination
discharges into waters of the state, including groundwater. Under certain other
laws, generators of hazardous or toxic substances or wastes that send such
substances or wastes to disposal, recycling or treatment facilities may be
liable for remediation of contamination at such facilities. Other laws,
ordinances and regulations govern the generation, handling, storage,
transportation and disposal of hazardous and toxic substances or wastes, the
operation and removal of underground storage tanks, the discharge of pollutants
into surface waters and sewers, emissions of certain potentially harmful
substances into the air and employee health and safety. The business operations
of the Company are subject to such laws, ordinances and regulations including
the use, handling and contracting for recycling or disposal of hazardous or
toxic substances or wastes, including environmentally sensitive materials such
as motor oil, transmission fluid, antifreeze, freon, waste paint and lacquer
thinner, batteries, solvent, lubricants, degreasing agents, gasoline and diesel
fuels. The Company is subject to other laws, ordinances and regulations as a
result of the past or present existence of underground storage tanks at many of
the Company's properties.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, are amended periodically to require compliance with
new or more stringent standards as of future dates. The Company cannot predict
what other environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist in the
future. Compliance with new or more stringent laws or regulations, stricter
interpretation of existing laws, or the future discovery of environmental
conditions may require expenditures by the Company, some of which may be
material.
NO ANTICIPATED DIVIDENDS
The Company has not paid dividends on its Common Stock since its initial
public offering of Common Stock in 1995, and does not intend to pay any
dividends on its Common Stock for the foreseeable future. It is anticipated
that any earnings which the Company may realize in the foreseeable future will
be retained to finance the development and expansion of its business. In
addition, under certain loan covenants, the Company is prohibited from paying
dividends without the prior consent of the lender. Also, certain series of the
Company's preferred stock provide for cumulative dividends on such preferred
stock and prohibit the payment of dividends on the Common Stock if unpaid
dividends are outstanding on such preferred stock. See "Description of Capital
Stock."
NO ASSURANCE OF CONTINUED MARKET FOR COMMON STOCK
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market and the Company has applied to have the Common Stock listed on the
Nasdaq National Market. Continued inclusion on the Nasdaq SmallCap Market or,
upon listing, continued listing on the Nasdaq National Market, requires the
Company to maintain certain criteria such as market value, public float,
capital and surplus. The Company is currently in compliance with the listing
requirements of the Nasdaq SmallCap Market and, after giving effect to the
Offering, believes it will meet the requirements for initial listing on the
Nasdaq National Market; however, in the past, the Company did not meet the
Nasdaq SmallCap Market requirement of a market capitalization of $35 million,
and Nasdaq commenced the delisting process. The Company requested a hearing and
made a submission against delisting. Based on the submission and the Company's
subsequent compliance with the market capitalization requirement, Nasdaq
terminated the delisting process.
17
<PAGE>
If the Company fails to comply with the applicable Nasdaq listing
requirements, it would lose Nasdaq listing and trading in the securities would
be conducted in the over-the-counter market known as the OTC Electronic
Bulletin Board, or the "pink sheets." In such event, purchasers of Common Stock
may have difficulty selling their shares because some brokerage firms will not
effect transactions in securities that are traded in the pink sheets. Further,
if for any reason the Company fails to maintain sufficient qualifications for
continued listing on the Nasdaq SmallCap Market or, subsequently, the Nasdaq
National Market, and the market price of the Common Stock declines to below
$5.00 per share, purchasers of Common Stock may have difficulty selling their
shares should they desire to do so because of the penny stock rules. The
Commission has adopted regulations which generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. The
shares of Common Stock are currently exempt from the definition of penny stock
because they are quoted on the Nasdaq SmallCap Market. If they are later
removed from listing by the Nasdaq SmallCap Market, or subsequently, the Nasdaq
National Market, and are traded at a price below $5.00 per share, the shares of
Common Stock may become subject to the penny stock rules that impose burdensome
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and institutional accredited
investors, and, thus, the rules will restrict the ability of broker-dealers to
sell the Company's Common Stock. Some brokerage firms will not effect
transactions in securities if such securities trade below $5.00 per share, and
it is unlikely that any bank or financial institution will accept such
securities as collateral, which could have an adverse effect on the development
or maintenance of a market for such securities and may affect the ability of
purchasers in the Offering to sell their Common Stock in the secondary market.
POTENTIAL CONFLICTS OF INTEREST
Robert J. Abrahams, the Chairman of the Board of the Company, is also a
director of Ugly Duckling Corporation ("Ugly Duckling"), a retailer of used
cars. Although the Company believes that it is not in direct competition with
Ugly Duckling because the Company generally retails later model cars to a
different market segment of customers, Mr. Abrahams may have a conflict of
interest in the future should Ugly Duckling and the Company pursue the same
acquisitions or customers having the same credit profile. In such event, Mr.
Abrahams would be required to recuse himself from both boards of directors
regarding any decisions to be made about business opportunities. See
"Management."
POTENTIAL INFLUENCE OF EXISTING SHAREHOLDERS
As of June 30, 1998, the Company's directors and executive officers, their
affiliates, and certain principal shareholders owned or had voting control of
approximately 39.6% of the issued and outstanding Common Stock of the Company.
Further, assuming exercise by all of the Company's directors and executive
officers of all of the outstanding options and warrants to purchase Common
Stock held by them, they would control, as of June 30, 1998 approximately 50%
of the voting stock. Consequently, management may be able to direct the
election of the Company's directors, effect significant corporate events and
generally direct the affairs of the Company. The concentration of ownership by
the Company's directors and executive officers and certain principal
shareholders may have the effect of approving or preventing a sale or takeover
of the Company on terms unfavorable to purchasers of Common Stock in the
Offering and other shareholders.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of Florida law and the Company's Articles of
Incorporation as amended or Bylaws as amended ("Articles/Bylaws") could,
together or separately, discourage potential acquisition proposals, delay or
prevent a change in control of the Company and limit the price that certain
investors might be willing to pay in the future for the Company's Common Stock.
The Company is subject to the "affiliated transactions" and "control share
acquisition" provisions of the Florida Business Corporation Act (the "FBCA").
Those provisions require, subject to certain exceptions, that an
18
<PAGE>
"affiliated transaction" be approved by a majority of disinterested directors
or by the holders of two-thirds of the voting shares other than those
beneficially owned by an "interested shareholder." Voting rights must also be
conferred on "control shares" acquired in specified control share acquisitions,
generally only to the extent conferred by resolution approved by the
shareholders, excluding holders of shares defined as "interested shares." In
addition, the Company's Articles/Bylaws, among other things, provide for a
classified Board of Directors for the Company and provide that (i) any action
required or permitted to be taken by the shareholders of the Company may be
effected only at an annual or special meeting of shareholders and not by
written consent of the shareholders; (ii) any special meeting of the
shareholders may be called only by the Chairman of the Board, the President or
the Chief Executive Officer, or upon the written demand of the holders of not
less than 25% of the votes entitled to be cast at a special meeting; (iii) an
advance notice procedure must be followed for nomination of directors and for
other shareholder proposals to be considered at annual shareholders' meetings;
and (iv) a director may be removed only for cause upon approval of holders of
not less than 662/3% of the Company's voting stock as such term is used in the
Articles/Bylaws. In addition, the Company is authorized to issue up to 5.0
million shares of preferred stock, in one or more series, having terms fixed by
the Board of Directors without shareholder approval, including voting, dividend
or liquidation rights that could be greater than or senior to the rights of
holders of Common Stock. As of June 30, 1998, the Company had outstanding
595.98 shares of preferred stock. Issuance of additional shares of Common Stock
or new series of preferred stock could have the effect of preventing or
delaying a sale or takeover of the Company which might have been in the best
interests of the Company and its shareholders. See "Description of Capital
Stock."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby at an assumed public offering price of $8.00 per
share (the last reported bid price of the Common Stock on the Nasdaq SmallCap
Market on August 17, 1998 and after giving effect to the 1-for-2 reverse stock
split), after deducting underwriting discounts and estimated Offering expenses,
are estimated to be approximately $18.0 million (approximately $20.8 million if
the Underwriters' over-allotment option is exercised in full).
The Company intends to use the net proceeds of this Offering to repay the
following outstanding indebtedness: $12.7 to reduce the amount outstanding
under the Company's revolving credit facility with Finova Capital Corporation
which the Company uses to fund finance receivables; $3.5 million to Stephens
Inc., the lead managing underwriter of the Offering; and $1.8 million to
certain sellers of their businesses to the Company. The Company's revolving
credit facility with Finova Capital Corporation bears interest at the prime
rate plus 2.5% (11.0% at June 30, 1998) and matures on December 31, 2001. The
loans made by Stephens Inc. mature at various times in 1998 and 1999, bear
interest at 10% per year and were obtained to provide working capital for the
Company. The sellers of businesses received a portion of their consideration in
the form of notes which mature on the earlier of a public offering or January
31, 1999 and bear interest at 9% ($1.1 million) and 12% ($718,000). See "Risk
Factors--Ability to Manage Growth; Risks Associated with Expansion and Changes
in Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Underwriting."
The Company intends to use the resulting increased available balance on
the revolving credit facility with Finova Capital Corporation to implement its
growth strategy, including the expansion of its used car business. See
"Business--Growth Strategy."
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock since its initial
public offering of Common Stock in 1995. The Company has no present plans to
pay cash dividends on its Common Stock for the foreseeable future and intends
to retain any 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 on the Company's
results of operations, financial condition, capital requirements, level of
indebtedness, any contractual restrictions and other factors deemed relevant by
the Board of Directors. The Company's current obligations to Finova Capital
Corporation, The Huntington National Bank and Sirrom Capital Corporation
prevent the Company from declaring or paying dividends.
20
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock and publicly held warrants to purchase shares
of Common Stock (the "Public Warrants") began trading on the Nasdaq SmallCap
Market under the symbols "SMCH" and "SMCHW," respectively, and the Common Stock
began trading on the Boston Stock Exchange under the symbol "SMCH" in November
1995. The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the symbol "SMCH." The Company is in the process of
delisting its securities from the Boston Stock Exchange.
The following table sets forth the high and low closing bid prices of
Common Stock and the Public Warrants as reported by the Nasdaq SmallCap Market
for the periods indicated, adjusted to give effect to the 1-for-2 reverse split
of the Company's Common Stock which will be effected prior to the consummation
of the Offering. Such prices reflect inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK PUBLIC WARRANTS
---------------------- ---------------------
HIGH LOW HIGH LOW
----------- -------- --------- ---------
(IN DOLLARS)
<S> <C> <C> <C> <C>
1996
- ----
First Quarter ................................... $10 1/4 $6 $1 7/8 $ 3/4
Second Quarter .................................. 9 5/8 6 3/4 1 5/8 1 1/8
Third Quarter ................................... 9 5 3/4 1 7/8 1
Fourth Quarter .................................. 12 1/2 6 2 3/8 7/8
1997
- ----
First Quarter ................................... $12 1/4 $9 1/4 $2 5/8 $1 1/2
Second Quarter .................................. 13 1/2 8 3 3/4 1 1/2
Third Quarter ................................... 14 8 3/8 3 1 1/2
Fourth Quarter .................................. 12 1/2 7 2 5/16 1
1998
- ----
First Quarter ................................... $ 9 1/8 $3 7/8 $1 1/2 $ 9/32
Second Quarter .................................. 11 15/16 7 5/8 3 9/16
Third Quarter (through August 17, 1998) ......... 11 3/8 7 3/4 2 7/8 1
</TABLE>
At August 17, 1998, after giving effect to the 1-for-2 reverse split of
the Company's Common Stock which will be effected prior to the consummation of
the Offering, the last reported bid prices of the Common Stock and the Public
Warrants on the Nasdaq SmallCap Market were $8.00 and $1.00, respectively. At
August 17, 1998, there were approximately 1,875 beneficial holders of the
Common Stock and approximately 264 beneficial holders of the Public Warrants.
21
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company on an
as adjusted basis to give effect to the sale by the Company of the 2,500,000
shares of Common Stock offered hereby at an assumed public offering price of
$8.00 per share (the last reported bid price of the Common Stock on the Nasdaq
SmallCap Market on August 17, 1998) after deducting the underwriting discount
and estimated Offering expenses, and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Revolving credit facility ............................................... $ 45,771 $ 33,146
Vehicle floor plan ...................................................... 8,482 8,482
Capital lease obligations ............................................... 901 901
Debt associated with acquisitions ....................................... 6,207 4,369
Other notes payable ..................................................... 24,883 21,383
--------- ---------
Total debt .............................................................. 86,244 68,281
Redeemable convertible preferred stock .................................. 10 10
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value; 5,000,000 shares authorized,
595 shares issued and outstanding ...................................... 5,891 5,891
Common stock, $.01 par value; 50,000,000 shares authorized; 6,553,756
shares issued and outstanding (actual); and 9,053,756 shares issued
and outstanding (as adjusted)(1) ....................................... 66 91
Additional paid-in capital .............................................. 30,718 48,656
Accumulated deficit ..................................................... (15,742) (15,742)
--------- ---------
Total stockholders' equity ............................................ 20,933 38,896
Total capitalization .................................................. $ 107,187 $ 107,187
========= =========
</TABLE>
- ----------------
(1) Excludes 375,000 shares of Common Stock that may be sold by the Company
upon exercise of the Underwriters' over-allotment option. Also excludes (i)
1,117,100 shares of Common Stock issuable upon exercise of stock options
outstanding at June 30, 1998 with a weighted average exercise price of
$9.28 per share, (ii) 878,770 shares of Common Stock issuable upon exercise
of warrants with a weighted average exercise price of $12.00 per share,
(iii) 903,302 shares of Common Stock issuable upon conversion of
approximately $9.5 million of convertible debt with an average conversion
price of $10.48 per share and (iv) 535,012 shares of Common Stock issuable
upon conversion of the convertible preferred stock. See "Management" and
"Description of Capital Stock."
22
<PAGE>
DILUTION
As of June 30, 1998, the net tangible book value of the Company was
approximately $(10,503,491) or $(1.60) per share of Common Stock. "Net tangible
book value per share" is defined as the book value of tangible assets of the
Company less all liabilities, divided by the number of issued and outstanding
shares of Common Stock. After giving effect to the sale by the Company of the
2,500,000 shares of Common Stock offered hereby at an assumed public offering
price of $8.00 per share, and after deducting the estimated underwriting
discount and Offering expenses payable by the Company, the pro forma net
tangible book value of the Company as of June 30, 1998 would have been
approximately $7,459,009 or $0.82 per share. This represents an immediate
increase in net tangible book value of $2.43 per share to existing shareholders
and an immediate dilution in net tangible book value of $7.18 per share to
purchasers of shares of Common Stock in the Offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share ............................ $ 8.00
-------
Net tangible book value per share before the Offering ............ $ (1.60)
Increase per share attributable to new shareholders .............. 2.42
-------
Pro forma as adjusted net tangible book value per share(1) ......... 0.82
-------
Dilution per share to new shareholders(1) .......................... $ 7.18
=======
</TABLE>
- ----------------
(1) The calculation of pro forma net tangible book value per share and dilution
per share to new shareholders assumes no exercise of outstanding options
or warrants and no conversion into Common Stock of outstanding convertible
debt or redeemable convertible preferred stock. As of June 30, 1998, (i)
1,117,100 shares of Common Stock were issuable upon exercise of stock
options with a weighted average exercise price of $9.28 per share, (ii)
878,770 shares of Common Stock were issuable upon exercise of warrants
with a weighted average exercise price of $12.00 per share, (iii) 903,302
shares of Common Stock were issuable upon conversion of approximately $9.5
million of convertible debt with an average exercise price of $10.48 per
share, and (iv) 535,012 shares of Common Stock were issuable upon
conversion of the Company's convertible preferred stock. To the extent
that the outstanding options or warrants are exercised or the convertible
debt or convertible preferred stock is converted, there will be further
dilution to purchasers of the Common Stock offered hereby. See "Risk
Factors--Dilution to New Investors."
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected combined consolidated financial data of the Predecessors as
of and for the fiscal years ended December 31, 1993, 1994, 1995 and 1996
included in this Prospectus have been audited by the independent accountants
whose reports are set forth herein. The selected consolidated financial data of
the Company for the period from June 21, 1996 (commencement of operations) to
December 31, 1996, as of December 31, 1996 and as of and for the fiscal year
ended December 31, 1997 have been derived from the consolidated financial
statements of the Company included in this Prospectus which have been audited
by BDO Seidman, LLP, independent accountants. The selected consolidated
financial data of the Company as of and for the six months ended June 30, 1997
and 1998 have been derived from unaudited consolidated financial statements of
the Company and, in the opinion of the Company, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of such information. Operating results for the six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
entire fiscal year. The selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and notes thereto of the Company and the Predecessors
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSORS(1)
-------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales at used car stores ........................ $ 22,923 $ 26,043 $ 27,521 $ 33,867
Income on finance receivables(3) ................ 2,624 3,194 4,614 5,949
Sales at new car dealerships(4) ................. -- -- -- --
Sales of Corvette parts and accessories ......... 14,317 13,943 12,973 14,893
Income from insurance and training .............. -- -- -- --
-------- -------- -------- --------
Total revenues ................................... 39,864 43,180 45,108 54,709
Total costs of sales ............................. 27,064 30,446 31,960 40,867
Selling, general and administrative expenses ..... 12,035 9,837 10,902 12,565
Compensation expense related to employee
stock options ................................... -- -- -- --
Restructuring charges ............................ -- -- -- --
-------- -------- -------- --------
Income (loss) from operations .................... 765 2,897 2,246 1,277
Interest expense ................................. (1,414) (1,409) (2,012) (2,402)
Other income (expense) ........................... 121 61 (368) 261
-------- -------- -------- --------
Net income (loss) ................................ (528) 1,549 (134) (864)
Net income (loss) applicable to common stock ..... (528) 1,549 (134) (864)
Net income (loss) per common share:
Basic ........................................... -- -- -- --
Diluted ......................................... -- -- -- --
Supplemental(5) ................................. -- -- -- --
Weighted average common shares outstanding
during period:
Basic ........................................... -- -- -- --
Diluted ......................................... -- -- -- --
<CAPTION>
THE COMPANY(1)
-----------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ---------------------
PRO
FORMA
1996 1997 1997(2) 1997 1998
----------- ------------ ------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales at used car stores ........................ $ -- $ 35,279 $ 43,259 $ 11,789 $ 40,603
Income on finance receivables(3) ................ -- 6,899 8,764 1,723 6,942
Sales at new car dealerships(4) ................. -- 9,863 23,803 -- 14,349
Sales of Corvette parts and accessories ......... -- 15,385 16,238 7,972 10,411
Income from insurance and training .............. -- 1,178 1,183 651 426
------- ---------- ---------- -------- --------
Total revenues ................................... -- 68,604 93,247 22,135 72,731
Total costs of sales ............................. -- 49,490 69,280 14,461 50,118
Selling, general and administrative expenses ..... 671 24,708 29,830 10,020 15,082
Compensation expense related to employee
stock options ................................... -- 4,650 4,650 3,215 --
Restructuring charges ............................ -- 2,118 2,118 -- --
------- ---------- ---------- -------- --------
Income (loss) from operations .................... (671) (12,362) (12,631) (5,561) 7,531
Interest expense ................................. (33) (6,455) (7,386) (1,748) (4,032)
Other income (expense) ........................... -- 168 465 43 609
------- ---------- ---------- -------- --------
Net income (loss) ................................ (704) (18,649) (19,552) (7,266) 4,108
Net income (loss) applicable to common stock ..... (704) (18,982) (19,885) (7,266) 3,944
Net income (loss) per common share:
Basic ........................................... $ (0.26) $ (4.28) $ (4.32) $ (1.73) $ 0.68
Diluted ......................................... (0.26) (4.28) (4.32) (1.73) 0.66
Supplemental(5) ................................. -- -- -- -- 0.60
Weighted average common shares outstanding
during period:
Basic ........................................... 2,744 4,430 4,604 4,199 5,790
Diluted ......................................... 2,744 4,430 4,604 4,199 6,841
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
PREDECESSORS(1) THE COMPANY(1)
------------------------------------------ --------------------
AS OF DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1996 1997
--------- ---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables, net ............... $ 7,280 $11,477 $16,399 $19,825 $ -- $33,227
Inventories ............................ 3,495 3,781 4,899 5,409 -- 15,516
Total assets ........................... 17,762 21,851 28,569 32,555 716 89,105
Total debt ............................. 11,629 14,563 19,760 23,723 322 69,654
Redeemable convertible
preferred stock ....................... -- -- 477 -- -- 4,942
Total stockholders' equity (deficit) ... 4,019 4,143 3,503 5,854 (698) 4,520
<CAPTION>
THE COMPANY(1)
----------------------------------
AS OF JUNE 30,
----------------------------------
AS ADJUSTED
1997 1998 1998(6)
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables, net ............... $26,974 $ 53,819 $ 53,819
Inventories ............................ 7,291 17,950 17,950
Total assets ........................... 67,518 116,218 116,218
Total debt ............................. 52,671 86,244 68,281
Redeemable convertible
preferred stock ....................... 3,950 10 10
Total stockholders' equity (deficit) ... 10,167 20,933 38,896
</TABLE>
- ---------------
(1) On January 28, 1997, the Company, which was then named Eckler Industries,
Inc. and was operating exclusively in the Corvette parts and accessories
business, acquired SCHI in a transaction accounted for as an acquisition
of Eckler's by SCHI. Accordingly, the financial statements of the Company
for the periods from June 21, 1996 to January 28, 1997 are those of SCHI,
which was incorporated on June 21, 1996 and was a development stage
company prior to the Predecessor Acquisition. Eckler's changed its name to
Smart Choice Automotive Group, Inc. after the Predecessor Acquisition.
From the date of the Predecessor Acquisition through February 14, 1997,
the Company acquired three automotive sales and finance companies.
Together with Eckler's, these companies are treated and referred to as the
Predecessors. The financial data for the four Predecessors are presented
on a combined basis. Such data is not comparable to that of the Company.
See Note 1 to the Company's Consolidated Financial Statements.
(2) Pro Forma Statement of Operations Data reflects the Predecessors and
additional significant companies acquired by the Company during 1997 as if
such acquisitions had occurred on January 1, 1997.
(3) Income on finance receivables consists of income related to used cars sold
at the Company's used car stores.
(4) Sales at new car dealerships include sales of new and used cars, sales of
parts and accessories, revenues from service, and finance and insurance
commissions.
(5) Supplemental net income per common share for the six months ended June 30,
1998 is based upon the weighted average number of shares of Common Stock
used in the calculation of diluted net income per share increased by the
number of shares (2,245,313), whose sale in the Offering is estimated to
yield the proceeds needed to reduce borrowings by $18.0 million and reduce
interest expense by approximately $1.0 million. See "Use of Proceeds."
(6) Gives effect to the sale of 2,500,000 shares of Common Stock offered hereby
at an assumed public offering price of $8.00 per share and the initial
application of the estimated net proceeds thereof in the manner described
in the "Use of Proceeds" as of June 30, 1998.
25
<PAGE>
<TABLE>
<CAPTION>
PREDECESSORS THE COMPANY
--------------------- ------------------------------------
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores ..................................... * * 20 10 24
Average number of used cars sold per store per period ......... * * 188 122 185
Number of used cars sold per period ........................... * * 3,750 1,096 4,435
Average selling price per car ................................. * * $ 9,408 $ 10,756 $ 9,155
Gross profit(1) as a percentage of total sales ................ * * 27.3% 32.4% 35.0%
Finance Receivables:
Principal balance outstanding (000s) ........................... * * $39,597 $ 33,286 $62,205
Allowance for credit losses as a percentage of
principal balance outstanding * * 17.3% 19.0% 15.0%
Principal balance of contracts originated
during the period (000s) ..................................... $15,560 $24,937 $27,687 $ 7,842 $35,276
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days ................................. * * 4.0% 5.9% 2.2%
Principal balances over 60 days ............................... * * 4.9% 6.1% 3.1%
------- ------- ------- -------- -------
Total over 31 days ............................................ * * 8.9% 12.0% 5.3%
New Car Dealerships(2):
Gross profit(1) as a percentage of total sales ................ * * 12.6% * 12.3%
Corvette Parts and Accessories:
Gross profit(1) as a percentage of total sales ................ * * 33.7% 38.4% 35.9%
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE
MONTHS ENDING
-----------------------
MAR. 31, JUNE 30,
1997 1997
----------- -----------
<S> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................. 8 10
Average number of used cars sold per store ............. 52 68
Number of used cars sold per quarter ................... 416 680
Average selling price per car .......................... 11,503 10,300
Gross profit(1) as a percentage of total sales ......... 29.2% 34.7%
Finance Receivables:
Number of contracts outstanding ......................... 2,146 6,505
Principal balance outstanding (000s) .................... $23,711 $33,286
Allowance for credit losses as a percentage of
principal balance outstanding ......................... 15.8% 19.0%
Principal balance of contracts originated during the
period (000s) ......................................... $ 2,932 $ 4,910
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days .......................... 7.5% 5.9%
Principal balances over 60 days ........................ 6.7% 6.1%
------- -------
Total over 31 days ..................................... 14.2% 12.0%
New Car Dealerships(2):
Gross profit(1) as a percentage of total sales ......... * *
Corvette Parts and Accessories:
Gross profit(1) as a percentage of total sales ......... 37.5% 38.8%
<CAPTION>
AS OF OR FOR THE THREE MONTHS ENDING
-----------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1998 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................. 16 20 22 24
Average number of used cars sold per store ............. 82 67 105 88
Number of used cars sold per quarter ................... 1,317 1,337 2,316 2,119
Average selling price per car .......................... 8,308 9,386 9,432 8,852
Gross profit(1) as a percentage of total sales ......... 39.7% 11.7% 36.7% 33.1%
Finance Receivables:
Number of contracts outstanding ......................... 6,616 6,857 7,787 9,036
Principal balance outstanding (000s) .................... $35,767 $39,597 $51,146 $62,205
Allowance for credit losses as a percentage of
principal balance outstanding ......................... 17.1% 17.3% 16.6% 15.0%
Principal balance of contracts originated during the
period (000s) ......................................... $ 9,093 $10,752 $16,686 $18,590
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days .......................... 5.0% 4.0% 2.7% 2.2%
Principal balances over 60 days ........................ 5.9% 4.9% 3.4% 3.1%
------- ------- ------- -------
Total over 31 days ..................................... 11.0% 8.9% 6.1% 5.3%
New Car Dealerships(2):
Gross profit(1) as a percentage of total sales ......... 12.2% 12.8% 11.5% 13.3%
Corvette Parts and Accessories:
Gross profit(1) as a percentage of total sales ......... 33.6% 21.1% 35.9% 35.8%
</TABLE>
- ---------------
* Information not available for this period.
(1) Reflects the difference between sales and cost of sales.
(2) Includes sales of used and new cars, sales of parts and accessories
revenues from service, and finance and insurance commissions.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT, AND SECTION 21E OF THE THE
EXCHANGE ACT. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"PROJECT," "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE EACH SUCH STATEMENT WAS MADE.
FORWARD-LOOKING STATEMENTS MAY INCLUDE, BUT NOT BE LIMITED TO, PROJECTIONS OF
REVENUES, INCOME OR LOSS, PLANS FOR ACQUISITIONS AND EXPANSION, INTEGRATION OF
NEW OPERATIONS, FINANCING NEEDS, INDUSTRY TRENDS, CONSUMER DEMAND AND LEVELS OF
COMPETITION. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN,
CONTEMPLATED BY OR UNDERLYING ANY SUCH FORWARD-LOOKING STATEMENTS. STATEMENTS
CONTAINED IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS," IN "RISK FACTORS," IN THE NOTES TO THE FINANCIAL
STATEMENTS AND ELSEWHERE IN THIS PROSPECTUS DESCRIBE FACTORS, AMONG OTHERS,
THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES.
The following discussion and analysis regarding the Company's consolidated
financial position and consolidated results of operations should be read in
conjunction with the financial statements and related notes thereto included
elsewhere in this Prospectus.
OVERVIEW
Smart Choice Automotive Group, Inc. operates 20 locations in Florida that
sell used cars under the "First Choice" brand name. The Company's First Choice
cars are three to six years old, have less than 80,000 miles and have undergone
thorough inspection, reconditioning and, as necessary, repair. The Company also
sells used cars that may not meet the First Choice criteria through four
additional stores in Florida that operate under the "Team" name. Through its
finance company subsidiary, the Company provides financing for its customers by
originating retail automobile installment sales contracts secured by the cars
it sells. The Company's customers typically have limited credit histories, low
incomes and/or past credit problems. The Company intends to expand primarily by
opening additional used car stores in Florida and extending its operations into
other areas of the southeastern United States. The Company's objective is to
become the leading self-financed retailer of used cars in the southeastern
United States.
The Company also manufactures and sells Corvette parts and accessories
through its subsidiary Eckler's, owns two new car dealerships in Florida, sells
insurance and provides dealership training services.
THE PREDECESSOR ACQUISITION. On January 28, 1997, the Company, which was
then named Eckler Industries, Inc. and was operating exclusively in the
Corvette parts and accessories business, acquired Smart Choice Holdings, Inc.
("SCHI") in the Predecessor Acquisition through a merger between SCHI and an
acquisition subsidiary of Eckler's. SCHI was engaged in the business of
acquiring various automobile sales and finance companies. After the Predecessor
Acquisition, the Company's name was changed to Smart Choice Automotive Group,
Inc.
In the Predecessor Acquisition, shareholders of SCHI were issued Common
Stock having a majority of the voting rights of the Company. Therefore, the
Predecessor Acquisition was accounted for as a purchase of Eckler's by SCHI (a
reverse acquisition in which SCHI was considered the acquiror for accounting
purposes). Accordingly, the financial statements of the Company are those of
SCHI, which was incorporated on June 21, 1996, and was a development stage
company prior to the Predecessor Acquisition.
PREDECESSOR COMPANIES AND LACK OF COMPARABILITY. At approximately the same
time as the Predecessor Acquisition, the Company acquired various automobile
sales and finance companies. The Company accounted for the acquisition of each
of these companies as a purchase, recording the assets
27
<PAGE>
purchased and liabilities assumed at their estimated fair values and including
their results of operations in the consolidated financial statements of the
Company from their respective dates of acquisition. For accounting purposes,
the following companies are treated as Predecessors for purposes of financial
statement presentation: Eckler's, Florida Finance Group, Inc. and affiliates
("FFG"), Liberty Finance Company and affiliates ("Liberty"), and Palm Beach
Finance and Mortgage Company and affiliates ("PBF"). The Predecessors lacked a
common year end, had different cost bases, had different elections for income
taxation, had different target customers for used car sales, and had different
credit underwriting and loss reporting policies. Accordingly, the Predecessors'
historical results of operations are not comparable to those of the Company.
Eckler's previously had a fiscal year ending September 30 for financial
reporting purposes. As a result of the Predecessor Acquisition in which SCHI
was the acquiror for accounting purposes, the Company's fiscal year end became
December 31, which was the fiscal year end of SCHI.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. The Company's revenues were $72.7 million for the six months
ended June 30, 1998 compared to $22.1 million for the same period in 1997. The
increase for the first six months of 1998 reflects primarily the increase to 24
used car stores at June 30, 1998 as compared to 10 used car stores at June 30,
1997. In addition, the 1997 first six months revenues reflect less than a full
six months of operations of the Predecessors, whereas the 1998 first quarter
revenues reflect a full six months of operations of all of the used car
companies acquired by the Company during 1997 and of two new car dealerships
acquired in August 1997, as well as an increase in the average number of used
cars sold during the period.
COSTS AND EXPENSES. Cost of sales increased to $50.1 million for the six
months ended June 30, 1998 compared to $14.5 million for the same period in
1997. The increase in cost of sales at the used car stores primarily reflects
the opening of additional used car store locations as discussed above and, to a
lesser extent, inclusion in the first six months of 1998 of a full six months
of operations of the Predecessors. As a percent of sales, the cost of sales at
the used car stores declined slightly to 65.0% from 67.6% in 1997, reflecting
management's focus on increasing gross margins as well as an increase in
average sales volume per store. The cost of sales for the Corvette parts and
accessories increased to 64.1% from 61.6% of sales, reflecting an increase in
sales of lower margin items.
The Company's selling, general and administrative expenses increased to
$15.1 million for the six months ended June 30, 1998 from $10.0 million for the
same period in 1997. The results reflect a decrease as a percentage of revenues
to 20.7% in the first six months of 1998 from 45.3% in the comparable 1997
period as a result of better utilization of the Company's infrastructure,
including centralized marketing, accounting and management information
functions.
During the first six months of 1997, the Company recognized a charge of
$3.2 million for compensation expense related to employee and director stock
options. The Company did not have a comparable expense during the six-month
period ended June 30, 1998.
INTEREST EXPENSE AND OTHER INCOME. Interest expense totaled $4.0 million
for the six months ended June 30, 1998 compared to $1.7 million for the same
period in 1997, an increase of 131%. The increase resulted primarily from
higher outstanding indebtedness needed to finance higher levels of finance
receivables and inventory as the Company expanded its operations.
Other income totaled $0.6 million for the six months ended June 30, 1998
compared to $43,000 for the same period in 1997. The 1998 amount is comprised
primarily of additional fees generated at the new car dealerships ($338,000)
and recoupment of prior year's expenses $(166,000).
NET INCOME. Net income totaled $4.1 million for the six months ended June
30, 1998 as compared to a net loss of $7.3 million for the same period in 1997.
The improvement resulted primarily from the
28
<PAGE>
refocusing of the Company's strategy, the restructuring of its operations
during the last quarter of 1997 and increased levels of business activities.
SEGMENT INFORMATION
The Company is comprised of four segments: used cars stores, financing of
used car sales, new car dealerships and Corvette parts and accessories. The
Company's results of operations are most meaningful when analyzed and discussed
by segment.
USED CAR STORES
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
------------------------ ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at used car stores ................. $11,789 100.0% $40,603 100.0%
Cost of sales at used car stores ......... 7,967 67.6 26,376 65.0
------- ----- ------- -----
Gross profit ............................ 3,822 32.4 14,227 35.0
Operating expenses ....................... 2,031 17.2 7,149 17.6
------- ----- ------- -----
Operating income ........................ $ 1,791 15.2% $ 7,078 17.4%
</TABLE>
Sales at used car stores increased to $40.6 million for the six months
ended June 30, 1998 compared to $11.8 million for the same period in 1997. The
increase in sales reflects the sale of 4,435 cars at the 24 used car stores
that were open during the 1998 period as compared to the sale of 1,096 cars at
the 10 used car stores that were open during the 1997 period. In addition, the
average number of used cars sold per store increased to 185 cars for the six
months ended June 30, 1998 as compared to average sales of 122 used cars for
the same period of 1997.
Gross profit increased to $14.2 million during the six months ended June
30, 1998 from $3.8 million during the six months ended June 30, 1997. Gross
profit as a percentage of sales increased to 35.0% for the six months ended
June 30, 1998 as compared to 32.4% for the six months ended June 30, 1997. The
improvement resulted primarily from management's focus on increasing gross
margins, as well as a higher average sales volume per store.
Operating expenses relating to sales at used car stores increased to $7.1
million from $2.0 million as a result of the increase in the number of used car
stores.
FINANCING OF USED CAR SALES
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
-------------------------- --------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income on finance receivables ................... $ 1,723 100.0% $ 6,942 100.0%
Provision for credit losses ..................... 1,549 90.0 4,419 63.6
Operating expenses .............................. 803 46.5 1,401 20.2
-------- ----- -------- -----
Operating income (loss) ........................ (629) (36.5) 1,122 16.2
Interest expense on finance receivables ......... 1,031 59.8 2,374 34.2
-------- ----- -------- -----
Net loss ....................................... $ (1,660) (96.3)% $ (1,252) (18.0)%
</TABLE>
Income on finance receivables increased to $6.9 million for the six months
ended June 30, 1998 from $1.7 million for the same period in 1997. The increase
reflects the increase in the average net finance receivables outstanding to
$52.5 million for the six months ended June 30, 1998 from $19.9 million for the
same period of 1997. This increase results from the corresponding increase in
sales of used cars during the six months ended June 30, 1998.
Interest expense on finance receivables increased to $2.4 million for the
six months ended June 30, 1998 from $1.0 million for the same period in 1997.
The increase reflects the higher level of finance
29
<PAGE>
receivables, which was only partially offset by the reduction in the interest
rate on the borrowed funds to 11.0% for the six months ended June 30, 1998 from
11.5% for the six months ended June 30, 1997.
A high percentage of the Company's customers do not make all of their
contractually scheduled payments on their finance contracts, requiring the
Company to charge off the remaining principal balance and accrued interest, net
of recoveries on repossessed cars. The Company maintains on its balance sheet
an allowance for credit losses to absorb such losses. To accrue to the
allowance, the Company records an expense (the "provision") based upon its
estimate of future credit losses on finance receivables originated. The
provision for credit losses for the six months ended June 30, 1998 was $4.4
million compared to $1.5 million for the same period in 1997. The increase
reflects the significantly higher amount of finance receivables outstanding.
The net loss for the six months ended June 30, 1998 was approximately $1.2
million compared to a net loss of $1.7 million for the same period in 1997 as a
result of a lower provision for credit losses as a percentage of income on
finance receivables.
NEW CAR DEALERSHIPS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, SIX MONTHS ENDED
1997 JUNE 30, 1998
----------- ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at new car dealerships ................. -- -- $14,349 100.0%
Cost of sales at new car dealerships ......... -- -- 12,587 87.7
-- -- ------- -----
Gross profit ................................ -- -- 1,762 12.3
Operating expenses ........................... -- -- 2,003 14.0
-- -- ------- -----
Operating loss .............................. -- -- $ (241) ( 1.7)%
</TABLE>
The Company acquired two new car dealerships in August 1997. Sales at new
car dealerships were $14.3 million during the six months ended June 30, 1998.
During the six months ended June 30, 1998, the Company sold 675 cars at its two
new car dealerships. The gross profit on sales at the new car dealerships was
$1.8 million during the six months ended June 30, 1998.
The Company's operating expenses of $2.0 million during the six months
ended June 30, 1998 exceeded the gross profit during such period, resulting in
an operating loss at the new car dealerships of $241,000.
CORVETTE PARTS AND ACCESSORIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
----------------------- ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales of Corvette parts and accessories ......... $7,972 100.0% $10,411 100.0%
Cost of Corvette parts and accessories .......... 4,909 61.6 6,677 64.1
------ ----- ------- -----
Gross profit ................................... 3,063 38.4 3,734 35.9
Operating expenses .............................. 2,817 35.3 2,107 20.3
------ ----- ------- -----
Operating income ............................... $ 246 3.1% $ 1,627 15.6%
</TABLE>
Sales of Corvette parts and accessories increased to $10.4 million for the
six months ended June 30, 1998 compared to $8.0 million for the same period in
1997. The increase in sales reflects an additional mailing of Eckler's mail
order catalog in late 1997.
Although gross profit increased to $3.7 million for the six months ended
June 30, 1998 from $3.1 million for the six months ended June 30, 1997, the
gross margin on sales of Corvette parts and accessories declined to 35.9%
during the six months ended June 30, 1998 from 38.4% during the six months
ended June 30, 1997 as a result of sales of lower margin items in the 1998
period.
30
<PAGE>
The decrease in operating expenses to $2.1 million during the six months
ended June 30, 1998 as compared to $2.8 million during the six months ended
June 30, 1997 was due to the reallocation of certain expenses to corporate
overhead.
COMPARISON OF THE THREE YEARS ENDED DECEMBER 31, 1997
The following comparison of the results of operations for the three years
ended December 31, 1997 compares the results of the Company for the year ended
December 31, 1997 to the results of the Predecessors and the Company on a
combined basis for the year ended December 31, 1996. The comparison of results
for the years ended December 31, 1996 and 1995 discuss the results of the
Predecessors on a combined basis.
REVENUES. The Company's revenues for the fiscal year ended December 31,
1997 were $68.6 million representing a 25.4% increase over the Predecessors'
revenues of $54.7 million in 1996. The increase was primarily the result of:
(i) the inclusion in 1997 of revenues from additional acquired companies which
are not reflected as Predecessors, including $9.9 million in revenues from the
Company's new car dealerships and $1.2 million from the Company's insurance and
dealer training operations, (ii) the Company's income on finance receivables
exceeding that of the Predecessors by $1.0 million due to growth of the
Company's receivables portfolio after the Predecessor Acquisition and (iii) the
Company's used car sales exceeding those of the Predecessors by $1.4 million as
a result of additional acquisitions and opening of additional used car stores.
The combined revenues of the Predecessors increased by 21.3% to $54.7 million
in 1996 from $45.1 million in 1995, reflecting an increase in the total number
of used car stores in 1996, a related increase in the number of cars sold and
an increase in prices of the cars offered for sale.
COSTS AND EXPENSES. The Company's cost of sales was $49.5 million for 1997
compared to $40.9 million for the Predecessors during 1996, representing an
increase of $8.6 million, or 21.1%. The Company's cost of sales in 1997
includes $8.6 million attributable to sales at new car dealerships which are
not reflected in the Predecessors' 1996 amounts. The cost of sales for the
Company's used car stores was slightly lower than the Predecessors' cost of
sales for used car stores in 1996 and the Company achieved profit margins of
27.3% for the year ended December 31, 1997, compared to the Predecessors'
profit margin of 16.3% for the same period in 1996. The cost of sales of the
Predecessors increased by $8.9 million or 27.9% from 1995 to 1996. The
percentage increase exceeds the 21.3% increase in sales for the same period,
reflecting (i) an increase in the cost of cars offered for sale not offset by
higher prices in order to attract more creditworthy customers and (ii)
aggressive pricing campaigns associated with the opening of additional used car
stores in 1996.
The Company's provision for credit losses was 14.0% of sales of used cars
in 1997 as compared to the Predecessors' provision for credit losses over sales
of used cars in 1996 of 8.5%. The higher provision primarily reflects the
significantly higher amount of finance receivables originated during 1997.
The Company's selling, general and administrative expenses (including
depreciation and amortization) were $24.7 million for 1997, compared to the
Predecessors' selling, general and administrative expenses of $13.2 million for
1996. The higher amount reflects expenses related to increased used car stores
and continued development of the Company's corporate infrastructure after the
Predecessor Acquisition. These costs were offset partially by savings resulting
from the consolidation of the acquired companies' management functions.
The Company incurred $6.8 million in charges during 1997 which were not
comparable to any charges incurred by the Predecessors in 1996 and which the
Company believes will not recur in the future. These charges include (i) the
recognition of non-cash compensation expense of $4.7 million associated with
the issuance of stock options by an affiliated trust to attract key management
personnel and (ii) restructuring charges of $2.1 million. The restructuring
charges consisted primarily of costs related to employment contract
terminations and severance pay.
Combined selling, general and administrative expenses of the Predecessors
increased to $13.2 million in 1996 as compared to $10.9 million in 1995. Of the
increase, $1.3 million was attributable to
31
<PAGE>
additional costs associated with extensive additional printing and advertising
costs related to the Eckler's catalog, which contributed to an increase in
sales as discussed above, and with additional costs resulting from reporting
obligations following the initial public offering that year. Excluding the
increase relating to the Eckler's catalog, operating expenses increased 9.5%,
reflecting a commensurate increase in advertising and employment expenses
associated with increased sales.
INTEREST EXPENSE AND OTHER INCOME. The Company's interest expense totaled
$6.5 million for 1997, compared to $2.4 million for the Predecessors during
1996, an increase of $4.1 million or 171%. This resulted primarily from
interest on debt attributable to the Predecessor Acquisition and certain other
acquisitions and higher outstanding indebtedness needed to finance higher
levels of finance receivables and inventory as the Company expanded its
operations. In addition, the Company incurred substantial non-cash interest
expense associated with the accounting recognition of the conversion features
of certain debt obligations.
The Predecessors' combined interest expense increased to $2.4 million in
1996 from $2.0 million in 1995. The increase reflected the increased car sales
and finance income discussed earlier. As sales increased, the Predecessors
borrowed more to finance increased inventory and finance receivables.
Inventories grew to $5.4 million at December 31, 1996, from $4.8 million at
December 31, 1995, and finance receivables increased to $19.8 million at
December 31, 1996 from $16.4 million at December 31, 1995. Total debt increased
to $23.5 million at December 31, 1996 from $20.2 million at December 31, 1995.
NET LOSS. The Company's net loss for the year ended December 31, 1997 of
$18.6 million was higher than the combined loss of the Predecessors of $0.9
million for the year ended December 31, 1996. The increase in the loss resulted
primarily from the compensation expense related to employee stock options,
restructuring charges in 1997 and the costs of integration of the businesses
acquired during 1997. The increase in the net loss for the year ended December
31, 1996 to $0.9 million from $134,000 for the year ended December 31, 1995
resulted from a disproportionate increase in costs and expenses for 1996.
CREDIT LOSSES
GENERAL. The Company has established an allowance to cover anticipated
credit losses on the finance receivables currently in its portfolio. The
allowance has been established by the recognition in the Company's statements
of operations of the provision for credit losses attributed to finance
receivables originated by the Company.
The allowance decreased from 17.1% of outstanding principal balances as of
December 31, 1997 to 15.0% as of June 30, 1998. The following table reflects
activity in the allowance for the six months ended June 30, 1998 and 1997 and
for the year ended December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------
1997 1997 1998
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period ............................. $ -- $ -- $ 6,857
Balance at dates of acquisitions ......................... 5,628 5,628 --
Provision for credit losses .............................. 4,941 3,469 4,419
Net charge offs .......................................... (3,712) (2,785) (1,939)
-------- -------- --------
Balance, end of period ................................... $ 6,857 $ 6,312 $ 9,337
Allowance as a percentage of finance receivables ......... 17.1% 19.0% 15.0%
</TABLE>
NET CHARGE OFFS. The Company's policy is to charge off finance receivables
when they are deemed uncollectible but in any event at such time as a finance
receivable is delinquent for 90 days. The net charge off amount is the
principal balance of the finance receivable at the time of the charge off plus
32
<PAGE>
accrued but unpaid interest, less any recovery. The Company recognizes
recoveries in the amount of the wholesale value (typically "Clean Black Book")
of repossessions. The following table sets forth information regarding charge
off activity for the Company's finance receivables for the six months ended
June 30, 1998 and 1997 and for the year ended December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1997 1997 1998
------------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal Balances:
Collateral repossessed ................... $ 7,920 $ 3,818 $ 5,887
Other .................................... 37 36 --
-------- -------- --------
Total principal balances ................. 7,957 3,854 5,887
Recoveries, net .......................... (4,245) (1,069) (3,948)
-------- -------- --------
Net charge offs .......................... 3,712 2,785 1,939
Average principal balances ............... 27,325 19,907 52,547
Net charge offs as a percentage of average
principal balance outstanding .......... 13.6% 14.0% 3.7%
</TABLE>
STATIC POOL ANALYSIS. The Company has reduced its allowance for credit
losses as a percentage of outstanding finance receivables as a result of the
improved performance of its portfolio from 17.1% as of December 31, 1997 to
15.0% as of June 30, 1998. To monitor portfolio performance, beginning in 1997,
the Company implemented a "static pool" analysis for all finance receivables
originated since January 1, 1995. The static pool analysis monitors each
month's originations and subsequent charge offs. Improving or deteriorating
performance is measured based on cumulative gross and net charge offs as a
percentage of outstanding finance receivables.
The following table sets forth the cumulative net charge offs as a
percentage of outstanding finance receivables as of the end of the month of
origination.
<TABLE>
<CAPTION>
CUMULATIVE NET LOSSES AS PERCENTAGE OF ORIGINAL
PRINCIPAL BALANCE OF LOANS ORIGINATED DURING PERIOD
--------------------------------------------------------------
MONTHS
AFTER 1ST 2ND 3RD 4TH 1ST 2ND 3RD
ORIGINATION QTR 95 QTR 95 QTR 95 QTR 95 QTR 96 QTR 96 QTR 96
- ------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
3 1.5% 1.8% 1.3% 1.1% 1.5% 1.0% 0.9%
6 3.6% 5.8% 4.8% 4.3% 5.3% 4.6% 4.0%
9 5.5% 7.7% 6.7% 7.7% 9.6% 7.9% 6.1%
12 7.0% 9.1% 8.0% 8.7% 12.2% 9.5% 8.2%
15 8.0% 10.0% 9.1% 12.9% 13.8% 10.3% 9.3%
18 8.6% 10.9% 9.7% 13.8% 14.6% 11.3% 10.5%
24 9.1% 11.8% 10.7% 14.6% 15.9% 12.7%
30 9.1% 11.8% 11.5% 15.2%
36 9.1% 12.1%
39 9.1%
<CAPTION>
CUMULATIVE NET LOSSES AS PERCENTAGE OF ORIGINAL
PRINCIPAL BALANCE OF LOANS ORIGINATED DURING PERIOD
---------------------------------------------------------------
MONTHS
AFTER 4TH 1ST 2ND 3RD 4TH 1ST 2ND
ORIGINATION QTR 96 QTR 97 QTR 97 QTR 97 QTR 97 QTR 98 QTR 98
- ------------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
3 1.2% 1.4% 0.8% 0.5% 0.1% 0.8% 0.2%
6 3.6% 3.1% 2.0% 2.3% 1.1% 1.4%
9 5.0% 4.6% 4.9% 4.9% 1.4%
12 5.4% 7.0% 6.7%
15 6.6% 8.3%
18 7.4%
24
30
36
39
</TABLE>
The Company's credit loss experience has been improving since the
Predecessor Acquisition. The Company believes that the improvement in its
credit loss experience as a percentage of finance receivables originated
resulted from (i) a continuing improvement in the application of its
underwriting standards and servicing and collection efforts, (ii) maximization
of recoveries on repossessions and (iii) reduced defaults due to improved
operating performance of used cars sold.
DELINQUENCIES. Analysis of delinquency trends is also considered in
evaluating the adequacy of the allowance. The following table reflects the
principal balance of delinquent finance receivables as a percentage of total
outstanding principal balances of the Company's finance receivables portfolio
as of June 30, 1998 and 1997 and as of December 31, 1997.
33
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF JUNE 30,
DECEMBER 31, -----------------------
1997 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
Aging Percentages:
Principal balances current .................... 91.1% 88.0% 94.7%
Principal balances 31 days to 60 days ......... 4.0 5.9 2.2
Principal balances over 60 days ............... 4.9 6.1 3.1
Total over 31 days ............................ 8.9 12.0 5.3
</TABLE>
The Company's improved delinquency experience on its finance receivables
portfolio is primarily attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in finance receivables,
car inventory, parts and accessories inventory, property and equipment, and
working capital for general corporate purposes. Funding sources potentially
available to the Company include operating cash flow, third-party investors,
financial institution borrowings, borrowings against finance receivables and
the securitization of its finance receivables.
Net cash provided by (used for) operating activities was approximately
$3.2 million and ($2.0) million for the six month periods ended June 30, 1998
and 1997, respectively. Net cash provided from operating activities in the
first six months of 1998 primarily reflected the net income for the period
which was partially offset by increases in account receivables and inventories.
The increase from the first six months of 1997 was primarily a result of the
large net loss in the first six months of 1997. Net cash used by operating
activities was $5.9 million and $97,000 during 1997 and 1996, respectively. In
addition to a net operating loss in 1997, the Company used approximately $6.6
million in 1997 to expand inventory and accounts receivable. Cash used for
operating activities in 1996 is primarily attributable to approximately
$700,000 in first year start-up expenses by the Company, as well as further
expansion of inventory and reduction of payables owed by the Predecessors. The
Predecessors had approximately $469,000 of cash provided by operating
activities in 1995, attributable primarily to increases in accounts payable and
deferred income taxes.
Cash used in investing activities was approximately $24.4 million and
$15.2 million during the six months ended June 30, 1998 and 1997, respectively.
The 1998 amount primarily reflects increases in finance receivables. The 1997
amount reflects an increase in finance receivables associated with acquisitions
during the first six months of 1997. Cash used in investing activities was
approximately $26.6 million, $3.7 million and $5.3 million during 1997, 1996
and 1995, respectively. The 1995 and 1996 amounts primarily reflect increases
in finance receivables carried by the Predecessors. The 1997 amount reflects
the Company's growth, including a $13.6 million increase to finance
receivables, approximately $12.2 million associated with acquisitions and $1.3
million related to the acquisition of property and equipment.
Cash provided by financing activities was approximately $23.9 million and
$18.2 million during the six months ended June 30, 1998 and 1997, respectively.
In the first six months of 1998, the Company increased its notes payable on
finance receivables by $14.5 million and borrowed $7.0 million. In the first
six months of 1997, the Company raised approximately $0.6 million through a
sale of preferred stock and increased its line of credit and floorplan
borrowings by approximately $11.7 million. Cash provided by financing
activities was approximately $33.6 million, $6.6 million and $4.8 million
during 1997, 1996 and 1995, respectively. In 1997, the Company raised
approximately $4.6 million through sales of preferred stock and increased its
line of credit and floorplan borrowings by $16.4 million and $4.2 million,
respectively, as the Company expanded its automobile sales and financing
activities. Notes payable increased by $14.2 million during 1997 with the
borrowings primarily used for acquisitions and expansion of operations.
Eckler's raised an additional $4.0 million through the issuance of notes in
1996 and approximately $3.0 million through a sale of Common Stock in its
initial public offering in 1995.
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<PAGE>
The balance of the increase in cash from investing activities in 1996 and 1995
is attributable to an increase in notes payable by the other Predecessors to
finance increased inventories and finance receivables.
The Company has borrowed, and will continue to borrow, substantial amounts
to fund its used car sales and financing operations. The Company has a
revolving credit facility with Finova Capital Corporation to provide funding
for finance receivables from used car sales originated by the Company (the
"Finova Revolving Facility"). The Finova Revolving Facility had a maximum
commitment of $35.0 million at December 31, 1997 and was increased to a maximum
commitment of $75.0 million, effective May 11, 1998. Under the Finova Revolving
Facility, the Company may borrow up to 55% of the gross balance of eligible
finance contracts. The Finova Revolving Facility expires in December 1999, at
which time its renewal will be subject to renegotiation. The Finova Revolving
Facility is secured by substantially all of the Company's finance receivables.
As of June 30, 1998 and December 31, 1997, the principal amount outstanding
under the Finova Revolving Facility was $45.9 million and $31.4 million,
respectively. The Finova Revolving Facility bears interest at the prime rate
plus 2.5% (11.0% as of June 30, 1998).
In the first six months of 1998 and in 1997, the Company financed its used
car inventory through a line of credit with Manheim Automotive Financial
Services, Inc. (the "Manheim Facility") which had an outstanding balance of
$2.5 million at June 30, 1998 and $2.7 million at December 31, 1997. The
maximum commitment under the Manheim Facility is $3.75 million. The Manheim
Facility is secured by the Company's used car inventory and bears interest at
1.5% over the prime rate (10.0% as of June 30, 1998). Amounts outstanding are
payable on the earlier of the day after a car is sold or 180 days after the
floorplan advance.
The Company finances its new car inventory through manufacturer floorplan
facilities. The Company's floorplan facility with Volvo Finance North America,
Inc. has a maximum commitment of $3.3 million, bears interest at 1.0% above the
prime rate (9.5% as of June 30, 1998), and at June 30, 1998 and December 31,
1997 had outstanding balances of $3.2 million and $3.3 million, respectively.
The Company's floorplan facility with Nissan Motor Acceptance Corporation has a
$3.0 million maximum commitment, bears interest at 1.0% above prime (9.5% as of
June 30, 1998), and at June 30, 1998 and December 31, 1997 had outstanding
balances of $2.8 million and $2.3 million, respectively.
In March 1997 and May 1997, Sirrom Capital Corporation ("Sirrom") loaned
the Company a total of $7.5 million. The Company issued Sirrom a $3.5 million
convertible note that bears interest at 12.0% and is convertible into Common
Stock until its maturity date of March 12, 1999 at a price of $7.34 per share
and a $4.0 million convertible note that bears interest at 12.0% and is
convertible at a price of $15.00 per share until its maturity date of May 12,
2002, subject to adjustment.
In September 1997, the Company completed the private placement of
convertible notes in the aggregate amount of $1,050,000. The notes bear
interest at the rate of 8.0% per annum and, since December 14, 1997, have been
convertible into Common Stock of the Company at a conversion price of 66 2/3% of
the average closing bid price for the five trading days immediately preceding
the effective date of conversion. Approximately $886,000 of the debt had been
converted into Common Stock as of June 30, 1998. The Company recorded deferred
interest of $525,000 as a result of the discount on the conversion price which
was amortized from the date of issuance to the first conversion date of the
notes.
In December 1997, Raytheon Aircraft Credit Corporation extended credit to
the Company in the amount of $2.2 million to finance the purchase of equipment.
The loan, which matures in December 2009, bears interest at 8.5%, requires
monthly payments of $19,995 plus balloon payments of $100,000 in September 1998
and September 1999 and is secured by equipment.
In October 1997 and January and May 1998, the Company borrowed a total of
$8.5 million from Stephens Inc. ("Stephens"), the investment banking firm that
is the lead managing underwriter of the Offering to which this Prospectus
relates. The loans bear interest at the rate of 10% per annum and are
35
<PAGE>
secured by all of the assets and common stock of Eckler's. The Company
guaranteed the debt. The Stephens loans mature on various dates through
September 30, 1999. See "Use of Proceeds" and "Underwriting."
In December 1997, the Company completed an offering to institutional
investors of 400 units of Series A Redeemable Convertible Preferred Stock and
warrants at a price of $10,000 per unit. Proceeds from the offering, net of
offering costs, were approximately $3.9 million. Each unit consisted of one
share of Series A Redeemable Convertible Preferred Stock and a five year
warrant to acquire 150 shares of Common Stock for each preferred share
purchased. The exercise prices of the warrants are $16.20 for 45,000 shares and
$10.46 for 15,000 shares. As of June 30, 1998 all but one share of the Series A
Redeemable Convertible Preferred Stock had been converted into Common Stock.
In May and December 1997, the Company borrowed $1.0 million from Bankers
Life Insurance Company and its affiliates. Of such amount, $250,000 bears
interest at the prime rate plus 1.0% (9.5% as of June 30, 1998), matures on
June 1, 1999, and is convertible into Common Stock at $7.40 per share; and
$750,000 bears interest at the prime rate (8.5% as of June 30, 1998), matures
on December 31, 2000 and is convertible into Common Stock at $18.00 per share.
In May 1998, the Company sold to a private investment group 220 shares of
the Company's Series B Convertible Preferred Stock for $10,000 per share for an
aggregate of $2.2 million. The Series B Convertible Preferred Stock has an
11.0% dividend per year and is convertible into Common Stock at a conversion
rate of $10.00 per share. After November 5, 1999, the Company may, at its
option, redeem the Series B Convertible Preferred Stock for $10,000 per share.
In connection with the issuance of the Series B Convertible Preferred Stock,
the Company agreed to certain limitations on the issuance of additional shares
of preferred stock by the Company.
In June 1998, the Company sold to a private investment group 24.98 shares
of the Company's Series C Convertible Preferred Stock for $10,000 per share for
an aggregate of $249,800. The Series C Convertible Preferred Stock has an 11.0%
dividend per year and is convertible into Common Stock at a conversion rate of
$11.18 per share. After December 2, 1999, the Company may, at its option,
redeem the Series C Convertible Preferred Stock for $10,000 per share. In
connection with the issuance of the Series C Convertible Preferred Stock, the
Company agreed to certain limitations on the issuance of additional shares of
preferred stock by the Company.
In June 1998, the Company sold to a private investment group 350 shares of
the Company's Series D Convertible Preferred Stock for $10,000 per share for an
aggregate of $3.5 million. The Series D Convertible Preferred Stock has an 11.0%
dividend per year for five years and thereafter has a 20% dividend per year and
is convertible into Common Stock at a conversion rate of $12.00 per share.
After June 22, 2001, the Company may, at its option, redeem the Series D
Convertible Preferred Stock for $10,000 per share. In connection with the
issuance of the Series D Convertible Preferred Stock, the Company agreed to
certain limitations on the issuance of additional shares of preferred stock by
the Company.
Upon the closing of various acquisitions during 1997, the Company incurred
debt to certain shareholders of the acquired companies. The balance as of June
30, 1998 for the acquisition debt was $6.2 million. Of this amount, $4.6
million requires aggregate monthly principal payments of $27,112 plus interest
and matures on June 27, 1999.
SEASONALITY
Historically, the Company's used car business has experienced higher
revenues in the first two quarters of the calendar year than in the latter half
of the year. Management believes that these results are due to seasonal buying
patterns resulting in part from the fact that many of its customers receive
income tax refunds during the first half of the year, which are a primary
source of down payments on used car purchases.
36
<PAGE>
Eckler's is also subject to seasonal fluctuations. Historically, Eckler's
has realized a higher portion of its revenues in the second and third quarters
of the calendar year and the lowest portion of its revenues in the fourth
quarter. Eckler's is particularly dependent on sales to Corvette enthusiasts
during the spring and summer months.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would increase the interest expense
related to the Company's existing debt. The Company cannot seek to limit this
risk by increasing interest rates earned on its finance contracts since the
interest charged is at or near the maximum permitted under Florida law. To
date, inflation has not had a significant impact on the Company's operations.
YEAR 2000
At the beginning of the third quarter of 1996, the Company's primary
operating system and its peripherals were made Year 2000 compliant. All of
Eckler's existing core applications are to be modified and tested for Year 2000
compliance no later than the last quarter of 1998. All new computer systems and
software installations, including the computer systems of the Company's
subsidiaries other than Eckler's, are currently Year 2000 compliant. All other
systems including the Company's local and wide area networks, telephone
systems, uninterruptible power supply systems and historical information are or
are expected to be in compliance no later than the fourth quarter of 1998. The
Company continues to evaluate other computerized equipment to include security
systems, fire control systems and power control systems, to determine whether
they are Year 2000 compliant. The anticipated expense associated with the year
2000 compliance project will not include additional hardware cost or external
staffing. The Company's computer systems and software are generally new and are
Year 2000 compliant. All of the Company's systems are expected to be in
compliance by the end of 1998. The Company is taking into account whether third
parties with which the Company has material relationships are Year 2000
compliant. In addition, the Company will develop contingency strategies, as
appropriate, in the event the Company encounters a Year 2000 compliance problem
in its own, or in a third party vendor's, software applications.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
statements issued to the public. Both FAS 130 and FAS 131 are effective for
periods beginning after December 15, 1997. Adoption of FAS 130 is not expected
to have a material adverse effect on the Company's financial statements. The
Company elected early adoption of FAS 131 during the three months ended March
31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the balance sheet and
to measure them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Historically, the Company has not entered into derivatives
contracts either to hedge
37
<PAGE>
existing risks or for speculative purposes. Accordingly, the Company does not
expect adoption of the new standard on January 1, 2000 to affect its financial
statements.
MARKET RISK
The Company does not invest or trade in foreign currency or commodity
transactions which would ordinarily be subject to market risk. The interest
rate on the Company's borrowings is generally based on the prime rate.
Accordingly, a significant increase or decrease in the prime rate could affect
the Company's earnings in the future. The Company believes, however, that its
financial instruments are disclosed at their fair values. Fair value estimates
are made at a specific point in time and are based on relevant market
information and information about the financial instrument; they are subjective
in nature and involve uncertainties and matters of judgment and, therefore,
cannot be determined with precision. These estimates do not reflect any premium
or discount that could result from offering for sale at one time the Company's
entire holdings of a particular instrument. Changes in assumptions could
significantly affect these estimates. Since fair value estimates are as of a
particular date, the amounts that will actually be realized or paid in
settlement of the instruments could be significantly different.
The carrying amount of cash and cash equivalents is assumed to be the fair
value due to the liquidity of these instruments. The carrying amount of the
finance receivables is assumed to be the fair value due to the relative short
maturity and repayment terms of the portfolio as compared to similar
instruments. The carrying amount of accounts payable and accrued expenses
approximates fair value due to the short maturity of these instruments. The
terms of the Company's notes payable approximates the terms in the market place
at which they could be replaced. Therefore, the fair value approximates the
carrying value of these financial instruments.
38
<PAGE>
BUSINESS
GENERAL
Smart Choice Automotive Group, Inc. currently operates 20 stores in
Florida that sell used cars under the "First Choice" brand name. The Company's
First Choice cars are three to six years old, have less than 80,000 miles and
have undergone thorough inspection, reconditioning and, as necessary, repair.
The Company also sells used cars that may not meet the First Choice criteria
through four additional stores in Florida that operate under the "Team" brand
name. Through its finance company subsidiary, the Company (referred to herein
as a "self-financed" retailer of used cars) provides financing for its
customers by originating retail automobile installment sales contracts secured
by the cars it sells ("finance receivables" or "finance contracts"). The
Company's customers typically have limited credit histories, low incomes and/or
past credit problems ("credit-impaired"). The Company intends to expand
primarily by opening additional used car stores in Florida and extending its
operations into other areas of the southeastern United States. The Company's
objective is to become the leading self-financed retailer of used cars in the
southeastern United States.
Retail sales of new and used cars in the United States totaled
approximately $673 billion in 1997. Used cars represented approximately 75% of
cars sold in the United States and 55% of total sales in 1997, with
approximately 41 million used cars sold at an average price of $9,029 per unit.
Retail sales of used cars in Florida in 1997 totaled more than $24.4 billion
(over 2 million vehicles). Approximately 36% of Florida's used car sales in
1997 (not including sales of used cars at new car dealerships) occurred at
approximately 2,800 self-financed used car stores.
Management believes that the quality and reliability of the Company's
First Choice cars (i) reduce the probability of product failure (which
management believes is a leading cause of defaults on finance contracts in the
Company's industry), (ii) reduce losses on the Company's repossessions of cars
and (iii) define the First Choice brand. Due to the quality and reliability of
its First Choice cars, the Company is able to provide a 24 month/24,000 mile
service contract to its customers, which is underwritten by a third party. The
Company sells used cars at its First Choice stores for an average retail price
of approximately $9,500, including the service contract on all cars sold. The
Company's Team stores generally sell older and higher mileage cars than First
Choice cars. Team cars, which sell for an average retail price of approximately
$7,900, are primarily cars that have been repossessed by the Company, have been
traded in by customers or have not been sold by the First Choice stores within
approximately 180 days. Cars sold at Team stores are covered by a 12
month/12,000 mile service contract.
The Company also manufactures and sells Corvette parts and accessories
through its subsidiary Eckler's, owns two new car dealerships in Florida, sells
insurance and provides dealer training services.
BUSINESS STRATEGY
The Company intends to become the leading self-financed retailer of used
cars in the southeastern United States by capitalizing on its operating
strengths and executing the growth strategy described below.
OPERATING STRENGTHS
SELL RELIABLE, QUALITY CARS. The Company sells reliable, quality used
cars. Management believes that product failure is a leading cause of defaults
on finance contracts in the self-financed used car industry. Generally, the
Company's First Choice cars are models having a good or superior reputation for
quality and reliability, are three to six years old and have less than 80,000
miles. In addition, First Choice and Team used cars have undergone a
comprehensive 110 point inspection, reconditioning and, as necessary, repair at
the Company's reconditioning facilities. Due to the quality, reliability,
condition and age of First Choice cars, the Company is able to provide a 24
month/24,000 mile service contract to
39
<PAGE>
its customers, which is underwritten by a third party, on all First Choice
cars. Cars sold at Team stores, which are generally older and higher mileage
cars, are covered by a similar 12 month/12,000 mile service contract. The
third-party service contracts allow the Company's customers to have their cars
repaired nationally by any one of approximately 375,000 ASE (Automotive Service
Excellence) certified technicians.
