AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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:
<TABLE>
<S> <C>
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 NO.: (202) 467-7176 TELEPHONE: (404) 881-7000
FAX NO.: (404) 881-4777
</TABLE>
---------------
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. [ ]
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<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
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
par value $.01 per share....... 5,750,000 $ 5.59 $32,142,500 $9,483
==========================================================================================================
</TABLE>
(1) Includes 750,000 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.
---------------
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 JULY 17, 1998
PROSPECTUS
5,000,000 SHARES
[LOGO]
COMMON STOCK
----------------
All of the 5,000,000 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 July 15, 1998, the last reported bid price of the Common
Stock as reported on the Nasdaq SmallCap Market was $5.50 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 11 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 $500,000.
(3) The Company has granted to the several Underwriters a 30-day option to
purchase up to 750,000 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
, 1998.
----------------
STEPHENS INC. CRUTTENDEN ROTH SOUTHEAST RESEARCH
INCORPORATED PARTNERS, INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[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 AND THE IMPOSITION OF PENALTY BIDS. 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 CONSOLIDATED 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 ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
Smart Choice Automotive Group, Inc. currently 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" 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 nearly $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 occurred at
approximately 2,800 self-financed used car stores, which are separate from used
car operations at new car dealerships.
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) define the First Choice brand and (iii) reduce losses
on the Company's repossessions of the cars. Due to the quality and reliability
of its First Choice cars, the Company is able to provide 24 month/24,000 mile
service contracts to its customers, which are underwritten by a third party.
The Company sells used cars at its First Choice stores for an average retail
price of approximately $9,700, which includes 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 receive
maintenance coverage under 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.
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
3
<PAGE>
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 24
month/24,000 mile service contracts to its customers, which are 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 service contracts allow the Company's
customers to have their cars serviced 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 approval 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 March 31, 1998, 93.9% of the 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
4
<PAGE>
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 55.1% (on a retail basis) of the principal amount of loans
charged off for the quarter ended March 31, 1998.
AVOID THIRD PARTY FINANCE RECEIVABLES. As part of its operating
philosophy, the Company only originates and services finance receivables on
cars sold by its First Choice and Team stores. The Company does not intend to
purchase third party finance receivables. In addition, the Company does not
intend to utilize gain on sale accounting which is a revenue recognition method
based upon certain estimates which may not subsequently be realized. See
"Business--Financing Customers with Impaired Credit."
INCREASE OPERATING EFFICIENCY. Since late 1997, to increase operating
efficiency, the Company has combined certain administrative functions, such as
accounting, treasury, insurance, employee benefits, strategic marketing and
legal support, to reduce administrative costs and enhance the administrative
functions. 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 ("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 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.
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
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 regions 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
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<S> <C>
Common Stock offered hereby .................... 5,000,000 shares
Common Stock to be outstanding immediately
after the Offering ............................ 18,107,508 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 750,000 shares of Common Stock that may be sold by the Company upon
exercise of the Underwriters' over-allotment option. Also excludes (i)
1,148,000 shares of Common Stock issuable upon exercise of stock options
outstanding at March 31, 1998 with a weighted average exercise price of
$4.75 per share, (ii) 2,591,720 shares of Common Stock issuable upon
exercise of warrants with a weighted average exercise price of $5.56, (iii)
1,712,017 shares of Common Stock issuable upon conversion of approximately
$9.1 million of convertible debt at an average conversion price of $5.56 per
share and (iv) 1,070,023 shares of Common Stock issuable upon conversion of
the 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
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PREDECESSORS(1) THE COMPANY(1)
--------------------- -------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------
PRO FORMA
1995 1996 1996 1997 1997(2)
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Sales at used car stores ........................ $ 27,521 $ 33,867 $ -- $ 35,279 $ 43,220
Income on finance receivables(3) ................ 4,614 5,949 -- 9,210 11,114
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 -- 70,915 95,558
Total costs and expenses ......................... 42,862 53,433 671 83,277 108,118
-------- -------- ------- ---------- ----------
Income (loss) from operations ................... 2,246 1,276 (671) (12,362) (12,560)
Interest expense and other income ............... (2,380) (2,140) (33) (6,287) (6,921)
-------- -------- ------- ---------- ----------
Net income (loss) ................................ (134) (864) (704) (18,649) (19,481)
Net income (loss) applicable to common
stock ........................................... (134) (864) (704) (18,982) (19,814)
Net income (loss) per common share:
Basic ........................................... -- -- $ (0.13) $ (2.14) $ (2.15)
Diluted ......................................... -- -- -- -- --
Supplemental(5) ................................. -- -- -- -- --
Weighted average common shares
outstanding during period:
Basic ........................................... -- -- 5,488 8,861 9,209
Diluted ......................................... -- -- -- -- --
<CAPTION>
THE COMPANY(1)
----------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
----------- ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Sales at used car stores ........................ $ 4,785 $ 21,846
Income on finance receivables(3) ................ 523 4,146
Sales at new car dealerships(4) ................. -- 8,123
Sales of Corvette parts and accessories ......... 2,499 4,364
Income from insurance and training .............. 262 180
-------- --------
Total revenues ................................... 8,069 38,659
Total costs and expenses ......................... 14,223 35,987
-------- --------
Income (loss) from operations ................... (6,154) 2,672
Interest expense and other income ............... (748) (1,005)
-------- --------
Net income (loss) ................................ (6,902) 1,667
Net income (loss) applicable to common
stock ........................................... (6,902) 1,589
Net income (loss) per common share:
Basic ........................................... $ (0.87) $ 0.15
Diluted ......................................... -- 0.14
Supplemental(5) ................................. -- 0.10
Weighted average common shares
outstanding during period:
Basic ........................................... 7,853 10,380
Diluted ......................................... -- 11,227
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY(1)
-----------------------------------------------------------------
AS OF AS OF
DECEMBER 31, MARCH 31,
1997 1998
-------------- ------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(6) AS ADJUSTED(6)(7)
---------- -------------- ------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables, net ....................... $33,227 $ 42,653 $ 42,653 $ 42,653
Inventories .................................... 15,516 17,429 17,429 17,429
Total assets ................................... 89,105 104,893 110,784 110,784
Total debt ..................................... 69,654 82,344 81,484 56,409
Redeemable Convertible Preferred Stock ......... 4,942 1,492 10 10
Total stockholders' equity ..................... 4,520 10,016 18,249 43,324
</TABLE>
(FOOTNOTES ON NEXT PAGE)
7
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- ----------------
(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 periods prior 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 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 the
significant companies acquired by the Company during 1997 as if such
acquisitions 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, as well as
revenues from service, parts and accessories and finance and insurance
commissions originating at those dealerships.
(5) Supplemental net income per common share for the three months ended March
31, 1998 is based upon the weighted number of shares of Common Stock used in
the calculation of diluted net income per share increased by the sale of
4,559,091 shares, the proceeds of which would be necessary to reduce
borrowings by $25.1 million.
(6) Gives effect to (a) the conversions into Common Stock of 154 shares of
Series A Redeemable Convertible Preferred Stock in May and June 1998 and
$860,135 of convertible debt in May and June 1998 and (b) the issuances of a
total of 595 shares of convertible preferred stock in May and June 1998 .
(7) Gives effect to the sale of 5,000,000 shares of Common Stock offered hereby
at $5.50 per share and the initial application of the estimated net proceeds
thereof in the manner described in the "Use of Proceeds" as of March 31,
1998.
8
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PREDECESSORS THE COMPANY
------------------------------------- --------------------------
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................. * * 20 8 22
Average number of used cars sold per store ............. * * 188 52 105
Number of used cars sold per period .................... * * 3,750 416 2,316
Average selling price per car .......................... * * $ 9,408 $ 11,503 $ 9,432
Gross profit as a percentage of total sales(1) ......... * * 20.8% 29.2% 30.9%
Finance Receivables:
Principal balance outstanding (000s) .................... * * $40,084 $ 23,711 $51,146
Allowance for credit losses as a percentage of
principal balance outstanding ........................ * * 17.1% 17.5% 16.6%
Principal balance of contracts originated during
the period (000s) .................................... $24,912 $39,925 $45,788 $ 8,428 $26,920
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days .......................... * * 4.0% 7.5% 2.7%
Principal balances over 60 days ........................ * * 4.9% 6.7% 3.4%
------- ------- ------- -------- -------
Total over 31 days ..................................... * * 8.9% 14.2% 6.1%
New Car Dealerships(2):
Gross profit as a percentage of total sales(1) ......... * * 12.8% * 11.5%
Corvette Parts and Accessories:
Gross profit as a percentage of total sales(1) ......... * * 21.1% 37.5% 35.9%
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE MONTHS ENDED
-------------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR
1997 1997 1997 1997 1998
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................. 8 10 11 20 22
Average number of used cars sold per store ............. 52 68 120 67 105
Number of used cars sold per quarter ................... 416 680 1,317 1,337 2,316
Average selling price per car .......................... $ 11,503 $ 10,300 $ 8,308 $ 9,386 $ 9,432
Gross profit as a percentage of total sales(1) ......... 29.2% 24.3% 33.1% 4.9% 30.9%
Finance Receivables:
Number of contracts outstanding ......................... 2,146 6,505 6,616 6,857 7,787
Principal balance outstanding (000s) .................... $ 23,711 $ 33,286 $35,767 $40,084 $51,146
Allowance for credit losses as a percentage of
principal balance outstanding ......................... 15.8% 19.0% 17.1% 17.1% 16.6%
Principal balance of contracts originated during
the period (000s) ..................................... $ 8,428 $ 13,141 $14,390 $ 9,829 $26,920
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days .......................... 7.5% 5.9% 5.0% 4.0% 2.7%
Principal balances over 60 days ........................ 6.7% 6.1% 5.9% 4.9% 3.4%
-------- -------- ------- ------- -------
Total over 31 days ..................................... 14.2% 12.0% 11.0% 8.9% 6.1%
New Car Dealerships(2):
Gross profit as a percentage of total sales(1) ......... * * 12.2% 12.8% 11.5%
Corvette Parts and Accessories:
Gross profit as a percentage of total sales(1) ......... 37.5% 38.8% 33.6% 21.1% 35.9%
</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, services, parts and accessories.
9
<PAGE>
RECENT DEVELOPMENTS
For the quarter ended June 30, 1998, revenues increased 166% to
approximately $39.1 million, compared with revenues of approximately $14.7
million in the second quarter of 1997. Cost of revenues increased 194% to
approximately $26.9 million for the quarter, compared with cost of revenues of
approximately $9.2 million in the second quarter of 1997. For the quarter ended
June 30, 1998, the Company recorded net income of approximately $2.4 million or
$0.19 per share, compared with a 1997 second quarter loss of approximately $0.4
million or $0.04 per share.
10
<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 Predecessors for periods prior to the
Predecessor Acquisition are presented on a different basis than the historical
financial results of the Company after the Predecessor Acquisition 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 $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 the costs related to acquisitions that were not completed.
Although the Company has experienced growth in revenues subsequent to the
Predecessor Acquisition and recorded net income for the three months ended
March 31, 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 Operation."
ABILITY TO MANAGE GROWTH; RISKS ASSOCIATED WITH ACQUISITIONS
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 business plan. While the Company is
presently focusing on internal expansion, a significant portion of
11
<PAGE>
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. Furthermore, 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 management infrastructure, systems
and financial controls, new store locations and any acquired used car
dealership operations and make adjustments or complete reorganizations as
appropriate. 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 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 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 operation 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 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 anywhere between 5% and 40% of any group of
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
12
<PAGE>
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 price 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 March 31, 1998, the Company's total
indebtedness was approximately $93.4 million, or 78.5% 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, the Company may be required to
significantly curtail 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.
13
<PAGE>
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 borrowing, 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 INDUSTRY
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."
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
14
<PAGE>
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 was 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 "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 decline in car sales in the
future. Any such decline 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 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.
15
<PAGE>
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 March 31, 1998, the Company's total assets were approximately $104.9
million, of which approximately $25.4 million, or approximately 24.2% 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 an aggregate of 18,107,508 shares of Common Stock, of which,
13,287,591 shares, including the shares sold in this Offering, will be freely
tradeable without restriction or further registration under the Securities Act.
Of such shares, 7,581,772 shares of Common Stock have been registered for
resale on a registration statement on Form S-3. Under Rule 144, restricted
securities that have been held for one year may be sold in accordance with
certain timing and volume limitations; and after two years they may be sold
without restriction, except for shares which are held by affiliates of the
Company, which would remain subject to the resale limitations of Rule 144.
Further, a total of 1,148,000 shares of Common Stock have been reserved for
issuance under the Company's employee compensation plans and will be registered
for resale on Form S-8 in the near future. The Company also has outstanding
convertible notes, public and non-public warrants, convertible preferred stock
and other rights to acquire a total of 6,521,760 shares of Common Stock.
Certain officers, directors and principal shareholders of the Company are
subject to lock-up agreements expiring 180 days from the date of this
Prospectus with respect to shares of Common Stock. After the expiration of the
lock-up period, these shares will be available for sale to the public, subject
to the resale limitations of Rule 144. 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," "Security Ownership of Certain Beneficial Owners and
Management," "Shares Eligible for Future Sale" and "Underwriting."
DILUTION TO NEW INVESTORS
After giving effect to the conversion into Common Stock of 154 shares of
Series A Redeemable Convertible Stock and $860,135 of convertible debt,
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 $4.88 per share. If the Company issues additional
Common Stock in the future, including shares which may be issued pursuant to
earn-out arrangements, option grants and
16
<PAGE>
future acquisitions, purchasers of Common Stock in the Offering may experience
further dilution in the net tangible book value per share of the Common Stock.
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, to 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 rate at 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
Offering price.
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
17
<PAGE>
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 the 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, have been amended 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
Although the Company's Common Stock is currently listed on the Nasdaq
SmallCap Market and application has been made to have the Common Stock listed
on the Nasdaq National Market, there can be no assurance that a public trading
market for the Common Stock will be sustained. 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 System, purchasers
of Common Stock may have difficulty selling their shares should they desire to
do so because certain restrictions (the "penny stock" rules) may be placed upon
the sale of their securities unless the securities qualify for an exemption
from 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 per share or an exercise price of less than $5 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 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 or desirability 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 per share, and it is unlikely that any bank
or financial institution will accept such securities as collateral,
18
<PAGE>
which could have an adverse effect in developing or sustaining any market for
such securities and may affect the ability of purchasers in this Offering to
sell their Common Stock in the secondary market.
LISTING MAINTENANCE CRITERIA FOR NASDAQ SYSTEM
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market and application has been made to have the Common Stock listed on the
Nasdaq National Market. Continued inclusion on the Nasdaq SmallCap Market, and
subsequent 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.
If the Company fails to comply with the Nasdaq listing requirements of the
respective Nasdaq system on which its securities are listed, 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," whereupon trading in the Company's securities would be subject
to the penny stock regulations. See "--No Assurance of Continued Market for
Common Stock."
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 March 31, 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 approximately 50.7% 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 or Bylaws ("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 "affiliated
transaction" be approved by a majority of disinterested directors or by the
holders of two-thirds of the voting shares
19
<PAGE>
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."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $5.50 per
share (the last reported bid price of the Common Stock on the Nasdaq SmallCap
Market on July 15, 1998), after deducting underwriting discounts and estimated
Offering expenses, are estimated to be approximately $25.1 million
(approximately $28.9 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: $19.8 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 revolving credit
facility with Finova Capital Corporation bears interest at the prime rate plus
2.5% (11% at March 31, 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 Acquisitions" and
"Business--The Company."
The Company intends to use the resulting available balance on the
revolving credit facility with Finova Capital Corporation for the
implementation of 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 in 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.
21
<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 symbol "SMCH" and 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. Such prices reflect inter-dealer prices without
retail markup, markdown or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
COMMON STOCK PUBLIC WARRANT
----------------------- ---------------------
HIGH LOW HIGH LOW
---------- ---------- ---------- --------
(IN DOLLARS)
<S> <C> <C> <C> <C>
1996
- ----
First Quarter ................................. $ 51/8 $ 3 $ 15/16 $ 3/8
Second Quarter ................................ 413/16 33/8 13/16 9/16
Third Quarter ................................. 41/2 27/8 15/16 1/2
Fourth Quarter ................................ 61/4 3 13/16 7/16
1997
- ----
First Quarter ................................. $ 61/8 $ 45/8 $ 15/16 $ 3/4
Second Quarter ................................ 63/4 4 17/8 3/4
Third Quarter ................................. 7 43/16 11/2 3/4
Fourth Quarter ................................ 61/4 31/2 15/32 1/2
1998
- ----
First Quarter ................................. $49/16 $115/16 $ 3/4 $9/32
Second Quarter ................................ 531/32 313/16 11/2 9/16
Third Quarter (through July 15, 1998) ......... 513/16 45/8 17/16 7/8
</TABLE>
At July 15, 1998, the last reported bid prices of the Common Stock and the
Public Warrants on the Nasdaq SmallCap Market were $5.50 and $1.50,
respectively. At July 15, 1998, there were approximately 1,880 record holders
of the Common Stock and approximately 264 record holders of the Public
Warrants.
22
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the actual
capitalization of the Company, (ii) the capitalization of the Company on a pro
forma basis as if the conversion into Common Stock of 154 shares of Series A
Redeemable Convertible Preferred Stock and $860,135 of convertible debt and the
issuance of a total of 594.98 shares of convertible preferred stock between
April 1, 1998 and June 30, 1998 each had occurred as of March 31, 1998 and
(iii) the capitalization of the Company on a pro forma as adjusted basis giving
effect to the sale by the Company of the 5,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $5.50 per share (the last
reported bid price of the Common Stock on the Nasdaq SmallCap Market on July
15, 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>
MARCH 31, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Revolving credit facility ....................................... $ 40,900 $ 40,900 $ 21,163
Vehicle floor plan .............................................. 9,414 9,414 9,414
Capital lease obligations ....................................... 869 869 869
Debt associated with acquisitions ............................... 7,619 7,619 5,781
Other notes payable ............................................. 23,542 22,682 19,182
--------- --------- ---------
Total debt ...................................................... 82,344 81,484 56,409
Redeemable convertible preferred stock .......................... 1,492 10 10
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no
shares issued and outstanding (actual); 594.98 shares issued and
outstanding (pro forma and pro forma as adjusted) .............. -- 5,891 5,891
Common stock, $.01 par value; 100,000,000 authorized; 12,259,482
shares issued and outstanding (actual); 13,013,405 shares issued
and outstanding (pro forma); and 18,013,405 shares issued and
outstanding (pro forma as adjusted)(1) ......................... 123 130 180
Additional paid-in capital ...................................... 27,913 30,248 55,273
Accumulated deficit ............................................. (18,020) (18,020) (18,020)
--------- --------- ---------
Total stockholders' equity .................................... 10,016 18,249 43,324
Total capitalization .......................................... $ 93,852 $ 99,743 $ 99,743
========= ========= =========
</TABLE>
- ----------------
(1) Excludes 750,000 shares of Common Stock that may be sold by the Company
upon exercise of the Underwriters' over-allotment option. Also excludes (i)
1,148,000 shares of Common Stock issuable upon exercise of stock options
outstanding at March 31, 1998 with a weighted average exercise price of
$4.75 per share, (ii) 2,591,720 shares of Common Stock issuable upon
exercise of warrants with a weighted average exercise price of $5.56, (iii)
1,712,017 shares of Common Stock issuable upon conversion of approximately
$9.1 million of convertible debt at an average conversion price of $5.56 per
share and (iv) 1,070,023 shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock. See "Management" and "Description of
Capital Stock."
23
<PAGE>
DILUTION
As of March 31, 1998, as adjusted on a pro forma basis as if the
conversion into Common Stock of 154 shares of Series A Redeemable Convertible
Stock and $860,135 of convertible debt each had occurred as of March 31, 1998,
the net tangible book value of the Company was approximately $(13,991,873) or
$(1.08) 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 5,000,000 shares
of Common Stock offered hereby at an assumed public offering price of $5.50 per
share, and after deducting the estimated underwriting discount and Offering
expenses payable by the Company, the pro forma as adjusted net tangible book
value of the Company as of March 31, 1998 would have been approximately
$11,083,127 or $0.62 per share. This represents an immediate increase in net
tangible book value of $1.70 per share to existing shareholders and an
immediate dilution in net tangible book value of $4.88 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 ......................... $ 5.50
-------
Net tangible book value per share before the Offering ......... $ (1.08)
Increase per share attributable to new shareholders ........... 1.70
-------
Pro forma as adjusted net tangible book value per share ......... .62
-------
Dilution per share to new shareholders .......................... $ 4.88
=======
</TABLE>
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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 three months ended March 31,
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 three months ended
March 31, 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 Consolidated 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
---------- ---------- ---------- ----------
<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 and expenses: ........................ 39,099 40,283 42,862 53,433
-------- -------- -------- --------
Income (loss) from operations .................... 765 2,897 2,246 1,276
Interest expense and other income ................ (1,293) (1,348) (2,380) (2,140)
-------- -------- -------- --------
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)
------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ----------------------
PRO
FORMA
1996 1997 1997(2) 1997 1998
----------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales at used car stores ........................ $ -- $ 35,279 $ 43,220 $ 4,785 $ 21,846
Income on finance receivables(3) ................ -- 9,210 11,114 523 4,146
Sales at new car dealerships(4) ................. -- 9,863 23,803 -- 8,123
Sales of Corvette parts and accessories ......... -- 15,385 16,238 2,499 4,364
Income from insurance and training .............. -- 1,178 1,183 262 180
------- ---------- ---------- -------- --------
Total revenues ................................... -- 70,915 95,558 8,069 38,659
Total costs and expenses: ........................ 671 83,277 108,118 14,223 35,987
------- ---------- ---------- -------- --------
Income (loss) from operations .................... (671) (12,362) (12,560) (6,154) 2,672
Interest expense and other income ................ (33) (6,287) (6,921) (748) (1,005)
------- ---------- ---------- -------- --------
Net income (loss) ................................ (704) (18,649) (19,481) (6,902) 1,667
Net income (loss) applicable to common stock ..... (704) (18,982) (19,814) (6,902) 1,589
Net income (loss) per common share:
Basic ........................................... $ (0.13) $ (2.14) $ (2.15) $ (0.87) $ 0.15
Diluted ......................................... -- -- -- -- 0.14
Supplemental(5) ................................. -- -- -- -- 0.10
Weighted average common shares outstanding
during period:
Basic ........................................... 5,488 8,861 9,209 7,853 10,380
Diluted ......................................... -- -- -- -- 11,227
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
PREDECESSORS(1)
------------------------------------------
AS OF DECEMBER 31,
------------------------------------------
1993 1994 1995 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables, net .............. $ 7,280 $11,477 $16,399 $19,825
Inventories ........................... 3,495 3,781 4,899 5,409
Total assets .......................... 17,762 21,851 28,569 32,555
Total debt ............................ 11,629 14,563 19,760 23,723
Redeemable Convertible
Preferred Stock ...................... -- -- 477 --
Total shareholders' equity (deficit) .. 4,019 4,143 3,503 5,854
<CAPTION>
THE COMPANY(1)
-------------------------------------------------------------------
AS OF MARCH 31,
-------------------------------------------------------------------
PRO
PRO FORMA AS
ACTUAL FORMA(6) ADJUSTED
1996 1997 1997 1998 1998 1998(6)(7)
--------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables, net .............. $ -- $33,227 $20,120 $ 42,653 $ 42,653 $ 42,653
Inventories ........................... -- 15,516 4,087 17,429 17,429 17,429
Total assets .......................... 716 89,105 50,880 104,893 110,784 110,784
Total debt ............................ 322 69,654 29,459 82,344 81,484 56,409
Redeemable Convertible
Preferred Stock ...................... -- 4,942 4 1,492 10 10
Total shareholders' equity (deficit) .. (698) 4,520 9,971 10,016 18,249 43,324
</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 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 periods prior 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 predecessors of
the Company (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 the
significant companies acquired by the Company during 1997 as if such
acquisitions 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, as well as
revenues from services, parts and accessories and finance and insurance
commissions originating at those dealerships.
(5) Supplemental net income per common share for the three months ended March
31, 1998 is based upon the weighted number of shares of Common Stock used
in the calculation of diluted net income per share increased by the sale
of 4,559,091 shares, the proceeds of which would be necessary to reduce
borrowings by $25.1 million.
(6) Gives effect to (a) the conversions into Common Stock of 154 shares of
Series A Redeemable Convertible Preferred Stock in May and June 1998 and
$860,135 of convertible debt in May and June 1998, and (b) the issuances
of a total of 595 shares of convertible preferred stock in May and June
1998.
(7) Gives effect to the sale of 5,000,000 shares of Common Stock offered hereby
at $5.50 per share and the initial application of the estimated net
proceeds thereof in the manner described in the "Use of Proceeds" as of
March 31, 1998.
26
<PAGE>
<TABLE>
<CAPTION>
PREDECESSORS THE COMPANY
---------------------------------------- ------------------------
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------------- ------------------------
1994 1995 1996 1997 1997 1998
------ ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................. * * * 20 8 22
Average number of used cars sold per store ............. * * * 188 52 105
Number of used cars sold per period .................... * * * 3,750 416 2,316
Average selling price per car .......................... * * * $ 9,408 $ 11,503 $ 9,432
Gross profit as a percentage of total sales(1) ......... * * * 20.8% 29.2% 30.9%
Finance Receivables:
Principal balance outstanding (000s) .................... * * * $40,084 $ 23,711 $51,146
Allowance for credit losses as a percentage of
principal balance outstanding * * * 17.1% 17.5% 16.6%
Principal balance of contracts originated
during the period (000s) .............................. $24,912 $39,925 $45,788 $ 8,428 $26,920
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days .......................... * * * 4.0% 7.5% 2.7%
Principal balances over 60 days ........................ * * * 4.9% 6.7% 3.4%
Total over 31 days ..................................... * * * 8.9% 14.2% 6.1%
New Car Dealerships(2):
Gross profit as a percentage of total sales(1) ......... * * * 12.8% * 11.5%
Corvette Parts and Accessories:
Gross profit as a percentage of total sales(1) ......... * * * 21.1% 37.5% 35.9%
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE
MONTHS ENDING
-----------------------
1ST QTR 2ND QTR
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 as a percentage of total sales(1) ......................... 29.2% 24.3%
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) ..... $ 8,428 $13,141
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 as a percentage of total sales(1) ......................... * *
Corvette Parts and Accessories:
Gross profit as a percentage of total sales(1) ......................... 37.5% 38.8%
<CAPTION>
AS OF OR FOR THE THREE MONTHS
ENDING
----------------------------------
3RD QTR 4TH QTR 1ST QTR
1997 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING DATA:
Used Car Stores
Number of used car stores .............................................. 11 20 22
Average number of used cars sold per store ............................. 120 67 105
Number of used cars sold per quarter ................................... 1,317 1,337 2,316
Average selling price per car .......................................... 8,308 9,386 9,432
Gross profit as a percentage of total sales(1) ......................... 33.1% 4.9% 30.9%
Finance Receivables:
Number of contracts outstanding ......................................... 6,616 6,857 7,787
Principal balance outstanding (000s) .................................... $35,767 $40,084 $51,146
Allowance for credit losses as a percentage of
principal balance outstanding ......................................... 17.1% 17.1% 16.6%
Principal balance of contracts originated during the period (000s) ..... $14,390 $ 9,829 $26,920
Delinquencies as a percentage of contracts outstanding:
Principal balances 31-60 days .......................................... 5.0% 4.0% 2.7%
Principal balances over 60 days ........................................ 5.9% 4.9% 3.4%
Total over 31 days ..................................................... 11.0% 8.9% 6.1%
New Car Dealerships(2):
Gross profit as a percentage of total sales(1) ......................... 12.2% 12.8% 11.5%
Corvette Parts and Accessories:
Gross profit as a percentage of total sales(1) ......................... 33.6% 21.1% 35.9%
</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, services, parts and accessories.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS," IN "RISK FACTORS," 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.
The following discussion and analysis regarding the Company's consolidated
financial position and consolidated results of operations should be read in
conjunction with the Company's Consolidated 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 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 SCHI through a merger between
SCHI and an acquisition subsidiary of Eckler's (the "Predecessor Acquisition").
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 for the periods
prior 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.
PREDECESSOR COMPANIES AND LACK OF COMPARABILITY. In connection with the
Predecessor Acquisition, the Company acquired various automobile sales and
finance companies. The Company
28
<PAGE>
accounted for the acquisition of each of these companies as a purchase,
recording the assets 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 that were acquired 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 THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED MARCH 31,
1997
REVENUES. The Company's revenues were $38.7 million for the three months
ended March 31, 1998 compared to $8.1 million for the same period in 1997. The
increase for the 1998 first quarter reflects primarily the increase to 22 used
car stores at March 31, 1998 as compared to 8 used car stores at March 31,
1997. In addition, the 1997 first quarter revenues reflect less than a full
quarter of operations of the Predecessors, whereas the 1998 first quarter
revenues reflect a full quarter 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 per
quarter.
COSTS AND EXPENSES. Cost of sales increased to $28.0 million for the three
months ended March 31, 1998 compared to $6.0 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 1998 first quarter of a full quarter of
operations of the Predecessors. As a percent of sales, the cost of sales at the
used car stores declined slightly to 69.1% from 70.8% 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 62.5% of sales, reflecting an increase in
sales of lower margin items.
The Company's selling, general and administrative expenses increased to
$8.0 million for the three months ended March 31, 1998 from $3.4 million for
the same period in 1997 excluding $1.7 million in settlement payments to
terminated employees and consultants of the Predecessors during the three
months ended March 31, 1997. The results reflect a decrease as a percentage of
revenues to 20.6% in the 1998 first quarter from 42.3% in the 1997 first
quarter as a result of better utilization of the Company's infrastructure,
including centralized marketing, accounting and management information
functions.
In the first quarter of 1997, the Company recognized a charge of $3.1
million for compensation expense related to employee and director stock
options. The Company did not have a comparable expense during the three-month
period ended March 31, 1998.
INTEREST EXPENSE AND OTHER INCOME. Interest expense totaled $1.9 million
for the three months ended March 31, 1998 compared to $0.7 million for the same
period in 1997, an increase of 176%. 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 $919,000 for the three months ended March 31, 1998
compared to $9,000 for the same period in 1997. The 1998 amount is comprised
primarily of sales tax refunds on cars
29
<PAGE>
repossessed during 1997 and through March 31, 1998 $(350,000), late fees on
delinquent loans $(167,000), and recoupment of prior year expenses $(166,000).
NET INCOME. Net income totaled $1.6 million for the three months ended
March 31, 1998 as compared to a net loss of $6.9 million for the same period in
1997. The improvement resulted primarily from the refocusing of the Company's
strategy and the restructuring of its operations during the last quarter of
1997.
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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------------ -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at used car stores ................. $21,846 100.0% $4,785 100.0%
Cost of sales at used car stores ......... 15,088 69.1 3,390 70.8
------- ----- ------ -----
Gross profit ............................ 6,758 30.9 1,395 29.2
Operating expenses ....................... 3,448 15.8 675 14.1
------- ----- ------ -----
Operating income ........................ $ 3,310 15.1% $ 720 15.1%
</TABLE>
Sales at used car stores increased to $21.8 million for the three months
ended March 31, 1998 compared to $4.8 million for the same period in 1997. The
increase in sales reflects the sale of 2,316 cars at the 22 used car stores
that were open during the 1998 period as compared to the sale of 416 cars at
the 8 used car stores that were open during the 1997 period. In addition, the
average number of used cars sold per store increased to 105 cars for the three
months ended March 31, 1998 as compared to average sales of 52 used cars for
the same period of 1997.
Gross profit increased to $6.8 million during the three months ended March
31, 1998 from $1.4 million during the three months ended March 31, 1997. Gross
profit as a percentage of sales increased to 30.9% for the three months ended
March 31, 1998 as compared to 29.2% for the three months ended March 31, 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 $3.4
million from $675,000 as a result of the increase in the number of used car
stores.
FINANCE RECEIVABLES
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income on finance receivables ................... $4,146 100.0% $ 523 100.0%
Provision for credit losses ..................... 2,904 70.0 1,050 200.8
Operating expenses .............................. 676 16.3 355 67.8
------ ----- ------ ------
Operating income (loss) ........................ 566 13.7 (882) (168.6)
Interest expense on finance receivables ......... 1,022 24.7 108 20.7
------ ----- ------ ------
Net loss ....................................... $ (456) (11.0)% $ (990) (189.3)%
</TABLE>
Income on finance receivables increased to $4.1 million for the three
months ended March 31, 1998 from $523,000 for the same period in 1997. The
increase reflects the increase in the average net finance
30
<PAGE>
receivables outstanding to $46.1 million for the three months ended March 31,
1998 from $13.1 million for the same period of 1997. This increase results from
the corresponding increase in sales of used cars during the three months ended
March 31, 1998.
Interest expense on finance receivables increased to $1.0 million for the
three months ended March 31, 1998 from $108,000 for the same period in 1997.
The increase reflects the higher level of finance receivables, which was only
partially offset by the reduction in the interest rate on the borrowed funds to
11% for the three months ended March 31, 1998 from 11.5% for the three months
ended March 31, 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 fund 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 three months ended March 31, 1998 was $2.9 million
compared to $1.0 million for the same period in 1997. The increase reflects the
significantly higher amount of finance receivables outstanding.
Operating income (loss) for the three months ended March 31, 1998
increased to $0.6 million from an operating loss of $0.9 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. Net losses resulted from the
recognition of the provision for credit losses on the significant increase in
finance receivables originated during the 1998 and 1997 first quarters.
NEW CAR DEALERSHIPS
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
THREE MONTHS ENDED MARCH 31,
MARCH 31, 1998 1997
----------------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at new car dealerships ................. $8,123 100.0% -- --
Cost of sales at new car dealerships ......... 7,187 88.5 -- --
------ ----- -- --
Gross profit ................................ 936 11.5 -- --
Operating expenses ........................... 999 12.3 -- --
------ ----- -- --
Operating loss .............................. $ (63) ( 0.8)% -- --
</TABLE>
The Company had new car dealerships for the first time during the three
months ended March 31, 1998, resulting from its acquisition of two new car
dealerships in August 1997. Sales at new car dealerships were $8.1 million
during the three months ended March 31, 1998 . During the three months ended
March 31, 1998, the Company sold 400 cars at its two new car dealerships. The
gross profit on sales at the new car dealerships was $936,000 during the three
months ended March 31, 1998.
The Company's operating expenses of $999,000 during the three months ended
March 31, 1998 exceeded the gross profit during such period, resulting in an
operating loss at the new car dealerships of $63,000.
31
<PAGE>
CORVETTE PARTS AND ACCESSORIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales of Corvette parts and accessories ......... $4,364 100.0% $2,499 100.0%
Cost of Corvette parts and accessories .......... 2,797 64.1 1,562 62.5
------ ----- ------ -----
Gross profit ................................... 1,567 35.9 937 37.5
Operating expenses .............................. 967 22.2 1,643 65.8
------ ----- ------ -----
Operating income (loss) ........................ $ 600 13.7% $ (706) (28.3)%
</TABLE>
Sales of Corvette parts and accessories increased to $4.4 million for the
three months ended March 31, 1998 compared to $2.5 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 $4.4 million for the three months ended
March 31, 1998 from $2.5 million for the three months ended March 31, 1997, the
gross margin on sales of Corvette parts and accessories declined to 35.9%
during the three months ended March 31, 1998 from 37.5% during the three months
ended March 31, 1997 as a result of sales of lower margin items in the 1998
period.
The decrease in operating expenses to $967,000 during the three months
ended March 31, 1998 as compared to $1.6 million during the three months ended
March 31, 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 $70.9 million representing a 22.9% 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 $3.3 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 $51.8 million for 1997
compared to $40.9 million for the Predecessors during 1996, representing an
increase of $10.9 million or 26.7%. 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
20.8% 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
32
<PAGE>
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 included $1.1 million associated with the settlement of various
employment and consulting agreements, $454,000 associated with acquisitions
which the Company determined not to complete when it decided to focus primarily
on used car sales rather than the acquisition of additional new car
dealerships, and $480,000 in costs associated with a contemplated public
offering.
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 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.
33
<PAGE>
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 through the provision for credit losses shown in
the Company's statements of operations on finance receivables originated by the
Company.
The allowance decreased from 17.1% of outstanding principal balances as of
December 31, 1997 to 16.6% as of March 31, 1998. The following table reflects
activity in the allowance for the three months ended March 31, 1998 and 1997
and for the year ended December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
------------------------- DECEMBER 31,
1998 1997 1997
----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period ............................. $ 6,857 $ 5,628 $ 5,628
Provision for credit losses .............................. 2,904 1,049 4,941
Net charge offs .......................................... (1,268) (2,941) (3,712)
-------- -------- --------
Balance, end of period ................................... $ 8,493 $ 3,736 $ 6,857
Allowance as a percentage of finance receivables ......... 16.6% 17.5% 17.1%
</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
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 three months ended
March 31, 1998 and 1997 and for the year ended December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
-------------------------- DECEMBER 31,
1998 1997 1997
---------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal Balances:
Collateral repossessed ................... $ 2,536 $2,907 $ 7,920
Other .................................... -- 36 37
-------- ------- --------
Total principal balances ................. 2,536 2,943 7,957
Recoveries, net .......................... (1,268) (2) (4,245)
-------- --------- --------
Net charge offs .......................... 1,268 2,941 3,712
Average principal balances ............... 46,142 13,088 27,325
Net charge offs as a percentage of average
principal balance outstanding .......... 2.7% 22.5% 13.6%
</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. To monitor portfolio performance,
beginning in 1997, the Company implemented "static pool" analysis for all
finance receivables originated since January 1, 1995. 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.
34
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE NET LOSSES AS PERCENTAGE OF ORIGINAL
PRINCIPAL BALANCE OF LOANS ORIGINATED DURING PERIOD
-----------------------------------------------------------------
MONTHS AFTER 1ST 2ND 3RD 4TH 1ST 2ND
ORIGINATION QTR 95 QTR 95 QTR 95 QTR 95 QTR 96 QTR 96
- -------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
3 1.37% 1.67% 1.21% 1.05% 1.03% 0.67%
6 3.28% 5.34% 4.44% 4.05% 3.64% 3.15%
9 5.02% 7.03% 6.23% 7.24% 6.56% 5.43%
12 6.32% 8.34% 7.42% 8.15% 8.37% 6.52%
18 7.81% 9.93% 9.01% 12.94% 9.99% 7.72%
24 8.27% 10.80% 9.92% 13.68% 10.97%
30 8.27% 10.85% 10.72%
36 8.29%
<CAPTION>
CUMULATIVE NET LOSSES AS PERCENTAGE OF ORIGINAL
PRINCIPAL BALANCE OF LOANS ORIGINATED DURING PERIOD
----------------------------------------------------------------------------
MONTHS AFTER 3RD 4TH 1ST 2ND 3RD 4TH 1ST
ORIGINATION QTR 96 QTR 96 QTR 97 QTR 97 QTR 97 QTR 97 QTR 98
- -------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
3 0.63% 0.83% 0.98% 0.47% 0.58% 0.55% 0.00%
6 2.76% 2.48% 2.14% 1.62% 2.39% 1.19%
9 4.15% 3.60% 3.60% 3.63% 1.42%
12 5.81% 4.12% 5.61%
18 7.70%
24
30
36
</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 portfolio as of March 31, 1998
and 1997 and as of December 31, 1997.
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
----------------------- DECEMBER 31,
1998 1997 1997
---------- ---------- -------------
Aging Percentages:
<S> <C> <C> <C>
Principal balances current .................... 93.9% 85.9% 91.1%
Principal balances 31 days to 60 days ......... 2.7 7.5 4.0
Principal balances over 60 days ............... 3.4 6.7 4.9
Total over 31 days ............................ 6.1 14.2 8.9
</TABLE>
The Company's improved delinquency experience on its 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 operating activities was approximately $2.3 million
and $0.5 million for the three month periods ended March 31, 1998 and 1997,
respectively. Net cash provided from operating activities in the first quarter
of 1998 primarily reflected the net income for the period and an increase in
payables. The increase from the first quarter of 1997 was primarily a result of
the large net loss in the first quarter of 1997. Net cash used by operating
activities was $5.9 million and $2.6 million 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 $12.6 million and $5.0
million during the three month periods ended March 31, 1998 and 1997,
respectively. The 1998 amount primarily reflects
35
<PAGE>
increases in finance receivables carried by the Predecessors. The 1997 amount
reflects an increase in finance receivables associated with acquisitions during
the first quarter 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 $11.6 million and
$6.2 million during the three months ended March 31, 1998 and 1997,
respectively. In the first quarter of 1998, the Company increased its notes
payable on finance receivables by $9.5 million and borrowed $3.0 million. In
the first quarter 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 $5.8 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. 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 March 31, 1998 and December 31, 1997, the principal amount outstanding
under the Finova Revolving Facility was $40.9 million and $31.4 million,
respectively. The Finova Revolving Facility bears interest at the prime rate
plus 2.5% (11.0% as of March 31, 1998).
In the first quarter 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
$3.5 million at March 31, 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 March 31, 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 March 31, 1998), and at March 31, 1998 and December 31,
1997 had outstanding balances of $2.8 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
March 31, 1998), and at March 31, 1998 and December 31, 1997 had outstanding
balances of $2.5 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%
36
<PAGE>
and is convertible into Common Stock until its maturity date of March 12, 1999
at a price of $3.67 per share and a $4.0 million convertible note that bears
interest at 12.0% and is convertible at a price of $6.00 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 662/3% of
the average closing bid price for the five trading days immediately preceding
the effective date of conversion. Approximately $475,000 of the debt had been
converted into Common Stock as of March 31, 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 conjunction with the borrowing, the Company also issued purchase
warrants for 52,500 shares of Common Stock exercisable at $7.00 per share at
any time prior to August 29, 2002.
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 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 $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 300 shares of Common Stock for each preferred share purchased. The
exercise prices of the warrants are $8.10 for 90,000 shares and $5.23 for
30,000 shares. As of March 31, 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 March 31, 1998), matures on
June 1, 1999, and is convertible into Common Stock at $4.50 per share; and
$750,000 bears interest at the prime rate (8.5% as of March 31, 1998), matures
on December 31, 2000, and is convertible into Common Stock at $9.00 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 $5.00 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
$5.59 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.
37
<PAGE>
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 $3,500,000. The Series D Convertible Preferred Stock has an 11.0%
dividend per year and is convertible into Common Stock at a conversion rate of
$6.00 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 March
31, 1998 for the acquisition debt was $7.6 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.
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. Beginning
in the first quarter of 1997, all new software on the Eckler's computer system
was developed and tested to be Year 2000 compliant. All 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 other subsidiaries' computer systems, 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 either in compliance or will be compliant 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 be 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 systems are expected to be
in compliance by the last quarter of 1998.
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
38
<PAGE>
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.
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.
39
<PAGE>
BUSINESS
GENERAL
Smart Choice Automotive Group, Inc. currently 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" 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 nearly $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 occurred at
approximately 2,800 self-financed used car stores, which are separate from used
car operations at new car dealerships.
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) define the First Choice brand and (iii) reduce losses
on the Company's repossessions of the cars. Due to the quality and reliability
of its First Choice cars, the Company is able to provide 24 month/24,000 mile
service contracts to its customers, which are underwritten by a third party.