UTILIZE CENTRALIZED CREDIT APPROVAL AND STRICT UNDERWRITING PRACTICES. The
Company separates the credit approval function and sales process for its used
cars. Credit review and approval is conducted by experienced finance personnel
at the Company's headquarters, distinct from the sales function. The Company's
credit underwriting process strictly adheres to objective underwriting
standards that have resulted in improved collection experience since February
1997. Underwriting criteria include employment continuity, ties to the local
community, ability to make the monthly payments and names, addresses and phone
numbers of a sufficient number of persons who can verify the credit application
information and would likely know where the applicant could be found in the
event a collection problem arises. The Company regularly reviews its collection
results to assess the effectiveness of its underwriting standards.
APPLY RIGOROUS COLLECTION PRACTICES. The Company diligently and
proactively pursues the collection of its finance receivables while maintaining
a professional, customer-friendly atmosphere. The Company utilizes proven
techniques in the collection process, including telephone calls, letters and
various alternative payment mechanisms to facilitate payment. The Company's
collection policy includes telephoning a borrower if the borrower's payment is
one day late. The Company generally begins repossession procedures when the
customer is two payments past due. Management believes that one of the reasons
the Company generally experiences lower losses on defaults than its competitors
is because the Company acts quickly to repossess cars on which defaults occur.
As of June 30, 1998, 94.7% of the Company's finance receivables were current.
MAXIMIZE RECOVERY ON REPOSSESSIONS. Management believes that the Company
generally experiences lower losses on repossessions than other lenders in the
self-financed used car industry due to (i) the quality of the cars it sells,
(ii) the timeliness of its repossessions and (iii) its ability to remarket
repossessions. The Company believes that its purchasing and reconditioning
expertise results in cars that maintain their quality and value at the time of
repossession. In addition, the speed with which the Company repossesses cars
results in a repossessed car in better condition. Finally, the Company
reconditions and remarkets approximately 70% of its repossessions through its
Team stores, rather than through auctions (where cars are generally sold at
lower prices). These practices allowed the Company to recover 53.2% (on a
retail basis) of the principal amount of loans charged off for the six-month
period ended June 30, 1998.
INCREASE OPERATING EFFICIENCY. Since late 1997, in an effort to increase
operating efficiency by reducing administrative costs and enhancing
administrative functions, the Company has combined certain administrative
functions, such as accounting, treasury, insurance, employee benefits,
strategic marketing and legal support. The Company intends to further increase
its operating efficiency in such areas as advertising, reconditioning, raising
capital and purchasing and transporting inventory.
EMPLOY INTEGRATED MANAGEMENT INFORMATION SYSTEMS. Each used car store is
linked to an integrated computer-based management information system (the
"MIS") that allows the Company to obtain "real time" information on its
operations. The Company uses the MIS to transmit data between its headquarters
and its stores, to evaluate store performance daily, monitor inventory, sales,
costs and customer payments and facilitate the Company's underwriting and
collection of its finance contracts.
PROMOTE FIRST CHOICE BRAND. The Company believes that its First Choice
brand is synonymous with quality cars and customer service. By seeking to
maintain continuity in the appearance of its store locations, the Company
expects to promote its name recognition. The Company attempts to maintain a
consistency between its facilities and its marketing materials through the use
of standardized logos and a white, blue and yellow color theme. The Company
recognizes that the purchase of a car is one of the
40
<PAGE>
most significant purchases that many of its customers will make. Consequently,
the Company focuses on providing professional service, convenient locations and
a diverse inventory selection. The Company provides to customers value-added
programs such as the service contract, rapid turnaround for credit decisions,
financing and convenient financing pre-qualification. By developing customer
loyalty, the Company seeks to generate repeat and referral business.
AVOID THIRD PARTY FINANCE RECEIVABLES. As part of its operating
philosophy, the Company only originates and services finance receivables on
used cars sold at its used car stores and new car dealerships. The Company does
not intend to purchase third party finance receivables.
GROWTH STRATEGY
In order to become the leading self-financed retailer of used cars in the
southeastern United States, the Company intends to open additional First Choice
and Team stores both in geographic markets where the Company currently operates
and in new markets. The choice of store locations in new and existing markets
is based upon the presence of a suitable customer base. The Company's criteria
for opening additional used car stores in existing markets include sufficient
projected incremental sales volume, reconditioning capacity, geographic media
coverage and market share. The Company believes that significant expansion
opportunities satisfying these criteria are available within its existing
markets.
The Company's criteria for opening used car stores in new markets include
the adequacy of radio and television coverage, demographic makeup of the market
(including income level and age of population), availability of qualified
managers, access to an adequate supply of quality used cars and availability of
appropriate store locations. Initially, the stores in new markets will rely
upon access to the Company's existing used car inventory at nearby stores and
reconditioning facilities. As a new market matures, the Company will open a
reconditioning center with sufficient capacity to support growth.
INDUSTRY OVERVIEW
AUTOMOTIVE RETAILING. Retail sales of new and used automobiles in the
United States totaled approximately $673 billion in 1997 compared to $438
billion in 1991. New car sales accounted for approximately $303 billion of the
1997 sales. Used car sales in 1997 were estimated at approximately $370
billion, with approximately $195 billion in sales by new car franchised dealers
and $130 billion in sales by independent dealers, many of which are
self-financed used car dealerships. From 1991 to 1997, new car retail sales
have grown at an average annual rate of 6.5%, used car retail sales have grown
at an average annual rate of 8.5%, and used car sales at independent
dealerships have grown at an average annual rate of 10.0%. This significant
increase in used car revenue is primarily a result of the average price of a
new car having risen significantly since 1991, and newer, higher quality used
cars now comprise a larger part of the used car market.
USED CAR SALES. Used car sales represented 73% of all cars sold in the
United States in 1997. Approximately 41 million used cars were sold for $370
billion, representing 55% of the total dollar value of the car market. Retail
sales of used cars in Florida in 1997 totaled more than $24.4 billion (over 2
million vehicles). Approximately 36% of Florida's used car sales in 1997
occurred at approximately 2,800 self-financed used car stores, which are
separate from used car operations at new car dealerships. Used car retail sales
generally are made by franchised new car dealerships that sell used cars,
independent used car businesses and/or car owners in privately negotiated
transactions. While the used car industry is still highly fragmented,
significant changes in the automotive industry have recently resulted in much
consolidation. It is estimated that the number of independent used car
dealerships has declined from approximately 72,800 in 1991 to approximately
60,500 in 1997. A number of dealership groups, such as Ugly Duckling
Corporation, have begun to acquire a significant number of other dealers,
including dealers in the Company's markets. In addition, several companies, such
as CarMax and AutoNation USA, have opened chains of used car "superstores" that
offer a large variety and a number of used cars at their locations. Others,
such as Auto-by-Tel, are marketing used cars on the Internet. Many new car
dealerships, in an effort to focus on higher margin products, are adding or
enlarging their used car
41
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divisions. In 1997, for example, used cars earned an average gross margin of
11.0% as compared to a new car's average gross margin of 6.4%. In recent years,
the number of cars coming off leases has increased significantly, resulting in
an increased supply of high quality used cars available for sale. These cars
and cars from other sources have become available to franchised new car
dealerships and non-franchised dealers of used cars, resulting in increased
competition in the used car market.
SUB-PRIME AUTO FINANCE. The automobile financing industry is the third
largest consumer finance market in the country (after mortgage debt and credit
card debt) with more than $466 billion in contracts on new and used cars
originated in 1997. The segment of this industry representing borrowers with
"C" and "D" credit profiles accounted for approximately $122 billion of the
overall market in 1997, up from $55.4 billion in 1990. Recent surveys show that
the number of these borrowers has increased to 34.9% in 1997 from 21.8% in 1991
at franchised new car dealers and to 55.8% in 1997 from 39.5% in 1991 at
independent used car dealers. The Company believes that the portion of the
automobile finance market attributable to used car borrowers has grown
significantly in recent years and will continue to grow. Factors contributing
to such growth include (i) the rise in lower skilled service industry jobs,
(ii) the rise in consumer debt and (iii) the increase in sales of used cars
relative to new cars in recent years due principally to increased new car
prices and the number of late model used cars coming off lease.
RECENT GROWTH
The Company's growth has resulted from acquisitions and, more recently
internal growth as reflected in the table below.
USED CAR OPERATIONS:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SOURCE DATE ACQUIRED/OPENED STORES
- -------------------------------------------------------- -------------------- ---------------------- ----------
<S> <C> <C> <C>
Suncoast Auto (part of FFG) Predecessor 1/28/97 3
RC Hill's World of Wheels (part of Liberty Finance) Predecessor 2/12/97 4
225 North Military Trail (part of PBF) Predecessor 2/14/97 1
Roman Fedo Acquisition 6/30/97 1
Strata Holdings, Inc. Acquisition 6/30/97 2
"First Choice" and "Team Stores" Internal Expansion 9/97-7/98 13
--
Total Used Car Stores 24
==
</TABLE>
OTHER BUSINESS OPERATIONS:
<TABLE>
<CAPTION>
COMPANY NAME SOURCE DATE ACQUIRED PRINCIPAL BUSINESS
- --------------------------------------- ------------- --------------- --------------------------------------
<S> <C> <C> <C>
Eckler's Predecessor 1/28/97 Corvette parts and accessories
Dealers Development Services, Inc. Acquisition 1/28/97 Auto dealership training services
Dealers Insurance Services, Inc. Acquisition 1/28/97 Insurance broker for auto dealerships
Jack Winters Enterprises, Inc. Acquisition 8/21/97 Volvo new car dealership
B&B Florida Enterprises, Inc. Acquisition 8/29/97 Nissan new car dealership
</TABLE>
1997 RESTRUCTURING
In late 1997, management undertook a comprehensive evaluation of its
business in order to improve earnings and address the Company's operational and
liquidity needs. As a result, management determined to emphasize used car
sales, which typically have higher gross margins than new car sales.
Accordingly, the Company terminated all plans to acquire or open new car
dealerships in early December 1997 and began to focus on achieving operational
efficiencies at the used car stores that the Company had acquired or opened
during 1997.
42
<PAGE>
The Company implemented the following changes to focus its business
strategy and to achieve certain operational efficiencies.
/bullet/ The Company took one-time charges in the fourth quarter of 1997
relating to acquisition expenses and severance payments.
/bullet/ Corporate headquarters personnel was reduced by approximately 15%
in the fourth quarter of 1997.
/bullet/ A Company-wide budget was prepared and implemented and, in
addition, "flash reports" were developed for the Company's
divisions beginning January 15, 1998. These flash reports provide
key information daily and are used to monitor business operations
and results on a regular basis.
/bullet/ In late 1997, the Company began maintaining a "static pool"
analysis that established a benchmark for analysis of the quality
of the Company's finance receivable portfolio.
/bullet/ The Company's finance subsidiary, FFG, expanded its loan portfolio
to $62.2 million as of June 30, 1998, while establishing and
maintaining underwriting procedures that have resulted in 94.7% of
the finance contracts being current (30 days or fewer past due).
/bullet/ The Company restructured certain debt obligations in late 1997 and
in the first quarter of 1998. The debt restructuring included
expanded financings for key areas of the business as well as
negotiating conversions of some debt instruments into equity and
refinancing obligations with maturities in 1998.
SELF-FINANCED USED CAR STORES
The Company currently owns and operates 20 self-financed used car stores
under the First Choice name and 4 used car stores under the Team name. Cars
that have less than 80,000 miles are placed at First Choice locations, while
cars that have more than 80,000 miles (usually repossessions or trade-ins) are
placed at Team stores. The Company's used car stores are divided into three
regions (the Tampa-St. Petersburg, Orlando and West Palm Beach, Florida
metropolitan areas), and each region is managed by a regional manager. Each
store is managed by a sales manager who oversees a sales staff. The Company
upgrades the facilities it acquires with fresh exterior and interior paint and
new signage (with an emphasis on the blue, yellow and white colors of First
Choice), replaces furniture and fixtures as necessary to be similar to the
existing locations and installs upgraded computer systems.
The Company's First Choice stores generally maintain an approximate
average of 90 used cars (ranging from 50 to 125) per store, featuring a wide
variety of makes and models (with ages generally ranging from three to six
years) and a range of sale prices, all of which enable the Company to meet the
preferences and budgets of a wide range of potential customers. The Company
believes that by selling higher quality used cars and providing a service
agreement to cover major repairs, improved customer satisfaction and fewer
defaults on finance contracts result.
The Company provides, through a third-party underwriter, a 24 month/24,000
mile service contract with each used car sold at a First Choice store and a 12
month/12,000 mile service contract to purchasers of the Company's Team cars.
Under the service contracts, which are underwritten by a third party, the
Company's customers may have their First Choice or Team cars repaired
nationally by any one of approximately 375,000 ASE (Automotive Service
Excellence) certified technicians. The Company does not perform any repairs
under these service contracts. These service contracts cover most major repairs
due to mechanical breakdown or failure. Customers are responsible for payment
of up to a $100 deductible during each repair visit under the service contract.
The Company acquires its used cars primarily at auto auctions. All cars
are subjected to a 110 point inspection program, reconditioning and, as
necessary, repair at the Company's reconditioning facilities.
43
<PAGE>
The Company outsources all painting and body work. The Company invests
approximately $300 per car in repairs prior to delivering the cars to the
individual stores for sale. The Company's regional managers determine the
number and types of cars for the stores in their regions. If a car is not sold
in 90 days, it is moved to another First Choice store in the same region for an
additional 90 days, after which, if not sold, it is moved to a Team location or
sold wholesale to other dealers.
RECONDITIONING CENTERS. The Company uses two reconditioning centers in its
used car operations. Both centers process used cars through the Company's 110
point inspection, perform minor body work and apply detailing, as necessary.
The main reconditioning facility, based in Lakeland, Florida, has total square
footage of 31,286 and is located on a 6.7 acre parcel. As of June 30, 1998, the
Lakeland operation had 20 bays and was capable of reconditioning approximately
1,500 cars per month. The Company believes that the parcel of land could be
used to expand reconditioning capacity by adding more bays. The Lakeland
facility also contains the Company's off-site disaster recovery operations
center.
In addition to the main facility, the Company uses a second center at its
Nissan dealership in Stuart, Florida. This reconditioning operation uses 7 of
the dealership's 14 bays in a facility which has total square footage of 25,940
and has the capacity to recondition approximately 250 cars per month.
MARKETING AND SALES. A primary focus of the Company's marketing strategy
for its used car stores is its ability to finance consumers with poor credit
histories. The Company has initiated marketing programs designed to attract
credit-impaired customers, assist such customers in re-establishing their
credit, reward those customers who pay on time, develop customer loyalty and
increase referral and repeat business. The Company created value-added programs
for its customers including providing quality cars through a comprehensive
inspection and refurbishment program, a service agreement on all used cars sold
at the Company stores, rapid loan application processing and pre-qualification
over the telephone by calling a toll-free number. The Company reports monthly
to credit bureaus, allowing customers the opportunity to work toward
re-establishing their credit while providing an avenue for them to purchase
newer cars as their credit improves.
In general, the Company's advertising for its used car stores emphasizes
its multiple locations, wide selection of quality used cars, ability to provide
financing to many credit-impaired borrowers and additional value-added programs
such as service agreements and loan pre-qualifications. The Company advertises
extensively in the radio and television media. In addition, management believes
that the Company's upgraded facilities provide effective advertising and
attract drive-by traffic to visit the stores because their appearance fosters
the image of a used car store that offers quality cars. The Company believes
that its advertising and marketing approach creates brand name recognition and
promotes its image as a professional, customer oriented business.
The Company utilizes various telemarketing programs to promote its used
cars. For example, potential customers are contacted within several days of
their visit to a Company store to follow up on leads and obtain information
regarding their experience while at a Company store. In addition, used car
customers with satisfactory payment histories are contacted several months
before contract maturity and are offered an opportunity to purchase another car
with a nominal down payment requirement or to move up to a newer car at one of
the Company's new car dealerships if the customer has improved credit.
The Company employs a dedicated on site sales force. The Company
continually seeks to develop and retain qualified salespersons. The
salesperson's sole responsibility is the sale of cars. The salespersons who
sell used cars do not in any way participate in the financing aspects of the
sale. The Company employed 127 full-time salespersons at its used car stores as
of June 30, 1998. The salespersons are compensated primarily through
commissions.
COMPETITION. The used car business in which the Company competes is highly
fragmented and very competitive. The Company may face increased competition
from automobile consolidators such as
44
<PAGE>
Ugly Duckling Corporation and "superstores" such as CarMax and AutoNation USA.
Others, such as Auto-By-Tel, Calling All Cars, AutoVantage and Auto Web
International are marketing cars on the Internet. In addition, certain regional
and national car rental companies have begun to operate retail used car lots to
dispose of their used rental cars. Many of these competitors have significantly
greater financial, marketing and other resources than the Company.
The used car superstores typically use a mega-dealer approach with
substantial investments in real estate and extensive inventory at each store.
In contrast, the Company maintains several medium to large stores in each of
its marketing areas. The Company believes that by covering more territory with
multiple locations in a market area rather than having one superstore serving a
large geographic area, the Company's stores are more easily accessible to a
wider population and the Company benefits from more visibility in its market
area. Also, the existence of multiple locations gives the Company greater
flexibility in responding to a change in market conditions.
The Company's used car stores do not directly compete with superstores
such as CarMax or AutoNation which offer newer, more expensive cars than the
Company sells and do not target credit-impaired borrowers. Of the large
companies that have entered the credit-impaired car business, only Ugly
Duckling Corporation has announced an intention to focus on the credit-impaired
borrower. However, the Company believes that it competes effectively with the
other self-financed dealers and can compete effectively with Ugly Duckling
Corporation because the Company's cars are generally newer, lower mileage cars.
Further, the Company provides each customer with a service agreement on each
used car sold at the Company's stores. The Company distinguishes its direct
sales and financing operations from those of typical self-financed used car
retailers by providing multiple locations, upgraded facilities, large
inventories of used automobiles, centralized purchasing, value-added marketing
programs and dedication to customer service. In addition, the Company has
developed underwriting guidelines and techniques to facilitate rapid credit
decisions, as well as an integrated, technology-based corporate infrastructure
that enables the Company to monitor and service its finance contracts. The
Company believes that it is the largest used car store chain in Florida that
focuses on credit-impaired customers.
The credit-impaired segment of the used car financing business is also
highly fragmented and very competitive. In recent years, several consumer
finance companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of finance
contracts. In addition, there are numerous financial services companies
serving, or capable of serving, this market. While traditional financial
institutions, such as commercial banks, savings and loans, credit unions and
captive finance companies of major automobile manufacturers, have not
consistently serviced credit-impaired borrowers, the high rates of return
earned by companies involved in credit-impaired financing have encouraged
certain of these traditional institutions to enter, or contemplate entering,
this market.
FINANCING CUSTOMERS WITH IMPAIRED CREDIT
The Company offers financing to its customers who purchase used cars at
its used car stores and its new car dealerships. The Company does not have any
loans from persons who are not customers except for finance contracts purchased
in the Company's used car dealership acquisitions. The Company has established
a policy not to acquire third party originated finance contracts. It provides
financing only for its own customers, thereby relying on its own underwriting
standards and not those of third parties. Sales and financing are separate
functions performed by different Company subsidiaries. All credit and financing
review and decisions are made by experienced financing personnel at the
Company's headquarters. The Company uses a standardized sales contract that
typically provides for down payments of approximately 10% of the purchase price
with the balance of the purchase price financed at an average annual percentage
rate of approximately 26% over periods ranging from 12 to 48 months. The
Company finances approximately 95% of the used car sales through finance
contracts that the Company originates and services.
45
<PAGE>
CUSTOMER CREDIT PROFILE. The Company targets customers with "C" or "D"
credit profiles. A "C" rated consumer may have an inconsistent employment
record or unresolved problems with credit in the past. This borrower will
generally not be able to obtain a loan to finance a late model or older used
car purchase from a captive finance subsidiary or a bank otherwise available to
customers with "A" or "B" credit ratings. A "D" rated consumer has an
unfavorable employment history and other credit problems, such as personal
bankruptcy. This borrower's primary choice is to finance his or her used car
purchase, which is often from a self-financed used car store, through an
independent finance company that is active in this market segment. Based on a
random sample by the Company of its loan portfolio in October 1997, the
Company's average customer (at the time such customer applies for or is
originally approved for credit) has gross annual household income of
approximately $30,000, and an average length of employment at his or her
current job of approximately 3.3 years and has resided in the same area for
approximately 4.9 years.
CREDIT EVALUATION PROCEDURES. The Company applies uniform underwriting and
credit approval standards in originating its used car loans. The most important
criteria the Company uses in evaluating a loan are the applicant's
creditworthiness, the collateral value of the car, employment and residence
histories, income information, personal references, income and expense
information and credit bureau reports. The sales managers at the Company's used
car stores submit the customer's credit application to the Company's
headquarters in Titusville, Florida, where the customer's creditworthiness is
analyzed. The Company utilizes a credit evaluation system it developed to
determine a customer's creditworthiness. Financing decisions are made by an
experienced loan staff with a minimum of five-years of experience and an
average of ten years of experience in car financing. For applicants who fall
outside of the guidelines, the ultimate financing determination is made by
senior management. Further, members of senior management regularly review
credit decisions made by the Company's employees to assure uniformity in
underwriting standards. Periodically, the Company retains credit underwriting
consultants to review the Company's loan quality, collection and underwriting
procedures and recommend areas for improvement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Credit Losses"
for information about the Company's loan loss and delinquency experience.
CONTRACT SERVICING. The Company services its finance contracts through the
use of servicing procedures which have been specifically tailored to the
Company's customers and include: (i) monitoring loans and related collateral,
(ii) accounting for and posting all payments received, (iii) responding to
borrowers' inquiries, (iv) taking all necessary action to maintain the security
interest granted in the financed automobile, (v) investigating delinquencies
and communicating with borrowers to obtain timely payments, (vi) pursuing
deficiencies on loans, and (vii) when necessary, repossessing the financed
automobile.
COLLECTION POLICY. The Company is strict in its collection policies,
believing that by acting promptly and working with the customers, the Company
is able to minimize its loss exposure. The Company employs a credit counselor
in each of its major market areas to work directly with delinquent customers,
and the Company also maintains regional payment centers so customers can pay by
cash rather than send checks through the mail. Approximately 60% of the
customer payments are received through the regional payment centers. The
Company begins collection efforts when an account balance becomes one day past
due. Generally, the Company's policy is to work with the customer to permit the
customer to keep the automobile and continue making payments, and to take more
aggressive action if the customer fails to continue making payments.
REPOSSESSIONS. The Company begins the process of repossession when two
payments are past due. Repossessions are handled by independent licensed,
bonded and insured repossession firms engaged by the Company. The Company
reconditions and remarkets approximately 70% of its repossessions through the
Company's Team stores, rather than through auctions (where cars are generally
sold at lower prices). These practices allowed the Company to recover 53.2% (on
a retail basis) of the principal amount of loans and accrued interest charged
off for the six-month period ended June 30, 1998.
46
<PAGE>
COMPETITION. The market for financing credit-impaired customers is highly
competitive. The Company's competitors include local, regional and national
automobile dealers, used car finance companies and other sources of financing
for automobile purchases, many of which are larger and have greater financial
and marketing resources than the Company. Historically, commercial banks,
savings and loan associations, credit unions, captive finance subsidiaries of
automobile manufacturers and other consumer lenders have not competed for
financing for credit-impaired used car buyers. During the past two years,
however, several companies, including large, well-capitalized public companies,
have devoted considerable resources to acquisitions in the Company's market for
credit-impaired customers.
THIRD PARTY FINANCE RECEIVABLES AND ACCOUNTING. As part of its operating
philosophy, the Company only originates and services finance receivables on
used cars sold at its used car stores and new car dealerships. The Company does
not intend to purchase receivables not originated by the Company.
NEW CAR DEALERSHIPS
The Company owns and operates two new car dealerships in Stuart, Florida,
a Nissan and a Volvo dealership. The Company purchased these new car
dealerships before it determined to focus on used car sales. The Company does
not intend to purchase any additional new car dealerships.
The Company sells new and used cars at the new car dealerships and
provides parts and services. The Company emphasizes customer satisfaction
throughout its new car dealerships. The customer satisfaction surveys sent by
the manufacturers to the Company's new car customers enhance the Company's
ability to maintain its customer satisfaction. Advertising and marketing play a
significant role in the success of the Company's new car sales. The Company
advertises new car sales primarily through the print media. The manufacturers
advertise in the print and radio media.
The new car dealership business in which the Company operates is highly
competitive. The Company principally competes in this business with other new
car dealerships, ranging in size from the independent dealer selling fewer than
25 cars per year to the large, well-capitalized new car dealership chains that
are significantly bigger than the Company. Also, the Company's franchise
agreements with manufacturers do not give the Company the exclusive right to
sell the manufacturer's product within a given geographical area. Accordingly,
a manufacturer could grant another dealer a franchise to start a new dealership
in close proximity to either of the Company's locations or an existing dealer
could move its dealership to a location which would be directly competitive
with the Company.
CORVETTE PARTS AND ACCESSORIES
The Company, through Eckler's, is a manufacturer and supplier of
aftermarket Corvette parts and accessories. For the year ended December 31,
1997, and the six months ended June 30, 1998, Eckler's accounted for
approximately 22.4% and 14.3%, respectively, of the Company's revenues. The
Company expects that Eckler's revenues, as a percentage of overall revenue,
will continue to decrease as the Company expands its used car operations.
The Company has 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, sell, distribute and market numerous parts discontinued by GM
which the Company may sell under the GM Restoration Parts trademark for various
Corvette model years.
SALES AND DISTRIBUTION METHODS. Eckler's generates revenues through
catalog sales and, to a lesser extent, showroom sales. The Company markets
approximately 17,000 items through the Eckler's catalog. In late 1997, the
Company began to distribute its catalog semiannually instead of annually. The
Company also markets Corvette products from its 5,000 square foot Titusville,
Florida showroom, advertises in magazines and trade publications and sponsors
various promotional programs. The Company also distributes approximately 30,000
copies of its catalog through newsstands.
47
<PAGE>
SOURCING AND PRODUCTION. A majority of the Company's Corvette products are
obtained from many independent manufacturers and distributors. The Company
sources its GM Restoration Parts through third-party manufacturers and the
purchase of discontinued parts directly from GM. The Company has over 400
Corvette product suppliers with no single source accounting for more than 5% of
purchases, except for Bob Steele Chevrolet, which accounted for approximately
14% of purchases in 1996. Of Eckler's approximately 95,000 customers, no single
customer accounted for more than 5% of its total revenues during 1997.
COMPETITION. The Company competes directly with a number of local,
regional and national suppliers of aftermarket Corvette automotive parts. The
Company has identified seven primary competitors.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information system allows the Company to manage
its operations uniformly and efficiently through "real time" information.
Utilizing its MIS, the Company is able to bar code inventory, track sales and
costs, and provide its stores access to inventory available at other Company
stores from one integrated platform. The Company also employs financial
software to facilitate the Company's underwriting and credit approval process,
track collections and monitor its loan portfolio. The Company has assimilated
loan tracking software utilized by the finance companies it acquired in
connection with acquisitions of self-financed used car dealerships. The Company
has installed financial software for its finance contracts that will integrate
all loan monitoring and servicing functions into one uniform system. The
Company has a recovery system in the event of a natural disaster (e.g.,
hurricanes, tornadoes, fire, lightning) under which all systems can be rerouted
to a remote location and be fully operational within 24 hours. The Company has
the ability to customize and upgrade its software in-house with its own staff
of MIS personnel and to trouble-shoot any interruptions that may occur. The
Company foresees no material problems in becoming Year 2000 compliant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
INSURANCE
The Company has developed a program offering collision and liability
insurance to its used car customers as well as credit life insurance.
REGULATION, SUPERVISION AND LICENSING
The Company's operations are subject to ongoing regulation, supervision
and licensing under various federal, state and local statutes, ordinances and
regulations. Among other things, these laws require that the Company obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company typically charges interest rates ranging from 25.0% to 29.9%
per annum on the finance contracts originated at its used car stores.
Currently, all of the Company's used car sales activities are conducted in, and
its finance contracts are originated in, Florida, which limits the interest
rate that a lender may charge. The Company may expand its operations into other
states that also impose interest rate limits.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company does not have any registered trademarks or service marks other
than "Eckler's." Under certain license agreements with GM, the Company is
licensed to use the GM Restoration Parts
48
<PAGE>
label on discontinued Corvette parts it manufactures or acquires under the GM
Agreement. The Company also has the non-exclusive right to use certain GM
trademarks (e.g., "CORVETTE" and Corvette body designs) under certain trademark
and licensing agreements, in connection with the manufacture, sale, promotion
and distribution of pre-approved accessory, novelty, gift and apparel items.
EMPLOYEES
At June 30, 1998, the Company employed 498 persons, of which 74 were
employed in the Company's executive and administrative offices, 273 were
employed in its Company dealership operations, 62 were employed in the
Company's credit and collection activities, and 89 were employed by Eckler's.
None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
PROPERTIES
The Company owns approximately 5.6 acres of real property at its main
facilities in Titusville, Florida. Three buildings comprise the Company's main
facilities--an administrative building, a manufacturing facility and a
warehouse and shipping facility--with total square footage of 87,825. The
Company also owns 5.3 acres of undeveloped property adjacent to its main
facilities, as well as a First Choice store located in Melbourne, Florida.
As of June 30, 1998 the Company leased 27 facilities, consisting of 23
used car stores, two new car dealerships, office space in Tampa, Florida, and
its main reconditioning facility in Lakeland, Florida. The other reconditioning
facility is leased as part of the Stuart Nissan new car dealership. The lease
on the Lakeland reconditioning facility is being extended for a three year term
until August, 2001, with renewal provisions for a three year, followed by five
one year, terms. The lease at the Volvo dealership expires in 2004, while the
lease for the Nissan dealership expires in 2003.
The rent expense on the Company's facilities was approximately $799,000
for the six months ended June 30, 1998, and $1.3 million for the twelve months
ended December 31, 1997. See "Certain Relationships and Related Transactions."
LEGAL PROCEEDINGS
The Company is involved in legal and administrative proceedings in the
ordinary course of business. The Company believes that none of these actions
will have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of all
directors and executive officers of the Company as of June 30, 1998. Also set
forth below is information as to the principal occupation and business
experience for each individual.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
- -------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Robert J. Abrahams 71 Chairman of the Board and Director
Gary R. Smith 45 President, Chief Executive Officer and Director
Ronald W. Anderson 51 Executive Vice President and Chief Operating Officer
Joseph E. Mohr 32 Executive Vice President and Chief Financial Officer
Joseph A. Alvarez 43 Executive Vice President and Chief Sales Officer
Robert J. Downing 41 Senior Vice President and Chief Legal Officer
Lewis H. Berman 58 Director
Jeffrey D. Congdon 55 Director
John W. Holden, Jr. 57 Director
Craig Macnab 42 Director
Gerald C. Parker 55 Director
Donald A. Wojnowski, Jr. 38 Director
</TABLE>
Robert J. Abrahams has been Chairman of the Board and a director of the
Company since 1997. For the past ten years, Mr. Abrahams has been self employed
as an independent consultant in the financial services industry. Mr. Abrahams
also serves on the Board of Directors of two public companies, HMI Industries,
Inc. and Ugly Duckling Corporation, and six private, independent consumer
finance companies. Prior to that time, Mr. Abrahams spent 28 years with Heller
Financial Corporation ("Heller"), an international financial services company,
in charge of its consumer finance activities. Mr. Abrahams held various titles
at Heller, including Executive Vice President from 1985 to 1988. Mr. Abrahams
serves as a member of the Executive Committee and Compensation Committee of the
Board of Directors of the Company.
Gary R. Smith has been the President, Chief Executive Officer and a
director of the Company since 1997. From 1990 until the Predecessor
Acquisition, Mr. Smith was the President, Chief Executive Officer and owner of
Florida Finance Group, Inc. Mr. Smith also served, from 1981 until the
Predecessor Acquisition, as the President, Chief Executive Officer and owner of
Suncoast Auto Brokers, Inc., an automobile dealership, and Suncoast Auto
Brokers Enterprises, Inc., a used car dealership. Mr. Smith served as President
of the Florida Independent Automobile Dealers Association in 1993 and currently
serves as a member of that association's Board of Directors. Mr. Smith also
serves as a member of the Board of Directors of the National Independent
Automobile Dealers Association. Mr. Smith serves as a member of the Executive
Committee of the Board of Directors.
Ronald W. Anderson joined the Company as Executive Vice President and
Chief Operating Officer in 1997. From June 1996 to March 1997 he was Vice
President of Marketing for North American Mortgage Insurance Group. From 1989
through June 1996, he served as Executive Vice President for Operations of the
Riverside Group, a diversified holding company, the business of which included
real estate, insurance and retail building supplies.
Joseph E. Mohr joined the Company as its Senior Vice President and Chief
Financial Officer in 1997 and was promoted to Executive Vice President in 1998.
From 1994 through 1997, Mr. Mohr was a management consultant with Gemini
Consulting, and from 1991 through 1994, he was a Senior Business Operations
Specialist with Heller Financial Corporation. Mr. Mohr is a certified public
accountant and practiced with Arthur Andersen LLP from 1988 to 1991. Mr. Mohr
holds a Masters degree in Business Administration from the University of
Chicago.
Joseph A. Alvarez has served as Executive Vice President of the Company
since 1997, in which capacity he is in charge of the Company's automobile sales
activities. Prior to joining the Company,
50
<PAGE>
Mr. Alvarez was general manager of the following factory franchised new car
dealerships: Lokey Automobile Group (1996-1997), Carlisle Motors (1994-1996),
and Dimmitt Cadillac (1988-1994).
Robert J. Downing joined the Company as Senior Vice President and Chief
Legal Officer in 1998. From 1990 to present, he has been the principal
shareholder in Downing & Associates, a law firm with offices in Miami, Florida
and previously in Albuquerque and Santa Fe, New Mexico. Mr. Downing also acted
as of counsel to Cohen & Cohen, P.A., a Santa Fe, New Mexico law firm, from
1994 until 1997 and as of counsel to Montgomery & Andrews, P.A., an
Albuquerque, New Mexico law firm, from 1991 until 1992. Mr. Downing holds a
Juris Doctor degree from Columbia University School of Law and a Masters degree
in Business Administration from Columbia University Graduate School of
Business.
Lewis H. Berman was appointed a director of the Company in 1998 and
currently serves as a member of the Audit Committee of the Board of Directors.
Mr. Berman, a certified public accountant, founded Berman, Hopkins, Wright,
Arnold, Laham LLP, an accounting and business consulting firm with offices in
Merritt Island and Melbourne, Florida, in 1964. Mr. Berman retired as managing
partner of such firm in January 1996.
Jeffrey D. Congdon was appointed a director of the Company in 1998 and
currently serves as a member of the Audit Committee of the Board of Directors.
Mr. Congdon has been Vice Chairman of the Board of Directors of Budget Group,
Inc. since January 1991. From January 1991 to November 1997 he also served as
the Budget Group, Inc.'s Chief Financial Officer. Since December 1990, he has
been Secretary, Treasurer and a director of Tranex Credit Corporation. From
1980 to 1989, he was an executive officer and principal shareholder of
corporations that owned and operated 30 Budget Car Rental franchises that were
sold to Budget Rent a Car Corporation in 1989. From 1982 to 1996, Mr. Congdon
owned and operated retail new and/or used car sales operations in Indianapolis,
Indiana.
John W. Holden, Jr. was appointed a director of the Company in 1998. Since
1974, Mr. Holden has been President and Chief Executive Officer of Pioneer
Credit Company, a consumer finance company.
Craig Macnab was appointed a director of the Company in 1997. Since 1997,
Mr. Macnab has been President of Tandem Capital, which provides growth capital
to small, rapidly growing public companies with market capitalizations below
$100 million. Mr. Macnab also serves on the Board of Directors of five public
companies, Clinicor, Inc., Teltronics, Inc., Environmental Tectonics
Corporation, JDN Realty Corp. and Digital Transmission Systems, Inc. From 1993
until 1996, he was a partner in J.C. Bradford & Co., a securities firm. Mr.
Macnab also serves on the Compensation Committee and Audit Committee of the
Board of Directors. Tandem Capital is an affiliate of Sirrom Capital
Corporation, which holds $7.5 million in convertible notes of the Company and
other securities exercisable for the Company's Common Stock.
Gerald C. Parker has been a director of the Company since 1997. For the
past ten years, Mr. Parker has been involved in the structuring and funding of
start-up companies. Since 1998, Mr. Parker has served as President of
Investment Management of America, Inc., a merger and acquisition firm. Mr.
Parker also serves as a director of LRG Restaurant Group, Inc., a publicly
traded company. Mr. Parker serves as a member of the Compensation Committee of
the Board of Directors.
Donald J. Wojnowski, Jr. has been a director of the Company since 1996.
Since 1992, he has been a stockbroker and registered principal of Empire
Financial Group, Inc., a securities broker-dealer firm. Mr. Wojnowski serves as
a member of the Executive Committee of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has a standing Executive Committee,
Compensation Committee and Audit Committee. The Executive Committee acts on
certain matters provided by law in lieu of action by the full Board of
Directors. The Compensation Committee makes recommendations to the Board of
Directors regarding salaries, incentives and other forms of compensation for
executive
51
<PAGE>
officers, directors and employees of the Company. The Audit Committee reviews
the Company's accounting practices, internal accounting controls and financial
results and oversees the engagement of the Company's independent auditors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services rendered in all capacities to the Company
during the 1997, 1996 and 1995 fiscal years of those persons who were, at
December 31, 1997: (i) the Chief Executive Officer of the Company, (ii) the
Company's four most highly compensated executive officers other than the Chief
Executive Officer who were serving as executive officers at December 31, 1997,
and (iii) those former executive officers of the Company who would have been
included under (ii) but for the fact that they were not executive officers of
the Company at December 31, 1997 (the "Named Executive Officers"). The annual
salary information in the table below is for 1997, except for the information
for Ralph H. Eckler, which is for 1997, 1996 and 1995. None of the Named
Executive Officers served for all of 1997, and, therefore, salary amounts for
1997 do not reflect salary for a full year.
<TABLE>
<CAPTION>
LONG-TERM OTHER
ANNUAL COMPENSATION COMPENSATION(1) COMPENSATION
------------------------------------------- ------------------- -----------------
SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
- -------------------------------------- ------ --------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Robert J. Abrahams 1997 $ 110,819 -- 111,250
Chairman of the Board
Gary R. Smith 1997 217,851 -- 151,250
President and Chief Executive Officer
Ronald W. Anderson 1997 115,328 -- 43,513
Executive Vice President and
Chief Operating Officer
Joseph E. Mohr 1997 37,073(2) -- 38,513
Executive Vice President and
Chief Financial Officer
Joseph A. Alvarez 1997 113,010 $ 50,000(3) 52,500
Executive Vice President
Ralph H. Eckler 1997 140,116 -- 150,000(4) $ 114,069(5)
Former President and 1996 100,000 52,500
Chief Executive Officer 1995 105,776
Fred E. Whaley 1997 153,263 -- 250,000(6)
Former Executive Vice President and
Chief Financial Officer
</TABLE>
- ----------------
(1) Adjusted to reflect a 1-for-2 reverse split of the Company's Common Stock
which will be effected prior to the consummation of the Offering.
(2) Represents compensation beginning September 22, 1997.
(3) Mr. Alvarez's employment agreement provides for a bonus payment at the end
of each fiscal year of $50,000, which the Company paid in 1998.
(4) Includes 25,000 securities underlying options originally granted to Mr.
Eckler in 1996 that were repriced in 1997.
(5) Represents a $100,000 fee paid in advance for consulting services and the
value of an automobile conveyed to Mr. Eckler pursuant to the Release
Agreement (as defined herein). See "Certain Relationships and Related
Transactions."
(6) The Company has asserted in litigation with Mr. Whaley that these grants
have been rescinded.
52
<PAGE>
OPTION GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR
Various stock option plans and arrangements are in effect that provide
options to purchase Common Stock as compensation to executive officers,
directors and employees of the Company. The following table sets forth
information regarding stock options granted during 1997 to the Named Executive
Officers and is adjusted to reflect a 1-for-2 reverse split of the Company's
Common Stock, which will be effected prior to the consummation of the Offering.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS MARKET OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE PRICE AT FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE DATE OF EXPIRATION ---------------------------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE GRANT(2) DATE 0% 5% 10%
- -------------------- --------------- --------------- ----------- ---------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert J. Abrahams 105,000 10.8% $ 2.00 $ 9.88 12/01/2002 $827,400 $1,114,014 $1,460,214
6,250 0.6 4.00 9.88 03/05/2002 36,750 53,810 74,418
Gary R. Smith 1,250 -- 4.00 9.76 03/24/2002 7,200 10,616 14,642
100,000 10.2 4.00 10.24 03/21/2002 624,000 910,720 1,248,640
50,000 5.2 9.00 9.12 07/29/2002 6,000 133,680 284,160
Ronald W. Anderson 10,000 1.0 4.00 9.76 03/24/2002 57,600 84,928 117,136
15,000 1.5 9.76 03/24/2002 -- 7,200 46,800
12,500 1.3 8.50 9.12 07/29/2002 7,750 39,670 77,290
6,013 0.6 4.00 8.00 12/31/2002 24,050 37,518 53,391
Joseph E. Mohr 17,500 1.8 4.00 12.50 09/19/2002 148,750 210,000 282,188
15,000(4) 1.5 13.00 09/19/2002 -- -- --
6,013 0.6 4.00 8.00 12/31/2002 24,050 45,318 53,391
Joseph A. Alvarez 40,000 4.1 4.00 12.00 04/11/2007 320,000 622,400 1,083,200
12,500 1.3 9.00 07/29/2002 -- 31,500 68,625
Ralph H. Eckler 50,000 5.1 17.50 01/28/2002 -- -- 71,680
50,000 5.1 13.00 09/30/2002 -- 182,000 396,500
25,000 2.6 13.00 01/28/2002 -- 91,000 198,250
25,000(5) 2.6 13.00 01/28/2002 -- 91,000 198,250
Fred E. Whaley(6) 100,000 10.3 4.00 9.76 03/24/2002 576,000 849,280 1,171,360
100,000 10.3 9.76 03/24/2007 -- 614,880 1,551,840
25,000(7) 5.2 03/24/2002
</TABLE>
- ----------------
(1) Except where noted otherwise, options were immediately exercisable upon
grant.
(2) If greater than exercise price.
(3) Gains are reported net of the option exercise price but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in this table will not
necessarily be achieved.
(4) Options vest as follows: 5,000 shares on September 19, 1998; 5,000 shares
on September 19, 1999; and 5,000 shares on September 19, 2000.
(5) Represents options that were repriced from a $20.00 per share exercise
price to a $6.50 per share exercise price.
(6) The Company has asserted in litigation with Mr. Whaley that these grants
have been rescinded.
(7) The terms of the option provide for the exercise price of the option to be
the price to the public in a public offering.
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<PAGE>
AGGREGATE OPTION EXERCISES AND 1997 YEAR END OPTION VALUES
The following table sets forth information concerning stock options
exercised by the Named Executive Officers in 1997 and the value of unexercised
stock options at December 31, 1997 for the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1997(1) AT DECEMBER 31, 1997
ACQUIRED ON VALUE ------------------------------- ------------------------------
NAME EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------- ----------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Abrahams -- -- 111,250 0 $655,000 $0
Gary R. Smith 100,000 $800,000 51,250 0 5,000 0
Ronald W. Anderson 10,000 80,000 33,513 0 24,050 0
Joseph E. Mohr -- -- 38,513 0 94,050 0
Joseph A. Alvarez -- -- 52,500 0 160,000 0
Ralph H. Eckler -- -- 152,500 0 0 0
Fred E. Whaley(2) -- -- 200,000 0 400,000 0
</TABLE>
- ----------------
(1) Adjusted to reflect a 1-for-2 reverse split of the Company's Common Stock
which will be effected prior to the consummation of the Offering.
(2) The Company has asserted in litigation with Mr. Whaley that these grants
have been rescinded.
EMPLOYMENT AGREEMENTS; CONSULTING AGREEMENT
In 1997, the Company entered into employment agreements with Messrs.
Abrahams, Smith, Alvarez, Anderson and Mohr providing for initial base salaries
of $120,000, $250,000, $150,000, $150,000 and $150,000, respectively. In 1998,
the Company entered into an employment agreement with Mr. Downing providing for
an initial base salary of $125,000. Mr. Alvarez's employment agreement provides
for a bonus payment of $50,000 at the end of each fiscal year. The initial term
of Mr. Smith's contract is five years, while the initial terms of the other
contracts are each for three years. Each of the employment contracts is
renewable by either party unless notice of termination is given at least 120
days prior to the renewal period. The salary for each executive is subject to
annual review, and each executive is provided a monthly automobile allowance
ranging from $500 to $700 or is provided the use of an automobile. In addition,
the employment agreements provide for continuation of the executive's base
salary and benefits for the remainder of the contract period if the employee is
terminated without cause prior to the expiration of the contract. The contracts
also contain confidentiality and non-compete covenants.
Under an agreement between the Company and Ralph H. Eckler dated September
30, 1997, Mr. Eckler's employment agreement was terminated and he was retained
as a consultant for five years at a fee of $20,000 per year, which was paid in
advance in October 1997. Under the agreement, Mr. Eckler was granted a five
year option to purchase 50,000 shares of Common Stock exercisable at $13.00 per
share. In addition, pursuant to the terms of the agreement the exercise price
of a previously granted option for 25,000 shares was changed to $13.00 per
share from $20.00 per share. The agreement also provides Mr. Eckler with
certain registration rights for the above-referenced options as well as the
100,000 shares he beneficially owns. The agreement also provides Mr. Eckler
with certain health insurance benefits, the transfer of a Company car to him
and a right of first refusal on the sale of the Company's Corvette parts
business.
DIRECTOR COMPENSATION
The Company compensates its directors who are not employees by granting
them options to purchase shares of the Company's Common Stock. The non-employee
directors receive annual grants of five-year options for 6,250 shares of Common
Stock. In addition, non-employee directors are reimbursed their travel expenses
to attend meetings.
54
<PAGE>
STOCK OWNERSHIP
The following table sets forth information as of June 30, 1998, as
adjusted to reflect a 1-for-2 reverse split of the Company's Common Stock which
will be effected prior to the consummation of the Offering, with respect to the
number of shares of Common Stock beneficially owned by (i) each director of the
Company, (ii) the Named Executive Officers, (iii) all directors and executive
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 the Company's voting
securities. The Company believes that except as otherwise noted, each person
named has sole investment and voting power with respect to the shares of Common
Stock indicated as beneficially owned by such person.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF CLASS PERCENTAGE OF CLASS
NAME OF BENEFICIAL OWNER OWNED(12) PRIOR TO THE OFFERING(1) AFTER THE OFFERING
- ------------------------------------ ------------------ -------------------------- --------------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Gerald C. Parker ................... 1,088,284(2) 16.6% 12.0%
Gary R. Smith ...................... 884,824(3) 13.5 9.8
Robert J. Abrahams ................. 135,195(4) 2.1 1.5
Joseph A. Alvarez .................. 52,500(5) * *
Ronald W. Anderson ................. 37,513(6) * *
Joseph E. Mohr ..................... 38,513(7) * *
Donald A. Wojnowski, Jr. ........... 36,250(8) * *
Robert J. Downing .................. 35,000(9) * *
Craig Macnab ....................... 21,000(10) * *
Jeffrey D. Congdon ................. 16,250(11) * *
Lewis H. Berman .................... 15,000 * *
John W. Holden, Jr. ................ 7,750(12) * *
All executive officers and directors
as a group (12 persons) .......... 1,777,662 27.1 19.6
FORMER EXECUTIVE OFFICERS
Ralph H. Eckler .................... 806,500(13) 12.3 8.9
Fred E. Whaley ..................... 207,500(14) 3.1 2.3
OTHER PRINCIPAL SHAREHOLDERS
Sirrom Capital Corporation ......... 893,506(15) 13.6 9.9
Thomas E. Conlan ................... 654,245(16) 10.0 7.2
</TABLE>
- ----------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant or right. Shares of Common Stock subject to
options, warrants, or rights which are currently exercisable or
exercisable within 60 days are deemed outstanding for computing the
percentage of the person holding such options, warrants or rights but are
not deemed outstanding for computing the percentage of any other person.
(2) The shares shown represent (i) 385,367 shares owned directly, (ii) 50,000
shares underlying presently exercisable rights to acquire Common Stock,
(iii) 60,000 shares underlying a presently exercisable option which Mr.
Parker holds jointly with Thomas E. Conlan and Ralph H. Eckler, (iv) 2,500
shares held in a trust of which Mr. Parker is a co-trustee with Thomas E.
Conlan and (v) 590,417 shares owned by four trusts of which Gerald C.
Parker and Gary R. Smith are trustees and have voting power over the
shares.
(3) The shares shown represent (i) 244,407 shares owned directly, (ii) 50,000
shares underlying presently exercisable rights to acquire Common Stock and
(iii) 590,417 shares owned by four trusts of which Gerald C. Parker and
Gary R. Smith are trustees and have voting power over the shares.
(4) The shares shown represent (i) 15,000 shares owned directly and (ii)
120,195 shares underlying presently exercisable rights to acquire Common
Stock.
(5) The shares shown underlie presently exercisable rights to acquire Common
Stock.
(6) The shares shown represent (i) 10,000 shares owned directly and (ii)
27,513 shares underlying presently exercisable rights to acquire Common
Stock.
55
<PAGE>
(7) The shares shown underlie presently exercisable rights to acquire Common
Stock.
(8) The shares shown represent (i) 13,750 shares owned directly and (ii)
22,500 shares underlying presently exercisable rights to acquire Common
Stock.
(9) The shares shown underlie presently exercisable rights to acquire Common
Stock.
(10) The shares shown represent (i) 8,500 shares owned directly and (ii) 6,250
shares underlying presently exercisable rights to acquire Common Stock.
(11) The shares shown represent (i) 10,000 shares owned directly and (ii) 6,250
shares underlying presently exercisable rights to acquire Common Stock.
(12) The shares shown represent (i) 1,500 shares owned directly and (ii) 6,250
shares underlying presently exercisable rights to acquire Common Stock.
(13) The shares shown represent (i) 591,500 shares owned directly (ii) 152,500
shares underlying presently exercisable rights to acquire Common Stock,
and (iii) 60,000 shares underlying a presently exercisable option which
Mr. Eckler holds jointly with Thomas E. Conlan and Gerald C. Parker.
(14) The shares shown represent (i) 7,500 shares owned directly and (ii)
155,000 shares underlying presently exercisable options to acquire Common
Stock. The Company has asserted in litigation with Mr. Whaley that these
option grants have been rescinded.
(15) The shares shown represent shares underlying presently exercisable rights
to acquire Common Stock including options granted by a trust. The address
of Sirrom Capital Corporation is 500 Church Street, Suite 200, Nashville,
Tennessee 37219.
(16) The shares shown represent (i) 554,245 shares owned directly, (ii) 60,000
shares underlying a presently exercisable option which Mr. Conlan holds
jointly with Gerald C. Parker and Ralph H. Eckler, (iii) 37,500 shares
underlying presently exercisable rights to acquire Common Stock, and (iv)
2,500 shares held in a trust of which Mr. Conlan is a co-trustee with
Gerald C. Parker. Thomas E. Conlan's address is 1081 Fairview Lane, Singer
Island, Florida 33404.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January of 1997, Eckler's and SCHI completed the Predecessor
Acquisition in which SCHI was the surviving corporation of a merger with an
acquisition subsidiary of Eckler's. Gary R. Smith, President, Chief Executive
Officer and a director of the Company and a beneficial owner of more than 5% of
the outstanding Common Stock of the Company (a "principal shareholder"), Gerald
C. Parker, a director and principal shareholder of the Company, Ralph H.
Eckler, a principal shareholder of the Company and, in 1997, an executive
officer and a director of the Company, and Thomas E. Conlan, a principal
shareholder of, and consultant to, the Company, each were shareholders,
officers and/or directors of SCHI prior to the Predecessor Acquisition.
Information regarding the interests of Messrs. Smith, Parker, Conlan and Eckler
in the Predecessor Acquisition and related transactions is set forth below.
Thomas E. Conlan was a founder, principal shareholder, officer and
director of SCHI. In the Predecessor Acquisition, Mr. Conlan received 588,695
shares of Common Stock in exchange for his shares of SCHI stock. In addition,
Mr. Conlan is the beneficiary of two trusts, the Conlan Smart Choice Management
Trust and the Conlan Smart Choice Finance Trust (the "Conlan Trusts"). In the
Predecessor Acquisition, these trusts received 222,500 and 132,500 shares of
Common Stock, respectively, in exchange for the SCHI stock held thereby.
Messrs. Smith and Parker are the trustees of the Conlan Trusts; however, Mr.
Conlan has the sole right to receive any proceeds of the sale of the Common
Stock held by the Conlan Trusts. The Conlan Trusts may, at the option of the
trustees, and shall, after the first to occur of the satisfaction of the
purposes of the trusts and the exercise or expiration of all options granted
with respect to the shares of the Company's Common Stock or February 15, 2007,
cause shares of Common Stock held by the trusts to be purchased by the Company.
In the case of the Conlan Smart Choice Finance Trust, the purchase price per
share is generally $4.00. In the case of the Conlan Smart Choice Management
Trust, the purchase price will be an average of the closing market price for
the Common Stock for the 20 days immediately preceding the date of the
trustees' notice regarding such purchase by the Company.
Gerald C. Parker was a founder and director of SCHI. In the Predecessor
Acquisition, Mr. Parker received 588,695 shares of Company Common Stock in
exchange for his shares of SCHI stock. In
56
<PAGE>
addition, Mr. Parker is the beneficiary of two trusts, the Parker Smart Choice
Management Trust and the Parker Smart Choice Finance Trust (the "Parker
Trusts"). In the Predecessor Acquisition, these trusts received 222,500 and
132,500 shares of Company Common Stock, respectively, in exchange for the SCHI
stock held thereby. Messrs. Smith and Parker are the trustees of the Parker
Trusts; however, Mr. Parker has the sole right to receive any proceeds of the
sale of the Common Stock held by the Parker Trusts. The Parker Trusts may, at
the option of the trustees and shall, after the first to occur of the
satisfaction of the purposes of the trusts and the exercise or expiration of
all options granted with respect to the shares of the Company's Common Stock or
February 15, 2007, cause shares of Company Common Stock held by such trusts to
be purchased by the Company. In the case of the Parker Smart Choice Finance
Trust, the purchase price per share is generally $4.00. In the case of the
Parker Smart Choice Management Trust, the purchase price will be an average of
the closing market price for the Common Stock for the 20 days immediately
preceding the date of the trustees' notice regarding such purchase by the
Company.
Ralph H. Eckler was a director, President and Chief Executive Officer of
the Company prior to the Predecessor Acquisition. At the time of the
Predecessor Acquisition, Mr. Eckler owned 160,000 shares of SCHI stock, in
exchange for which he received 80,000 shares of Common Stock. Additionally, and
as part of the terms and conditions of the Predecessor Acquisition, Mr. Eckler
agreed to surrender his rights under his then current employment agreement and
the right to receive options to purchase up to 335,000 shares of Common Stock
in exchange for a new employment agreement, options to purchase 75,000 shares
of Common Stock and certain registration rights with respect to 100,000 shares
of Common Stock. The options are exercisable at $17.50 per share for 50,000
shares and $13.00 per share for 25,000 shares.
Gary R. Smith was the former President, a director and the sole
shareholder of Florida Finance Group, Inc. ("FFG"), Suncoast Auto Brokers, Inc.
("SAB") and Suncoast Auto Brokers Enterprises, Inc. ("SABE" and, collectively
with FFG and SAB, the "Smith Companies"). Mr. Smith sold substantially all the
assets of SAB and SABE and all the issued and outstanding stock of FFG to SCHI
prior to the Predecessor Acquisition in exchange for a promissory note in the
principal amount of $1,181,008 and 142,857 shares of SCHI common stock. At the
time of the Predecessor Acquisition, Mr. Smith's shares of SCHI common stock
were exchanged for an equal number of shares of Common Stock. In connection
with the Predecessor Acquisition, Mr. Smith also became the President and Chief
Executive Officer of the Company and a member of the Company's Board of
Directors. After the Predecessor Acquisition, SCHI became a wholly owned
subsidiary of the Company and continues to be the obligor on such note.
Gary R. Smith leases to the Company real property in Pinellas Park,
Florida on which the Company operates a used car dealership. The lease term
expires in 1999 and has three one-year renewals. The monthly rental for the
property is $3,500 plus taxes.
Sirrom Capital Corporation ("Sirrom") is a principal shareholder of the
Company. In 1997, Sirrom loaned the Company $7.5 million pursuant to two
convertible promissory notes (the "Sirrom Notes") that bear interest at 12% per
annum. The first Sirrom Note has a principal amount of $3.5 million, matures on
March 12, 1999 and is convertible into Common Stock at $7.34 per share, subject
to adjustment. The second Sirrom Note has a principal amount of $4.0 million,
matures on May 12, 2002 and is convertible into Common Stock at $15.00 per
share, subject to adjustment. In connection with these financings, Sirrom was
also granted options (the "Sirrom Options") to purchase Common Stock from the
Conlan Smart Choice Finance Trust and the Parker Smart Choice Finance Trust at
$6.00 per share and received registration rights for shares of Common Stock
issued on conversion of the Sirrom Notes and exercise of the Sirrom Options.
Craig Macnab, a Vice President of Sirrom, became a member of the Board of
Directors of the Company on March 21, 1997.
On September 30, 1997, the Company entered into a Settlement Agreement and
Release (the "Release Agreement") with Ralph H. Eckler. The Release Agreement
terminated Mr. Eckler's employment agreement and also effected Mr. Eckler's
resignation from the Company's Board of
57
<PAGE>
Directors. The Release Agreement retains Mr. Eckler as a consultant to the
Company for a period of five years for an aggregate payment of $100,000 which
was paid in advance. In addition, Mr. Eckler has been granted a right of first
refusal with respect to the purchase of Eckler's (the wholly owned subsidiary
of the Company consisting of the Company's Corvette parts manufacturing and
retail business) for a period of five years. The Company also (i) conveyed to
Mr. Eckler an automobile (having a book value of $14,069) that was currently
being supplied for his use, (ii) granted him options to purchase 50,000 shares
of Common Stock at the price of $13.00 per share, (iii) reduced the exercise
price of options to purchase 25,000 shares of Common Stock held by Mr. Eckler
from $20.00 per share to $13.00 per share and (iv) granted to Mr. Eckler
certain registration rights.
Pursuant to Ralph H. Eckler's former employment agreement, the Company was
obligated to pay Mr. Eckler an annual fee equal to two percent of the
outstanding balance of all Company loans guaranteed by Mr. Eckler. During 1997,
Mr. Eckler was paid $38,459 in such fees. On November 4, 1997, the loan was
refinanced and Mr. Eckler was released as a guarantor.
During 1997, the Company paid $103,750 to Greyhouse Services Corporation
("Greyhouse") pursuant to a consulting agreement which was terminated in 1997.
Gerald C. Parker and Thomas E. Conlan own 100% of Greyhouse. In March 1997, the
Company issued to each of Messrs. Conlan and Parker an option to purchase
37,500 shares of Common Stock exercisable at the then market price of $9.62 per
share, in satisfaction of outstanding consulting fees owed to Greyhouse of
approximately $125,000.
DESCRIPTION OF CAPITAL STOCK
The Company is a Florida corporation and its affairs are governed by the
Articles/Bylaws and the FBCA. The following description of the Company's
capital stock is complete in all material respects and is qualified in its
entirety by reference to the provisions of the Articles/Bylaws.
The authorized capital stock of the Company consists of 50,000,000 shares
of common stock, par value $.01 per share ("Common Stock"), and 5,000,000
shares of preferred stock, par value $.01 per share ("Preferred Stock"). The
Preferred Stock, which may be issued in series, may have such rights and
preferences as may be established by the Company's Board of Directors. At June
30, 1998, of the 50,000,000 authorized shares of Common Stock, 6,553,754 shares
(excluding shares held in treasury) were outstanding; of the 400 authorized
shares of Series A Redeemable Convertible Preferred Stock, par value $.01 per
share (the "Series A Stock"), one share was outstanding; of the 300 authorized
shares of the Series B Convertible Preferred Stock, par value $.01 per share
(the "Series B Stock"), 220 shares were outstanding; of the 24.98 authorized
shares of the Series C Convertible Preferred Stock, par value $.01 per share
(the "Series C Stock"), 24.98 shares were outstanding; and of the 350
authorized shares of the Series D Convertible Preferred Stock, par value $.01
per share (the "Series D Stock"), 350 shares were outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which shareholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of
the directors. In such event, the holders of the remaining shares will not be
able to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company has not paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. In the
event of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in any corporate assets remaining
after payment of all debts, subject to any preferential rights of any
outstanding Preferred Stock.
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Holders of Common Stock have no preemptive, conversion or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are, and the shares offered by the
Company hereby will be, if issued, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the Company's shareholders, to issue from time to time up to
5,000,000 shares of Preferred Stock in one or more series and to fix the number
of shares, designations, voting powers, preferences, optional and other special
rights, and the restrictions or qualifications thereof. The rights,
preferences, privileges and restrictions or qualifications of different series
of Preferred Stock may differ with respect to dividend rates, amounts payable
on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions and other matters. The issuance of Preferred Stock
could (i) decrease the amount of earnings and assets available for distribution
to holders of Common Stock, (ii) adversely affect the rights and powers,
including voting rights, of holders of Common Stock and (iii) have the effect
of delaying, deferring or preventing a change in control of the Company. In
accordance with the designation of each series of Preferred Stock, no dividends
may be declared on the Common Stock in the event a default exists under the
terms of such series of Preferred Stock.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In September and December 1997, the Company issued an aggregate of 400
shares of Series A Stock, each with a stated value of $10,000 per share. At
June 30, 1998, all but one of the shares of Series A Stock had converted to
Common Stock. The outstanding share of Series A Stock (the "A Share") is not
entitled to receive dividends and is non-voting. The A Share is convertible
into shares of Common Stock at the holder's election, subject to certain
restrictions. In the event of any liquidation, dissolution or winding up of the
Company, voluntary or involuntary, the A Share shall be entitled to a
distribution of $10,000 out of the assets of the Company available for
distribution to shareholders prior to any distribution being made on any other
class of stock of the Company. The Series A Stock ranks senior to all other
classes of stock of the Company with respect to redemption rights and rights
upon liquidation, dissolution or winding up of the Company. The A Share, which
is fully paid and non-assessable, is redeemable, subject to certain conditions,
at the option of the holder or the Company.
SERIES B, SERIES C AND SERIES D CONVERTIBLE PREFERRED STOCK
In May 1998, the Company issued an aggregate of 220 shares of Series B
Stock. In June 1998, the Company issued an aggregate of 24.98 shares of Series
C Stock, and an aggregate of 350 shares of Series D Stock (together with the
Series B Stock and Series C Stock, the "BCD Stock"). Each share of BCD Stock
was issued with a stated value of $10,000 per share and, at August 20, 1998, no
shares of the BCD Stock had converted to Common Stock. The BCD Stock has the
rights and preferences summarized below, among others.
DIVIDENDS. Each share of Series B Stock and Series C Stock accrues
dividends at the rate of 11% per annum, payable in cash dividends per share of
$91.67 per month. Each share of Series D Stock accrues dividends at the rate of
11% per annum, payable monthly in arrears for a period of sixty (60) months,
and thereafter at the rate per annum of 20% payable monthly in arrears.
VOTING RIGHTS. The BCD Stock is non-voting.
CONVERSION RIGHTS. Each share of BCD Stock is convertible into shares of
Common Stock at the Holder's election at a price of $10.00, $11.18 and $12.00
respectively, subject to certain restrictions applying to conversion of the
Series D Stock.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Company, voluntary or involuntary, BCD Stock shall be entitled to a
distribution of $10,000 per share plus accrued and
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unpaid dividends, if any, out of the assets of the Company available for
distribution to shareholders prior to any distribution being made on any other
class of stock of the Company junior to the applicable series of BCD Stock.
RANK. The shares of BCD Stock ranks senior to all other classes of stock
of the Company with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, except the Series A Stock. The Series
C Stock ranks senior to all other classes of stock of the Company with respect
to dividend rights and rights upon liquidation, dissolution or winding up of
the Company, except the Series A Stock and the Series B Stock. The Series D
Stock ranks senior to all other classes of stock of the Company with respect to
dividend rights and rights upon liquidation, dissolution or winding up of the
Company, except the Series A Stock, the Series B Stock and the Series C Stock.
PREEMPTIVE RIGHTS; ASSESSABILITY. Holders of BCD Stock are not entitled to
preemptive rights with respect to any shares of any stock of the Company that
may be issued. The outstanding BCD Stock is fully paid and non-assessable.
OTHER SECURITIES AND REGISTRATION RIGHTS
In connection with its initial public offering, the Company issued 600,000
Public Warrants which are traded on the Nasdaq SmallCap Market. Each Public
Warrant has an exercise price of $13.00 per share, subject to adjustment by the
Company under certain circumstances. The agreement with respect to the Public
Warrants provides for the registration of the shares of Common Stock underlying
the Public Warrants, pursuant to which the Company filed a post-effective
amendment on Form S-3 to its initial registration statement (the "S-3
Registration Statement"). The Company may call the Public Warrants upon 30
days' notice for $0.10 per Warrant at any time that the average closing price
of the Common Stock equals or exceeds $17.50 per share for the 20 consecutive
trading days ending three days prior to the notice of redemption.
The Company also issued to the underwriter of its initial public offering
a Unit Purchase Option entitling the holder thereof to purchase, at any time
through November 9, 2000, up to 42,000 units, each unit consisting of one share
of Common Stock and one Public Warrant at a price of $12.00 per unit. The
Public Warrants issuable upon exercise of the Unit Purchase Option have an
exercise price of $13.00 per share and are substantially identical to the
outstanding Public Warrants, except that the Company does not have the right to
call such Public Warrants. The Common Stock issuable upon exercise of the Unit
Purchase Option and Public Warrants is included in the Company's S-3
Registration Statement pursuant to certain registration rights provisions of
the Unit Purchase Option.
Also included in the S-3 Registration Statement are 228,500 shares of
Common Stock beneficially held by certain shareholders of the Company, 51,250
of which are subject to non-public common stock purchase warrants exercisable
at $12.00 per share.
The beneficial owners of 601,428 shares of Common Stock, which include
534,011 shares of Common Stock issuable upon conversion of currently
outstanding convertible preferred stock, have certain piggy-back and/or demand
registration rights in particular circumstances in connection with a secondary
public offering of the Company's equity securities.
ANTI-TAKEOVER EFFECTS OF FLORIDA LAW, CHARTER PROVISIONS, UNISSUED STOCK
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. Certain provisions of Florida law and the Company's
Articles/Bylaws may deter or frustrate a takeover attempt of the Company that
shareholders might consider in their best interest, including attempts that
might result in a premium over the market price for the Common Stock held by
the Company's shareholders. The Company is subject to several anti-takeover
provisions under Florida law (which are also set forth in the Articles/Bylaws)
that apply to a public corporation organized under Florida law, unless the
corporation has elected to opt out of such provisions in its articles or
bylaws. The Company is
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subject to the "affiliated transactions" and "control-share acquisition"
provisions of the FBCA. These provisions require, subject to certain
exceptions, that an "affiliated transaction" be approved by the holders of
two-thirds of the voting shares other than those beneficially owned by an
"interested shareholder" or by a majority of disinterested directors. Voting
rights must also be conferred on "control shares" acquired in specified control
share acquisitions, generally only to the extent conferred by resolution
approved by the shareholders, excluding holders of shares defined as
"interested shares."
In addition, the Articles/Bylaws, among other things, provide that: (i)
any action required or permitted to be taken by the shareholders of the Company
may be effected only at an annual or special meeting of shareholders, and not
by written consent of the shareholders; (ii) a special meeting of the
shareholders may be called only by the Board of Directors, Chairman of the
Board, President, Chief Executive Officer or upon the written demand of the
holders of not less than 25% of the votes entitled to be cast at a special
meeting; (iii) an advance notice procedure must be followed for nomination of
directors and for other shareholder proposals to be considered at annual
shareholders' meetings and (iv) a director may be removed only for cause upon
approval of holders of at least 66 2/3% of the Company's voting stock.
At its annual meeting on June 24, 1998, the Company's shareholders
approved a proposal to amend the Company's Bylaws to provide for the
classification of the Company's directors into three classes serving staggered
terms. The classification of the Company's directors will have the effect of
making it more difficult for shareholders to change the composition of the
Board of Directors in a relatively short period of time since at least two
annual meetings of shareholders will be required to effect a change in a
majority of the members of the Board.
Upon consummation of this Offering, the Company will be authorized to
issue additional Common Stock and Preferred Stock in one or more series, having
terms fixed by the Board of Directors without shareholder approval, including
voting, dividend or liquidation rights that could be greater than or senior to
the rights of holders of Common Stock. The existence of authorized but unissued
and unreserved shares of Common Stock and Preferred Stock may enable the Board
of Directors to issue shares to persons friendly to current management which
would render more difficult or discourage an attempt to obtain control of the
Company by means of a proxy contest, tender offer, merger or otherwise, and
thereby protect the continuity of the Company's management. Issuance of shares
of Common Stock or Preferred Stock could also be used as an anti-takeover
device.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has authority under the FBCA to indemnify its directors and
officers to the extent provided in such statute. The Company's Bylaws provide
for indemnification of its executive officers, directors, agents and employees
to the fullest extent permitted by Florida law. In general, Florida law permits
a Florida corporation to indemnify its directors, officers, employees and
agents, and persons serving at the corporation's request in such capacities for
another enterprise against liabilities arising from conduct that such persons
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
The provisions of the FBCA that authorize indemnification do not eliminate
the duty of care of a director, and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Florida law. In addition, each director will continue to be
subject to liability for (i) violations of the criminal law, unless the
director had reasonable cause to believe his conduct was not unlawful or had no
reasonable cause to believe his conduct was unlawful, (ii) deriving an improper
personal benefit from a transaction, (iii) voting for or assenting to an
unlawful distribution and (iv) willful misconduct or a conscious disregard for
the best interests of the Company in a proceeding by or in the right of the
Company to procure a judgment in its favor or in a proceeding by or in the
right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the Federal securities laws or
state or Federal environmental laws.
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
9,053,756 shares of Common Stock, of which 5,104,050 shares have been
registered for resale on registration statements on Form S-3. In addition,
67,417 shares of Common Stock are "restricted" securities within the meaning of
Rule 144 under the Securities Act and may be sold if registered under the
Securities Act or subject to the conditions of any applicable exemption from
registration, including the exemption contained in Rule 144 discussed below.
The Company's executive officers and directors and holders of 2% or more of the
outstanding Common Stock have agreed, subject to certain exceptions, not to
sell or otherwise dispose of a total of 1,810,519 shares of Common Stock for a
period of 180 days (the "Lock-up Period") after the date of this Prospectus
without the prior written consent of Stephens Inc. that are otherwise not
restricted as to resale and will immediately be eligible for sale in the public
market upon the expiration of the Lock-up Period. See "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares of
Common Stock for at least one year (generally including the prior holding
period of any prior owner other than an affiliate) is entitled to sell within
any three-month period that number of shares which does not exceed the greater
of 1% of the outstanding shares of Common Stock and the average weekly trading
volume during the four calendar weeks preceding each such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed an
"affiliate" of the Company for at least three months and who has beneficially
owned the shares for at least two years (including the holding period of any
prior owner other than an affiliate) would be entitled to sell such shares
under Rule 144 without regard to the limitations described above. Rule 144
defines "affiliate" of a company as a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with such company. Affiliates of a company generally include its
directors, officers and principal shareholders.
The Company intends to register on a registration statement on Form S-8 the
shares of Common Stock issuable to directors and employees upon exercise of
options granted or reserved for issuance under the option agreements or the
Company's employee compensation plans, including 1,335,100 shares subject to
options which are currently outstanding. The Company also has outstanding
convertible notes, public and non-public warrants, convertible preferred stock
and certain other rights to acquire a total of 2,379,183 shares of Common Stock,
of which all but 680,012 shares of Common Stock have been registered for resale
on registration statements on Form S-3, including 600,000 shares underlying
publicly traded warrants. The beneficial owners of 660,012 shares of Common
Stock that are issuable upon conversion of currently outstanding convertible
preferred stock and debt have registration rights that allow them to cause the
Company to register their shares for sale under certain circumstances. Upon such
registrations, such shares will be eligible for resale in the public market
without restrictions by persons who are not affiliates of the Company, and to
the extent they are held by affiliates, pursuant to Rule 144 without observance
of the holding period requirements.
No prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market, or the availability of substantial amounts
of Common Stock for future sale, could adversely affect prevailing market
prices and the ability of the Company to raise equity capital in the future.
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UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters listed below, who are represented by
Stephens Inc., Cruttenden Roth Incorporated and Southeast Research Partners,
Inc. (the "Representatives"), have agreed severally to purchase from the
Company the number of shares of Common Stock set forth below opposite their
respective names:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------- -----------------
<S> <C>
Stephens Inc. ..............................
Cruttenden Roth Incorporated ...............
Southeast Research Partners, Inc. ..........
---------
Total .................................... 2,500,000
=========
</TABLE>
The Underwriters have committed to purchase all of such shares if any are
purchased, subject to the terms of the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the Offering, the
public offering price and such concession may be changed. The Representatives
have informed the Company that the Underwriters do not intend to confirm sales
to accounts over which they exercise discretionary authority.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any, on the same
terms as those on which the shares of Common Stock are being offered. To the
extent that the Underwriters exercise this option, each of them will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the table above bears to the total number of shares in
such table and the Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters.
The Company's executive officers, directors and certain securityholders
have agreed with the Representatives not to offer, sell or otherwise dispose of
any shares of Common Stock or any securities exercisable for or convertible
into Common Stock owned by them for a period of 180 days after the date of this
Prospectus without the prior consent of Stephens Inc. See "Shares Eligible for
Future Sale."
In connection with the Offering, the Underwriters and other persons
participating in this Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in the Common Stock for their own account. To cover over-allotments or
to stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
bid for, and purchase, shares of Common Stock in market making transactions.
These activities may stabilize or maintain the market price of Common Stock
above market levels that may otherwise prevail. The Underwriters are not
required to engage in these activities and may end any of these activities at
any time.
Certain of the Underwriters that currently act as market makers for the
Company's Common Stock may engage in "passive market making" in the Common
Stock on the Nasdaq SmallCap Market in
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accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103
permits, upon the satisfaction of certain conditions, underwriters
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market making transactions
during the period when Rule 103 under the Exchange Act would otherwise prohibit
such activity. Rule 103 prohibits underwriters engaged in passive market making
generally from entering a bid or effecting a purchase at a price that exceeds
the highest bid for those securities displayed by a market maker that is not
participating in the distribution. Under Rule 103, each underwriter engaged in
passive market making is subject to a daily net purchase limitation equal to
30% of such market maker's average daily trading volume in the security during
the two full calendar months immediately preceding the date of the filing of
the registration statement under the Securities Act pertaining to the security
being distributed. Passive market making is prohibited, however, when a
stabilizing bid pursuant to Rule 104 of Regulation M (discussed above) is in
effect.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil
liabilities, including liabilities under the Securities Act, or will contribute
to payments that the Underwriters or any such controlling persons may be
required to make in respect thereof.
As of June 30, 1998, the Company owed approximately $8.5 million in
principal to Stephens Inc., which is the lead managing Underwriter of the
Offering. Such indebtedness was incurred in 1997 and 1998 to provide working
capital for the Company and bears interest at the rate of 10% per year. During
1997 and through June 30, 1998, the Company paid approximately $284,658 in
interest on such indebtedness. In accordance with its terms, such indebtedness
is payable in full upon the completion of the Offering. Stephens Inc. has
waived the requirement that the Company pay the indebtedness in full upon the
completion of the Offering. Following completion of the Offering and the
repayment of $3.5 million of such indebtedness to Stephens Inc., the Company
will remain obligated to repay Stephens Inc. an aggregate of $5.0 million,
consisting of $1.0 million due on June 30, 1999 and $4.0 million due on
September 30, 1999. Notwithstanding the aforementioned, the entire $5.0 million
remaining outstanding after the Offering becomes immediately due and payable,
under certain circumstances, upon the completion of an offering of the
Company's securities or the sale of certain of the Company's operating units.
Because $3.5 million of the Offering proceeds, which is more than 10% of the
net Offering proceeds, are to be paid by the Company to Stephens Inc. to reduce
such indebtedness, the Offering is being conducted in accordance with
subparagraph 8 of section (c) of Rule 2710 of the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD"), which provides for an
exception to NASD conflicts of interest and pricing rules for offerings of
securities for which a bona fide independent market exists. See "Use of
Proceeds." Stephens Inc. also provides financial advisory services to the
Company from time to time. To date, the Company has not paid any additional
financial advisory fees to Stephens Inc.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Morgan, Lewis & Bockius LLP. Certain legal matters will be
passed upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements appearing in this Prospectus and in the
Registration Statement have been audited by various independent certified
public accountants to the extent and for the periods set forth in their reports
appearing elsewhere herein and in the Registration Statement, and are included
in reliance on the reports of the various independent accountants given upon
the authority of such firms as experts in auditing and accounting.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such materials can be obtained upon
written request from the Public Reference Section of the Commission at 450
Fifth Street N.W., Washington, D.C. 20549, at prescribed rates. Quotations
relating to the Company's Common Stock appear on the Nasdaq SmallCap Market and
such reports and proxy statements and other information concerning the Company
can also be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement. Each statement made in this Prospectus concerning a
document filed as part of the Registration Statement is qualified in its
entirety by reference to such document for a complete statement of its
provisions. Copies of the Registration Statement may be inspected, without
charge, at the offices of the Commission or obtained at prescribed rates from
the Public Reference Section of the Commission, at the address set forth above
or on the World Wide Web through the Commission's Internet address at "http://
www.sec.gov."
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ............................. F-4
Consolidated Balance Sheets as of June 30, 1998, December 31, 1997 and 1996 .... F-5
Consolidated Statements of Operations for the six months ended June 30, 1998
and 1997, the year ended December 31, 1997 and the period from inception
(June 21, 1996) through December 31, 1996 .................................... F-6
Consolidated Statements of Stockholders' Equity (Capital Deficit) for the period
from inception (June 21, 1996) through December 31, 1996, the year ended
December 31, 1997 and the six months ended June 30, 1998 ..................... F-7
Consolidated Statements of Cash Flows for the six months ended June 30, 1998
and 1997, the year December 31, 1997 and the period from inception
(June 21, 1996) through December 31, 1996 .................................... F-8
Summary of Significant Accounting Policies ..................................... F-9
Notes to Consolidated Financial Statements ..................................... F-13
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Pro Forma Consolidated Statement of Operations --Explanatory Headnote .......... F-32
Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997 ............................................................ F-33
Notes to Pro Forma Consolidated Statement of Operations ........................ F-34
FLORIDA FINANCE GROUP, INC., SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC. (PREDECESSOR)
Independent Auditor's Report ................................................... F-35
Combined Balance Sheets as of December 31, 1996 and 1995 ....................... F-36
Combined Statements of Operations and Retained Deficit for the years ended
December 31, 1996 and 1995 ................................................... F-37
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1995 ................................................... F-38
Notes to Combined Financial Statements ......................................... F-39
Combining Balance Sheets as of December 31, 1996 ............................... F-45
Combining Statements of Operations and Retained Earnings (Accumulated Deficit)
for the year ended December 31, 1996 ......................................... F-46
Combining Balance Sheets as of December 31, 1995 ............................... F-47
Combining Statements of Operations and Retained Earnings (Accumulated Deficit)
for the year ended December 31, 1995 ......................................... F-48
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ECKLER INDUSTRIES, INC. (PREDECESSOR)
Report of Independent Certified Public Accountants .............................. F-49
Balance Sheets as of January 28, 1997, December 31, 1996 and
September 30, 1996 and 1995 ................................................... F-50
Statements of Operations for the period from January 1, 1997 through
January 28, 1997, the three months ended December 31, 1996, and the years ended
September 30, 1996, 1995 and 1994 ............................................. F-51
Statements of Stockholders' Equity (Deficit) for the period from January 1, 1997
through January 28, 1997, the three months ended December 31, 1996, and the
years ended September 30, 1996, 1995 and 1994 ................................. F-52
Statements of Cash Flows for the period from January 1, 1997 through
January 28, 1997, the three months ended December 31, 1996 and the years ended
September 30, 1996, 1995 and 1994 ............................................. F-53
Summary of Significant Accounting Policies ...................................... F-54
Notes to Financial Statements ................................................... F-57
LIBERTY FINANCE COMPANY, INC.(FORMERLY KNOWN AS R. C. HILL'S WORLD OF WHEELS, INC.)
AND AFFILIATES (PREDECESSOR)
Independent Auditor's Report .................................................... F-69
Combined Balance Sheets as of December 31, 1996 and 1995 ........................ F-70
Combined Statements of Operations for the years ended
December 31, 1996 and 1995 .................................................... F-71
Combined Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995 .................................................... F-72
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1995 .................................................... F-73
Notes to Combined Financial Statements .......................................... F-74
TWO TWO FIVE NORTH MILITARY TRAIL CORPORATION D/B/A MIRACLE MILE
MOTORS AND PALM BEACH FINANCE COMPANY, INC. (PREDECESSOR)
Independent Auditor's Report .................................................... F-81
Combined Balance Sheet as of December 31, 1996 and 1995 ......................... F-82
Combined Statements of Income and Retained Earnings for the years ended
December 31, 1996 and 1995 .................................................... F-83
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1995 .................................................... F-84
Notes to Financial Statements ................................................... F-85
Combining Balance Sheets as of December 31, 1996 ................................ F-90
Combining Statements of Income and Retained Earnings for the year ended
December 31, 1996 ............................................................. F-91
Combining Balance Sheets as of December 31, 1995 ................................ F-92
Combining Statements of Income and Retained Earnings for the year ended
December 31, 1995 ............................................................. F-93
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
STRATA HOLDING, INC. AND READY FINANCE, INC. (SIGNIFICANT ACQUISITION)
Independent Auditor's Report ............................................... F-94
Combined Balance Sheet as of December 31, 1996 ............................. F-95
Combined Statement of Operations for the year ended
December 31, 1996 ........................................................ F-96
Combined Statement of Stockholders' Equity for the year ended
December 31, 1996 ........................................................ F-97
Combined Statement of Cash Flows for the year ended
December 31, 1996 ........................................................ F-98
Notes to Combined Financial Statements ..................................... F-99
Independent Auditors' Report on Supplemental Material ...................... F-104
Combining Balance Sheet as of December 31, 1996 ............................ F-105
B&B FLORIDA ENTERPRISES, INC., D/B/A STUART NISSAN (SIGNIFICANT ACQUISITION)
Independent Accountant's Report ............................................ F-107
Balance Sheet as of December 31, 1996 ...................................... F-108
Statement of Operations for the year ended December 31, 1996 ............... F-109
Statement of Stockholders' Deficit for the year ended December 31, 1996 .... F-110
Statement of Cash Flows for the year ended December 31, 1996 ............... F-111
Notes to Financial Statements .............................................. F-112
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Smart Choice Automotive Group, Inc.
Titusville, Florida
We have audited the accompanying consolidated balance sheets of Smart
Choice Automotive Group, Inc. and subsidiaries as of December 31, 1997 and 1996
and the related statements of operations, stockholders' equity (capital
deficit) and cash flows for the year ended December 31, 1997 and the period
from inception (June 21, 1996) through December 31, 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smart
Choice Automotive Group, Inc. and subsidiaries as of December 31, 1997 and 1996
and the results of their operations and their cash flows for the year ended
December 31, 1997 and the period from inception (June 21, 1996) through
December 31, 1996 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Orlando, Florida
March 30, 1998, except for the first paragraph
in Note 12 as to which the date is July 23, 1998
F-4
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- JUNE 30,
1996 1997 1998
------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents ................................. $ -- $ 1,066,949 $ 3,839,650
Accounts receivable ....................................... 25,000 1,773,124 3,821,521
Finance receivables:
Principal balances, net .................................. -- 40,084,412 63,156,265
Less allowance for credit losses ......................... -- (6,857,265) (9,336,911)
---------- ------------- -------------
Finance receivables, net ................................ -- 33,227,147 53,819,354
---------- ------------- -------------
Inventories, at cost ...................................... -- 15,516,084 17,949,707
Land held for resale ...................................... -- 1,050,000 --
Property and equipment, net ............................... 22,454 9,214,207 9,181,974
Notes receivable .......................................... 400,000 46,280 --
Deferred acquisition costs ................................ 194,101 -- --
Deferred financing costs, net of accumulated amortization
of $356,961, $207,508 and $2,249 ........................ 24,735 426,823 308,521
Goodwill, net of accumulated amortization of $796,285
and $470,897 ............................................ -- 25,562,162 25,236,774
Prepaid expenses .......................................... -- 1,008,229 1,799,646
Deposits and other assets ................................. 50,000 213,986 261,081
---------- ------------- -------------
$ 716,290 $ 89,104,991 $ 116,218,228
========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Liabilities:
Bank overdraft ........................................... $ 82,884 $ -- --
Accounts payable ......................................... 438,890 5,259,903 5,925,730
Accrued expenses ......................................... 183,314 4,633,841 3,103,886
Line of credit, net of discount .......................... -- 31,229,600 45,771,017
Floor plans payable ...................................... -- 8,287,092 8,482,492
Capital lease obligations ................................ -- 940,280 900,809
Notes payable ............................................ 322,000 29,197,458 31,090,052
Other liabilities ........................................ -- 94,913 1,028
---------- ------------- -------------
Total liabilities ...................................... 1,027,088 79,643,087 95,275,014
---------- ------------- -------------
Redeemable convertible preferred stock .................... 387,022 4,941,834 10,000
Stockholders' equity (capital deficit):
Preferred stock $.01 per value, authorized 675 shares;
issued 595 shares ...................................... -- -- 5,891,410
Common stock $.01 par value, authorized 50,000,000
shares; issued 6,553,756, 4,867,004 and 2,744,216 shares 27,442 48,670 65,538
Additional paid-in capital ............................... (21,474) 24,157,126 30,718,071
Accumulated deficit ...................................... (703,788) (19,685,726) (15,741,805)
---------- ------------- -------------
Total stockholders' equity (capital deficit) .......... (697,820) 4,520,070 20,933,214
---------- ------------- -------------
$ 716,290 $ 89,104,991 $ 116,218,228
========== ============= =============
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements
F-5
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 21, 1996) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------------
1996 1997 1997 1998
---------------- ---------------- ---------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Sales at used car stores ...................... $ -- $ 35,279,228 $ 11,788,779 $ 40,602,531
Income on finance receivables ................. -- 6,898,694 1,722,865 6,942,139
Sales at new car dealerships .................. -- 9,863,245 -- 14,349,193
Corvette parts and accessories sales .......... -- 15,384,589 7,972,200 10,411,541
Income from insurance and training ............ -- 1,177,903 651,256 426,032
---------- ------------- ------------ ------------
Total revenues ............................. -- 68,603,659 22,135,100 72,731,436
---------- ------------- ------------ ------------
COSTS AND EXPENSES:
Costs of sales at used car stores ............. -- 25,639,741 7,966,735 26,376,231
Provision for credit losses ................... -- 4,941,983 1,548,811 4,418,884
Costs of sales at new car dealerships ......... -- 8,618,109 -- 12,587,089
Costs of Corvette parts and accessories
sold ........................................ -- 10,205,633 4,909,266 6,676,788
Costs of insurance and training ............... -- 85,098 36,714 59,595
Selling, general and administrative
expenses .................................... 670,616 24,707,839 10,019,848 15,082,265
Compensation expense related to
employee and director stock options ......... -- 4,649,702 3,214,767 --
Restructuring charges ......................... -- 2,117,906 -- --
---------- ------------- ------------ ------------
Total costs and expenses ................... 670,616 80,966,011 27,696,141 65,200,852
---------- ------------- ------------ ------------
Income (loss) from operations .............. (670,616) (12,362,352) (5,561,041) 7,530,584
---------- ------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense .............................. (33,172) (6,454,175) (1,748,613) (4,032,283)
Other income, net ............................. -- 167,922 43,531 609,459
---------- ------------- ------------ ------------
(33,172) (6,286,253) (1,705,082) (3,422,824)
---------- ------------- ------------ ------------
Net income (loss) .............................. (703,788) (18,648,605) (7,266,123) 4,107,760
Preferred stock dividends ...................... -- (333,333) -- (163,839)
---------- ------------- ------------ ------------
Net income (loss) applicable to common
stock ......................................... $ (703,788) $ (18,981,938) $ (7,266,123) $ 3,943,921
========== ============= ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic ......................................... $ (.26) $ (4.28) $ (1.73) $ .68
Diluted ....................................... (.26) (4.28) (1.73) .66
========== ============= ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic ......................................... 2,744,216 4,430,367 4,198,856 5,790,926
Diluted ....................................... 2,744,216 4,430,367 4,198,856 6,840,915
========== ============= ============ ============
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements
F-6
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ -------------------------
NUMBER PAR
OF SHARES VALUE
------------- -----------
<S> <C> <C> <C> <C>
Balance, June 21, 1996 (date of
incorporation) ........................... -- $ -- -- $ --
Issuance of founders' shares .............. -- -- 2,744,216 27,442
Net loss .................................. -- -- -- --
-- ---------- --------- --------
Balance, December 31, 1996 ................ -- -- 2,744,216 27,442
Common stock issued for acquisitions....... -- -- 2,055,476 20,555
Contribution and retirement of
common stock ............................. -- -- (165,714) (1,657)
Common stock options granted to
employees and directors .................. -- -- -- --
Common stock options and warrants
granted to lenders and consultants ....... -- -- -- --
Treasury stock purchased and retired ...... -- -- (1,000) (10)
Issuance of common stock for
professional services .................... -- -- 8,965 90
Issuance of common stock for
conversion of debt ....................... -- -- 221,257 2,212
Exercise of common stock options and
warrants, net ............................ -- -- 3,804 38
Convertible debt issued at a discount ..... -- -- -- --
Common stock issued by stockholders
for cancellation of common stock
options granted by the Company ........... -- -- -- --
Contribution to capital ................... -- -- -- --
Preferred stock dividend .................. -- -- -- --
Net loss .................................. -- -- -- --
-- ---------- --------- --------
Balance, December 31, 1997 ................ -- -- 4,867,004 48,670
Six months ended June 30, 1998
(unaudited):
Issuance of common stock for
conversion of debt ....................... -- -- 249,905 2,499
Issuance of common stock for
conversion of preferred stock and
accrued dividends ........................ -- -- 1,398,961 13,991
Issuance of common stock for services...... -- -- 4,547 45
Exercise of common stock options,
net ...................................... -- -- 42,500 425
Purchase and retirement of treasury
stock .................................... -- -- (9,161) (92)
Preferred stock dividend .................. -- -- -- --
Issuance of preferred stock, net .......... 595 5,891,410 -- --
Net income ................................ -- -- -- --
--- ---------- --------- --------
Balance, June 30, 1998 (unaudited) ........ 595 $5,891,410 6,553,756 $ 65,538
=== ========== ========= ========
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
-------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, June 21, 1996 (date of
incorporation) ........................... $ -- $ -- $ --
Issuance of founders' shares .............. (21,474) -- 5,968
Net loss .................................. -- (703,788) (703,788)
----------- ------------- --------------
Balance, December 31, 1996 ................ (21,474) (703,788) (697,820)
Common stock issued for acquisitions....... 14,393,325 -- 14,413,880
Contribution and retirement of
common stock ............................. 1,657 -- --
Common stock options granted to
employees and directors .................. 3,809,826 -- 3,809,826
Common stock options and warrants
granted to lenders and consultants ....... 1,957,953 -- 1,957,953
Treasury stock purchased and retired ...... (13,580) -- (13,590)
Issuance of common stock for
professional services .................... 99,716 -- 99,806
Issuance of common stock for
conversion of debt ....................... 1,767,844 -- 1,770,056
Exercise of common stock options and
warrants, net ............................ 41,638 -- 41,676
Convertible debt issued at a discount ..... 827,685 -- 827,685
Common stock issued by stockholders
for cancellation of common stock
options granted by the Company ........... 800,000 -- 800,000
Contribution to capital ................... 159,203 -- 159,203
Preferred stock dividend .................. 333,333 (333,333) --
Net loss .................................. -- (18,648,605) (18,648,605)
----------- ------------- --------------
Balance, December 31, 1997 ................ 24,157,126 (19,685,726) 4,520,070
Six months ended June 30, 1998
(unaudited):
Issuance of common stock for
conversion of debt ....................... 1,331,381 -- 1,333,880
Issuance of common stock for
conversion of preferred stock and
accrued dividends ........................ 5,042,066 -- 5,056,057
Issuance of common stock for services...... 36,331 -- 36,376
Exercise of common stock options,
net ...................................... 244,975 -- 245,400
Purchase and retirement of treasury
stock .................................... (93,808) -- (93,900)
Preferred stock dividend .................. -- (163,839) (163,839)
Issuance of preferred stock, net .......... -- -- 5,891,410
Net income ................................ -- 4,107,760 4,107,760
----------- ------------- --------------
Balance, June 30, 1998 (unaudited) ........ $30,718,071 $ (15,741,805) $ 20,933,214
=========== ============= ==============
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
F-7
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 21, 1996)
THROUGH
DECEMBER 31,
1996
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ (703,788)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation ............................................... 2,132
Amortization ............................................... 2,249
(Gain) loss on disposal of property and equipment .......... --
Provision for credit losses ................................ --
Compensation expense related to stock options .............. --
Issuance of common stock for services and interest ......... 4,968
Stock options and warrants issued to consultants and
lenders .................................................. --
Cash provided by (used for), net of effect of
acquisitions:
Accounts receivable ....................................... (25,000)
Inventories ............................................... --
Prepaid expenses .......................................... --
Accounts payable .......................................... 438,890
Accrued expenses and other liabilities .................... 183,314
----------
Net cash provided by (used for) operating activities ......... (97,235)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in finance receivables ............................. --
Cash for acquisitions, net of cash acquired ................. --
Advances to acquired companies prior to acquisition ......... --
Purchase of property and equipment .......................... (24,586)
Increase in notes receivable ................................ (400,000)
Increase in deposits ........................................ --
Increase in deferred acquisition costs ...................... --
Repayments of notes receivable .............................. --
Proceeds from disposal of property and equipment ............ --
Other ....................................................... (244,101)
----------
Net cash used for investing activities ....................... (668,687)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock ....................... 387,022
Proceeds from sale of common stock .......................... 1,000
Proceeds from exercise of common stock warrants ............. --
Purchase of treasury stock .................................. --
Increase (decrease) in bank overdraft ....................... 82,884
Proceeds from line of credit borrowings ..................... --
Proceeds from floor plan notes payable ...................... --
Proceeds from notes payable ................................. 322,000
Repayment of notes payable .................................. --
Proceeds from issuance of convertible debentures ............ --
Proceeds from capital lease obligations ..................... --
Repayments of capital lease obligations ..................... --
Payment of dividends ........................................ --
Deferred financing costs .................................... (26,984)
----------
Net cash provided by financing activities .................... 765,922
----------
Net increase in cash and cash equivalents .................... --
----------
Cash and cash equivalents, beginning of period ............... --
----------
Cash and cash equivalents, end of period ..................... $ --
==========
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------------
1997 1997 1998
----------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ (18,648,605) $ (7,266,123) $ 4,107,760
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation ............................................... 445,311 216,281 482,708
Amortization ............................................... 1,239,929 534,565 809,594
(Gain) loss on disposal of property and equipment .......... (8,166) 2,176 (43,381)
Provision for credit losses ................................ 4,941,983 1,222,230 4,418,884
Compensation expense related to stock options .............. 4,649,702 3,214,767 --
Issuance of common stock for services and interest ......... 374,806 150,000 36,376
Stock options and warrants issued to consultants and
lenders .................................................. 1,296,863 -- --
Cash provided by (used for), net of effect of
acquisitions:
Accounts receivable ....................................... (662,488) (186,743) (2,442,297)
Inventories ............................................... (5,969,719) (2,368,124) (2,433,623)
Prepaid expenses .......................................... 679,663 189,081 (791,417)
Accounts payable .......................................... 2,668,636 (395,807) 665,827
Accrued expenses and other liabilities .................... 3,048,563 2,689,962 (1,616,129)
------------- ------------- --------------
Net cash provided by (used for) operating activities ......... (5,943,522) (1,997,735) 3,194,302
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in finance receivables ............................. (13,600,550) (3,631,742) (25,011,091)
Cash for acquisitions, net of cash acquired ................. (7,927,844) (8,100,020) --
Advances to acquired companies prior to acquisition ......... (4,230,761) (2,744,093) --
Purchase of property and equipment .......................... (1,356,644) (250,192) (435,239)
Increase in notes receivable ................................ -- -- --
Increase in deposits ........................................ -- (822,200) (14,608)
Increase in deferred acquisition costs ...................... -- (51,717) --
Repayments of notes receivable .............................. 530,420 400,420 46,280
Proceeds from disposal of property and equipment ............ 24,425 28,475 1,093,381
Other ....................................................... (21,981) (12,471) (33,932)
------------- ------------- --------------
Net cash used for investing activities ....................... (26,582,935) (15,183,540) (24,355,209)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock ....................... 4,554,812 590,000 5,891,410
Proceeds from sale of common stock .......................... -- -- 245,400
Proceeds from exercise of common stock warrants ............. 1,800 -- --
Purchase of treasury stock .................................. (13,590) (13,590) --
Increase (decrease) in bank overdraft ....................... (82,884) (82,884) --
Proceeds from line of credit borrowings ..................... 16,462,090 9,562,090 14,500,000
Proceeds from floor plan notes payable ...................... 4,201,467 2,105,804 195,400
Proceeds from notes payable ................................. 14,163,892 8,652,812 7,000,000
Repayment of notes payable .................................. (5,271,154) (2,408,441) (3,770,636)
Proceeds from issuance of convertible debentures ............ -- 300,000 --
Proceeds from capital lease obligations ..................... 251,722 -- --
Repayments of capital lease obligations ..................... (67,402) -- (54,708)
Payment of dividends ........................................ -- -- (39,618)
Deferred financing costs .................................... (607,347) (533,322) (33,640)
------------- ------------- --------------
Net cash provided by financing activities .................... 33,593,406 18,172,469 23,933,608
------------- ------------- --------------
Net increase in cash and cash equivalents .................... 1,066,949 991,194 2,772,701
------------- ------------- --------------
Cash and cash equivalents, beginning of period ............... -- -- 1,066,949
------------- ------------- --------------
Cash and cash equivalents, end of period ..................... $ 1,066,949 $ 991,194 $ 3,839,650
============= ============= ==============
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
F-8
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Smart Choice
Automotive Group, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CONCENTRATION OF CREDIT RISK
The Company provides sales finance services in connection with the sale of
used cars to individuals residing primarily in Central and South Florida.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
REVENUE RECOGNITION
Income on finance receivables is recognized using the interest method.
Direct loan origination costs are deferred and charged against finance income
over the life of the related installment sales contract as an adjustment of
yield.
Revenue from the sale of cars is recognized upon delivery, when the sales
contract is signed and the agreed-upon down payment has been received.
Parts and accessories sales are recognized upon shipment of products to
customers.
FINANCE RECEIVABLES
The Company originates installment sales contracts from its Company
dealerships. Finance receivables consist of contractually scheduled payments
from installment sales contracts net of unearned finance charges, direct loan
origination costs and an allowance for credit losses. The Company follows the
provisions of Statement of Financial Accounting Standards No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases." Unearned finance charges represent the
balance of finance income (interest) remaining from the capitalization of the
total interest to be earned over the original term of the related installment
sales contract. Direct loan origination costs represent the unamortized balance
of costs incurred in the origination of contracts at the Company's dealerships.
ALLOWANCE FOR CREDIT LOSSES
The allowance for uncollectible finance receivables is maintained at a
level which, in management's judgment, is adequate to absorb potential losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, which all
originated in the State of Florida, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, collateral values and economic conditions. Because of uncertainties
associated with regional economic conditions, collateral values and future cash
flows on impaired loans, it is reasonably possible that management's estimate
of credit losses inherent in the loan portfolio and the related allowance may
change materially in the near term. However, the amount of
F-9
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
change that is reasonably possible cannot be estimated. The allowance for
uncollectible finance receivables is increased by a provision for loan losses,
which is charged to expense. Repossessed vehicles are recorded as inventory at
the lower of estimated net realizable value or the related loan balances. The
difference between the balance of the installment contract and the amount
recorded as inventory for the repossessed vehicle is charged to the allowance
for credit losses.
PRESENTATION OF REVENUES AND COST OF REVENUES
The prices at which the Company sells its used cars and the interest rate
that it charges to finance these sales take into consideration that the
Company's primary customers are high-risk borrowers. The provision for credit
losses reflects these factors and is treated by the Company as a cost of both
the future finance income derived on the contract receivables originated by the
Company as well as a cost of the sale of the cars themselves. Accordingly,
unlike traditional car dealerships, the Company does not present gross profit
margin in its statement of operations calculated as sales of cars less cost of
cars sold.
INVENTORY
Inventory consists of new and used vehicles and vehicle and Corvette parts
and accessories. Vehicle reconditioning costs are capitalized as a component of
inventory cost. The cost of new and used vehicles sold is determined on a
specific identification basis. Vehicle and Corvette parts and accessories are
valued at the lower of first-in, first-out (FIFO) cost or market. Repossessed
vehicles are valued at the lower of estimated net realizable value or the
related loan balance.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the assets by the straight-line method.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs were related to specific identifiable
acquisitions and were allocated to the purchase price of the companies when
acquired.
GOODWILL
Goodwill represents acquisition costs in excess of the fair value of net
tangible assets of businesses purchased. These costs are being amortized over
40 years on a straight-line basis. Goodwill is evaluated for impairment when
events or changes in circumstances indicate that the carrying amounts of the
assets may not be recoverable. When any such impairment exists, the related
assets will be written down to fair value.
DEFERRED FINANCING COSTS
Deferred financing costs include costs related to obtaining debt financing
and are being amortized over the term of the debt.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 is an asset and liability
F-10
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 tax rates, with the
measurement of deferred income tax assets being reduced by available tax
benefits not expected to be realized.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," (SFAS 121) during 1997. SFAS 121 requires impairment losses
to be recorded on long-lived assets used in operations and goodwill when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
adoption of SFAS 121 did not impact the financial statements of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
EARNINGS PER SHARE
Earnings (loss) per share is based upon the weighted average number of
common shares outstanding during each period. Potential common shares for 1997
and 1996 have not been included since their effect would be antidilutive.
Potential common shares as of June 30, 1998 include 1,117,100 stock options,
warrants exercisable for 878,770 common shares, 903,302 shares underlying the
convertible debt and 535,012 shares underlying the convertible preferred stock.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," (FAS 128) during 1997. FAS 128 simplifies the standards
for computing earnings per share and makes them comparable to international
earnings per share standards. This statement replaces the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and diluted
EPS, respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding for the period. Similar to fully diluted EPS, diluted
EPS reflects the potential dilution of securities that could share in the
earnings. Adoption of this statement did not have a material effect on the
Company's reported earnings (loss) per share amounts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," (FAS
130) and No. 131, "Disclosure about Segments of an Enterprise and Related
Information," (FAS 131). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in
F-11
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
interim financial statements issued to the public. Both FAS 130 and FAS 131 are
effective for periods beginning after December 15, 1997. Adoption of FAS 130 is
not expected to have a material adverse effect on the Company's financial
statements. Management elected early adoption of FAS 131 during the first
quarter of fiscal 1998 (see Note 17).
In June 1998, the Financial Accounting Standards Board Issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to the
hedged risk or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
affect its financial statements.
F-12
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)
1. ORGANIZATION AND ACQUISITIONS
Smart Choice Automotive Group, Inc. (the "Company"), formerly named
"Eckler Industries, Inc.," operates new vehicle dealerships and used vehicle
dealerships in Florida and underwrites, finances, and services retail
installment contracts generated from the sale of used cars by its dealerships.
The Company also operates automobile dealers training and insurance divisions
as well as Eckler's, a supplier of Corvette parts and accessories.
On January 28, 1997, pursuant to an Agreement and Plan of Merger dated
December 30, 1996 (the "Agreement"), Eckler Industries, Inc. ("EII") acquired
all of the issued and outstanding shares of common stock of Smart Choice
Holdings, Inc. ("SCHI") in exchange for 1,463,969.5 shares of EII Class A and
788,162 shares of EII Class B, common stock. Under the terms of the Agreement,
the shareholders of SCHI obtained approximately 64% of the voting rights of
EII. Although EII was the parent of SCHI following the transaction, the
transaction was accounted for as a purchase of EII by SCHI (a reverse
acquisition in which SCHI is considered the acquirer for accounting purposes),
since the shareholders of SCHI obtained a majority of the voting rights in EII
as a result of the transaction. Accordingly, the financial statements of the
Company for the periods prior to January 28, 1997 are those of SCHI. The
purchase price for EII was computed by valuing the outstanding shares of common
stock of EII (the equivalent of 1,378,750 shares) at $6.75 or $9,306,563 and
acquisition costs of $100,119.
SCHI was incorporated on June 21, 1996 and was a development-stage
corporation prior to January 28, 1997. On August 16, 1996, SCHI acquired the
stock of First Choice Auto Finance, Inc. ("FCAF"). On January 28, 1997, in
addition to the acquisition of EII, SCHI acquired the stock of Florida Finance
Group, Inc. ("FFG"), Dealer Insurance Services, Inc. ("DIS") and Dealer
Development Services, Inc. ("DDS"). FFG underwrites, finances and services
automobile retail installment contracts and was based in St. Petersburg,
Florida prior to moving to the Company headquarters in Titusville, Florida.
FCAF was incorporated on March 22, 1994 and had no significant operations or
assets until it acquired the assets of Suncoast Auto Brokers, Inc. ("SAB"), and
Suncoast Auto Brokers Enterprises, Inc. ("SABE") on January 28, 1997. FCAF,
based at the Company headquarters in Titusville, Florida, now operates the
three used vehicle lots in St. Petersburg and Tampa, previously operated by SAB
and SABE. DIS is based in Tampa, Florida and provides insurance services for
automobile dealers. DDS is based in Tampa and provides consulting services and
training programs to automobile dealers. The purchase price of FFG was
$1,181,008 notes due to the seller, 142,857 shares of common stock valued at
$6.75 per share ($964,285) and acquisition costs of $40,643. The purchase price
of DDS and DIS was $781,000 notes due to the sellers and acquisition costs of
$24,561.
On February 12, 1997, the Company acquired the stock of Liberty Finance
Company ("Liberty"). On the same date, FCAF acquired the stock of Wholesale
Acquisitions, Inc. ("WA"), and Team Automobile Sales and Finance, Inc.
("Team"). FFG services the receivables purchased from Liberty, and FCAF
operates the five used vehicle lots previously operated by WA and Team in
Orlando, Florida. The outstanding capital stock of Liberty and affiliates was
acquired for $1,500,000 notes due to the seller, the equivalent of 176,078
shares of common stock valued at $6.75 per share ($1,188,527) and $109,249 in
acquisition costs.
On February 14, 1997, FCAF acquired the assets of Palm Beach Finance and
Mortgage Company ("PBF") and Two Two Five North Military Corp. d/b/a Miracle
Mile Motors ("MMM"). FFG services
F-13
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
the receivables purchased from PBF, and FCAF operates the used vehicle lot
previously operated by MMM located in West Palm Beach, Florida. The net assets
of PBF and MMM were acquired for $3,050,000 cash, $1,473,175 notes due to the
seller, 142,857 shares of common stock valued at $6.75 per share ($964,285) and
$53,299 in acquisition costs.
On June 27, 1997, the Company acquired the assets of Strata Holdings, Inc.
("SHI") and Ready Finance, Inc. ("RFI"). FCAF operates the three used vehicle
lots previously operated by SHI in West Palm Beach, Florida and FFG services
the finance receivables purchased from RFI. The net assets of SHI and RFI were
acquired for $5,000,000 cash, $4,880,089 notes due to the seller and $27,271 in
acquisition costs.
On June 30, 1997, the Company acquired the assets of Roman Fedo, Inc.
("FEDO") and Fedo Finance, Inc. ("FFI"). FCAF operates the used vehicle lot
previously operated by FEDO in West Palm Beach, Florida, and FFG services the
finance receivables purchased from FFI. The assets of FEDO were acquired for
$268,000 cash, 112,500 shares of common stock valued at $9.00 per share
($1,012,500) and $8,741 in acquisition costs.
On August 21, 1997, the Company acquired the assets of Jack Winters
Enterprises, Inc. ("Winters"). These assets consisted of a retail automobile
dealership located in Stuart, Florida for Volvo automobiles and other consumer
vehicles. The business is being operated by First Choice Stuart 2, Inc., a
100%-owned subsidiary of the Company and is doing business as Motorcars of
Stuart. The purchase price of Winters was $442,500 cash, $1,200,000 notes due
the seller, 9,161 shares of common stock valued at $10.25 per share ($93,900)
and acquisition costs of $49,540.
On August 29, 1997, the Company acquired the stock of B&B Enterprises Inc.
("B&B"). B&B operates a retail automobile dealership located in Stuart, Florida
for Nissan automobiles and other consumer vehicles. The business is being
operated by First Choice Stuart 1, Inc., a 100%-owned subsidiary of the Company
and is doing business as Stuart Nissan. The purchase price of B&B was 43,273
shares of common stock valued at $12.625 per share ($546,322) and acquisition
costs of $55,385.
The acquisitions described above have been accounted for using the
purchase method of accounting, and accordingly, the purchase prices have been
allocated to the assets purchased and the liabilities assumed based upon the
fair values at the dates of acquisition. The excess of the purchase prices over
the fair values of the net assets acquired was approximately $26,000,000 and
has been recorded as goodwill, which is being amortized on a straight-line
basis over 40 years.
F-14
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
The operating results of the significant acquired businesses have been
included in the consolidated statement of operations from the dates of
acquisition. The following pro forma information has been prepared assuming
certain of the acquisitions above, which were deemed to be significant
acquisitions, had taken place at the beginning of the respective periods. The
pro forma information includes adjustments for interest expense that would have
been incurred to finance the purchases, additional depreciation based on the
fair value of property acquired and the amortization of intangibles arising
from the transactions. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
transactions been effected on the assumed dates.
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997
-------------- ----------------
<S> <C> <C>
Total revenues .............................. $ 90,158,113 $ 93,247,492
Net loss applicable to common stock ......... (3,803,046) (19,884,913)
Loss per common share ....................... (1.34) (4.32)
</TABLE>
The results of operations of the insignificant acquisitions were not
material to the Company's consolidated results of operations.
2. FINANCE RECEIVABLES
The following is a summary of principal balances, net:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
---------------- ----------------
<S> <C> <C>
Contractually scheduled payments .......... $ 55,107,232 $ 90,036,501
Less: unearned finance charges ............ (15,510,342) (27,831,899)
------------- -------------
Principal balances ........................ 39,596,890 62,204,602
Add: loan origination costs ............... 487,522 951,663
------------- -------------
Principal balances, net ................... 40,084,412 63,156,265
Less: allowance for credit losses ......... (6,857,265) (9,336,911)
------------- -------------
Finance receivables, net .................. $ 33,227,147 $ 53,819,354
============= =============
</TABLE>
Finance receivables consist of sales of used cars under installment sale
contracts with maturities that generally do not exceed 48 months. The
receivables bear interest at rates ranging from 25.0% to 29.9% and are
collateralized by the vehicles sold. The Company holds title to the vehicles
until full contract payment is made. Finance receivables are pledged as
collateral under a line of credit agreement (see Note 6).
F-15
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------- --------------
<S> <C> <C>
Balance at beginning of year ................. $ -- $ 6,857,265
Balance at dates of acquisitions ............. 5,627,937 --
Loans charged off, net of recoveries ......... (3,712,655) (1,939,238)
Provision for credit losses .................. 4,941,983 4,418,884
------------ ------------
Balance at end of year ....................... $ 6,857,265 $ 9,336,911
============ ============
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------------
USEFUL LIFE 1996 1997
------------- --------- -------------
<S> <C> <C> <C>
Land ................................... $ -- $1,177,091
Buildings and improvements ............. 10-40 years -- 4,263,930
Leasehold improvements ................. 7-39 years -- 708,009
Machinery and equipment ................ 3-7 years -- 909,197
Molds .................................. 5-10 years -- 310,305
Office equipment and furniture ......... 3-8 years 24,586 3,542,413
Transportation equipment ............... 3-10 years -- 2,482,521
Signs .................................. 7 years -- 152,234
------- ----------
24,586 13,545,700
Less accumulated depreciation .......... 2,132 4,331,493
------- ----------
$22,454 $9,214,207
======= ==========
</TABLE>
4. NOTE RECEIVABLE
At December 31, 1996, note receivable consisted of advances under a
$800,000 line of credit extended to a company which had signed a contract to be
acquired by Smart Choice Holdings, Inc. Advances under the line of credit bore
interest at the prime rate, were due and payable 30 days after written demand
and were collateralized by substantially all assets of the borrower.
F-16
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Accrued compensation .................. $141,713 $ 855,806 $ 786,338
Accrued interest ...................... 32,620 411,913 219,461
Accrued professional fees ............. -- 897,837 369,439
Accrued restructuring charges ......... -- 1,101,266 569,191
Accrued taxes and other ............... 8,981 1,367,019 1,159,457
-------- ---------- ----------
$183,314 $4,633,841 $3,103,886
======== ========== ==========
</TABLE>
6. LINE OF CREDIT
The Company has a revolving line of credit with a lender which allows the
Company to borrow the lesser of $75,000,000 or 55% of certain eligible accounts
receivable at prime plus 2.5%. Interest is payable monthly with all of the
outstanding principal due December 2001. The line of credit is collateralized
by substantially all the assets of Florida Finance Group, Inc. and is
guaranteed by Smart Choice Holdings, Inc. and Smart Choice Automotive Group,
Inc. The balance at June 30, 1998 and December 31, 1997 under this line of
credit was $45,900,000 and $31,400,000, respectively. Unamortized debt discount
was $128,983 and $170,400 at June 30, 1998 and December 31, 1997, respectively.
The line of credit agreement contains various financial and operating
covenants. As of June 30, 1998, the Company was in violation of the leverage
ratio requirement. As of December 31, 1997, the Company was in violation of
certain of these covenants, including leverage ratios and minimum net income
requirement. The lender waived compliance of these covenants for the year
ending December 31, 1997.
The following summarizes certain information about the borrowings under
the line of credit:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------- ----------------
<S> <C> <C>
Maximum amount outstanding at any month end .............. $ 31,681,590 $ 45,900,000
Average amount outstanding during the period ............. $ 21,921,484 $ 40,191,667
Weighted average interest rate during the period ......... 11.45% 11.33%
</TABLE>
Interest rates ranged from 11.25% to 11.5% and 11.0% to 11.5%, and
interest expense was $2,235,954 and $2,228,262 for the year ended December 31,
1997 and the six months ended June 30, 1998, respectively.
F-17
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
------ ------------- -------------
<S> <C> <C> <C>
Notes payable issued in connection with various acquisitions, interest ranging from 8%
to 10%, payable through June 1999. ...................................................... $-- $6,029,146 $5,039,365
12% unsecured convertible note payable, interest payable quarterly, unpaid principal
and interest due May 2002, convertible at a rate of one share of common stock for
every $15.00 of outstanding principal, conversion price adjustable upon the
occurrence of certain events. ........................................................... -- 4,000,000 4,000,000
12% convertible note payable, net of discount, interest payable quarterly, unpaid
principal and interest due June 2000, convertible at a rate of one share of common
stock for every $12.00 of outstanding principal, conversion price adjustable upon
the occurrence of certain events. On December 31, 1997, the conversion price was
adjusted to 90% of the market price of the Company's common stock. Accordingly,
$282,506 of interest expense has been recorded for the difference between the
conversion price of the note payable and the fair market value of the Company's
common stock on the date of issuance. ................................................... -- 3,025,125 3,221,625
Prime + 1.5% (10% at December 31, 1997) mortgage note payable, principal payments
of $14,405 plus interest payable monthly, outstanding principal and interest due July
2001, collateralized by property and equipment of Eckler Industries, Inc. and
guaranteed by a stockholder of the Company. ............................................. -- 2,500,000 2,393,333
Variable rate (8.5% at December 31, 1997) installment loan payable, principal and
interest payable monthly, outstanding principal and interest due December 2009,
collateralized by certain property of the Company. ...................................... -- 2,199,900 2,172,952
Various unsecured notes payable to investors bearing interest at rates ranging
from 10%-16%, interest payable monthly, outstanding principal balances due
through December 2001. .................................................................. -- 1,699,142 1,338,507
$1,500,000 note payable, (see below) ..................................................... -- 1,500,000 1,500,000
9% unsecured convertible notes payable, interest and principal due April 1999,
convertible at a rate of one share of common stock for each $17.50 of principal,
$800,000 was repaid in 1998.............................................................. -- 1,267,601 467,601
8% convertible debentures, net of discount (see below) ................................... -- 965,784 163,835
9% unsecured convertible note payable, interest and principal due January 1999,
convertible at a rate of one share of common stock for each $17.50 of principal.......... -- 1,031,008 700,000
Prime plus 1.75% (10.25% at December 31, 1997) notes payable, principal of $24,274
plus interest payable monthly through April 1999, at which time all remaining
principal and interest are due, secured by substantially all the assets of First Choice
Stuart 1, Inc. and guaranteed by First Choice Auto Finance, Inc. and
Smart Choice Holdings, Inc. ............................................................. -- 894,173 844,172
8% note payable, principal and interest of $10,010 payable monthly through
June 2007, collateralized by certain property of the Company. ........................... -- 797,488 768,857
Prime (8.5% at December 31, 1997) unsecured convertible subordinated debenture,
net of discount, interest payable quarterly, unpaid principal and interest due
December 31, 2000, convertible at the rate of one share of common stock for every
$18.00 of outstanding principal, conversion price adjustable upon the occurrence of
certain events. ......................................................................... -- 697,895 706,579
</TABLE>
F-18
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- --------------
<S> <C> <C>
Prime plus 1% (9.5% at December 31, 1997) unsecured note payable, interest payable
monthly, outstanding principal repaid in April 1998. ................................... -- 600,000
7.75% note payable, principal and interest of $8,683 payable monthly through
December 2003, secured by certain real property of the Company, repaid in 1998. ........ -- 498,923
12% convertible debentures (see below) .................................................. 262,000 410,000
Prime plus 1% (9.5% at December 31, 1997) note payable, interest payable monthly,
principal due upon demand, repaid in 1998. ............................................. -- 300,000
Various notes payable bearing interest at rates from 6% to 10%, principal and interest
payable through July 2001. ............................................................. 60,000 274,023
10% unsecured note payable, interest payable monthly, outstanding principal repaid in
1998. .................................................................................. -- 257,250
Prime plus 1% (9.5% at December 31, 1997) unsecured convertible subordinated note
payable, interest payable quarterly, unpaid principal and interest due June 1999,
convertible at a rate of one share of common stock for every $15.00 of outstanding
principal, conversion price adjustable upon the occurrence of certain events. On
December 31, 1997, the conversion price was adjusted to 90% of the market price
of the Company's common stock. Accordingly, $20,179 of interest expense has been
recorded for the difference between the conversion price of the note payable and
the fair market value of the Company's common stock on the date of issuance. ........... -- 250,000
10% note payable, interest payable semiannually, principal of $1,500,000 due upon a
public offering by the Company in 1998 and $1,500,000 due June 30, 1999,
collateralized by substantially all the assets and outstanding capital stock of EII. ... -- --
10% note payable, interest payable semiannually, outstanding principal due September
1999 unless the assets or stock of Eckler Industries, Inc. are sold, then all the
outstanding principal is due in full on the date of closing of such sale, collateralized
by substantially all the assets and outstanding capital stock of EII. .................. -- --
-------- -----------
Total notes payable ..................................................................... $322,000 $29,197,458
======== ===========
<CAPTION>
JUNE 30,
1998
--------------
<S> <C>
Prime plus 1% (9.5% at December 31, 1997) unsecured note payable, interest payable
monthly, outstanding principal repaid in April 1998. ................................... --
7.75% note payable, principal and interest of $8,683 payable monthly through
December 2003, secured by certain real property of the Company, repaid in 1998. ........ --
12% convertible debentures (see below) .................................................. 340,000
Prime plus 1% (9.5% at December 31, 1997) note payable, interest payable monthly,
principal due upon demand, repaid in 1998. ............................................. --
Various notes payable bearing interest at rates from 6% to 10%, principal and interest
payable through July 2001. ............................................................. 183,226
10% unsecured note payable, interest payable monthly, outstanding principal repaid in
1998. .................................................................................. --
Prime plus 1% (9.5% at December 31, 1997) unsecured convertible subordinated note
payable, interest payable quarterly, unpaid principal and interest due June 1999,
convertible at a rate of one share of common stock for every $15.00 of outstanding
principal, conversion price adjustable upon the occurrence of certain events. On
December 31, 1997, the conversion price was adjusted to 90% of the market price
of the Company's common stock. Accordingly, $20,179 of interest expense has been
recorded for the difference between the conversion price of the note payable and
the fair market value of the Company's common stock on the date of issuance. ........... 250,000
10% note payable, interest payable semiannually, principal of $1,500,000 due upon a
public offering by the Company in 1998 and $1,500,000 due June 30, 1999,
collateralized by substantially all the assets and outstanding capital stock of EII. ... 3,000,000
10% note payable, interest payable semiannually, outstanding principal due September
1999 unless the assets or stock of Eckler Industries, Inc. are sold, then all the
outstanding principal is due in full on the date of closing of such sale, collateralized
by substantially all the assets and outstanding capital stock of EII. .................. 4,000,000
-----------
Total notes payable ..................................................................... $31,090,052
===========
</TABLE>
Aggregate maturities of notes payable over future years as of December 31,
1997 are as follows: 1998--$11,180,849; 1999--$10,471,143; 2000--$1,002,763;
2001--$740,415; 2002--$4,264,519; thereafter--$2,148,965.
Unamortized debt discount was $611,196 and $321,796 at December 31, 1997
and June 30, 1998, respectively.
$1,500,000 NOTE PAYABLE
On December 31, 1997, the Company signed a $1,500,000 note payable. The
note payable bears interest at 10%. Interest is payable monthly and the
outstanding principal balance is due October 1998. If the Company or any of its
affiliates should, prior to the repayment in full of the note, either (i) issue
any debt or equity securities in a public offering or (ii) issue, in the
aggregate, more than seven and one-half million dollars of debt or equity
securities in one or more private placements, including any securitization or
other sale or financing of chattel paper or receivables, but excluding floor
plan financing; then all the outstanding principal and all the accrued and
unpaid interest on the note will be due in full on the date of closing of such
issuance. The note is collateralized by substantially all the assets as well as
all of the issued and outstanding capital stock of EII.
F-19
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
8% CONVERTIBLE DEBENTURES
The unsecured convertible debentures bear interest at 8%. Interest is
payable monthly, and all outstanding principal is due April 1999. The
debentures were convertible from December 14, 1997 through April 15, 1998 at a
conversion price equal to 66 2/3% of the average closing bid price of the
Company's common stock for the five trading days immediately preceding the
conversion date. Accordingly, $525,000 of interest expense was recorded for the
year ended December 31, 1997 for the difference between the conversion price of
the debentures and the fair market value of the Company's stock at the time of
issuance. The interest rate and conversion price are both adjustable upon the
occurrence of certain events. During the six months ended June 30, 1998,
$886,165 was converted into 182,485 shares of common stock.
12% CONVERTIBLE DEBENTURES
The convertible debentures bear interest at 12% and were due on November
19, 1997. Holders of $340,000 of the debentures have extended the due date to
January 1999. Outstanding principal after November 19, 1997 bears interest at
18%. The debentures were convertible prior to November 19, 1997 into the
Company's common stock at a rate of one share of common stock for each $10.00
of outstanding principal. Additionally, holders of the debentures who did not
convert prior to the maturity date received, for each $20,000 debenture, a
warrant to purchase 600 shares of the Company's common stock at $6.00 per
share. The warrants are immediately exercisable and expire five years from the
date of issuance. During the six months ended June 30, 1998, $70,000 of the
debentures were repaid.
F-20
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
8. FLOOR PLANS PAYABLE
Floor plans payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
------ ------------- -------------
<S> <C> <C> <C>
$3,350,000 floor plan line of credit, variable interest rate,
interest payable monthly, principal balance payable at
the earlier of the time a vehicle is sold or 360 and 180
days from the time a vehicle is floored for new and
used vehicles, respectively, guaranteed by Smart
Choice Automotive Group, Inc., collateralized by
vehicle inventory floored. The line of credit
agreement contains certain financial ratio covenants. ......... $-- $3,285,165 $3,163,685
$3,750,000 floor plan line of credit, interest at prime plus
1.5% (10% at December 31, 1997), interest payable
monthly, principal balance payable the earlier of
(i) 48 hours from the time of sale of a vehicle or
within 24 hours from the time payment is received
from thepurchaser of the vehicle or (ii) upon
demand. Collateralized by all inventory, fixed assets,
holdback reserves, manufacturers' rebates, incentive
payments and intangible assets of First Choice
Auto Finance, Inc., guaranteed by Smart Choice
Automotive Group, Inc. ........................................ -- 2,659,968 2,470,066
$3,000,000 floor plan line of credit, interest at prime plus
1% (9.5% at December 31, 1997), interest payable
monthly, principal payable upon sale of floored
vehicle, guaranteed by Smart Choice Automotive
Group Inc. and collateralized by certain assets of First
Choice Stuart 1, Inc. The line of credit was subject to
various financial and operating covenants. As of
June 30, 1998 and December 31, 1997, the Company
was in violation of certain of the covenants. The
lender waived these covenants through December 31,
1997. ......................................................... -- 2,341,959 2,848,741
--- ---------- ----------
Total .......................................................... $-- $8,287,092 $8,482,492
=== ========== ==========
</TABLE>
F-21
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
9. INCOME TAXES
The components of deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards ......... $ 238,000 $ 3,476,000
Accounts receivable ...................... -- 2,589,000
Stock options and warrants ............... -- 1,805,000
Accruals ................................. -- 523,000
Compensation ............................. -- 423,000
Depreciation and amortization ............ -- 243,000
Inventory ................................ -- 149,000
Other .................................... -- 93,000
---------- ------------
Gross deferred income tax assets ......... 238,000 9,301,000
Valuation allowance ...................... (238,000) (9,301,000)
---------- ------------
Total deferred income tax assets ......... $ -- $ --
========== ============
</TABLE>
The Company's valuation allowance increased by approximately $238,000 and
$9,063,000 for the periods ended December 31, 1996 and 1997, respectively,
which represents the effect of changes in the temporary differences and net
operating losses. The Company has recorded a valuation allowance to state its
deferred tax assets at estimated net realizable value due to the uncertainty
related to realization of these assets through future taxable income.
At December 31, 1997, the Company had unused federal tax net operating
losses (NOLs) to carry forward against future years' taxable income of
approximately $10,223,000 expiring in various amounts through 2012. As a result
of certain acquisitions, the use of approximately $1,141,000 of the NOLs will
be limited each year under the provisions of Section 382 of the Internal
Revenue Code of 1986, as amended, and the provisions of Treasury Regulation
1.1502-21 regarding separate return limitation years.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts its operations partially from leased facilities.
These leases are classified as operating leases and expire on various dates
through 2005.
The Company also leases equipment under capital leases which expire on
various dates through 2002. The total capitalized cost for this equipment is
$1,004,961 with accumulated depreciation of $116,015 as of December 31, 1997.
F-22
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
As of December 31, 1997, future minimum lease payments under capital
leases and future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
DECEMBER 31, 1997 LEASES LEASES
- ---------------------------------------------------- ------------ -------------
<S> <C> <C>
1998 ............................................ $ 322,490 $2,247,147
1999 ............................................ 268,330 1,584,132
2000 ............................................ 254,342 1,481,429
2001 ............................................ 204,906 1,446,639
2002 ............................................ 101,111 936,414
Thereafter ...................................... -- 479,160
---------- ----------
1,151,179 $8,174,921
==========
Less amount representing interest ............... 210,899
----------
Present value of minimum lease payments ......... $ 940,280
==========
</TABLE>
Rental expense for the year ended December 31, 1997 was approximately
$1,542,000.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements expiring at various
dates through the year 2002. As of December 31, 1997, the Company's total
noncancellable obligation under all employment agreements is approximately
$2,404,000.
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 since the Company has accrued sufficient amounts to cover
the costs expected to be incurred in settlement of these actions.
ENVIRONMENTAL MATTERS
Some of the Company's past and present operations involve activities which
are subject to extensive and changing federal and state environmental
regulations and can give rise to environmental issues. As a result, the Company
is from time to time involved in administrative and judicial proceedings and
administrative inquiries related to environmental matters. Based on advice of
counsel, management believes that the outcome of these matters will not have a
material impact on the Company's financial position.
11. CONVERTIBLE PREFERRED STOCK
During December 1996 and January 1997, the Company sold 395,000 shares of
Series A redeemable convertible preferred stock. Proceeds from these offerings,
net of offering costs, were
F-23
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
approximately $977,000. The liquidation preference of each preferred share is
$2.00. Upon the completion of an initial public offering of the Company that
raises a minimum of $20 million in gross proceeds, each preferred share will be
converted automatically into the higher of: (i) one share of the Company's $.01
par value common stock or (ii) that number of shares of common stock having a
value (as measured by a public offering sale price) equal to $9.00. The holders
of the Series A shares may require, by a two-thirds vote of the issued and
outstanding Series A shares, that the Company offer to redeem the Series A
shares at any time after September 30, 1998. The redemption price will equal
$2.00 per share. As of June 30, 1998, all of these Series A shares had been
exchanged for 526,500 shares of common stock of the Company.
On September 30, 1997, the Company completed an offering of 300 units of
Series A redeemable convertible preferred stock and warrants at $10,000 per
unit. Proceeds from the offering, net of offering costs, were approximately
$2,965,000. Each unit consists of one share of Series A redeemable convertible
preferred stock and one warrant to acquire 150 shares of common stock for each
preferred share purchased at a price equal to $16.20 per share. The warrants
expire five years after the date of issuance. The preferred stock is
convertible into shares of common stock at a conversion price which, at the
option of the buyer, is either fixed at a rate of 135% of the market price of
common stock on the date of issuance of the preferred stock, or floating at a
rate of 100% of the market price of the common stock if converted during the
period 90 days after the issuance of the preferred stock and 90% of the market
price if converted at any time after that 90-day period. Accordingly, since
none of the preferred stock was converted 90 days after issuance, a preferred
stock dividend of $333,333 ($.08 per share) has been recorded for the year
ended December 31, 1997 for the difference between the discounted conversion
price of the preferred stock and the fair market value of the Company's common
stock at the time of issuance. The preferred stock is redeemable at the option
of the buyer upon the occurrence of certain events at a price per share that is
also dependent upon the occurrence of certain events.
On December 10, 1997, the Company issued an additional 100 units of the
Series A redeemable convertible preferred stock and associated warrants for net
proceeds of $1,000,000. Each unit consists of one share of Series A redeemable
convertible preferred stock and one warrant to acquire 150 shares of common
stock for each preferred share purchased at a price equal to $10.46 per share.
The warrants expire five years after the date of issuance. The preferred stock
has features identical to that of the Series A redeemable convertible preferred
stock issued on September 30, 1997. As of June 30, 1998, all but one share of
Series A redeemable convertible preferred stock issued in September 1997 and
December 1997 had been converted into 872,461 shares of common stock.
In May 1998, the Company sold to a private investment group 220 shares of
the Company's Series B convertible preferred stock for $10,000 per share.
Proceeds from this offering, net of offering costs, were approximately
$2,200,000. The Series B convertible preferred stock has an 11.0% dividend per
year and is convertible into common stock at a conversion rate of $10.00 per
share. After November 5, 1999, the Company may, at its option, redeem the
Series B convertible preferred stock for $10,000 per share. In connection with
the issuance of the Series B convertible preferred stock, the Company agreed to
certain limitations on the issuance of additional shares of preferred stock by
the Company.
In June 1998, the Company sold to a private investment group 24.98 shares
of the Company's Series C convertible preferred stock for $10,000 per share.
Proceeds from this offering, net of offering costs, were approximately
$249,800. The Series C convertible preferred stock has an 11.0% dividend per
year and is convertible into common stock at a conversion rate of $11.18 per
share. After December 2, 1999,
F-24
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
the Company may, at its option, redeem the Series C convertible preferred stock
for $10,000 per share. In connection with the issuance of the Series C
convertible preferred stock, the Company agreed to certain limitations on the
issuance of additional shares of preferred stock by the Company.
In June 1998, the Company sold to a private investment group 350 shares of
the Company's Series D convertible preferred stock for $10,000 per share.
Proceeds from this offering, net of offering costs, were approximately
$3,441,610. The Series D convertible preferred stock has an 11.0% dividend per
year for five years and thereafter has a 20% dividend per year and is
convertible into common stock at a conversion rate of $12.00 per share. After
June 22, 2001, the Company may, at its option, redeem the Series D convertible
preferred stock for $10,000 per share. In connection with the issuance of the
Series D convertible preferred stock, the Company agreed to certain limitations
on the issuance of additional shares of preferred stock by the Company.
12. CAPITAL STOCK
INCREASE IN PAR VALUE AND STOCK SPLIT
In March 1997, the Company authorized an increase in the par value of its
common stock from $.001 to $.01. On July 23, 1998, the Board of Directors
authorized a 1-for-2 reverse stock split with respect to the Common Stock. All
common share information included in the accompanying financial statements has
been retroactively adjusted to give effect to the increase in par value and the
reverse stock split.
STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been recognized for options
granted to employees at exercise prices which equal or exceed the market price
of the Company's common stock at the date of grant. Options granted at exercise
prices below market prices are recognized as compensation cost measured as the
difference between market price and exercise price at the date of grant.
Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting
for Stock-Based Compensation," requires the Company to provide pro forma
information regarding net income and earnings per share as if compensation cost
for the Company's employee stock options had been determined in accordance with
the fair market value based on the method prescribed in FAS 123. The Company
estimates the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended December 31, 1997: no dividend
yield, an expected life of 4.9 years; expected volatility of 61%, and a
risk-free interest rate of 6%.
F-25
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
Under the accounting provisions of FAS 123, the Company's net loss
applicable to common stock and loss per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997
-------------- -----------------
<S> <C> <C>
Net loss applicable to common stock
As reported ...................... $ (703,788) $ (18,981,938)
Pro forma ........................ (703,788) (22,570,717)
Basic loss per common share
As reported ...................... $ (.26) $ (4.28)
Pro forma ........................ (.26) (5.10)
</TABLE>
The following table summarizes information about employee plan and
non-plan stock option activity for the periods ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
SHARES EXERCISE PRICE OPTIONS GRANTED
---------- ------------------ -----------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 ......... -- $ -- $ --
Acquired in merger .................... 87,500 5.32 --
Granted, at market value .............. 419,000 9.78 5.56
Granted, above market value ........... 15,000 13.00 7.10
Granted, below market value ........... 25,000 8.14 5.06
Exercised ............................. (6,250) 5.00 --
Forfeited ............................. (1,500) 9.76 --
------- ------ -------
Outstanding, December 31, 1997 ......... 538,750 $ 9.12 $ --
======= ====== =======
</TABLE>
At December 31, 1997, a total of 301,250 options were exercisable at a
weighted-average exercise price of $8.48.