The Company sells used cars at its First Choice stores for an average retail
price of approximately $9,700, which includes 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 receive
maintenance coverage under 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
40
<PAGE>
and age of First Choice cars, the Company is able to provide 24 month/24,000
mile service contracts to its customers, which are 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 serviced 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 approval process is based upon strict adherence 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 March 31, 1998, 93.9% of the 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 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 55.1% (on a
retail basis) of the principal amount of loans charged off for the three-month
period ended March 31, 1998.
AVOID THIRD PARTY FINANCE RECEIVABLES. As part of its operating
philosophy, the Company only originates and services finance receivables on
cars sold by its First Choice and Team stores. The Company does not intend to
purchase third party finance receivables. In addition, the Company does not
intend to utilize gain on sale accounting which is a revenue recognition method
based upon certain estimates which may not subsequently be realized.
INCREASE OPERATING EFFICIENCY. Since late 1997, to increase operating
efficiency, the Company has combined certain administrative functions, such as
accounting, treasury, insurance, employee benefits, strategic marketing and
legal support, to reduce administrative costs and enhance the administrative
functions. 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 ("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.
41
<PAGE>
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 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.
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 their criteria are available within its existing
markets.
The Company's criteria for opening used car stores in new markets
including 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
regions 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% while 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 cars 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
42
<PAGE>
dealerships, in an effort to focus on higher margin products, are adding or
enlarging their used car 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.
HISTORICAL GROWTH
The Company's historic growth has resulted from a combination of internal
growth (more recently) and acquisitions 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(1) Predecessor 1/28/97 3
RC Hill's World of Wheels(1) Predecessor 2/12/97 4
225 North Military Trail(1) Predecessor 2/14/97 1
Roman Fedo(1) Acquisition 6/30/97 1
Strata Holdings, Inc.(1) Acquisition 6/30/97 2
"First Choice" and "Team Stores"(1) Internal Expansion 9/97-7/98 9
--
Total Used Car Stores 20
==
</TABLE>
----------------
(1) Includes associated finance contracts.
Other Business Operations:
<TABLE>
<CAPTION>
COMPANY NAME SOURCE DATE ACQUIRED PRINCIPAL BUSINESS
- --------------------------------------- ------------- --------------- --------------------------
<S> <C> <C> <C>
Eckler Industries, Inc. 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.
43
<PAGE>
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.
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. The static pool indicated that
the actual net cumulative loss incurred on the amount of the portfolio
(12%) were less than the ratio of loss reserves to the amount of the
portfolio (17%) through March 31, 1998.
/bullet/ The Company's finance subsidiary, FFG, expanded its loan portfolio
to $51.1 million as of March 31, 1998, while establishing and maintaining
underwriting procedures that have resulted in 93.9% 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 agreement with each
used car sold at a First Choice store and a 12 month/12,000 mile service
agreement to purchasers of the Company's Team cars. Under the service
agreements, the Company's customers may have their First Choice or Team cars
serviced nationally by any one of approximately 375,000 ASE (Automotive Service
Excellence) certified technicians. The Company does not perform any repairs
under these service agreements.
44
<PAGE>
The Company acquires its used cars primarily through auto auctions. All
cars are subjected to a 110 point inspection program, reconditioning and, as
necessary, repair at the Company's reconditioning facilities. 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 rotated
to another First Choice dealership 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 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 for which the total square footage is
25,940 and which has the capacity to recondition 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 such value-added
programs for its customers such as providing quality cars through a
comprehensive inspection and refurbishment program, providing 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 reestablishing 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
the Company's upgraded facilities provide effective advertising. The
facilities' fresh and inviting appearance fosters the image of a used car store
that offers quality cars and attracts drive-by traffic to visit the stores. 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
45
<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 dealership 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.
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 sells
new and used cars at the new car dealership and provides parts and services.
The Company has determined not to purchase any additional new car dealerships.
The Company emphasizes customer satisfaction throughout its new car dealership.
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 which are significantly bigger than the Company, ranging in
size from the independent dealer selling fewer than 25 cars per
46
<PAGE>
year to the large, well-capitalized new car dealership chains. 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.
FINANCING CUSTOMERS WITH IMPAIRED CREDIT
The Company offers financing to its customers who purchase used cars. 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's
used car stores use 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 at its used car stores through
finance contracts that the Company originates and services.
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, an average length of employment at his or her current
job of approximately 3.2 years and 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 in
determining a customer's creditworthiness. Financing decisions are made by an
experienced loan staff with a minimum of five-years experience, and overall an
average of ten-years 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 use
of the 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
47
<PAGE>
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 55.1% (on
a retail basis) of the principal amount of loans and accrued interest charged
off for the three month period ended March 31, 1998.
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. The Company does not
intend to utilize gain on sale accounting which is a revenue recognition method
based upon certain estimates which may not subsequently be realized. The amount
of the gain on sale reflects the difference between the yield earned on the
contract portfolio securitized and the return on the securities sold, and is
computed based on the difference between (i) the dollar amount received for the
securities plus the value of the residual retained, and (ii) the net principal
balance of the contract portfolio sold less the amount of the allowance for
credit losses allocable to such contract portfolio and direct expenses. To the
extent that actual cash flows on a securitization are materially below
estimates, the seller would be required to revalue the residual portion of the
securitization which it retains and record a charge to earnings based upon the
reduction.
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 three months ended March 31, 1998, Eckler's accounted for
approximately 21.7% and 11.3%, 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
48
<PAGE>
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.
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 ("MIS") 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 into one uniform system all loan monitoring and servicing
functions. 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 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.
49
<PAGE>
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 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 $577,000
for the three months ended March 31, 1998, and $1.3 million for the twelve
months ended December 31, 1997. See "Certain Relationships and Related
Transactions."
LEGAL PROCEEDING
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.
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<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. 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 50 Executive Vice President and Chief Operating Officer
Joseph E. Mohr 32 Executive Vice President and Chief Financial Officer
Joseph A. Alvarez 42 Executive Vice President
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 50 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 has practiced
accounting, as a certified public accountant with Arthur Andersen L.L.P.
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,
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<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.
Lewis H. Berman was appointed a director of the Company in 1998. 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. 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 and Company, 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., an NASD registered broker-dealer. 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 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.
52
<PAGE>
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 COMPENSATION
------------------------------------------- ---------------------- ----------------
SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS(1)
- -------------------------------------- ------ --------------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
Robert J. Abrahams 1997 $ 110,819 -- 222,500
Chairman of the Board
Gary R. Smith 1997 217,851 -- 302,500
President and Chief Executive Officer
Ronald W. Anderson 1997 115,328 -- 87,025
Executive Vice President and
Chief Operating Officer
Joseph E. Mohr 1997 37,073(2) -- 77,025
Executive Vice President and
Chief Financial Officer
Joseph A. Alvarez 1997 113,010 $ 50,000(3) 105,000
Executive Vice President
Ralph H. Eckler(4) 1997 101,657 -- 250,000(5) $ 14,069(6)
Former President and 1996 100,000 105,000
Chief Executive Officer 1995 105,776
Fred E. Whaley 1997 153,263 -- 500,000(7)
Former Executive Vice President and
Chief Financial Officer
</TABLE>
- ----------------
(1) The amounts shown in this column represent outstanding stock options
granted as compensation.
(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) Mr. Eckler was also paid $100,000 in 1997 in connection with the
termination of his employment.
(5) Includes 50,000 securities underlying options originally granted to Mr.
Eckler in 1996 that were repriced in 1997.
(6) Represents the value of an automobile conveyed to Mr. Eckler pursuant to
the Release Agreement (as defined herein). See "Certain Relationships and
Related Transactions."
(7) The Company has asserted in litigation with Mr. Whaley that these grants
have been rescinded.
53
<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.
<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 210,000 10.8% $ 1.00 $ 4.94 12/01/2002 $827,400 $1,114,014 $1,460,214
12,500 0.6 2.00 4.94 03/05/2002 36,750 53,810 74,418
Gary R. Smith 2,500 -- 2.00 4.88 03/24/2002 7,200 10,616 14,642
200,000 10.2 2.00 5.12 03/21/2002 624,000 910,720 1,248,640
100,000 5.2 4.50 4.56 07/29/2002 6,000 133,680 284,160
Ronald W. Anderson 20,000 1.0 2.00 4.88 03/24/2002 57,600 84,928 117,136
30,000 1.5 4.88 03/24/2002 -- 7,200 46,800
25,000 1.3 4.25 4.56 07/29/2002 7,750 39,670 77,290
12,025 0.6 2.00 4.00 12/31/2002 24,050 37,518 53,391
Joseph E. Mohr 35,000 1.8 2.00 6.25 09/19/2002 148,750 210,000 282,188
30,000(4) 1.5 6.50 09/19/2002 -- -- --
12,025 0.6 2.00 4.00 12/31/2002 24,050 45,318 53,391
Joseph A. Alvarez 80,000 4.1 2.00 6.00 04/11/2007 320,000 622,400 1,083,200
25,000 1.3 4.50 07/29/2002 -- 31,500 68,625
Ralph H. Eckler 100,000 5.1 8.75 01/28/2002 -- -- 71,680
100,000 5.1 6.50 09/30/2002 -- 182,000 396,500
50,000 2.6 6.50 01/28/2002 -- 91,000 198,250
Fred E. Whaley(5) 200,000 10.3 2.00 4.88 03/24/2002 576,000 849,280 1,171,360
200,000 10.3 4.88 03/24/2007 -- 614,880 1,551,840
50,000 2.6 03/24/2002
50,000 2.6 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: 10,000 shares on September 19, 1998; 10,000 shares
on September 19, 1999; and 10,000 shares on September 19, 2000.
(5) The Company has asserted in litigation with Mr. Whaley that these grants
have been rescinded.
54
<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 AT DECEMBER 31, 1997
ACQUIRED ON VALUE ------------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------- ----------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Abrahams -- -- 210,000 0 $630,000 $0
12,500 0 25,000 0
Gary R. Smith 200,000 $800,000 100,000 0 0 0
2,500 0 5,000 0
Ronald W. Anderson 20,000 80,000 30,000 0 0 0
25,000 0 0 0
12,025 0 24,050 0
Joseph E. Mohr -- -- 35,000 0 70,000 0
30,000 0 0 0
12,025 0 24,050 0
Joseph A. Alvarez -- -- 80,000 0 160,000 0
25,000 0 0 0
Ralph H. Eckler -- -- 250,000 0 0 0
35,000 0 0 0
20,000 0 0 0
Fred E. Whaley(1) -- -- 200,000 0 400,000 0
200,000 0 0 0
0 50,000 0 0
0 50,000 0 0
</TABLE>
- ----------------
(1) 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 to be provided a monthly automobile
allowance ranging from $500 to $700. 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 100,000 shares of Common Stock exercisable at $6.50 per
share. In addition, pursuant to the terms of the agreement the exercise price
of a previously
55
<PAGE>
granted option for 50,000 shares was changed to $6.50 per share from $10.00 per
share. The agreement also provides Mr. Eckler with certain registration rights
for the above-referenced options as well as the 200,000 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. In 1997, the
non-employee directors were each granted five-year options for 12,500 shares of
Common Stock exercisable at $5.50 per share. In addition, non-employee
directors are reimbursed their travel expenses to attend meetings.
56
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 1998 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(1)(2) PRIOR TO THE OFFERING(2) AFTER THE OFFERING
- ------------------------------------------------------ -------------------- -------------------------- --------------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Gerald C. Parker ..................................... 1,035,733(3) 7.9% 5.7%
Gary R. Smith ........................................ 588,814(4) 4.4 3.3
Robert J. Abrahams ................................... 270,389(5) 2.1 1.5
Joseph A. Alvarez .................................... 105,000(6) * *
Ronald W. Anderson ................................... 89,525(7) * *
Joseph E. Mohr ....................................... 79,525(8) * *
Donald A. Wojnowski, Jr. ............................. 72,500(9) * *
Robert J. Downing .................................... 70,000(10) * *
Craig Macnab ......................................... 42,000 * *
Jeffrey D. Congdon ................................... 32,500(11) * *
Lewis H. Berman ...................................... 30,000 * *
John W. Holden, Jr. .................................. 3,000 * *
All executive officers and directors
as a group (12 persons) ............................ 2,418,986 18.5 13.4
FORMER EXECUTIVE OFFICERS
Ralph H. Eckler ...................................... 1,688,000(12) 12.9 9.3
Fred E. Whaley ....................................... 515,000(13) 3.9 2.8
CERTAIN SHAREHOLDERS
Sirrom Capital Corporation ........................... 1,787,012(14) 13.6 9.9
Thomas E. Conlan ..................................... 1,348,489(15) 10.3 7.4
Gary R. Smith and Gerald C. Parker, Trustees ......... 1,180,833(16) 9.0 6.5
</TABLE>
- ----------------
* Less than 1%
(1) For purposes of calculating beneficial ownership percentages, 13,107,508
shares of Common Stock were deemed outstanding prior to the Offering and
18,107,508 shares of Common Stock were deemed outstanding after the
Offering.
(2) 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.
(3) The shares shown represent (i) 770,733 shares owned directly, (ii) 100,000
shares underlying presently exercisable rights to acquire Common Stock,
(iii) 160,000 shares underlying a presently exercisable option which Mr.
Parker holds jointly with Thomas E. Conlan and Ralph H. Eckler, and (iv)
5,000 shares held in a trust of which Mr. Parker is a co-trustee with
Thomas E. Conlan. See Note (16).
(4) The shares shown represent (i) 488,814 shares owned directly, and (ii)
100,000 shares underlying presently exercisable rights to acquire Common
Stock. See Note (16).
(5) The shares shown represent (i) 30,000 shares owned directly and (ii)
240,389 shares underlying presently exercisable rights to acquire Common
Stock.
(6) The shares shown underlie presently exercisable rights to acquire Common
Stock.
(7) The shares shown represent (i) 20,000 shares owned directly and (ii)
69,225 shares underlying presently exercisable rights to acquire Common
Stock.
57
<PAGE>
(8) The shares shown underlie presently exercisable rights to acquire Common
Stock.
(9) The shares shown represent (i) 27,500 shares owned directly and (ii)
45,000 shares underlying presently exercisable rights to acquire Common
Stock.
(10) The shares shown underlie presently exercisable rights to acquire Common
Stock.
(11) The shares shown represent (i) 20,000 shares owned directly and (ii)
12,500 shares underlying presently exercisable rights to acquire Common
Stock.
(12) The shares shown represent (i) 1,183,000 shares owned directly (ii)
305,000 shares underlying presently exercisable rights to acquire Common
Stock, and (iii) 200,000 shares underlying a presently exercisable option
which Mr. Eckler holds jointly with Thomas E. Conlan and Gerald C.
Parker.
(13) The shares shown represent (i) 15,000 shares owned directly and (ii)
400,000 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.
(14) The shares shown represent shares underlying presently exercisable rights
to acquire Common Stock. The address of Sirrom Capital Corporation is 500
Church Street, Suite 200, Nashville, Tennessee 37219.
(15) The shares shown represent (i) 1,108,489 shares owned directly, (ii)
160,000 shares underlying a presently exercisable option which Mr. Conlan
holds jointly with Gerald C. Parker and Ralph H. Eckler, (iii) 75,000
shares underlying presently exercisable rights to acquire Common Stock,
and (iv) 5,000 shares held in a trust of which Mr. Conlan is a co-trustee
with Gerald C. Parker. Thomas E. Conlan's address is 303 E. 7th Avenue,
Windemere, Florida 34786.
(16) Gerald C. Parker and Gary R. Smith are co-trustees of four trusts which
hold these shares and share voting and investment power as to these
shares.
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 1,177,389
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 445,000 and 265,000 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 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 $2.00. 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 1,177,390 shares of Company Common Stock in
exchange for his shares of SCHI stock. In 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 445,000 and 265,000 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,
58
<PAGE>
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 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
$2.00. 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 160,000 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 670,000 shares of
Common Stock in exchange for a new employment agreement, options to purchase
150,000 shares of Common Stock and certain registration rights with respect to
200,000 shares of Common Stock. The options are exercisable at $8.75 per share
for 100,000 shares and $6.50 per share for 50,000 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 285,714 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 $3.67 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 $7.50 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
$3.00 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 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
59
<PAGE>
(having a book value of $14,069) that was currently being supplied for his use,
(ii) granted him options to purchase 100,000 shares of Common Stock at the
price of $6.50 per share, (iii) reduced the conversion price of options to
purchase 50,000 shares of Common Stock held by Mr. Eckler from $10.00 per share
to $6.50 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
75,000 shares of Common Stock exercisable at the then market price of $4.81 per
share, in satisfaction of outstanding consulting fees owed 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 100,000,000 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 100,000,000 authorized shares of Common Stock, 13,107,508
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.
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.
60
<PAGE>
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 July 15, 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, 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 $10,000.00 per share plus accrued and 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
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<PAGE>
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
1,200,000 Public Warrants which are traded on the Nasdaq SmallCap Market. Each
Public Warrant has an exercise price of $6.50 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 $0.05 per Warrant at any time that the average closing price
of the Common Stock equals or exceeds $8.75 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 84,000 units, each unit consisting of one share
of Common Stock and one Public Warrant at a price of $6.00 per unit. The Public
Warrants issuable upon exercise of the Unit Purchase Option have an exercise
price of $6.50 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 457,000 shares of
Common Stock beneficially held by certain shareholders of the Company, 102,500
of which are subject to non-public common stock purchase warrants exercisable
at $6.00 per share.
The beneficial owners of 1,202,855 shares of Common Stock, which include
1,068,021 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 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."
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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 (a) 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, (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.
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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
18,107,508 shares of Common Stock, of which 13,287,591 shares, including the
shares sold in this Offering, will be freely tradeable by persons other than
affiliates of the Company, without restriction. Of such shares 7,581,772 shares
have been registered for resale on registration statements on Form S-3. In
addition, 134,834 shares of Common Stock are "restricted" securities within the
meaning of Rule 144 under the Securities Act and may be sold pursuant to a
registration under the Securities Act or pursuant to an exemption from
registration, including the exemption contained in Rule 144 discussed below.
The Company's officers, 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 any 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. 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. Upon the expiration of the
Lock-up Period, 4,685,083 shares of Common Stock that are "restricted"
securities will be eligible for sale in the public market subject to the
limitations of Rule 144.
The Company intends to register on a registration statement on Form S-8
the shares of Common Stock issuable upon exercise of options granted or
reserved for issuance under the Company's employee compensation plans,
including 1,148,000 shares subject to options which are currently outstanding.
Upon such registration, 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 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 ....................................
</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 750,000
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
impose a penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or dealer for distributing Common Stock in the Offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short positions, in stabilization transactions or otherwise.
Finally, the Underwriters may 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.
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<PAGE>
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 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.
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. (the
lead managing Underwriter of the Offering) to retire certain indebtedness, the
Offering is being conducted in accordance with subparagraph 8 of section (c) of
Rule 2710 of the National Association of Securities Dealers ("NASD"), which
prohibits a NASD member firm from participating in a public offering of an
issuer's equity securities where more than ten percent of the net offering
proceeds, not including underwriting compensation, are intended to be paid to
NASD members (and their affiliates) participating in the distribution of the
offering, unless the price at which the equity securities is to be distributed
to the public is no greater than that recommended by a "qualified independent
underwriter" (as defined in NASD Rule 2720). Cruttenden Roth Incorporated is
assuming the responsibilities of acting as a qualified independent underwriter
in pricing the offering and conducting due diligence. See "Use of Proceeds."
As of June 30, 1998, the indebtedness owed by the Company to Stephens
Inc., which was incurred in 1997 and 1998, totaled $8.5 million in principal.
During 1997 and through June 30, 1998, the Company paid an aggregate of
approximately $284,658 in interest on such indebtedness. In accordance with its
terms, such indebtedness bears interest at 10% and 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.