The following table summarizes information about non-plan stock option
activity issued to non-employees for the periods ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
SHARES EXERCISE PRICE OPTIONS GRANTED
------------- ------------------ -----------------
<S> <C> <C> <C>
Outstanding--inception ................. -- $ -- $ --
Granted, above market value ........... 145,000 9.50 --
------- ------ -------
Outstanding, December 31, 1996 ......... 145,000 9.50 --
Acquired in merger .................... 522,000 7.62 --
Granted, at market value .............. 116,250 10.12 5.16
Granted, above market value ........... 150,000 16.34 4.56
Forfeited ............................. (340,000) 7.58 --
Expired ............................... (20,000) 10.00 --
-------- ------ -------
Outstanding, December 31, 1997 ......... 573,250 $ 10.82 $ --
======== ======= =======
</TABLE>
At December 31, 1997 and 1996, a total of 498,250 and 131,000 options were
exercisable at a weighted-average exercise price of $10.28 and $9.84,
respectively.
F-26
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE REMAINING LIFE EXERCISABLE EXERCISE PRICE
- ------------------------- ------------- ------------------ ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
EMPLOYEE PLAN AND
NON-PLAN OPTIONS
$5.00 to $7.76........... 93,750 $ 5.68 3.3 years 81,250 $ 5.36
$8.50 to $13.00.......... 445,000 9.86 4.4 years 220,000 9.64
------- ------- ------- -------
538,750 $ 9.12 301,250 $ 8.48
======= ======= ======= =======
NON-EMPLOYEE
NON-PLAN OPTIONS
$5.76 to $6.00........... 137,500 $ 5.82 3.7 years 137,500 $ 5.82
$9.00 to $13.00.......... 360,750 10.88 3.8 years 310,750 11.10
$17.50 to $24.00......... 75,000 19.66 3.7 years 50,000 17.50
------- ------- ------- -------
573,250 $ 10.82 498,250 $ 10.82
======= ======= ======= =======
</TABLE>
COMMON STOCK OPTIONS ISSUED--COMPENSATION
During the year ended December 31, 1997, compensation expense of
$3,809,826 was recognized on common stock options granted to employees and
directors. These options were granted by trusts created by two major
stockholders to purchase shares of the Company's common stock owned by the
trusts. The trusts will receive the proceeds, if any, from the exercise of
these options. Since these options were not granted by the Company and their
exercise will not result in the issuance of any additional common stock, they
have been excluded from the tables above.
COMMON STOCK OPTIONS ISSUED--CONSULTANTS
During the year ended December 31, 1997, options granted to consultants
were valued at $607,700 in accordance with FAS 123.
COMMON STOCK ISSUED--PROFESSIONAL FEES
The Company issued 8,965 shares of common stock as payment for
professional services which were valued at $99,806 representing the fair value
of the stock on the date of issuance.
COMMON STOCK OPTIONS AND WARRANTS ISSUED--LENDERS
During 1997, the Company entered into various agreements with lending
institutions and issued options and warrants to purchase 236,250 shares of the
Company's common stock at exercise prices ranging from $4.00 to $24.00 per
share. Of these options and warrants, 211,250 were exercisable at December 31,
1997. The options and warrants expire at various dates ranging from December
1999 through August 2002.
The above common stock options and warrants were valued at $1,350,253 in
accordance with the provisions of FAS 123. This amount was recorded as debt
discount and is being amortized over the life of the related debt. Interest
expense related to these options and warrants was $466,979 for the year ended
December 31, 1997.
F-27
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
COMMON STOCK ISSUED--DEBT CONVERSION
During the year ended December 31, 1997, the Company issued 221,257 shares
of common stock in conversion of debt amounting to $1,770,056.
During the period ended June 30, 1998, the Company issued 249,905 shares
of common stock in conversion of debt amounting to $1,333,880.
COMMON STOCK--INCENTIVE PLAN
During 1998, the Company's Board of Directors and Stockholders approved
the Executive Incentive Compensation Plan (the "Plan"). This plan provides for
grants of stock options, stock appreciation rights, restricted stock, deferred
stock, dividend equivalents, and other forms of stock based and non-stock based
compensation. The plan provides that up to 750,000 shares of the Company's
common stock may be granted as awards under the plan.
STOCK WARRANTS
At December 31, 1997, the Company had the following stock warrants
outstanding:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
EXPIRATION DATE UNDERLYING SHARES PRICE
- ------------------------------- ------------------- ---------
<S> <C> <C>
December 31, 1999 .......... 35,000 $ 4.00
November 8, 2000 ........... 6,250 $ 12.00
November 14, 2000 .......... 642,000 $ 13.00
March 30, 2001 ............. 10,000 $ 8.40
August 29, 2002 ............ 26,250 $ 14.00
September 30, 2002 ......... 45,000 $ 16.20
November 19, 2002 .......... 16,860 $ 6.00
December 10, 2002 .......... 15,000 $ 10.46
December 24, 2002 .......... 45,000 $ 8.00
-------
841,360
=======
</TABLE>
At December 31, 1997, 816,000 of the warrants were exercisable.
SHARES RESERVED
At December 31, 1997, the Company has reserved approximately 4,079,985
shares of common stock for future issuance under all of the above arrangements,
the convertible debt and the convertible preferred stock.
13. RESTRUCTURING CHARGES
During the fourth quarter of 1997, after all acquisitions were completed,
the Company implemented a restructuring program (the "Program") designed to
enhance overall competitiveness and efficiency through the reduction of
operating costs. The Program resulted in charges to operations of $2,117,906.
The charges consist of costs related to employment contract terminations and
severance pay.
F-28
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
14. RETIREMENT BENEFIT PLAN
The Company sponsors a defined contribution pension plan for all employees
meeting certain eligibility requirements. The plan provides for voluntary
employee contributions and contributions by the Company to be determined at the
discretion of the Board of Directors. The Company made no contribution to the
plan for the year ended December 31, 1997. There was no plan in effect from the
period of inception to December 31, 1996.
15. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 21, 1996) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------------
1996 1997 1997 1998
---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash paid for interest .............................. $ 552 $4,228,339 $1,198,871 $3,893,918
------ ---------- ---------- ----------
Noncash investing and financing activities:
Notes payable and capital lease obligations
incurred in connection with the purchase
of property and equipment ........................ $ -- $3,722,670 $ -- $ 15,236
Notes payable issued in connection with
acquisitions ..................................... -- 11,015,272 9,784,272 --
Common stock issued in connection with
acquisitions ..................................... -- 14,413,880 13,773,661 --
Common stock issued for conversion of
debt ............................................. -- 1,770,056 -- 1,333,880
Common stock options granted to
employees and directors .......................... -- 3,809,826 -- --
Common stock options and warrants issued
to lenders and consultants ....................... -- 1,957,953 -- --
Common stock issued for professional
services ......................................... 4,968 99,806 -- --
Common stock issued by stockholders for
cancellation of common stock options
granted by the Company ........................... -- 800,000 -- --
Contribution to capital by stockholder ............. -- 159,203 -- --
Debt discount on convertible debt .................. -- 827,685 -- --
Common stock issued for conversion of
preferred stock and accrued dividends ............ -- -- -- 5,056,057
Purchase of treasury stock for reduction of
accounts receivable and acquisition debt ......... -- -- -- 93,900
</TABLE>
F-29
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts:
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of judgment
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect these estimates.
Since the fair value is estimated as of December 31, 1997, the amounts
that will actually be realized or paid in settlement of the instruments could
be significantly different.
CASH AND CASH EQUIVALENTS
The carrying amount is assumed to be the fair value because of the
liquidity of these instruments.
FINANCE RECEIVABLES, NET
The carrying amount is assumed to be the fair value because of the
relative short maturity and repayment terms of the portfolio as compared to
similar instruments.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value because of the short maturity
of these instruments.
NOTES PAYABLE
The terms of the Company's notes payable approximates the terms in the
market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
17. SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information."
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management elected the early adoption of this pronouncement during the six
months ended June 30, 1998. SFAS 131 requires that public enterprises report
certain information about reporting segments in financial statements. It also
requires the disclosure of certain information regarding services provided,
geographic areas of operation and major customers.
The Company's operations are classified into four reportable segments. The
used car stores segment operates a network of 22 used car stores in Florida.
The Company primarily sells used vehicles
F-30
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1998 AND JUNE 30, 1997 IS UNAUDITED)--(CONTINUED)
to payment-sensitive non-prime customers who, most likely, would be unable to
purchase a vehicle without financing through the Company's financing services
segment. The new car dealerships segment operates two new car dealerships in
Florida. The financing services segment finances consumer purchases of used
vehicles sold in the Company's used and new car dealerships. The parts and
accessories segment sells and distributes Corvette parts and accessories
throughout the United States, primarily through its extensive catalog.
The following table shows certain financial information by reportable
segment as of and for the six months ended June 30, 1998 and as of and for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
USED NEW
CAR FINANCING CAR
STORES SERVICES DEALERSHIPS
-------------- ------------- ---------------
<S> <C> <C> <C>
1996
Revenue from external customers ......... $ -- $ -- $ --
Operating income (loss) ................. -- -- --
Depreciation and amortization ........... -- -- --
Identifiable assets ..................... -- -- --
Capital expenditures (exclusive
of acquisitions) ....................... -- -- --
Interest expense ........................ -- -- --
1997
Revenue from external customers ......... $35,279,228 $ 6,898,694 $ 9,863,245
Operating income (loss) ................. 2,382,464 717,634 (470,739)
Depreciation and amortization ........... 41,709 8,078 86,964
Identifiable assets ..................... 10,273,420 34,763,399 7,369,038
Capital expenditures (exclusive
of acquisitions) ....................... 1,494,370 178,238 (63,031)
Interest expense ........................ 153,405 2,902,039 128,384
Compensation expense related
to employee and director
stock options .......................... -- -- --
1998 (unaudited)
Revenue from external customers ......... $40,602,531 $ 6,942,139 $14,349,193
Operating income (loss) ................. 7,077,817 1,122,052 (241,522)
Depreciation and amortization ........... 241,541 47,415 23,048
Identifiable assets ..................... 14,402,881 54,408,783 8,207,635
Capital expenditures .................... 173,796 46,867 30,635
Interest expense ........................ 177,017 2,374,407 178,248
<CAPTION>
CORVETTE
PARTS AND CORPORATE
ACCESSORIES AND OTHER CONSOLIDATED
------------- ---------------- ----------------
<S> <C> <C> <C>
1996
Revenue from external customers ......... $ -- $ -- $ --
Operating income (loss) ................. -- (670,616) (670,616)
Depreciation and amortization ........... -- 4,381 4,381
Identifiable assets ..................... -- 716,290 716,290
Capital expenditures (exclusive
of acquisitions) ....................... -- 24,586 24,586
Interest expense ........................ -- 33,172 33,172
1997
Revenue from external customers ......... $15,384,589 $ 1,177,903 $ 68,603,659
Operating income (loss) ................. 17,635 (15,009,346) (12,362,352)
Depreciation and amortization ........... 277,794 1,270,695 1,685,240
Identifiable assets ..................... 5,439,449 31,259,685 89,104,991
Capital expenditures (exclusive
of acquisitions) ....................... 286,853 3,182,884 5,079,314
Interest expense ........................ 244,591 3,025,756 6,454,175
Compensation expense related
to employee and director
stock options .......................... -- 4,649,702 4,649,702
1998 (unaudited)
Revenue from external customers ......... $10,411,541 $ 426,032 $ 72,731,436
Operating income (loss) ................. 1,627,114 (2,054,877) 7,530,584
Depreciation and amortization ........... 83,504 896,794 1,292,302
Identifiable assets ..................... 5,937,558 33,261,371 116,218,228
Capital expenditures .................... 57,968 125,973 435,239
Interest expense ........................ 13,587 1,289,024 4,032,283
</TABLE>
18. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1997, the Company recorded the following
adjustments:
<TABLE>
<S> <C>
Expense costs of abandoned public offering ......... $ 479,406
Restructuring charge ............................... 2,117,906
Expense related to stock options ................... 1,405,087
</TABLE>
F-31
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
EXPLANATORY HEADNOTE (UNAUDITED)
INTRODUCTION
On October 28, 1996, Eckler Industries, Inc. (Eckler) entered into an
Agreement and Plan of Reorganization (the Agreement) with Smart Choice
Holdings, Inc. (SCHI). The closing of the transaction between Eckler and SCHI
occurred on January 28, 1997. Based on the controlling interest in Eckler
obtained by SCHI as a result of this transaction, the transaction was accounted
for as an acquisition of Eckler by SCHI (a reverse acquisition in which SCHI is
considered the acquirer for accounting purposes).
SCHI was incorporated on June 21, 1996 and had no significant operations
or assets until it acquired Eckler and other companies. Prior to the Eckler
transaction, SCHI had previously entered into agreements to acquire the
outstanding capital stock or net assets of other companies. The transactions
between SCHI and the other companies closed on January 28, 1997, February 12,
1997 and February 14, 1997. In addition, on June 27, 1997, Smart Choice
Automotive Group, Inc. acquired certain assets and assumed certain liabilities
of Strata Holding, Inc. and Ready Finance, Inc., which were under common
ownership and on August 29, 1997 acquired the outstanding capital stock of B&B
Florida Enterprises, Inc. d/b/a Stuart Nissan. The acquisitions of Eckler and
the other companies were accounted for under the purchase method, with the
assets acquired and liabilities assumed recorded at their estimated fair
values.
The pro forma consolidated statement of operations for the year ended
December 31, 1997 assumes the transactions were consummated as of January 1,
1997 and includes the operations of the acquired companies from January 1, 1997
through the dates of acquisition.
The pro forma consolidated statement of operations may not be indicative
of the actual results of the transactions, but in the opinion of management,
all adjustments have been made that are necessary to present fairly the pro
forma data.
F-32
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FLORIDA PALM
LIBERTY FINANCE BEACH
SCHI FINANCE GROUP FINANCE
---------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales at used car stores ......... $ 35,279,228 $1,351,838 $ 225,599 $1,373,986
Income on finance receivables..... 6,898,694 458,028 162,203 138,584
Sales at new car dealerships ..... 9,863,245
Corvette parts and
accessories sales ............... 15,384,589
Income from insurance
and training .................... 1,177,903 3,724 1,235
------------- ---------- ----------- ----------
68,603,659 1,813,590 389,037 1,512,570
------------- ---------- ----------- ----------
Costs and expenses:
Cost of sales .................... 49,490,564 1,511,731 289,820 1,146,801
Selling, general and
administrative expenses ......... 24,707,839 434,243 152,053 192,349
Compensation expense related
to employee stock options ....... 4,649,702 -- -- --
Restructuring charges ............ 2,117,906 -- -- --
------------- ---------- ----------- ----------
80,966,011 1,945,974 441,873 1,339,150
------------- ---------- ----------- ----------
Income (loss) from operations ..... (12,362,352) (132,384) (52,836) 173,420
Other income (expense):
Interest expense ................. (6,454,175) (176,585) (64,061) (3,694)
Other ............................ 167,922
------------- ---------- ----------- ----------
(6,286,253) (176,585) (64,061) (3,694)
------------- ---------- ----------- ----------
Income (loss) before income
taxes (benefit) .................. (18,648,605) (308,969) (116,897) 169,726
Taxes on income (benefit) .........
Net income (loss) ................. (18,648,605) (308,969) (116,897) 169,726
Preferred stock dividends ......... (333,333)
------------- ---------- ----------- ----------
Net income (loss) applicable to
common stock ..................... $ (18,981,938) $ (308,969) $ (116,897) $ 169,726
============= ========== =========== ==========
Basic loss per common share ....... $ (4.28)
=============
Weighted average number of
common shares outstanding ........ 4,430,367
=============
<CAPTION>
STRATA
AND PRO
READY STUART FORMA CONSOLIDATED
ECKLER'S FINANCE NISSAN ADJUSTMENTS PRO FORMA
--------------- --------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales at used car stores ......... $ $ 5,028,687 $ $ $ 43,259,338
Income on finance receivables..... 1,106,071 8,763,580
Sales at new car dealerships ..... 13,939,997 23,803,242
Corvette parts and
accessories sales ............... 853,881 16,238,470
Income from insurance
and training .................... 1,182,862
----------- ----------- ----------- ------------ -------------
853,881 6,134,758 13,939,997 93,247,492
----------- ----------- ----------- ------------ -------------
Costs and expenses:
Cost of sales .................... 582,117 3,866,468 12,393,236 69,280,737
Selling, general and
administrative expenses ......... 432,005 1,916,464 1,856,429 138,806 (1) 29,830,188
Compensation expense related
to employee stock options ....... -- -- -- -- 4,649,702
Restructuring charges ............ -- -- -- -- 2,117,906
----------- ----------- ----------- ------------ -------------
1,014,122 5,782,932 14,249,665 138,806 105,878,533
----------- ----------- ----------- ------------ -------------
Income (loss) from operations ..... (160,241) 351,826 (309,668) (138,806) (12,631,041)
Other income (expense):
Interest expense ................. (23,728) (120,190) (145,031) (398,137)(2) (7,385,601)
Other ............................ 6,411 290,729 465,062
----------- ----------- ----------- ------------ -------------
(17,317) (120,190) 145,698 (398,137) (6,920,539)
----------- ----------- ----------- ------------ -------------
Income (loss) before income
taxes (benefit) .................. (177,558) 231,636 (163,970) (536,943) (19,551,580)
Taxes on income (benefit) ......... (68,000) 68,000 (3) --
----------- ----------- ----------- ------------ -------------
Net income (loss) ................. (109,558) 231,636 (163,970) (604,943) (19,551,580)
Preferred stock dividends ......... (333,333)
----------- ----------- ----------- ------------ -------------
Net income (loss) applicable to
common stock ..................... $ (109,558) $ 231,636 $ (163,970) $ (604,943) $ (19,884,913)
=========== =========== =========== ============ =============
Basic loss per common share ....... $ (4.32)
=============
Weighted average number of
common shares outstanding ........ 4,604,455
=============
</TABLE>
See accompanying headnote and notes to pro forma consolidated statement
of operations (unaudited).
F-33
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
1. AMORTIZATION OF EXCESS COST OVER FAIR VALUE OF ASSETS ACQUIRED
This adjustment reflects the amortization of excess cost over fair value
of net assets acquired over 40 years.
2. INTEREST EXPENSE
This adjustment reflects the net additional interest expense on the
indebtedness incurred as partial payment of the purchase price of the acquired
companies, reduced by the interest expense incurred on debt converted to
capital by the sellers of the acquired companies and interest expense on debt
not assumed.
3. INCOME TAX BENEFIT
This adjustment eliminates the tax benefits in determining pro forma
income (loss) from operations. Management believes that sufficient evidence
would have not existed to recognize a deferred tax asset relating to these
losses.
F-34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholder of Florida Finance Group, Inc.
Suncoast Auto Brokers, Inc.
and Suncoast Auto Brokers Enterprises, Inc.
We have audited the accompanying combined balance sheets of Florida
Finance Group, Inc., Suncoast Auto Brokers, Inc. and Suncoast Auto Brokers
Enterprises, Inc. as of December 31, 1996 and 1995 and the related combined
statements of operations and retained deficit, and cash flows for the years
then ended. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined 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 combined financial statements are free
of material misstatement. An audit includes examining, on a test basis, the
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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Florida Finance Group, Inc., Suncoast Auto Brokers, Inc. and Suncoast Auto
Brokers Enterprises, Inc. as of December 31, 1996 and 1995, and the combined
results of their operations and their combined cash flows for the years then
ended in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplementary combining
balance sheets, and the combining statements of operations and retained
earnings (accumulated deficit), as of December 31, 1996 and 1995 and for the
years then ended, are presented for purposes of additional analysis and are not
a required part of the basic combined financial statements. Such information
has been subjected to the auditing procedures applied in the audit of the basic
combined financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic combined financial statements taken
as a whole.
Spence, Marston, Bunch, Morris & Co.
Certified Public Accountants
March 28, 1997
F-35
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Cash .............................................. $ 50,701 $ 20,272
Accounts and notes receivable, net ................ 2,973,514 4,383,759
Inventory ......................................... 941,433 440,317
Prepaid expenses .................................. 14,497 44,705
Leasehold improvements and equipment, net ......... 133,586 111,950
Other assets ...................................... 5,539 2,360
------------ ------------
$ 4,119,270 $ 5,003,363
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Liabilities:
Notes payable ..................................... $ 3,614,624 $ 5,018,343
Trade accounts payable ............................ 177,205 95,093
Accrued expenses .................................. 74,362 16,505
Drafts payable .................................... 104,680 --
Stockholder loans ................................. 306,378 345,250
Deferred income ................................... 68,933 134,571
Related party payable ............................. 714,146 811,600
Income taxes payable .............................. 1,202 --
------------ ------------
Total liabilities ................................ 5,061,530 6,421,362
------------ ------------
Stockholders' equity (deficit):
Common stock ...................................... 1,600 1,600
Paid-in capital in excess of par value ............ 220,129 220,129
Retained deficit .................................. (1,163,989) (1,639,728)
------------ ------------
Total stockholder's deficit ...................... (942,260) (1,417,999)
------------ ------------
Commitments ........................................ -- --
------------ ------------
$ 4,119,270 $ 5,003,363
============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1995 1996
---------------- ---------------
<S> <C> <C>
Revenue:
Sales ....................................... $ 4,340,896 $ 4,443,091
Interest income ............................. 1,189,289 1,687,057
------------ ------------
Total revenue .............................. 5,530,185 6,130,148
------------ ------------
Cost of sales and expenses:
Cost of sales ............................... 3,562,713 3,768,929
Selling, general and administrative ......... 1,910,782 1,635,606
Provision for credit losses ................. 236,152 445,133
Depreciation and amortization ............... 44,232 32,959
Interest .................................... 454,037 723,056
------------ ------------
Total cost of sales and expenses ........... 6,207,916 6,605,683
------------ ------------
Loss before income taxes ..................... (677,731) (475,535)
Income taxes ................................. 6,146 204
------------ ------------
Net loss ..................................... (683,877) (475,739)
Retained deficit, beginning of year .......... (480,112) (1,163,989)
------------ ------------
Retained deficit, end of year ................ $ (1,163,989) $ (1,639,728)
============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $ (683,877) $ (475,739)
------------ ------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 44,232 32,959
Loss on disposal of equipment .......................... 1,994 --
Changes in operating assets and liabilities:
(Increase) decrease in inventory ...................... (202,921) 501,116
Increase in prepaid expenses .......................... (470) (30,208)
Increase in other assets .............................. -- (154)
Increase (decrease) in accounts payable ............... 123,403 (82,112)
Increase (decrease) in accrued expenses ............... 8,538 (57,857)
Increase (decrease) in drafts payable ................. 85,320 (104,680)
Increase (decrease) in income taxes payable ........... 1,202 (1,202)
Increase in deferred income ........................... 29,770 65,638
------------ ------------
Total adjustments ................................... 91,068 323,500
------------ ------------
Net cash used in operating activities ............. (592,809) (152,239)
------------ ------------
Cash flows from investing activities:
Increase in accounts and notes receivable, net ......... (1,288,014) (1,410,245)
Purchase of equipment .................................. (11,911) (7,990)
------------ ------------
Net cash used in investing activities ............... (1,299,925) (1,418,235)
------------ ------------
Cash flows from financing activities:
Debt incurred .......................................... 1,979,295 1,575,543
Debt reduction ......................................... (55,663) (35,498)
------------ ------------
Net cash provided by financing activities ........... 1,923,632 1,540,045
------------ ------------
Net increase (decrease) in cash ......................... 30,898 (30,429)
Cash, beginning of year ................................. 19,803 50,701
------------ ------------
Cash, end of year ....................................... $ 50,701 $ 20,272
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--CASH PAID DURING THE YEAR FOR:
Interest on borrowings .................................. $ 432,726 $ 719,289
Income taxes ............................................ $ 4,944 $ 33,768
</TABLE>
See accompanying notes to combined financial statements.
F-38
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL--The accompanying financial statements include, on a combined
basis, Florida Finance Group, Inc. (FFG), Suncoast Auto Brokers, Inc. (SAB) and
Suncoast Auto Brokers Enterprises, Inc. (SABE). FFG, SAB and SABE are
collectively referred to as the "Company". All material intercompany
transactions between the combined entities have been eliminated.
The Company sells and finances cars, trucks and vans, primarily to credit
challenged individuals who cannot qualify for traditional automobile financing.
The Company is located in St. Petersburg, Florida.
REVENUE RECOGNITION--Interest income from vehicle installment notes
receivable is recognized as earned. Vehicle installment notes receivable are
purchased by FFG from SABE at a 20% discount. The discount is amortized and the
income recognized on a straight-line basis over the life of the loan.
Accrual of interest income is suspended when management deems the loan to
be uncollectible. Vehicles are repossessed and loan balances written off based
on management's review of loans on a loan-by-loan basis.
RESERVE FOR POSSIBLE LOAN LOSSES--Provision for credit losses includes
repossession losses incurred for the years ended December 31, 1996 and 1995. As
all loans were purchased at a 20% discount, no additional reserve for possible
loan losses was necessary at December 31, 1996 and 1995 based on repossession
losses occurring subsequent to year end plus a historical percent of losses
applied to the remaining loan balances.
Material estimates that are particularly susceptible to significant change
relate to the determination of the reserve for possible loan losses.
Accordingly, the ultimate collectibility of the vehicle installment notes
receivable is susceptible to changes in economic and market conditions.
Therefore, actual losses in future periods could differ materially from amounts
provided in the current period and could result in a material adjustment to
future results of operations.
INVENTORY--Inventory consists of used vehicles and is stated at the lower
of cost or market, on a specific identification basis. Inventory is pledged as
collateral for notes payable (Note 4) and related party payable (Note 6).
LEASEHOLD IMPROVEMENTS AND EQUIPMENT--These assets are carried at cost.
Major additions are capitalized while replacements, maintenance and repairs
which do not improve or extend the life of the respective assets are expensed
currently. When property is retired or otherwise disposed of, the cost of the
property is eliminated from the asset account, accumulated depreciation is
charged with an amount equal to the depreciation provided and the difference,
if any, is charged or credited to income.
F-39
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Depreciation is provided for using accelerated methods over the estimated
useful lives which are as follows:
<TABLE>
<S> <C>
Leasehold improvements ......... 15 - 39 years
Furniture and fixtures ......... 5 - 7 years
Automotive equipment ........... 5 - 7 years
Tow truck ...................... 5 years
Signs .......................... 5 years
Office equipment ............... 5 years
</TABLE>
OTHER ASSETS--Other assets includes loan costs of $10,000 which are being
amortized over the loan period of three years. Accumulated amortization totaled
$9,494 and $6,161 for 1996 and 1995, respectively, and amortization expense was
$3,333 for 1996 and 1995.
ADVERTISING COSTS--Advertising costs are generally charged to operations
in the year incurred and totaled $134,648 and $374,116 in 1996 and 1995,
respectively.
INCOME TAXES--The sole stockholder of SAB and SABE elected to have these
entities subject to the provisions of Subchapter S of the Internal Revenue
Code. Consequently, the accompanying financial statements do not reflect income
tax expense for these companies because all taxable income or loss is the
responsibility of the sole stockholder. The accompanying financial statements
reflect income tax for FFG and as a result the income tax expense is
disproportionate to financial statement income before taxes. Prepaid expenses
includes prepaid income taxes totaling approximately $32,565 at December 31,
1996.
DRAFTS PAYABLE--Drafts payable represent non-interest bearing amounts due
to wholesalers for vehicle purchases.
DEFERRED INCOME--Deferred income relates to unearned commissions on credit
life and warranty polices which are amortized into income over the term of the
loan. Deferred income also includes late fee income which is included in income
when paid.
CONCENTRATION OF CREDIT RISK--Substantially all of the Company's loans
have been granted to customers in the Company's market area which is primarily
Pinellas County, Florida.
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates that
affect certain reported amounts and disclosures. These estimates are based on
management's knowledge and experience. Accordingly, actual results could differ
from these estimates.
F-40
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable arise principally from retail sales of
vehicles under installment contracts. Such receivables are stated net of
unearned interest, bear interest at an average rate of 26% with terms ranging
from 36 to 48 months and are collateralized by the vehicles sold.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
Accounts and notes receivable are summarized as follows:
Contractually scheduled payments ....................... $ 5,009,234 $ 7,629,382
Less: unearned interest income ......................... (1,301,295) (2,150,628)
------------ ------------
Installment sales contract principal balance ........... 3,707,939 5,478,754
Other receivable ....................................... 650 650
------------ ------------
3,708,589 5,479,404
Less: 20% discount on loans purchased .................. (735,075) (1,095,645)
------------ ------------
Accounts and notes receivable, net ..................... $ 2,973,514 $ 4,383,759
============ ============
</TABLE>
Accounts and notes receivable are pledged as collateral for notes payable
(Note 4) and related party payable (Note 6). See Note 1 regarding reserve for
possible loan losses. Due to the relatively short term of the contracts
underlying the receivables and the low likelihood that all of the contracts
will reach maturity, contractual maturities have not been disclosed.
(3) LEASEHOLD IMPROVEMENTS AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Leasehold improvements ................. $ 108,131 $ 108,131
Furniture and fixtures ................. 95,105 95,499
Automotive equipment ................... 82,140 82,140
Tow truck .............................. 36,500 36,500
Signs .................................. 33,531 38,027
Office equipment ....................... 18,595 21,695
---------- ----------
374,002 381,992
Less: accumulated depreciation ......... (240,416) (270,042)
---------- ----------
$ 133,586 $ 111,950
========== ==========
</TABLE>
Equipment recorded under capital leases is included in automotive
equipment. The cost of the equipment was $53,503. Amortization expense is
included in depreciation expense. Accumulated amortization was $41,566 and
$36,791 at December 31, 1996 and 1995, respectively. The lease matured in
December, 1996.
F-41
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------- -------------
<S> <C> <C>
NOTES PAYABLE--LINE OF CREDIT
Line of credit payable to FINOVA Capital Corporation (FINOVA),
interest payable monthly at prime plus 3.5%. Maximum available
at December 31, 1996 and 1995 was $5,000,000 and $4,000,000 of
eligible receivables, respectively. The line of credit requires FFG
to maintain certain tangible net worth, leverage ratio, minimum
net income and restricts distributions. FFG was not in compliance
with the leverage ratio at December 31, 1995. FINOVA removed
this loan covenant effective March 31, 1996. FFG was not in
compliance with the tangible net worth ratio at December 31,
1996. However, the line of credit was renewed on February 4,
1997. The note is collateralized by accounts and notes receivable
and is guaranteed by the stockholder of the Company and Your
Car Store, Inc. (See Note 7). The line of credit matures
February 28, 1997. (See Note 10). .................................. $2,625,000 $4,675,000
Line of credit payable to AmSouth (formerly First Gulf Bank),
interest payable monthly at prime plus 2.75%. Maximum
available is $100,000 at December 31, 1995. The note is
collateralized by inventory and guaranteed by the stockholder.
The line of credit was paid off March 1996 and was not renewed. $ 12,178 $ --
Revolving line of credit payable to American Express. Interest
payable at 15.15%. Maximum available is $23,000..................... -- 21,500
NOTE PAYABLE--FLOOR PLAN
Floor plan line of credit payable to Manheim Automotive Financial
Services, collateralized by inventory and guaranteed by
stockholder of the Company. Interest payable monthly at prime
plus 2%. Maximum available is $800,000.............................. 800,563 142,060
NOTES PAYABLE--OTHER
Seven individual notes payable with interest ranging from
10%-15%, collateralized by accounts and notes receivable and
guaranteed by the stockholder of the Company. The notes
mature at various dates through February 1999. ..................... 143,187 168,406
Capital lease payable at $1,359 per month including interest at 20%,
matures December 1996, collateralized by automotive
equipment. ......................................................... 13,932 --
7.75% note payable to SouthTrust Bank $802 per month including
interest, matures March 1998, collateralized by tow truck .......... 19,764 11,377
---------- ----------
$3,614,624 $5,018,343
========== ==========
</TABLE>
F-42
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE--(CONTINUED)
The following is a schedule of maturities subsequent to December 31, 1996:
<TABLE>
<S> <C>
Year ending December 31,
1997 ................... $4,929,236
1998 ................... 44,107
1999 ................... 45,000
----------
$5,018,343
==========
</TABLE>
(5) STOCKHOLDER LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ -----------
<S> <C> <C>
9% unsecured loans payable to stockholder with interest payable
monthly and principal due on demand .......................... $ 306,378 $345,250
========= ========
</TABLE>
(6) RELATED PARTY PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Unsecured non-interest bearing payable to related entity on demand ... $ 22,046 $ --
Loan payable to related entity, interest payable monthly and principal
due on demand, collateralized by inventory and notes receivable.
Interest paid at 16% and 15% for the years ended December 31,
1996 and 1995, respectively ......................................... 570,100 679,600
Loan payable to related entity, interest payable monthly and principal
due on demand, collateralized by inventory and notes receivable.
Interest paid at 31% and 22% for the years ended December 31,
1996 and 1995, respectively ......................................... 122,000 132,000
-------- --------
$714,146 $811,600
======== ========
</TABLE>
(7) RELATED PARTY TRANSACTIONS
FFG provides administrative and accounting services to SAB and SABE at no
charge.
Your Car Store, Inc. ("YCS"), a corporation partially owned by the sole
stockholder of FFG, SAB and SABE began operations on December 15, 1995. Related
party transactions included sales of vehicles to YCS and FFG purchased some
loans from YCS. Such transactions were immaterial in 1995. In 1996, loans
purchased from YCS were approximately $506,000.
The Company leases two lots from the sole stockholder on a month-to-month
basis. Rent expense for the years ended December 31, 1996 and 1995 was $45,810
and $63,120, respectively.
F-43
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(8) COMMITMENTS
The Company leases property from unrelated parties under agreements
ranging from 1 to 5 years. Certain leases also contain renewal provisions.
Total rental expense under these operating leases was $143,387 and $145,438 for
the years ended December 31, 1996 and 1995, respectively.
As of December 31, 1996, the approximate future minimum rental payments
plus applicable real estate taxes for all operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997 ................... $162,426
1998 ................... 89,904
1999 ................... 29,968
--------
$282,298
========
</TABLE>
(9) COMMON STOCK AND PAID-IN CAPITAL IN EXCESS OF PAR VALUE
<TABLE>
<CAPTION>
PAID-IN CAPITAL
COMMON IN EXCESS
STOCK OF PAR VALUE
-------- ----------------
<S> <C> <C>
Florida Finance Group, Inc.:
$1 par value, 1,000 shares authorized, issued and outstanding in
1996 and 1995 ................................................. $1,000 $220,129
Suncoast Auto Brokers, Inc.:
$1 par value, 1,000 shares authorized, 100 shares issued and
outstanding in 1996 and and 1995 .............................. 100 --
Suncoast Auto Brokers Enterprises, Inc.:
$5 par value, 100 shares authorized, issued and outstanding in
1996 and 1995 ................................................. 500 --
------ --------
$1,600 $220,129
====== ========
</TABLE>
(10) SUBSEQUENT EVENTS
Effective January 28, 1997, the sole stockholder of FFG sold all of his
outstanding stock to Smart Choice Holdings, Inc. in exchange for a specified
number of shares of its common stock. Effective January 28, 1997, SAB and SABE
sold substantially all of their business assets to Smart Choice Holdings, Inc.
Effective February 4, 1997, the line of credit payable to FINOVA was
increased to $20,000,000. Interest is payable monthly at prime plus 3%. The
line of credit is collateralized by accounts and notes receivable, inventory,
and certain other business assets. The line of credit matures December 31, 1999
and is guaranteed by Smart Choice Automotive Holdings, Inc. and Smart Choice
Holdings, Inc. The line of credit requires FFG to maintain a certain leverage
ratio and minimum net income, and restricts distributions.
F-44
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINING BALANCE SHEETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
FLORIDA SUNCOAST SUNCOAST
FINANCE AUTO AUTO BROKERS COMBINING COMBINED
GROUP, INC. BROKERS, INC. ENTERPRISES, INC. ENTRIES TOTALS
------------- --------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash ................................. $ 13,715 $ 3,294 $ 3,263 $ -- $ 20,272
Accounts and notes receivable,
net .................................. 4,383,109 -- 650 -- 4,383,759
Inventory ............................ 161,400 278,917 -- -- 440,317
Prepaid expenses ..................... 32,565 -- 12,140 -- 44,705
Intercompany receivable .............. 855,015 121,642 508,042 (1,484,699) --
Leasehold improvements and
equipment, net ....................... 16,280 67,080 28,590 -- 111,950
Other assets ......................... 506 1,854 -- -- 2,360
---------- ------------ ---------- ------------ ------------
$5,462,590 $ 472,787 $ 552,685 $ (1,484,699) $ 5,003,363
========== ============ ========== ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Liabilities:
Notes payable ....................... $4,843,406 $ 174,937 $ -- $ -- $ 5,018,343
Trade accounts payable .............. 54,053 12,742 28,298 -- 95,093
Accrued expenses .................... -- 4,932 11,573 -- 16,505
Stockholder loans ................... -- 157,861 187,389 -- 345,250
Deferred income ..................... 134,571 -- -- -- 134,571
Intercompany payable ................ 54,042 620,915 809,742 (1,484,699) --
Related party payable ............... -- 679,600 132,000 -- 811,600
---------- ------------ ---------- ------------ ------------
Total liabilities ................. 5,086,072 1,650,987 1,169,002 (1,484,699) 6,421,362
---------- ------------ ---------- ------------ ------------
Stockholder's equity (deficit):
Common stock ........................ 1,000 100 500 -- 1,600
Paid-in capital in excess of
par value .......................... 220,129 -- -- -- 220,129
Retained earnings (deficit) ......... 155,389 (1,178,300) (616,817) -- (1,639,728)
---------- ------------ ---------- ------------ ------------
Total stockholder's equity
(deficit) ........................ 376,518 (1,178,200) (616,317) -- (1,417,999)
---------- ------------ ---------- ------------ ------------
Commitments .......................... -- -- -- -- --
---------- ------------ ---------- ------------ ------------
$5,462,590 $ 472,787 $ 552,685 $ (1,484,699) $ 5,003,363
========== ============ ========== ============ ============
</TABLE>
See independent auditor's report on page 1
F-45
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINING STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FLORIDA SUNCOAST SUNCOAST
FINANCE AUTO AUTO BROKERS COMBINING COMBINED
GROUP, INC. BROKERS, INC. ENTERPRISES, INC. ENTRIES TOTALS
------------- --------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue:
Sales ............................... $ -- $ 3,679,780 $3,146,912 $ (2,383,601) $ 4,443,091
Interest income ..................... 1,687,057 -- -- -- 1,687,057
---------- ------------ ---------- ------------ ------------
Total revenue ..................... 1,687,057 3,679,780 3,146,912 (2,383,601) 6,130,148
---------- ------------ ---------- ------------ ------------
Cost of sales and expenses:
Cost of sales ....................... -- 3,651,707 2,500,823 (2,383,601) 3,768,929
Selling, general and
administrative .................... 743,157 307,238 585,211 -- 1,635,606
Provision for credit losses ......... 445,133 -- -- -- 445,133
Depreciation and
amortization ...................... 5,966 17,525 9,468 -- 32,959
Interest ............................ 489,640 175,974 57,442 -- 723,056
---------- ------------ ---------- ------------ ------------
1,683,896 4,152,444 3,152,944 (2,383,601) 6,605,683
---------- ------------ ---------- ------------ ------------
Income (loss) before income
taxes ............................... 3,161 (472,664) (6,032) -- (475,535)
Income taxes ......................... 204 -- -- -- 204
---------- ------------ ---------- ------------ ------------
Net income (loss) .................... 2,957 (472,664) (6,032) -- (475,739)
Retained earnings (accumulated
deficit), beginning of year ......... 152,432 (705,636) (610,785) -- (1,163,989)
---------- ------------ ---------- ------------ ------------
Retained earnings (accumulated
deficit), end of year ............... $ 155,389 $ (1,178,300) $ (616,817) $ -- $ (1,639,728)
========== ============ ========== ============ ============
</TABLE>
See independent auditor's report on page 1
F-46
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINING BALANCE SHEETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
FLORIDA SUNCOAST SUNCOAST
FINANCE AUTO AUTO BROKERS COMBINING COMBINED
GROUP, INC. BROKERS, INC. ENTERPRISES, INC. ENTRIES TOTALS
------------- --------------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash ................................. $ 44,858 $ 3,911 $ 1,932 $ -- $ 50,701
Accounts and notes receivable,
net ................................ 2,940,350 32,514 650 -- 2,973,514
Inventory ............................ 105,260 836,173 -- -- 941,433
Prepaid expenses ..................... 7,177 -- 7,320 -- 14,497
Intercompany receivable .............. 165,300 93,907 9,409 (268,616) --
Leasehold improvements and
equipment, net ..................... 16,723 84,605 32,258 -- 133,586
Other assets ......................... 3,839 1,700 -- -- 5,539
---------- ---------- ---------- ---------- ------------
$3,283,507 $1,052,810 $ 51,569 $ (268,616) $ 4,119,270
========== ========== ========== ========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Liabilities:
Notes payable ....................... $2,768,187 $ 846,437 $ -- $ -- $ 3,614,624
Trade accounts payable .............. 40,169 57,945 79,091 -- 177,205
Accrued expenses .................... -- 40,995 33,367 -- 74,362
Drafts payable ...................... -- 104,680 -- -- 104,680
Stockholder loans ................... -- 117,989 188,389 -- 306,378
Deferred income ..................... 68,933 -- -- -- 68,933
Intercompany payable ................ 9,409 20,200 239,007 (268,616) --
Related party payable ............... 22,046 570,100 122,000 -- 714,146
Income taxes payable ................ 1,202 -- -- -- 1,202
---------- ---------- ---------- ---------- ------------
Total liabilities ................. 2,909,946 1,758,346 661,854 (268,616) 5,061,530
---------- ---------- ---------- ---------- ------------
Stockholder's equity (deficit):
Common stock ........................ 1,000 100 500 -- 1,600
Paid-in capital in excess of par
value ............................. 220,129 -- -- -- 220,129
Retained earnings (deficit) ......... 152,432 (705,636) (610,785) -- (1,163,989)
---------- ---------- ---------- ---------- ------------
Total stockholder's equity
(deficit) ...................... 373,561 (705,536) (610,285) -- (942,260)
Commitments .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ------------
$3,283,507 $1,052,810 $ 51,569 $ (268,616) $ 4,119,270
========== ========== ========== ========== ============
</TABLE>
See independent auditor's report on page 1
F-47
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINING STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FLORIDA SUNCOAST SUNCOAST
FINANCE AUTO AUTO BROKERS COMBINING COMBINED
GROUP, INC. BROKERS, INC. ENTERPRISES, INC. ENTRIES TOTALS
------------- --------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenue:
Sales ............................ $ -- $3,802,313 $2,640,254 $ (2,101,671) $ 4,340,896
Interest income .................. 1,189,289 -- -- -- 1,189,289
---------- ---------- ---------- ------------ ------------
Total revenue .................. 1,189,289 3,802,313 2,640,254 (2,101,671) 5,530,185
---------- ---------- ---------- ------------ ------------
Cost of sales and expenses:
Cost of sales .................... -- 3,517,772 2,146,612 (2,101,671) 3,562,713
Selling, general and
administrative ................. 719,811 495,604 695,367 -- 1,910,782
Provision for credit losses ...... 178,855 57,297 -- -- 236,152
Depreciation and amortization..... 7,666 25,348 11,218 -- 44,232
Interest ......................... 256,613 157,767 39,657 -- 454,037
---------- ---------- ---------- ------------ ------------
1,162,945 4,253,788 2,892,854 (2,101,671) 6,207,916
---------- ---------- ---------- ------------ ------------
Income (loss) before income
taxes ............................ 26,344 (451,475) (252,600) -- (677,731)
Income taxes ...................... 6,146 -- -- -- 6,146
Net income (loss) ................. 20,198 (451,475) (252,600) -- (683,877)
Retained earnings (accumulated
deficit), beginning of year ...... 132,234 (254,161) (358,185) -- (480,112)
---------- ---------- ---------- ------------ ------------
Retained earnings (accumulated
deficit), end of year ............ $ 152,432 $ (705,636) $ (610,785) $ -- $ (1,163,989)
========== ========== ========== ============ ============
</TABLE>
See independent auditor's report on page 1
F-48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Eckler Industries, Inc.
We have audited the accompanying balance sheets of Eckler Industries, Inc.
as of January 28, 1997, December 31, 1996 and September 30, 1996 and 1995 and
the related statements of operations, stockholders' equity (deficit) and cash
flows for the period from January 1, 1997 through January 28, 1997, the three
months ended December 31, 1996 and each of the three 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 January 28, 1997, December 31, 1996 and September 30, 1996 and 1995 and the
results of its operations and its cash flows for the period from January 1,
1997 through January 28, 1997, the three months ended December 31, 1996 and
each of the three 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 13, 1997
F-49
<PAGE>
ECKLER INDUSTRIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, JANUARY 28,
1995 1996 1996 1997
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Assets
Current:
Cash ........................................................ $ -- $ 251,997 $ 241,652 $ 111,050
Accounts receivable--trade, less allowance for possible
losses of $9,761, $8,772, $9,608 and $2,335 (Note 6) ....... 108,660 168,047 153,285 162,610
Notes receivable ............................................ -- 94,000 326,700 576,700
Due from affiliates ......................................... 561,850 -- -- --
Inventories (Notes 2 and 6) ................................. 832,918 1,438,895 1,307,525 1,421,139
Prepaid expenses (Note 3) ................................... 615,618 874,694 633,284 545,774
Deferred tax asset (Note 5) ................................. -- 116,000 262,000 404,000
---------- ---------- ------------ ------------
Total current assets ...................................... 2,119,046 2,943,633 2,924,446 3,221,273
---------- ---------- ------------ ------------
Property, plant and equipment, less accumulated
depreciation and amortization (Notes 4, 6 and 7) ............ 2,597,428 2,539,316 2,512,645 2,514,325
---------- ---------- ------------ ------------
Other assets:
Prepaid royalty expense (Note 3) ............................ 776,455 745,054 641,726 641,726
Prepaid consulting fees (Note 3) ............................ -- 269,291 126,689 126,689
Deferred public offering costs .............................. 463,081 -- -- --
Other ....................................................... 129,562 97,397 92,392 131,259
---------- ---------- ------------ ------------
Total other assets ........................................ 1,369,098 1,111,742 860,807 899,674
---------- ---------- ------------ ------------
$6,085,572 $6,594,691 $ 6,297,898 $ 6,635,272
========== ========== ============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable (Note 6) ....................................... $ -- $ 133,073 $ 333,073 $ 343,823
Accounts payable ............................................ 1,598,994 983,127 545,765 671,445
Royalties payable ........................................... 175,000 -- -- --
Accrued wages ............................................... 117,629 106,366 100,554 122,160
Other accrued expenses ...................................... 358,727 300,243 209,059 188,091
Current maturities of long-term debt (Note 7) ............... 1,208,853 167,414 167,582 167,639
Obligations under capital leases ............................ 31,840 2,280 1,691 1,495
Deferred income taxes ....................................... 94,500 -- -- --
---------- ---------- ------------ ------------
Total current liabilities ................................. 3,585,543 1,692,503 1,357,724 1,494,653
---------- ---------- ------------ ------------
Long-term debt, less current maturities (Note 7) ............. 2,338,108 2,245,819 2,203,860 2,189,863
Obligations under capital leases, less current portion ....... 13,022 -- -- --
Deferred income taxes (Note 5) ............................... 351,500 401,000 403,000 404,000
---------- ---------- ------------ ------------
Total liabilities ......................................... 6,288,173 4,339,322 3,964,584 4,088,516
---------- ---------- ------------ ------------
Commitments and contingencies (Note 12)
Redeemable preferred stock; $10 par value; 100,000 shares
authorized, issued and outstanding .......................... 476,968 -- -- --
Class A common stock subject to rescission offer,
140,000 shares .............................................. 211,905 -- -- --
Stockholders' equity (deficit) (Notes 9 and 10):
Class A common stock; $.01 par value; 10,000,000 shares
authorized; 1,836,750, 1,736,750, 1,641,750 and 360,000
issued and outstanding ..................................... 3,600 16,417 17,367 18,367
Class B common stock; $.01 par value; 5,000,000 shares
authorized; 510,375 and 570,000 issued and outstanding ..... 5,700 5,104 5,104 5,104
Additional paid-in capital .................................. (923,939) 3,077,251 3,419,251 3,741,251
Retained earnings (deficit) ................................. 23,165 (843,403) (1,108,408) (1,217,966)
---------- ---------- ------------ ------------
Total stockholders' equity (deficit) ...................... (891,474) 2,255,369 2,333,314 2,546,756
---------- ---------- ------------ ------------
$6,085,572 $6,594,691 $ 6,297,898 $ 6,635,272
========== ========== ============ ============
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-50
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS PERIOD FROM
YEAR ENDED SEPTEMBER 30, ENDED JANUARY 1, 1997
-------------------------------------------- DECEMBER 31, TO JANUARY 28,
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Net sales ........................................ $13,942,936 $12,973,162 $14,893,083 $2,941,821 $ 853,881
Cost of sales .................................... 9,102,753 8,428,777 9,648,505 1,813,371 582,117
----------- ----------- ----------- ---------- ----------
Gross profit ................................... 4,840,183 4,544,385 5,244,578 1,128,450 271,764
Selling, general and administrative expenses ..... 4,508,770 4,177,034 5,489,776 1,492,939 432,005
----------- ----------- ----------- ---------- ----------
Income (loss) from operations .................. 331,413 367,351 (245,198) (364,489) (160,241)
----------- ----------- ----------- ---------- ----------
Other income (expense):
Interest expense ................................ (406,386) (434,589) (332,195) (72,673) (23,728)
Interest income ................................. 6,842 6,050 16,467 2,114 6
Miscellaneous ................................... 62,212 77,723 84,496 26,043 6,405
----------- ----------- ----------- ---------- ----------
(337,332) (350,816) (231,232) (44,516) (17,317)
----------- ----------- ----------- ---------- ----------
Income (loss) before taxes on income ........... (5,919) 16,535 (476,430) (409,005) (177,558)
Taxes on income (benefit)--deferred (Note 5) ..... -- 446,000 (161,000) (144,000) (68,000)
----------- ----------- ----------- ---------- ----------
Net loss ......................................... (5,919) (429,465) (315,430) (265,005) (109,558)
Accretion of redemption value of redeemable
preferred stock (Note 9) ........................ -- (113,703) (533,032) -- --
Preferred stock dividends ........................ -- (3,288) (18,106) -- --
----------- ----------- ----------- ---------- ----------
Net loss applicable to common stock .............. $ (5,919) $ (546,456) $ (866,568) $ (265,005) $ (109,558)
=========== =========== =========== ========== ==========
Loss per share ................................... $ -- $ (.26) $ (.34) $ (.10) $ (.39)
=========== =========== =========== ========== ==========
Pro forma (unaudited):
Historical income (loss) before
taxes on income ................................ $ (5,919) $ 16,535 -- -- --
Pro forma adjustment to eliminate
compensation in excess of $100,000
received by the stockholder .................... 200,000 -- -- -- --
Pro forma taxes on income (Note 5) .............. 66,000 5,622 -- -- --
----------- ----------- ----------- ---------- ----------
Pro forma net income ............................. $ 128,081 $ 10,913 -- -- --
=========== =========== =========== ========== ==========
Pro forma earnings per share ..................... $ .06 $ .01 -- -- --
=========== =========== =========== ========== ==========
Weighted average number of shares and
share equivalents outstanding ................... 2,117,500 2,117,500 2,532,309 2,665,833 2,841,371
=========== =========== =========== ========== ==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-51
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
--------------------- --------------------- ADDITIONAL RETAINED
NUMBER OF PAR NUMBER OF PAR PAID-IN EARNINGS
SHARES VALUE SHARES VALUE CAPITAL (DEFICIT)
----------- --------- ----------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993,
as previously reported ............................. 200,000 $ 2,000 650,000 $6,500 $ 156,504 $ 520,693
Prior period adjustment to reflect change in
method of accounting for inventories ............... -- -- -- -- -- 148,324
------- ------- ------- ------ ------------ ------------
Balance, September 30, 1993, as restated ............ 200,000 2,000 650,000 6,500 156,504 669,017
Dividends ........................................... -- -- -- -- -- (856,404)
Net loss ............................................ -- -- -- -- -- (5,919)
------- ------- ------- ------ ------------ ------------
Balance, September 30, 1994 ......................... 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)
Issuance of Class A common stock for
consulting services ................................ 5,000 50 -- -- 16,200 --
Exercise of Class A common stock warrants ........... 90,000 900 -- -- 325,800 --
Net loss ............................................ -- -- -- -- -- (265,005)
--------- ------- ------- ------ ------------ ------------
Balance, December 31, 1996 .......................... 1,736,750 17,367 510,375 5,104 3,419,251 (1,108,408)
Exercise of Class A common stock options ............ 100,000 1,000 -- -- 249,000 --
Tax benefit from exercise of stock options .......... -- -- -- -- 73,000 --
Net loss ............................................ -- -- -- -- -- (109,558)
--------- ------- ------- ------ ------------ ------------
Balance, January 28, 1997 ........................... 1,836,750 $18,367 510,375 $5,104 $ 3,741,251 $ (1,217,966)
========= ======= ======= ====== ============ ============
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-52
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1994 1995 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................. $ (5,919) $ (429,465) $ (315,430)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization ..................... 367,417 301,170 372,979
Loss on disposal of assets ........................ 9,383 -- 160
Common stock, options and warrants issued
for consulting services ......................... -- -- 146,512
Deferred income taxes (benefit) ................... -- 446,000 (161,000)
Cash provided by (used for):
Accounts receivable .............................. 209,632 70,892 (59,387)
Inventories ...................................... 355,321 100,991 (605,977)
Prepaid expenses ................................. 197,505 (45,547) (87,966)
Prepaid royalty expense .......................... (650,000) -- --
Accounts payable ................................. 481,103 273,583 (615,867)
Royalties payable ................................ -- (175,000) (175,000)
Accrued expenses ................................. 35,497 8,404 (52,946)
------------- ---------- -------------
Net cash provided by (used for)
operating activities ............................... 999,939 551,028 (1,553,922)
------------- ---------- -------------
Cash flows from investing activities:
Notes and advances to affiliates ................... (216,685) (143,339) 561,850
Purchases of property, plant and equipment ......... (58,352) (23,303) (66,660)
Proceeds from disposal of property
and equipment ..................................... 37,000 -- 3,600
Decrease (increase) in other assets ................ 40,146 22,923 (24,314)
Payments received on notes receivable .............. 361,214 -- --
------------- ---------- -------------
Net cash provided by (used for)
investing activities ............................... 163,323 (143,719) 474,476
------------- ---------- -------------
Cash flows from financing activities:
Borrowings under line of credit .................... -- -- --
Proceeds from issuance of long-term debt ........... 130,000 295,498 17,467
Principal payments of long-term debt ............... (960,666) (387,017) (1,026,796)
Payments on capital lease obligations .............. -- (46,375) (41,197)
Proceeds from sale of common stock ................. -- 211,905 3,219,075
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 .......................................... (450,000) (320,004) (18,106)
------------- ---------- -------------
Net cash provided by (used for)
financing activities ............................... (1,280,666) (407,309) 1,331,443
------------- ---------- -------------
Net increase (decrease) in cash ..................... (117,404) -- 251,997
Cash, beginning of period ........................... 117,404 -- --
------------- ---------- -------------
Cash, end of period ................................. $ -- $ -- $ 251,997
============= ========== =============
<CAPTION>
THREE MONTHS PERIOD FROM
ENDED JANUARY 1, 1997
DECEMBER 31, TO JANUARY 28,
1996 1997
-------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................. $ (265,005) $ (109,558)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization ..................... 66,636 22,394
Loss on disposal of assets ........................ -- 366
Common stock, options and warrants issued
for consulting services ......................... 16,250 --
Deferred income taxes (benefit) ................... (144,000) (68,000)
Cash provided by (used for):
Accounts receivable .............................. 14,762 (9,325)
Inventories ...................................... 131,370 (113,614)
Prepaid expenses ................................. 487,340 46,551
Prepaid royalty expense .......................... -- --
Accounts payable ................................. (437,362) 125,680
Royalties payable ................................ -- --
Accrued expenses ................................. (96,996) 638
---------- ----------
Net cash provided by (used for)
operating activities ............................... (227,005) (104,868)
---------- ----------
Cash flows from investing activities:
Notes and advances to affiliates ................... -- --
Purchases of property, plant and equipment ......... (33,601) (22,318)
Proceeds from disposal of property
and equipment ..................................... -- --
Decrease (increase) in other assets ................ (1,359) (30)
Payments received on notes receivable .............. 94,000 --
---------- ----------
Net cash provided by (used for)
investing activities ............................... 59,040 (22,348)
---------- ----------
Cash flows from financing activities:
Borrowings under line of credit .................... 200,000 10,750
Proceeds from issuance of long-term debt ........... -- --
Principal payments of long-term debt ............... (41,791) (13,940)
Payments on capital lease obligations .............. (589) (196)
Proceeds from sale of common stock ................. -- --
Proceeds from sale of preferred stock .............. -- --
Redemption of preferred stock ...................... -- --
Proceeds from exercise of stock options ............ -- --
Deferred public offering costs ..................... -- --
Deferred financing costs ........................... -- --
Dividends .......................................... -- --
---------- ----------
Net cash provided by (used for)
financing activities ............................... 157,620 (3,386)
---------- ----------
Net increase (decrease) in cash ..................... (10,345) (130,602)
Cash, beginning of period ........................... 251,997 241,652
---------- ----------
Cash, end of period ................................. $ 241,652 $ 111,050
========== ==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-53
<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 AND ROYALTIES
The Company capitalizes catalog costs and amortizes the costs on the
straight-line method over the life of the catalog which is usually one year.
Total catalog costs expensed during the period from January 1, 1997 through
January 28, 1997, the three months ended December 31, 1996 and the years ended
September 30, 1996, 1995 and 1994 were approximately $101,000, $311,000,
$1,207,000, $907,000 and $988,000, 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 AND EQUIPMENT
Property, plant and equipment are stated at cost. 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 RECOGNITION
Sales are recognized upon shipment of products to 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 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 SHARE
Loss per share of Class A common stock is based on net loss applicable to
common stock and the weighted average number of shares of Class A common stock
and common stock equivalents
F-54
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
LOSS PER SHARE--(CONTINUED)
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 AMOUNTS
STATEMENT OF OPERATIONS
The Company entered into employment arrangements with its President that
provided for a base annual salary of $100,000 in 1995 and increases in future
years. A pro forma adjustment for the year ended September 30, 1994 was
presented for the difference between the current compensation and the actual
compensation paid during 1994.
Pro forma adjustments are also 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
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 earnings per share as if they were
outstanding for the period from October 1, 1993 through November 15, 1995, the
date of the initial public offering (see Note 10).
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS
128, which is effective for financial statements issued for periods ending
after December 15, 1997, simplifies the standards for computing earnings per
share ("EPS") and makes them comparable to international earnings-per-share
standards. This statement replaces the presentation of primary EPS and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
This statement is not expected to have a material effect on the Company's
reported earnings-per-share amounts.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130), and No. 131, "Disclosure about
F-55
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS--(CONTINUED)
Segments of an Enterprise and Related Information" (FAS 131). FAS 130
establishes standards for reporting and displaying comprehensive income, its
components and accumulated balances. FAS 131 establishes standards for the way
that public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. Both
FAS 130 and FAS 131 are effective for periods beginning after December 15,
1997. The Company has not determined the impact that the adoption of these new
accounting standards will have on its future financial statements and
disclosures.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial 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.
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.
F-56
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Eckler Industries, Inc. (the "Company") is an aftermarket 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 15%, 11% and 14% of its products from one supplier
during the period from January 1, 1997 through January 28, 1997, the three
months ended December 31, 1996 and the year ended September 30, 1996,
respectively.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, JANUARY 28,
1995 1996 1996 1997
--------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Raw materials and supplies ............. $ 67,749 $ 56,948 $ 56,281 $ 63,419
Work in progress ....................... 43,620 42,761 35,768 34,219
Finished goods ......................... 3,320 27,900 23,195 25,365
-------- ---------- ---------- ----------
Total manufactured inventories ......... 114,689 127,609 115,244 123,003
Inventory purchased for resale ......... 718,229 1,311,286 1,192,281 1,298,136
-------- ---------- ---------- ----------
$832,918 $1,438,895 $1,307,525 $1,421,139
======== ========== ========== ==========
</TABLE>
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
years ended September 30, 1995 and 1994 was to decrease net loss by $15,135 and
to increase net loss by $27,929, respectively.
3. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, JANUARY 28,
1995 1996 1996 1997
--------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Prepaid royalties ................ $ 919,685 $ 844,429 $ 825,004 $ 822,466
Catalog costs .................... 404,504 499,121 233,813 183,120
Prepaid consulting fees .......... -- 468,195 224,093 223,476
Other prepaid expenses ........... 67,884 77,294 118,789 85,127
---------- ---------- ---------- ----------
1,392,073 1,889,039 1,401,699 1,314,189
Less noncurrent portion of prepaid
consulting fees ................. -- (269,291) (126,689) (126,689)
Less noncurrent portion of prepaid
royalties ....................... (776,455) (745,054) (641,726) (641,726)
---------- ---------- ---------- ----------
$ 615,618 $ 874,694 $ 633,284 $ 545,774
========== ========== ========== ==========
</TABLE>
F-57
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PREPAID EXPENSES--(CONTINUED)
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, 2001. 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.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, JANUARY 28,
LIVES 1994 1996 1996 1997
------------- --------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Land ................................... $ 641,699 $ 641,699 $ 641,699 $ 641,699
Buildings and improvements ............. 10-40 years 2,674,989 2,685,253 2,685,253 2,686,967
Machinery and equipment ................ 3- 7 years 554,476 557,592 560,936 563,109
Molds .................................. 5-10 years 344,576 310,305 310,305 310,305
Equipment under capital leases ......... 5 years 288,739 318,683 318,683 318,683
Vehicles ............................... 3- 7 years 142,960 113,180 113,180 108,885
Furniture and fixtures ................. 3- 8 years 407,996 338,019 338,019 338,019
Computer hardware
and software ......................... 4- 5 years 1,399,265 1,515,171 1,545,428 1,558,794
---------- ---------- ---------- ----------
6,454,700 6,479,902 6,513,503 6,526,461
Less accumulated depreciation
and amortization ..................... 3,857,272 3,940,586 4,000,858 4,012,136
---------- ---------- ---------- ----------
$2,597,428 $2,539,316 $2,512,645 $2,514,325
========== ========== ========== ==========
</TABLE>
Substantially all of the assets listed above have been pledged as
collateral under the mortgage note payable (see Note 7).
Depreciation expense for the period from January 1, 1997 through January
28, 1997 and the three months ended December 31, 1996 was $20,190 and $60,026
and for the years ended September 30, 1996, 1995 and 1994 was $247,932,
$283,445 and $261,277, respectively. Accumulated amortization on equipment
under capital leases was $267,009, $265,245, $259,957 and $238,706 as of
January 28, 1997, December 31, 1996 and September 30, 1996 and 1995,
respectively.
F-58
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. TAXES ON INCOME
Effective as of the closing date of the private 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.
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, JANUARY 28,
1995 1996 1996 1997
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Provision for bad debts .................... $ 900 $ 4,000 $ 3,000 $ 4,000
Accrued vacation ........................... 30,200 30,000 28,000 33,000
Accrued interest ........................... 5,900 -- -- --
Stock options .............................. -- 39,000 82,000 10,000
Deferred compensation ...................... 19,800 20,000 20,000 20,000
Net operating loss carryforward ............ 1,300 190,000 200,000 430,000
---------- ---------- ---------- ----------
Gross deferred tax assets--current .......... 58,100 283,000 333,000 497,000
Valuation allowance ......................... -- -- -- (40,000)
---------- ---------- ---------- ----------
Net deferred tax assets--current ............ 58,100 283,000 333,000 457,000
Less current portion of deferred tax
liabilities ................................ (152,600) (167,000) (71,000) (53,000)
---------- ---------- ---------- ----------
Net deferred tax assets (liabilities)--
current .................................... $ (94,500) $ 116,000 $ 262,000 $ 404,000
========== ========== ========== ==========
Deferred tax liabilities:
Depreciation ............................... $ (351,500) $ (368,000) $ (372,000) $ (374,000)
Prepaid catalog costs ...................... (152,600) (167,000) (71,000) (53,000)
LIFO reserve ............................... -- (33,000) (31,000) (30,000)
---------- ---------- ---------- ----------
Gross deferred tax liabilities .............. (504,100) (568,000) (474,000) (457,000)
Less current portion ........................ (152,600) (167,000) (71,000) (53,000)
---------- ---------- ---------- ----------
Net deferred tax liabilities--long-term ..... $ (351,500) $ (401,000) $ (403,000) $ (404,000)
========== ========== ========== ==========
</TABLE>
The Company had unused net operating losses to carryforward against future
years' taxable income of approximately $1,141,000 as of January 28, 1997
expiring in various amounts from 2010 to 2012.
F-59
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. NOTE PAYABLE
The Company has a $1,000,000 line of credit with a bank which had an
outstanding balance of $343,823, $333,073 and $133,073 at January 28, 1997,
December 31, 1996 and September 30, 1996, respectively. Advances on the credit
line carry an interest rate of prime plus 1.5% (9.75% at January 28, 1997). 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.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, JANUARY 28,
1995 1996 1996 1997
--------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Prime plus 1.5% (9.75% at January 28,
1997) mortgage note payable due in
monthly principal installments of
$13,333 plus interest through July
1998, 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 $2,360,000 $2,346,667
Notes payable to bank refinanced on
October 6, 1995 (see below) ............... 3,071,932 -- -- --
Mortgage payable, interest at 10% per
annum payable monthly, paid off
during 1996 ............................... 130,000 -- -- --
Investor notes payable (see below) ......... 205,000 -- -- --
Other ...................................... 140,029 13,233 11,442 10,835
---------- ---------- ---------- ----------
3,546,961 2,413,233 2,371,442 2,357,502
Less current maturities .................... 1,208,853 167,414 167,582 167,639
---------- ---------- ---------- ----------
$2,338,108 $2,245,819 $2,203,860 $2,189,863
========== ========== ========== ==========
</TABLE>
The aggregate amount of the maturities of long-term debt maturing in
future years as of January 28, 1997 is as follows:
<TABLE>
<S> <C>
1998 ......... $ 167,639
1999 ......... 2,189,863
</TABLE>
LOAN COVENANTS
Among other provisions of the Company's line of credit and mortgage note
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
of all loan covenants through October 31, 1997.
F-60
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT--(CONTINUED)
REFINANCING OF NOTES PAYABLE
On October 6, 1995, the Company renegotiated and consolidated its loans
with the bank which were outstanding at September 30, 1995. The terms of the
loan refinancing required a principal payment of $500,000, which was paid out
of the proceeds of the initial public offering ("IPO") (see Note 10). The
additional terms of the refinancing included principal repayments of $100,000
per month from October 1995 through January 1996. For the period from February
1996 through September 1996, payments under the terms of this refinancing
consisted of interest only. On September 30, 1996, the remaining principal
balance was repaid from the proceeds of the current mortgage note payable.
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. The exercise
price of these warrants has been periodically reduced for specified periods of
time as dictated by the Board of Directors. On December 31, 1996, 90,000
warrants were exercised at a reduced price of $3.63 per share.
8. RETIREMENT BENEFIT PLAN
The Company sponsors a defined contribution pension plan for all employees
meeting certain eligibility requirements. The plan provides for voluntary
employee contributions and contributions by the Company to be determined at the
discretion of the Board of Directors. The Company made no contribution to the
plan for the period from January 1, 1997 through January 28, 1997, the three
months ended December 31, 1996 and the years ended September 30, 1996, 1995 and
1994.
9. PRIVATE PLACEMENT
On September 20, 1995, the Company completed a private 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 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
F-61
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. PRIVATE PLACEMENT--(CONTINUED)
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 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 January 28, 1997, the Company had the following common stock
warrants outstanding:
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
EXERCISE SHARES ISSUABLE
EXPIRATION DATE PRICE UPON EXERCISE
- ------------------------------ ---------- ----------------
<S> <C> <C>
November 8, 2000 .......... $ 6.00 12,500
November 14, 2000 ......... 6.50 1,284,000
March 30, 2001 ............ 4.20 20,000
</TABLE>
At January 28, 1997, all of the warrants were exercisable.
F-62
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. CAPITAL STOCK--(CONTINUED)
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.
PRO FORMA DISCLOSURES
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been recognized for options
granted to employees at exercise prices which equal or exceed the market price
of the Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting
for Stock-Based Compensation," requires the Company to provide pro forma
information regarding net income and earnings per share as if compensation cost
for the Company's employee stock options had been determined in accordance with
the fair market value based on the method prescribed in FAS 123. The Company
estimates the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants for both the three months ended December 31, 1996
and the year ended September 30, 1996: no dividend yield, expected volatility
of 61%, an expected life of five years and a risk-free interest rate of 6%.
Under the accounting provisions of FAS 123, the Company's net loss
applicable to common stock and net loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS PERIOD FROM
YEAR ENDED YEAR ENDED ENDED JANUARY 1, 1997
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, TO JANUARY 28,
1995 1996 1996 1997
--------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net loss applicable to
common stock
As reported ............... $ (546,456) $ (866,568) $ (265,005) $ (109,558)
Pro forma ................. (546,456) (1,112,153) (288,735) (109,558)
Net loss per share .........
As reported ............... $ (.26) $ (.34) $ (.10) $ (.39)
Pro forma ................. (.26) (.44) (.11) (.39)
</TABLE>
EMPLOYEE STOCK OPTION PLANS
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 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.
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.
F-63
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. CAPITAL STOCK--(CONTINUED)
The following table summarizes information about employee stock option
activity:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
SHARES EXERCISE PRICE OPTIONS GRANTED
---------- ------------------ -----------------
<S> <C> <C> <C>
Outstanding, September 30, 1994 ......... -- $ -- $ --
Granted ................................ 135,000 2.50 --
Forfeited .............................. (5,000) 2.50 --
------- ----- ------
Outstanding, September 30, 1995 ......... 130,000 2.50 --
Granted, at market value ............... 15,000 3.00 1.21
Granted, above market value ............ 10,000 3.30 1.16
------- ----- -------
Outstanding, September 30, 1996 ......... 155,000 2.60 --
Granted, at market value ............... 10,000 3.00 1.21
Granted, above market value ............ 10,000 3.30 1.16
------- ----- -------
Outstanding, December 31, 1996 .......... 175,000 2.66 --
------- ----- -------
Outstanding, January 28, 1997 ........... 175,000 $ 2.66 $ --
======= ====== =======
</TABLE>
At January 28, 1997, a total of 25,000 options were exercisable at a
weighted-average exercise price of $3.12.
The following table summarizes information about employee stock options
outstanding and exercisable at January 28, 1997:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT WEIGHTED-
RANGE OF JANUARY 28, EXERCISE REMAINING JANUARY 28, AVERAGE
EXERCISE PRICES 1997 PRICE LIFE 1997 EXERCISE PRICE
- ----------------- ---------------- ----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 2.50 130,000 $ 2.50 3.0 -- $ --
$ 3.00 25,000 3.00 5.0 15,000 3.00
$ 3.30 20,000 3.30 5.0 10,000 3.30
</TABLE>
F-64
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. CAPITAL STOCK--(CONTINUED)
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. The following table
summarizes information about non-plan stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
SHARES EXERCISE PRICE OPTIONS GRANTED
------------- ------------------ -----------------
<S> <C> <C> <C>
Outstanding, September 30, 1994 ......... 100,000 $ 2.50 $ --
Granted, at market value ............... 160,000 2.50 1.14
Granted, above market value ............ 320,000 5.00 0.54
------- ------- -------
Outstanding, September 30, 1995 ......... 580,000 3.88 --
Granted, at market value ............... 495,000 2.90 0.90
Granted, above market value ............ 284,000 4.48 0.40
Exercised .............................. (75,000) 3.00 --
Forfeited .............................. (200,000) 3.84 --
-------- ------- -------
Outstanding, September 30, 1996 ......... 1,084,000 3.66 --
Granted, at market value ............... 20,000 3.00 1.73
Granted, above market value ............ 10,000 5.00 0.33
Granted, below market value ............ 20,000 5.00 1.00
--------- ------- -------
Outstanding, December 31, 1996 .......... 1,134,000 3.68 --
Granted, below market value ............ 20,000 5.00 1.13
Exercised .............................. (100,000) 2.50 --
Expired ................................ (10,000) 5.00 --
--------- ------- -------
Outstanding, January 28, 1997 ........... 1,044,000 $ 3.81 $ --
========= ======= =======
</TABLE>
At January 28, 1997, a total of 1,024,000 options were exercisable at a
weighted-average exercise price of $3.82. In connection with the merger on
January 28, 1997 (see Note 13), 680,000 options included above were canceled.
The following table summarizes information about non-plan stock options
outstanding and exercisable at January 28, 1997:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT WEIGHTED-
RANGE OF JANUARY 28, EXERCISE REMAINING JANUARY 28, AVERAGE
EXERCISE PRICES 1997 PRICE LIFE 1997 EXERCISE PRICE
- ------------------- ---------------- ----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 2.50-$3.00 600,000 $ 2.79 5.2 580,000 $ 2.78
$ 5.00 360,000 5.00 5.9 360,000 5.00
$ 6.00 84,000 6.00 2.8 84,000 6.00
</TABLE>
During the year ended September 30, 1996, compensation expense of $204,000
was recognized, in accordance with FAS 123, on Class A common stock options
granted to non-employees and was recorded as additional paid-in capital.
F-65
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. CAPITAL STOCK--(CONTINUED)
STOCK ISSUED TO CONSULTANTS
During the three months ended December 31, 1996, the Company issued 5,000
shares of Class A common stock to a consultant, which were valued at the fair
value of the stock on the date of issuance.
During the year ended September 30, 1996, 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.
SHARES RESERVED
At January 28, 1997, the Company has reserved Class A common stock for
future issuance under all of the following arrangements:
<TABLE>
<S> <C>
Warrants ................................... 1,316,500
Conversion of Class B common stock ......... 1,020,750
Non-plan stock options ..................... 1,044,000
Employee stock option plan ................. 475,000
Management stock option plan ............... 35,000
---------
3,891,250
=========
</TABLE>
F-66
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS PERIOD FROM
YEAR ENDED SEPTEMBER 30, ENDED JANUARY 1, 1997
---------------------------------------- DECEMBER 31, TO JANUARY 28,
1994 1995 1996 1996 1997
----------- ----------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash paid for interest ................. $434,653 $374,360 $ 369,619 $ 72,672 $ 23,728
======== ======== ========= ======== ========
Non-cash investing and
financing activities:
Land acquired through assumption
of mortgage payable ................. $ -- $163,873 $ -- $ -- $ --
Assets acquired through obligation
under capital leases and note
payable to stockholder .............. 21,333 20,860 126,920 -- --
Accretion of redemption value of
redeemable preferred stock .......... -- 113,703 533,032 -- --
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 ..................... -- -- 94,000 326,700 250,000
Dividend paid to stockholder
through reduction of debt owed
to the Company ...................... 406,404 -- -- -- --
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
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 years ended September 30, 1995 and 1994
amounted to $62,727 and $113,988, respectively. 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 years ended
F-67
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
September 30, 1995 and 1994 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.
13. MERGER
On January 28, 1997, the Company acquired all of the issued and
outstanding shares of common stock of Smart Choice Holdings, Inc. ("SCHI")
pursuant to a merger transaction, which resulted in SCHI becoming a subsidiary
of the Company. However, since the shareholders of SCHI obtained a majority of
the voting rights of the Company as a result of the transaction, the
transaction was accounted for as a purchase of the Company by SCHI (a reverse
acquisition in which SCHI is considered the acquirer for accounting purposes).
In connection with this merger, the Company's employment agreement with the
President and a consulting agreement with a financial consultant were canceled.
F-68
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Liberty Finance Company, Inc. and Affiliates
Orlando, Florida
We have audited the accompanying combined balance sheets of Liberty
Finance Company, Inc. and affiliates as of December 31, 1996 and 1995, and the
related combined statements of operations, stockholders' equity, and cash flows
for the years then ended. 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 audits to
obtain reasonable assurance about whether the combined 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 combined financial statements referred to above
present fairly, in all material respects, the financial position of Liberty
Finance Company, Inc. and affiliates as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
OSBURN, HENNING AND COMPANY
Orlando, Florida
March 26, 1997, except for
Note 6, as to which the
date is April 12, 1997
F-69
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------------- ---------------
<S> <C> <C>
ASSETS
Cash ................................................................... $ 8,368 $ 163,184
Finance receivables, less allowance for uncollectible accounts ......... 9,804,684 11,383,431
Inventories ............................................................ 2,264,315 2,861,848
Land held for sale ..................................................... 1,050,000 1,050,000
Property and equipment, less accumulated depreciation .................. 241,210 272,543
Loan costs, less accumulated amortization of $3,476--1996
and $20,197--1995..................................................... 13,290 4,154
Other assets ........................................................... 68,159 83,754
----------- -----------
$13,450,026 $15,818,914
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Cash overdraft ......................................................... $ 11,269 $ --
Floor plan notes payable ............................................... 785,163 1,378,601
Accounts payable ....................................................... 505,510 473,088
Sales taxes payable .................................................... 49,471 23,535
Accrued interest ....................................................... 14,094 45,280
Accrued real estate taxes .............................................. 58,900 47,262
Advances from related parties .......................................... 182,096 197,237
Notes payable .......................................................... 10,640,827 13,059,981
Other liabilities ...................................................... 110,221 113,781
----------- -----------
Total liabilities ......................................... ......... 12,357,551 15,338,765
----------- -----------
STOCKHOLDERS' EQUITY
Common stock ........................................................... 1,500 700
Stock subscriptions .................................................... (1,400) (600)
Additional paid-in capital ............................................. 703,044 703,044
Retained earnings (deficit) ............................................ 389,331 (222,995)
----------- -----------
Total stockholders' equity .......................................... 1,092,475 480,149
----------- -----------
$13,450,026 $15,818,914
=========== ===========
</TABLE>
The Notes to Combined Financial Statements are an integral part of these
statements.
F-70
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
AUTOMOBILE RETAILING
Sales ......................................................... $ 11,786,657 $ 18,639,749
Cost of sales ................................................. 9,235,343 16,122,778
------------ ------------
Gross profit ............................................... 2,551,314 2,516,971
------------ ------------
AUTOMOBILE FINANCING
Interest income ............................................... 2,334,256 3,047,669
Interest expense .............................................. (1,105,558) (1,324,437)
------------ ------------
Interest income before provision for credit losses ......... 1,228,698 1,723,232
Provision for credit losses ................................... (417,659) (1,324,787)
------------ ------------
Net interest income ........................................ 811,039 398,445
------------ ------------
INCOME FROM OPERATIONS ......................................... 3,362,353 2,915,416
GENERAL AND ADMINISTRATIVE EXPENSE ............................. 2,772,391 3,527,742
------------ ------------
NET INCOME (LOSS) .............................................. $ 589,962 $ (612,326)
============ ============
</TABLE>
The Notes to Combined Financial Statements are an integral part of these
statements.
F-71
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS
STOCK SUBSCRIPTIONS CAPITAL (DEFICIT) TOTAL
-------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ........... $ 500 $ (400) $250,400 $ 186,857 $ 437,357
Issuance of common stock ........... 1,000 (1,000) -- --
Contribution of capital(1) ......... -- -- 452,644 -- 452,644
Net income ......................... -- -- -- 589,962 589,962
Distributions ...................... -- -- -- (387,488) (387,488)
------ -------- -------- ---------- ----------
Balance, December 31, 1995 ......... 1,500 (1,400) 703,044 389,331 1,092,475
Merger of affiliates(2) ............ (800) 800 -- -- --
Net loss ........................... -- -- -- (612,326) (612,326)
------ -------- -------- ---------- ----------
Balance, December 31, 1996 ......... $ 700 $ (600) $703,044 $ (222,995) $ 480,149
====== ======== ======== ========== ==========
</TABLE>
- ----------------
(1) The contribution of capital resulted from the assumption of a note payable
by a stockholder of the Company under a refinancing agreement with the
creditor.
(2) Merger of RRL Investments, Inc., RRL Central Enterprises, Inc., RRL
Trading, Inc. and Team Automobile Sales & Finance East, Inc. into Team
Automobile Sales & Finance, Inc.
The Notes to Combined Financial Statements are an integral part of these
statements.
F-72
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers ............................. $ 7,999,776 $ 15,736,215
Interest received ........................................ 2,334,256 3,047,669
Cash paid to suppliers and employees ..................... (11,764,018) (19,673,517)
Interest paid ............................................ (1,091,464) (1,293,251)
------------- -------------
Net cash (used in) operating activities ............... (2,521,450) (2,182,884)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ....................... (159,373) (54,965)
------------- -------------
Net cash (used in) investing activities ............... (159,373) (54,965)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties ............................ 182,096 15,141
Proceeds from issuance of notes payable .................. 7,861,144 10,015,455
Principal payments on notes payable ...................... (5,004,717) (7,630,301)
Loan costs paid .......................................... -- (7,630)
Distributions to stockholder ............................. (387,488) --
------------- -------------
Net cash provided by financing activities ............. 2,651,035 2,392,665
------------- -------------
NET INCREASE (DECREASE) IN CASH ........................... (29,788) 154,816
CASH, BEGINNING OF YEAR ................................... 38,156 8,368
------------- -------------
CASH, END OF YEAR ......................................... $ 8,368 $ 163,184
============= =============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net income (loss) ........................................ $ 589,962 $ (612,326)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation ............................................ 31,135 57,632
Amortization of loan costs .............................. 27,335 16,766
Provision for uncollectible finance receivables ......... 417,659 1,324,787
Decrease (Increase) In:
Finance receivables ..................................... (3,786,881) (2,903,534)
Inventories ............................................. (1,017,419) (597,533)
Other assets ............................................ 16,062 (15,595)
Increase (Decrease) In:
Accounts payable ........................................ 385,683 (32,422)
Floor plan note payable ................................. 739,363 593,438
Cash overdraft .......................................... 11,269 (11,269)
Sales taxes payable ..................................... 32,541 (25,936)
Accrued interest ........................................ 14,094 31,186
Accrued real estate taxes ............................... (240) (11,638)
Other liabilities ....................................... 17,987 3,560
------------- -------------
Net cash (used in) operating activities ............... $ (2,521,450) $ (2,182,884)
============= =============
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996, the Company acquired a vehicle
through the assumption of long-term debt amounting to $34,000.
During the year ended December 31, 1995, the Company had a $452,644
non-cash decrease in notes payable, and related contribution to capital due to
the assumption of the note by a stockholder under a refinancing agreement with
the creditor.
The Notes to Combined Financial Statements are an integral part of these
statements.
F-73
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The principal business activity of Liberty Finance Company, Inc. and
Affiliates (the Company) is retail and wholesale sales, and the related
financing, of used automobiles in the Central Florida market.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
In preparing the financial statements, management is required to make
estimates and assumptions that affect certain reported amounts and disclosures.
Actual results could differ from those estimates.
PRINCIPLES OF COMBINATION:
The combined financial statements include Liberty Finance Company, Inc.
and the following related entities under the common control of R.C. Hill, Jr.:
Wholesale Acquisitions, Inc., RRL Investments, Inc., RRL Central Enterprises,
Inc., RRL Trading, Inc., Team Automobile Sales and Finance, Inc., and Team
Automobile Sales and Finance East, Inc. All material intercompany transactions
and balances have been eliminated in combination.
INCOME RECOGNITION:
Vehicle sales are recognized when delivery is made.
Interest income from finance receivables is recognized using the interest
method.
CREDIT LOSSES:
The allowance for uncollectible finance receivables is maintained at a
level which, in management's judgment, is adequate to absorb potential losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, collateral values, and economic
conditions. Because of uncertainties associated with regional economic
conditions, collateral values, and future cash flows on impaired loans, it is
reasonably possible that management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change materially in the near
term. However, the amount of change that is reasonably possible cannot be
estimated. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is generally
determined on a specific unit basis.
LAND HELD FOR SALE:
The land, which is being held for sale, is recorded at estimated fair
value at date of contribution by the Company's stockholder.
F-74
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on furniture and fixtures, and signs is computed using an
accelerated method, and on leasehold improvements using the straight-line
method, over the estimated useful lives of the assets.
LOAN COSTS:
Loan costs are amortized over the life of the loan using the straight-line
method.
INCOME TAXES:
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be "S corporations". In lieu of corporation income
taxes, the stockholders of an S corporation are taxed on the Company's taxable
income. Therefore, no provision or liability for federal income taxes has been
included in these financial statements.
MODIFICATIONS OF 1995 FINANCIAL STATEMENTS:
The 1995 combined statement of operations as previously reported has been
modified to correct a misclassification of losses on the sales of repossessed
automobiles in the amount of $406,154. This modification increased provision
for credit losses, and decreased cost of sales, but had no effect on net
income. The 1995 combined financial statements contain certain other
reclassifications in order to conform to the 1996 format.
NOTE 2. FINANCE RECEIVABLES
Finance receivables at December 31, 1995 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Finance receivables--gross ......................... $10,304,684 $12,283,431
Less allowance for uncollectible accounts .......... 500,000 900,000
----------- -----------
Finance receivables--net ........................... $ 9,804,684 $11,383,431
=========== ===========
</TABLE>
An analysis of the allowance for uncollectible finance receivables for the
years ended December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Balance, beginning of year ............................... $ 750,000 $ 500,000
Provision for uncollectible finance receivables .......... 417,659 1,324,787
Loans charged off, net of recoveries ..................... (667,659) (924,787)
---------- ----------
Balance, end of year ..................................... $ 500,000 $ 900,000
========== ==========
</TABLE>
Finance receivables consist of installment sale contracts with maturities
that generally do not exceed 36 months. The receivables are collateral- ized by
the vehicles sold, and the Company holds title to the vehicles until full
contract payment is made.
F-75
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. INVENTORIES
Inventories at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Used cars ................. $2,081,673 $2,610,934
Used motorcycles .......... 132,323 203,094
Accessories ............... 50,319 47,820
---------- ----------
$2,264,315 $2,861,848
========== ==========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Furniture and fixtures ................. $123,671 $190,280
Leasehold improvements ................. 115,880 130,895
Signs .................................. 48,427 55,768
-------- --------
287,978 376,943
Less accumulated depreciation .......... 46,768 104,400
-------- --------
$241,210 $272,543
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1996 and 1995
amounted to $57,632 and $31,135, respectively.
NOTE 5. FLOOR PLAN NOTES PAYABLE
Floor plan notes payable at December 31, 1995 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <C> <C>
Floor plan note payable to financial institution, collateralized by used
car inventory, maximum total advances of $2,000,000 are available,
note bears interest at prime plus 2%, principal and interest on
individual advances due 90 days after advance or 48 hours from
time car is sold, agreement expires June 30, 1997 ..................... $739,363 $1,010,663
Floor plan note payable to stockholder, collateralized by specific used
cars in inventory, bears interest at 15%, principal and interest on
individual advances due 120 days after advance or date car is sold.
Balance paid off in February 1997 ..................................... $ 45,800 $ 331,938
Floor plan note payable to relative of stockholder, collateralized by
specific cars in inventory, bears interest at 15%, principal and
interest on individual advances due 120 days after advance or date
car is sold. Balance paid off in February 1997 ........................ -- 36,000
-------- ----------
$785,163 $1,378,601
======== ==========
</TABLE>
F-76
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. NOTES PAYABLE
Notes payable at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------------- -------------
<S> <C> <C>
Unrelated Parties:
Uncollateralized notes payable to individuals, payable in monthly
installments of interest only at 15%, due on demand .................. $ 20,000 $ 20,000
Uncollateralized notes payable, payable in monthly installments of
interest at 16%, matures in 1997 ..................................... 180,000 180,000
Note payable to bank, collateralized by land held for sale, payable in
monthly principal and interest payments of $8,683, bears interest of
7.75% until December 1998, after that date, payments will be
modified to reflect an interest rate at 2.75% over the then five year
constant U. S. Treasury Index, matures December 2003 ................. 619,750 561,683
Note payable to bank, collateralized by Ford Wrecker, payable in
monthly principal and interest payments of $781, bears interest of
9.5%, matures in December, 1998 ...................................... $ 24,073 $ 16,728
Note payable under financing agreement, collateralized by
substantially all Company assets except real estate, maximum note
is the lower of $15,000,000 or 80% of outstanding balance of finance
receivables, payable based on the repayment history of finance
receivables, bears interest at 5% plus the LIBOR rate, expires in
June, 1997 ........................................................... 8,188,231 10,391,312
Note payable to bank, collateralized by land held for sale, principal
and interest at 1% over Barnett Bank, Inc.'s prime rate payable
April 30, 1997 ....................................................... -- 600,000
Note payable to bank, collateralized by Chevy Suburban, payable in
monthly principal and interest payments of $1,092, bears interest of
8.99%, matures in October 1999 ....................................... -- 32,549
----------- -----------
9,032,054 11,802,272
----------- -----------
Related Parties: Uncollateralized notes payable to relatives of
stockholder, payable in monthly installments of interest only ranging
from 10% to 15%, balloon maturities range from due on demand to
December, 2001 ....................................................... $ 440,975 $ 395,575
Notes payable to relative of stockholder, collateralized by real estate
owned by stockholder, payable in monthly installments of interest
only at 10%, matures December, 2001 .................................. 200,000 200,000
Uncollateralized note payable to stockholder, payable in monthly
principal and interest payments of $8,520, bears interest of 7.75%
until December 1998, after that date, payments will be modified to
reflect an interest rate at 2.75% over the then five year constant U.
S. Treasury Index, matures December 2003 ............................. 835,798 389,279
Uncollateralized notes payable to stockholder, payable in monthly
installments of interest only of 15%, balloon maturities range from
due on demand to November, 2000 ...................................... 132,000 272,855
----------- -----------
1,608,773 1,257,709
----------- -----------
$10,640,827 $13,059,981
=========== ===========
</TABLE>
F-77
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. NOTES PAYABLE--(CONTINUED)
At December 31, 1996, the Company was not in compliance with certain terms
and covenants related to the note payable under financing agreement, including
overdrawing the limit on drawings of 80% of the outstanding balance of finance
receivables. On January 21, 1997, the Company entered into a forbearance
agreement with this lender to work out the non-compliance issues, and this
agreement amended some of the terms of the original agreement. In particular,
1% was added to the basic interest rate to reflect default interest, and
interest on the overdrawings accrues at 13%. At December 31, 1996, the
overdrawing amounted to $498,599.
On February 19, 1997, the Company was notified by the lender referred to
in the preceding paragraph that the note payable under financing agreement
would not be renewed after its maturity date on June 30, 1997.
On April 12, 1997, the Company entered into an agreement with the lender
referred to in the preceding paragraph which commits the lender to modify the
forbearance agreement referred to in the second prior paragraph in order to
extend the forbearance period until January 1998. In addition, the agreement
commits the lender to modify certain terms and covenants to cure acts of
default as of December 31, 1996, and allows the lender to reduce the limit on
drawings under the agreement from 80% of the outstanding balance of finance
receivables to 75% upon the occurrence of certain events.
On February 12, 1997, in connection with the ownership change described in
Note 10, certain notes payable were amended to accelerate their maturity dates
to June 30, 1997. The balances of these notes payable at December 31,1996 were
as follows:
<TABLE>
<S> <C>
Uncollateralized notes payable to individuals ...................... $ 20,000
Uncollateralized notes payable ..................................... 180,000
Note payable to relative of stockholder ............................ 200,000
Uncollateralized notes payable to relatives of stockholder ......... 395,575
--------
$795,575
========
</TABLE>
On February 12, 1997, in connection with the ownership change described in
Note 10, certain notes payable to stockholder were converted to stockholders'
equity. At December 31, 1996, these notes payable amounted to $662,134.
F-78
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. NOTES PAYABLE--(CONTINUED)
Principal maturities of notes payable (as modified for the circumstances
described above) are as follows at December 31, 1996:
<TABLE>
<S> <C>
Year ending December 31,
1997 .............................................................. $ 9,477,265
1998 .............................................................. 2,479,351
1999 .............................................................. 83,747
2000 .............................................................. 79,281
2001 .............................................................. 85,648
Later years ....................................................... 192,555
-----------
12,397,847
Stockholder notes to be converted to stockholders' equity ......... 662,134
-----------
$13,059,981
===========
</TABLE>
The Company is the cosigner on a stockholder's note payable which has a
balance of $432,488 at December 31, 1996.
Total interest expense amounted to $1,324,437 and $1,105,558,
respectively, for the years ended December 31, 1996 and 1995.
NOTE 7. COMMON STOCK
At December 31, 1995 and 1996, the Company's common stock consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- -------
<S> <C> <C>
Liberty Finance Company, Inc., par value $1 per share, 7,500 shares
authorized, 100 shares issued and outstanding ................................. $ 100 $100
Wholesale Acquisitions, Inc., par value $.10 per share, 75,000 shares
authorized, 1,000 shares issued and outstanding ............................... 100 100
RRL Investments, Inc., par value $.10 per share, 75,000 shares authorized,
1,000 shares issued and outstanding ........................................... 100 --
RRL Central Enterprises, Inc., par value $.10 per share, 75,000 shares
authorized, 1,000 shares issued and outstanding ............................... 100 --
RRL Trading, Inc., par value $.10 per share, 75,000 shares authorized, 1,000
shares issued and outstanding ................................................. 100 --
Team Automobile Sales & Finance, Inc., par value $.10 per share, 75,000
shares authorized, 5,000 shares issued and outstanding ........................ 500 500
Team Automobile Sales & Finance East, Inc., par value $.10 per share,
75,000 shares authorized, 5,000 shares issued and outstanding ................. 500 --
------ ----
$1,500 $700
====== ====
</TABLE>
Effective January 1, 1996, RRL Investments, Inc., RRL Central Enterprises,
Inc., RRL Trading, Inc., and Team Automobile Sales & Finance East, Inc. were
merged into Team Automobile Sales & Finance, Inc.
NOTE 8. RELATED PARTY TRANSACTIONS
Two of the eight locations used by the Company (see also Note 9) are owned
by a stockholder. These locations are rented under operating leases. The
stockholder and the Company entered into an agreement to cancel these leases in
1997.
F-79
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS--(CONTINUED)
Total rent expense related to these two locations amounted to $151,335 for
each of the years ended December 31, 1996 and 1995.
Floor plan notes payable include $367,938 and $45,800 payable to the
stockholder or relatives of the stockholder at December 31, 1996 and 1995,
respectively.
Notes payable to related parties totaled $1,257,709 and $1,608,773 as of
December 31, 1996 and 1995, respectively, (see Note 6).
Interest expense related to these notes was $208,164 and $165,657,
respectively, for the years ended December 31, 1996 and 1995.
Advances from related parties are uncollateralized, non-interest bearing,
and contain no repayment terms.
NOTE 9. LEASE COMMITMENTS (SEE ALSO NOTE 8)
The Company leases three of its locations and a portion of another
location from unrelated parties under cancelable leases. The Company leases
three of its locations, office equipment, and garage equipment from unrelated
parties under noncancelable operating leases. The future minimum rentals under
noncancellable operating leases with unrelated parties are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997 ................. $139,866
1998 ................. 85,506
1999 ................. 45,762
2000 ................. 25,919
2001 ................. 24,000
Thereafter ........... 90,000
--------
$411,053
========
</TABLE>
Total rent expense for the years ended December 31, 1996 and 1995 amounted
to $512,008 and $388,687, respectively, which includes the related party rents
and other short-term rentals.
NOTE 10. OWNERSHIP CHANGE
On February 12, 1997, the stockholder of Wholesale Acquisitions, Inc.
(Wholesale), and Team Automobile Sales and Finance, Inc. (Team) entered into an
agreement to sell Wholesale and Team to First Choice Auto Finance, Inc. (First
Choice), a wholly owned subsidiary of Eckler Industries, Inc. (Eckler). Eckler
is a publicly traded company.
Also, on February 12, 1997, Liberty Finance Co. (Liberty) and its
stockholder entered into a merger agreement with R. C. Acquisition, Inc.
(Acquisition), a wholly-owned subsidiary of Eckler. Subsequently, Acquisition
was merged into Liberty so that Liberty became a wholly-owned subsidiary of
Eckler.
The transactions described above resulted in the termination of the
election under the Internal Revenue Code to be "S corporations." The effect of
the terminations has not been determined.
F-80
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholder of 225 North Military Corporation
d/b/a Miracle Mile Motors
and Palm Beach Finance Company, Inc.
We have audited the accompanying combined balance sheets of 225 North
Military Corporation d/b/a Miracle Mile Motors and Palm Beach Finance Company,
Inc. as of December 31, 1996 and 1995 and the related combined statements of
income and retained earnings, and cash flows for the years then ended. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
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 combined financial statements are free
of material misstatement. An audit includes examining, on a test basis, the
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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
225 North Military Corporation d/b/a Miracle Mile Motors and Palm Beach Finance
Company, Inc. as of December 31, 1996 and 1995, and the combined results of
their operations and their combined cash flows for the years then ended in
conformity with generally accepted accounting principles.
As disclosed in Note 11 to the financial statements, certain
reclassifications resulting in the overstatement of previously reported cash
and contracts in transit on the combined statements of cash flows for the year
ended December 31, 1995 were subsequently discovered. Accordingly, adjustments
have been made to the combined statements of cash flows for the year ended
December 31, 1995 to correct the error.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplementary combining
balance sheets, and the combining statements of income and retained earnings,
as of December 31, 1996 and 1995 and for the years then ended, are presented
for purposes of additional analysis and are not a required part of the basic
combined financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic combined financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic combined financial statements taken as a whole.
Spence, Marston, Bunch, Morris & Co.
Certified Public Accountants
April 10, 1997
(except for Note 11, as to
which the date is October 24, 1997)
F-81
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and contracts in transit ................. $ 304,914 $ 192,999
Finance receivables, net ...................... 3,620,623 4,057,682
Inventory ..................................... 860,105 799,358
Property and equipment, net ................... 104,010 10,086
Other assets .................................. 24,859 48,275
---------- ----------
$4,914,511 $5,108,400
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Drafts payable ................................ $ 317,875 $ 220,887
Accounts payable and accrued expenses ......... 256,577 128,206
Loan from stockholder ......................... 50,880 --
Note payable .................................. 45,000 300,000
---------- ----------
Total liabilities ........................... 670,332 649,093
---------- ----------
Stockholder's equity:
Common stock .................................. 800 800
Additional paid-in capital .................... 20,000 20,000
Retained earnings ............................. 4,223,379 4,438,507
---------- ----------
Total stockholder's equity .................. 4,244,179 4,459,307
---------- ----------
Commitments ................................... -- --
---------- ----------
$4,914,511 $5,108,400
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-82
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Revenue:
Sales ........................................ $11,393,704 $10,784,322
Interest income .............................. 1,090,692 1,214,525
----------- -----------
Total revenue ............................... 12,484,396 11,998,847
----------- -----------
Cost of sales and expenses:
Cost of sales ................................ 9,118,158 8,446,683
Selling, general, and administrative ......... 1,994,632 1,877,065
Provision for credit losses .................. 961,416 1,110,989
Interest expense ............................. 18,248 22,593
Depreciation ................................. 3,262 1,748
----------- -----------
Total cost of sales and expenses ............ 12,095,716 11,459,078
----------- -----------
Net income ................................. 388,680 539,769
Retained earnings, beginning of year .......... 3,971,944 4,223,379
Distributions to stockholder .................. (137,245) (324,641)
----------- -----------
Retained earnings, end of year ................ $ 4,223,379 $ 4,438,507
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-83
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1995 1996
------------ -------------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 388,680 $ 539,769
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................................... 3,262 1,748
Change in operating assets and liabilities:
Decrease in inventory ................................................ 1,881 60,747
Increase in other assets ............................................. (6,661) (23,416)
Increase (decrease) in drafts payable ................................ 46,627 (96,988)
Increase (decrease) in accounts payable and accrued expenses ......... 7,649 (128,371)
---------- ----------
Total adjustments ................................................... 52,758 (186,280)
---------- ----------
Net cash provided by operating activities .......................... 441,438 353,489
---------- ----------
Cash flows from investing activities: ...................................
Increase in finance receivable, net .................................... (250,271) (437,059)
Purchase of property and equipment ..................................... (3,386) (8,851)
---------- ----------
Net cash used in investing activities .............................. (253,657) (445,910)
---------- ----------
Cash flows from financing activities:
Increase in note payable ............................................... 44,000 255,000
Repay stockholder loan ................................................. - (50,880)
Distributions to stockholder ........................................... (137,245) (223,614)
---------- ----------
Net cash used in financing activities .............................. (93,245) (19,494)
---------- ----------
Net increase (decrease) in cash and contracts in transit ................ 94,536 (111,915)
Cash and contracts in transit, beginning of year ........................ 210,378 304,914
---------- ----------
Cash and contracts in transit, end of year .............................. $ 304,914 $ 192,999
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on borrowings ................................................. $ 17,243 $ 21,149
========== ==========
Noncash investing and financing transaction:
Property distributed to stockholder (Note 7) ........................... $ -- $ 101,027
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-84
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF OPERATIONS
The accompanying financial statements include 225 North Military
Corporation d/b/a Miracle Mile Motors (Miracle Mile) and Palm Beach Finance
Company, Inc. (PBF), (collectively, the Company). The Company sells used
automobiles and trucks to retail and wholesale purchasers through its
independent dealership located in West Palm Beach, Florida. A majority of its
retail sales are financed pursuant to installment sales contracts requiring
periodic payments over terms ranging from one to three years.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION--The accompanying financial statements include
the accounts of Miracle Mile and PBF. All significant intercompany accounts,
transactions, and profits have been eliminated in the combination.
CONTRACTS IN TRANSIT--The Company's policy is to treat contracts in
transit as a cash equivalent. The contracts in transit amounted to $106,164 and
$196,325, respectively, at December 31, 1996 and 1995.
REVENUE RECOGNITION--Sales of vehicles are recorded on an accrual basis.
Interest income from finance receivables is recognized using the interest
method. Accrual of interest income is suspended when management deems the loan
to be uncollectible. Vehicles are repossessed and the loan balances written off
based on management's review of loans on a loan-by-loan basis.
ALLOWANCE FOR CREDIT LOSSES--Provisions for credit losses are charged to
income in amounts sufficient to maintain the allowance at a level considered
adequate to cover losses in the existing portfolio. The Company charges or
credits the allowance for repossessions and charge-offs.
Material estimates that are particularly susceptible to significant change
relate to the determination of the reserve of possible loan losses.
Accordingly, the ultimate collectibility of the finance receivables is
susceptible to changes in economic and market conditions. Therefore, actual
losses in future periods could differ materially from amounts provided in the
current period and could result in a material adjustment to future results of
operations.
INVENTORY--Inventory consists of used vehicles and is stated at the lower
of cost or market, on a specific unit basis.
PROPERTY AND EQUIPMENT--These assets are carried at cost. Major additions
are capitalized while replacements, maintenance, and repairs which do not
improve or extend the life of the respective assets, are expensed currently.
When property is retired or otherwise disposed of, the cost of the property is
eliminated from the asset account, accumulated depreciation is charged with an
amount equal to the depreciation provided and the difference, if any, is
charged or credited to income.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Sales office ................... 40 years
Furniture and fixtures ......... 7 years
</TABLE>
LOAN ORIGINATION COSTS--Direct costs incurred for the origination of
finance receivables are deferred and amortized over the contractual lives of
the loans.
F-85
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ADVERTISING COSTS--Advertising costs are generally charged to operations
in the year incurred and totaled $150,096 in 1996 and $151,697 in 1995.
INCOME TAXES--The sole stockholder for Miracle Mile and PBF has elected
for each corporation to be treated as an S corporation for federal income tax
purposes. In accordance with the provisions of such election, each
corporation's income and losses are passed through to its stockholder;
accordingly, no provision for income taxes has been made in the accompanying
combined financial statements.
DRAFTS PAYABLE--Drafts payable represent non-interest bearing amounts due
to wholesalers for vehicle purchases.
OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK--The Company
maintains deposits in excess of federally insured limits. Statement of
Financial Accounting Standards No. 105 requires disclosure, regardless of the
degree of risk. Concentration of credit risk exists as substantially all of the
Company's loans have been granted to customers in the Company's market area
which is primarily West Palm Beach, Florida.
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates that
affect certain reported amounts and disclosures. These estimates are based on
management's knowledge and experience. Accordingly, actual results could differ
from these estimates.
(3) FINANCE RECEIVABLES
Receivables arise principally from retail sales of vehicles under
installment contracts to credit challenged individuals who cannot qualify for
traditional automobile financing. The Company investigates the credit
worthiness of potential customers and requires substantial down payments and
frequent periodic payments on installment contracts. Such finance receivables
are stated net of unearned interest, bear interest at rates ranging from 20% to
26%, and are collateralized by the vehicles sold.
Management provides an allowance for credit losses based on its experience
with collections and repossessions. Repossessed vehicles are recorded as
inventory at their estimated fair value. The difference between the balance of
the installment contract and the estimated fair value of the repossessed
vehicle is charged or credited to the allowance for credit losses.
F-86
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) FINANCE RECEIVABLES--(CONTINUED)
Finance receivables at December 31, 1995 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
Contractually scheduled payments ...................... $ 5,360,589 $ 6,227,510
Less: unearned interest income ........................ (1,012,754) (1,307,027)
------------ ------------
Installment sales contract principal balances ......... 4,347,835 4,920,483
Loan origination costs, net ........................... 62,792 64,780
Other receivables ..................................... 84,996 56,419
------------ ------------
Principal balances, net ............................... 4,495,623 5,041,682
Less: allowance for credit losses ..................... $ (875,000) $ (984,000)
------------ ------------
Finance receivables, net .............................. $ 3,620,623 $ 4,057,682
============ ============
</TABLE>
The allowance for credit losses for the years ended December 31, 1995 and
1996 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996
------------- ---------------
<S> <C> <C>
Balance, beginning of the year ......... $ 618,000 $ 875,000
Provision for credit losses ............ 961,416 1,110,989
Charge-offs and repossessions .......... (704,416) (1,001,989)
---------- ------------
Balance, end of the year ............... $ 875,000 $ 984,000
========== ============
</TABLE>
Finance receivables are pledged as collateral for the note payable (Note
5). See Note 2 regarding the allowance for credit losses. Due to the relatively
short-term nature of the contracts underlying the receivables and the low
likelihood that all of the contracts will reach maturity, contractual
maturities have not been disclosed.
(4) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Sales office (Note 7) .................. $ 114,370 $ --
Furniture and fixtures ................. 3,386 12,236
--------- --------
117,756 12,236
Less: accumulated depreciation ......... (13,746) (2,150)
--------- --------
$ 104,010 $ 10,086
========= ========
</TABLE>
F-87
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) NOTE PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- -----------
<S> <C> <C>
Line of credit payable to First United Bank, interest payable monthly at
prime plus 1%. Maximum available is $400,000. The line of credit
contains loan covenants which restrict changes in the capital structure
and prohibits certain related party capital transactions and new
borrowings. The note is collateralized by finance receivables and is
guaranteed by the stockholder. The line of credit matures in 1997 ...... $45,000 $300,000
======= ========
</TABLE>
(6) LOAN FROM STOCKHOLDER
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Uncollateralized non-interest bearing loan payable to stockholder on
demand, repaid during 1996 ........................................ $50,880 $ --
======= =======
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company leases its operating facilities from the stockholder under a
five-year operating lease for $12,000 per month. The lease is effective January
1, 1995 through December 31, 1999. Rent expense for the years ended December
31, 1996 and 1995 was $144,000 and $144,445, respectively. The approximate
future minimum rental payments under this lease are $144,000 per year for 1997
through 1999.
The Company also paid the stockholder $25,500 in 1996 and $23,375 in 1995
for the use of other facilities for promotional purposes.
Miracle Mile provided collection, administrative and accounting services
to PBF for $204,000 in each of the years 1996 and 1995. The fees have been
eliminated in the combined financial statements.
During 1996, the Company transferred ownership of the sales office (Note
4) to the stockholder and recorded a stockholder distribution of $101,027 based
on the asset's net book value. Management believes the net book value
approximates the market value.
Vehicle installment notes receivable are purchased by PBF from Miracle
Mile at a 30% discount. The discount is amortized and the income recognized
over the life of the loan. At December 31, 1996 and 1995, the remaining
unamortized discount of $1,476,980 and $977,785, respectively, have been
eliminated in the combined financial statements.
(8) PROFIT SHARING PLAN
The Company maintains a discretionary profit sharing plan for eligible
employees who have completed one year of service. Contributions under this plan
amounted to $39,810 in 1996 and $52,930 in 1995. The Company terminated the
Plan effective April 15, 1997.
F-88
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN CAPITAL EARNINGS TOTAL
-------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1995:
225 North Military Corporation:
No par value; 60 shares authorized,
issued, and outstanding ............. $300 $20,000 $3,476,516 $3,496,816
Palm Beach Finance Company, Inc.:
$1 par value; 1,000 shares
authorized; 500 shares issued and
outstanding ......................... 500 -- 746,863 747,363
---- ------- ---------- ----------
$800 $20,000 $4,223,379 $4,244,179
==== ======= ========== ==========
December 31, 1996:
225 North Military Corporation:
No par value; 60 shares authorized,
issued, and outstanding ........... $300 $20,000 $3,583,463 $3,603,763
Palm Beach Finance Company, Inc.:
$1 par value; 1,000 shares
authorized; 500 shares issued and
outstanding ......................... $500 $ -- $ 855,044 $ 855,544
---- ------- ---------- ----------
$800 $20,000 $4,438,507 $4,459,307
==== ======= ========== ==========
</TABLE>
(10) SUBSEQUENT EVENT
During February 1997, the Company sold substantially all of their business
and assets to Smart Choice Holdings, Inc. (Smart Choice), a wholly-owned
subsidiary of Eckler Industries, Inc. Eckler is a publicly-held Florida
corporation. The following consideration was received in connection with the
sale:
<TABLE>
<S> <C>
Cash ............................... $3,000,000
Short-term promissory note ......... 205,574
Convertible debenture .............. 467,601
Secured convertible note ........... 800,000
----------
$4,473,175
==========
</TABLE>
In addition, the Company received 142,857 shares of unregistered Class B
Common Stock of Eckler. The Company will recognize a gain on the sale equal to
the fair value of the consideration received over the book value of assets sold
during 1997.
(11) RESTATEMENT OF 1995 COMBINED STATEMENTS OF CASH FLOWS
During the subsequent audit of the financial statements as of and for the
year ended December 31, 1994, reclassification entries were made to various
asset accounts. The net effect was a decrease in cash and contracts in transit
of $99,687 as of December 31, 1994. As a result, the combined statement of cash
flows for the year ended December 31, 1995 was restated to reflect the
adjustment to the beginning of the year asset amounts. The net effect on the
combined statement of cash flows for the year ended December 31, 1995 is a
$99,687 increase in the change in cash and contracts in transit as compared to
the amount previously reported. The restatement had no effect on the ending
balance of cash and contracts in transit as of December 31, 1995.
F-89
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINING BALANCE SHEETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
255 NORTH PALM BEACH
MILITARY FINANCE COMBINING COMBINED
CORPORATION COMPANY, INC. ENTRIES TOTALS
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and contracts in transit ................. $ 176,120 $ 16,879 $ -- $ 192,999
Finance receivables, net ...................... 64,779 3,992,903 -- 4,057,682
Inventory ..................................... 799,358 -- -- 799,358
Property and equipment, net ................... 10,086 -- -- 10,086
Other assets .................................. 48,275 -- -- 48,275
Intercompany receivable ....................... 1,677,258 -- (1,677,258) --
---------- ---------- ------------ ----------
$2,775,876 $4,009,782 $ (1,677,258) $5,108,400
========== ========== ============ ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Drafts payable ................................ $ 220,887 $ -- $ -- $ 220,887
Accounts payable and accrued expenses ......... 128,206 -- -- 128,206
Note payable .................................. 300,000 -- -- 300,000
Deferred finance revenue ...................... -- 1,476,980 (1,476,980) --
Intercompany payable .......................... -- 1,677,258 (1,677,258) --
---------- ---------- ------------ ----------
Total liabilities .......................... 649,093 3,154,238 (3,154,238) 649,093
---------- ---------- ------------ ----------
Stockholder's equity:
Common stock .................................. 300 500 -- 800
Additional paid-in capital .................... 20,000 -- -- 20,000
Retained earnings ............................. 2,106,483 855,044 1,476,980 4,438,507
---------- ---------- ------------ ----------
Total stockholder's equity ................. 2,126,783 855,544 1,476,980 4,459,307
---------- ---------- ------------ ----------
Commitments .................................... -- -- -- --
---------- ---------- ------------ ----------
$2,775,876 $4,009,782 $ (1,677,258) $5,108,400
========== ========== ============ ==========
</TABLE>
See independent auditor's report on page 1
F-90
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINING STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
255 NORTH PALM BEACH
MILITARY FINANCE COMBINING COMBINED
CORPORATION COMPANY, INC. ENTRIES TOTALS
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Sales ........................................ $10,784,322 $ -- $ -- $10,784,322
Interest income .............................. 685,082 1,245,512 (716,069) 1,214,525
Administrative fee ........................... 204,000 -- (204,000) --
----------- ---------- ------------ -----------
Total revenue ............................. 11,673,404 1,245,512 (920,069) 11,998,847
----------- ---------- ------------ -----------
Cost of sales and expenses:
Cost of sales ................................ 8,446,683 -- -- 8,446,683
Selling, general, and administrative ......... 1,849,229 231,598 (204,000) 1,877,065
Provision for credit losses .................. 205,494 905,733 -- 1,110,989
Discount on sale of receivables .............. 1,215,264 -- (1,215,264) --
Interest expense ............................. 22,593 -- -- 22,593
Depreciation ................................. 1,748 -- -- 1,748
----------- ---------- ------------ -----------
Total cost of sales and expenses .......... 11,741,011 1,137,331 (1,419,264) 11,459,078
----------- ---------- ------------ -----------
Net income (loss) ............................. (67,607) 108,181 499,195 539,769
Retained earnings, beginning of year .......... 2,498,731 746,863 977,785 4,223,379
Distributions to stockholder .................. (324,641) -- -- (324,641)
----------- ---------- ------------ -----------
Retained earnings, end of year ................ $ 2,106,483 $ 855,044 $ 1,476,980 $ 4,438,507
=========== ========== ============ ===========
</TABLE>
See independent auditor's report on page 1
F-91
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINING BALANCE SHEETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
255 NORTH PALM BEACH
MILITARY FINANCE COMBINING COMBINED
CORPORATION COMPANY, INC. ENTRIES TOTALS
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and contracts in transit ................. $ 299,630 $ 5,284 $ -- $ 304,914
Finance receivables, net ...................... 834,328 2,786,295 -- 3,620,623
Inventory ..................................... 860,105 -- -- 860,105
Property and equipment, net ................... 104,010 -- -- 104,010
Other assets .................................. 24,859 -- -- 24,859
Intercompany receivable ....................... 1,015,551 -- (1,015,551) --
---------- ---------- ------------ ----------
$3,138,483 $2,791,579 $ (1,015,551) $4,914,511
========== ========== ============ ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Drafts payable ................................ $ 317,875 $ -- $ -- $ 317,875
Accounts payable and accrued expenses ......... 256,577 -- -- 256,577
Loan from stockholder ......................... -- 50,880 -- 50,880
Note payable .................................. 45,000 -- -- 45,000
Deferred finance revenue ...................... -- 977,785 (977,785) --
Intercompany payable .......................... -- 1,015,551 (1,015,551) --
---------- ---------- ------------ ----------
Total liabilities .......................... 619,452 2,044,216 (1,993,336) 670,332
---------- ---------- ------------ ----------
Stockholder's equity:
Common stock .................................. 300 500 -- 800
Additional paid-in capital .................... 20,000 -- -- 20,000
Retained earnings ............................. 2,498,731 746,863 977,785 4,223,379
---------- ---------- ------------ ----------
Total stockholder's equity ................. 2,519,031 747,363 977,785 4,244,179
---------- ---------- ------------ ----------
Commitments .................................... -- -- -- --
---------- ---------- ------------ ----------
$3,138,483 $2,791,579 $ (1,015,551) $4,914,511
========== ========== ============ ==========
</TABLE>
See independent auditor's report on page 1
F-92
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINING STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
255 NORTH PALM BEACH
MILITARY FINANCE COMBINING COMBINED
CORPORATION COMPANY, INC. ENTRIES TOTALS
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Sales ........................................ $11,393,704 $ -- $ -- $11,393,704
Interest income .............................. 382,614 1,610,569 (902,491) 1,090,692
Administrative fee ........................... 204,000 -- (204,000) --
----------- ---------- ------------ -----------
Total revenue ............................. 11,980,318 1,610,569 (1,106,491) 12,484,396
----------- ---------- ------------ -----------
Cost of sales and expenses:
Cost of sales ................................ 9,118,158 -- -- 9,118,158
Selling, general, and administrative ......... 1,959,783 238,849 (204,000) 1,994,632
Provision for credit losses .................. 368,504 592,912 -- 961,416
Discount on sale of receivables .............. 1,172,189 -- (1,172,189) --
Interest expense ............................. 18,248 -- -- 18,248
Depreciation ................................. 3,262 -- -- 3,262
----------- ---------- ------------ -----------
Total cost of sales and expenses .......... 12,640,144 831,761 (1,376,189) 12,095,716
----------- ---------- ------------ -----------
Net income .................................... (659,826) 778,808 269,698 388,680
Retained earnings, beginning of year .......... 3,295,802 (31,945) 708,087 3,971,944
Distributions to stockholder .................. (137,245) -- -- (137,245)
----------- ---------- ------------ -----------
Retained earnings, end of year ................ $ 2,498,731 $ 746,863 $ 977,785 $ 4,223,379
=========== ========== ============ ===========
</TABLE>
See independent auditor's report on page 1
F-93
<PAGE>
INDEPENDENT AUDITORS' REPORT
Strata Holding, Inc. and Ready Finance, Inc.
West Palm Beach, Florida
We have audited the accompanying combined balance sheets of Strata Holding
Inc. and Ready Finance, Inc. (collectively "the Company") as of December 31,
1996 and the related combined statements of operations, stockholders' equity,
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined 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 audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Strata Holding, Inc. and Ready Finance, Inc. as of December 31, 1996, and the
results of their combined operations and their combined cash flows for the year
then ended in conformity with generally accepted accounting principles.
LEVINE & LEVINE, Certified Public Accountants
Orlando, Florida
September 7, 1997
F-94
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
---------------
<S> <C>
ASSETS (Note 5)
Cash ..................................................... $ 86,000
Accounts receivable ...................................... 171,592
Finance receivables, principal balances (Note 2) ......... 5,627,381
Less allowance for credit losses (Note 2) ................ (1,158,712)
------------
Finance receivables, net ................................. 4,468,669
Inventories (Note 3) ..................................... 1,530,253
Property and equipment, net (Note 4) ..................... 69,180
Other .................................................... 91,135
------------
$ 6,416,829
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable ......................................... $ 271,882
Sales taxes payable ...................................... 23,370
Note payable--bank (Note 5) .............................. 1,640,000
Notes payable--related parties (Note 5) .................. 2,514,625
------------
Total liabilities ........................................ 4,449,877
------------
Commitments (Note 7) ..................................... --
Stockholders' equity (Note 6)
Common stock ............................................. 2,000
Retained earnings ........................................ 1,964,952
------------
Total stockholders' equity ............................... 1,966,952
------------
$ 6,416,829
============
</TABLE>
See accompanying notes to combined financial statements.
F-95
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
------------------------
<S> <C>
Revenues:
Sales of used vehicles ....................... $ 9,515,375
Income on finance receivables ................ 1,526,208
-----------
11,041,583
-----------
Cost of Revenues:
Cost of used vehicles sold ................... 6,973,535
Provision for credit losses (Note 2) ......... 1,285,539
-----------
8,259,074
-----------
Net revenues .................................. 2,782,509
Operating expenses ............................ 2,187,377
-----------
Income from operations ........................ 595,132
Interest expense .............................. 218,694
-----------
Net income .................................... $ 376,438
===========
</TABLE>
See accompanying notes to combined financial statements.
F-96
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 ......... $2,000 $2,098,514 $2,100,514
Net income ......................... -- 376,438 376,438
Distributions ...................... -- (510,000) (510,000)
------ ---------- ----------
Balance, December 31, 1996 ......... $2,000 $1,964,952 $1,966,952
====== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-97
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 376,438
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 18,741
Provision for credit losses ............................ 1,285,539
Decrease (increase):
Accounts receivable ................................... (82,953)
Inventories ........................................... (215,678)
Other assets .......................................... (36,995)
Increase (decrease):
Accounts payable ...................................... 120,551
Sales taxes payable ................................... (8,668)
------------
Net cash provided by operating activities ................. 1,456,975
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ....................... (36,345)
Net increase in finance receivables ...................... (1,804,834)
------------
Net cash used in investing activities ..................... (1,841,179)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit ...................... 1,639,900
Net payments on notes payable to related parties ......... (996,730)
Distributions to stockholders ............................ (510,000)
------------
Net cash provided by financing activities ................. 133,170
Net decrease in cash ...................................... (251,034)
Cash, beginning of year ................................... 337,034
------------
Cash, end of year ......................................... $ 86,000
============
</TABLE>
See accompanying notes to combined financial statements.
F-98
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The principal business activities of Strata Holding, Inc. (dba Don Cook
Motors) and Ready Finance, Inc. (collectively the "Company") are retail and
wholesale sales, and the related financing, of used vehicles in the South
Florida market.
USE OF ESTIMATES
In preparing the financial statements in accordance with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements as
well as reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF COMBINATION
The combined financial statements include Strata Holding, Inc. and Ready
Finance, Inc. Ownership of each Company is vested primarily in the same
stockholders, and the Companies are under common management. Because of these
relationships, the financial statements of the Companies have been presented as
if they were a single entity. All material intercompany transactions and
balances have been eliminated in combination.
REVENUE RECOGNITION
Vehicle sales are recognized upon delivery.
Interest income from finance receivables is recognized using the
straight-line method which approximates the interest method.
PRESENTATION OF REVENUES AND COST OF REVENUES
The prices at which the Company sells its cars and the interest rate that
it charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default. The
provision for credit losses reflects these factors and is treated by the
Company as a cost of both the future finance income derived on the contract
receivables originated by the Company as well as a cost of the sale of the cars
themselves. Accordingly, unlike traditional car dealerships, the Company does
not present gross profit margin in its statement of operations calculated as
sales of used vehicles less cost of used vehicles sold.
ALLOWANCE FOR CREDIT LOSSES
The allowance for uncollectible finance receivables is maintained at a
level which, in management's judgment, is adequate to absorb potential losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, collateral values, and economic
conditions. Because of uncertainties associated with regional economic
conditions, collateral values, and future cash flows on impaired loans, it is
reasonably possible
F-99
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
that management's estimate of credit losses inherent in the loan portfolio and
the related allowance may change materially in the near term. However, the
amount of change that is reasonably possible cannot be estimated. The allowance
for uncollectible finance receivables is increased by a provision for loan
losses, which is charged to expense. Repossessed vehicles are recorded as
inventory at their estimated fair value. The difference between the balance of
the installment contract and the estimated fair value of the repossessed
vehicle is charged to the allowance for credit losses.
INVENTORIES
Inventories are stated at the lower of cost or market, on a specific unit
basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on equipment is
computed using an accelerated method, and amortization on leasehold
improvements is computed using the straight-line method, over the estimated
useful lives of the assets.
INCOME TAXES
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be "S corporations". In lieu of corporation income
taxes, the stockholders of an S corporation are taxed on the Company's taxable
income. Therefore, no provision or liability for federal income taxes has been
included in these financial statements.
2. FINANCE RECEIVABLES
Finance receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Contractually scheduled payments ......... $7,137,220
Less unearned finance charges ............ 1,509,839
----------
Principal balances, net ................. $5,627,381
==========
</TABLE>
Finance receivables consist of sales of vehicles under installment sale
contracts with maturities that generally do not exceed 48 months. The
receivables bear interest at rates ranging from 17% to 30% and are
collateralized by the vehicles sold. The Company holds title to the vehicles
until full contract payment is made. Finance receivables are pledged as
collateral under the note payable (see Note 5).
F-100
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCE RECEIVABLES--(CONTINUED)
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
---------------
<S> <C>
Balance at beginning of year ................. $ 875,222
Loans charges off, net of recoveries ......... (1,002,049)
Provision for credit losses .................. 1,285,539
------------
Balance at end of year ....................... $ 1,158,712
============
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Used vehicles ................. $1,512,753
Parts and accessories ......... 17,500
----------
$1,530,253
==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES 1996
-------- -------------
<S> <C> <C>
Equipment .............................................. 5 - 7 $146,154
Leasehold improvements ................................. 31.5 69,234
---- --------
215,388
Less accumulated depreciation and amortization ......... 146,208
--------
$ 69,180
========
</TABLE>
F-101
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT--(CONTINUED)
Notes payable consist of the following:
Note payable to bank:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
$2,000,000 revolving line of credit due to bank, bearing interest at prime plus
1% (9.75% at December 31, 1996), collateralized by first lien on business
assets and second mortgage on real estate (owned by a stockholder), due on
demand ........................................................................ $1,640,000
</TABLE>
5. NOTES PAYABLE
Notes payable to related parties:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Unsecured notes payable to stockholders with interest ranging from 6% to 12%,
due December 31, 1996 ...................................................... $1,139,000
Unsecured notes payable to relatives of stockholders, with interest ranging
from 6% to 12% and due from December 31, 1996 to December 31, 1997 ......... 507,625
Unsecured notes payable to companies under common control, interest at 6%,
due December 31, 1996 ...................................................... 868,000
----------
$2,514,625
==========
</TABLE>
The line of credit and notes payable to related parties were paid off in
July 1997 in connection with the sale of the Company's assets (see Note 10).
6. STOCKHOLDERS' EQUITY
At December 31, 1996 the Company's stockholders' equity consisted of the
following:
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
STOCK (DEFICIT)
-------- --------------
<S> <C> <C>
Strata Holding, Inc. par value $1 per share, 7,500 shares authorized,
1,000 shares issued and outstanding ................................ $1,000 $ (105,770)
Ready Finance, Inc. par value $1 per share, 7,500 shares authorized,
1,000 shares issued and outstanding ................................. 1,000 2,070,722
------ ----------
$2,000 $1,964,952
====== ==========
</TABLE>
F-102
<PAGE>
STRATA HOLDING, INC. AND READY FINANCE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS
The Company leases an office building and a warehouse from a stockholder.
The future minimum rentals under noncancellable operating leases with this
related party are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997 ................. $105,000
1998 ................. 87,000
1999 ................. 51,000
2000 ................. 22,000
--------
$265,000
========
</TABLE>
8. RELATED PARTY TRANSACTIONS
The facilities under operating leases (Note 7) are owned by a stockholder.
Total rent paid to that stockholder for those facilities amounted to $107,890
during 1996.
The building occupied by Ready Finance, Inc. which is owned by a
stockholder is being held for collateral against the line of credit (see Note
5).
Interest expense on related party notes payable (see Note 5) was $136,689
during 1996.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest approximated $444,188 during 1996.
10. SUBSEQUENT EVENT
On June 27, 1997, the stockholders of Strata Holding, Inc. ("Strata") and
Ready Finance, Inc. ("Ready") entered into an agreement to sell substantially
all of the assets owned or used by Strata and Ready to Smart Choice Automotive
Group, Inc. ("Smart Choice"). In addition, Smart Choice assumed certain
liabilities of Strata and Ready and paid off the related party notes payable
(see Note 5).
As consideration for the assets acquired, Smart Choice paid the
stockholders cash of $3.2 million, paid off the Company's line of credit of
approximately $1.8 million (see Note 5), and issued to Ready a subordinated
note in the amount of $3,680,089 and a secured note in the amount of
$1,200,000. The notes bear interest at 9% and are payable in equal monthly
installments which total $27,112 until June 1999 when the entire unpaid
balances plus accrued interest are due in full. The secured note is
collateralized by certain equipment and inventory.
The transaction described above resulted in the termination of the
Company's election under the Internal Revenue Code to be "S Corporations".
F-103
<PAGE>
SUPPLEMENTAL MATERIAL
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL MATERIAL
Our audits of the combined financial statements included in the preceding
section of this report were made for the purpose of forming an opinion on those
statements taken as a whole. The supplemental material presented in the
following section of this report is presented for purposes of additional
analysis and is not a required part of the combined financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the combined financial statements and, in our opinion, is fairly stated in
all material respects in relation to the combined financial statements taken as
a whole.
LEVINE & LEVINE
Orlando, Florida
September 7, 1997
F-104
<PAGE>
STRATA HOLDING, INC., AND READY FINANCE, INC.
COMBINING BALANCE SHEET
<TABLE>
<CAPTION>
STRATA READY COMBINING COMBINED
DECEMBER 31, 1996 HOLDING, INC. FINANCE, INC. ENTRIES TOTALS
- ---------------------------------------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash ......................................... $ 20,840 $ 65,160 $ -- $ 86,000
Accounts receivable .......................... 171,592 -- -- 171,592
Finance receivables, net ..................... -- 4,468,669 -- 4,468,669
Inventory .................................... 1,530,253 -- -- 1,530,253
Property and equipment, net .................. 69,180 -- -- 69,180
Intercompany receivable ...................... 1,573,000 -- (1,573,000) --
Other assets ................................. 50,617 40,518 -- 91,135
---------- ---------- ------------ ----------
$3,415,482 $4,574,347 $ (1,573,000) $6,416,829
========== ========== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable ............................. $ 271,882 $ -- $ -- $ 271,882
Sales tax payable ............................ 23,370 -- -- 23,370
Note payable--bank ........................... 1,640,000 -- -- 1,640,000
Notes payable--related parties ............... 1,585,000 929,625 -- 2,514,625
Intercompany payable ......................... -- 1,573,000 (1,573,000) --
---------- ---------- ------------ ----------
Total liabilities ............................ 3,520,252 2,502,625 (1,573,000) 4,449,877
---------- ---------- ------------ ----------
STOCKHOLDERS' EQUITY
Common stock ................................. 1,000 1,000 -- 2,000
Retained earnings (deficit) .................. (105,770) 2,070,722 -- 1,964,952
---------- ---------- ------------ ----------
Total stockholders' equity (deficit) ......... (104,770) 2,071,722 -- 1,966,952
---------- ---------- ------------ ----------
$3,415,482 $4,574,347 $ (1,573,000) $6,416,829
========== ========== ============ ==========
</TABLE>
F-105
<PAGE>
STRATA HOLDING, INC., AND READY FINANCE, INC.
COMBINING BALANCE SHEET
<TABLE>
<CAPTION>
STRATA READY COMBINING COMBINED
YEAR ENDED DECEMBER 31, 1996 HOLDING, INC. FINANCE, INC. ENTRIES TOTALS
- --------------------------------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales of used vehicles ................ $9,515,375 $ -- $ -- $9,515,375
Income on finance receivables ......... -- 1,614,588 (88,380) 1,526,208
---------- ---------- ---------- ----------
9,515,375 1,614,588 (88,380) 11,041,583
---------- ---------- ---------- ----------
Cost of Revenues:
Cost of used vehicles sold ............ 6,973,535 -- -- 6,973,535
Provision for credit losses ........... 525,137 509,725 250,677 1,285,539
---------- ---------- ---------- ----------
7,498,672 509,725 250,677 8,259,074
---------- ---------- ---------- ----------
Net revenues .......................... 2,016,703 1,104,863 (339,057) 2,782,509
Operating expenses .................... 1,728,265 459,112 -- 2,187,377
Income from operations ................ 288,438 645,751 (339,057) 595,132
Interest expense ...................... 390,507 167,244 (339,057) 218,694
---------- ---------- ---------- ----------
Net income (loss) ..................... $ (102,069) $ 478,507 $ -- $ 376,438
========== ========== ========== ==========
</TABLE>
F-106
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
B&B Florida Enterprises, Inc.
Smart Choice Automotive Group, Inc.
We have audited the accompanying balance sheet of B & B Florida
Enterprises, Inc. (an S-Corporation) d/b/a Stuart Nissan as of December 31,
1996, and the related statements of operations, accumulated deficit, and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 B & B Florida Enterprises,
Inc. d/b/a Stuart Nissan as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,331,200 during the year ended December
31, 1996, and, as of that date, had a working capital deficiency of $2,925,390
and net deficit of $2,529,355. As discussed more fully in Note 9 of the
financial statements, as of December 31, 1996, the Company was in default under
certain covenants of its Automotive Wholesale Financing and Security Agreement
with Nissan Motor Acceptance Corporation (NMAC) and other debt obligations. On
December 17, 1996, the Company entered into a reinstatement agreement with NMAC
which contains substantially the same restrictive covenants included in the
previous agreements. If the Company defaults on any of the covenants in the
reinstatement agreement, the lender may demand repayment of the loans and
terminate the wholesale credit line. No such demand has been made. Subsequent
to the balance sheet date, the Company has secured financing with an
independent lender to permit the realization of assets and the liquidation of
liabilities. Negotiations are presently under way to sell substantially all of
the assets of the Company to a party related to the new lender. The Company
cannot predict the outcome of what the negotiations will be. These conditions
raise substantial doubt about the Company?s ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ROSENFIELD & COMPANY, P.A.