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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<PAGE>
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://
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ..................................... F-4
Consolidated Balance Sheets as of December 31, 1997 and 1996 ........................... F-5
Consolidated Statements of Operations for 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 year ended
December 31, 1997 and the period from inception (June 21, 1996) through
December 31, 1996 .................................................................... F-7
Consolidated Statements of Cash Flows for 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-9
Condensed Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997 .................................................................... F-29
Condensed Consolidated Statements of Operations for the three months ended March 31,
1998 and March 31, 1997 (unaudited) .................................................. F-30
Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
1998 and March 31, 1997 (unaudited) .................................................. F-31
Notes to Condensed Consolidated Financial Statements ................................... F-32
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Pro Forma Consolidated Statement of Operations --Explanatory Headnote .................. F-33
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997 .... F-34
Notes to Pro Forma Consolidated Statement of Operations ................................ F-35
FLORIDA FINANCE GROUP, INC., SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC. (PREDECESSOR)
Independent Auditor's Report ........................................................... F-36
Combined Balance Sheets as of December 31, 1996 and 1995 ............................... F-37
Combined Statements of Operations and Retained Deficit for the years ended
December 31, 1996 and 1995 ........................................................... F-38
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1995 ....... F-39
Notes to Combined Financial Statements ................................................. F-40
Combining Balance Sheets as of December 31, 1996 ....................................... F-46
Combining Statements of Operations and Retained Earnings (Accumulated Deficit) for
the year ended December 31, 1996 ..................................................... F-47
Combining Balance Sheets as of December 31, 1995 ....................................... F-48
Combining Statements of Operations and Retained Earnings (Accumulated Deficit) for
the year ended December 31, 1995 ..................................................... F-49
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ECKLER INDUSTRIES, INC. (PREDECESSOR)
Report of Independent Certified Public Accountants ..................................... F-51
Balance Sheets as of January 28, 1997, December 31, 1996 and September 30, 1996
and 1995 ............................................................................. F-52
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-54
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-55
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-57
Summary of Significant Accounting Policies ............................................. F-58
Notes to Financial Statements .......................................................... F-62
LIBERTY FINANCE COMPANY, INC.(FORMERLY KNOWN AS R. C. HILL'S WORLD OF WHEELS, INC.).,
AND AFFILIATES (PREDECESSOR)
Independent Auditor's Report ........................................................... F-95
Combined Balance Sheets as of December 31, 1996 and 1995 ............................... F-96
Combined Statements of Operations for the years ended December 31, 1996 and 1995 ....... F-97
Combined Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995 ........................................................... F-98
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1995 ....... F-99
Notes to Combined Financial Statements ................................................. F-100
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-107
Combined Balance Sheet as of December 31, 1996 and 1995 ................................ F-108
Combined Statements of Income and Retained Earnings for the years ended
December 31, 1996 and 1995 ........................................................... F-109
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1995 ....... F-110
Notes to Financial Statements .......................................................... F-111
Combining Balance Sheets as of December 31, 1996 ....................................... F-116
Combining Statements of Income and Retained Earnings for the year ended December 31,
1996 ................................................................................. F-117
Combining Balance Sheets as of December 31, 1995 ....................................... F-118
Combining Statements of Income and Retained Earnings for the year ended December 31,
1995 ................................................................................. F-119
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
STRATA HOLDING, INC. AND READY FINANCE, INC. (SIGNIFICANT ACQUISITION)
Independent Auditor's Report ...................................................... F-120
Combined Balance Sheet as of December 31, 1996 .................................... F-121
Combined Statement of Operations for the year ended December 31, 1996 ............. F-122
Combined Statement of Stockholders' Equity for the year ended December 31, 1996 ... F-123
Combined Statement of Cash Flows for the year ended December 31, 1996 ............. F-124
Notes to Combined Financial Statements ............................................ F-125
Independent Auditors' Report on Supplemental Material ............................. F-126
Combining Balance Sheet as of December 31, 1996 ................................... F-131
B&B FLORIDA ENTERPRISES, INC., D/B/A STUART NISSAN (SIGNIFICANT ACQUISITION)
Independent Accountant's Report ................................................... F-133
Balance Sheet as of December 31, 1996 ............................................. F-134
Statement of Operations for the year ended December 31, 1996 ...................... F-135
Statement of Stockholders' Deficit for the year ended December 31, 1996 ........... F-136
Statement of Cash Flows for the year ended December 31, 1996 ...................... F-137
Notes to Financial Statements ..................................................... F-138
</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
F-4
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents ........................................... $ 1,066,949 $ --
Accounts receivable ................................................. 1,773,124 25,000
Finance receivables:
Principal balances, net ............................................ 40,084,412 --
Less allowance for credit losses ................................... (6,857,265) --
------------- ----------
Finance receivables, net ............................................ 33,227,147 --
------------- ----------
Inventories, at cost ................................................ 15,516,084 --
Land held for resale ................................................ 1,050,000 --
Property and equipment, net ......................................... 9,214,207 22,454
Notes receivable .................................................... 46,280 400,000
Deferred acquisition costs .......................................... -- 194,101
Deferred financing costs, net of accumulated amortization of
$207,508 and $2,249 ............................................... 426,823 24,735
Goodwill, net of accumulated amortization of $470,897 ............... 25,562,162 --
Prepaid expenses .................................................... 1,008,229 --
Deposits and other assets ........................................... 213,986 50,000
------------- ----------
$ 89,104,991 $ 716,290
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Liabilities:
Bank overdraft ..................................................... $ -- $ 82,884
Accounts payable ................................................... 5,259,903 438,890
Accrued expenses ................................................... 4,633,841 183,314
Line of credit, net of discount .................................... 31,229,600 --
Floor plans payable ................................................ 8,287,092 --
Capital lease obligations .......................................... 940,280 --
Notes payable ...................................................... 29,197,458 322,000
Other liabilities .................................................. 94,913 --
------------- ----------
Total liabilities ................................................ 79,643,087 1,027,088
------------- ----------
Redeemable convertible preferred stock .............................. 4,941,834 387,022
Stockholders' equity (capital deficit):
Common stock $.01 par value, authorized 100,000,000 shares; issued
9,734,007 and 5,488,432 shares ................................... 97,340 54,884
Additional paid-in capital ......................................... 24,108,456 (48,916)
Accumulated deficit ................................................ (19,685,726) (703,788)
------------- ----------
Total stockholders' equity (capital deficit) .................... 4,520,070 (697,820)
------------- ----------
$ 89,104,991 $ 716,290
============= ==========
</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)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
---------------- ----------------
<S> <C> <C>
REVENUES:
Sales at used car stores .................................... $ 35,279,228 $ --
Income on finance receivables ............................... 9,209,656 --
Sales at new car dealerships ................................ 9,863,245 --
Corvette parts and accessories sales ........................ 15,384,589 --
Income from insurance and training .......................... 1,177,903 --
------------- ----------
Total revenues ........................................... 70,914,621 --
------------- ----------
COSTS AND EXPENSES:
Costs of sales at used car stores ........................... 27,950,703 --
Provision for credit losses ................................. 4,941,983 --
Costs of sales at new car dealerships ....................... 8,618,109 --
Costs of Corvette parts and accessories sold ................ 10,205,633 --
Costs of insurance and training ............................. 85,098
Selling, general and administrative expenses ................ 24,707,839 670,616
Compensation expense related to employee and
director stock options .................................... 4,649,702 --
Restructuring charges ....................................... 2,117,906 --
------------- ----------
Total costs and expenses ................................. 83,276,973 670,616
------------- ----------
Loss from operations ..................................... (12,362,352) (670,616)
------------- ----------
OTHER INCOME (EXPENSE):
Interest expense ............................................ (6,454,175) (33,172)
Other income, net ........................................... 167,922 --
------------- ----------
(6,286,253) (33,172)
------------- ----------
Net loss ..................................................... (18,648,605) (703,788)
Preferred stock dividends .................................... (333,333) --
------------- ----------
Net loss applicable to common stock .......................... $ (18,981,938) $ (703,788)
============= ==========
Basic loss per common share .................................. $ (2.14) $ (.13)
============= ==========
Weighted average number of common shares outstanding ......... 8,860,733 5,488,432
============= ==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated statements.
F-6
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL
NUMBER PAR PAID-IN ACCUMULATED
OF SHARES VALUE CAPITAL DEFICIT TOTAL
------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, June 21, 1996
(date of incorporation) ............... -- $ -- $ -- $ -- $ --
Issuance of founders' shares ............ 5,488,432 54,884 (48,916) -- 5,968
Net loss ................................ -- -- -- (703,788) (703,788)
--------- -------- ----------- ------------- -------------
Balance, December 31, 1996 .............. 5,488,432 54,884 (48,916) (703,788) (697,820)
Common stock issued
for acquisitions ...................... 4,110,952 41,110 14,372,770 -- 14,413,880
Contribution and retirement of
common stock .......................... (331,428) (3,314) 3,314 -- --
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 ........................... (2,000) (20) (13,570) -- (13,590)
Issuance of common stock for
professional services ................. 17,929 179 99,627 -- 99,806
Issuance of common stock for
conversion of debt .................... 442,514 4,425 1,765,631 -- 1,770,056
Exercise of common stock options
and warrants, net ..................... 7,608 76 41,600 -- 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 .............. 9,734,007 $ 97,340 $24,108,456 $ (19,685,726) $ 4,520,070
========= ======== =========== ============= =============
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated statements.
F-7
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 21, 1996)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................. $ (18,648,605) $ (703,788)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation ......................................................... 445,311 2,132
Amortization ......................................................... 1,239,929 2,249
Gain on disposal of property and equipment ........................... (8,166) --
Provision for credit losses .......................................... 4,941,983 --
Compensation expense related to stock options ........................ 4,649,702 --
Issuance of common stock for services and interest ................... 374,806 4,968
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) (25,000)
Inventories ......................................................... (5,969,719) --
Prepaid expenses .................................................... 679,663 --
Accounts payable .................................................... 2,668,636 438,890
Accrued expenses and other liabilities .............................. 3,048,563 183,314
------------- ----------
Net cash used for operating activities ................................. (5,943,522) (97,235)
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in finance receivables ....................................... (13,600,550) --
Cash for acquisitions, net of cash acquired ........................... (7,927,844) --
Advances to acquired companies prior to acquisition ................... (4,230,761) --
Purchase of property and equipment .................................... (1,356,644) (24,586)
Increase in notes receivable .......................................... -- (400,000)
Repayments of notes receivable ........................................ 530,420 --
Proceeds from disposal of property and equipment ...................... 24,425 --
Other ................................................................. (21,981) (244,101)
------------- ----------
Net cash used for investing activities ................................. (26,582,935) (668,687)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock ................................. 4,554,812 387,022
Proceeds from sale of common stock .................................... -- 1,000
Proceeds from exercise of common stock warrants ....................... 1,800 --
Purchase of treasury stock ............................................ (13,590) --
Increase (decrease) in bank overdraft ................................. (82,884) 82,884
Proceeds from line of credit borrowings ............................... 16,462,090 --
Proceeds from floor plan notes payable ................................ 4,201,467 --
Proceeds from notes payable ........................................... 14,163,892 322,000
Repayment of notes payable ............................................ (5,271,154) --
Proceeds from capital lease obligations ............................... 251,722 --
Repayments of capital lease obligations ............................... (67,402) --
Deferred financing costs .............................................. (607,347) (26,984)
------------- ----------
Net cash provided by financing activities .............................. 33,593,406 765,922
------------- ----------
Net increase in cash and cash equivalents .............................. 1,066,949 --
------------- ----------
Cash and cash equivalents, beginning of period ......................... -- --
------------- ----------
Cash and cash equivalents, end of period ............................... $ 1,066,949 $ --
============= ==========
</TABLE>
See accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-8
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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."
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
F-9
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
historical loss experience, specific impaired loans, collateral values and
economic conditions. Because of uncertainties associated with regional economic
conditions, collateral values and future cash flows on impaired loans, it is
reasonably possible that management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change materially in the near
term. However, the amount of change that is reasonably possible cannot be
estimated. The allowance for uncollectible finance receivables is increased by
a provision for loan losses, which is charged to expense. Repossessed vehicles
are recorded as inventory at the lower of estimated net realizable value or the
related loan balances. The difference between the balance of the installment
contract and the amount recorded as inventory for the repossessed vehicle is
charged to the allowance for credit losses.
PRESENTATION OF REVENUES AND COST OF REVENUES
The prices at which the Company sells its used cars and the interest rate
that it charges to finance these sales take into consideration that the
Company's primary customers are high-risk borrowers. The provision for credit
losses reflects these factors and is treated by the Company as a cost of both
the future finance income derived on the contract receivables originated by the
Company as well as a cost of the sale of the cars themselves. Accordingly,
unlike traditional car dealerships, the Company does not present gross profit
margin in its statement of operations calculated as sales of cars less cost of
cars sold.
INVENTORY
Inventory consists of new and used vehicles and vehicle parts and
accessories. Vehicle reconditioning costs are capitalized as a component of
inventory cost. The cost of new and used vehicles sold is determined on a
specific identification basis. Vehicle parts and accessories are valued at the
lower of first-in, first-out (FIFO) cost or market. Repossessed vehicles are
valued at the lower of estimated net realizable value or the related loan
balance.
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.
F-10
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
LOSS PER SHARE
Loss per share is based upon the weighted average number of common shares
outstanding during each period. Potential common shares have not been included
since their effect would be antidilutive. Potential common shares include
2,224,000 stock options, 1,682,720 warrants, 2,209,333 shares underlying the
convertible debt and 1,972,083 shares underlying the convertible preferred
stock.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share," (FAS
128), which is effective for financial statements issued for periods ending
after December 15, 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 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
F-11
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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.
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 2,927,939 shares of EII Class A and
1,576,324.5 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 is 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 Eckler was computed by valuing the outstanding shares of
common stock of Eckler (the equivalent of 2,757,500 shares) at $3.375 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, 285,714 shares of common stock valued at
$3.375 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
F-12
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 352,156 shares of common stock valued at $3.375 per share
($1,188,527) and $109,249 in acquisition costs.
On February 14, 1997, FCAF acquired the assets of Palm Beach Finance and
Mortgage Company ("PBF") and Two Two Five North Military Corp. d/b/a Miracle
Mile Motors ("MMM"). FFG services the receivables purchased from PBF, and FCAF
operates the used vehicle lot previously operated by MMM located in West Palm
Beach, Florida. The net assets of PBF and MMM were acquired for $3,050,000
cash, $1,473,175 notes due to the seller, 285,714 shares of common stock valued
at $3.375 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, 225,000 shares of common stock valued at $4.50 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, 18,322 shares of common stock valued at $5.125 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 86,546
shares of common stock valued at $6.3125 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.
The operating results of these 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
F-13
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
---------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Net sales ..................... $ 92,405,005 $ 90,158,113
Net loss ...................... (19,155,105) (3,803,046)
Loss per common share ......... (2.08) (.67)
</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 as of December 31,
1997:
<TABLE>
<S> <C>
Contractually scheduled payments .......... $ 55,107,232
Less: unearned finance charges ............ (15,510,342)
-------------
Principal balances ........................ 39,596,890
Add: loan origination costs ............... 487,522
-------------
Principal balances, net ................... 40,084,412
Less: allowance for credit losses ......... (6,857,265)
-------------
Finance receivables, net .................. $ 33,227,147
=============
</TABLE>
Finance receivables consist of sales of used cars under installment sale
contracts with maturities that generally do not exceed 48 months. The
receivables bear interest at rates ranging from 25.0% to 29.9% and are
collateralized by the vehicles sold. The Company holds title to the vehicles
until full contract payment is made. Finance receivables are pledged as
collateral under a line of credit agreement (see Note 6).
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997
------------------------
<S> <C>
Balance at dates of acquisitions ............. $ 5,627,937
Loans charged off, net of recoveries ......... (3,712,655)
Provision for credit losses .................. 4,941,983
------------
Balance at end of year ....................... $ 6,857,265
============
</TABLE>
F-14
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------------
USEFUL LIFE 1997 1996
------------- ------------- ---------
<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 3,542,413 24,586
Transportation equipment ............... 3-10 years 2,482,521 --
Signs .................................. 7 years 152,234 --
---------- -------
13,545,700 24,586
Less accumulated depreciation .......... 4,331,493 2,132
---------- -------
$9,214,207 $22,454
========== =======
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 was
$445,311 and $2,132, respectively.
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.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------- -----------
<S> <C> <C>
Accrued compensation .................. $ 855,806 $141,713
Accrued interest ...................... 411,913 32,620
Accrued professional fees ............. 897,837 --
Accrued restructuring charges ......... 1,101,266 --
Accrued taxes and other ............... 1,367,019 8,981
---------- --------
$4,633,841 $183,314
========== ========
</TABLE>
F-15
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LINE OF CREDIT
The Company has a revolving line of credit with a lender which allows the
Company to borrow the lesser of $42,500,000 or 60% of certain eligible accounts
receivable at prime plus 3%. Interest is payable monthly with all of the
outstanding principal due December 1999. 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 December 31, 1997 under this line of credit was
$31,400,000. Unamortized debt discount was $170,400 at December 31, 1997. The
line of credit agreement contains various financial and operating covenants. 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 has waived compliance of these covenants for the year ending December
31, 1997. The Company is currently in negotiations with the lender to modify
the terms of the line of credit agreement and to increase the amount of the
line of credit. The amount of the line of credit was increased from $35,000,000
to $42,500,000 on March 27, 1998.
The following summarizes certain information about the borrowings under
the line of credit:
<TABLE>
<CAPTION>
1997
----------------
<S> <C>
Maximum amount outstanding at any month end ............... $ 31,681,590
Average amount outstanding during the period .............. $ 21,921,484
Weighted average interest rate during the period .......... 11.45%
</TABLE>
Interest rates ranged from 11.25% to 11.5%, and interest expense was
$2,235,954 for the year ended December 31, 1997.
F-16
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------- ----------
<S> <C> <C>
Notes payable issued in connection with various acquisitions, interest ranging from 8% to
10%, payable through June 1999. ......................................................... $6,029,146 $ --
12% unsecured convertible note payable, interest payable quarterly, unpaid principal and
interest due May 2002, convertible at a rate of one share of common stock for every
$7.50 of outstanding principal, conversion price adjustable upon the occurrence of
certain events. ......................................................................... 4,000,000 --
12% convertible note payable, net of discount, interest payable quarterly, unpaid
principal and interest due March 1999, convertible at a rate of one share of common
stock for every $6.00 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 --
Prime + 1.5% (10% at December 31, 1997) mortgage note payable, principal payments of
$13,333 plus interest payable monthly, outstanding principal and interest due July,
1998, collateralized by property and equipment of Eckler Industries, Inc. and
guaranteed by a stockholder of the Company. ............................................. 2,500,000 --
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 --
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 --
$1,500,000 note payable, net of discount (see below)...................................... 1,415,784 --
9% unsecured convertible notes payable, interest and principal due February 1998,
convertible at a rate of one share of common stock for each $8.75 of principal. ......... 1,267,601 --
8% convertible debentures (see below) .................................................... 1,050,000 --
9% unsecured convertible note payable, interest and principal due January 1999,
convertible at a rate of one share of common stock for each $8.75 of principal. ......... 1,031,008 --
Prime plus 1.75% (10.25% at December 31, 1997) notes payable, principal of $24,274 plus
interest payable monthly through June 1998 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 --
8% note payable, principal and interest of $10,010 payable monthly through June 2007,
collateralized by certain property of the Company. ...................................... 797,488 --
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 $9.00 of
outstanding principal, conversion price adjustable upon the occurrence of certain
events. ................................................................................. 697,895 --
Prime plus 1% (9.5% at December 31, 1997) unsecured note payable, interest payable
monthly, outstanding principal due 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. .................................. 498,923 --
12% convertible debentures (see below) ................................................... 410,000 262,000
</TABLE>
F-17
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
-------------- -----------
<S> <C> <C>
Prime plus 1% (9.5% at December 31, 1997) note payable, interest payable monthly,
principal due upon demand. .......................................................... 300,000 --
Various notes payable bearing interest at rates from 6% to 10%, principal and interest
payable through July 2001. .......................................................... 274,023 60,000
10% unsecured note payable, interest payable monthly, outstanding principal due
December 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 $7.50 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 --
------- ------
Total notes payable .................................................................. $29,197,458 $322,000
=========== ========
</TABLE>
Aggregate maturities of notes payable over future years 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 at December 31, 1997.
$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 Eckler Industries, Inc.
8% CONVERTIBLE DEBENTURES
The unsecured convertible debentures bear interest at 8%. Interest is
payable monthly, and all outstanding principal is due April 1998. The
debentures are 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 has been 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.
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
F-18
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
November 19 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 $5.00 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 1,200 shares of the Company's
common stock at $3.00 per share. The warrants are immediately exercisable and
expire five years from the date of issuance.
8. FLOOR PLANS PAYABLE
Floor plans payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
------------- -------
<S> <C> <C>
$3,350,000 floor plan line of credit, variable interest rate, interest payable
monthly, principal balance payable at the earlier of the time a vehicle is
sold or 360 and 180 days from the time a vehicle is floored for new and
used vehicles, respectively, guaranteed by Smart Choice Automotive
Group, Inc., collateralized by vehicle inventory floored. The line of
credit agreement contains certain financial ratio covenants. .................... $3,285,165 $ --
$3,000,000 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 the purchaser of the
vehicle or (ii) upon demand. Collateralized by all inventory, fixed assets,
holdback reserves, manufacturers' rebates, incentive payments and
intangible assets of First Choice Auto Finance, Inc., guaranteed by
Smart Choice Automotive Group, Inc. ............................................. 2,659,968 --
$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, collateralized by certain assets of First Choice
Stuart 1, Inc. The line of credit expired December 31, 1997 and is
subject to various financial and operating covenants. As of
December 31, 1997, the Company was in violation of certain of the
covenants. The lender has waived these covenants through
December 31, 1997. The Company is currently in negotiations with the
lender to modify the terms of the line of credit agreement. ..................... 2,341,959 --
---------- ----
Total ............................................................................ $8,287,092 $ --
========== ====
</TABLE>
F-19
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The components of deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards ......... $ 3,476,000 $ 238,000
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 ......... 9,301,000 238,000
Valuation allowance ...................... (9,301,000) (238,000)
------------ ----------
Total deferred income tax assets ......... $ -- $ --
============ ==========
</TABLE>
The Company's valuation allowance increased by approximately $9,063,000
and $238,000 for the periods ended December 31, 1997 and 1996, 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 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.
F-20
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-21
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During December 1996 and January 1997, the Company sold 395,000 shares of
Series A redeemable convertible preferred stock. Proceeds from these offerings,
net of offering costs, were approximately $977,000. The liquidation preference
of each preferred share is $2.00. Upon the completion of an initial public
offering of the Company that raises a minimum of $20 million in gross proceeds,
each preferred share will be converted automatically into the higher of: (i)
one share of the Company's $.01 par value common stock or (ii) that number of
shares of common stock having a value (as measured by a public offering sale
price) equal to $9.00. The holders of the Series A shares may require, by a
two-thirds vote of the issued and outstanding Series A shares, that the Company
offer to redeem the Series A shares at any time after September 30, 1998. The
redemption price will equal $2.00 per share.
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 300 shares of common stock for each
preferred share purchased at a price equal to $8.10 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 $333,333 ($.04 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 300 shares of common
stock for each preferred share purchased at a price equal to $5.23 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.
Subsequent to December 31, 1997, the holders of the preferred stock
converted 245 shares of preferred stock into 1,265,827 shares of common stock.
F-22
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. CAPITAL STOCK
INCREASE IN PAR VALUE
In March 1997, the Company authorized an increase in the par value of its
common stock from $.001 to $.01. All share information included in the
accompanying financial statements has been retroactively adjusted to give
effect to the increase in par value.
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%.