April 10, 1997
(except for NOTE 12, as
to which the date is May 2, 1997)
F-107
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and contracts in transit .................................... $ 94,628
Accounts receivable--trade ....................................... 162,203
Inventories ...................................................... 2,163,593
Prepaid expenses ................................................. 11,100
------------
TOTAL CURRENT ASSETS ........................................... 2,431,524
PROPERTY AND EQUIPMENT--net ....................................... 436,641
OTHER ASSETS ...................................................... 10,300
------------
$ 2,878,465
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Line of credit ................................................... $ 400,000
Current maturities of obligations under capital leases ........... 26,005
Current maturities of long-term debt ............................. 1,520,045
Floor plan notes payable ......................................... 1,993,815
Due to related party ............................................. 166,557
Accounts payable--trade .......................................... 837,742
Other payables and accrued liabilities ........................... 412,750
------------
TOTAL CURRENT LIABILITIES ...................................... 5,356,914
OBLIGATIONS UNDER CAPITAL LEASES, less current maturities ......... 50,906
COMMITMENTS ....................................................... --
STOCKHOLDERS' DEFICIT ............................................. (2,529,355)
------------
$ 2,878,465
============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-108
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Sales ....................... $ 24,473,010
Cost of sales ............... 22,294,117
-------------
GROSS MARGIN .............. 2,178,893
Other income ................ 670,147
Operating expenses .......... (3,667,704)
Other expenses .............. (512,536)
-------------
NET LOSS ................. $ (1,331,200)
=============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-109
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED TOTAL
STOCK CAPITAL DEFICIT DEFICIT
------------ ----------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance--December 31, 1995, as previously
reported .............................. 353,750 197,154 (1,709,059) (1,158,155)
Shareholder distributions ............... -- -- (40,000) (40,000)
Net loss ................................ -- -- (1,331,200) (1,331,200)
------- ------- ---------- ----------
Balance--December 31, 1996 .............. $ 353,750 $ 197,154 $ (3,080,259) $ (2,529,355)
========= ========= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-110
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers ...................................................... $ 24,711,890
Cash paid to suppliers and employees .............................................. (24,783,160)
Other cash receipts ............................................................... 853,036
Interest paid ..................................................................... (389,000)
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................................... 392,766
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................ (231,103)
-------------
NET CASH USED IN INVESTING ACTIVITIES ........................................... (231,103)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft .................................................................... (461,953)
Principal payments on obligations under capital leases ............................ (19,918)
Principal payments on debt ........................................................ (24,581)
Proceeds from borrowings under line of credit agreement ........................... 400,000
Distributions to stockholder ...................................................... (40,000)
Net payments to related parties ................................................... (139,976)
-------------
NET CASH USED IN FINANCING ACTIVITIES ........................................... (286,428)
-------------
NET DECREASE IN CASH AND CONTRACTS IN TRANSIT ..................................... (124,765)
CASH AND CONTRACTS IN TRANSIT AT BEGINNING OF YEAR ................................ 219,393
CASH AND CONTRACTS IN TRANSIT AT END OF YEAR ...................................... $ 94,628
=============
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net loss .......................................................................... $ (1,331,200)
Adjustments to reconcile net loss to net cash provided by operating activities: ...
Depreciation and amortization .................................................... 109,465
New and used car writedowns ...................................................... 131,823
Decrease in accounts receivable .................................................. 238,880
Decrease in inventories .......................................................... 1,714,537
Decrease in prepaid expenses ..................................................... 70,889
Decrease in customer deposits .................................................... 10,000
Decrease in floor plan notes payable ............................................. (1,301,795)
Increase in accounts payable and accrued liabilities ............................. 750,167
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... $ 392,766
=============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of equipment with proceeds of capital lease obligation ................... $ 45,262
=============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-111
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
NOTES TO FINANCIAL STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
<TABLE>
<S> <C>
A) BUSINESS OPERATIONS
The principal business activity of B&B Florida Enterprises, Inc. d/b/a Stuart Nissan
(Company) is the retail sales of new Nissan automobiles obtained through an
exclusive dealer agreement with the distributor. In addition, the Company retails and
wholesales replacement parts and used automobiles and provides vehicle servicing.
The Company's operations are based in Stuart, Florida.
B) MAJOR SUPPLIER
The Company purchases substantially all of is new vehicles and parts inventory from
Nissan Motor Corporation of America at the prevailing prices charged by the
automobile distributors to all franchised dealers.
C) INVENTORIES
New and demonstrator vehicles, parts and accessories, and miscellaneous inventory
are stated at cost, determined on the first-in, first-out basis (FIFO), which is not in
excess of market.
Used vehicles are stated at the lower of cost or market, on a specific unit basis.
D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets, and the term of the lease for
the asset under the capital lease. Useful lives for purposes of computing depreciation
are:
Equipment, furniture, and fixtures - 5 and 7 years
Leasehold improvements - economic life or life of lease, whichever is shorter
E) ACCOUNTS RECEIVABLE
Management has established a reserve for those receivables deemed to be
uncollectible.
F) REVENUE RECOGNITION OF FINANCE AND INSURANCE INCOME
The Company includes income from finance and insurance commissions in other
income and recognizes an allowance for future finance and insurance chargebacks
based on past operating history. Prior to December 31, 1995, the Company's financial
statements did not reflect a reserve for chargebacks. The retained earnings balance
has been restated to properly reflect the reserve for future finance and insurance
chargebacks in the amount of $52,000.
G) INCOME TAXES
The Company and its stockholders have elected to be treated as a "Small Business
Corporation" for income tax purposes under Subchapter "S" of the Internal Revenue
Code. In accordance with the provisions of such election, the Company's income and
losses pass through to its stockholders; accordingly, no provision for income taxes has
been made.
</TABLE>
F-112
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
NOTES TO FINANCIAL STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996--(CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<S> <C>
H) STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers contracts in
transit to be cash equivalents. Additionally, the net change in floor plan financing of
inventory obtained through a captive finance company of Nissan Motor Corporation,
which is a customary financing technique in the industry, is reflected as an operating
activity.
I) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at December 31, 1996 and
revenues and expenses during the year then ended. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to significant
change in the near term are described in NOTES 1E and 1F.
</TABLE>
NOTE 2 RELATED PARTY TRANSACTIONS
The Company shares common ownership and/or management and in certain
instances engages in transactions with its stockholder and with TAD
Partnership, Inc. The transactions reflected at December 31, 1996 include the
leasing of the dealership facility.
A summary of transactions with related parties is as follows:
<TABLE>
<S> <C>
Due to TAD Partnership, Inc. ......... $ 166,557
Rent expense ......................... $ 223,200
</TABLE>
TAD Partnership, Inc. advanced funds to the Company for working capital
purposes. These obligations are non-interest bearing and are repaid by the
Company as funds become available.
NOTE 3 ACCOUNTS RECEIVABLE
<TABLE>
<S> <C>
Trade ........................................ $ 68,791
Due from manufacturer ........................ 74,481
Due from finance companies ................... 43,931
---------
187,203
Less allowance for doubtful accounts ......... (25,000)
---------
$ 162,203
=========
</TABLE>
NOTE 4 INVENTORIES
<TABLE>
<S> <C>
New vehicles and demonstrators ................... $ 1,313,295
Used vehicles .................................... 557,706
Parts, accessories and other inventories ......... 292,592
-----------
$ 2,163,593
===========
</TABLE>
F-113
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
NOTES TO FINANCIAL STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996--(CONTINUED)
NOTE 5 PROPERTY AND EQUIPMENT
<TABLE>
<S> <C>
Furniture and fixtures ....................................................... $ 338,763
Machinery and shop equipment ................................................. 209,081
Equipment under a capital lease .............................................. 120,459
Signs ........................................................................ 8,444
Leasehold improvements ....................................................... 12,054
---------
688,801
Less accumulated depreciation and amortization, including $49,146 on equipment
under a capital lease ....................................................... 252,160
---------
$ 436,641
=========
</TABLE>
Depreciation expense for the year ending December 31, 1996 was $109,465,
including the amortization of the capital lease of $20,320.
NOTE 6 LINE OF CREDIT
The Company has a line of credit with a subsidiary of the entity which has
entered into an agreement to purchase substantially all of the Company's assets
(NOTE 12) bearing interest at the floating prime rate of interest offered by
Citibank, N.A. The line is secured by the common stock of the Company.
NOTE 7 FLOOR PLAN NOTES PAYABLE
Floor plan notes payable on new, used and demonstrator vehicles, bearing
interest at the finance company's prime rate plus 1.75% (10% at December 31,
1996). The notes are collateralized by substantially all new, used and
demonstrator vehicles, the related proceeds from the sales, and all other
assets of the Company. The notes are due when the vehicles are sold and are
guaranteed by the stockholder. The maximum credit available under the financing
arrangement is $4,400,000 for new vehicles including $200,000 for demonstrator
vehicles and $2,500,000 for used vehicles.
Total interest expense on all indebtedness was approximately $389,000 for
the year ended December 31, 1996.
The Company is out of trust $200,700 as of December 31, 1996 on new and
used vehicles.
NOTE 8 OTHER PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<S> <C>
Interest ..................................................... $ 223,849
Reserve for future finance and insurance chargebacks ......... 52,000
Sales and other taxes ........................................ 58,800
Payroll and payroll taxes .................................... 31,126
Customer deposits ............................................ 27,194
Other accrued liabilities .................................... 9,781
---------
$ 412,750
=========
</TABLE>
F-114
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
NOTES TO FINANCIAL STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996--(CONTINUED)
NOTE 9 LONG TERM DEBT
<TABLE>
<S> <C>
Note payable--manufacturer (A) ......... $ 1,040,000
Note payable--manufacturer (B) ......... 235,045
Note payable--individuals (C) .......... 245,000
-----------
$ 1,520,045
===========
</TABLE>
<TABLE>
<S> <C>
(A) Note payable to manufacturer, payable in monthly principal installments of $20,000
plus interest of prime plus 1.75% (10% at December 31, 1996), through October 15,
2000, collateralized by inventory, property and equipment, and accounts receivable.
The note contains various covenants and restrictions with respect to (1) legal
requirements, (2) protection, repair, and replacement of property, (3) taxes, (4)
insurance, (5) financial and other statements, and (6) litigation.
As of December 31, 1996, the Company was in default of its payment obligations to
the manufacturer. See NOTE 9(B).
(B) Note payable to manufacturer, payable in monthly principal installments of $4,274
plus interest of prime plus 1.75% (10% at December 31, 1996), through January 15,
2001, collateralized by property and equipment with a combined carrying value of
$ 214,000.
As of December 31, 1996, the Company was in default of its payment obligations to
the manufacturer.
On December 17, 1996, the Company entered into a reinstatement agreement with
the manufacturer, which contains substantially the same restrictive covenants included
in the previous agreements. If the Company defaults on any of the covenants in the
reinstatement agreement, the lender may demand repayment of the loans and
terminate the wholesale credit line. As of the report date, no such demand has been
made.
(C) Note payable to a previous shareholder and his wife. The original note payable
provided monthly interest installments of $2,042 at 10% through December 20, 1998
with a balloon payment of unpaid principal and accrued interest due on that date. The
note is unsecured.
As of December 31, 1996, the Company was in default of its payment obligations. On
December 4, 1996, the Company entered into a forbearance agreement with the
individuals. Under the agreement, the individuals will waive certain outstanding
defaults (including unpaid accrued interest through December 20, 1996) and certain
remedies as well as modify the payment terms of the note.
The new terms under the forbearance agreement provide for monthly interest
payments of $2,144 at 10% commencing January 20, 1997. The principal balance and
any unpaid accrued interest are due and payable on December 20, 1998.
</TABLE>
Due to the Company's default of its payment obligations, all of the above
notes payable have been classified as current.
F-115
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
NOTES TO FINANCIAL STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996--(CONTINUED)
NOTE 10 COMMITMENTS
CAPITAL LEASES
The Company leases its computer equipment from a third party under six
capitalized lease agreements, which expire between 1998 and 2001. The following
is a schedule, by years, of future minimum lease payments:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1997 ...................................... $ 31,428
1998 ...................................... 31,190
1999 ...................................... 11,275
2000 ...................................... 9,798
2001 ...................................... 4,082
--------
Total minimum lease payments .............. 87,773
Less amount representing interest ......... 10,862
--------
76,911
Less current maturities ................... 26,005
--------
$ 50,906
========
</TABLE>
OPERATING LEASES
The Company leases its dealership facilities from a related party under
two operating leases expiring in June, 2000 and April, 2001, which calls for
monthly payments of approximately $24,000 plus sales tax. The lease requires
the Company to pay all maintenance, insurance and taxes on the related
property.
In addition, the Company leases office equipment under operating leases,
under 36 to 51 month leases expiring between March 1998 and March 2003. Annual
rent on this equipment is $4,908.
F-116
<PAGE>
B&B FLORIDA ENTERPRISES, INC.
D/B/A/STUART NISSAN
NOTES TO FINANCIAL STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996--(CONTINUED)
NOTE 10 COMMITMENTS--(CONTINUED)
The following is a schedule by years, of aggregate future minimum lease
payments required under the operating leases:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1997 ................... $ 291,948
1998 ................... 291,165
1999 ................... 289,818
2000 ................... 181,632
2001 ................... 55,632
Thereafter ............. 2,040
-----------
$ 1,112,235
===========
</TABLE>
Rent expense for all operating leases was $298,856 (including related
sales tax on the monthly payments) for the year ended December 31, 1996.
NOTE 11 STOCKHOLDER'S DEFICIT
The number of shares authorized, issued and outstanding at December 31,
1996 are as follows:
<TABLE>
<S> <C>
Number of shares authorized ..................... 7,500
Number of shares issued and outstanding ......... 7,075
Par value per share ............................. $ 50
</TABLE>
NOTE 12 SUBSEQUENT EVENT
On May 6, 1997, the Company signed a stock purchase agreement with an
independent third party to transfer 100 percent of the Company's outstanding
capital stock, including all stock options, warrants and similar equity based
rights of the Company, in exchange for 76,546 shares of the common capital
stock of the aforementioned third party.
F-117
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFERING, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH
IT RELATES OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN CONTAINED IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ................................. 3
Risk Factors ....................................... 10
Use of Proceeds .................................... 20
Dividend Policy .................................... 20
Price Range of Common Stock ........................ 21
Capitalization ..................................... 22
Dilution ........................................... 23
Selected Consolidated
Financial Information ........................... 24
Management's Discussion and Analysis
of Financial Condition
and Results of Operations ....................... 27
Business ........................................... 39
Management ......................................... 50
Stock Ownership .................................... 55
Certain Relationships and Related Transactions...... 56
Description of Capital Stock ....................... 58
Shares Eligible for Future Sale .................... 62
Underwriting ....................................... 63
Legal Matters ...................................... 64
Experts ............................................ 64
Available Information .............................. 65
Index to Financial Statements ...................... F-1
</TABLE>
--------------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,500,000 SHARES
[SMART CHOICE LOGO]
COMMON STOCK
-----------------------------------
PROSPECTUS
-----------------------------------
STEPHENS INC.
CRUTTENDEN ROTH INCORPORATED
SOUTHEAST RESEARCH PARTNERS, INC.
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by the
Registrant in connection with the filing of this Registration Statement. All of
such expenses, other than the filing fees for the Commission and the NASD, are
estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee .......... $ 9,483
NASD Filing Fee ........................................ $ 3,715
NASDAQ National Market Listing Fee ..................... $84,875
Printing and Engraving Expenses ........................ $ *
Legal Fees and Expenses ................................ $ *
Accounting Fees and Expenses ........................... $ *
Blue Sky Fees and Expenses ............................. $ *
Transfer Agent and Registrar Fees and Expenses ......... $ *
Miscellaneous .......................................... $ *
--------
Total ................................................ $637,500
========
</TABLE>
- ----------------
* To be filed by Amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has authority under the FBCA Act to indemnify its directors
and officers to the extent provided in such statute. The Company's Bylaws
provide for indemnification of its executive officers, directors, agents and
employees to the fullest extent permitted by Florida law. The Company also
entered into agreements with its directors and certain of its officers wherein
it agreed to indemnify each of them to the fullest extent permitted by law. In
general, Florida law permits a Florida corporation to indemnify its directors,
officers, employees and agents, and persons serving at the corporation's
request in such capacities for another enterprise, for such liabilities arising
from conduct that such persons reasonably believed to be in, or not opposed to,
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe their conduct was unlawful.
The provisions of the FBCA that authorize indemnification do not eliminate
the duty of care of a director, and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Florida law. In addition, each director will continue to be
subject to liability for (a) violations of the criminal law unless the director
had no reasonable cause to believe his conduct was unlawful, (b) deriving an
improper personal benefit from a transaction, (c) voting for or assenting to an
unlawful distribution and (d) willful misconduct or a conscious disregard for
the best interests of the Company in a proceeding by or in the right of the
Company to procure a judgment in its favor or in a proceeding by or in the
right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the Federal securities laws or
state or Federal environmental laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
All transactions listed below involved the issuance of shares of Common
Stock and other securities of the Company prior to the commencement of the
offering of shares of Common Stock described in the foregoing Prospectus.
Unless otherwise indicated, all securities were issued by the Company in
reliance upon Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. All securities were
acquired by the recipients thereof for investment and with no view toward the
resale or distribution thereof. In each instance, offers and sales were made to
a
II-1
<PAGE>
limited number of investors, each purchaser was an accredited investor or,
either alone or with a purchaser representative, a financially sophisticated
investor, the offers and sales were made without any public solicitation, the
certificates bear restrictive legends and appropriate stop transfer
instructions have been given to the transfer agent. No underwriter was involved
in the transactions, and no commissions were paid. Each transaction set forth
below has been adjusted to reflect a 1-for-2 reverse stock split, which shall
be effected prior to the consummation of the offering.
In June 1998, the Company issued to certain institutional investors 350
shares of Series D Stock for $10,000 per share for an aggregate of $3,500,000.
In June 1998, the Company issued to a private investment group 24.98
shares of Series C Stock for $10,000 per share for an aggregate of $249,800.
In June 1998, the Company issued 142,857 shares of Common Stock to David
Bumgardner in connection with the Company's acquisition of 225 North Military
Corp. d/b/a Miracle Mile Motors and Palm Beach Mortgage and Finance Company. In
connection with the acquisition on February 13, 1997, a subsidiary of the
Company issued to the seller a $800,000 9% convertible note, a $467,601 9%
convertible debenture and a $205,574 note.
On May 11, 1998, January 23, 1998 and October 3, 1997, the Company
borrowed a total of $8.5 million from Stephens, Inc.
In May 1998, 40,000 shares of Common Stock were issued to certain
investors upon exercise of options granted by the Company in 1995.
In May 1998, the Company issued to a private investment group 220 shares
of the Company's Series B Stock for $10,000 per share for an aggregate of
$2,200,000.
In April 1998, 7,047 shares of Common Stock were issued by the Company
upon the exercise of options granted to a former employee and as additional
compensation and repayment of expenses to a current employee.
On various dates during the three months ended March 31, 1998, the Company
issued Common Stock to holders of the Company's Series A Stock on conversion of
Series A Stock. The Company had issued the Series A Stock in 1997 to
institutional investors. The Series A Stock was converted into Common Stock at
a conversion price that was based on the market price of the Common Stock at
the time of conversion. A total of 632,912.50 shares of Common Stock were
issued in the first quarter of 1998 on conversion of the Series A Stock.
On various dates during the three months ended March 31, 1998, the Company
issued Common Stock to holders of preferred stock of a subsidiary of the
Company (the "Subsidiary Preferred Stock") in exchange for the Subsidiary
Preferred Stock. The holders of the Subsidiary Preferred Stock had purchased
the Subsidiary Preferred Stock in a private placement in 1996. The exchange
ratio for the exchange of Common Stock for the Subsidiary Preferred Stock was
1.35 shares of Common Stock for each share of Subsidiary Common Stock, which
was determined based on the market price of the Common Stock for the period
January 21, 1998 through January 30, 1998. A total of 324,000 shares of Common
Stock were issued in the first quarter of 1998 on conversion of the Subsidiary
Preferred Stock.
On various dates during the three months ended March 31, 1998, the Company
issued Common Stock to holders of the Company's 12% convertible notes due April
15, 1998 (the "Notes") on conversion of the Notes. The Company had issued the
Notes in 1997 to institutional and individual accredited investors. The Notes
were converted into Common Stock at a conversion price that was based on the
market price of the Common Stock at the time of the conversion.
In March 1998, the Company issued 6,250 options to purchase Common Stock
of the Company to five non-employee directors--Yossifan, Wojnowski, McNab,
Bumgardner and Parker--at an exercise
II-2
<PAGE>
price of $5.00 per share for their service as directors. Congdon, also a
non-employee director, was issued 6,250 options at $9.88 per share for his
service as a director.
In February 1998, the Company issued 83,500 options to purchase Common
Stock of the Company to certain management employees with various exercise
prices.
On January 29, 1998, the Company issued warrants to Laidlaw Global
Securities, Inc. and Faith Griffin, a principal of Laidlaw Global Securities,
Inc., in connection with financial advisory services rendered, to purchase up
to 28,125 and 9,285 shares, respectively, of Common Stock at $10.00 per share.
On December 31, 1997, in connection with the Company's acquisition of
Liberty Finance Company, Inc. and its affiliates, the Company issued a $600,000
unsecured note payable to R. C. Hill, Jr., bearing interest at the prime rate
plus 1% (9.5% as of December 31, 1997).
On December 31, 1997, the Company issued a $250,000 unsecured convertible
subordinated note to Bankers Credit Insurance Services Inc., bearing interest
at the prime rate plus 1% (9.5% as of December 31, 1997), convertible at a rate
of one share of Common Stock for every $15.00 of outstanding principal.
On December 31, 1997, the Company issued 2,750 shares of Common Stock to
Greenberg Traurig Hoffman Lipoff Rosen & Quentel P.A., a law firm, in
consideration of prior legal services rendered to the Company.
On December 31, 1997, the Company issued options to purchase 50 shares
each of Common Stock to 412 employees for an aggregate of 20,600 shares. All of
these options are exercisable at a price equal to $8.00 per share.
On December 30, 1997, the Company issued to four individual investors a
total of 221,257 shares of Common Stock in consideration of cancellation of
debt owed by the Company in the aggregate amount of $1,770,055.
On December 29, 1997, the Company issued 300 shares of Common Stock to
Richard Bogani on exercise of a warrant to purchase Common Stock for $6.00 per
share held by him.
On December 24, 1997, the Company issued a warrant to Sands Brothers &
Co., Ltd. to purchase up to 45,000 shares of Common Stock at $8.00 per share in
connection with entering into an agreement to render financial advisory and
other services to the Company.
On December 16, 1997, the Company issued 3,504 shares of Common Stock to
Robert Eckler on the exercise of a stock option held by him for $5.00 per
share.
On December 10, 1997, the Company issued to certain investors represented
by Promethean Investment Group, L.L.C., 100 units of the Series A Stock and
associated warrants for net proceeds of $1,000,000. Each unit consists of one
share of Series A Stock and one warrant to acquire 150 shares of common stock
for each preferred share purchased at a price equal to $8.10 per share.
On November 19, 1997, the Company issued warrants to purchase Common Stock
for $6.00 per share to certain investors holding debentures, issued in November
1996 by a company acquired by the Company, on the maturity of such debentures,
at which time the holders agreed to extend the maturity and agreed to a new
interest rate, pursuant to a contractual requirement under such debentures. The
total number of shares covered by the warrants issued on November 19, 1997 is
15,360 shares.
On November 3, 1997 and May 14, 1997, the Company issued to Bankers Life
Insurance Company a convertible subordinated debenture in the amount of $1.0
million, which is convertible into shares of
II-3
<PAGE>
Common Stock at a converstion price equal to $4.50 per share with respect to
$250,000 and $9.00 per share with respect to $750,000 of the debt, and options
exercisable for 25,000 shares of Common Stock for an exercise price equal to
$11.12 per share..
From October 29, 1997 to November 14, 1997, the Company issued options to
purchase a total of 43,000 shares of Common Stock to five key employees of the
Company. The exercise price of these options ranged from $11.26 per share to
$11.76 per share.
On September 30, 1997, the Company completed an offering to certain
investors represented by Promethean Investment Group, L.L.C. of 300 units of
Series A Stock and warrants at $10,000 per unit. Proceeds from the offering,
net of offering costs, were approximately $2,965,000. Each unit consists of one
share of Series A Stock and one warrant to acquire 150 shares of common stock
for each preferred share purchased at a price equal to $16.20 per share.
On September 24, 1997, the Company issued a $50,000 convertible note to
David and Joan Herskovitz as joint tenants with a right of survivorship due on
April 15, 1998.
On September 19, 1997, the Company issued a $50,000 convertible note to
James Noonan due on April 15, 1998. On the same date, the Company issued a
$50,000 convertible note to the Bridge Fund, N.V. due on April 15, 1998, and
the Company issued a $100,000 convertible note to Stephen and Alfred E. Garber
as joint tenants with a right of survivorship due on April 15, 1998.
On September 18, 1997, the Company issued a $100,000 convertible note to
Howard Commander due on April 15, 1998.
On September 9, 1997, the Company issued 500 shares of Common Stock to
Pepper O'Donnell & Co. in consideration of public relations services previously
provided to the Company.
In September 1997, the Company issued 26,250 warrants to institutional
purchasers to purchase Common Stock of the Company in connection with the
issuance of convertible debt. The warrants are exercisable at $4.76 per share
through August 29, 2002.
In September 1997, the Company issued 5,714.50 shares of the Company's
Common Stock to Greenberg Traurig Hoffman Lipoff Rosen & Quentel P.A., in
consideration of prior legal services rendered to the Company.
On August 29, 1997, the Company issued to High Capital Funding $1,050,000
of convertible notes convertible into shares of Common Stock at a conversion
price of 662/3% of the average closing bid price for the five trading days
immediately preceding the effective date of conversion and warrants exercisable
for 52,500 shares of Common Stock at an exercise price of $14.00 per share.
On August 29, 1997, the Company issued a $200,000 convertible note to Mary
Hart due on April 15, 1998.
In August 1997, the Company acquired the assets of Jack Winters
Enterprises, Inc., a new car dealership, and in connection therewith issued
9,161 shares of Common Stock to the seller as partial consideration for the
assets. On August 20, 1997, the Company's subsidiary issued to the sellers a
$300,000 promissory note and a $900,000 promissory note as additional
consideration for the acquisition.
In August 1997, the Company acquired Stuart Nissan, a new car dealership,
and issued to the sellers 43,273 shares of Common Stock as partial
consideration for the acquisition.
On June 30, 1997, in connection with the acquisition of substantially all
of the assets of Roman Fedo, Inc. and Roman Fedo Finance, Inc., the Company
issued to the sellers 112,500 shares of the Common Stock as partial
consideration for the acquisition.
II-4
<PAGE>
On June 27, 1997, in connection with its acquisition of Strata Holding,
Inc. and Ready Finance, Inc., the Company issued to the sellers a $3,680,089
subordinated note and a $1,200,000 secured note.
On May 13, 1997, the Company issued a $4,000,000 convertible senior
promissory note to Sirrom Capital Corporation.
On April 17, 1997, the Company issued to non-employee directors of the
Company non-transferrable options to acquire in the aggregate 31,250 shares of
the Company's Common Stock. The options are exercisable at $11.00 per share and
expire April 16, 2002.
On March 13, 1997, the Company issued a $3,500,000 convertible senior
promissory note to Sirrom Capital Corporation.
On February 12, 1997, the Company's subsidiary issued a $1,500,000
promissory note as partial consideration for the acquisition of Liberty
Finance, Inc., Team Auto Finance, Inc. and Wholesale Acquisition, Inc.
On February 4, 1997, the Company issued a warrant to purchase 35,000
shares of the Company's Common Stock at $4.00 per share to Finova Capital
Corporation in connection with the establishment of a revolving line of credit.
On January 28, 1997, in connection with the Company's acquisition of
Dealer Development Services and Dealer Insurance Services, the Company issued a
promissory note of $250,000 as partial consideration to the target companies.
The Company also issued promissory notes of $134,615, $365,385 and $31,000 to
the shareholders of the target companies.
On January 28, 1997, in connection with the Company's acquisition of
Florida Finance Group, Suncoast Auto Brokers, Inc., and Suncoast Auto Brokers
Enterprises, Inc., the Company issued to Gary R. Smith 142,857 shares of Common
Stock valued at $6.76 per share.
During December 1996 and January 1997, the Company sold 395,000 shares of
Series A redeemable convertible preferred stock. Proceeds from these offerings,
net of offering costs, were approximately $977,000.
On November 19, 1996, Eckler's issued to four individual investors
$562,000 of convertible debentures convertible after November 19, 1997 into
shares of Common Stock at a conversion rate of one share of Common Stock for
each $10.00 outstanding principal amount and bearing interest of 12% until
November 19, 1997 and 18% thereafter. Holders of the debentures who did not
convert prior to November 19, 1997 received, for each $20,000 debenture, a
warrant to purchase 600 shares of Common Stock at $6.00.
In October 1996, Eckler's, the predecessor company prior to the January
1997 acquisition by Smart Choice Holdings, Inc., issued a stock option to each
of its four directors for 5,000 shares of Class A Common Stock of Eckler's. The
options had an exercise price of $6.00 per share ($6.60 per share for Ralph H.
Eckler, a member of the Board and a 10% beneficial owner at such time).
In July 1996, Eckler's issued stock options as follows: (i) incentive
stock options to certain officers of Eckler's under its Combined Qualified and
Non-Qualified Stock Option Plan for an aggregate of 12,500 shares of Class A
Common Stock of Eckler's (the "Class A Common Stock"), which options expire in
July 2001 and were first exercisable in January 1997 at exercise prices ranging
from $6.00 to $6.60 per share; (ii) non-qualified stock options for a total of
10,000 shares of its Class A Common Stock to two independent directors of
Eckler's, which options expire in July 2001 and were first exercisable in
January 1997 at an exercise price of $6.00 per share; and (iii) a non-qualified
stock option to Ralph H. Eckler for 100,000 shares of Class A Common Stock
which expires in 2001 and became exercisable in August 1996.
II-5
<PAGE>
Effective March 31, 1996, Eckler's issued to Randolph Fields, Esq., for
legal services, a nonredeemable stock purchase warrant for 10,000 shares of
Class A Common Stock, exercisable at $8.40 per share for a term of five years
commencing March 31, 1996 and expiring March 31, 2001.
Effective November 15, 1995, Eckler's issued a Unit Purchase Option to
Argent Securities, Inc., Eckler's underwriter of its initial public offering.
The Unit Purchase Option entitles Argent to acquire 42,000 units, each unit
consisting of one share of Class A Common Stock and one nonredeemable Class A
Common Stock purchase warrant. The Unit Purchase Option is exercisable for a
period of four years commencing November 15, 1996 at $12.00 per unit, and the
underlying warrants are exercisable for four years commencing November 15, 1996
at $13.00 per share.
Effective November 15, 1995, Eckler's issued 51,750 shares of Class A
Common Stock and warrants for 51,750 shares of Class A Common Stock to seven
individuals, five of whom were executive officers of Eckler's, in cancellation
of $205,000 of promissory notes. Each warrant is exercisable for four years
commencing on November 9, 1996 for one share of Class A Common Stock at $12.00
per share.
In August 1995, Eckler's granted stock options pursuant to its stock
option plans to certain Eckler's executive officers in consideration for their
service to Eckler's. The options are for an aggregate of 67,500 shares of
Eckler's Class A Common Stock at a per share exercise price of $5.00. The terms
of the options are for 5 years, however, they may not be exercised for 2 years
from the date of grant.
ITEM 16. EXHIBITS
(a) Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- --------- -------------------------------------- ---------------------------------------------------
<S> <C> <C>
1 Form of Underwriting Agreement To be filed by amendment.
3.1 Amended and Restated Articles of Exhibit 3.1 to Form SB-2 Registration Statement,
Incorporation of Smart Choice filed on September 1, 1995, File No. 33-96520-A.
Automotive Group, Inc. (the
"Company")
3.1.1 Articles of Amendment to Articles of Exhibit 3.2 to Form 10-Q filed on May 20, 1997
Incorporation of SMCH
3.2 Amended and Restated Bylaws of the Exhibit 3.2 to Form SB-2 Registration Statement,
Company 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 SB-2
Restated Bylaws Registration Statement, filed on November 6, 1995,
File No. 33-96520-A.
3.2.2 Second Articles of Amendment to Exhibit 3.1 to Form 8-K filed on October 9, 1997.
Articles of Incorporation
3.2.3 Third Articles of Amendment to Exhibit 3.1 to Form 10-Q filed on May 15, 1998.
Articles of Incorporation
3.2.4 Fourth Articles of Amendment to Previously Filed.
Articles of Incorporation
3.2.5 Fifth Articles of Amendment to Previously Filed.
Articles of Incorporation
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Form 8-A Registration Statement,
filed on April 16, 1997.
4.2 Specimen of Warrant Certificate Exhibit 4.2 to Form 8-A Registration Statement,
filed on April 16, 1997.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ---------- ---------------------------------------- -----------------------------------------------------
<S> <C> <C>
4.3 Warrant Agreement between the Exhibit 4.5 to Amendment No. 2 to Form SB-2
Company and American Stock Registration Statement, filed on November 6, 1995,
Transfer & Trust Company, as Warrant File No. 33-96520-A.
Agent, dated November 9, 1995
4.3.1 Form of Amendment to Warrant Exhibit 4.4 to Form 8-A Registration Statement,
Agreement filed on April 16, 1997.
5.1 Opinion of Morgan, Lewis & Bockius To be filed by amendment.
LLP
10.1 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 September No. 33-96520-A.
14, 1992
10.1.1 1998 Executive Incentive Exhibit A to Proxy Statement filed on June 9, 1998.
Compensation Plan
10.2 Amendment No. 1 to Eckler Exhibit 10.4.2 to Form SB-2 Registration Statement
Industries, Inc. Retirement and filed on September 1, 1995, File No. 33-96520-A.
Savings Plan Trust Agreement Dated
March 28, 1994.
10.3 Eckler Industries, Inc. Non-qualified Exhibit 10.6 to Form SB-2 Registration Statement,
Stock Option Plan filed on September 1, 1995, File No. 33-96520-A.
10.4 Eckler Industries, Inc. 1995 Combined Exhibit 10.7 to Form SB-2 Registration Statement,
Qualified and Non-Qualified Employee filed on September 1, 1995, File No. 33-96520-A.
Stock Option Plan
10.5 Registration Rights Agreement by and Exhibit 10.15 to Amendment No. 1 to Form SB-2
among the Company and each of the Registration Statement, filed on October 13, 1995,
Purchasers referred to in Schedule 1 File No. 33-96520-A.
thereto, dated September 20, 1995.
10.6 Unit Purchase Option Agreement Exhibit 1.2 to Amendment No. 2 to Form SB-2
between the Company and Argent Registration Statement, filed on November 6, 1995,
Securities, Inc. and Certificate dated File No. 33-96520-A.
September 20, 1995.
10.7 Loan Agreement between the Exhibit 10.19 to Post-Effective Amendment No. 2
Company and Barnett Bank, N.A. to Form SB-2 Registration Statement, filed on
dated September 30, 1996. November 14, 1996, File No. 33-96520-A.
10.8 Mortgage and Security Agreement Exhibit 10.20 to Post-Effective Amendment No. 2
between the Company and Barnett to Form SB-2 Registration Statement, filed on
Bank, N.A. dated September 30, 1996. November 14, 1996, File No. 33-96520-A.
10.9 Promissory Note in the amount of Exhibit 10.21 to Post-Effective Amendment No. 2
$2,400,000 from the Company in favor to Form SB-2 Registration Statement, filed on
of Barnett Bank, N.A. dated November 14, 1996, File No. 33-96520-A.
September 30, 1996.
10.10 Assignment of Loan Documents dated Exhibit 10.10 to Form 10-K, filed on April 14, 1998.
November 4, 1997 between Barnett
Bank, N.A. and The Huntington
National Bank ("Huntington").
10.11 Modification of Mortgage Deed and Exhibit 10.11 to Form 10-K, filed on April 14, 1998.
Security Agreement dated
November 3, 1997 between the
Company and Huntington.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- -----------------------------------------------------
<S> <C> <C>
10.12 Future Advance Promissory Note Exhibit 10.12 to Form 10-K, filed on April 14, 1998.
dated December 30, 1997, principal
amount $260,000, the Company make,
Huntington, payee.
10.13 Modification of Mortgage and Exhibit 10.13 to Form 10-K, filed on April 14, 1998.
Mortgage Note and Extension
Agreement dated December 30, 1997
between the Company and
Huntington.
10.13.1 Modification of Mortgage Note and Filed herewith.
Extension Agreement dated July 24,
1998 between the Company and
Huntington
10.14 Merger Agreement between Smart Exhibit 10.1 to Form 8-K filed on February 12,
Choice Holdings, Inc. ("SCHI"), the 1997.
Company, Thomas E. Conlan and
Gerald C. Parker dated December 30,
1997.
10.15 First Amended and Restated Loan and Exhibit 4.1 to Form 10-Q filed on May 20, 1997.
Security Agreement between Florida
Finance Group, Inc. ("FFG") and
Finova Capital Corporation
("Finova"), dated February 4, 1997.
10.16 Warrant to Purchase Common Stock Exhibit 4.2 to Form 10-Q filed on May 20, 1997.
of the Company between the
Company and Finova, dated
January 13, 1997.
10.17 Promissory Note by Eckler Industries, Exhibit 10.1 to Form 8-K filed on March 5, 1998.
inc. in favor of Stephens Inc.
10.17.1 Amendment to Guaranty Agreement Exhibit 10.4 to Form 8-K filed on March 5, 1998.
between Registrant and Stephens Inc.
10.17.2 Amendment to Pledge and Security Exhibit 10.5 to Form 8-K filed on March 5, 1998.
Agreement between Registrant and
Stephens Inc.
10.18 Promissory note, dated February 24, Exhibit 10.9 to Form 8-K filed on March 5, 1998.
1998, First Choice Auto Finance, Inc.,
maker, and Manheim Automotive
Financial Services, Inc., payee.
10.18.1 Guaranty, dated March 21, 1997 from Exhibit 10.10 to Form 8-K filed on March 5, 1998.
the Registrant in favor of Manheim
Automotive Financial Services, Inc.
10.19 Guaranty to Finova from the Exhibit 4.5 to Form 10-Q filed on May 20, 1997.
Company dated January 13, 1997.
10.20 Eighth Amended and Restated Exhibit 10.20 to Form 10-K, filed on April 14, 1998.
Promissory Note dated March 27,
1998, between FFG, maker, and
Finova.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- -----------------------------------------------------
<S> <C> <C>
10.20.1 Ninth Amended and Restated Exhibit 10.1 to Form 10-Q, filed on May 15, 1998.
Promissory Note dated March 27,
1998, between FFG, maker, and
Finova.
10.21 Fourth Amended and Restated Exhibit 10.21 to Form 10-K, filed on April 14, 1998.
Schedule to Amended and Restated
Loan and Security Agreement, FFG,
borrower, Finova, lender, dated
March 27, 1998.
10.21.1 Fifth Amended and Restated Schedule Exhibit 10.2 to Form 10-Q, filed on May 15, 1998.
to Amended and Restated Loan and
Security Agreement, FFG, borrower,
Finova, lender.
10.22 Stock Purchase Agreement dated Exhibit 10.1 to Form 10-Q, filed on May 20, 1997.
January 28, 1997 between SCHI and
Gary R. Smith.
10.23 Promissory Note dated January 28, Exhibit 10.2 to Form 10-Q filed on May 20, 1997.
1997, First Choice Auto Finance, Inc.
("FCAF"), maker, Gary Smith, payee,
in the principal amount of $1,031,008.
10.24 Lease dated April 5, 1997 between Exhibit 10.24 to Form 10-K, filed on April 14, 1998.
Gary R. Smith and Team Automobile
Sales and Finance, Inc.
10.25 Promissory Note Modification Exhibit 10.25 to Form 10-K, filed on April 14, 1998.
Agreement, dated December 15, 1997
between FCAF and Gary R. Smith.
10.26 Asset Purchase Agreement dated Exhibit 10.3 to Form 10-Q, filed on May 20, 1997.
January 28, 1997 between FCAF and
Gary R. Smith.
10.27 Asset Purchase Agreement among Exhibit 10.17 to Form 8-K, filed on February 26,
FCAF, Palm Beach Finance and 1997.
Mortgage Company ("PBF"), Two
Two Five North Military Corp.
("225"), and David Bumgardner, and
Amendment thereto.
10.28 Loan and Security Agreement between Exhibit 10.18 to Form 8-K, filed on February 26,
225 and FCAF dated February 14,
1997.
10.29 9% Secured Convertible Note of Exhibit 10.20 to Form 8-K, filed on February 26,
FCAF to 225 and PBF. 1997.
10.30 9% Convertible Debenture of SCHI to Exhibit 10.21 to Form 8-K, filed on February 26,
PBF. 1997.
10.31 Lease between David Bumgardner as Exhibit 10.22 to Form 8-K, filed on February 26,
Lessor and FCAF, Lessee, dated 1997.
February 13, 1997.
10.32 Indemnification Agreement in favor of Exhibit 10.23 to Form 8-K, filed on February 26,
PBF and 225 by FCAF, dated 1997.
February 14, 1997.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- -----------------------------------------------------
<S> <C> <C>
10.33 Executive Employment Agreement Exhibit 10.15 to Form 10-Q, filed on May 20, 1997.
between the Company and Gary R.
Smith.
10.34 Executive Employment Agreement Exhibit 10.16 to Form 10-Q, filed on May 20, 1997.
between the Company and Robert J.
Abrahams.
10.35 Executive Employment Agreement Exhibit 10.35 to Form 10-K, filed on April 14, 1998.
dated April 11, 1997 between the
Company and Joseph A. Alvarez.
10.36 Executive Employment Agreement Exhibit 10.36 to Form 10-K, filed on April 14, 1998.
dated April 24, 1997 between the
Company and Ronald Anderson.
10.36.1 Executive Employment Agreement Filed herewith.
dated September 22, 1998 between the
Company and Joseph E. Mohr.
10.36.2 Executive Employment Agreement Filed herewith.
dated February 9, 1998 between the
Company and Robert J. Downing.
10.37 Non Qualified Stock Option Exhibit 10.37 to Form 10-K, filed on April 14, 1998.
Agreement dated March 5, 1997
among the Smart Choice Holdings
Management Trusts (the "Management
Trusts"), Eckler Industries, Inc., and
Robert J. Abrahams.
10.38 Non Qualified Stock Option Exhibit 10.38 to Form 10-K, filed on April 14, 1998.
Agreement dated March 5, 1997
among the Management Trusts, Eckler
Industries, Inc., and Robert J.
Abrahams.
10.39 Non Qualified Stock Option Exhibit 10.39 to Form 10-K, filed on April 14, 1998.
Agreement dated April 11, 1997
among the Management Trusts, the
Company and Joseph Alvarez.
10.40 Stock Option Agreement dated Exhibit 10.40 to Form 10-K, filed on April 14, 1998.
March 24, 1997 between the Company
and Ronald Anderson.
10.41 Non Qualified Stock Option Exhibit 10.41 to Form 10-K, filed on April 14, 1998.
Agreement dated April 17, 1997
between the Company and David
Bumgardner.
10.42 Non Qualified Stock Option Exhibit 10.42 to Form 10-K, filed on April 14, 1998.
Agreement dated April 17, 1997
between the Company and Craig
Macnab.
10.43 Stock Option Agreement dated Exhibit 10.43 to Form 10-K, filed on April 14, 1998.
March 19, 1997 between the Company
and Gerald Parker.
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- -----------------------------------------------------
<S> <C> <C>
10.44 Non Qualified Stock Option Exhibit 10.44 to Form 10-K, filed on April 14, 1998.
Agreement dated April 17, 1997
between the Company and Gerald
Parker.
10.45 Non Qualified Stock Option Exhibit 10.45 to Form 10-K, filed on April 14, 1998.
Agreement dated April 17, 1997
between the Company and Donald
Wojnowski.
10.46.1 Non Qualified Stock Option Filed herewith.
Agreement dated July 29, 1997
between the Company and Joseph
Alvarez.
10.46.2 Non Qualified Stock Option Filed herewith.
Agreement dated January 29, 1997
between the Company and Joseph
Mohr.
10.46.3 Non Qualified Stock Option Filed herewith.
Agreement dated February 9, 1998
between the Company and Robert
Downing.
10.46.4 Non-Qualified Stock Option Filed herewith.
Agreement dated January 29, 1997
between the Company and Ron
Anderson.
10.47 Convertible Senior Promissory Note Exhibit 10.18 to Form 10-Q, filed on May 20, 1997.
dated March 13, 1997, the Company,
maker, Sirrom Capital Corporation
("Sirrom"), payee.
10.48 Convertible Senior Promissory Note Exhibit 10.19 to Form 10-Q, filed on May 20, 1997.
dated March 13, 1997, the Company,
maker, Sirrom, payee.
10.49 Amended and Restated Registration Exhibit 10.20 to Form 10-Q, filed on May 20, 1997.
Rights Agreement between the
Company and Sirrom, dated May 13,
1997.
10.50 Asset Purchase Agreement dated as of Exhibit 10.1 to Form 8-K, filed on July 14, 1997.
June 27, 1997 among the Company,
Strata Holding, Inc., Ready Finance,
Inc., Donald Cook, Marilyn Cook and
Madie A. Stratemeyer.
10.51 Form of Convertible Note issued by Exhibit 10.1 to Form 8-K, filed on October 9, 1997.
the Company to High Capital Funding,
LLC, and other purchasers.
10.52 Form of Warrant issued by the Exhibit 10.2 to Form 8-K, filed on October 9, 1997.
Company to High Capital Funding,
LLC, and other purchasers.
10.53 Promissory Note, principal amount Exhibit 10.3 to Form 8-K, filed on October 9, 1997.
$1,500,000 by Eckler Industries, Inc.,
maker, Stephens Inc., payee.
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ---------- --------------------------------------- -----------------------------------------------------
<S> <C> <C>
10.54 Promissory Note, principal amount Exhibit 10.1 to Form 8-K, filed on March 5, 1998.
$3,000,000 Eckler Industries, Inc.,
maker, Stephens Inc., payee
10.55 Guaranty Agreement by the Company Exhibit 10.4 to Form 8-K, filed on October 9, 1997.
to Stephens Inc.
10.56 Amendment to Guaranty Agreement Exhibit 10.4 to Form 8-K, filed on March 5, 1998.
between the Company and Stephens
Inc.
10.57 Pledge and Security Agreement Exhibit 10.4 to Form 8-K, filed on October 9, 1997.
between the Company and Stephens
Inc.
10.58 Amendment to Pledge and Security Exhibit 10.5 to Form 8-K, filed on March 5, 1998.
Agreement between the Company and
Stephens Inc.
10.59 Securities Purchase Agreement Exhibit 10.6 to Form 8-K, filed on October 9, 1997.
between the Company and certain
buyers represented by Promethean
Investment Group, L.L.C.
10.60 Form of Warrant from the Company Exhibit 10.7 to Form 8-K, filed on October 9, 1997.
to certain buyers represented by
Promethean Investment Group, L.L.C.
10.61 Automotive Wholesale Financing and Exhibit 10.61 to Form 10-K, filed on April 14, 1998.
Security Agreement dated July 21,
1997 between First Choice Smart 1,
Inc. ("FCS1") and Nissan Motor
Acceptance Corporation ("NMAC").
10.62 Addendum to Automotive Wholesale Exhibit 10.62 to Form 10-K, filed on April 14, 1998.
Financing and Security Agreement.
10.63 Second Addendum to Automotive Exhibit 10.63 to Form 10-K, filed on April 14, 1998.
Wholesale Financing and Security
Agreement dated August 11, 1997
between NMAC and FSC1.
10.64 Dealer Capital Loan and Security Exhibit 10.65 to Form 10-K, filed on April 14, 1998.
Agreement dated October 12, 1995
between B&B Florida Enterprises, Inc.
and NMAC.
10.65 Amendment to Dealer Capital Loan Exhibit 10.66 to Form 10-K, filed on April 14, 1998.
and Security Agreement dated
September 1, 1997 between NMAC
and FSC1.
10.66 Dealer Equipment Loan and Security Exhibit 10.67 to Form 10-K, filed on April 14, 1998.
Agreement dated October 12, 1995
between NMAC and B&B Florida
Enterprises, Inc.
10.67 Amendment to Dealer Equipment Exhibit 10.67 to Form 10-K, filed on April 14, 1998.
Loan and Security Agreement dated
September 1, 1997 between NMAC
and FCS1.
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ------------ -------------------------------------- -----------------------------------------------------
<S> <C> <C>
10.67.1 Second Amendment to Dealer Filed herewith.
Equipment Loan and Security
Agreement.
10.68 Nissan Dealer Term Sales and Service Exhibit 10.68 to Form 10-K, filed on April 14, 1998.
Agreement dated August 29, 1997
between Nissan Motor Corporation in
U.S.A., the Company, Smart Cars, Inc.
and FCS1.
10.69 Wholesale Financing and Security Exhibit 10.69 to Form 10-K, filed on April 14, 1998.
Agreement dated August 11, 1997
between First Choice Stuart 2, Inc.
("FCS2") and Volvo Finance North
America, Inc.
10.70 Authorized Retailer Agreement Exhibit 10.70 to Form 10-K, filed on April 14, 1998.
between Volvo Cars of North
America, Inc. and FCS2.
10.71 Convertible Subordinated Debenture Exhibit 10.71 to Form 10-K, filed on April 14, 1998.
dated November 3, 1997, principal
amount $750,000, the Company, maker,
Bankers Life Insurance Company,
payee.
10.72 Registration Rights Agreement dated Exhibit 10.72 to Form 10-K, filed on April 14, 1998.
November 3, 1997 between the
Company and Bankers Life Insurance
Company.
10.73 Settlement Agreement and Release Exhibit 10.73 to Form 10-K, filed on April 14, 1998.
dated January 30, 1998 among the
Company, FCAF, FCS2, Jack Winters
Enterprises, Inc., Jack Winters, F.
Craig Clements, Killgore Pearlman,
P.A. and Mark L. Ornstein.
10.74 Stock Purchase Agreement dated Exhibit 10.74 to Form 10-K, filed on April 14, 1998.
May 6, 1997 between FCS1 and
Thomas DeRita, Jr.
10.75 Promissory Note dated December 19, Exhibit 10.76 to Form 10-K, filed on April 14, 1998.
1997, principal amount $2,199,000,
First Choice Melbourne 1, Inc., maker
and Raytheon Aircraft Credit
Corporation, payee.
10.76 Guaranty Agreement by the Company Exhibit 10.76 to Form 10-K, filed on April 14, 1998.
to Raytheon Aircraft Credit
Corporation.
10.77 Security Agreement dated Exhibit 10.77 to Form 10-K, filed on April 14, 1998.
December 19, 1997 between First
Choice Melbourne 1, Inc. And
Raytheon Aircraft Credit Corporation.
10.78 Registration Rights Agreement Exhibit 3.1 to Form 8-K filed on October 9, 1997.
between the Company and certain
buyers represented by Promethean
Investment Group, L.L.C.
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- ---------- --------------------------------------- -----------------------------------------------------
<S> <C> <C>
10.79 Promissory Note dated February 24, Exhibit 10.1 to Form 8-K, filed on March 5, 1998.
1998, FCAF, maker, Manheim
Automotive Financial Services, Inc.,
payee.
10.80 Guaranty dated March 21, 1997 from Exhibit 10.1 to Form 8-K, filed on March 5, 1998.
the Company in favor of Manheim
Automotive Financial Services, Inc.
10.81 Intentionally Omitted.
10.82 Manheim Automotive Financial Exhibit 10.82 to Form 10-K, filed on April 14, 1998.
Services, Inc. Security Agreement
dated March 21, 1997 between FCAF
and Manheim Automotive Financial
Services, Inc.
10.83 Promissory Note dated June 17, 1997, Exhibit 10.83 to Form 10-K, filed on April 14, 1998.
principal amount $825,000, FCAF,
maker, Carl Schmidt Enterprises, Inc.,
payee.
10.84 Real Estate Mortgage dated June 17, Exhibit 10.84 to Form 10-K, filed on April 14, 1998.
1997, FCAF, mortgagor, Carl Schmidt
Enterprises, Inc., mortgagee.
10.85 Intentionally Omitted.
10.86 Intentionally Omitted.
10.87 Twenty-Fourth Amendment to GM Exhibit 10.87 to Form 10-K, filed on April 14, 1998.
Reproduction and Service Part Tooling
License Agreement.
10.88 Twenty-Sixth Amendment to GM Exhibit 10.88 to Form 10-K, filed on April 14, 1998.
Reproduction and Service Part Tooling
License Agreement.
10.89 Thirty-Fourth Amendment to GM Exhibit 10.89 to Form 10-K, filed on April 14, 1998.
Reproduction and Service Part Tooling
License Agreement.
10.90 Lease between Florida Auto Auction Exhibit 10.90 to Form 10-K, filed on April 14, 1998.
of Orlando, Inc. and First Choice Auto
Finance, Inc. dated May 12, 1997, for
Reconditioning Facility.
11.1 Statement re Computation of Earnings Exhibit 11.1 to Form 10-K, Filed on April 14, 1998.
Per Share.
21.1 List of Subsidiaries. Exhibit 21.1 to Form 10-K, filed on April 14, 1998.
23.1 Consent of BDO Seidman, LLP. Filed herewith.
23.1.1 Consent of BDO Seidman, LLP. Filed herewith.
23.2 Consent of Spence, Marston, Bunch, Filed herewith.
Morris & Co.
23.3 Consent of Osburn, Henning and Filed herewith.
Company.
23.4 Consent of Rosenfield & Company, Filed herewith.
P.A.
23.5 Consent of Levine & Levine, Certified Filed herewith.
Public Accountants.
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH, PREVIOUSLY FILED OR
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
- -------- ------------------------------------ ----------------------------------------------------
<S> <C> <C>
23.6 Consent of Morgan, Lewis & Bockius To be included in Exhibit 5.
LLP.
24 Power of Attorney. Signature page.
27.1 Financial Data Schedule. Exhibit 27.1 to Form 10-K, filed on April 14, 1998.
</TABLE>
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(b) (1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the State of
Florida, on August 21, 1998.
SMART CHOICE AUTOMOTIVE GROUP, INC.
BY: /s/ Gary R. Smith
-------------------------------------------
Gary R. Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- --------------------------- -------------------------------------- ----------------
<S> <C> <C>
/s/ Gary R. Smith President and Chief Executive August 21, 1998
- --------------------------- Officer (Principal Executive Officer)
Gary R. Smith
/s/ * Chief Financial Officer August 21, 1998
- --------------------------- (Principal Financial and
Joseph E. Mohr Accounting Officer)
/s/ * Chairman of the Board of Directors August 21, 1998
- ---------------------------
Robert J. Abraham
/s/ * Director August 21, 1998
- ---------------------------
John W. Holden, Jr.
/s/ * Director August 21, 1998
- ---------------------------
Craig Macnab
/s/ * Director August 21, 1998
- ---------------------------
Gerald C. Parker
/s/ * Director August 21, 1998
- ---------------------------
Donald J. Wojnowski, Jr.
/s/ * Director August 21, 1998
- ---------------------------
Lewis H. Berman
/s/ * Director August 21, 1998
- ---------------------------
Jeffrey D. Congdon
</TABLE>
*By: /s/ Gary R. Smith
----------------------
Gary R. Smith
Attorney-in-fact
II-16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- ------------------------------------------------
<S> <C> <C>
10.13.1 Modification of Mortgage Note and Filed herewith.
Extension Agreement dated July 24,
1998 between the Company and
Huntington
10.36.1 Executive Employment Agreement Filed herewith.
dated September 22, 1998 between the
Company and Joseph E. Mohr.
10.36.2 Executive Employment Agreement Filed herewith.
dated February 9, 1998 between the
Company and Robert J. Downing.
10.46.1 Non Qualified Stock Option Filed herewith.
Agreement dated July 29, 1997
between the Company and Joseph
Alvarez
10.46.2 Non Qualified Stock Option Filed herewith.
Agreement dated January 29, 1997
between the Company and Joseph
Mohr.
10.46.3 Non Qualified Stock Option Filed herewith.
Agreement dated February 9, 1998
between the Company and Robert
Downing.
10.46.4 Non-Qualified Stock Option Filed herewith.
Agreement dated January 29, 1997
between the Company and Ron
Anderson.
10.67.1 Second Amendment to Dealer Filed herewith.
Equipment Loan and Security
Agreement
23.1 Consent of BDO Seidman, LLP. Filed herewith.
23.1.1 Consent of BDO Seidman, LLP. Filed herewith.
23.2 Consent of Spence, Marston, Bunch, Filed herewith.
Morris & Co.
23.3 Consent of Osburn, Henning and Filed herewith.
Company
23.4 Consent of Rosenfield & Company, Filed herewith.
P.A.
23.5 Consent of Levine & Levine, Certified Filed herewith.
Public Accountants
</TABLE>
Exhibit 10.13.1
THIS IS A BALLOON MORTGAGE AND THE FINAL PAYMENT OF THE BALANCE DUE UPON
MATURITY IS $1,889,204.50, TOGETHER WITH ACCRUED INTEREST, IF ANY, AND ALL
ADVANCEMENTS MADE BY THE MORTGAGEE UNDER THE TERMS OF THIS MORTGAGE.
MODIFICATION OF MORTGAGE
AND MORTGAGE NOTE AND EXTENSION AGREEMENT
THIS MODIFICATION OF MORTGAGE AND MORTGAGE NOTE AND EXTENSION AGREEMENT
is entered into this 29th day of July, 1998, by and between THE HUNTINGTON
NATIONAL BANK, a national banking association, whose address is 685 S. Babcock
Street, Melbourne, Florida 32901, hereinafter referred to as `Mortgagee"; and
SMART CHOICE AUTOMOTIVE GROUP, INC., a Florida corporation, whose address is
5200 S. Washington Avenue, Titusville, FL 32780, hereinafter referred to as
"Mortgagor".
W I T N E S S E T H :
WHEREAS, BARNETT BANK, N.A., on September 30, 1996, made a loan to
Mortgagor in the original principal amount of TWO MILLION FOUR HUNDRED THOUSAND
AND NO/.100 ($2,400,000.00) DOLLARS ("Loan"); and
WHEREAS, in connection with the Loan, Mortgagor executed that certain
promissory note dated September 30, 1996, in the original principal amount of
TWO MILLION FOUR HUNDRED THOUSAND AND NO/100 ($2,400,000.00) DOLLARS evidencing
the Loan ("Note"); and
WHEREAS, the Note is secured by that certain Mortgage and Security
Agreement dated September 30, 1996, and recorded in Official Records Book 3609,
Page 0715, of the Public Records of Brevard County, Florida ("Mortgage"),
encumbering that certain real property described therein, and further secured by
that certain Assignment of Leases, Rents and Profits dated September 30, 1996
and recorded in Official Records Book 3609, Page 0737; UCC-1 Financing Statement
recorded in Official Records Book 3609, Page 0743, Public Records of Brevard
County, Florida; and
WHEREAS, the Loan, Note and Mortgage were modified by a Mortgage
Modification Agreement dated October 25, 1996, recorded in Official Records Book
3617, Page 1805, Public Records of Brevard County, Florida; and
WHEREAS, the Loan, Note and Mortgage were modified by a Second
Modification to Mortgage and Security Agreement and Partial Release of Personal
Property Agreement dated September 15, 1997 and recorded in Official Records
Book 3711, Page 4702 , Public Records of Brevard County, Florida; and
WHEREAS, the Loan, Note and Mortgage were assigned by Barnett Bank,
N.A. to Mortgagee by Assignment of Loan Documents dated November 4, 1997,
recorded in Official Records Book 3725, Page 3827, Public Records of Brevard
County, Florida; and
WHEREAS, the Loan, Note and Mortgage were further modified by
Modification of Mortgage Deed and Security Agreement dated November 3, 1997 and
recorded in Official Records Book 3725, Page 3830; Collateral Assignment of
Leases or Leases recorded in Official Records Book 3725, Page 3837; UCC-1
Financing Statement recorded in Official Records Book 3725, Page 3847; UCC-3
recorded in Official Records Book 3725, Page 3853, Public Records of Brevard
County, Florida; and
WHEREAS, the Loan, Note and Mortgage were further modified by
Modification of Mortgage and Mortgage Note and Extension Agreement dated
December 30, 1997, recorded in Official Records Book 3760, Page 1333, and
re-recorded in Official Records Book 3776, Page 0133, Public Records of Brevard
County, Florida; and
<PAGE>
WHEREAS, the property currently encumbered by the Mortgage is the real
property set forth on Exhibit "A" and Exhibit "B" to that certain Mortgage
Modification Agreement dated October 25, 1996 and recorded in official Records
Book 3617, Page 1805, Public Records of Brevard County, Florida; and
WHEREAS, the parties hereto are desirous of further modifying said
Mortgage and Mortgage Note.
NOW, THEREFORE, in consideration of the sum of $10.00 this day by each
party to the other, receipt whereof being hereby acknowledged, and other good
and valuable considerations, the parties do hereby amend said Note and Mortgage
as follows:
1. The present outstanding principal balance of said Mortgage is
$2,393,333.28.
2. The Note and Mortgage are hereby deemed to be modified to
incorporate the following provisions which shall prevail to
the extent of any inconsistency with the provisions of the
Note and Mortgage. Failure to comply with any or all of the
following provisions shall constitute a default under the
Note, Mortgage, UCC-1 Financing Statements, assignment of
rents, leases, guarantees, and all other documents executed
and/or delivered by Mortgagor to Mortgagee.
3. The total principal indebtedness of $2,393,333.28 plus
interest at the rate of three-quarters (.75%) per annum IN
EXCESS of The Huntington National Bank's Prime Commercial
Lending Rate ("Rate"), with the amount of interest payable to
be adjusted from time to time as the Rate changes, shall be
paid as follows:
Monthly principal payments of $14,405.00 PLUS interest shall be due and
payable on the first day of AUGUST, 1998, and the first day of each
consecutive month thereafter until the 1st day of JULY, 2001, when the
entire outstanding principal balance plus all accrued interest shall be
due and payable.
Interest shall be calculated on the basis of a three hundred sixty
(360) day year and charged for the actual number of days elapsed in an
interest period. In no event shall the amount of interest due or
payments in the nature of interest payable hereunder exceed the maximum
rate of interest allowed by applicable law, as amended form time to
time, and in the event any such payment is paid by Borrower or received
by the Lender, then such excess sum shall be credited as a payment of
principal, unless Borrower shall notify the Lender, in writing, that
Borrower elects to have such excess returned to it for its worth.
Each payment when made shall be applied first to the payment of
interest, second to the payment of sums due hereunder other than
interest or principal (i.e., late payment and similar charges), and
then to the payment of principal.
Mortgagor shall have the right to prepay this loan, in full or in part,
without penalty through the application of normal operating cash flow
of the Mortgagor. Should prepayment be funded from any other source, a
prepayment fee of one-half (.50%) percent of the then outstanding
balance shall be due and payable.
4. The parties agree that interest at the rate of three-quarters
(.75%) percent per annum IN EXCESS of The Huntington National
Bank's prime Commercial Lending Rate ("Rate") with the
amount of interest payable to be adjusted from time to time
as the Rate changes, shall begin accruing July 1, 1998.
5. Nothing herein is intended to nor shall it constitute a
novation of the indebtedness evidenced by the Existing Note
or of the other obligations secured by the Mortgage,
<PAGE>
and such indebtedness and obligations remain in full force
and effect, and shall be evidenced by the Renewal Note.
6. The Commitment Letter of May 28, 1998, by and between
Mortgagor and Mortgagee is incorporated herein and made a
part hereof. Any default in the provisions of the Commitment
Letter by Mortgagor shall be a default herein.
7. This instrument shall be binding upon the successors and
assigns to the parties hereto.
8. Should any provision of this instrument be invalid or
unenforceable, the remainder of this instrument shall not be
affected thereby and shall be enforceable to the greatest
extent permitted by law.
9. Except as expressly modified herein, the Mortgage is hereby
ratified and confirmed and shall remain in full force and
effect.
10. Mortgagor further covenants and agrees that Mortgagor has no
defenses or set-offs to the enforcement of the Note and
Mortgage, as modified, or any counterclaims against the
holder of the Note and Mortgage and by the execution of this
Agreement, they hereby waive all defenses, setoffs or
counterclaims they may have as of the date hereof.
IN WITNESS WHEREOF the undersigned have executed this instrument.
SMART CHOICE AUTOMOTIVE GROUP, INC., a Florida
corporation
By: /s/ JOSEPH E. MOHR
-----------------------------------------
JOSEPH E. MOHR, Executive Vice President and
Chief Financial Officer
THE HUNTINGTON NATIONAL BANK,
a national banking association
By:
-----------------------------------------
Print Name:
Title:
STATE OF FLORIDA )
) ss:
COUNTY OF BREVARD )
The foregoing instrument was acknowledged before me this 29th day of
July, 1998 by JOSEPH E. MOHR, as EXECUTIVE VICE PRESIDENT and CHIEF FINANCIAL
OFFICER of SMART CHOICE AUTOMOTIVE GROUP, INC., a Florida corporation. He is
personally known to me or has produced ______________ as identification..
/S/ LILLIAN CLOVER
----------------------------------
My Commission Expires: Notary Public,
[SEAL]
STATE OF FLORIDA )
) ss:
COUNTY OF BREVARD )
The foregoing instrument was acknowledged before me this __________day
of July, 1998 by ________________________ , as Vice President of THE HUNTINGTON
NATIONAL BANK, a national banking association.
He is personally known to me or has produced ______________ _____ as
identification.
----------------------------------
My Commission Expires: Notary Public,
<PAGE>
ACKNOWLEDGEMENT AND CONSENT OF GUARANTOR
The undersigned hereby acknowledges and consents to the foregoing
Modification of Mortgage and Mortgage Note and Extension Agreement.
Dated this 29th day of July, 1998
ECKLER INDUSTRIES, INC., a Florida
corporation
By: /s/ DONNA SIEBEL
------------------------------
DONNA SIEBEL, Vice President
STATE OF FLORIDA )
) ss:
COUNTY OF BREVARD )
The foregoing instrument was acknowledged before me this 29th day of
July, 1998 by DONNA SIEBEL, as VICE PRESIDENT of ECKLER INDUSTRIES, INC., a
Florida corporation. She is personally known to me or has produced
______________a as identification.
/s/ LILLIAN CLOVER
----------------------------------
Notary Public,
[SEAL]
My Commission Expires:
Exhibit 10.36.1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Employment Agreement") is
effective as of September 22, 1997, by and between SMART CHOICE AUTOMOTIVE
GROUP, INC., a Florida corporation ("Company"), and JOSEPH E. MOHR, an
individual ("Executive").
W I T N E S S E T H:
WHEREAS, the Executive has extensive experience relating to business
matters; and
WHEREAS, to promote the ongoing business of the Company, the Company
desires to assure itself of the right to the Executive's services from and after
the date hereof, on the terms and conditions of this Agreement; and
WHEREAS, the Executive is willing and able to render his services to
the Company from and after the date hereof, on the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby covenant and agree as follows:
SECTION 1. EMPLOYMENT.
a. Subject to the terms and conditions of this Employment
Agreement, the Company shall retain the Executive as its Senior Vice President
and Chief Financial Officer, and the Executive shall render services to the
Company in an executive capacity. Executive shall perform such duties ordinarily
and customarily performed by a similar executive of a corporation of like type
and size as the Company, and shall perform such other reasonable executive
duties as the Company's President may assign to him from time to time. The
Executive may also be given additional titles, and may be assigned
responsibilities on behalf of certain of the Company's affiliates commensurate
with his position with the Company, without requirement of additional
compensation hereunder.
b. Throughout the period of his employment hereunder, the
Executive shall: (i) devote his full business time, attention, knowledge and
skills, faithfully, diligently and to the best of his ability, to the active
performance of his duties and responsibilities hereunder on behalf of the
Company; (ii) observe and carry out such reasonable rules, regulations,
policies, directions and restrictions as may be established from time to time by
the Company's Board of Directors, including but not limited to
<PAGE>
the standard policies and procedures of the Company as in effect from time to
time; and (iii) do such traveling as may reasonably be required in connection
with the performance of such duties and responsibilities. However, the Company
shall not have the right to transfer the Executive's primary location from which
he is to perform services to a location outside of Central Florida without
Executive's prior consent.
SECTION 2. INTENTIONALLY OMITTED.
SECTION 3. TERM OF EMPLOYMENT. Subject to prior termination in
accordance with the terms and conditions of this Employment Agreement, the term
of employment of Executive by the Company pursuant to this Employment Agreement
shall be for an initial period of three (3) years (the "Employment Period")
commencing on the date hereof (the "Commencement Date"). The Employment Period
shall automatically renew for additional terms of three years each on each
anniversary of the date hereof hereafter (an "Anniversary Date"), unless either
party gives written notice of termination to the other party not less than one
hundred twenty (120) days prior to such Anniversary Date, in which case the
Employment Period shall not so renew on such Anniversary Date and shall
terminate two years from such Anniversary Date. The term "Employment Period"
shall include the initial Employment Period and any and all successive renewals
thereof.