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,
----------------------------------
1997 1996
----------------- --------------
<S> <C> <C>
Net loss applicable to common stock
As reported ...................... $ (18,981,938) $ (703,788)
Pro forma ........................ (22,570,717) (703,788)
Basic loss per common share
As reported ...................... $ (2.14) $ (.13)
Pro forma ........................ (2.55) (.13)
</TABLE>
F-23
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 FAIR VALUE
SHARES EXERCISE PRICE OF OPTIONS
------------ ------------------ -----------
<S> <C> <C> <C>
Outstanding, December 31, 1996 ......... -- $ -- $--
Acquired in merger .................... 175,000 2.66 --
Granted, at market value .............. 838,000 4.89 2.78
Granted, above market value ........... 30,000 6.50 3.55
Granted, below market value ........... 50,000 4.07 2.53
Exercised ............................. (12,500) 2.50 --
Forfeited ............................. (3,000) 4.88 --
------- ----- ----
Outstanding, December 31, 1997 ......... 1,077,500 $ 4.56 $--
</TABLE>
At December 31, 1997, a total of 602,500 options were exercisable at a
weighted-average exercise price of $4.24.
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 FAIR VALUE
SHARES EXERCISE PRICE OF OPTIONS
------------ ------------------ -----------
<S> <C> <C> <C>
Outstanding--inception ................. -- $ -- $ --
Granted, above market value ........... 290,000 4.75 --
------- ----- ------
Outstanding, December 31, 1996 ......... 290,000 4.75 --
Acquired in merger .................... 1,044,000 3.81 --
Granted, at market value .............. 232,500 5.06 2.58
Granted, above market value ........... 300,000 8.17 2.28
Forfeited ............................. (680,000) 3.79 --
Expired ............................... (40,000) 5.00 --
--------- ----- -------
Outstanding, December 31, 1997 ......... 1,146,500 $ 5.41 $ --
</TABLE>
At December 31, 1997 and 1996, a total of 996,500 and 262,000 options were
exercisable at a weighted-average exercise price of $5.14 and $4.92,
respectively.
F-24
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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
$2.50 to $3.88.......... 187,500 $ 2.84 3.3 years 162,500 $ 2.68
$4.25 to $6.50.......... 890,000 4.93 4.4 years 440,000 4.82
------- ------- ------- -------
1,077,500 $ 4.56 602,500 $ 4.24
NON-EMPLOYEE
NON-PLAN OPTIONS
$2.88 to $3.00.......... 275,000 $ 2.91 3.7 years 275,000 $ 2.91
$4.50 to $6.50.......... 721,500 5.44 3.8 years 621,500 5.55
$8.75 to $12.00......... 150,000 9.83 3.7 years 100,000 8.75
--------- ------- ------- -------
1,146,500 $ 5.41 996,500 $ 5.41
</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 17,929 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 472,500 shares of the
Company's common stock at exercise prices ranging from $2.00 to $12.00 per
share. Of these options and warrants, 422,500 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-25
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMMON STOCK ISSUED--DEBT CONVERSION
During the year ended December 31, 1997, the Company issued 442,514 shares
of common stock in conversion of debt amounting to $1,770,056.
STOCK WARRANTS
At December 31, 1997, the Company had the following stock warrants
outstanding:
<TABLE>
<CAPTION>
NUMBER OF
EXPIRATION DATE UNDERLYING SHARES EXERCISE PRICE
- ------------------------------- ------------------- ---------------
<S> <C> <C>
December 31, 1999 .......... 70,000 $ 2.00
November 8, 2000 ........... 12,500 $ 6.00
November 14, 2000 .......... 1,284,000 $ 6.50
March 30, 2001 ............. 20,000 $ 4.20
August 29, 2002 ............ 52,500 $ 7.00
September 30, 2002 ......... 90,000 $ 8.10
November 19, 2002 .......... 33,720 $ 3.00
December 10, 2002 .......... 30,000 $ 5.23
December 24, 2002 .......... 90,000 $ 4.00
---------
1,682,720
</TABLE>
At December 31, 1997, 1,632,000 of the warrants were exercisable.
SHARES RESERVED
At December 31, 1997, the Company has reserved approximately 8,159,970
shares of common stock for future issuance under all of the above arrangements,
the convertible debt and the convertible preferred stock.
13. RESTRUCTURING CHARGE
During the fourth quarter of 1997, after all acquisitions were completed,
the Company implemented a restructuring program (the "Program") designed to
enhance overall competitiveness and efficiency through the reduction of
operating costs. The Program resulted in a charge to operations of $2,117,906.
The charge consists primarily of costs related to employment contract
terminations and severance pay.
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.
F-26
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
------------- --------
<S> <C> <C>
Cash paid for interest ............................................ $4,228,339 $ 552
Noncash investing and financing activities:
Notes payable and capital lease obligations incurred in
connection with the purchase of property and equipment ......... $3,722,670 $ --
Notes payable issued in connection with acquisitions ............. 11,015,272 --
Common stock issued in connection with acquisitions .............. 14,413,880 --
Common stock issued for conversion of debt ....................... 1,770,056 --
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 .................... 99,806 4,968
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 --
</TABLE>
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.
F-27
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 has elected the early adoption of this pronouncement. 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 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.
F-28
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows certain financial information by reportable
segment as of and for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
USED NEW CORVETTE
CAR CAR FINANCING PARTS AND CORPORATE
STORES DEALERSHIPS SERVICES ACCESSORIES AND OTHER CONSOLIDATED
-------------- ------------- ------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1997
Sales ................................. $35,279,228 $9,863,245 $ 9,209,656 $15,384,589 $ 1,177,903 $ 70,914,621
Operating income (loss) ............... 71,502 (470,739) 3,028,596 17,635 (15,009,346) (12,362,352)
Depreciation and amortization ......... 41,709 86,964 8,078 277,794 1,270,695 1,685,240
Identifiable assets ................... 10,273,420 7,369,038 34,763,399 5,439,449 31,259,685 89,104,991
Capital expenditures (exclusive of
acquisitions) ........................ 1,494,370 (63,031) 178,238 286,853 3,182,884 5,079,314
Interest expense ...................... 153,405 128,384 2,903,039 244,591 3,025,756 6,454,175
Compensation expense related to
employee and director stock
options .............................. -- -- -- -- 4,649,702 4,649,702
1996
Sales ................................. $ -- $ -- $ -- $ -- $ -- $ --
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
</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-29
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
----------------------------------
MARCH 31, DECEMBER 31,
1998 1997
---------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ....................... $ 2,394,391 $ 1,066,949
Accounts receivable ............................. 3,164,705 1,773,124
Finance receivables
Principal balances, net ........................ 51,146,019 39,109,368
Less: allowance for credit losses .............. (8,493,306) (6,857,265)
------------- -------------
42,652,713 32,252,103
Inventories, at cost ............................ 17,429,409 15,516,084
Land held for resale ............................ 1,064,205 1,050,000
Property and equipment, net ..................... 9,126,667 9,214,207
Notes receivable ................................ 23,140 46,280
Deferred tax asset .............................. 1,000 --
Deferred debt costs ............................. 949,330 426,823
Goodwill ........................................ 25,401,022 25,562,162
Prepaid expenses ................................ 1,530,471 1,008,229
Deposits ........................................ 178,237 170,305
Other assets .................................... 977,477 43,681
------------- -------------
$ 104,892,766 $ 89,104,991
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable ............................... $ 6,793,434 $ 5,259,903
Accrued expenses ............................... 4,152,209 4,633,841
Deferred income ................................ 92,861 --
Floorplan payable .............................. 9,413,944 8,287,092
Capital lease obligations ...................... 869,268 940,280
Notes payable .................................. 71,720,664 60,427,058
Deferred income taxes .......................... 2,042 --
Convertible debt ............................... 340,000 --
Other liabilities .............................. -- 94,913
------------- -------------
Total liabilities ............................... 93,384,422 79,643,087
------------- -------------
Redeemable convertible preferred stock ......... 1,491,834 4,941,834
Stockholders' equity:
Common stock ................................... 122,595 97,340
Additional paid in capital ..................... 27,913,049 24,108,456
Accumulated deficit ............................ (18,019,934) (19,685,726)
------------- -------------
Total stockholders' equity ...................... 10,016,510 4,520,070
------------- -------------
$ 104,892,766 $ 89,104,991
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial
statements
F-30
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
VEHICLE AND RELATED REVENUES:
Sales of new vehicles ................................................. $ 8,123,424 --
Sales of used vehicles ................................................ 21,845,559 4,785,077
Income on finance receivables ......................................... 4,146,215 522,939
Income from insurance and training .................................... 180,222 262,280
Income from parts and accessories ..................................... 4,364,037 2,498,753
----------- ---------
38,659,457 8,069,049
----------- ---------
COST OF VEHICLE AND VEHICLE RELATED REVENUES:
Cost of new vehicles sold ............................................. 7,187,085 --
Cost of used vehicles sold ............................................ 15,088,274 3,390,292
Provision for credit losses ........................................... 2,904,128 1,049,680
Cost of insurance and training ........................................ 30,757 13,565
Cost of parts and accessories sold .................................... 2,796,891 1,561,922
----------- ---------
28,007,135 6,015,459
----------- ---------
NET REVENUES FROM VEHICLE SALES AND VEHICLE RELATED ACTIVITIES ......... 10,652,322 2,053,590
----------- ---------
EXPENSES:
Operating expenses .................................................... 7,979,811 5,081,660
Compensation expense related to employee stock options ................ -- 3,125,877
----------- ---------
7,979,811 8,207,537
----------- ---------
INCOME (LOSS) FROM OPERATIONS .......................................... 2,672,511 (6,153,947)
----------- ----------
OTHER EXPENSE (INCOME):
Interest expense ...................................................... 1,909,671 692,617
Other income .......................................................... (919,413) (9,173)
Miscellaneous expense ................................................. 15,661 64,944
----------- ----------
1,005,919 748,388
----------- ----------
NET INCOME (LOSS) ...................................................... $ 1,666,592 $ (6,902,335)
PREFERRED STOCK DIVIDENDS .............................................. $ 77,875 --
NET INCOME AVAILABLE TO COMMON STOCK HOLDERS ........................... $ 1,588,717 $ (6,902,335)
=========== ============
NET INCOME (LOSS) PER SHARE ............................................
--Primary ............................................................. $ 0.15 $ (0.87)
=========== ============
--Fully diluted ....................................................... 0.14
===========
WEIGHTED AVERAGE NUMBER OF SHARES AND SHARE EQUIVALENTS
OUTSTANDING:
--Primary ............................................................. 10,380,260 7,853,134
--Fully diluted ....................................................... 11,226,758
</TABLE>
See accompanying notes to condensed consolidated financial
statements
F-31
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ............................................ $ 1,666,592 $ (6,902,335)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for credit losses ................................. 2,904,128 681,435
Common stock and options issued for consulting fees ......... -- 150,000
Loss on disposal of fixed assets ............................ -- 1,151
Stock option compensation ................................... -- 3,125,877
Depreciation and amortization ............................... 634,995 245,530
Recoupment of expenses ...................................... (165,967) --
Cash provided by (used for):
Accounts receivable ........................................ (2,513,545) (70,894)
Inventory .................................................. (1,913,325) (422,499)
Prepaid expenses ........................................... (522,242) (18,974)
Other assets ............................................... (1,453)
Accounts payable ........................................... 1,537,063 964,984
Accrued expenses ........................................... (481,632) 950,891
Deferred income ............................................ (1,010) 20,772
Other liabilities .......................................... -- 1,657,444
Customer deposits .......................................... -- (116,099)
Floorplan payable .......................................... 1,126,852 224,876
------------- ------------
Net cash provided by operating activities ..................... 2,271,909 470,706
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in finance receivables .............................. (12,329,624) (1,153,486)
Cash for acquisitions, net of cash acquired .................. -- (2,797,310)
Issuance of notes receivable ................................. -- (565,896)
Increase in deposits ......................................... (7,932) (477,300)
Increase in other assets ..................................... (41,210) --
Increase in deferred acquisition costs ....................... -- (15,400)
Payment of notes receivable .................................. 23,140 --
Purchase of property and equipment ........................... (181,034) (56,379)
Decrease in other assets ..................................... -- 40,435
Purchase of land ............................................. (14,205) --
------------- ------------
Net cash used in investing activities ......................... (12,550,935) (5,025,336)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable .......................... $ (874,242) $ (1,835,310)
Proceeds from issuance of Sirrom debt ........................ -- 3,500,000
Proceeds from issuance of notes payable ...................... 3,000,000 3,996,722
Increase in deferred debt costs .............................. -- (256,494)
Increase (decrease) in senior secured debt payable ........... 9,500,000 --
Proceeds from issuance of preferred stock .................... -- 590,000
Proceeds from issuance of convertible debentures ............. -- 300,000
Bank overdraft ............................................... -- (82,884)
Payments on capital lease obligations ........................ (19,289) --
------------- ------------
Net cash provided by financing activities ..................... 11,606,469 6,212,034
------------- ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS .......... 1,327,438 1,657,404
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 1,066,949 0
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 2,394,391 $ 1,657,404
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-32
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Smart Choice Automotive Group, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for a complete
financial statement presentation. In the opinion of management, such unaudited
interim information reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present the Company's financial position
and results of operations for the periods presented. The results of operations
for interim periods are not necessarily indicative of the results to be
expected for a full fiscal year. The Condensed Consolidated Balance Sheet as of
December 31, 1997 was derived from audited consolidated financial statements as
of that date but does not include all the information and notes required by
generally accepted accounting principles. It is suggested that these condensed
consolidated financial statements be read in conjunction with the company's
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE 2--FINANCE RECEIVABLES
The Company's finance receivables ("Finance Receivables" or "Finance
Contracts") are automobile retail installment sale contracts originated by the
Company on sales of used cars at its automobile dealerships. The following
shows the principal balances of the Company's Finance Receivables as of March
31, 1998:
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------
<S> <C>
Contractually scheduled payments ........... $ 50,439,275
Less: allowance for credit losses .......... (8,493,306)
------------
Principal balances, net .................... $ 41,945,969
============
</TABLE>
NOTE 3--PRESENTATION OF DEALERSHIP REVENUES AND COST OF REVENUES
Revenues from Company dealership operations consist of Sales of New Cars,
Sales of Used Cars, Income on Finance Receiveables, Income from Insurance and
Training, and Income from Parts and Accessories. Cost of Revenues include cost
of New Cars Sold, Cost of Used Cars Sold, the Provision for Credit Losses,
Costs of Insurance and Training Income and Cost of Parts and Accessories Sold.
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, some 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 finance
receivables originated at Company dealerships as well as a cost of the sales of
the cars themselves.
NOTE 4--COMMON STOCK EQUIVALENTS
Net earnings per common share amounts are based on the weighted average
number of common shares and common stock equivalents outstanding as reflected
on Exhibit 11 to this Quarterly Report on Form 10-Q.
F-33
<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 (prior to the
Eckler and SCHI closing), 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 as a
purchase, 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-34
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PALM
BEACH
FINANCE
FLORIDA AND
SCHI LIBERTY FINANCE MORTGAGE
---------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales at used car stores ......... $ 35,279,228 $1,351,838 $ 225,599 $1,334,472
Income on finance receivables..... 9,209,656 458,028 162,203 178,098
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
------------- ---------- -----------
70,914,621 1,813,590 389,037 1,512,570
------------- ---------- ----------- ----------
Costs and expenses:
Cost of sales .................... 46,774,445 1,511,731 289,820 1,060,814
Operating expenses ............... 36,502,528 434,243 152,053 207,336
------------- ---------- ----------- ----------
83,276,973 1,945,974 441,873 1,268,150
------------- ---------- ----------- ----------
Income (loss) from operations ..... (12,362,352) (132,384) (52,836) 244,420
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) 240,726
Taxes on income (benefit) .........
Net income (loss) ................. (18,648,605) (308,969) (116,897) 240,726
Preferred stock dividends ......... (333,333)
-------------
Net income (loss) applicable to
common stock ..................... $ (18,981,938) $ (308,969) $ (116,897) $ 240,726
============= ========== =========== ==========
Basic loss per common share ....... $ (2.14)
=============
Weighted average number of
common shares outstanding ........ 8,860,733
=============
<CAPTION>
STRATA
AND PRO
READY STUART FORMA CONSOLIDATED
ECKLER FINANCE NISSAN ADJUSTMENTS PRO FORMA
--------------- --------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales at used car stores ......... $ $ 5,028,687 $ $ $ 43,219,824
Income on finance receivables..... 1,106,071 11,114,056
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 95,558,454
----------- ------------- ----------- -------------
Costs and expenses:
Cost of sales .................... 582,117 3,866,468 12,393,236 66,478,631
Operating expenses ............... 432,005 1,916,464 1,856,429 138,806 (1) 41,639,864
----------- ------------- ----------- ------------ -------------
1,014,122 5,782,932 14,249,665 138,806 108,118,495
----------- ------------- ----------- ------------ -------------
Income (loss) from operations ..... (160,241) 351,826 (309,668) (138,806) (12,560,041)
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) (19,480,580)
Taxes on income (benefit) ......... (68,000) 68,000 (3) ---
----------- ------------ -------------
Net income (loss) ................. (109,558) 231,636 (163,970) (604,943) (19,480,580)
Preferred stock dividends ......... (333,333)
-------------
Net income (loss) applicable to
common stock ..................... $ (109,558) $ 231,636 $ (163,970) $ (604,943) $ (19,813,913)
=========== ============= =========== ============ =============
Basic loss per common share ....... $ (2.15)
=============
Weighted average number of
common shares outstanding ........ 9,208,910
=============
</TABLE>
See accompanying headnote and notes to pro forma consolidated statement
of operations (unaudited).
F-35
<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-36
<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-37
<PAGE>
FLORIDA FINANCE GROUP, INC.,
SUNCOAST AUTO BROKERS, INC.
AND SUNCOAST AUTO BROKERS ENTERPRISES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Cash .............................................. $ 20,272 $ 50,701
Accounts and notes receivable, net ................ 4,383,759 2,973,514
Inventory ......................................... 440,317 941,433
Prepaid expenses .................................. 44,705 14,497
Leasehold improvements and equipment, net ......... 111,950 133,586
Other assets ...................................... 2,360 5,539
------------ ------------
$ 5,003,363 $ 4,119,270
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Liabilities:
Notes payable ..................................... $ 5,018,343 $ 3,614,624
Trade accounts payable ............................ 95,093 177,205
Accrued expenses .................................. 16,505 74,362
Drafts payable .................................... -- 104,680
Stockholder loans ................................. 345,250 306,378
Deferred income ................................... 134,571 68,933
Related party payable ............................. 811,600 714,146
Income taxes payable .............................. -- 1,202
------------ ------------
Total liabilities ................................ 6,421,362 5,061,530
------------ ------------
Stockholders' equity (deficit):
Common stock ...................................... 1,600 1,600
Paid-in capital in excess of par value ............ 220,129 220,129
Retained deficit .................................. (1,639,728) (1,163,989)
------------ ------------
Total stockholder's deficit ...................... (1,417,999) (942,260)
------------ ------------
Commitments ........................................ -- --
------------ ------------
$ 5,003,363 $ 4,119,270
============ ============
</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.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
Revenue:
Sales ....................................... $ 4,443,091 $ 4,340,896
Interest income ............................. 1,687,057 1,189,289
------------ ------------
Total revenue .............................. 6,130,148 5,530,185
------------ ------------
Cost of sales and expenses:
Cost of sales ............................... 3,768,929 3,562,713
Selling, general and administrative ......... 1,635,606 1,910,782
Provision for credit losses ................. 445,133 236,152
Depreciation and amortization ............... 32,959 44,232
Interest .................................... 723,056 454,037
------------ ------------
Total cost of sales and expenses ........... 6,605,683 6,207,916
------------ ------------
Loss before income taxes ..................... (475,535) (677,731)
Income taxes ................................. 204 6,146
------------ ------------
Net loss ..................................... (475,739) (683,877)
Retained deficit, beginning of year .......... (1,163,989) (480,112)
------------ ------------
Retained deficit, end of year ................ $ (1,639,728) $ (1,163,989)
============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-39
<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,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $ (475,739) $ (683,877)
------------ ------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 32,959 44,232
Loss on disposal of equipment .......................... -- 1,994
Changes in operating assets and liabilities:
(Increase) decrease in inventory ...................... 501,116 (202,921)
Increase in prepaid expenses .......................... (30,208) (470)
Increase in other assets .............................. (154) --
Increase (decrease) in accounts payable ............... (82,112) 123,403
Increase (decrease) in accrued expenses ............... (57,857) 8,538
Increase (decrease) in drafts payable ................. (104,680) 85,320
Increase (decrease) in income taxes payable ........... (1,202) 1,202
Increase in deferred income ........................... 65,638 29,770
------------ ------------
Total adjustments ................................... 323,500 91,068
------------ ------------
Net cash used in operating activities ............. (152,239) (592,809)
------------ ------------
Cash flows from investing activities:
Increase in accounts and notes receivable, net ......... (1,410,245) (1,288,014)
Purchase of equipment .................................. (7,990) (11,911)
------------ ------------
Net cash used in investing activities ............... (1,418,235) (1,299,925)
------------ ------------
Cash flows from financing activities:
Debt incurred .......................................... 1,575,543 1,979,295
Debt reduction ......................................... (35,498) (55,663)
------------ ------------
Net cash provided by financing activities ........... 1,540,045 1,923,632
------------ ------------
Net increase (decrease) in cash ......................... (30,429) 30,898
Cash, beginning of year ................................. 50,701 19,803
------------ ------------
Cash, end of year ....................................... $ 20,272 $ 50,701
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--CASH PAID DURING THE YEAR FOR:
Interest on borrowings .................................. $ 719,289 $ 432,726
Income taxes ............................................ $ 33,768 $ 4,944
</TABLE>
See accompanying notes to combined financial statements.