SECTION 4. COMPANY'S PRINCIPAL PLACE OF BUSINESS. The Company's
principal place of business will be located in the Titusville, Florida area, or
such other area in Florida as may be designated by the Company's Board.
SECTION 5. COMPENSATION. During the Employment Period, subject to all
the terms and conditions of this Employment Agreement and as compensation for
all services to be rendered by Executive under this Employment Agreement, the
Company shall pay to Executive the following:
a. BASE SALARY. The Company shall pay to Executive a base salary of
$150,000 during each year of the initial three (3) year Employment Period
payable in equal periodic installments in accordance with the standard payroll
practices of the Company in effect from time to time, but in no case less than
once a month. During each year of the Employment Period (as renewed under
Section 3 hereof) after the initial three (3) years of the Employment Period,
the Board shall review the base salary amount to determine whether or not to
grant additional increases in the base salary amount.
b. BONUS. In addition to the annual base salary, Executive shall be
entitled to receive an annual
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<PAGE>
performance bonus (the "Performance Bonus") as determined and in an amount set
by the Board.
c. COMPANY CAR/CAR ALLOWANCE. During the Employment Period, the Company
shall provide to Executive, at the option of Executive, either (i) an automobile
for Executive's use, or (ii) an automobile allowance of $600 per month which the
Executive shall apply to leasing an automobile(s) for use by executive and his
immediate family. The automobile allowance shall be payable at the end of each
calendar month of the Employment Period. The Company shall pay all necessary
maintenance fees, insurance payments, gasoline expenses and all other expenses
related to the maintenance, operation and upkeep of the automobile. Upon
termination of the obligation of the Company to provide Benefits pursuant to
Section 6 hereof, the Executive shall have the right and option to purchase the
automobile at its then book value for financial statement purposes (if the
automobile is owned by the Company) or, subject to the terms of the lease, to
assume the lease for said automobile (if the automobile is leased by the
Company).
d. STOCK OPTIONS. During the Employment Period, Executive will be
provided with stock options under the Company's stock option plan(s) as
determined by the Company's Board of Directors (other than those granted on the
date hereof) and/or a committee appointed by the Company's Board of Directors in
accordance with the Company's stock option plan(s). Such awards shall be made on
a basis commensurate with other executives of the Company giving due
consideration to gross compensation levels and overall job performance.
SECTION 6. FRINGE BENEFITS. Executive shall be entitled to vacations,
health care benefits, fringe benefits and reimbursement for reasonable
out-of-pocket expense, including but not limited to those hereinafter detailed
(the "Benefits"), in accordance with the Company's practices covering executive
personnel. Unless Executive consents to a different treatment, his eligibility,
participation and benefits under the Benefits will be, and will continue to be,
not less than the Benefits provided to any other employee of Senior Vice
President or higher level. The Company shall use its best efforts to obtain
waivers of waiting periods, if any, applicable to particular benefits. The
benefits shall, at a minimum, include:
a. coverage for Executive and his family, under any major
medical and dental insurance programs and plans, and under any short-term,
long-term or permanent disability programs and plans, which are or may become
generally available to management employees of the Company. Notwithstanding the
foregoing, Executive shall be provided at minimum fully-paid health, major
medical, dental and life insurance (equal to $300,000);
3
<PAGE>
b. retirement benefits at such time and on such amounts as are
paid to executives by the Company at such time as the Company institutes a
retirement or 401(k) plan;
c. reimbursement of all properly approved travel and business
related expenses normally paid by the Company for the benefit of its executives,
including, but not limited to, all expenses for the acquisition and use of a
cellular telephone and cellular service of Executive's choice. All expense
reimbursement shall conform to the Company's expense reimbursement policies at
the time the expenses were incurred;
d. four (4) weeks paid vacation per calendar year at any time
or times selected by Executive taking into account the convenience of the
Company. Executive shall give the Board reasonable prior notice of selected
vacation times of one week or more. While unused vacation time shall not be
cumulative from year to year, Executive may carry forward not more than four (4)
weeks of unused vacation time into the following calendar year, PROVIDED,
HOWEVER, that under no circumstances shall Executive be entitled to more than
eight (8) weeks of vacation per calendar year;
e. days of annual sick leave as is usual and customary for a
vice president of a company similar to Company;
f. a holiday on the following days with full pay: New Year's
Day, Easter, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day, and such other holidays as the Company may declare;
g. paid leave and reimbursement of all travel, tuition and
related expenses in attending trade conferences and/or seminars and/or college
or other high level courses acceptable to the Board in its reasonable
discretion;
h. the Company shall purchase director and officer liability
insurance that shall include coverage for Executive, as is normal and customary
for a company of similar size to the Company and, in addition, the Company and
its subsidiaries shall indemnify Executive pursuant to a separate written
agreement for liabilities incurred as an officer to the fullest extent allowed
by Florida law;
i. Executive shall also be provided with a disability income
plan equal to 100% of his base salary, at least 80% of which is funded by
insurance;
j. MOVING EXPENSES. The Company shall reimburse the Executive
for the Executive's reasonable pre-approved expenses of moving the Executive's
principal residence from the Ocala, Florida area to the area of Titusville,
Florida, in accordance with the Company's expense reimbursement policies.
4
<PAGE>
SECTION 7. TERMINATION.
a. MUTUAL TERMINATION. This Employment Agreement may be
terminated upon mutual written agreement of the Company and the Executive;
b. BY EXECUTIVE. This Employment Agreement may be terminated
at the option of the Executive, upon fourteen (14) days' prior written notice to
the Company, in the event that the Company shall (i) fail to make any payment to
the Executive required to be made under the terms of this Employment Agreement
after payment is due, or (ii) fail to perform any other material covenant or
agreement to be performed by it hereunder or take any action prohibited by this
Employment Agreement, and fail to cure or remedy same within thirty (30) days
after written notice thereof to the Company. In the event that this Employment
Agreement is terminated pursuant to this Section 7b, then at the option of the
Executive on notice to the Company, the full compensation payable to the
Executive for the Employment Period under Section 5a hereof (just as if
Executive had not been so terminated and was continuing to serve as an employee
hereunder for the full term of this Employment Agreement, not including any
renewal or extension thereof) shall be immediately due and payable by the
Company.
c. BY THE COMPANY FOR CAUSE. This Employment Agreement may be
terminated at the option of the Company, upon written notice to the Executive,
"for cause" (as hereinafter defined), or in the event of the "permanent
disability" (as defined and provided for in Section 8) or death of the Executive
as provided for in Section 8. The Company may terminate Executive "without
cause" (as defined in Section 8).
(i) As used herein, the term "for cause" shall mean and be
limited to: (A) any material breach of this Employment Agreement by the
Executive which in any case is not fully corrected within thirty (30) days after
written notice of same from the Company to the Executive; (B) any fraud, theft,
conversion, criminal misconduct, breach of fiduciary duty, or gross and willful
misconduct by the Executive in connection with the performance of his duties and
responsibilities hereunder; (C) habitual breach by the Executive of any of the
material provisions of this Agreement (regardless of any prior cure thereof); or
(D) gross neglect by the Executive of his duties and responsibilities hereunder
which in any case is not fully corrected upon written notice of same from the
Company to the Executive.
d. EFFECT OF TERMINATION FOR CAUSE. In the event of
termination for any of the reasons set forth in this Section 7 (except as
otherwise provided for hereinafter with respect to "permanent disability", death
or "without cause") Executive shall be entitled to no further compensation, Base
Salary or other Benefits under this Employment Agreement, except as to that
5
<PAGE>
portion of any unpaid Base Salary or other benefits accrued and earned by him
hereunder up to and including the effective date of termination.
SECTION 8. TERMINATION BY REASON OF DEATH; PERMANENT DISABILITY; OR
WITHOUT CAUSE.
a. If the Company terminates Executive "without cause" which
shall mean for any reason other than as set forth in Section 7c(i), the
Executive terminates this Agreement under Section 7b, or in the event of
Executive's death or "permanent disability" (as defined below), Executive shall
(i) be entitled to receive an amount equal to the full compensation including
Benefits, to which he would otherwise be entitled under this Employment
Agreement for the remainder of the Employment Period in effect as of the date of
termination as well as any and all options awarded, vested or subject to vesting
as of such date, (the "Severance Payment") (just as if Executive had not been so
terminated and was continuing to serve as an employee hereunder for the full
Employment Period in effect as of the date of termination) and (ii) be provided,
for the remainder of the Employment Period, with all the insurance and other
benefits set forth in Section 6a hereof (PROVIDED, HOWEVER, to the extent that
the benefits in Section 6a cannot in fact be paid due to the fact that Executive
is not in fact employed by the Company, the Company promptly shall pay Executive
the monetary, after-tax equivalent thereof in U.S. Dollars, without any present
value adjustment). Such Severance Payment shall be payable in a single lump sum
distribution (without any present value adjustment) to Executive or his estate,
as the case may be, no later than ninety (90) days from the effective date of
such termination.
b. PAYMENT IN THE EVENT OF PERMANENT DISABILITY. For purposes
of this Employment Agreement, Executive's "permanent disability" shall be deemed
to have occurred after one hundred twenty (120) days in the aggregate during any
consecutive twelve (12) month period, or after ninety (90) consecutive days,
during which one hundred twenty (120) or ninety (90) days, as the case may be,
Executive, by reason of his physical or mental disability or illness, shall have
been unable to discharge fully his duties under this Employment Agreement. The
date of permanent disability shall be the one hundred twentieth (120th) or
ninetieth (90th) day, as the case may be. In the event Executive shall dispute
that his permanent disability shall have occurred, he shall promptly submit to a
physical examination by a qualified practicing physician mutually selected by
the Company and the Executive and paid for by the Company (and reasonably
acceptable to the Executive). Unless such physician shall issue a written
statement to the effect that in his opinion, based on his diagnosis, Executive
is capable of resuming his employment and devoting his full time and energy to
discharging his duties within ten (10) days after the date of such statement,
such permanent disability shall be deemed to have occurred without
6
<PAGE>
further dispute by Executive or Company. Notwithstanding the foregoing, the time
periods set forth in this Subsection b shall be modified as necessary so that
they match the time periods set forth in the appropriate disability insurance
policy such that there is no gap in payment of disability insurance benefits and
Executive's compensation hereunder.
SECTION 9. CHANGE OF CONTROL.
a. Notwithstanding anything herein to the contrary,
specifically including Section 7 hereof, in the event that following a "Change
of Control" of the Company (as defined below), Executive's employment with the
Company is either: (i) terminated by the Company, or (ii) terminated by
Executive because his regular duties hereunder are materially reduced,
diminished or modified (the position and duties of the Executive hereunder being
material to such employment), then (subject to Section 9c that provides for a
lump sum cash payment) the Company shall pay to Executive for a period of
thirty-six (36) full calendar months from the date of termination, (A) the Base
Salary in effect at the time of the termination of employment (in the same
installments as prior to termination), (B) the Benefits to which he is entitled
hereunder, and (C) when and as due, any other amounts to which the Executive is
entitled under any compensation plan of the Company, including any Performance
Bonuses (PROVIDED, HOWEVER, that to the extent that the Benefits cannot in fact
be provided or paid due to the fact that Executive is not in fact employed by
the Company, the Company shall pay to Executive the monetary, after tax
equivalent thereof, in U.S. dollars without any present value adjustment).
During the period that the Company is required to make payments to the Executive
pursuant to this Section 9a, or for a period of twelve (12) months after
termination of employment in the event the Executive elects a lump sum cash
payment hereunder, the Company shall maintain in full force and effect for the
continued benefit of the Executive, all employee benefit plans and programs in
which the Executive was entitled to participate immediately prior to the date of
termination, including without limitation, all Benefits provided pursuant to
Section 6 hereof; provided that the Executive's continued participation is
possible under the general terms and provisions of such plans and programs. In
the event that the Executive's participation in such plan or program is barred,
the Company shall arrange to provide the Executive with benefits substantially
similar to those which the Executive would otherwise have been entitled to
receive under such plans and programs from which his continued participation is
barred.
b. "Change of Control" shall be deemed to have occurred when:
(i) securities of the Company representing 25% or
more of the combined voting power of the Company's then outstanding voting
securities are acquired by a person or entity
7
<PAGE>
which is not a wholly-owned subsidiary of the Company or any of its affiliates;
(ii) a merger or consolidation is consummated in
which the Company is a constituent corporation and which results in less than
50% of the outstanding voting securities of the surviving or resulting entity
being owned by the then existing stockholders of the Company;
(iii) a sale or other disposition or transaction is
consummated by the Company of more than 50% of the Company's assets to a person
or entity which is not a wholly-owned subsidiary of the Company or any of its
affiliates; or
(iv) during any period of two consecutive years,
individuals who, at the beginning of such period, constituted the Board cease,
for any reason, to constitute at least a majority thereof.
c. In lieu of payments in installments hereunder, within
thirty (30) days of termination of employment, the Executive may, at his sole
option, elect to have all amounts to which he is entitled hereunder, be paid in
a lump sum cash payment. The lump sum cash payment provided herein shall be due
within five (5) days of notice from the Executive of the election to receive a
lump sum cash payment pursuant to this subsection.
d. It is the intention of the Company and the Executive that
no portion of any payment or benefit paid or provided under this Section or any
other payment or benefit under this Agreement, or payments to or for the
Executive under any other agreement or plan shall be deemed to be an excess
parachute payment as defined in Section 280G of the Internal Revenue Code of
1986 as amended (the "Code") or any successor provision. However, it is
understood that, depending upon elections hereunder made by the Executive, the
present value of all payments made under this Section and any other payment to
or for the benefit of the Executive in the nature of compensation, the receipt
of which is contingent on a Change of Control of the Company and to which
Section 280G of the Code or any successor provision thereto may apply, might
exceed the maximum amounts which the Executive may receive without becoming
subject to the tax imposed by Section 4999 of the Code or any successor
provision. In the event that the Executive becomes subject to a tax imposed by
Section 4999 of the Code or any successor provision as a result of the election
of the Executive to receive a lump sum cash payment hereunder or otherwise, the
Company shall pay to the Executive an amount equal to any excise tax imposed
upon the Executive as a result of such payment (in addition to any other payment
or benefit hereunder).
8
<PAGE>
SECTION 10. RESTRICTIVE COVENANTS.
a. The Executive hereby acknowledges and agrees that (i) the
business contacts, customers, suppliers, know-how, trade secrets, marketing
techniques, confidential information, financial and operating models,
promotional methods and other aspects of the business of the Company and its
affiliates have been and are of value to the Company, and have provided and will
hereafter provide the Company with substantial competitive advantages in the
operation of its business, (ii) he has and will continue to have detailed
knowledge and possesses and will possess confidential information concerning the
business and operations of the Company, (iii) the restrictions set forth in this
Section are reasonably necessary to protect the legitimate business interests of
the Company, and (iv) but for Executive's agreement to be governed by the
restrictions set forth in this Section 10, the Company would not have entered
into this Agreement. The Executive hereby further acknowledges that his business
skills are not uniquely suited to businesses of the type conducted by the
Company, and that, if required, he could readily adapt and utilize such skills
in one or more other types of businesses.
b. The Executive shall not, directly or indirectly, for
himself or through or on behalf of any other person or entity:
(i) at any time, divulge, transmit or otherwise
disclose or cause to be divulged, transmitted or otherwise disclosed, any
business contacts, client or customer lists, technology, know-how, trade
secrets, marketing techniques, contracts or other confidential or proprietary
information of the Company of whatever nature, whether now existing or hereafter
created or developed (provided, however, that for purposes hereof, information
shall not be considered to be confidential or proprietary if (A) it is a matter
of common knowledge or public record, (B) it is generally known in the industry,
or (C) such information was already known to the recipient thereof other than by
reason of any breach of any obligation under this Agreement or any other
confidentiality or non-disclosure agreement); and/or
(ii) at any time during the period from the date
hereof through and including the date of the expiration or termination of the
Executive's employment with the Company (the "Restrictive Period"), directly or
indirectly invest, carry on, engage or become involved, either as an employee,
agent, advisor, officer, director, stockholder (excluding ownership of not more
than 3% of the outstanding shares of a publicly held corporation if such
ownership does not involve managerial or operational responsibility), manager,
partner, joint venturer, participant or consultant, in any business enterprise
(other than the Company or its subsidiaries, affiliates, successors or assigns)
which derives any material revenues from the sale, lease, financing or other
transactions in new or used automobiles or other consumer vehicles.
9
<PAGE>
c. The Executive and the Company hereby acknowledge and agree
that, in the event of any breach by the Executive, directly or indirectly, of
the foregoing restrictive covenants, it will be difficult to ascertain the
precise amount of damages that may be suffered by the Company by reason of such
breach; and accordingly, the parties hereby agree that, as liquidated damages
(and not as a penalty) in respect of any such breach, the breaching party or
parties shall be required to pay to the Company, on demand from time to time,
cash amounts equal to any and all gross revenues derived by the breaching party
or parties, directly or indirectly, from any and all violative acts or
activities. The parties hereby agree that the foregoing constitutes a fair and
reasonable estimate of the actual damages that might be suffered by reason of
any breach of this Section 10 by the Executive, and the parties hereby agree to
such liquidated damages in lieu of any and all other measures of damages that
might be asserted in respect of any subject breach.
d. The Executive and the Company hereby further acknowledge
and agree that any breach by the Executive, directly or indirectly, of the
foregoing restrictive covenants will cause the Company irreparable injury for
which there is no adequate remedy at law. Accordingly, the Executive expressly
agrees that, in the event of any such breach or any threatened breach hereunder
by the Executive, directly or indirectly, the Company shall be entitled, in
addition to any and all other remedies available (including but not limited to
the liquidated damages provided for in Section 10c above), to seek and obtain
injunctive and/or other equitable relief to require specific performance of or
prevent, restrain and/or enjoin a breach under the provisions of this Section 10
without the necessity of proof of actual damages and without the necessity of
posting bond. In the event either party does apply for such injunction, the
other party shall not raise as a defense thereto that such applying party has an
adequate remedy at law.
e. In the event of any dispute under or arising out of this
Section 10, the prevailing party in such dispute shall be entitled to recover
from the non-prevailing party or parties, in addition to any damages and/or
other relief that may be awarded, its actual costs and expenses (including
actual attorneys' fees) incurred in connection with prosecuting or defending the
subject dispute.
f. Executive expressly agrees that the existence of any claims
that he has or that he may have against the Company, its affiliates or parent
companies, whether or not arising from this Agreement, shall not constitute a
defense to the enforcement by the Company of this Section 10.
SECTION 11. REASONABLENESS. Executive has carefully read and considered
the provisions of Sections 10 and 11 hereof and, having done so, agrees that the
restrictions set forth in such
10
<PAGE>
sections are fair and reasonable and are reasonably required for the protection
of the legitimate business interests of the Company.
SECTION 12. NO INCONSISTENT OBLIGATIONS. Executive represents and
warrants that no action required of him under this Employment Agreement or any
other agreements or understandings, written or oral, entered into with the
Company will conflict with, breach or otherwise impair any previously existing
agreements or understandings, whether written or oral, into which Executive has
entered with other persons or entities, including agreements with respect to
proprietary information or non-competition.
SECTION 13. NOTICES. Any notice to be given hereunder shall be deemed
to be given when delivered by hand or by overnight courier to the party for whom
the notice is intended, or three (3) days after notice is placed in the U.S.
mail properly addressed to the party for whom notice is intended, at the
following address:
If to the Company: Smart Choice Automotive Group, Inc.
5200 S. Washington Avenue
Titusville, Florida 32780
Attention: Gary Smith
If to Executive: Joseph E. Mohr
5200 S. Washington Avenue
Titusville, Florida 32780
SECTION 14. BINDING EFFECT AND GOVERNING LAW. This Employment Agreement
supersedes all prior understandings and agreements between the parties with
respect to the subject matter hereof. This Employment Agreement shall be binding
upon the legal representatives, heirs, distributees, successors and assigns of
the parties. The Employment Agreement contains the entire agreement of the
parties, and may not be changed orally but only in writing signed by the party
against whom enforcement of any such change is sought. It is agreed that a
waiver by either party of a breach of any provision of this Employment Agreement
shall not be operated or be construed as a waiver of any subsequent breach by
that same party. This Employment Agreement shall be governed by the laws of the
State of Florida.
SECTION 15. SEVERABILITY. In the event that any terms or provisions of
this Employment Agreement shall be held to be invalid or unenforceable by a
court of competent jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remaining terms and provisions
hereof.
SECTION 16. ASSIGNABILITY. The rights or obligations contained in this
Employment Agreement shall not be assigned,
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transferred, or divided in any manner by Executive or Company, without the prior
written consent of the other; PROVIDED, HOWEVER, that nothing in this Section 16
shall preclude: (i) Executive from designating a beneficiary to receive any
benefits hereunder upon his death, or the executors, administrator or other
legal representatives of Executive or his estate from assigning any rights
hereunder to the person(s) entitled thereto; or (ii) the Company's right to
assign this Employment Agreement to a related entity subsequent to any merger,
stock for stock exchange, reorganization, or otherwise as set forth in Section
11f. Notwithstanding the foregoing, this Employment Agreement shall be binding
on any entity which by purchase of assets, merger, or otherwise, becomes a
successor to the business of the Company.
SECTION 17. DIRECTOR & OFFICER LIABILITY INSURANCE. The Company shall
obtain Director & Officer Liability Insurance of a type that is usual and
customary for businesses similar to Company.
SECTION 18. HEADINGS. The headings of paragraph herein are included
solely for convenience of reference and shall not control the meaning or
interpretation and performance of any of the provisions of this Employment
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed the day and year first above written.
COMPANY:
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /illegible/
EXECUTIVE:
/s/ JOSEPH MOHR
-----------------------------------
Joseph E. Mohr
12
Exhibit 10.36.2
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Employment Agreement") is
effective as of February 9, 1998, by and between SMART CHOICE AUTOMOTIVE GROUP,
INC., a Florida corporation ("Company"), and ROBERT J. DOWNING, an individual
("Executive").
W I T N E S S E T H:
WHEREAS, the Executive has extensive experience relating to business
matters; and
WHEREAS, to promote the ongoing business of the Company, the Company
desires to assure itself of the right to the Executive's services from and after
the date hereof, on the terms and conditions of this Agreement; and
WHEREAS, the Executive is willing and able to render his services to
the Company from and after the date hereof, on the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby covenant and agree as follows:
SECTION 1. EMPLOYMENT.
a. Subject to the terms and conditions of this Employment
Agreement, the Company shall retain the Executive as its Senior Vice President
and Chief Legal Officer, and the Executive shall render services to the Company
in an executive capacity. Executive shall perform such duties ordinarily and
customarily performed by a similar executive of a corporation of like type and
size as the Company, and shall perform such other reasonable executive duties as
the Company's President may assign to him from time to time. The Executive may
also be given additional titles, and may be assigned responsibilities on behalf
of certain of the Company's affiliates commensurate with his position with the
Company, without requirement of additional compensation hereunder.
b. Throughout the period of his employment hereunder, the
Executive shall: (i) devote his full business time, attention, knowledge and
skills, faithfully, diligently and to the best of his ability, to the active
performance of his duties and responsibilities hereunder on behalf of the
Company; (ii) observe and carry out such reasonable rules, regulations,
policies, directions and restrictions as may be established from time to time
<PAGE>
by the Company's Board of Directors, including but not limited to the standard
policies and procedures of the Company as in effect from time to time; and (iii)
do such traveling as may reasonably be required in connection with the
performance of such duties and responsibilities. However, the Company shall not
have the right to transfer the Executive's primary location from which he is to
perform services to a location outside of Central Florida without Executive's
prior consent. Notwithstanding the foregoing, it is acknowledged and acceptable
that Executive may continue his legal practice outside the Company from time to
time so long as such work does not interfere with his obligations created by
this Employment Agreement nor create a conflict of interest with the Company.
SECTION 2. INTENTIONALLY OMITTED.
SECTION 3. TERM OF EMPLOYMENT. Subject to prior termination in
accordance with the terms and conditions of this Employment Agreement, the term
of employment of Executive by the Company pursuant to this Employment Agreement
shall be for an initial period of three (3) years (the "Employment Period")
commencing on the date hereof (the "Commencement Date"). The Employment Period
shall automatically renew for additional terms of three years each on each
anniversary of the date hereof hereafter (an "Anniversary Date"), unless either
party gives written notice of termination to the other party not less than one
hundred twenty (120) days prior to such Anniversary Date, in which case the
Employment Period shall not so renew on such Anniversary Date and shall
terminate two years from such Anniversary Date. The term "Employment Period"
shall include the initial Employment Period and any and all successive renewals
thereof.
SECTION 4. COMPANY'S PRINCIPAL PLACE OF BUSINESS. The Company's
principal place of business will be located in the Titusville, Florida area, or
such other area in Florida as may be designated by the Company's Board.
SECTION 5. COMPENSATION. During the Employment Period, subject to all
the terms and conditions of this Employment Agreement and as compensation for
all services to be rendered by Executive under this Employment Agreement, the
Company shall pay to Executive the following:
a. BASE SALARY. The Company shall pay to Executive a base
salary of $125,000 during each year of the initial three (3) year Employment
Period payable in equal periodic installments in accordance with the standard
payroll practices of the Company in effect from time to time, but in no case
less than once a month. During each year of the Employment Period (as renewed
under Section 3 hereof) after the initial three (3) years of the Employment
Period, the Board shall review
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the base salary amount to determine whether or not to grant additional increases
in the base salary amount.
b. BONUS. In addition to the annual base salary, Executive
shall be entitled to receive an annual performance bonus (the "Performance
Bonus") as determined and in an amount set by the Board.
c. COMPANY CAR/CAR ALLOWANCE. During the Employment Period,
the Company shall provide to Executive, at the option of Executive, either (i)
an automobile for Executive's use, or (ii) an automobile allowance of $600 per
month which the Executive shall apply to leasing an automobile(s) for use by
executive and his immediate family. The automobile allowance shall be payable at
the end of each calendar month of the Employment Period. The Company shall pay
all necessary maintenance fees, insurance payments, gasoline expenses and all
other expenses related to the maintenance, operation and upkeep of the
automobile. Upon termination of the obligation of the Company to provide
Benefits pursuant to Section 6 hereof, the Executive shall have the right and
option to purchase the automobile at its then book value for financial statement
purposes (if the automobile is owned by the Company) or, subject to the terms of
the lease, to assume the lease for said automobile (if the automobile is leased
by the Company).
d. STOCK OPTIONS. During the Employment Period, Executive will
be provided with stock options under the Company's stock option plan(s) as
determined by the Company's Board of Directors (other than those granted on the
date hereof) and/or a committee appointed by the Company's Board of Directors in
accordance with the Company's stock option plan(s). Such awards shall be made on
a basis commensurate with other executives of the Company giving due
consideration to gross compensation levels and overall job performance.
SECTION 6. FRINGE BENEFITS. Executive shall be entitled to vacations,
health care benefits, fringe benefits and reimbursement for reasonable
out-of-pocket expense, including but not limited to those hereinafter detailed
(the "Benefits"), in accordance with the Company's practices covering executive
personnel. Unless Executive consents to a different treatment, his eligibility,
participation and benefits under the Benefits will be, and will continue to be,
not less than the Benefits provided to any other employee of Senior Vice
President or higher level. The Company shall use its best efforts to obtain
waivers of waiting periods, if any, applicable to particular benefits. The
benefits shall, at a minimum, include:
a. coverage for Executive and his family, under any major
medical and dental insurance programs and plans, and under any short-term,
long-term or permanent disability programs and plans, which are or may become
generally available to management
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employees of the Company. Notwithstanding the foregoing, Executive shall be
provided at minimum fully-paid health, major medical, dental and life insurance
(equal to $300,000);
b. retirement benefits at such time and on such amounts as are
paid to executives by the Company at such time as the Company institutes a
retirement or 401(k) plan;
c. reimbursement of all properly approved travel and business
related expenses normally paid by the Company for the benefit of its executives,
including, but not limited to, all expenses for the acquisition and use of a
cellular telephone and cellular service of Executive's choice. All expense
reimbursement shall conform to the Company's expense reimbursement policies at
the time the expenses were incurred;
d. four (4) weeks paid vacation per calendar year at any time
or times selected by Executive taking into account the convenience of the
Company. Executive shall give the Board reasonable prior notice of selected
vacation times of one week or more. While unused vacation time shall not be
cumulative from year to year, Executive may carry forward not more than four (4)
weeks of unused vacation time into the following calendar year, PROVIDED,
HOWEVER, that under no circumstances shall Executive be entitled to more than
eight (8) weeks of vacation per calendar year;
e. days of annual sick leave as is usual and customary for a
vice president of a company similar to Company;
f. a holiday on the following days with full pay: New Year's
Day, Easter, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day, and such other holidays as the Company may declare;
g. paid leave and reimbursement of all travel, tuition and
related expenses in attending trade conferences and/or seminars and/or college
or other high level courses acceptable to the Board in its reasonable
discretion;
h. the Company shall purchase director and officer liability
insurance that shall include coverage for Executive, as is normal and customary
for a company of similar size to the Company and, in addition, the Company and
its subsidiaries shall indemnify Executive pursuant to a separate written
agreement for liabilities incurred as an officer to the fullest extent allowed
by Florida law;
i. Executive shall also be provided with a disability income
plan equal to 100% of his base salary, at least 80% of which is funded by
insurance;
j. MOVING EXPENSES. The Company shall reimburse the Executive
for the Executive's reasonable pre-approved expenses up
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(up to $2,000) of moving the Executive's principal residence from the Coral
Gables, Florida area to the area of Titusville, Florida, in accordance with the
Company's expense reimbursement policies.
SECTION 7. TERMINATION.
a. MUTUAL TERMINATION. This Employment Agreement may be
terminated upon mutual written agreement of the Company and the Executive;
b. BY EXECUTIVE. This Employment Agreement may be terminated
at the option of the Executive, upon fourteen (14) days' prior written notice to
the Company, in the event that the Company shall (i) fail to make any payment to
the Executive required to be made under the terms of this Employment Agreement
after payment is due, or (ii) fail to perform any other material covenant or
agreement to be performed by it hereunder or take any action prohibited by this
Employment Agreement, and fail to cure or remedy same within thirty (30) days
after written notice thereof to the Company. In the event that this Employment
Agreement is terminated pursuant to this Section 7b, then at the option of the
Executive on notice to the Company, the full compensation payable to the
Executive for the Employment Period under Section 5a hereof (just as if
Executive had not been so terminated and was continuing to serve as an employee
hereunder for the full term of this Employment Agreement, not including any
renewal or extension thereof) shall be immediately due and payable by the
Company.
c. BY THE COMPANY FOR CAUSE. This Employment Agreement may be
terminated at the option of the Company, upon written notice to the Executive,
"for cause" (as hereinafter defined), or in the event of the "permanent
disability" (as defined and provided for in Section 8) or death of the Executive
as provided for in Section 8. The Company may terminate Executive "without
cause" (as defined in Section 8).
(i) As used herein, the term "for cause" shall mean and be
limited to: (A) any material breach of this Employment Agreement by the
Executive which in any case is not fully corrected within thirty (30) days after
written notice of same from the Company to the Executive; (B) any fraud, theft,
conversion, criminal misconduct, breach of fiduciary duty, or gross and willful
misconduct by the Executive in connection with the performance of his duties and
responsibilities hereunder; (C) habitual breach by the Executive of any of the
material provisions of this Agreement (regardless of any prior cure thereof); or
(D) gross neglect by the Executive of his duties and responsibilities hereunder
which in any case is not fully corrected upon written notice of same from the
Company to the Executive.
d. EFFECT OF TERMINATION FOR CAUSE. In the event of
termination for any of the reasons set forth in this Section 7
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<PAGE>
(except as otherwise provided for hereinafter with respect to "permanent
disability", death or "without cause") Executive shall be entitled to no further
compensation, Base Salary or other Benefits under this Employment Agreement,
except as to that portion of any unpaid Base Salary or other benefits accrued
and earned by him hereunder up to and including the effective date of
termination.
SECTION 8. TERMINATION BY REASON OF DEATH; PERMANENT DISABILITY; OR
WITHOUT CAUSE.
a. If the Company terminates Executive "without cause" which
shall mean for any reason other than as set forth in Section 7c(i), the
Executive terminates this Agreement under Section 7b, or in the event of
Executive's death or "permanent disability" (as defined below), Executive shall
(i) be entitled to receive an amount equal to the full compensation including
Benefits, to which he would otherwise be entitled under this Employment
Agreement for the remainder of the Employment Period in effect as of the date of
termination as well as any and all options awarded, vested or subject to vesting
as of such date (the "Severance Payment") (just as if Executive had not been so
terminated and was continuing to serve as an employee hereunder for the full
Employment Period in effect as of the date of termination) and (ii) be provided,
for the remainder of the Employment Period, with all the insurance and other
benefits set forth in Section 6a hereof (PROVIDED, HOWEVER, to the extent that
the benefits in Section 6a cannot in fact be paid due to the fact that Executive
is not in fact employed by the Company, the Company promptly shall pay Executive
the monetary, after-tax equivalent thereof in U.S. Dollars, without any present
value adjustment). Such Severance Payment shall be payable in a single lump sum
distribution (without any present value adjustment) to Executive or his estate,
as the case may be, no later than ninety (90) days from the effective date of
such termination.
b. PAYMENT IN THE EVENT OF PERMANENT DISABILITY. For purposes
of this Employment Agreement, Executive's "permanent disability" shall be deemed
to have occurred after one hundred twenty (120) days in the aggregate during any
consecutive twelve (12) month period, or after ninety (90) consecutive days,
during which one hundred twenty (120) or ninety (90) days, as the case may be,
Executive, by reason of his physical or mental disability or illness, shall have
been unable to discharge fully his duties under this Employment Agreement. The
date of permanent disability shall be the one hundred twentieth (120th) or
ninetieth (90th) day, as the case may be. In the event Executive shall dispute
that his permanent disability shall have occurred, he shall promptly submit to a
physical examination by a qualified practicing physician mutually selected by
the Company and the Executive and paid for by the Company (and reasonably
acceptable to the Executive). Unless such physician shall issue a written
statement to the effect that in his opinion, based on his
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diagnosis, Executive is capable of resuming his employment and devoting his full
time and energy to discharging his duties within ten (10) days after the date of
such statement, such permanent disability shall be deemed to have occurred
without further dispute by Executive or Company. Notwithstanding the foregoing,
the time periods set forth in this Subsection b shall be modified as necessary
so that they match the time periods set forth in the appropriate disability
insurance policy such that there is no gap in payment of disability insurance
benefits and Executive's compensation hereunder.
SECTION 9. CHANGE OF CONTROL.
a. Notwithstanding anything herein to the contrary,
specifically including Section 7 hereof, in the event that year following a
"Change of Control" of the Company (as defined below), Executive's employment
with the Company is either: (i) terminated by the Company, or (ii) terminated by
Executive because his regular duties hereunder are materially reduced,
diminished or modified (the position and duties of the Executive hereunder being
material to such employment), then (subject to Section 9c that provides for a
lump sum cash payment) the Company shall pay to Executive for a period of
thirty-six (36) full calendar months from the date of termination, (A) the Base
Salary in effect at the time of the termination of employment (in the same
installments as prior to termination), (B) the Benefits to which he is entitled
hereunder, and (C) when and as due, any other amounts to which the Executive is
entitled under any compensation plan of the Company, including any Performance
Bonuses (PROVIDED, HOWEVER, that to the extent that the Benefits cannot in fact
be provided or paid due to the fact that Executive is not in fact employed by
the Company, the Company shall pay to Executive the monetary, after tax
equivalent thereof, in U.S. dollars without any present value adjustment).
During the period that the Company is required to make payments to the Executive
pursuant to this Section 9a, or for a period of twelve (12) months after
termination of employment in the event the Executive elects a lump sum cash
payment hereunder, the Company shall maintain in full force and effect for the
continued benefit of the Executive, all employee benefit plans and programs in
which the Executive was entitled to participate immediately prior to the date of
termination, including without limitation, all Benefits provided pursuant to
Section 6 hereof; provided that the Executive's continued participation is
possible under the general terms and provisions of such plans and programs. In
the event that the Executive's participation in such plan or program is barred,
the Company shall arrange to provide the Executive with benefits substantially
similar to those which the Executive would otherwise have been entitled to
receive under such plans and programs from which his continued participation is
barred.
b. "Change of Control" shall be deemed to have occurred when:
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(i) securities of the Company representing 25% or
more of the combined voting power of the Company's then outstanding voting
securities are acquired by a person or entity which is not a wholly-owned
subsidiary of the Company or any of its affiliates;
(ii) a merger or consolidation is consummated in
which the Company is a constituent
corporation and which results in less than 50% of the outstanding voting
securities of the surviving or resulting entity being owned by the then existing
stockholders of the Company;
(iii) a sale or other disposition or transaction is
consummated by the Company of more than 50% of the Company's assets to a person
or entity which is not a wholly-owned subsidiary of the Company or any of its
affiliates; or
(iv) during any period of two consecutive years,
individuals who, at the beginning of such period, constituted the Board cease,
for any reason, to constitute at least a majority thereof.
c. In lieu of payments in installments hereunder, within
thirty (30) days of termination of employment, the Executive may, at his sole
option, elect to have all amounts to which he is entitled hereunder, be paid in
a lump sum cash payment. The lump sum cash payment provided herein shall be due
within five (5) days of notice from the Executive of the election to receive a
lump sum cash payment pursuant to this subsection.
d. It is the intention of the Company and the Executive that
no portion of any payment or benefit paid or provided under this Section or any
other payment or benefit under this Agreement, or payments to or for the
Executive under any other agreement or plan shall be deemed to be an excess
parachute payment as defined in Section 280G of the Internal Revenue Code of
1986 as amended (the "Code") or any successor provision. However, it is
understood that, depending upon elections hereunder made by the Executive, the
present value of all payments made under this Section and any other payment to
or for the benefit of the Executive in the nature of compensation, the receipt
of which is contingent on a Change of Control of the Company and to which
Section 280G of the Code or any successor provision thereto may apply, might
exceed the maximum amounts which the Executive may receive without becoming
subject to the tax imposed by Section 4999 of the Code or any successor
provision. In the event that the Executive becomes subject to a tax imposed by
Section 4999 of the Code or any successor provision as a result of the election
of the Executive to receive a lump sum cash payment hereunder or otherwise, the
Company shall pay to the Executive an amount equal to any excise tax imposed
upon the Executive as a result of such payment (in addition to any other payment
or benefit hereunder).
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SECTION 10. RESTRICTIVE COVENANTS.
a. The Executive hereby acknowledges and agrees that (i) the
business contacts, customers, suppliers, know-how, trade secrets, marketing
techniques, confidential information, financial and operating models,
promotional methods and other aspects of the business of the Company and its
affiliates have been and are of value to the Company, and have provided and will
hereafter provide the Company with substantial competitive advantages in the
operation of its business, (ii) he has and will continue to have detailed
knowledge and possesses and will possess confidential information concerning the
business and operations of the Company, (iii) the restrictions set forth in this
Section are reasonably necessary to protect the legitimate business interests of
the Company, and (iv) but for Executive's agreement to be governed by the
restrictions set forth in this Section 10, the Company would not have entered
into this Agreement. The Executive hereby further acknowledges that his business
skills are not uniquely suited to businesses of the type conducted by the
Company, and that, if required, he could readily adapt and utilize such skills
in one or more other types of businesses.
b. The Executive shall not, directly or indirectly, for
himself or through or on behalf of any other person or entity:
(i) at any time, divulge, transmit or otherwise
disclose or cause to be divulged, transmitted or otherwise disclosed, any
business contacts, client or customer lists, technology, know-how, trade
secrets, marketing techniques, contracts or other confidential or proprietary
information of the Company of whatever nature, whether now existing or hereafter
created or developed (provided, however, that for purposes hereof, information
shall not be considered to be confidential or proprietary if (A) it is a matter
of common knowledge or public record, (B) it is generally known in the industry,
or (C) such information was already known to the recipient thereof other than by
reason of any breach of any obligation under this Agreement or any other
confidentiality or non-disclosure agreement); and/or
(ii) at any time during the period from the date
hereof through and including the date of the expiration or termination of the
Executive's employment with the Company (the "Restrictive Period"), directly or
indirectly invest, carry on, engage or become involved, either as an employee,
agent, advisor, officer, director, stockholder (excluding ownership of not more
than 3% of the outstanding shares of a publicly held corporation if such
ownership does not involve managerial or operational responsibility), manager,
partner, joint venturer, participant or consultant, in any business enterprise
(other than the Company or its subsidiaries, affiliates, successors or assigns)
which derives any material revenues from the sale, lease, financing or other
transactions in new or used automobiles or other consumer vehicles.
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c. The Executive and the Company hereby acknowledge and agree
that, in the event of any breach by the Executive, directly or indirectly, of
the foregoing restrictive covenants, it will be difficult to ascertain the
precise amount of damages that may be suffered by the Company by reason of such
breach; and accordingly, the parties hereby agree that, as liquidated damages
(and not as a penalty) in respect of any such breach, the breaching party or
parties shall be required to pay to the Company, on demand from time to time,
cash amounts equal to any and all gross revenues derived by the breaching party
or parties, directly or indirectly, from any and all violative acts or
activities. The parties hereby agree that the foregoing constitutes a fair and
reasonable estimate of the actual damages that might be suffered by reason of
any breach of this Section 10 by the Executive, and the parties hereby agree to
such liquidated damages in lieu of any and all other measures of damages that
might be asserted in respect of any subject breach.
d. The Executive and the Company hereby further acknowledge
and agree that any breach by the Executive, directly or indirectly, of the
foregoing restrictive covenants will cause the Company irreparable injury for
which there is no adequate remedy at law. Accordingly, the Executive expressly
agrees that, in the event of any such breach or any threatened breach hereunder
by the Executive, directly or indirectly, the Company shall be entitled, in
addition to any and all other remedies available (including but not limited to
the liquidated damages provided for in Section 10c above), to seek and obtain
injunctive and/or other equitable relief to require specific performance of or
prevent, restrain and/or enjoin a breach under the provisions of this Section 10
without the necessity of proof of actual damages and without the necessity of
posting bond. In the event either party does apply for such injunction, the
other party shall not raise as a defense thereto that such applying party has an
adequate remedy at law.
e. In the event of any dispute under or arising out of this
Section 10, the prevailing party in such dispute shall be entitled to recover
from the non-prevailing party or parties, in addition to any damages and/or
other relief that may be awarded, its actual costs and expenses (including
actual attorneys' fees) incurred in connection with prosecuting or defending the
subject dispute.
f. Executive expressly agrees that the existence of any claims
that he has or that he may have against the Company, its affiliates or parent
companies, whether or not arising from this Agreement, shall not constitute a
defense to the enforcement by the Company of this Section 10.
SECTION 11. REASONABLENESS. Executive has carefully read and considered
the provisions of Sections 10 and 11 hereof and, having done so, agrees that the
restrictions set forth in such
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sections are fair and reasonable and are reasonably required for the protection
of the legitimate business interests of the Company.
SECTION 12. NO INCONSISTENT OBLIGATIONS. Executive represents and
warrants that no action required of him under this Employment Agreement or any
other agreements or understandings, written or oral, entered into with the
Company will conflict with, breach or otherwise impair any previously existing
agreements or understandings, whether written or oral, into which Executive has
entered with other persons or entities, including agreements with respect to
proprietary information or non-competition.
SECTION 13. NOTICES. Any notice to be given hereunder shall be deemed
to be given when delivered by hand or by overnight courier to the party for whom
the notice is intended, or three (3) days after notice is placed in the U.S.
mail properly addressed to the party for whom notice is intended, at the
following address:
If to the Company: Smart Choice Automotive Group, Inc.
5200 S. Washington Avenue
Titusville, Florida 32780
Attention: Gary Smith
If to Executive: Robert J. Downing
5200 S. Washington Avenue
Titusville, Florida 32780
SECTION 14. BINDING EFFECT AND GOVERNING LAW. This Employment Agreement
supersedes all prior understandings and agreements between the parties with
respect to the subject matter hereof. This Employment Agreement shall be binding
upon the legal representatives, heirs, distributees, successors and assigns of
the parties. The Employment Agreement contains the entire agreement of the
parties, and may not be changed orally but only in writing signed by the party
against whom enforcement of any such change is sought. It is agreed that a
waiver by either party of a breach of any provision of this Employment Agreement
shall not be operated or be construed as a waiver of any subsequent breach by
that same party. This Employment Agreement shall be governed by the laws of the
State of Florida.
SECTION 15. SEVERABILITY. In the event that any terms or provisions of
this Employment Agreement shall be held to be invalid or unenforceable by a
court of competent jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remaining terms and provisions
hereof.
SECTION 16. ASSIGNABILITY. The rights or obligations contained in this
Employment Agreement shall not be assigned,
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transferred, or divided in any manner by Executive or Company, without the prior
written consent of the other; PROVIDED, HOWEVER, that nothing in this Section 16
shall preclude: (i) Executive from designating a beneficiary to receive any
benefits hereunder upon his death, or the executors, administrator or other
legal representatives of Executive or his estate from assigning any rights
hereunder to the person(s) entitled thereto; or (ii) the Company's right to
assign this Employment Agreement to a related entity subsequent to any merger,
stock for stock exchange, reorganization, or otherwise as set forth in Section
11f. Notwithstanding the foregoing, this Employment Agreement shall be binding
on any entity which by purchase of assets, merger, or otherwise, becomes a
successor to the business of the Company.
SECTION 17. DIRECTOR & OFFICER LIABILITY INSURANCE. The Company shall
obtain Director & Officer Liability Insurance of a type that is usual and
customary for businesses similar to Company.
SECTION 18. HEADINGS. The headings of paragraph herein are included
solely for convenience of reference and shall not control the meaning or
interpretation and performance of any of the provisions of this Employment
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed the day and year first above written.
COMPANY:
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /illegible/
--------------------------------
EXECUTIVE:
/s/ Robert J. Downing
-----------------------------------
Robert J. Downing
THE OPTION AND COMMON STOCK REFERRED TO HEREIN HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, THE FLORIDA SECURITIES ACT, AS AMENDED, OR THE LAWS
OF ANY OTHER STATE, AND ARE BEING GRANTED PURSUANT TO EXEMPTIONS FROM
REGISTRATION UNDER THAT ACT AND SUCH STATE LAWS. OPTIONS OR SHARES OF STOCK
ACQUIRED BY OPTIONEE MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE OPTIONS OR SHARES OF STOCK UNDER THAT
ACT OR SUCH STATE LAWS AS MAY BE APPLICABLE, OR PURSUANT TO EXEMPTIONS FROM SAID
REGISTRATION UNDER SAID ACT AND SAID LAWS. FURTHER, THIS AGREEMENT CONTAINS
SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY OF THE OPTIONS AND SHARES OF STOCK.
SMART CHOICE AUTOMOTIVE GROUP, INC.
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement") effective as of the 29th day of
July, 1997, by and between Smart Choice Automotive Group, Inc., a Florida
corporation (the "Company") and Joseph A. Alvarez, an individual (the
"Optionee").
WITNESSETH:
WHEREAS, the Company believes that the attraction and retention of key
employees such as Optionee is essential to the Company's growth and success; and
WHEREAS, in order to induce Optionee to serve as an Employee of the
Company, the Company hereby provides Optionee with the following additional
incentives, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby covenant and agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth in
this Agreement, the Company hereby grants to Optionee, the option (the "Option")
to purchase 25,000 shares (the "Option Shares")of the Company's common stock,
par value $.01 per share (the "Common Stock") at the exercise price of $4.50 per
share (the "Option Price"). The Option shall be exercisable, in whole or in
part, for a period of five (5) years (the "Exercise Period"), which period shall
commence on the date of execution of this Agreement (the "Execution Date"). The
Option shall be fully vested and exercisable as to all the Option Shares on the
Execution Date for the entire Exercise Period.
2. TERMINATION OF THE OPTION.
(a) The Option shall terminate and no longer be exercisable upon
the expiration of the Exercise Period set forth above.
<PAGE>
(b) Termination in the event of death, permanent disability or
termination of status as an employee.
(i) If Optionee dies while an employee of the Company or
within three (3) months after termination of his status as an employee because
of his permanent disability (as defined below), his Option may be exercised, to
the extent that the Optionee shall have been entitled to do so on the date of
his death, by the person or persons to whom the Optionee's right under the
Option passes by will or applicable law, or if no such person has such right, by
his executors or administrators, at any time or from time to time, but not later
than the expiration date specified in Section 1 or three (3) months after the
appointment or qualification of an executor of Optionee's estate, whichever is
earlier.
(ii) If Optionee's status as an employee of the Company shall
terminate because of his permanent disability, he may exercise his Option to the
extent that he shall have been entitled to do so at the date of such
termination, at any time or from time to time, but not later than the expiration
date specified in Section 1 or three (3) months after termination of employment,
whichever date is earlier.
(iii) If Optionee's status as an employee of the Company shall
terminate involuntarily other than for cause, death, or total disability, all
rights to exercise his Option, to the extent that he shall have been entitled to
do so at the date of such termination, shall terminate at the expiration date
specified in Section 1 or three months after termination of employment,
whichever date is earlier.
(iv) If Optionee's status as an employee of the Company shall
terminate for cause (as defined below), all rights to exercise his Options shall
terminate no later than sixty (60) days after such termination.
(c) "TERMINATION FOR CAUSE" shall be defined as set forth in the
Employment Agreement between Company and Optionee. "PERMANENT DISABILITY" shall
be defined as set forth in the Employment Agreement between Company and
Optionee.
3. EXERCISE. Optionee (or in the case of Optionee's death or
disability, the legal representative of Optionee) may exercise the Option only
by giving timely notice to the Company of exercise of an Option prior to the
expiration or termination of the Exercise Period. Such notice shall state the
number of shares to be purchased which are attributable to the Option which is
being exercised, and shall be accompanied by the full purchase price for such
shares, payable in U.S. dollars by certified check or bank draft, unless the
Company shall permit payment of the purchase price in another manner.
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<PAGE>
4. DELIVERY OF OPTION SHARES. As soon as reasonably practicable after
receipt by the Company of a timely notice of exercise of any of the Options
hereunder, and payment therefor, the Company shall issue to Optionee or his
legal representative(s), as the case may be, one or more certificate(s) for the
number of shares with respect to which the Options shall have been so exercised.
5. RESTRICTIONS UPON TRANSFER.
(a) Neither the Optionee nor any other person or entity shall
have any interest in any specific asset or assets or stock of the Company by
reason of the granting of the Options. Any attempt to assign or to transfer this
Agreement or the Options granted hereunder, whether voluntarily or
involuntarily, by operation of law or otherwise, shall be of no further force or
effect and no interest or right hereunder shall vest in any other person.
Nothing in this Agreement shall be deemed to limit Optionee's right to transfer
this Agreement or the Option Shares by will or in accordance with the laws of
devise, descent and distribution.
(b) Nothing in this Agreement shall be construed in limitation
of any restrictions upon transfer of any of the Option Shares contained
elsewhere, including any restrictions that may be contained in the Certificate
of Incorporation or the By-Laws of the Company.
(c) Nothing in this Agreement shall be construed as a
modification of any existing agreements with respect to the gift, sale,
purchase, transfer, pledge, hypothecation, or other disposition or encumbrance
of the Option Shares between the parties to this Agreement, or between or among
either or both of the parties to this Agreement and one or more persons not
party to this Agreement.
(d) The Optionee acknowledges that the certificate evidencing
ownership of the Common Stock will be stamped or otherwise imprinted on the face
thereof with a legend in substantially the following form:
"The shares represented by this Certificate have not been
registered under the federal Securities Act of 1933, as
amended (the "Act") or any state securities act. No sale,
offer to sell or transfer of the shares shall be made unless a
registration statement under the Act, and any applicable state
statute, with respect to the shares is then in effect or an
exemption from the registration requirements of such Act or
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<PAGE>
state statute is then in fact applicable to the shares."
(e) Any legend endorsed on a certificate pursuant to Section
5(d) hereof and the stop transfer instructions with respect to the Option Shares
shall be removed and the Company shall issue a certificate without such legend
to the holder thereof if such Option Shares are registered under the Securities
Act and a prospectus meeting the requirements of Section 10 of the Securities
Act is available.
(f) The restrictions described in any legend endorsed on a
certificate pursuant to Section 5(d) hereof shall be removed at such time as
permitted by Rule 144(k) promulgated under the Securities Act.
(g) (1) If the Company at any time elects or proposes to
register any of its shares of Common Stock (the "Registration Shares") under the
1933 Act on forms S-1, S-2, S-3 or SB-1, SB-2 or any other form in effect at
such time for the registration of securities to be sold for cash (a
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") pursuant to which shares of Common Stock owned by any other shareholder
of the Company are to be registered, the Company shall give prompt written
notice (the "Registration Notice") to the Optionee of its intention to register
the Registration Shares.
(2) Within fifteen (15) days after the Registration
Notice shall have been given to the Optionee, the Optionee may give written
notice to the Company of exercise of all, or a portion of the Option (the
"Optionee Notice"), accompanied by payment of the Option Price in accordance
with Section 1 hereof, stating the number of shares Optionee elects to be
included among the Registration Shares (which number may include shares held by
Optionee as a result of prior exercises of this Option, or otherwise) (the
"Optionee's Included Shares").
(3) The Company shall use reasonable efforts to register
the Optionee's Included Shares under the Securities Act of 1933 and any state
securities acts, if necessary, designated by the Optionee in the Optionee
Notice. The Company shall have the right to withdraw and discontinue
registration of the Optionee's Included Shares at any time prior to the
effective date of such Registration Statement if the registration of the
Registration Shares is withdrawn or discontinued.
(4) The Company shall not be required to include any of
the Optionee's Included Shares in any Registration Statement unless the Optionee
agrees, if so requested by the Company, to: (i) offer and sell the Optionee's
Included Shares to or through an underwriter selected by the Company and, to the
extent possible, on substantially the same terms and conditions under which the
Registration Shares are to be offered and sold;
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<PAGE>
(ii) comply with any arrangements, terms and conditions with respect to the
offer and sale of the Optionee's Included Shares to which the Company may be
required to agree; and (iii) enter into any underwriting agreement containing
customary terms and conditions.
(5) If the offering of the Registration Shares by the
Company is, in whole or in part, an underwritten public offering, and if the
managing underwriter determines and advises the Company in writing that the
inclusion in such Registration Statement of all of the Shares, together with the
stock of other persons who have a right to include their stock in the
Registration Statement (collectively referred to as the "Aggregate Shares"),
would adversely affect the marketability of the offering of the Registration
Shares, then the Optionee and such other holders shall be entitled to register
the portion of such number of Aggregate Shares as the managing underwriter
determines may be included without such adverse effects (collectively,
"Aggregate Underwriter Shares"), subject to the terms, exceptions and conditions
of this Section 5(g). The number of Aggregate Underwriter Shares which the
Optionee shall be entitled to register shall be equal to the number of Aggregate
Underwriter Shares multiplied by a fraction, the numerator of which is the
number of Optionee's Included Shares and the denominator of which is the number
of Aggregate Shares.
(6) The Company shall bear all costs and expenses of
registration of the Registration Shares, including Optionee's Included Shares.
(7) It shall be a condition precedent to the Company's
obligation to register any of Optionee's Included Shares that the Optionee shall
provide the Company with all information and documents, and shall execute,
acknowledge, seal and deliver all documents reasonably necessary, to enable the
Company to comply with the 1933 Act, the State Acts, and all applicable laws,
rules and regulations of the SEC or of any state securities law authorities.
6. RIGHTS AS STOCKHOLDER.
(a) Optionee shall have none of the rights of a stockholder with
respect to any of the Option Shares until any Option granted herein shall have
been exercised.
(b) Nothing in this Agreement shall affect in any way the rights
or powers of the Company, or any parent or subsidiary Company, or any of the
directors or stockholders of the Company, to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or business, or any merger or consolidation of the
Company, or any issue of bonds, debentures, preferred or prior preference stocks
or other classes of securities ahead of or
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<PAGE>
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of the
Company's assets or business, or any grant of options to purchase securities of
the Company otherwise than under this Agreement, or to effect any other
corporate act or proceeding, whether of a similar character or otherwise.
(c) (i) If the outstanding shares of Common Stock of the Company
are increased, decreased, changed into or exchanged for a different number or
kind of shares or securities of the Company or of another corporation or entity
or shares of a different par value or without par value through a
recapitalization, stock dividend, stock split, reverse stock split or a
reorganization under which the Company is not the surviving entity, an
appropriate or proportionate adjustment shall be made in the number and/or kind
of securities allocated to the Options, without change in the aggregate Option
Price applicable to the unexercised portion of the outstanding Option but with a
corresponding adjustment in the Option Price for each share or other unit of any
security covered by the Option. No adjustment shall occur under this Section 6
by virtue of the fact that the Company purchases or sells Common Stock or any
securities of the Company at its fair market value (other than pursuant to
compensatory Stock Options) for cash.
(ii) In case the Company shall issue rights or warrants to
all holders of its shares of Common Stock entitling them to subscribe for or to
purchase shares of Common Stock at a price per share which, when added to the
amount of consideration received or receivable by the Company for such rights or
warrants is less than the Current Market Price (as hereinafter defined) per
share at the record date, the number of Option Shares purchasable upon the
exercise of the Option shall be increased so that thereafter, until further
adjusted, this Option shall entitle the Optionee to purchase an additional
number of shares determined as if the Option had been fully exercised and the
Optionee were a record holder entitled to receive such rights or warrants at an
option price which is the same as the per share consideration payable pursuant
to such rights or warrants. Such adjustment shall be made whenever such rights
or warrants are issued, but shall also be effective retroactively as to portions
of the Option exercised between the record date for the determination of
shareholders entitled to receive such rights or warrants and the date such
rights or warrants are issued.
(iii) For the purpose of any computation under Section
6(c)(ii), the Current Market Price per share of Common Stock at any date shall
be (i) if the shares of Common Stock are listed on any national securities
exchange, the average of the daily closing prices for the fifteen (15)
consecutive business days commencing twenty (20) business days before the date
of determination (the "Trading Period"); (ii) if the shares of
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<PAGE>
Common Stock are not listed on any national securities exchange but are quoted
or reported on the National Association of Securities Dealers, Inc., Automated
Quotation System ("NASDAQ"), the last quoted price or, if not quoted, the
average of the high bid and low asked price as reported by NASDAQ for the
Trading Period, or the daily closing prices for the Trading Period as reported
by NASDAQ, as the case may be; and (iii) if the shares of Common Stock are
neither listed on any national securities exchange nor quoted or reported on
NASDAQ, the higher of (x) the Exercise Price then in effect, or (y) the tangible
book value per share of Common Stock as of the end of the Company's immediately
preceding fiscal year.
(d) In the event of the proposed dissolution or liquidation of
the Company, the Company shall cause the Board of Directors of the Company to
notify the Optionee at least thirty (30)days prior to such proposed action. To
the extent it has not been exercised during such thirty (30) day period, the
Options will terminate as to any unexercised portion thereof immediately prior
to the consummation of such proposed action.
(e) In lieu of paying in cash any withholding tax obligation
imposed on any exercise of an Option hereunder, Optionee may elect to have the
actual number of shares issuable upon exercise of the Option reduced by the
smallest number of whole shares of Common Stock which, when multiplied by the
fair market value of the Common Stock as of the date the Option is exercised, is
sufficient to satisfy the amount of the withholding tax obligations imposed by
reason of the exercise hereof (the "Withholding Elections"). Optionee may make a
Withholding Election only if all of the following conditions are met:
(i) the Withholding Election must be made on or prior
to the date on which the amount of tax required to be withheld is determined
(the "Tax Date") by executing and delivering to the Company a properly completed
Notice of Withholding Election, in substantially the form of Exhibit "A"
attached hereto;
(ii) any Withholding Election made will be
irrevocable; and
(iii) if Optionee is required to file beneficial
ownership reports pursuant to Subsection (a) of Section 16 of the Securities
Exchange Act of 1934, at any time during the period in which the Option is
exercisable, then the Withholding Election must be made either (A) at least six
(6) months prior to the Tax Date applicable to the exercise of the Option, or
(B) prior to the Tax Date and in any ten day period beginning on the third day
following the release of the Company's quarterly or annual summary statement of
sales and earnings.
7
<PAGE>
7. REPRESENTATIONS. Optionee will acquire Optionee's shares for
Optionee's own account, for investment only and without a view to resale or
distribution except in compliance with the Securities Act of 1933, as amended,
("Act") and any applicable state securities laws, and upon the acquisition of
the shares, Optionee will enter into such written representations, warranties
and agreements as the Company may request in order to comply with the Act, any
applicable state securities laws and this Option Agreement. The Company
represents and warrants that it owns sufficient Common Stock to issue the Option
Shares to the Optionee on exercise of the Option and agrees that it will reserve
sufficient Common Stock to issue the Option Shares to the Optionee on exercise
of the Option.
8. TAX CONSEQUENCES AND WITHHOLDING. Optionee agrees that the Company
is not responsible for the tax consequences to Optionee of the granting of the
Options or its subsequent exercise by Optionee, and that it is the
responsibility of Optionee to consult with Optionee's personal tax advisor
regarding all matters with respect to the tax consequences of the granting of
the Options and its exercise by Optionee.
9. NON-EMPLOYMENT. Nothing in this Agreement, shall confer on Optionee,
nor imply in favor of Optionee any right to continue as a contractor to or
employee of the Company or of any parent or subsidiary company of the Company or
prevent, or in any way impair the right of the stockholders or Board to
terminate Optionee's relationship with the Company pursuant to the Employment
Agreement.
10. GENERAL PROVISIONS.
(a) AGREEMENT TO BE BOUND BY CONTRACT. This Agreement shall be
binding not only on the parties hereto, but also upon their heirs, executors,
administrators, successors or assigns. The parties hereto agree for themselves
and their heirs, executors, administrators, successors or assigns, to execute
any instruments and to perform any acts which may be necessary or proper to
carry out the purposes of this Agreement.
(b) AMENDMENT OR ALTERATION. This Agreement may be altered or
amended, in whole or in part, at any time, only by a written instrument setting
forth such changes signed by all parties hereto.
(c) WAIVER. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
(d) NOTICES. Any notices permitted or required hereunder shall
be delivered to the parties personally, by telecopier, or by United States Mail,
with postage prepaid, certified
8
<PAGE>
or registered, return receipt requested, addressed to the respective parties at
the following addresses and telecopier numbers:
If to Company: Smart Choice Automotive Group, Inc.
5200 South Washington Avenue
Titusville, Florida 32780
Attention: James Neal Hutchinson, Jr.
Corporate Counsel
Telecopier: (407) 383-8822
If to Optionee: At the address and telecopier
number for the Optionee on file
with the Company
The date of service of any notice or communication hereunder shall be the date
of the hand delivery or receipt of telecopy, or three (3) days after the
mailing, if mailed by certified mail, return receipt requested. A party whose
address or telecopy number changes shall notify the other party, in accordance
with this Section, within five (5) business days of such change (the "Changed
Party"). Failure of the Changed Party to notify the other party of such a change
shall constitute a waiver of any right to receive notice under this Agreement by
the Changed Party.
(e) VALIDITY. In the event that any provision of this Agreement
shall be held to be invalid, the same shall not affect, in any respect, the
validity of the remainder of this Agreement.
(f) INTEGRATED AGREEMENT. This Agreement and the Employment
Agreement and all agreements executed in accordance with the terms hereof
constitutes the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and there are no agreements,
understandings, restrictions, representations or warranties among the parties
other than those set forth herein.
(g) ATTORNEYS' FEES. In the event any litigation including any
appeals is instituted in connection with the breach, enforcement or
interpretation of this Agreement, including, without limitation, any action
seeking declaratory relief, equitable relief, injunctive relief, or damages, the
prevailing party shall be entitled to recover from the non-prevailing party all
costs, expenses and attorneys' fees incurred in connection therewith, including
any costs of collection.
(h) STATE LAW GOVERNING CONTRACTS. This Agreement shall be
governed by the laws of the State of Florida.
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<PAGE>
(i) NO CONSTRUCTION AGAINST DRAFTING PARTY. Each party to this
Agreement expressly recognizes that it results from a negotiated process in
which each party was given the opportunity to consult with counsel and
contributed to the drafting of this Agreement. Given this fact, no legal or
other presumptions against the party drafting this Agreement concerning its
construction, interpretation or otherwise shall accrue to the benefit of any
party to this Agreement and each party expressly waives the right to assert such
a presumption in any proceedings or disputes connected with, arising out of, or
involving this Agreement.
IN WITNESS WHEREOF, the parties have executed this Stock Option Agreement
under seal as of the date first above written.
THE COMPANY:
SMART CHOICE AUTOMOTIVE GROUP,INC.
By:______________________________
THE OPTIONEE:
----------------------------------
Joseph A. Alvarez
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<PAGE>
EXHIBIT A
NOTICE OF WITHHOLDING ELECTION
TO: Smart Choice Automotive Group, Inc.
FROM: Optionee (or other party specified in (2) below)
RE: Withholding Election
* * * * * * * * * * * * * * *
This election relates to the Option identified in Paragraph 3 below. I hereby
certify that:
(1) My correct name and social security number and my current
address are set forth at the end of this document.
(2) I am (check one, whichever is applicable).
[ ] the original recipient of the Option.
[ ] the legal representative of the estate of the
original recipient of the Option.
[ ] a legatee of the original recipient of the Option.
[ ] the legal guardian of the original recipient of the
Option.
(3) The Option pursuant to which this election is made in the name
of ____________________________ for __________ shares of
Common Stock and dated __________________ (the "Option"). This
election relates to ___________ shares of Common Stock
issuable upon whole or partial exercise(s) of the Option (the
"Option Shares"); provided that the numbers set forth above
shall be deemed changed as appropriate to reflect stock splits
and other adjustments contemplated by the applicable
provisions of the Option.
(4) In connection with any future exercise of the Option with
respect to the Option Shares, I hereby elect to have certain
of the shares issuable pursuant to the exercise withheld by
the Company for the purpose of having the value of the shares
applied to pay federal, state, and local, if any, taxes
arising from the exercise. The shares to be withheld shall
have, as of the Tax Date (as defined in the Option Agreement
applicable to the Option (the "Option Agreement")), applicable
to the exercise, a fair market value equal to the minimum
statutory tax withholding requirement
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<PAGE>
under federal, state, and local law in connection with the
exercise.
(5) This Withholding Election is made prior to the Tax Date and is
otherwise timely made pursuant to the Option Agreement.
(6) I further understand that the Company shall withhold from the
Option Shares a number of shares of Common Stock having the
value specified in Paragraph 4 above.
(7) Capitalized terms used in this Notice of Withholding Election
without definition shall have the meanings given to them in
the Option Agreement.
Dated: ____________________ ___________________________________
Legal Signature
___________________________ ___________________________________
Social Security Number Name (Printed)
___________________________________
Street Address
___________________________________
City, State, Zip Code
12
THE OPTION AND COMMON STOCK REFERRED TO HEREIN HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, THE FLORIDA SECURITIES ACT, AS AMENDED, OR THE LAWS
OF ANY OTHER STATE, AND ARE BEING GRANTED PURSUANT TO EXEMPTIONS FROM
REGISTRATION UNDER THAT ACT AND SUCH STATE LAWS. OPTIONS OR SHARES OF STOCK
ACQUIRED BY OPTIONEE MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE OPTIONS OR SHARES OF STOCK UNDER THAT
ACT OR SUCH STATE LAWS AS MAY BE APPLICABLE, OR PURSUANT TO EXEMPTIONS FROM SAID
REGISTRATION UNDER SAID ACT AND SAID LAWS. FURTHER, THIS AGREEMENT CONTAINS
SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY OF THE OPTIONS AND SHARES OF STOCK.
SMART CHOICE AUTOMOTIVE GROUP, INC.