F-40
<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-41
<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-42
<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,
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Accounts and notes receivable are summarized as follows:
Contractually scheduled payments ....................... $ 7,629,382 $ 5,009,234
Less: unearned interest income ......................... (2,150,628) (1,301,295)
------------ ------------
Installment sales contract principal balance ........... 5,478,754 3,707,939
Other receivable ....................................... 650 650
------------ ------------
5,479,404 3,708,589
Less: 20% discount on loans purchased .................. (1,095,645) (735,075)
------------ ------------
Accounts and notes receivable, net ..................... $ 4,383,759 $ 2,973,514
============ ============
</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,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Leasehold improvements ................. $ 108,131 $ 108,131
Furniture and fixtures ................. 95,499 95,105
Automotive equipment ................... 82,140 82,140
Tow truck .............................. 36,500 36,500
Signs .................................. 38,027 33,531
Office equipment ....................... 21,695 18,595
---------- ----------
381,992 374,002
Less: accumulated depreciation ......... (270,042) (240,416)
---------- ----------
$ 111,950 $ 133,586
========== ==========
</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-43
<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,
-----------------------------
1996 1995
------------- -------------
<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). .................................. $4,675,000 $2,625,000
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.............................. 142,060 800,563
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. ..................... 168,406 143,187
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 .......... 11,377 19,764
---------- ----------
$5,018,343 $3,614,624
========== ==========
</TABLE>
F-44
<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,
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
9% unsecured loans payable to stockholder with interest payable
monthly and principal due on demand .......................... $345,250 $ 306,378
======== =========
</TABLE>
(6) RELATED PARTY PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<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 ......................................... 679,600 570,100
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 ......................................... 132,000 122,000
-------- --------
$811,600 $714,146
======== ========
</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-45
<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-46
<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-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, 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-48
<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 (D ICIT)
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-49
<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-50
<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 to the financial statements, the Company changed its method
of accounting for inventories in 1996.
BDO Seidman, LLP
Orlando, Florida
November 13, 1997
F-51
<PAGE>
<TABLE>
<CAPTION>
ECKLER INDUSTRIES, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
JANUARY 28, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Current:
Cash $ 111,050 $ 241,652 $ 251,997 $ --
Accounts receivable - trade, less allowance for
possible losses of $9,761, $8,772, $9,608
and $2,335 (Note 6) 162,610 153,285 168,047 108,660
Notes receivable 576,700 326,700 94,000 --
Due from affiliates -- -- -- 561,850
Inventories (Notes 2 and 6) 1,421,139 1,307,525 1,438,895 832,918
Prepaid expenses (Note 3) 545,774 633,284 874,694 615,618
Deferred tax asset (Note 5) 404,000 262,000 116,000 --
---------- ---------- ---------- ----------
Total current assets 3,221,273 2,924,446 2,943,633 2,119,046
---------- ---------- ---------- ----------
Property, plant and equipment, less accumulated
depreciation and amortization (Notes 4, 6 and 7) 2,514,325 2,512,645 2,539,316 2,597,428
---------- ---------- ---------- ----------
Other assets:
Prepaid royalty expense (Note 3) 641,726 641,726 745,054 776,455
Prepaid consulting fees (Note 3) 126,689 126,689 269,291 --
Deferred public offering costs -- -- -- 463,081
Other 131,259 92,392 97,397 129,562
---------- ---------- ---------- ----------
Total other assets 899,674 860,807 1,111,742 1,369,098
---------- ---------- ---------- ----------
$6,635,272 $6,297,898 $6,594,691 $6,085,572
========== ========== ========== ==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-52
<PAGE>
<TABLE>
<CAPTION>
ECKLER INDUSTRIES, INC.
BALANCE SHEETS
(CONTINUED)
- --------------------------------------------------------------------------------
JANUARY 28, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable (Note6) $ 343,823 $ 333,073 $ 133,073 $ --
Accounts payable 671,445 545,765 983,127 1,598,994
Royalties payable -- -- -- 175,000
Accrued wages 122,160 100,554 106,366 117,629
Other accrued expenses 188,091 209,059 300,243 358,727
Current maturities of long-term debt (Note 7) 167,639 167,582 167,414 1,208,853
Obligations under capital leases 1,495 1,691 2,280 31,840
Deferred income taxes -- -- -- 94,500
----------- ----------- ----------- -----------
Total current liabilities 1,494,653 1,357,724 1,692,503 3,585,543
Long-term debt, less current maturities (Note 7) 2,189,863 2,203,860 2,245,819 2,338,108
Obligations under capital leases, less current portion -- -- -- 13,022
Deferred income taxes (Note 5) 404,000 403,000 401,000 351,500
----------- ----------- ----------- -----------
Total liabilities 4,088,516 3,964,584 4,339,322 6,288,173
----------- ----------- ----------- -----------
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; 1,836,650, 1,736,650, 1,641,750 and
360,000 issued and outstanding 18,367 17,367 16,417 3,600
Class B common stock; $.01 par value; 5,000,000 shares
authorized; 510,375 and 570,000 issued and outstanding 5,104 5,104 5,104 5,700
Additional paid-in capital 3,741,251 3,419,251 3,077,251 (923,939)
Retained earnings (deficit) (1,217,966) (1,108,408) (843,403) 23,165
----------- ----------- ----------- -----------
Total stockholders' equity (deficit) 2,546,756 2,333,314 2,255,369 (891,474)
----------- ----------- ----------- -----------
$ 6,635,272 $ 6,297,898 $ 6,594,691 $ 6,085,572
=========== =========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-53
<PAGE>
<TABLE>
<CAPTION>
ECKLER INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
PERIOD FROM THREE MONTHS
JANUARY 1, 1997 ENDED YEAR ENDED SEPTEMBER 30,
TO JANUARY 28, DECEMBER 31, --------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 853,881$ 2,941,821 $ 14,893,083 $ 12,973,162 $ 13,942,936
Cost of sales 582,117 1,813,371 9,648,505 8,428,777 9,102,753
------------ ------------ ------------ ------------ ------------
Gross profit 271,764 1,128,450 5,244,578 4,544,385 4,840,183
Selling, general and administrative expenses 432,005 1,492,939 5,489,776 4,177,034 4,508,770
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (160,241) (364,489) (245,198) 367,351 331,413
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest expense (23,728) (72,673) (332,195) (434,589) (406,386)
Interest income 6 2,114 16,467 6,050 6,842
Miscellaneous 6,405 26,043 84,496 77,723 62,212
------------ ------------ ------------ ------------ ------------
(17,317) (44,516) (231,232) (350,816) (337,332)
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes on income (177,558) (409,005) (476,430) 16,535 (5,919)
Taxes on income (benefit) - deferred (Note 5) (68,000) (144,000) (161,000) 446,000 --
------------ ------------ ------------ ------------ ------------
Net loss (109,558) (265,005) (315,430) (429,465) (5,919)
Accretion of redemption value of redeemable
preferred stock (Note 9) -- -- (533,032) (113,703) --
Preferred stock dividends -- -- (18,106) (3,288) --
------------ ------------ ------------ ------------ ------------
Net loss applicable to common stock $ (109,558) $ (265,005) $ (866,568) $ 546,456) $ (5,919)
============ ============ ============ ============ ============
Loss per share $ (.39) $ (.10) $ (.34) $ (.26) $ --
============ ============ ============ ============ ============
Pro forma (unaudited):
Historical income (loss) before taxes on income -- -- -- $ 16,535 $ (5,919)
Pro forma adjustment to eliminate compensation in
excess of $100,000 received by the stockholder -- -- -- -- 200,000
Pro forma taxes on income (Note 5) -- -- -- 5,622 66,000
------------ ------------ ------------ ------------ ------------
Pro forma net income -- -- -- $ 10,913 $ 128,081
============ ============ ============ ============ ============
Pro forma earnings per share -- -- -- $ .01 $ .06
============ ============ ============ ============ ============
Weighted average number of shares
and share equivalents outstanding 2,841,371 2,665,833 2,532,309 2,117,500 2,117,500
============ ============ ============ ============ ============
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-54
<PAGE>
<TABLE>
<CAPTION>
ECKLER INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------------- ------------------------ ADDITIONAL RETAINED
NUMBER PAR NUMBER PAR PAID-IN EARNINGS
OF SHARES VALUE OF SHARES VALUE CAPITAL (DEFICIT)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 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)
F-55
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK
---------------------- ------------------------ ADDITIONAL RETAINED
NUMBER PAR NUMBER PAR PAID-IN EARNINGS
OF SHARES VALUE OF SHARES VALUE CAPITAL (DEFICIT)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 1,736,650 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 1,836,650 $ 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-56
<PAGE>
<TABLE>
<CAPTION>
ECKLER INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
PERIOD FROM THREE MONTHS
JANUARY 1, 1997 ENDED YEAR ENDED SEPTEMBER 30,
TO JANUARY 28, DECEMBER 31, -----------------------------------------
1997 1996 1996 1995 1994
--------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (109,558) $ (265,005) $ (315,430) $ (429,465) $ (5,919)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 22,394 66,636 372,979 301,170 367,417
Loss on disposal of assets 366 -- 160 -- 9,383
Common stock, options and warrants
issued for consulting services -- 16,250 146,512 -- --
Deferred income taxes (benefit) (68,000) (144,000) (161,000) 446,000 --
Cash provided by (used for):
Accounts receivable (9,325) 14,762 (59,387) 70,892 209,632
Inventories (113,614) 131,370 (605,977) 100,991 355,321
Prepaid expenses 46,551 487,340 (87,966) (45,547) 197,505
Prepaid royalty expense -- -- -- -- (650,000)
Accounts payable 125,680 (437,362) (615,867) 273,583 481,103
Royalties payable -- -- (175,000) (175,000) --
Accrued expenses 638 (96,996) (52,946) 8,404 35,497
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) operating activities (104,868) (227,005) (1,553,922) 551,028 999,939
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Notes and advances to affiliates -- -- 561,850 (143,339) (216,685)
Purchases of property, plant and equipment (22,318) (33,601) (66,660) (23,303) (58,352)
Proceeds from disposal of property and equipment -- -- 3,600 -- 37,000
Decrease (increase) in other assets (30) (1,359) (24,314) 22,923 40,146
Payments received on notes receivable -- 94,000 -- -- 361,214
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) investing activities (22,348) 59,040 474,476 (143,719) 163,323
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit 10,750 200,000 -- -- --
Proceeds from issuance of long-term debt -- -- 17,467 295,498 130,000
Principal payments of long-term debt (13,940) (41,791) (1,026,796) (387,017) (960,666)
Payments on capital lease obligations (196) (589) (41,197) (46,375) --
Proceeds from sale of common stock -- -- 3,219,075 211,905 --
Proceeds from sale of preferred stock -- -- -- 363,265 --
Redemption of preferred stock -- -- (950,000) -- --
Proceeds from exercise of stock options -- -- 131,000 -- --
Deferred public offering costs -- -- -- (463,081) --
Deferred financing costs -- -- -- (61,500) --
Dividends -- -- (18,106) (320,004) (450,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) financing activities (3,386) 157,620 1,331,443 (407,309) (1,280,666)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash (130,602) (10,345) 251,997 -- (117,404)
Cash, beginning of period 241,652 251,997 -- -- (117,404)
----------- ----------- ----------- ----------- -----------
Cash, end of period $ 111,050 $ 241,652 $ 251,997 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-57
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Inventories Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.
Prepaid Expenses The Company capitalizes catalog costs and amortizes the costs
and Royalties 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 ).
Property, Plan Property, plant and equipment are stated at cost. Depreciation
and Equipment 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 ), 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
F-58
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
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 Loss per share of Class A common stock is based on net loss
Share applicable to common stock and the weighted average number of
shares of Class A common stock and common stock equivalents
outstanding during each period after giving retroactive effect
to the Company's recapitalization discussed in Note . 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 ).
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 . Shares
of Class B common stock become convertible into shares of
Class
F-59
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
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 loss 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 ).
Recent Accounting In March 1997, the Financial Accounting Standards Board
Pronouncements 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 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.
F-60
<PAGE>
ECKLER INDUSTRIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Use of The preparation of financial statements in conformity with
Estimates generally accepted accounting principles requires management
to make estimates and assumptions thataffect 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 Statement of Financial Accounting Standards No. 107,
Financial "Disclosures about Fair Value of Financial Instruments,"
Instruments requires disclosure of fair value information about financial
instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information
available to management.
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-61
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Nature of Eckler Industries, Inc. (the Company) is an aftermarket
Operations supplier of Corvette automotive parts and accessories
throughout the United States. The Company has four basic
product lines which include accessories, Corvette restoration
parts, maintenance items and gift and apparel items. The
Company purchased approximately 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>
JANUARY 28, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials and supplies $ 63,419 $ 56,281 $ 56,948 $ 67,749
Work in progress 34,219 35,768 42,761 43,620
Finished goods 25,365 23,195 27,900 3,320
---------- ---------- ---------- ----------
Total manufactured inventories 123,003 115,244 127,609 114,689
Inventory purchased for resale 1,298,136 1,192,281 1,311,286 718,229
---------- ---------- ---------- ----------
$1,421,139 $1,307,525 $1,438,895 $ 832,918
========== ========== ========== ==========
</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 Prepaid expenses consist of the following:
Expenses
<TABLE>
<CAPTION>
JANUARY 28, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Prepaid royalties $ 822,466 $ 825,004 $ 844,429 $ 919,685
Catalog costs 183,120 233,813 499,121 404,504
F-62
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Prepaid consulting fees 223,476 224,093 468,195 --
Other prepaid expenses 85,127 118,789 77,294 67,884
----------- ----------- ----------- -----------
1,314,189 1,401,699 1,889,039 1,392,073
Less noncurrent portion of
prepaid consulting fees (126,689) (126,689) (269,291) --
Less noncurrent portion of
prepaid royalties (641,726) (641,726) (745,054) (776,455)
----------- ----------- ----------- -----------
$ 545,774 $ 633,284 $ 874,694 $ 615,618
=========== =========== =========== ===========
</TABLE>
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.
F-63
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 28, DECEMBER 31 SEPTEMBER 30, SEPTEMBER 30,
USEFUL LIVES 1997 1996 1996 1994
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Land $ 641,699 $ 641,699 $ 641,699 $ 641,699
Buildings and improvements 10 - 40 years 2,686,967 2,685,253 2,685,253 2,674,989
Machinery and equipment 3 - 7 years 563,109 560,936 557,592 554,476
Molds 5 - 10 years 310,305 310,305 310,305 344,576
Equipment under capital leases 5 years 318,683 318,683 318,683 288,739
Vehicles 3 - 7 years 108,885 113,180 113,180 142,960
Furniture and fixtures 3 - 8 years 338,019 338,019 338,019 407,996
Computer hardware and software 4 - 5 years 1,558,794 1,545,428 1,515,171 1,399,265
---------- ---------- ---------- ---------- ----------
6,526,461 6,513,503 6,479,902 6,454,700
Less accumulated depreciation
and amortization 4,012,136 4,000,858 3,940,586 3,857,272
---------- ---------- ---------- ----------
$2,514,325 $2,512,645 $2,539,316 $2,597,428
========== ========== ========== ==========
</TABLE>
Substantially all of the assets listed above have been pledged as collateral
under the mortgage note payable (see Note ).
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-64
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
65
<PAGE>
<TABLE>
<CAPTION>
JANUARY 28, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Provision for bad debts $ 4,000 $ 3,000 $ 4,000 $ 900
Accrued vacation 33,000 28,000 30,000 30,200
Accrued interest -- -- -- 5,900
Stock options 10,000 82,000 39,000 --
Deferred compensation 20,000 20,000 20,000 19,800
Net operating loss carryforward 430,000 200,000 190,000 1,300
--------- --------- --------- ---------
Gross deferred tax
assets - current 497,000 333,000 283,000 58,100
Valuation allowance (40,000) -- -- --
--------- --------- --------- ---------
Net deferred tax assets - current 457,000 333,000 283,000 58,100
Less current portion of
deferred tax liabilities (53,000) (71,000) (167,000) (152,600)
Net deferred tax assets
(liabilities) - current $ 404,000 $ 262,000 $ 116,000 $ (94,500)
========= ========= ========= =========
Deferred tax liabilities:
Depreciation $(374,000 $(372,000) (368,000) $(351,500)
Prepaid catalog costs (53,000) (71,000) (167,000) (152,600)
LIFO reserve (30,000) (31,000) (33,000) --
--------- --------- --------- ---------
Gross deferred tax liabilities (457,000) (474,000) (568,000) (504,100)
Less current portion (53,000) (71,000) (167,000) (152,600)
--------- --------- --------- ---------
Net deferred tax
liabilities - long-term $(404,000) $(403,000) $(401,000) $(351,500)
========= ========= ========= =========
</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.
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 .
F-66
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. Long-Term Long-term debt consists of the following:
Debt
<TABLE>
<CAPTION>
JANUARY 28, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
--------------------------------------------------------------------------------------------------------
<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 $2,346,667 $2,360,000 $2,400,000 $ --
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 10,835 11,442 13,233 140,029
----------
2,357,502 2,371,442 2,413,233 3,546,961
Less current maturities 167,639 167,582 167,414 1,208,853
----------
$2,189,863 $2,203,860 $2,245,819 $2,338,108
----------
</TABLE>
The aggregate amount of the maturities of long-term debt maturing in future
years as of January 28, 1997 is as follows:
---------------------------------------
1998 $ 167,639
1999 2,189,863
---------------------------------------
F-67
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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 ).
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.
F-68
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 , 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 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
F-69
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 ). 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.
F-70
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK WARRANTS
As of January 28, 1997, the Company had the following common
stock warrants outstanding:
Class A
Common Stock
Exercise Shares Issuable
Expiration Date Price Upon Exercise
- ----------------------------------------------------------
November 8, 2000 $6.00 12,500
November 14, 2000 6.50 1,284,000
March 30, 2001 4.20 20,000
- ----------------------------------------------------------
At January 28, 1997, all of the warrants were exercisable.
During the year ended September 30, 1996, compensation expense
of $49,200 was recognized, in accordance with SFAS 123, on
Class A common stock warrants granted to non-employees and was
recorded as additional paid-in capital.
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
F-71
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
Period from Three
January 1, 1997 Months Ended Year Ended Year Ended
to January 28, December 31, September 30, September 30,
1997 1996 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss applicable
to common stock
As reported $ (109,558) $ (265,005) $ (866,568) $ (546,456)
Pro forma (109,558) (288,735) (1,112,153) (546,456)
Net loss per share
As reported $ (.39) $ (.10) $ (.34 $ (.26)
Pro forma (.39) (.11) (.44) (.26)
- --------------------------------------------------------------------------------
</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-72
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about employee
stock option activity:
Weighted-Average
Weighted-Average Fair Value of
Shares Exercise Price Options Granted
- -------------------------------------------------------------------------------
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 --
- -------------------------------------------------------------------------------
Otstanding, January 28, 1997 175,000 $ 2.66 $ --
- -------------------------------------------------------------------------------
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:
Outstanding Weighted- Weighted- Exercisable Weighted-
Range of at Average Average at Average
Exercise January 28, Exercise Remaining January 28, Exercise
Prices 1997 Price Life 1997 Price
- -------------------------------------------------------------------------------
$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
- -------------------------------------------------------------------------------
F-73
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NON-PLAN STOCK OPTIONS
The Company has granted stock options to certain consultants,
key employees and directors of the Company which were not
issued under stock option plans. These options are exercisable
over various terms as determined by the consulting agreements
and the Company's Board of Directors. The following table
summarizes information about non-plan stock option activity:
Weighted-
Weighted- Average
Average Fair Value
Exercise of Options
Shares Price Granted
- --------------------------------------------------------------------------------
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 $ --
- --------------------------------------------------------------------------------
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 ),
680,000 options included above were canceled.
F-74
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about non-plan
stock options outstanding and exercisable at January 28, 1997:
Outstandin Weighted- Weighted- Exercisable Weighted-
Range of at Average Average at Average
Exercise January 28, Exercise Remaining January 28, Exercise
Prices 1997 Price Life 1997 Price
- --------------------------------------------------------------------------------
$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
- --------------------------------------------------------------------------------
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.
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.
F-75
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SHARES RESERVED
At January 28, 1997, the Company has reserved Class A common
stock for future issuance under all of the following
arrangements:
- ----------------------------------------------------------
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
- ----------------------------------------------------------
F-76
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Period from Three Months
January 1, 1997 Ended YEAR ENDED SEPTEMBER 30,
to January 28, December 31, ------------------------------------
1997 1996 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash paid for interest $ 23,728 $ 72,672 $ 369,619 $ 374,360 $ 434,653
- -------------------------------------------------------------------------------------------------------------
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 -- -- 126,920 20,860 21,333
Accretion of redemption value of
redeemable preferred stock -- -- 533,032 113,703 --
Conversion of investor notes -- -- 205,000 -- --
Conversion of preferred stock -- -- 60,000 -- --
Issuance of common stock options
and warrants for consulting services -- -- 555,513 -- --
Retirement of existing notes payable
and capital leases through issuance
of notes payable -- -- 2,430,237 -- --
Market value of Class B common
stock contributed to the Company
and retired -- -- 405,375 -- --
Issuance of common stock for
note receivable 250,000 326,700 94,000 -- --
Dividend paid to stockholder through
reduction of debt owed to the Company -- -- -- -- 406,404
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-77
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. Commitments LEASES
a n d
Contingencies
The Company leased approximately 20,000 square feet of
warehouse space in an industrial park located in Titusville,
Florida from Eckler Development, Inc., a corporation that is
wholly owned by the Company's principal stockholder. The lease
had an expiration date of January 31, 1998 and monthly rent of
$9,499. Rent expense for the 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 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.
F-78
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
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-79
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Eckler Industries, Inc.
We have audited the accompanying balance sheet of Eckler Industries, Inc.
as of September 30, 1995 and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the two years in the
period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eckler Industries, Inc. as
of September 30, 1995 and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 1995 in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Orlando, Florida
December 20, 1995
F-80
<PAGE>
ECKLER INDUSTRIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
--------------
<S> <C>
ASSETS (Note 0)
Current:
Accounts receivable--trade, less allowance for possible losses of $2,335 $ 108,660
Due from affiliates (Note 0) ............................................ 561,850
Inventories (Note 0) .................................................... 697,388
Prepaid expenses (Note 0) ............................................... 615,618
------------
Total current assets ................................................. 1,983,516
------------
Property, plant and equipment, less accumulated depreciation and
amortization (Note 0) ................................................... 2,597,428
------------
Other assets:
Deferred public offering costs .......................................... 463,081
Deferred financing costs ................................................ 61,500
Prepaid royalty expense (Note 0) ........................................ 776,455
Other ................................................................... 68,062
------------
Total other assets ................................................... 1,369,098
------------
$ 5,950,042
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................................ $ 1,598,994
Royalties payable (Note 0) .............................................. 175,000
Accrued wages ........................................................... 117,629
Other accrued expenses .................................................. 358,727
Current maturities of long-term debt (Note 0) ........................... 1,208,853
Current portion of obligations under capital leases ..................... 31,840
Deferred income taxes (Note 0) .......................................... 94,500
------------
Total current liabilities ............................................ 3,585,543
------------
Long-term debt, less current maturities (Note 0) ......................... 2,338,108
Obligations under capital leases, less current portion ................... 13,022
Deferred income taxes (Note 0) ........................................... 351,500
------------
Total liabilities .................................................... 6,288,173
------------
Commitments and contingencies (Notes 0 and 0)
Redeemable preferred stock; $10 par value; 100,000 shares authorized,
issued and outstanding (Note 0) ......................................... 476,968
Class A common stock subject to rescission offer, 140,000 shares (Note 0) 211,905
Stockholders' deficit (Notes 0 and 0):
Class A common stock; $.01 par value; 10,000,000 shares authorized;
360,000 issued and outstanding ........................................... 3,600
Class B common stock; $.01 par value; 5,000,000 shares authorized;
570,000 issued and outstanding ........................................... 5,700
Additional paid-in capital .............................................. (923,939)
Deficit ................................................................. (112,365)
------------
Total stockholders' deficit .......................................... (1,027,004)
------------
$ 5,950,042
============
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-81
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Net sales .................................................. $12,932,450 $13,942,936
Cost of sales .............................................. 8,443,912 9,074,824
----------- -----------
Gross profit ........................................... 4,488,538 4,868,112
Selling, general and administrative expenses ............... 4,136,322 4,508,770
----------- -----------
Income from operations ................................. 352,216 359,342
----------- -----------
Other income (expense):
Interest expense .......................................... (434,589) (406,386)
Interest income ........................................... 6,050 6,842
Gain (loss) on sale of assets ............................. -- (9,383)
Miscellaneous income ...................................... 77,723 71,595
----------- -----------
(350,816) (337,332)
----------- -----------
Income before taxes on income .......................... 1,400 22,010
Taxes on income--deferred (Note 0) ......................... 446,000 --
----------- -----------
Net income (loss) .......................................... $ (444,600) $ 22,010
=========== ===========
Pro forma (unaudited):
Historical income before taxes on income .................. $ 1,400 $ 22,010
Pro forma adjustment to eliminate compensation in excess of
$100,000 received by the stockholder (Note 0)............ -- 200,000
Pro forma income before taxes on income ................ 1,400 222,010
Pro forma taxes on income (Note 0) ..................... 476 75,500
----------- -----------
Pro forma net income ....................................... 924 146,510
Accretion of redemption value of redeemable preferred stock
(Note 0) ................................................. (113,703) --
Preferred stock dividends .................................. (3,288) --
----------- -----------
Net income (loss) applicable to common stock ............... $ (116,067) $ 146,510
=========== ===========
Pro forma earnings (loss) per share ........................ $ (.05) $ .07
=========== ===========
Weighted average number of shares and share
equivalents outstanding .................................. 2,117,500 2,117,500
=========== ===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-82
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
--------------------- ---------------------
ADDITIONAL RETAINED
NUMBER PAR NUMBER PAR PAID-IN EARNINGS
OF SHARES VALUE OF SHARES VALUE CAPITAL (DEFICIT)
----------- --------- ----------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993 ................. 200,000 $2,000 650,000 $6,500 $ 156,504 $ 520,693
Dividends ................................... -- -- -- -- -- (856,404)
Net income .................................. -- -- -- -- -- 22,010
------- ------ ------- ------ ------------ ----------
Balance, September 30, 1994 ................. 200,000 2,000 650,000 6,500 156,504 (313,701)
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 0) ................... -- -- -- -- -- (113,703)
Net loss .................................... -- -- -- -- -- (444,600)
------- ------ ------- ------ ------------ ----------
Balance, September 30, 1995 ................. 360,000 $3,600 570,000 $5,700 $ (923,939) $ (112,365)
======= ====== ======= ====== ============ ==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-83
<PAGE>
ECKLER INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1994
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... $ (444,600) $ 22,010
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: .........................
Depreciation and amortization .............................. 301,170 367,417
(Gain) loss on sale of assets .............................. -- 9,383
Deferred income taxes ...................................... 446,000 --
Cash provided by (used for): ...............................
Accounts receivable ........................................ 70,892 209,632
Inventories ................................................ 116,126 327,392
Prepaid expenses ........................................... (45,547) (452,495)
Accounts payable ........................................... 273,583 481,103
Royalties payable .......................................... (175,000) --
Accrued expenses ........................................... 8,404 35,497
---------- ------------
Net cash provided by operating activities .................... 551,028 999,939
---------- ------------
Cash flows from investing activities:
Notes and advances to affiliates ............................ (143,339) (216,685)
Purchases of property, plant and equipment .................. (23,303) (58,352)
Proceeds from disposal of property and equipment ............ -- 37,000
Payments received on notes from stockholder ................. -- 361,214
Decrease in other assets .................................... 22,923 40,146
---------- ------------
Net cash provided by (used for) investing activities ......... (143,719) 163,323
---------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................... 295,498 130,000
Principal payments of long-term debt ........................ (387,017) (960,666)
Payments on capital lease obligations ....................... (46,375) --
Proceeds from sale of common stock .......................... 211,905 --
Proceeds from sale of preferred stock ....................... 363,265 --
Deferred public offering costs .............................. (463,081) --
Deferred financing costs .................................... (61,500) --
Dividends ................................................... (320,004) (450,000)
---------- ------------
Net cash used for financing activities ....................... (407,309) (1,280,666)
---------- ------------
Net decrease in cash ......................................... -- (117,404)
Cash, beginning of year ...................................... -- 117,404
---------- ------------
Cash, end of year ............................................ $ -- $ --
========== ============
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-84
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are priced at the lower of cost or market with costs being
determined by the use of the last-in, first-out (LIFO) method.
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 years ended September 30, 1995 and 1994
were approximately $907,000 and $988,000, respectively.
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 0).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried 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.
DEFERRED OFFERING COSTS
Fees, costs and expenses related to the Company's anticipated initial
public offering (see Note 0) are being deferred and will be charged against the
proceeds therefrom.
DEFERRED FINANCING COSTS
Deferred financing costs related to notes payable to a bank are
capitalized and amortized over the term of the loan (see Note 0).
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 0), 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
F-85
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
PRO FORMA AMOUNTS
STATEMENT OF OPERATIONS
The Company has entered into employment arrangements with its President
that provide 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 each of the years presented (see Note 0).
EARNINGS (LOSS) PER SHARE
Pro forma earnings (loss) per share of Class A common stock is based on
pro forma net income less accretion of redemption value of redeemable preferred
stock and dividends thereon 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 0. 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 net income (loss) per share as if they were
outstanding for all periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets Being Disposed of," which provides
guidance on how and when impairment losses are recognized on long-lived assets.
This statement, when adopted, is not expected to have a material impact on the
Company.
The FASB has issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
stock-based compensation plans. This statement provides a choice to either
adopt the fair value based method of accounting or continue to apply APB
F-86
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Opinion No. 25, which would require only disclosure of the pro forma net income
and earnings per share, determined as if the fair value based method had been
applied. The Company plans to continue to apply APB Opinion No. 25 when
adopting this statement, and accordingly, this statement is not expected to
have a material impact on the Company.
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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials and supplies ............. $ 67,749
Work in progress ....................... 43,620
Finished goods ......................... 3,320
Total manufactured inventories ......... 114,689
Inventory purchased for resale ......... 582,699
$697,388
</TABLE>
If the first-in, first-out (FIFO) method had been used, inventories would
have been higher by $135,530 at September 30, 1995.
3. PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<S> <C>
Prepaid royalties .................................... $ 919,685
Catalog costs ........................................ 404,504
Other prepaid expenses ............................... 67,884
1,392,073
Less noncurrent portion of prepaid royalties ......... 776,455
$ 615,618
</TABLE>
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 expires July 31, 2000. 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 has been 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.
F-87
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PREPAID EXPENSES--(CONTINUED)
For each 12-month period from August 1, 1997 through July 31, 2000, 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 July 31,
1997 aggregate royalties of $1,000,000 are not achieved, then the guaranteed
minimum for the period August 1, 1997 to July 31, 1998 shall be reduced (up to
a maximum of $200,000) by an amount equal to the difference between the
$1,000,000 advance payment and actual royalties paid.
4. NOTES AND ACCOUNTS RECEIVABLE FROM AFFILIATES
At September 30, 1995, the Company had made advances to affiliated
companies under accounts and notes receivable amounting to $561,850. These
receivables may be offset against a note payable to the Company's stockholder
(see Note 0). The stockholder paid these receivables in their entirety from
proceeds of the sale of his shares in connection with the Company's initial
public offering (see Note 0).
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL LIVES
-------------
<S> <C> <C>
Land .................................................... $ 641,699
Buildings and improvements .............................. 10-40 years 2,674,989
Machinery and equipment ................................. 3-7 years 554,476
Molds ................................................... 5-10 years 344,576
Equipment under capital leases .......................... 5 years 288,739
Vehicles ................................................ 3-7 years 142,960
Furniture and fixtures .................................. 3-8 years 407,996
Computer hardware and software .......................... 4-5 years 1,399,265
6,454,700
Less accumulated depreciation and amortization .......... 3,857,272
$2,597,428
</TABLE>
Substantially all of the assets listed above have been pledged by the
Company as collateral for various long and short-term borrowings (see Note 0).
Accumulated amortization on equipment under capital leases was $238,706 as
of September 30, 1995.
6. INCOME TAXES
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, "Accounting for Income Taxes" (FAS 109). Under
the provisions of FAS 109, a net deferred
F-88
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES--(CONTINUED)
tax liability of $447,300 was recorded as of September 20, 1995 as a charge to
earnings. The pro forma provision for income taxes represents the estimated
income taxes that would have been reported had the Company been subject to
income taxes for all periods presented.
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 liabilities consist of the
following:
<TABLE>
<S> <C>
Deferred tax assets:
Provision for bad debts ................... $ 900
Accrued vacation .......................... 30,200
Accrued interest .......................... 5,900
Deferred compensation ..................... 19,800
Net operating loss carryforward ........... 1,300
Gross deferred income tax assets ........... 58,100
Deferred tax liabilities:
Depreciation .............................. (351,500)
Prepaid catalog costs ..................... (152,600)
Gross deferred tax liabilities ............. (504,100)
Net deferred tax liabilities ............... (446,000)
Less current portion ....................... (94,500)
Long-term deferred tax liabilities ......... $ (351,500)
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Notes payable to bank, collateralized by substantially all assets (see below) . $3,071,932
Note payable to the Company's employee pension plan, interest at 8%, due
October 1995 ................................................................. 7,733
Note payable to the Company's principal stockholder, interest at 18% per
annum, due on demand, subject to offset against accounts and notes
receivable from affiliates (see Note 0) ...................................... 6,361
Note payable to the Company's principal stockholder, interest at 10%, principal
and interest due monthly to September 30, 1998 ............................... 33,873
Mortgage payable, interest at 10% per annum payable monthly, principal and
accrued interest due November 1, 1997 collateralized by real estate .......... 130,000
Investor notes payable (see below) ............................................ 205,000
Other ......................................................................... 92,062
3,546,961
Less current maturities ....................................................... 1,208,853
$2,338,108
</TABLE>
NOTES PAYABLE TO BANK
Among other provisions of these loan agreements, there are restrictions
upon the Company with respect to additional borrowings, loans to related
parties, lease commitments and payment of dividends
F-89
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT--(CONTINUED)
or salaries above specified amounts to its principal stockholder. Such
agreements also impose financial covenants requiring the Company to maintain
specified leverage ratios which include debt to equity and liabilities to
tangible net worth. The debt has been guaranteed by the Company's principal
stockholder and certain of its affiliates. At September 30, 1995 and 1994, the
Company was in default under the debt agreements.
On October 6, 1995, the Company renegotiated and consolidated its loans
with the bank. The terms of the loan refinancing require a principal payment of
$500,000 which was paid out of the proceeds of the initial public offering
("IPO") (see Note 0). The additional terms of the refinancing include 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 will consist of interest only. In October 1996, the Company
will pay an additional amount toward principal in the amount of $750,000.
Thereafter, payments will include monthly principal payments of $25,600 per
month until October 1, 1997, at which time the remaining balance on this note
will be due and payable. Interest will accrue at the rate of 3% over prime and
will be payable monthly.
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 aggregate amount of the maturities of long-term debt maturing in
future years is as follows:
<TABLE>
<S> <C>
1996 ......... $1,208,853
1997 ......... 1,083,537
1998 ......... 1,254,571
</TABLE>
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 years ended September 30, 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, $363,265 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 0, the Company commenced an offer of rescission
(which expired December 9, 1995) to all purchasers who purchased units in the
private placement.
F-90
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. PRIVATE PLACEMENT--(CONTINUED)
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 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. All
holders of preferred stock required the Company to redeem such shares. The
excess of the fair value of the $1,000,000 of consideration issued over the
private placement proceeds assigned to the preferred stock ($363,265) is being
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. Subsequent to the
recapitalization, 80,000 Class B shares were converted into 160,000 Class A
shares. 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 remaining
570,000 Class B shares may be made range from 24 to 60 months from the
completion of the Company's IPO (see Note 0). The Company has reserved
1,140,000 Class A shares for conversion of Class B shares.
CONSULTANT OPTION
In August 1994, pursuant to a consulting agreement (see Note 0), the
Company granted to a consultant an option to purchase 100,000 shares of the
Company's Class A common stock at an exercise price of $2.50 per share, which
approximated the value of the Company's common stock at the date of grant. The
option is exercisable for three years and is granted with certain "piggy back"
registration rights.
EMPLOYEE STOCK OPTION PLAN
Effective August 25, 1995, the Company adopted the 1995 Employee Combined
Qualified and Non-Qualified Employee Stock Option Plan (the "Combined Plan"),
pursuant to which 475,000 shares of Class A common stock have been reserved for
issuance upon the exercise of options designated 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 granted 100,000 incentive stock options under the plan
on August 25, 1995 at an exercise price of $2.50 per share (which the Company
believes approximated fair value at the date of grant). Those options are
exercisable for five years from the grant date and are subject to a 24-month
exercise restriction.
F-91
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. CAPITAL STOCK--(CONTINUED)
MANAGEMENT STOCK OPTION PLAN
The Company established a non-qualified stock option plan in 1995 for the
purpose of granting options to certain management employees. The Company
reserved 35,000 shares of its Class A common stock for issuance pursuant to
such options, all of which are subject to options granted to certain executives
on August 25, 1995. The options are exercisable for five years at an exercise
price of $2.50 per share (which the Company believes approximated fair value at
the date of grant) and are subject to a 24-month exercise restriction.
SHARES RESERVED
At September 30, 1995, the Company has reserved Class A common stock for
future issuance under the following arrangements:
<TABLE>
<S> <C>
Conversion of Class B common stock ................. 1,140,000
Consultant option .................................. 100,000
Employee stock option plan ......................... 475,000
Management stock option plan ....................... 35,000
Investor notes (see Note 0) ........................ 205,000
Conversion of preferred stock (see Note 0) ......... 240,000
Employment agreement (see Note 0) .................. 480,000
2,675,000
</TABLE>
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1995 1994
- -------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Cash paid for interest ................................................ $374,360 $434,653
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 ........................................ 20,860 21,331
Dividend paid to stockholder through reduction of debt
owed to the Company ................................................ -- 406,404
Accretion of redemption value of redeemable preferred stock .......... 113,703 --
</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 leases 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 is for a term
F-92
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
of five years and expires on August 31, 1996. The initial rent for the building
is $1,440 per month, subject to annual increases at the rate of four percent
(4%). Rental income for the years ended September 30, 1995 and 1994 amounted to
$19,050.
GUARANTEES
The Company was a guarantor of a lease agreement between Eckler
Properties, Inc. ("EPI") as lessor and Eckler Service Center, Inc. ("ESCI") as
lessee, corporations owned 100% by the Company's principal stockholder. In
addition, the property under this lease is subleased pursuant to a lease
agreement between ESCI as lessor and Eckler Chevrolet GEO, Inc., a corporation
owned 50% by the Company's principal stockholder. The lease and sublease
provide for annual lease payments of $110,000 for a period of ten years. Lease
payments due from Eckler Chevrolet GEO, Inc. are in arrears under the terms of
the lease agreement. Furthermore, the Company was also a guarantor of up to
$850,000 of EPI's debt incurred in connection with the acquisition and
improvement of the subject property under the lease agreement. The balance of
the debt was approximately $780,000 at September 30, 1995. EPI was in default
under the terms of this loan. The Company's principal shareholder has pledged
120,000 shares of the Company's Class B common stock owned by him as additional
collateral. EPI is negotiating the sale of this property and plans to satisfy
this mortgage with the proceeds therefrom. The Company's original guarantee of
ESCI's lease obligation is secondary to the shareholder's pledge of additional
collateral and will be completely eliminated upon the sale of the property.
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.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with its President and
CEO effective May 23, 1995. The term of the agreement is seven years and is
automatically renewable for two successive two-year terms, unless notice of
termination is given prior to a renewal period. The agreement provides that the
employee shall receive an annual base salary of $100,000 with increases to
$150,000 for the second and third years of the agreement and to $175,000 and
$200,000 for the fourth and fifth years of the agreement, respectively. The
base salary increases to $250,000 for the sixth, seventh and any years subject
to the automatic renewal options.
F-93
<PAGE>
ECKLER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The agreement also provides the employee with incentive stock options to
acquire 160,000 and 320,000 shares of the Company's Class A common stock at
exercise prices of $2.50 and $5.00 per share, respectively. These options
accumulate annually at varying amounts for the first seven years following the
closing of the IPO (see Note 0) and are "earned" contingent upon the Company
achieving either a specified earnings per share level or a specified stock
price level (the "performance threshold") for the corresponding fiscal year
end. To the extent that the common stock's fair market value exceeds the
exercise prices at the grant dates, compensation expense will be recorded.
In addition, the employee will receive annual fixed bonuses which shall be
paid quarterly, provided the Company achieves either of the above-mentioned
performance thresholds. The annual bonuses shall be $250,000 for each of the
fiscal years ending September 30, 1996 through September 30, 2002.
CONSULTING AGREEMENTS
The Company entered into a consulting agreement dated as of August 29,
1994 with a financial consultant. The agreement provides for payment at the
rate of $150 per hour. The agreement further provides for minimum payments of
$7,500 per month commencing June 1, 1995 through May 31, 1998 and a grant of
stock options (see Note 0).
The Company entered into a consulting agreement with its underwriter dated
March 31, 1995, pursuant to which the underwriter will provide financial and
investor relation services, public relation services and corporate
communications services for a period of three years. The agreement provides for
prepayment of the consulting fees in three $50,000 installments on November 15,
1995 (which was paid upon closing of the IPO), January 15, 1996 and April 1,
1996. If the Company does not have stockholders' equity of at least $2 million
by December 15, 1995, the agreement is null and void. The Company may terminate
the agreement for any reason upon ten days written notice to the underwriter.
However, if termination is after December 15, 1995, the underwriter shall not
be required to perform any additional services under the agreement, and the
remainder of the unpaid balance of funds due to the underwriter shall be earned
and shall be immediately due and payable. The agreement also includes certain
provisions regarding the payment of out-of-pocket expenses, indemnification of
the underwriter and arbitration.
13. 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 $2,981,000 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 (see Note 0). The Company plans to
use these proceeds to purchase additional inventory, reduce notes payable to
bank (see Note 0) and redeem preferred stock issued in the private placement
(see Note 0). 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.
F-94
<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-95
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Cash ................................................................... $ 163,184 $ 8,368
Finance receivables, less allowance for uncollectible accounts ......... 11,383,431 9,804,684
Inventories ............................................................ 2,861,848 2,264,315
Land held for sale ..................................................... 1,050,000 1,050,000
Property and equipment, less accumulated depreciation .................. 272,543 241,210
Loan costs, less accumulated amortization of $3,476--1996
and $20,197--1995..................................................... 4,154 13,290
Other assets ........................................................... 83,754 68,159
----------- -----------
$15,818,914 $13,450,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Cash overdraft ......................................................... $ -- $ 11,269
Floor plan notes payable ............................................... 1,378,601 785,163
Accounts payable ....................................................... 473,088 505,510
Sales taxes payable .................................................... 23,535 49,471
Accrued interest ....................................................... 45,280 14,094
Accrued real estate taxes .............................................. 47,262 58,900
Advances from related parties .......................................... 197,237 182,096
Notes payable .......................................................... 13,059,981 10,640,827
Other liabilities ...................................................... 113,781 110,221
----------- -----------
Total liabilities ......................................... ......... 15,338,765 12,357,551
----------- -----------
STOCKHOLDERS' EQUITY
Common stock ........................................................... 700 1,500
Stock subscriptions .................................................... (600) (1,400)
Additional paid-in capital ............................................. 703,044 703,044
Retained earnings (deficit) ............................................ (222,995) 389,331
----------- -----------
Total stockholders' equity .......................................... 480,149 1,092,475
----------- -----------
$15,818,914 $13,450,026
=========== ===========
</TABLE>
The Notes to Combined Financial Statements are an integral part of these
statements.