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement") effective as of the 31st day
of December, 1997, by and among the CONLAN-SMART CHOICE HOLDINGS MANAGEMENT
TRUST under agreement dated January 29, 1997, Thomas E. Conlan, settlor, and
Gary R. Smith and Gerald C. Parker, trustees, and the PARKER-SMART CHOICE
HOLDINGS MANAGEMENT TRUST under agreement dated January 29, 1997, Gerald C.
Parker, settlor, and Gary R. Smith and Gerald C. Parker, trustees (such trusts
are referred to herein as the "Grantors"), JOSEPH E. MOHR, an individual, (the
"Optionee") and SMART CHOICE AUTOMOTIVE GROUP, INC., a Florida corporation (the
"Company").
WITNESSETH:
WHEREAS, the Grantors and the Company believe that the attraction and
retention of key employees such as Optionee is essential to the Company's growth
and success; and
WHEREAS, in order to induce Optionee to serve as an Employee of the
Company, the Grantors hereby provide Optionee with the following additional
incentives, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby covenant and agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth in
this Agreement, the Grantors hereby grant to Optionee, the option to purchase a
total of 12,025 shares (the "Option Shares")of the Company's common stock, par
value $.01 per share (the "Common Stock"), 6,012.5 shares from each Grantor (the
"Option"), at the exercise price of $2.00 per share (the "Option Price"). The
Option shall be exercisable, in whole or in part, for a period of five (5) years
(the "Exercise Period"), which period shall commence on the date of execution of
this Agreement (the "Execution Date"). The Option shall be fully vested and
exercisable as to all the Option Shares on the Execution Date for the entire
Exercise Period. None of the Options are intended
<PAGE>
to be "incentive stock options" as defined in Section 422(b) of the Internal
Revenue Code.
2. TERMINATION OF THE OPTION.
(a) The Option shall terminate and no longer be exercisable upon the
expiration of the Exercise Period set forth above.
(b) Termination in the event of death, permanent disability or
termination of status as an employee.
(i) If Optionee dies while an employee of the Company or
within three (3) months after termination of his status as an employee because
of his permanent disability (as defined below), his Option may be exercised, to
the extent that the Optionee shall have been entitled to do so on the date of
his death, by the person or persons to whom the Optionee's right under the
Option passes by will or applicable law, or if no such person has such right, by
his executors or administrators, at any time or from time to time, but not later
than the expiration date specified in Section 1 or three (3) months after the
appointment or qualification of an executor of Optionee's estate, whichever is
earlier.
(ii) If Optionee's status as an employee of the Company shall
terminate because of his permanent disability, he may exercise his Option to the
extent that he shall have been entitled to do so at the date of such
termination, at any time or from time to time, but not later than the expiration
date specified in Section 1 or three (3) months after termination of employment,
whichever date is earlier.
(iii) If Optionee's status as an employee of the Company shall
terminate involuntarily other than for cause, death, or total disability, all
rights to exercise his Option, to the extent that he shall have been entitled to
do so at the date of such termination, shall terminate at the expiration date
specified in Section 1 or three months after termination of employment,
whichever date is earlier.
(iv) If Optionee's status as an employee of the Company shall
terminate for cause (as defined below), all rights to exercise his Options shall
terminate no later than sixty (60) days after such termination.
(c) "TERMINATION FOR CAUSE" shall be defined as set forth in the
Employment Agreement between Company and Optionee. "PERMANENT DISABILITY" shall
be defined as set forth in the Employment Agreement between Company and
Optionee.
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3. EXERCISE. Optionee (or in the case of Optionee's death or
disability, the legal representative of Optionee) may exercise the Option only
by giving timely notice of exercise of an Option prior to the expiration or
termination of the Exercise Period to the Grantor c/o Smart Choice Automotive
Group, Inc., 5200 South Washington Avenue, Titusville, Florida 32780. Such
notice shall state the number of shares to be purchased which are attributable
to the Option which is being exercised, and shall be accompanied by the full
purchase price for such shares, payable in U.S. Dollars by certified check or
bank draft, unless the Grantor shall permit payment of the purchase price in
another manner.
4. DELIVERY OF OPTION SHARES. As soon as reasonably practicable after
receipt by the Grantor of a timely notice of exercise of any of the Options
hereunder, and payment therefor, the Grantor shall transfer to Optionee or his
legal representative(s), as the case may be, one or more certificate(s) for the
number of shares with respect to which the Options shall have been so exercised.
The Grantor represents to Optionee that it has sufficient shares to grant the
Option set forth herein.
5. RESTRICTIONS UPON TRANSFER.
(a) Neither the Optionee nor any other person or entity shall have any
interest in any specific asset or assets or stock of the Company by reason of
the granting of the Options. Any attempt to assign or to transfer this Agreement
or the Options granted hereunder, whether voluntarily or involuntarily, by
operation of law or otherwise, shall be of no further force or effect and no
interest or right hereunder shall vest in any other person. Nothing in this
Agreement shall be deemed to limit Optionee's right to transfer this Agreement
or the Option Shares by will or in accordance with the laws of devise, descent
and distribution.
(b) Nothing in this Agreement shall be construed in limitation of any
restrictions upon transfer of any of the Option Shares contained elsewhere,
including any restrictions that may be contained in the Certificate of
Incorporation or the By-Laws of the Company.
(c) Nothing in this Agreement shall be construed as a modification of
any existing agreements with respect to the gift, sale, purchase, transfer,
pledge, hypothecation, or other disposition or encumbrance of the Option Shares
between the parties to this Agreement, or between or among either or both of the
parties to this Agreement and one or more persons not party to this Agreement.
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(d) The Optionee acknowledges that the certificate evidencing ownership
of the Common Stock will be stamped or otherwise imprinted on the face thereof
with a legend in substantially the following form:
"The shares represented by this Certificate have not been registered
under the federal Securities Act of 1933, as amended (the "Act") or any
state securities act. No sale, offer to sell or transfer of the shares
shall be made unless a registration statement under the Act, and any
applicable state statute, with respect to the shares is then in effect
or an exemption from the registration requirements of such Act or state
statute is then in fact applicable to the shares."
(e) Any legend endorsed on a certificate pursuant to Section 5(d)
hereof and the stop transfer instructions with respect to the Option Shares
shall be removed and the Company shall issue a certificate without such legend
to the holder thereof if such Option Shares are registered under the Securities
Act and a prospectus meeting the requirements of Section 10 of the Securities
Act is available.
(f) The restrictions described in any legend endorsed on a certificate
pursuant to Section 5(d) hereof shall be removed at such time as permitted by
Rule 144(k) promulgated under the Securities Act.
(g) (1) If the Company at any time elects or proposes to register any
of its shares of Common Stock (the "Registration Shares") under the 1933 Act on
forms S-1, S-2, S-3 or SB-1, SB-2 or any other form in effect at such time for
the registration of securities to be sold for cash (a "Registration Statement")
with the Securities and Exchange Commission (the "SEC") pursuant to which shares
of Common Stock owned by any other shareholder of the Company are to be
registered, the Company shall give prompt written notice (the "Registration
Notice") to the Optionee of its intention to register the Registration Shares.
(2) Within fifteen (15) days after the Registration Notice shall
have been given to the Optionee, the Optionee may give written notice to the
Company of exercise of all, or a portion of the Option (the "Optionee Notice"),
accompanied by payment of the Option Price in accordance with Section 1 hereof,
stating the number of shares Optionee elects to be included among the
Registration Shares (which number may
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include shares held by Optionee as a result of prior exercises of this Option,
or otherwise) (the "Optionee's Included Shares").
(3) The Company shall use reasonable efforts to register the
Optionee's Included Shares under the Securities Act of 1933 and any state
securities acts, if necessary, designated by the Optionee in the Optionee
Notice. The Company shall have the right to withdraw and discontinue
registration of the Optionee's Included Shares at any time prior to the
effective date of such Registration Statement if the registration of the
Registration Shares is withdrawn or discontinued.
(4) The Company shall not be required to include any of the
Optionee's Included Shares in any Registration Statement unless the Optionee
agrees, if so requested by the Company, to: (i) offer and sell the Optionee's
Included Shares to or through an underwriter selected by the Company and, to the
extent possible, on substantially the same terms and conditions under which the
Registration Shares are to be offered and sold; (ii) comply with any
arrangements, terms and conditions with respect to the offer and sale of the
Optionee's Included Shares to which the Company may be required to agree; and
(iii) enter into any underwriting agreement containing customary terms and
conditions.
(5) If the offering of the Registration Shares by the Company is,
in whole or in part, an underwritten public offering, and if the managing
underwriter determines and advises the Company in writing that the inclusion in
such Registration Statement of all of the Shares, together with the stock of
other persons who have a right to include their stock in the Registration
Statement (collectively referred to as the "Aggregate Shares"), would adversely
affect the marketability of the offering of the Registration Shares, then the
Optionee and such other holders shall be entitled to register the portion of
such number of Aggregate Shares as the managing underwriter determines may be
included without such adverse effects (collectively, "Aggregate Underwriter
Shares"), subject to the terms, exceptions and conditions of this Section 5(g).
The number of Aggregate Underwriter Shares which the Optionee shall be entitled
to register shall be equal to the number of Aggregate Underwriter Shares
multiplied by a fraction, the numerator of which is the number of Optionee's
Included Shares and the denominator of which is the number of Aggregate Shares.
(6) The Company shall bear all costs and expenses of registration
of the Registration Shares, including Optionee's Included Shares.
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(7) It shall be a condition precedent to the Company's obligation
to register any of Optionee's Included Shares that the Optionee shall provide
the Company with all information and documents, and shall execute, acknowledge,
seal and deliver all documents reasonably necessary, to enable the Company to
comply with the 1933 Act, the State Acts, and all applicable laws, rules and
regulations of the SEC or of any state securities law authorities.
6. RIGHTS AS STOCKHOLDER.
(a) Optionee shall have none of the rights of a stockholder
with respect to any of the Option Shares until any Option granted herein shall
have been exercised.
(b) Nothing in this Agreement shall affect in any way the
rights or powers of the Company, or any parent or subsidiary Company, or any of
the directors or stockholders of the Company, to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or business, or any merger or consolidation of the
Company, or any issue of bonds, debentures, preferred or prior preference stocks
or other classes of securities ahead of or affecting the Common Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of the Company's assets or business, or any grant of
options to purchase securities of the Company otherwise than under this
Agreement, or to effect any other corporate act or proceeding, whether of a
similar character or otherwise.
(c) (i) If the outstanding shares of Common Stock of the
Company are increased, decreased, changed into or exchanged for a different
number or kind of shares or securities of the Company or of another corporation
or entity or shares of a different par value or without par value through a
recapitalization, stock dividend, stock split, reverse stock split or a
reorganization under which the Company is not the surviving entity, an
appropriate or proportionate adjustment shall be made in the number and/or kind
of securities allocated to the Options, without change in the aggregate Option
Price applicable to the unexercised portion of the outstanding Option but with a
corresponding adjustment in the Option Price for each share or other unit of any
security covered by the Option. No adjustment shall occur under this Section 6
by virtue of the fact that the Company purchases or sells Common Stock or any
securities of the Company at its fair market value (other than pursuant to
compensatory Stock Options) for cash.
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(ii) In case the Company shall issue rights or warrants to
all holders of its shares of Common Stock entitling them to subscribe for or to
purchase shares of Common Stock at a price per share which, when added to the
amount of consideration received or receivable by the Company for such rights or
warrants is less than the Current Market Price (as hereinafter defined) per
share at the record date, the number of Option Shares purchasable upon the
exercise of the Option shall be increased so that thereafter, until further
adjusted, this Option shall entitle the Optionee to purchase an additional
number of shares determined as if the Option had been fully exercised and the
Optionee were a record holder entitled to receive such rights or warrants at an
option price which is the same as the per share consideration payable pursuant
to such rights or warrants. Such adjustment shall be made whenever such rights
or warrants are issued, but shall also be effective retroactively as to portions
of the Option exercised between the record date for the determination of
shareholders entitled to receive such rights or warrants and the date such
rights or warrants are issued.
(iii) For the purpose of any computation under Section
6(c)(ii), the Current Market Price per share of Common Stock at any date shall
be (i) if the shares of Common Stock are listed on any national securities
exchange, the average of the daily closing prices for the fifteen (15)
consecutive business days commencing twenty (20) business days before the date
of determination (the "Trading Period"); (ii) if the shares of Common Stock are
not listed on any national securities exchange but are quoted or reported on the
National Association of Securities Dealers, Inc., Automated Quotation System
("NASDAQ"), the last quoted price or, if not quoted, the average of the high bid
and low asked price as reported by NASDAQ for the Trading Period, or the daily
closing prices for the Trading Period as reported by NASDAQ, as the case may be;
and (iii) if the shares of Common Stock are neither listed on any national
securities exchange nor quoted or reported on NASDAQ, the higher of (x) the
Exercise Price then in effect, or (y) the tangible book value per share of
Common Stock as of the end of the Company's immediately preceding fiscal year.
(d) In the event of the proposed dissolution or liquidation of
the Company, the Company shall cause the Board of Directors of the Company to
notify the Optionee and the Grantor at least thirty (30)days prior to such
proposed action. To the extent it has not been exercised during such thirty (30)
day period, the Options will terminate as to any unexercised portion thereof
immediately prior to the consummation of such proposed action.
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7. REPRESENTATIONS. Optionee will acquire Optionee's shares for
Optionee's own account, for investment only and without a view to resale or
distribution except in compliance with the Securities Act of 1933, as amended,
("Act") and any applicable state securities laws, and upon the acquisition of
the shares, Optionee will enter into such written representations, warranties
and agreements as the Company or the Grantor may request in order to comply with
the Act, any applicable state securities laws and this Option Agreement. Grantor
represents and warrants that it owns sufficient Common Stock to issue the Option
Shares to the Optionee on exercise of the Option and agrees that it will reserve
sufficient Common Stock to issue the Option Shares to the Optionee on exercise
of the Option.
8. TAX CONSEQUENCES AND WITHHOLDING. Optionee agrees that the Grantor
is not responsible for the tax consequences to Optionee of the granting of the
Options or its subsequent exercise by Optionee, and that it is the
responsibility of Optionee to consult with Optionee's personal tax advisor
regarding all matters with respect to the tax consequences of the granting of
the Options and its exercise by Optionee.
9. NON-EMPLOYMENT. Nothing in this Agreement, shall confer on Optionee,
nor imply in favor of Optionee any right to continue as a contractor to or
employee of the Company or of any parent or subsidiary company of the Company or
prevent, or in any way impair the right of the stockholders or Board to
terminate Optionee's relationship with the Company pursuant to the Employment
Agreement.
10. GENERAL PROVISIONS.
(a) AGREEMENT TO BE BOUND BY CONTRACT. This Agreement shall be
binding not only on the parties hereto, but also upon their heirs, executors,
administrators, successors or assigns. The parties hereto agree for themselves
and their heirs, executors, administrators, successors or assigns, to execute
any instruments and to perform any acts which may be necessary or proper to
carry out the purposes of this Agreement.
(b) AMENDMENT OR ALTERATION. This Agreement may be altered or
amended, in whole or in part, at any time, only by a written instrument setting
forth such changes signed by all parties hereto.
(c) WAIVER. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
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(d) NOTICES. Any notices permitted or required hereunder shall
be delivered to the parties personally, by telecopier, or by United States Mail,
with postage prepaid, certified or registered, return receipt requested,
addressed to the respective parties at the following addresses and telecopier
numbers:
If to Company: Smart Choice Automotive Group, Inc.
5200 South Washington Avenue
Titusville, Florida 32780
Attention: James Neal Hutchinson, Jr.
Corporate Counsel
Telecopier: (407) 383-8822
If to Grantor: Gerald C. Parker, Trustee
101 Phillipe Parkway, Suite 300
Safety Harbor, Florida 34695
Telecopier: (813) 725-9570
If to Optionee: At the address and telecopier
number for the Optionee on file
with the Company
The date of service of any notice or communication hereunder shall be the date
of the hand delivery or receipt of telecopy, or three (3) days after the
mailing, if mailed by certified mail, return receipt requested. A party whose
address or telecopy number changes shall notify the other party, in accordance
with this Section, within five (5) business days of such change (the "Changed
Party"). Failure of the Changed Party to notify the other party of such a change
shall constitute a waiver of any right to receive notice under this Agreement by
the Changed Party.
(e) VALIDITY. In the event that any provision of this
Agreement shall be held to be invalid, the same shall not affect, in any
respect, the validity of the remainder of this Agreement.
(f) INTEGRATED AGREEMENT. This Agreement and the Employment
Agreement and all agreements executed in accordance with the terms hereof
constitutes the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and there are no agreements,
understandings, restrictions, representations or warranties among the parties
other than those set forth herein.
(g) ATTORNEYS' FEES. In the event any litigation including any
appeals is instituted in connection with the breach,
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enforcement or interpretation of this Agreement, including, without limitation,
any action seeking declaratory relief, equitable relief, injunctive relief, or
damages, the prevailing party shall be entitled to recover from the
non-prevailing party all costs, expenses and attorneys' fees incurred in
connection therewith, including any costs of collection.
(h) STATE LAW GOVERNING CONTRACTS. This Agreement shall be
governed by the laws of the State of Florida.
(i) NO CONSTRUCTION AGAINST DRAFTING PARTY. Each party to this
Agreement expressly recognizes that it results from a negotiated process in
which each party was given the opportunity to consult with counsel and
contributed to the drafting of this Agreement. Given this fact, no legal or
other presumptions against the party drafting this Agreement concerning its
construction, interpretation or otherwise shall accrue to the benefit of any
party to this Agreement and each party shall expressly waives the right to
assert such a presumption in any proceedings or disputes connected with, arising
out of, or involving this Agreement.
IN WITNESS WHEREOF, the parties have executed this Stock Option
Agreement under seal as of the date first above written.
THE COMPANY:
SMART CHOICE AUTOMOTIVE GROUP,INC.
By:_______________________________
THE GRANTORS:
CONLAN-SMART CHOICE HOLDINGS
MANAGEMENT TRUST under agreement
dated January 29, 1997
By:_______________________________
Gary R. Smith, Trustee
By:_______________________________
Gerald C. Parker, Trustee
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PARKER-SMART CHOICE HOLDINGS
MANAGEMENT TRUST under agreement
dated January 29, 1997
By:_____________________________
Gary R. Smith, Trustee
By:_____________________________
Gerald C. Parker, Trustee
THE OPTIONEE:
------------------------------
Joseph E. Mohr
11
EXHIBIT 10.46.3
THE OPTION AND COMMON STOCK REFERRED TO HEREIN HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, THE FLORIDA SECURITIES ACT, AS AMENDED, OR THE LAWS
OF ANY OTHER STATE, AND ARE BEING GRANTED PURSUANT TO EXEMPTIONS FROM
REGISTRATION UNDER THAT ACT AND SUCH STATE LAWS. OPTIONS OR SHARES OF STOCK
ACQUIRED BY OPTIONEE MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE OPTIONS OR SHARES OF STOCK UNDER THAT
ACT OR SUCH STATE LAWS AS MAY BE APPLICABLE, OR PURSUANT TO EXEMPTIONS FROM SAID
REGISTRATION UNDER SAID ACT AND SAID LAWS. FURTHER, THIS AGREEMENT CONTAINS
SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY OF THE OPTIONS AND SHARES OF STOCK.
SMART CHOICE AUTOMOTIVE GROUP, INC.
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement") effective as of the 9th day of
February, 1998, by and between Smart Choice Automotive Group, Inc., a Florida
corporation (the "Company") and Robert J. Downing, an individual (the
"Optionee").
WITNESSETH:
WHEREAS, the Company believes that the attraction and retention of key
employees such as Optionee is essential to the Company's growth and success; and
WHEREAS, in order to induce Optionee to serve as an Employee of the
Company, the Company hereby provides Optionee with the following additional
incentives, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby covenant and agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth in this
Agreement, the Company hereby grants to Optionee, the option (the "Option") to
purchase 70,000 shares (the "Option Shares")of the Company's common stock, par
value $.01 per share (the "Common Stock") at the exercise price of $2.12 per
share (the "Option Price"). The Option shall be exercisable, in whole or in
part, for a period of five (5) years (the "Exercise Period"), which period shall
commence on the date of execution of this Agreement (the "Execution Date"). The
Option shall be fully vested and
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exercisable as to all the Option Shares on the Execution Date for the entire
Exercise Period.
2. TERMINATION OF THE OPTION.
(a) The Option shall terminate and no longer be exercisable upon
the expiration of the Exercise Period set forth above.
(b) Termination in the event of death, permanent disability or
termination of status as an employee.
(i) If Optionee dies while an employee of the Company
or within three (3) months after termination of his status as an employee
because of his permanent disability (as defined below), his Option may be
exercised, to the extent that the Optionee shall have been entitled to do so on
the date of his death, by the person or persons to whom the Optionee's right
under the Option passes by will or applicable law, or if no such person has such
right, by his executors or administrators, at any time or from time to time, but
not later than the expiration date specified in Section 1 or three (3) months
after the appointment or qualification of an executor of Optionee's estate,
whichever is earlier.
(ii) If Optionee's status as an employee of the Company
shall terminate because of his permanent disability, he may exercise his Option
to the extent that he shall have been entitled to do so at the date of such
termination, at any time or from time to time, but not later than the expiration
date specified in Section 1 or three (3) months after termination of employment,
whichever date is earlier.
(iii) If Optionee's status as an employee of the
Company shall terminate involuntarily other than for cause, death, or total
disability, all rights to exercise his Option, to the extent that he shall have
been entitled to do so at the date of such termination, shall terminate at the
expiration date specified in Section 1 or three months after termination of
employment, whichever date is earlier.
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(iv) If Optionee's status as an employee of the Company
shall terminate for cause (as defined below), all rights to exercise his Options
shall terminate no later than sixty (60) days after such termination.
(c) "TERMINATION FOR CAUSE" shall be defined as set forth in the
Employment Agreement between Company and Optionee. "PERMANENT DISABILITY" shall
be defined as set forth in the Employment Agreement between Company and
Optionee.
3. EXERCISE. Optionee (or in the case of Optionee's death or
disability, the legal representative of Optionee) may exercise the Option only
by giving timely notice to the Company of exercise of an Option prior to the
expiration or termination of the Exercise Period. Such notice shall state the
number of shares to be purchased which are attributable to the Option which is
being exercised, and shall be accompanied by the full purchase price for such
shares, payable in U.S. dollars by certified check or bank draft, unless the
Company shall permit payment of the purchase price in another manner.
4. DELIVERY OF OPTION SHARES. As soon as reasonably practicable after
receipt by the Company of a timely notice of exercise of any of the Options
hereunder, and payment therefor, the Company shall issue to Optionee or his
legal representative(s), as the case may be, one or more certificate(s) for the
number of shares with respect to which the Options shall have been so exercised.
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<PAGE>
5. RESTRICTIONS UPON TRANSFER.
(a) Neither the Optionee nor any other person or entity shall
have any interest in any specific asset or assets or stock of the Company by
reason of the granting of the Options. Any attempt to assign or to transfer this
Agreement or the Options granted hereunder, whether voluntarily or
involuntarily, by operation of law or otherwise, shall be of no further force or
effect and no interest or right hereunder shall vest in any other person.
Nothing in this Agreement shall be deemed to limit Optionee's right to transfer
this Agreement or the Option Shares by will or in accordance with the laws of
devise, descent and distribution.
(b) Nothing in this Agreement shall be construed in limitation
of any restrictions upon transfer of any of the Option Shares contained
elsewhere, including any restrictions that may be contained in the Certificate
of Incorporation or the By-Laws of the Company.
(c) Nothing in this Agreement shall be construed as a
modification of any existing agreements with respect to the gift, sale,
purchase, transfer, pledge, hypothecation, or other disposition or encumbrance
of the Option Shares between the parties to this Agreement, or between or among
either or both of the parties to this Agreement and one or more persons not
party to this Agreement.
(d) The Optionee acknowledges that the certificate evidencing
ownership of the Common Stock will be stamped or otherwise imprinted on the face
thereof with a legend in substantially the following form:
"The shares represented by this Certificate have not been
registered under the federal Securities Act of 1933, as
amended (the "Act") or any state securities act. No sale,
offer to sell or transfer of the shares shall be made unless a
registration statement under the Act, and any applicable state
statute, with respect to the shares is then in effect or an
exemption from the registration requirements
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<PAGE>
of such Act or state statute is then in fact applicable to the
shares."
(e) Any legend endorsed on a certificate pursuant to Section
5(d) hereof and the stop transfer instructions with respect to the Option Shares
shall be removed and the Company shall issue a certificate without such legend
to the holder thereof if such Option Shares are registered under the Securities
Act and a prospectus meeting the requirements of Section 10 of the Securities
Act is available.
(f) The restrictions described in any legend endorsed on a
certificate pursuant to Section 5(d) hereof shall be removed at such time as
permitted by Rule 144(k) promulgated under the Securities Act.
(g) (1) If the Company at any time elects or proposes to
register any of its shares of Common Stock (the "Registration Shares") under the
1933 Act on forms S-1, S-2, S-3 or SB-1, SB-2 or any other form in effect at
such time for the registration of securities to be sold for cash (a
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") pursuant to which shares of Common Stock owned by any other shareholder
of the Company are to be registered, the Company shall give prompt written
notice (the "Registration Notice") to the Optionee of its intention to register
the Registration Shares.
(2) Within fifteen (15) days after the Registration
Notice shall have been given to the Optionee, the Optionee may give written
notice to the Company of exercise of all, or a portion of the Option (the
"Optionee Notice"), accompanied by payment of the Option Price in accordance
with Section 1 hereof, stating the number of shares Optionee elects to be
included among the Registration Shares (which number may include shares held by
Optionee as a result of prior exercises of this Option, or otherwise) (the
"Optionee's Included Shares").
(3) The Company shall use reasonable efforts to
register the Optionee's Included Shares under the Securities Act of 1933 and any
state securities acts, if necessary, designated by the Optionee in the Optionee
Notice. The Company shall have the right to withdraw and discontinue
registration of the Optionee's Included
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<PAGE>
Shares at any time prior to the effective date of such Registration Statement if
the registration of the Registration Shares is withdrawn or discontinued.
(4) The Company shall not be required to include any
of the Optionee's Included Shares in any Registration Statement unless the
Optionee agrees, if so requested by the Company, to: (i) offer and sell the
Optionee's Included Shares to or through an underwriter selected by the Company
and, to the extent possible, on substantially the same terms and conditions
under which the Registration Shares are to be offered and sold; (ii) comply with
any arrangements, terms and conditions with respect to the offer and sale of the
Optionee's Included Shares to which the Company may be required to agree; and
(iii) enter into any underwriting agreement containing customary terms and
conditions.
(5) If the offering of the Registration Shares by the
Company is, in whole or in part, an underwritten public offering, and if the
managing underwriter determines and advises the Company in writing that the
inclusion in such Registration Statement of all of the Shares, together with the
stock of other persons who have a right to include their stock in the
Registration Statement (collectively referred to as the "Aggregate Shares"),
would adversely affect the marketability of the offering of the Registration
Shares, then the Optionee and such other holders shall be entitled to register
the portion of such number of Aggregate Shares as the managing underwriter
determines may be included without such adverse effects (collectively,
"Aggregate Underwriter Shares"), subject to the terms, exceptions and conditions
of this Section 5(g). The number of Aggregate Underwriter Shares which the
Optionee shall be entitled to register shall be equal to the number of Aggregate
Underwriter Shares multiplied by a fraction, the numerator of which is the
number of Optionee's Included Shares and the denominator of which is the number
of Aggregate Shares.
(6) The Company shall bear all costs and expenses of
registration of the Registration Shares, including Optionee's Included Shares.
(7) It shall be a condition precedent to the
Company's obligation to register any of Optionee's Included Shares that the
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<PAGE>
Optionee shall provide the Company with all information and documents, and shall
execute, acknowledge, seal and deliver all documents reasonably necessary, to
enable the Company to comply with the 1933 Act, the State Acts, and all
applicable laws, rules and regulations of the SEC or of any state securities law
authorities.
6. RIGHTS AS STOCKHOLDER.
(a) Optionee shall have none of the rights of a stockholder with
respect to any of the Option Shares until any Option granted herein shall have
been exercised.
(b) Nothing in this Agreement shall affect in any way the rights
or powers of the Company, or any parent or subsidiary Company, or any of the
directors or stockholders of the Company, to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or business, or any merger or consolidation of the
Company, or any issue of bonds, debentures, preferred or prior preference stocks
or other classes of securities ahead of or affecting the Common Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of the Company's assets or business, or any grant of
options to purchase securities of the Company otherwise than under this
Agreement, or to effect any other corporate act or proceeding, whether of a
similar character or otherwise.
(c) (i) If the outstanding shares of Common Stock of the Company
are increased, decreased, changed into or exchanged for a different number or
kind of shares or securities of the Company or of another corporation or entity
or shares of a different par value or without par value through a
recapitalization, stock dividend, stock split, reverse stock split or a
reorganization under which the Company is not the surviving entity, an
appropriate or proportionate adjustment shall be made in the number and/or kind
of securities allocated to the Options, without change in the aggregate Option
Price applicable to the unexercised portion of the outstanding Option but with a
corresponding adjustment in the Option Price for each share or other unit of any
security covered by the Option. No adjustment shall occur under this Section 6
by virtue of the fact that the Company purchases or sells Common Stock
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or any securities of the Company at its fair market value (other than pursuant
to compensatory Stock Options) for cash.
(ii) In case the Company shall issue rights or
warrants to all holders of its shares of Common Stock entitling them to
subscribe for or to purchase shares of Common Stock at a price per share which,
when added to the amount of consideration received or receivable by the Company
for such rights or warrants is less than the Current Market Price (as
hereinafter defined) per share at the record date, the number of Option Shares
purchasable upon the exercise of the Option shall be increased so that
thereafter, until further adjusted, this Option shall entitle the Optionee to
purchase an additional number of shares determined as if the Option had been
fully exercised and the Optionee were a record holder entitled to receive such
rights or warrants at an option price which is the same as the per share
consideration payable pursuant to such rights or warrants. Such adjustment shall
be made whenever such rights or warrants are issued, but shall also be effective
retroactively as to portions of the Option exercised between the record date for
the determination of shareholders entitled to receive such rights or warrants
and the date such rights or warrants are issued.
(iii) For the purpose of any computation under
Section 6(c)(ii), the Current Market Price per share of Common Stock at any date
shall be (i) if the shares of Common Stock are listed on any national securities
exchange, the average of the daily closing prices for the fifteen (15)
consecutive business days commencing twenty (20) business days before the date
of determination (the "Trading Period"); (ii) if the shares of Common Stock are
not listed on any national securities exchange but are quoted or reported on the
National Association of Securities Dealers, Inc., Automated Quotation System
("NASDAQ"), the last quoted price or, if not quoted, the average of the high bid
and low asked price as reported by NASDAQ for the Trading Period, or the daily
closing prices for the Trading Period as reported by NASDAQ, as the case may be;
and (iii) if the shares of Common Stock are neither listed on any national
securities exchange nor quoted or reported on NASDAQ, the higher of (x) the
Exercise Price then in effect, or (y) the tangible book value per share of
Common Stock as of the end of the Company's immediately preceding fiscal year.
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(d) In the event of the proposed dissolution or liquidation of
the Company, the Company shall cause the Board of Directors of the Company to
notify the Optionee at least thirty (30)days prior to such proposed action. To
the extent it has not been exercised during such thirty (30) day period, the
Options will terminate as to any unexercised portion thereof immediately prior
to the consummation of such proposed action.
(e) In lieu of paying in cash any withholding tax obligation
imposed on any exercise of an Option hereunder, Optionee may elect to have the
actual number of shares issuable upon exercise of the Option reduced by the
smallest number of whole shares of Common Stock which, when multiplied by the
fair market value of the Common Stock as of the date the Option is exercised, is
sufficient to satisfy the amount of the withholding tax obligations imposed by
reason of the exercise hereof (the "Withholding Elections"). Optionee may make a
Withholding Election only if all of the following conditions are met:
(i) the Withholding Election must be made on or prior
to the date on which the amount of tax required to be withheld is determined
(the "Tax Date") by executing and delivering to the Company a properly completed
Notice of Withholding Election, in substantially the form of Exhibit "A"
attached hereto;
(ii) any Withholding Election made will be
irrevocable; and
(iii) if Optionee is required to file beneficial
ownership reports pursuant to Subsection (a) of Section 16 of the Securities
Exchange Act of 1934, at any time during the period in which the Option is
exercisable, then the Withholding Election must be made either (A) at least six
(6) months prior to the Tax Date applicable to the exercise of the Option, or
(B) prior to the Tax Date and in any ten day period beginning on the third day
following the release of the Company's quarterly or annual summary statement of
sales and earnings.
7. REPRESENTATIONS. Optionee will acquire Optionee's shares for
Optionee's own account, for investment only and without a view to resale or
distribution except in compliance with the Securities Act of 1933, as amended,
("Act") and any applicable state
9
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securities laws, and upon the acquisition of the shares, Optionee will enter
into such written representations, warranties and agreements as the Company may
request in order to comply with the Act, any applicable state securities laws
and this Option Agreement. The Company represents and warrants that it owns
sufficient Common Stock to issue the Option Shares to the Optionee on exercise
of the Option and agrees that it will reserve sufficient Common Stock to issue
the Option Shares to the Optionee on exercise of the Option.
8. TAX CONSEQUENCES AND WITHHOLDING. Optionee agrees that the Company is
not responsible for the tax consequences to Optionee of the granting of the
Options or its subsequent exercise by Optionee, and that it is the
responsibility of Optionee to consult with Optionee's personal tax advisor
regarding all matters with respect to the tax consequences of the granting of
the Options and its exercise by Optionee.
9. NON-EMPLOYMENT. Nothing in this Agreement, shall confer on Optionee,
nor imply in favor of Optionee any right to continue as a contractor to or
employee of the Company or of any parent or subsidiary company of the Company or
prevent, or in any way impair the right of the stockholders or Board to
terminate Optionee's relationship with the Company pursuant to the Employment
Agreement.
10. GENERAL PROVISIONS.
(a) AGREEMENT TO BE BOUND BY CONTRACT. This Agreement shall be
binding not only on the parties hereto, but also upon their heirs, executors,
administrators, successors or assigns. The parties hereto agree for themselves
and their heirs, executors, administrators, successors or assigns, to execute
any instruments and to perform any acts which may be necessary or proper to
carry out the purposes of this Agreement.
(b) AMENDMENT OR ALTERATION. This Agreement may be altered or
amended, in whole or in part, at any time, only by a written instrument setting
forth such changes signed by all parties hereto.
10
<PAGE>
(c) WAIVER. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
(d) NOTICES. Any notices permitted or required hereunder shall
be delivered to the parties personally, by telecopier, or by United States Mail,
with postage prepaid, certified or registered, return receipt requested,
addressed to the respective parties at the following addresses and telecopier
numbers:
If to Company: Smart Choice Automotive Group, Inc.
5200 South Washington Avenue
Titusville, Florida 32780
Attention: James Neal Hutchinson, Jr.
Corporate Counsel
Telecopier: (407) 383-8822
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<PAGE>
If to Optionee: At the address and telecopier
number for the Optionee on file
with the Company
The date of service of any notice or communication hereunder shall be the date
of the hand delivery or receipt of telecopy, or three (3) days after the
mailing, if mailed by certified mail, return receipt requested. A party whose
address or telecopy number changes shall notify the other party, in accordance
with this Section, within five (5) business days of such change (the "Changed
Party"). Failure of the Changed Party to notify the other party of such a change
shall constitute a waiver of any right to receive notice under this Agreement by
the Changed Party.
(e) VALIDITY. In the event that any provision of this
Agreement shall be held to be invalid, the same shall not affect, in any
respect, the validity of the remainder of this Agreement.
(f) INTEGRATED AGREEMENT. This Agreement and the Employment
Agreement and all agreements executed in accordance with the terms hereof
constitutes the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and there are no agreements,
understandings, restrictions, representations or warranties among the parties
other than those set forth herein.
(g) ATTORNEYS' FEES. In the event any litigation including any
appeals is instituted in connection with the breach, enforcement or
interpretation of this Agreement, including, without limitation, any action
seeking declaratory relief, equitable relief, injunctive relief, or damages, the
prevailing party shall be entitled to recover from the non-prevailing party all
costs, expenses and attorneys' fees incurred in connection therewith, including
any costs of collection.
(h) STATE LAW GOVERNING CONTRACTS. This Agreement shall be
governed by the laws of the State of Florida.
(i) NO CONSTRUCTION AGAINST DRAFTING PARTY. Each party to this
Agreement expressly recognizes that it results from a negotiated process in
which each party was given the opportunity to
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<PAGE>
consult with counsel and contributed to the drafting of this Agreement. Given
this fact, no legal or other presumptions against the party drafting this
Agreement concerning its construction, interpretation or otherwise shall accrue
to the benefit of any party to this Agreement and each party expressly waives
the right to assert such a presumption in any proceedings or disputes connected
with, arising out of, or involving this Agreement.
IN WITNESS WHEREOF, the parties have executed this Stock Option Agreement
under seal as of the date first above written.
THE COMPANY:
SMART CHOICE AUTOMOTIVE GROUP,INC.
By:
------------------------------
THE OPTIONEE:
---------------------------------
Robert J. Downing
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<PAGE>
EXHIBIT A
NOTICE OF WITHHOLDING ELECTION
TO: Smart Choice Automotive Group, Inc.
FROM: Optionee (or other party specified in (2) below)
RE: Withholding Election
* * * * * * * * * * * * * * *
This election relates to the Option identified in Paragraph 3 below. I hereby
certify that:
(1) My correct name and social security number and my current
address are set forth at the end of this document.
(2) I am (check one, whichever is applicable).
[ ] the original recipient of the Option.
[ ] the legal representative of the estate of the
original recipient of the Option.
[ ] a legatee of the original recipient of the Option.
[ ] the legal guardian of the original recipient of the
Option.
(3) The Option pursuant to which this election is made in the name
of ____________________________ for __________ shares of
Common Stock and dated __________________ (the "Option"). This
election relates to ___________ shares of Common Stock
issuable upon whole or partial exercise(s) of the Option (the
"Option
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<PAGE>
Shares"); provided that the numbers set forth above shall be
deemed changed as appropriate to reflect stock splits and
other adjustments contemplated by the applicable provisions of
the Option.
(4) In connection with any future exercise of the Option with
respect to the Option Shares, I hereby elect to have certain
of the shares issuable pursuant to the exercise withheld by
the Company for the purpose of having the value of the shares
applied to pay federal, state, and local, if any, taxes
arising from the exercise. The shares to be withheld shall
have, as of the Tax Date (as defined in the Option Agreement
applicable to the Option (the "Option Agreement")), applicable
to the exercise, a fair market value equal to the minimum
statutory tax withholding requirement under federal, state,
and local law in connection with the exercise.
(5) This Withholding Election is made prior to the Tax Date and is
otherwise timely made pursuant to the Option Agreement.
(6) I further understand that the Company shall withhold from the
Option Shares a number of shares of Common Stock having the
value specified in Paragraph 4 above.
(7) Capitalized terms used in this Notice of Withholding Election
without definition shall have the meanings given to them in
the Option Agreement.
Dated: ____________________ ___________________________________
Legal Signature
___________________________ ___________________________________
Social Security Number Name (Printed)
___________________________________
Street Address
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<PAGE>
___________________________________
City, State, Zip Code
16
THE OPTION AND COMMON STOCK REFERRED TO HEREIN HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, THE FLORIDA SECURITIES ACT, AS AMENDED, OR THE LAWS
OF ANY OTHER STATE, AND ARE BEING GRANTED PURSUANT TO EXEMPTIONS FROM
REGISTRATION UNDER THAT ACT AND SUCH STATE LAWS. OPTIONS OR SHARES OF STOCK
ACQUIRED BY OPTIONEE MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE OPTIONS OR SHARES OF STOCK UNDER THAT
ACT OR SUCH STATE LAWS AS MAY BE APPLICABLE, OR PURSUANT TO EXEMPTIONS FROM SAID
REGISTRATION UNDER SAID ACT AND SAID LAWS. FURTHER, THIS AGREEMENT CONTAINS
SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY OF THE OPTIONS AND SHARES OF STOCK.
SMART CHOICE AUTOMOTIVE GROUP, INC.
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement") effective as of the 31st day
of December, 1997, by and among the CONLAN-SMART CHOICE HOLDINGS MANAGEMENT
TRUST under agreement dated January 29, 1997, Thomas E. Conlan, settlor, and
Gary R. Smith and Gerald C. Parker, trustees, and the PARKER-SMART CHOICE
HOLDINGS MANAGEMENT TRUST under agreement dated January 29, 1997, Gerald C.
Parker, settlor, and Gary R. Smith and Gerald C. Parker, trustees (such trusts
are referred to herein as the "Grantors"), RONALD W. ANDERSON, an individual,
(the "Optionee") and SMART CHOICE AUTOMOTIVE GROUP, INC., a Florida corporation
(the "Company").
WITNESSETH:
WHEREAS, the Grantors and the Company believe that the attraction and
retention of key employees such as Optionee is essential to the Company's growth
and success; and
WHEREAS, in order to induce Optionee to serve as an Employee of the
Company, the Grantors hereby provide Optionee with the following additional
incentives, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby covenant and agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth in
this Agreement, the Grantors hereby grant to Optionee, the option to purchase a
total of 12,025 shares (the "Option Shares")of the Company's common stock, par
value $.01 per share (the "Common Stock"), 6,012.5 shares from each Grantor (the
"Option"), at the exercise price of $2.00 per share (the "Option Price"). The
Option shall be exercisable, in whole or in part, for a period of five (5) years
(the "Exercise Period"), which period shall commence on the date of execution of
this Agreement (the "Execution Date"). The Option shall be fully vested and
exercisable as to all the Option Shares on the Execution Date for the entire
Exercise Period. None of the Options are intended to
<PAGE>
be "incentive stock options" as defined in Section 422(b) of the Internal
Revenue Code.
2. TERMINATION OF THE OPTION.
(a) The Option shall terminate and no longer be exercisable upon
the expiration of the Exercise Period set forth above.
(b) Termination in the event of death, permanent disability or
termination of status as an employee.
(i) If Optionee dies while an employee of the Company or
within three (3) months after termination of his status as an employee because
of his permanent disability (as defined below), his Option may be exercised, to
the extent that the Optionee shall have been entitled to do so on the date of
his death, by the person or persons to whom the Optionee's right under the
Option passes by will or applicable law, or if no such person has such right, by
his executors or administrators, at any time or from time to time, but not later
than the expiration date specified in Section 1 or three (3) months after the
appointment or qualification of an executor of Optionee's estate, whichever is
earlier.
(ii) If Optionee's status as an employee of the Company shall
terminate because of his permanent disability, he may exercise his Option to the
extent that he shall have been entitled to do so at the date of such
termination, at any time or from time to time, but not later than the expiration
date specified in Section 1 or three (3) months after termination of employment,
whichever date is earlier.
(iii) If Optionee's status as an employee of the Company shall
terminate involuntarily other than for cause, death, or total disability, all
rights to exercise his Option, to the extent that he shall have been entitled to
do so at the date of such termination, shall terminate at the expiration date
specified in Section 1 or three months after termination of employment,
whichever date is earlier.
(iv) If Optionee's status as an employee of the Company shall
terminate for cause (as defined below), all rights to exercise his Options shall
terminate no later than sixty (60) days after such termination.
(c) "TERMINATION FOR CAUSE" shall be defined as set forth in the
Employment Agreement between Company and Optionee. "PERMANENT DISABILITY" shall
be defined as set forth in the Employment Agreement between Company and
Optionee.
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<PAGE>
3. EXERCISE. Optionee (or in the case of Optionee's death or
disability, the legal representative of Optionee) may exercise the Option only
by giving timely notice of exercise of an Option prior to the expiration or
termination of the Exercise Period to the Grantor c/o Smart Choice Automotive
Group, Inc., 5200 South Washington Avenue, Titusville, Florida 32780. Such
notice shall state the number of shares to be purchased which are attributable
to the Option which is being exercised, and shall be accompanied by the full
purchase price for such shares, payable in U.S. Dollars by certified check or
bank draft, unless the Grantor shall permit payment of the purchase price in
another manner.
4. DELIVERY OF OPTION SHARES. As soon as reasonably practicable after
receipt by the Grantor of a timely notice of exercise of any of the Options
hereunder, and payment therefor, the Grantor shall transfer to Optionee or his
legal representative(s), as the case may be, one or more certificate(s) for the
number of shares with respect to which the Options shall have been so exercised.
The Grantor represents to Optionee that it has sufficient shares to grant the
Option set forth herein.
5. RESTRICTIONS UPON TRANSFER.
(a) Neither the Optionee nor any other person or entity shall
have any interest in any specific asset or assets or stock of the Company by
reason of the granting of the Options. Any attempt to assign or to transfer this
Agreement or the Options granted hereunder, whether voluntarily or
involuntarily, by operation of law or otherwise, shall be of no further force or
effect and no interest or right hereunder shall vest in any other person.
Nothing in this Agreement shall be deemed to limit Optionee's right to transfer
this Agreement or the Option Shares by will or in accordance with the laws of
devise, descent and distribution.
(b) Nothing in this Agreement shall be construed in limitation
of any restrictions upon transfer of any of the Option Shares contained
elsewhere, including any restrictions that may be contained in the Certificate
of Incorporation or the By-Laws of the Company.
(c) Nothing in this Agreement shall be construed as a
modification of any existing agreements with respect to the gift, sale,
purchase, transfer, pledge, hypothecation, or other disposition or encumbrance
of the Option Shares between the parties to this Agreement, or between or among
either or both of the parties to this Agreement and one or more persons not
party to this Agreement.
3
<PAGE>
(d) The Optionee acknowledges that the certificate evidencing
ownership of the Common Stock will be stamped or otherwise imprinted on the face
thereof with a legend in substantially the following form:
"The shares represented by this Certificate have not been
registered under the federal Securities Act of 1933, as
amended (the "Act") or any state securities act. No sale,
offer to sell or transfer of the shares shall be made unless a
registration statement under the Act, and any applicable state
statute, with respect to the shares is then in effect or an
exemption from the registration requirements of such Act or
state statute is then in fact applicable to the shares."
(e) Any legend endorsed on a certificate pursuant to Section
5(d) hereof and the stop transfer instructions with respect to the Option Shares
shall be removed and the Company shall issue a certificate without such legend
to the holder thereof if such Option Shares are registered under the Securities
Act and a prospectus meeting the requirements of Section 10 of the Securities
Act is available.
(f) The restrictions described in any legend endorsed on a
certificate pursuant to Section 5(d) hereof shall be removed at such time as
permitted by Rule 144(k) promulgated under the Securities Act.
(g) (1) If the Company at any time elects or proposes to
register any of its shares of Common Stock (the "Registration Shares") under the
1933 Act on forms S-1, S-2, S-3 or SB-1, SB-2 or any other form in effect at
such time for the registration of securities to be sold for cash (a
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") pursuant to which shares of Common Stock owned by any other shareholder
of the Company are to be registered, the Company shall give prompt written
notice (the "Registration Notice") to the Optionee of its intention to register
the Registration Shares.
(2) Within fifteen (15) days after the Registration Notice
shall have been given to the Optionee, the Optionee may give written notice to
the Company of exercise of all, or a portion of the Option (the "Optionee
Notice"), accompanied by payment of the Option Price in accordance with Section
1 hereof, stating the number of shares Optionee elects to be included among the
Registration Shares (which number may
4
<PAGE>
include shares held by Optionee as a result of prior exercises of this Option,
or otherwise) (the "Optionee's Included Shares").
(3) The Company shall use reasonable efforts to register
the Optionee's Included Shares under the Securities Act of 1933 and any state
securities acts, if necessary, designated by the Optionee in the Optionee
Notice. The Company shall have the right to withdraw and discontinue
registration of the Optionee's Included Shares at any time prior to the
effective date of such Registration Statement if the registration of the
Registration Shares is withdrawn or discontinued.
(4) The Company shall not be required to include any of
the Optionee's Included Shares in any Registration Statement unless the Optionee
agrees, if so requested by the Company, to: (i) offer and sell the Optionee's
Included Shares to or through an underwriter selected by the Company and, to the
extent possible, on substantially the same terms and conditions under which the
Registration Shares are to be offered and sold; (ii) comply with any
arrangements, terms and conditions with respect to the offer and sale of the
Optionee's Included Shares to which the Company may be required to agree; and
(iii) enter into any underwriting agreement containing customary terms and
conditions.
(5) If the offering of the Registration Shares by the
Company is, in whole or in part, an underwritten public offering, and if the
managing underwriter determines and advises the Company in writing that the
inclusion in such Registration Statement of all of the Shares, together with the
stock of other persons who have a right to include their stock in the
Registration Statement (collectively referred to as the "Aggregate Shares"),
would adversely affect the marketability of the offering of the Registration
Shares, then the Optionee and such other holders shall be entitled to register
the portion of such number of Aggregate Shares as the managing underwriter
determines may be included without such adverse effects (collectively,
"Aggregate Underwriter Shares"), subject to the terms, exceptions and conditions
of this Section 5(g). The number of Aggregate Underwriter Shares which the
Optionee shall be entitled to register shall be equal to the number of Aggregate
Underwriter Shares multiplied by a fraction, the numerator of which is the
number of Optionee's Included Shares and the denominator of which is the number
of Aggregate Shares.
(6) The Company shall bear all costs and expenses of
registration of the Registration Shares, including Optionee's Included Shares.
5
<PAGE>
(7) It shall be a condition precedent to the Company's
obligation to register any of Optionee's Included Shares that the Optionee shall
provide the Company with all information and documents, and shall execute,
acknowledge, seal and deliver all documents reasonably necessary, to enable the
Company to comply with the 1933 Act, the State Acts, and all applicable laws,
rules and regulations of the SEC or of any state securities law authorities.
6. RIGHTS AS STOCKHOLDER.
(a) Optionee shall have none of the rights of a stockholder
with respect to any of the Option Shares until any Option granted herein shall
have been exercised.
(b) Nothing in this Agreement shall affect in any way the
rights or powers of the Company, or any parent or subsidiary Company, or any of
the directors or stockholders of the Company, to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or business, or any merger or consolidation of the
Company, or any issue of bonds, debentures, preferred or prior preference stocks
or other classes of securities ahead of or affecting the Common Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of the Company's assets or business, or any grant of
options to purchase securities of the Company otherwise than under this
Agreement, or to effect any other corporate act or proceeding, whether of a
similar character or otherwise.
(c) (i) If the outstanding shares of Common Stock of the
Company are increased, decreased, changed into or exchanged for a different
number or kind of shares or securities of the Company or of another corporation
or entity or shares of a different par value or without par value through a
recapitalization, stock dividend, stock split, reverse stock split or a
reorganization under which the Company is not the surviving entity, an
appropriate or proportionate adjustment shall be made in the number and/or kind
of securities allocated to the Options, without change in the aggregate Option
Price applicable to the unexercised portion of the outstanding Option but with a
corresponding adjustment in the Option Price for each share or other unit of any
security covered by the Option. No adjustment shall occur under this Section 6
by virtue of the fact that the Company purchases or sells Common Stock or any
securities of the Company at its fair market value (other than pursuant to
compensatory Stock Options) for cash.
6
<PAGE>
(ii) In case the Company shall issue rights or warrants to
all holders of its shares of Common Stock entitling them to subscribe for or to
purchase shares of Common Stock at a price per share which, when added to the
amount of consideration received or receivable by the Company for such rights or
warrants is less than the Current Market Price (as hereinafter defined) per
share at the record date, the number of Option Shares purchasable upon the
exercise of the Option shall be increased so that thereafter, until further
adjusted, this Option shall entitle the Optionee to purchase an additional
number of shares determined as if the Option had been fully exercised and the
Optionee were a record holder entitled to receive such rights or warrants at an
option price which is the same as the per share consideration payable pursuant
to such rights or warrants. Such adjustment shall be made whenever such rights
or warrants are issued, but shall also be effective retroactively as to portions
of the Option exercised between the record date for the determination of
shareholders entitled to receive such rights or warrants and the date such
rights or warrants are issued.
(iii) For the purpose of any computation under Section
6(c)(ii), the Current Market Price per share of Common Stock at any date shall
be (i) if the shares of Common Stock are listed on any national securities
exchange, the average of the daily closing prices for the fifteen (15)
consecutive business days commencing twenty (20) business days before the date
of determination (the "Trading Period"); (ii) if the shares of Common Stock are
not listed on any national securities exchange but are quoted or reported on the
National Association of Securities Dealers, Inc., Automated Quotation System
("NASDAQ"), the last quoted price or, if not quoted, the average of the high bid
and low asked price as reported by NASDAQ for the Trading Period, or the daily
closing prices for the Trading Period as reported by NASDAQ, as the case may be;
and (iii) if the shares of Common Stock are neither listed on any national
securities exchange nor quoted or reported on NASDAQ, the higher of (x) the
Exercise Price then in effect, or (y) the tangible book value per share of
Common Stock as of the end of the Company's immediately preceding fiscal year.
(d) In the event of the proposed dissolution or liquidation of
the Company, the Company shall cause the Board of Directors of the Company to
notify the Optionee and the Grantor at least thirty (30)days prior to such
proposed action. To the extent it has not been exercised during such thirty (30)
day period, the Options will terminate as to any unexercised portion thereof
immediately prior to the consummation of such proposed action.
7
<PAGE>
7. REPRESENTATIONS. Optionee will acquire Optionee's shares for
Optionee's own account, for investment only and without a view to resale or
distribution except in compliance with the Securities Act of 1933, as amended,
("Act") and any applicable state securities laws, and upon the acquisition of
the shares, Optionee will enter into such written representations, warranties
and agreements as the Company or the Grantor may request in order to comply with
the Act, any applicable state securities laws and this Option Agreement. Grantor
represents and warrants that it owns sufficient Common Stock to issue the Option
Shares to the Optionee on exercise of the Option and agrees that it will reserve
sufficient Common Stock to issue the Option Shares to the Optionee on exercise
of the Option.
8. TAX CONSEQUENCES AND WITHHOLDING. Optionee agrees that the Grantor
is not responsible for the tax consequences to Optionee of the granting of the
Options or its subsequent exercise by Optionee, and that it is the
responsibility of Optionee to consult with Optionee's personal tax advisor
regarding all matters with respect to the tax consequences of the granting of
the Options and its exercise by Optionee.
9. NON-EMPLOYMENT. Nothing in this Agreement, shall confer on Optionee,
nor imply in favor of Optionee any right to continue as a contractor to or
employee of the Company or of any parent or subsidiary company of the Company or
prevent, or in any way impair the right of the stockholders or Board to
terminate Optionee's relationship with the Company pursuant to the Employment
Agreement.
10. GENERAL PROVISIONS.
(a) AGREEMENT TO BE BOUND BY CONTRACT. This Agreement shall be
binding not only on the parties hereto, but also upon their heirs, executors,
administrators, successors or assigns. The parties hereto agree for themselves
and their heirs, executors, administrators, successors or assigns, to execute
any instruments and to perform any acts which may be necessary or proper to
carry out the purposes of this Agreement.
(b) AMENDMENT OR ALTERATION. This Agreement may be altered or
amended, in whole or in part, at any time, only by a written instrument setting
forth such changes signed by all parties hereto.
(c) WAIVER. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
8
<PAGE>
(d) NOTICES. Any notices permitted or required hereunder shall
be delivered to the parties personally, by telecopier, or by United States Mail,
with postage prepaid, certified or registered, return receipt requested,
addressed to the respective parties at the following addresses and telecopier
numbers:
If to Company: Smart Choice Automotive Group, Inc.
5200 South Washington Avenue
Titusville, Florida 32780
Attention: James Neal Hutchinson, Jr.
Corporate Counsel
Telecopier: (407) 383-8822
If to Grantor: Gerald C. Parker, Trustee
101 Phillipe Parkway, Suite 300
Safety Harbor, Florida 34695
Telecopier: (813) 725-9570
If to Optionee: At the address and telecopier
number for the Optionee on file
with the Company
The date of service of any notice or communication hereunder shall be the date
of the hand delivery or receipt of telecopy, or three (3) days after the
mailing, if mailed by certified mail, return receipt requested. A party whose
address or telecopy number changes shall notify the other party, in accordance
with this Section, within five (5) business days of such change (the "Changed
Party"). Failure of the Changed Party to notify the other party of such a change
shall constitute a waiver of any right to receive notice under this Agreement by
the Changed Party.
(e) VALIDITY. In the event that any provision of this
Agreement shall be held to be invalid, the same shall not affect, in any
respect, the validity of the remainder of this Agreement.
(f) INTEGRATED AGREEMENT. This Agreement and the Employment
Agreement and all agreements executed in accordance with the terms hereof
constitutes the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and there are no agreements,
understandings, restrictions, representations or warranties among the parties
other than those set forth herein.
(g) ATTORNEYS' FEES. In the event any litigation including any
appeals is instituted in connection with the breach,
9
<PAGE>
enforcement or interpretation of this Agreement, including, without limitation,
any action seeking declaratory relief, equitable relief, injunctive relief, or
damages, the prevailing party shall be entitled to recover from the
non-prevailing party all costs, expenses and attorneys' fees incurred in
connection therewith, including any costs of collection.
(h) STATE LAW GOVERNING CONTRACTS. This Agreement shall be
governed by the laws of the State of Florida.
(i) NO CONSTRUCTION AGAINST DRAFTING PARTY. Each party to this
Agreement expressly recognizes that it results from a negotiated process in
which each party was given the opportunity to consult with counsel and
contributed to the drafting of this Agreement. Given this fact, no legal or
other presumptions against the party drafting this Agreement concerning its
construction, interpretation or otherwise shall accrue to the benefit of any
party to this Agreement and each party shall expressly waives the right to
assert such a presumption in any proceedings or disputes connected with, arising
out of, or involving this Agreement.
IN WITNESS WHEREOF, the parties have executed this Stock Option
Agreement under seal as of the date first above written.
THE COMPANY:
SMART CHOICE AUTOMOTIVE GROUP,INC.
By:_______________________________
THE GRANTORS:
CONLAN-SMART CHOICE HOLDINGS
MANAGEMENT TRUST under agreement
dated January 29, 1997
By:_______________________________
Gary R. Smith, Trustee
By:_______________________________
Gerald C. Parker, Trustee
10
<PAGE>
PARKER-SMART CHOICE HOLDINGS
MANAGEMENT TRUST under agreement
dated January 29, 1997
By:_____________________________
Gary R. Smith, Trustee
By:_____________________________
Gerald C. Parker, Trustee
THE OPTIONEE:
------------------------------
Ronald W. Anderson
Exhibit 10.67.1
SECOND AMENDMENT TO DEALER EQUIPMENT
LOAN AND SECURITY AGREEMENT
This Second Amendment to Dealer Equipment Loan and Security Agreement
("Amendment"), effective as of the 29th day of July, 1998 (the "Effective
Date"), by and between NISSAN MOTOR ACCEPTANCE CORPORATION ("NMAC") and FIRST
CHOICE STUART 1, INC., a Florida corporation d/b/a Stuart Nissan ("Dealer").
W I T N E S S E T H:
WHEREAS, NMAC and B & B Florida Enterprises, Inc., a Florida
corporation ("B & B") entered into that certain Nissan Motor Acceptance
Corporation Dealer Equipment Loan and Security Agreement, dated October 12, 1995
(the " Original Loan Agreement"), whereby NMAC agreed to advance to B & B the
maximum sum of TWO HUNDRED FIFTY THOUSAND AND NO/100 ($250,000.00) DOLLARS, upon
fulfillment of the terms and conditions thereof by B & B; and
WHEREAS, the Original Loan Agreement was subsequently amended September
1, 1997 and again on June 8, 1998 pursuant to that certain Extension Agreement
(the Original Loan Agreement, as subsequently amended, the "Loan Agreement") and
Dealer and NMAC wish to further amend the Loan Agreement as provided herein.
NOW THEREFORE, in consideration of the premises, Ten and No/100
($10.00) Dollars and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. The recitations set forth above are true and correct.
2. The principal outstanding balance (exclusive of interest) owed to NMAC under
the Loan Agreement is, as of the Effective Date of this Amendment, One Hundred
Sixty-Eight Thousand, Eighty-one Dollars and Thirty-nine Cents ($168,081.39).
3. Section 2.2 of the Loan Agreement is hereby deleted in its entirety and the
following is substituted therefore:
"From the Effective Date of this Dealer Equipment Loan and
Security Agreement through June 30, 1998 (the "Interest Only
Period"), accrued interest together with all other fees, costs
and charges shall be paid monthly on the 15th day thereof
under this Loan. Commencing with the first month following the
expiration of the Interest Only Period and continuing each
month thereafter, successive monthly principal installments of
Five Thousand Six Hundred Two Dollars and Seventy-One Cents
($5,602.71) each together with all accrued and unpaid interest
and all other fees, costs and charges due and owing under this
Loan shall be paid on the 15th day of each
<PAGE>
month, commencing with the payment due August 15, 1998,
followed by one final installment on January 15, 2001 equal to
the then unpaid Principal, all accrued and unpaid interest and
all other fees, costs and charges due and owing under this
Loan. Interest shall be calculated on a daily basis, computed
on the actual number of days elapsed over a year of 365 or 366
days, commencing on the date the Principal is funded.
4. NMAC's waiver of any term, provision, condition, covenant or agreement of the
Loan Agreement prior to the Effective Date hereof shall not be construed, in any
manner, to be NMAC's consent to such waiver on or after the Effective Date of
this Amendment. No waiver of any term, provision, condition, covenant or
agreement contained in this Agreement or contained in the Loan Agreement shall
be effective unless set forth in writing signed by NMAC and any such waiver
shall be effective only to the extent set forth in such writing.
5. Dealer agrees to pay any and all documentary stamps and all penalties, if
any, which are assessed by the State of Florida on account of the execution
and/or delivery of the Loan Agreement and/or this Amendment. Dealer shall pay
such sums immediately upon receipt of notice of such amounts from NMAC. If the
Dealer fails to pay such sums to NMAC, NMAC may (and without waiving such Event
of Default), at its option, pay such taxes and penalties) and any such payment
made by NMAC shall be added to the indebtedness hereof and shall bear interest
from the date advanced at the rate of the lesser of eighteen (18%) percent per
annum or the maximum rate permissible under Florida law.
6. The Dealer hereby represents, ratifies and affirms to NMAC that NMAC has
acted in good faith and has fulfilled and fully performed its obligations under
the Loan Agreement and all of its obligations with respect to the administration
and disbursement of the loan proceeds.
7. Except as specifically provided in this Amendment, no part of the Loan
Agreement or any other instrument securing the Loan Agreement is in any way
altered, amended or changed.
8. The parties hereto intend that this Amendment will not disturb the existing
lien priority of NMAC and that this Amendment will retain the same lien and
priority as the Loan Agreement which this Amendment modifies.
9. This Amendment shall be governed by and construed and the rights and
obligations of the parties under this Amendment shall be determined in
accordance with the laws of the State of Florida.
10. This Amendment and the Loan Agreement shall be binding upon and shall enure
to the benefit of the parties hereto and their respective personnel,
representatives, heirs, successors and assigns.
2
<PAGE>
11. Each party to this Amendment acknowledges that it has reviewed this
Amendment and hereby declares that the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Amendment. In the event that any terms or
provisions of this Amendment are held invalid or unenforceable, the remaining
terms and conditions of this Amendment shall continue to be fully enforceable
without change, and this Amendment shall be interpreted as if the unenforceable
provision had not been a part hereof.
12. NMAC AND DEALER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
ANY AND ALL RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION (INCLUDING, BUT NOT LIMITED TO, ANY CLAIMS, CROSS-CLAIMS OR A
THIRD-PARTY CLAIMS) ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AMENDMENT,
THE LOAN AGREEMENT OR ANY OTHER AGREEMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH OR THEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER WRITTEN OR VERBAL) OR ACTIONS OF ANY PARTY HERETO. THIS
PROVISION IS A MATERIAL INDUCEMENT FOR NMAC TO ENTER INTO THIS AMENDMENT. THE
DEALER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF NMAC NOR NMAC'S
COUNSEL HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT NMAC WOULD NOT, IN THE
EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL
PROVISION.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date and year first above written.
Signed, sealed and delivered in NISSAN MOTOR ACCEPTANCE CORPORATION
the presence of:
___________________________ By:________________________________
Witness Print Name:________________________
Print Name:_________________ Title:_____________________________
____________________________
Witness
Print Name:_________________
FIRST CHOICE STUART 1, INC.,
a Florida corporation d/b/a Stuart
Nissan
_____________________________ ___________________________________
Witness Print Name:________________________
Print Name:__________________ Title:_____________________________
_____________________________
Witness
Print Name:__________________
4
<PAGE>
By execution hereof, the following Guarantors, in their capacity as
guarantors of the obligations of Dealer to NMAC under their respective
Continuing Guaranty Agreement (Corporation) previously delivered to NMAC, hereby
approve and consent to the execution and delivery of this Amendment and
acknowledge and agree that, notwithstanding the execution and delivery of this
Amendment, each Guarantor shall have continuing liability under their respective
Continuing Guaranty Agreement (Corporation) for the obligations of Dealer as
modified by this Amendment.
SMART CHOICE AUTOMOTIVE GROUP,
INC., a Florida corporation
By:___________________________________
Print Name:____________________________
Title:_________________________________
SMART CARS, INC., a Florida corporation
By:___________________________________
Print Name:____________________________
Title:_________________________________
5
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Smart Choice Automotive Group, Inc.
Titusville, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated November 13, 1997 relating to the
financial statements of Eckler Industries, Inc. which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
--------------------
BDO Seidman, LLP
Orlando, Florida
August 20, 1998
EXHIBIT 23.1.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Smart Choice Automotive Group, Inc.
Titusville, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 30, 1998, except for the first
paragraph in Note 12 as to which the date is July 23, 1998, relating to the
consolidated financial statements of Smart Choice Automotive Group, Inc. and
subsidiaries which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
--------------------
BDO Seidman, LLP
Orlando, Florida
August 20, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Smart Choice Automotive Group, Inc.
Titusville, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 28, 1997 relating to the
financial statements of Florida Finance Group, Inc., Suncoast Auto Brokers,
Inc. and Suncoast Auto Brokers Enterprises, Inc. which are contained in this
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ Spence, Marston, Bunch, Morris & Co.
------------------------------------
Spence, Marston, Bunch, Morris & Co.
Certified Public Accountants
Clearwater, Florida
August 18, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
Smart Choice Automotive Group, Inc.
Titusville, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated March 26, 1997, except
for Note 6 as to which the date is April 12, 1997, on our audit of the combined
balance sheets of Liberty Finance Company, Inc. and Affiliates (consisting of
Liberty Finance Company, Inc., Wholesale Acquisitions, Inc., and Team
Automobile Sales & Finance, Inc.), as of December 31, 1996 and 1995, and the
related combined statements of operations, stockholders' equity, and cash flows
for the two years then ended, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ Osburn, Henning and Company
---------------------------
OSBURN, HENNING AND COMPANY
Orlando, Florida
August 18, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Smart Choice Automotive Group, Inc.
Titusville, FL
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report for the year ended December 31, 1996 of
B&B Enterprises of Florida, Inc. which are contained in this Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ Rosenfield & Company, P.A.
--------------------------
Rosenfield & Company, P.A.
Orlando, Florida
August 18, 1998
EXHIBIT 23.5
CONSENT OF LEVINE & LEVINE
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS
Smart Choice Automotive Group, Inc.
Titusville, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated January 20, 1997 (except for Note
15, as to which the date is April 10, 1997) relating to the Financial
Statements of B&B Florida Enterprises, Inc., which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ LEVINE & LEVINE
-------------------
Levine & Levine
Jupiter, Florida
August 18, 1998