F-96
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
AUTOMOBILE RETAILING
Sales ......................................................... $ 18,639,749 $ 11,786,657
Cost of sales ................................................. 16,122,778 9,235,343
------------ ------------
Gross profit ............................................... 2,516,971 2,551,314
------------ ------------
AUTOMOBILE FINANCING
Interest income ............................................... 3,047669 2,334,256
Interest expense .............................................. (1,324,437) (1,105,558)
------------ ------------
Interest income before provision for credit losses ......... 1,723,232 1,228,698
Provision for credit losses ................................... (1,324,787) (417,659)
------------ ------------
Net interest income ........................................ 398,445 811,039
------------ ------------
INCOME FROM OPERATIONS ......................................... 2,915,416 3,362,353
GENERAL AND ADMINISTRATIVE EXPENSE ............................. 3,527,742 2,772,391
------------ ------------
NET INCOME (LOSS) .............................................. $ (612,326) $ 589,962
============ ============
</TABLE>
The Notes to Combined Financial Statements are an integral part of these
statements.
F-97
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<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-98
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers ............................. $ 15,736,215 $ 7,999,776
Interest received ........................................ 3,047,669 2,334,256
Cash paid to suppliers and employees ..................... (19,673,517) (11,764,018)
Interest paid ............................................ (1,293,251) (1,091,464)
------------- -------------
Net cash (used in) operating activities ............... (2,182,884) (2,521,450)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES: .....................
Purchase of property and equipment ....................... (54,965) (159,373)
------------- -------------
Net cash (used in) investing activities ............... (54,965) (159,373)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties ............................ 15,141 182,096
Proceeds from issuance of notes payable .................. 10,015,455 7,861,144
Principal payments on notes payable ...................... (7,630,301) (5,004,717)
Loan costs paid .......................................... (7,630) --
Distributions to stockholder ............................. -- (387,488)
------------- -------------
Net cash provided by financing activities ............. 2,392,665 2,651,035
------------- -------------
NET INCREASE (DECREASE) IN CASH ........................... 154,816 (29,788)
CASH, BEGINNING OF YEAR ................................... 8,368 38,156
------------- -------------
CASH, END OF YEAR ......................................... $ 163,184 $ 8,368
============= =============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (612,326) $ 589,962
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation ............................................ 57,632 31,135
Amortization of loan costs .............................. 16,766 27,335
Provision for uncollectible finance receivables ......... 1,324,787 417,659
Decrease (Increase) In:
Finance receivables ..................................... (2,903,534) (3,786,881)
Inventories ............................................. (597,533) (1,017,419)
Other assets ............................................ (15,595) 16,062
Increase (Decrease) In:
Accounts payable ........................................ (32,422) 385,683
Floor plan note payable ................................. 593,438 739,363
Cash overdraft .......................................... (11,269) 11,269
Sales taxes payable ..................................... (25,936) 32,541
Accrued interest ........................................ 31,186 14,094
Accrued real estate taxes ............................... (11,638) (240)
Other liabilities ....................................... 3,560 17,987
------------- -------------
Net cash (used in) operating activities ............... $ (2,182,884) $ (2,521,450)
============= =============
</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-99
<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-100
<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, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Finance receivables--gross ......................... $12,283,431 $10,304,684
Less allowance for uncollectible accounts .......... 900,000 500,000
----------- -----------
Finance receivables--net ........................... $11,383,431 $ 9,804,684
=========== ===========
</TABLE>
An analysis of the allowance for uncollectible finance receivables for the
years ended December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Balance, beginning of year ............................... $ 500,000 $ 750,000
Provision for uncollectible finance receivables .......... 1,324,787 417,659
Loans charged off, net of recoveries ..................... (924,787) (667,659)
---------- ----------
Balance, end of year ..................................... $ 900,000 $ 500,000
========== ==========
</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-101
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. INVENTORIES
Inventories at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Used cars ................. $2,610,934 $2,081,673
Used motorcycles .......... 203,094 132,323
Accessories ............... 47,820 50,319
---------- ----------
$2,861,848 $2,264,315
========== ==========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Furniture and fixtures ................. $190,280 $123,671
Leasehold improvements ................. 130,895 115,880
Signs .................................. 55,768 48,427
-------- --------
376,943 287,978
Less accumulated depreciation .......... 104,400 46,768
-------- --------
$272,543 $241,210
======== ========
</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, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<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 ..................... $1,010,663 $739,363
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 ..................................... $ 331,938 $ 45,800
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 --
---------- --------
$1,378,601 $785,163
========== ========
</TABLE>
F-102
<PAGE>
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<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 ................. 561,683 619,750
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 ...................................... $ 16,728 $ 24,073
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 ........................................................... 10,391,312 8,188,231
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 --
----------- -----------
11,802,272 9,032,054
----------- -----------
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 ....................................................... $ 395,575 $ 440,975
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 ............................. 389,279 835,798
Uncollateralized notes payable to stockholder, payable in monthly
installments of interest only of 15%, balloon maturities range from
due on demand to November, 2000 ...................................... 272,855 132,000
----------- -----------
1,257,709 1,608,773
----------- -----------
$13,059,981 $10,640,827
=========== ===========
</TABLE>
F-103
<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-104
<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, 1996 and 1995, the Company's common stock consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------ ---------
<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
---- ------
$700 $1,500
==== ======
</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-105
<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-106
<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-107
<PAGE>
225 NORTH MILITARY CORPORATION
D/B/A MIRACLE MILE MOTORS AND
PALM BEACH FINANCE COMPANY, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and contracts in transit ................. $ 192,999 $ 304,914
Finance receivables, net ...................... 4,057,682 3,620,623
Inventory ..................................... 799,358 860,105
Property and equipment, net ................... 10,086 104,010
Other assets .................................. 48,275 24,859
---------- ----------
$5,108,400 $4,914,511
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Drafts payable ................................ $ 220,887 $ 317,875
Accounts payable and accrued expenses ......... 128,206 256,577
Loan from stockholder ......................... -- 50,880
Note payable .................................. 300,000 45,000
---------- ----------
Total liabilities ........................... 649,093 670,332
---------- ----------
Stockholder's equity:
Common stock .................................. 800 800
Additional paid-in capital .................... 20,000 20,000
Retained earnings ............................. 4,438,507 4,223,379
---------- ----------
Total stockholder's equity .................. 4,459,307 4,244,179
---------- ----------
Commitments ................................... -- --
---------- ----------
$5,108,400 $4,914,511
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-108
<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,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Revenue:
Sales ........................................ $10,784,322 $11,393,704
Interest income .............................. 1,214,525 1,090,692
----------- -----------
Total revenue ............................... 11,998,847 12,484,396
----------- -----------
Cost of sales and expenses:
Cost of sales ................................ 8,446,683 9,118,158
Selling, general, and administrative ......... 1,877,065 1,994,632
Provision for credit losses .................. 1,110,989 961,416
Interest expense ............................. 22,593 18,248
Depreciation ................................. 1,748 3,262
----------- -----------
Total cost of sales and expenses ............ 11,459,078 12,095,716
----------- -----------
Net income ................................. 539,769 388,680
Retained earnings, beginning of year .......... 4,223,379 3,971,944
Distributions to stockholder .................. (324,641) (137,245)
----------- -----------
Retained earnings, end of year ................ $ 4,438,507 $ 4,223,379
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-109
<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,
-----------------------------
1996 1995
------------- -------------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 539,769 $ 388,680
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .......................................................... 1,748 3,262
Change in operating assets and liabilities:
Decrease in inventory ................................................ 60,747 1,881
Increase in other assets ............................................. (23,416) (6,661)
Increase (decrease) in drafts payable ................................ (96,988) 46,627
Increase (decrease) in accounts payable and accrued expenses ......... (128,371) 7,649
---------- ----------
Total adjustments ................................................... (186,280) 52,758
---------- ----------
Net cash provided by operating activities .......................... 353,489 441,438
---------- ----------
Cash flows from investing activities: ...................................
Increase in finance receivable, net .................................... (437,059) (250,271)
Purchase of property and equipment ..................................... (8,851) (3,386)
---------- ----------
Net cash used in investing activities .............................. (445,910) (253,657)
---------- ----------
Cash flows from financing activities:
Increase in note payable ............................................... 255,000 44,000
Repay stockholder loan ................................................. (50,880) -
Distributions to stockholder ........................................... (223,614) (137,245)
---------- ----------
Net cash used in financing activities .............................. (19,494) (93,245)
---------- ----------
Net increase (decrease) in cash and contracts in transit ................ (111,915) 94,536
Cash and contracts in transit, beginning of year ........................ 304,914 210,378
---------- ----------
Cash and contracts in transit, end of year .............................. $ 192,999 $ 304,914
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on borrowings ................................................. $ 21,149 $ 17,243
========== ==========
Noncash investing and financing transaction:
Property distributed to stockholder (Note 7) ........................... $ 101,027 $ --
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-110
<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-111
<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-112
<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, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Contractually scheduled payments ...................... $ 6,227,510 $ 5,360,589
Less: unearned interest income ........................ (1,307,027) (1,012,754)
------------ ------------
Installment sales contract principal balances ......... 4,920,483 4,347,835
Loan origination costs, net ........................... 64,780 62,792
Other receivables ..................................... 56,419 84,996
------------ ------------
Principal balances, net ............................... 5,041,682 4,495,623
Less: allowance for credit losses ..................... $ (984,000) $ (875,000)
------------ ------------
Finance receivables, net .............................. $ 4,057,682 $ 3,620,623
============ ============
</TABLE>
The allowance for credit losses for the years ended December 31, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
--------------- -------------
<S> <C> <C>
Balance, beginning of the year ......... $ 875,000 $ 618,000
Provision for credit losses ............ 1,110,989 961,416
Charge-offs and repossessions .......... (1,001,989) (704,416)
------------ ----------
Balance, end of the year ............... $ 984,000 $ 875,000
============ ==========
</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,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales office (Note 7) .................. $ -- $ 114,370
Furniture and fixtures ................. 12,236 3,386
-------- ---------
12,236 117,756
Less: accumulated depreciation ......... (2,150) (13,746)
-------- ---------
$ 10,086 $ 104,010
======== =========
</TABLE>
F-113
<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,
------------------------
1996 1995
----------- ----------
<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 ...... $300,000 $45,000
======== =======
</TABLE>
(6) LOAN FROM STOCKHOLDER
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<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-114
<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, 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
==== ======= ========== ==========
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
==== ======= ========== ==========
</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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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 THIS 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 ....................................... 11
Use of Proceeds .................................... 21
Dividend Policy .................................... 21
Price Range of Common Stock ........................ 22
Capitalization ..................................... 23
Dilution ........................................... 24
Selected Consolidated
Financial Information ........................... 25
Management's Discussion and Analysis
of Financial Condition
and Results of Operations ....................... 28
Business ........................................... 40
Management ......................................... 51
Security Ownership of Certain Beneficial
Owners and Management ........................... 57
Certain Relationships and Related Transactions...... 58
Description of Capital Stock ....................... 60
Shares Eligible for Future Sale .................... 64
Underwriting ....................................... 65
Legal Matters ...................................... 66
Experts ............................................ 66
Additional Information ............................. 67
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.
================================================================================
================================================================================
5,000,000 SHARES
SMART CHOICE
AUTOMOTIVE GROUP, INC.
COMMON STOCK
-----------------------------------
PROSPECTUS
-----------------------------------
STEPHENS INC.
CRUTTENDEN ROTH INCORPORATED
SOUTHEAST RESEARCH PARTNERS, LTD.
, 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 ..................... $ *
Printing and Engraving Expenses ........................ $ *
Legal Fees and Expenses ................................ $ *
Accounting Fees and Expenses ........................... $ *
Blue Sky Fees and Expenses ............................. $ *
Transfer Agent and Registrar Fees and Expenses ......... $ *
---------
Total ................................................ $500,000
========
</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 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 limited number of investors, each purchaser was an accredited investor or,
either alone or with a
II-1
<PAGE>
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.
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 285,714 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 May 1998, 80,000 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, 14,094 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 1,265,825 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
2.7 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 648,000 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.
On December 31, 1997, the Company issued 5,500 shares of Common Stock to
Greenberg Traurig, a law firm, in consideration of prior legal services
rendered to the Company.
On December 30, 1997, the Company issued to four individual investors a
total of 442,514 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 600 shares of Common Stock to
Richard Bogani on exercise of a warrant to purchase Common Stock for $3.00 per
share held by him.
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On December 16, 1997, the Company issued 7,008 shares of Common Stock to
Robert Eckler on the exercise of a stock option held by him for $2.50 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 300 shares of common stock
for each preferred share purchased at a price equal to $5.23 per share.
On November 19, 1997, the Company issued warrants to purchase Common Stock
for $3.00 per share to certain investors holding debentures issued by a
subsidiary of the Company on maturity of such debentures, pursuant to a
contractual requirement under such debentures. The total number of shares
covered by the warrants issued on November 19, 1997 is 30,720 shares. On
December 31, 1997, the Company issued warrants to purchase 2,400 shares of
Common Stock for $3.00 per share to an investor holding debentures issued by a
subsidiary of the Company on maturity of such debentures, pursuant to a
contractual requirement under such debentures.
From October 29, 1997 to November 14, 1997, the Company issued options to
purchase a total of 86,000 shares of Common Stock to five key employees of the
Company. The exercise price of these options ranged from $5.63 per share to
$5.88 per share. On December 31, 1997, the Company issued options to purchase
100 shares each of Common Stock to 417 employees for an aggregate of 41,700
shares. All of these options are exercisable at a price equal to $4.00 per
share.
On September 30, 1997, the Company completed an offering 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 300 shares of common stock
for each preferred share purchased at a price equal to $8.10 per share.
In September 1997, the Company issued 11,429 shares of the Company's
Common Stock to Greenberg Traurig, in consideration of prior legal services
rendered to the Company.
In September 1997, the Company issued 52,500 warrants to institutional
purchasers to purchase Common Stock of the Company in connection with the
issuance of convertible debt. The warrants are exercisable at $7.00 per share
through August 29, 2002.
On September 9, 1997, the Company issued 1,000 shares of Common Stock to
Pepper O'Donnell & Co. In consideration of public relations services previously
provided to the Company.
In August 1997, the Company closed on the acquisition of the assets of
Jack Winters Enterprises, Inc., a new car dealership, and in connection
therewith issued 18,322 shares of Common Stock to the seller as partial
consideration for the assets.
In August 1997, the Company closed on the acquisition of Stuart Nissan, a
new car dealership, and issued to the sellers 86,546 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 225,000 shares of the Common Stock as partial
consideration for the acquisition.
On April 17, 1997, the Company issued to non-employee directors of the
Company non-transferrable options to acquire in the aggregate 62,500 shares of
the Company's Common Stock. The options are exercisable at $5.50 per share and
expire April 16, 2002.
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 10,000 shares of Class A Common Stock of Eckler's.
The options had an exercise price of $3.00 per share ($3.30 per share for Ralph
H. Eckler, a member of the Board and a 10% beneficial owner).
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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 25,000 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 $3.00 to $3.30 per share; (ii) non-qualified stock options for a total of
20,000 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 $3.00 per share; and (iii) a non-qualified
stock option to Ralph H. Eckler for 200,000 shares of Class A Common Stock
which expires in 2001 and became exercisable in August 1996.
Effective March 31, 1996, Eckler's issued to Randolph Fields, Esq., for
legal services, a nonredeemable stock purchase warrant for 20,000 shares of
Class A Common Stock, exercisable at $4.20 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 84,000 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 $6.00 per unit, and the
underlying warrants are exercisable for four years commencing November 15, 1996
at $6.50 per share.
Effective November 15, 1995, Eckler's issued 102,500 shares of Class A
Common Stock and warrants for 102,500 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 $6.00
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 135,000 shares of
Eckler's Class A Common Stock at a per share exercise price of $2.50. The term
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
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR 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
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ---------- ---------------------------------------- ----------------------------------------------------
<S> <C> <C>
3.2.4 Fourth Articles of Amendment to Filed herewith.
Articles of Incorporation
3.2.5 Fifth Articles of Amendment to Filed herewith.
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.
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.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- -----------------------------------------------------
<S> <C> <C>
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.
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.
10.14 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- -----------------------------------------------------
<S> <C> <C>
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.
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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ---------- --------------------------------------- -----------------------------------------------------
<S> <C> <C>
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.
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.
10.37 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.
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.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ------------ --------------------------------------- -----------------------------------------------------
<S> <C> <C>
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 Intentionally Omitted
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.
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.
</TABLE>
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<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ---------- -------------------------------------- -----------------------------------------------------
<S> <C> <C>
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.
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.
</TABLE>
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EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ---------- -------------------------------------- -----------------------------------------------------
<S> <C> <C>
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.
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.
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ---------- --------------------------------------- -----------------------------------------------------
<S> <C> <C>
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
Per Share. Exhibit 11.1 to Form 10-K, filed on April 14, 1998.
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,
Morris & Co. Filed herewith.
23.3 Consent of Osburn, Henning and
Company Filed herewith.
23.4 Consent of Rosenfield & Company, P.A. Filed herewith.
23.5 Consent of Levine & Levine,
Certified Public Accountants Filed herewith.
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
II-12
<PAGE>
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-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the State of Florida, on July 17,
1998.
SMART CHOICE AUTOMOTIVE GROUP, INC.
BY: /s/ Gary R. Smith
Gary R. Smith
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Gary R. Smith and Joseph E. Mohr, and each of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his person's name, place and
stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this registration statement and additional
registration statements pursuant to Rule 462(b) of the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or either of them or their or his
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed 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 July 17, 1998
Officer (Principal Executive Officer)
Gary R. Smith
/s/ Joseph E. Mohr Chief Financial Officer July 17, 1998
(Principal Financial and
Joseph E. Mohr
Accounting Officer)
/s/ Robert J. Abraham Chairman of the Board of Directors July 17, 1998
Robert J. Abraham
/s/ John W. Holden, Jr. Director July 17, 1998
John W. Holden, Jr.
/s/ Craig Macnab Director July 17, 1998
Craig Macnab
/s/ Gerald C. Parker Director July 17, 1998
Gerald C. Parker
/s/ Donald J. Wojnowski, Jr. Director July 17, 1998
Donald J. Wojnowski, Jr.
/s/ Lewis H. Berman Director July 17, 1998
Lewis H. Berman
/s/ Jeffrey D. Congdon Director July 17, 1998
Jeffrey D. Congdon
</TABLE>
II-14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
- ---------- ------------------------------------ ------------------------------------------------
<S> <C> <C>
3.2.4 Fourth Articles of Amendment to Filed herewith.
Articles of Incorporation
3.2.5 Fifth Articles of Amendment to Filed herewith.
Articles of Incorporation
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,
Morris & Co. Filed herewith.
23.3 Consent of Osburn, Henning and
Company Filed herewith.
23.4 Consent of Rosenfield &
Company, P.A. Filed herewith.
23.5 Consent of Levine & Levine,
Certified Public Accountants Filed herewith.
</TABLE>
EXHIBIT 3.2.4
FOURTH ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
SMART CHOICE AUTOMOTIVE GROUP, INC.
Pursuant to the provisions of Sections 607.1006 and 607.0602 of the
Florida Business Corporation Act, the Corporation adopts the following Articles
of Amendment to its Articles of Incorporation:
FIRST:
ARTICLE V
Article V of the Articles of Incorporation of the Corporation is hereby
amended by inserting the following words at the end of such article:
SERIES C CONVERTIBLE PREFERRED STOCK
Twenty-Four and 98/100 (24.98) shares of the authorized and unissued shares of
$0.01 par value per share Preferred Stock of the Corporation are hereby
designated "Series C Convertible Preferred Stock" (the "Series C Preferred
Stock") with the following powers, preferences and rights, and the
qualifications, limitations and restrictions hereon:
RANK. The Series C Preferred Stock shall rank, with respect to dividend rights
and rights upon liquidation, dissolution or winding up of the Corporation,
senior to the Common Stock and any subsequent issues of stock, whether common or
preferred.
DIVIDENDS. Each holder of shares of the Series C Preferred Stock (the "Holder",
collectively, the "Holders") shall be entitled to receive out of the assets of
the Corporation legally available therefor, cumulative cash dividends at the
rate per share (based on the stated value of $10,000.00 per share) of $91.67 per
month, accruing from the date of original issuance ("Original Issuance Date")
which dividends are due and payable monthly commencing on the first day of the
month following the Original Issuance Date. Such dividends shall accrue from the
Original Issuance Date. In the event that a Holder is not paid dividends on a
timely basis in accordance with the foregoing, such Holder shall be entitled to
accrue interest on the accrued and unpaid dividends at the rate per share (based
on the stated value of $10,000.00 per share) of 15% per annum, until all accrued
dividends have been paid. If the Corporation remains in default on the monthly
dividend payments to
<PAGE>
the Holders for a period of greater than ninety (90) days, and such default is
continuing for a period of thirty (30) days after written notice of such default
is sent by a Holder the Corporation, and further provided that the Holders of at
least seventy-five (75%) percent of the then outstanding Series C Preferred
Stock so agree, a Holder may, at its option, receive an amount which is equal to
(i) the number of shares of Series C Preferred Stock which have not been
converted by such Holder as of such date, TIMES, (ii) $10,000.00, plus all
unpaid and accrued dividends and interest in exchange for such shares of Series
C Preferred Stock. Unless full cumulative dividends on the Series C Preferred
Stock to which Holders are entitled have been paid or are declared and a sum
sufficient for the payment thereof has been set apart for the payment of such
unpaid dividends, no dividend shall be declared or paid or set aside for payment
or other distribution declared or made upon the Common Stock of the Corporation
or on any other stock of the Corporation ranking junior to or on parity with the
Series C Preferred Stock as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration or any monies to be paid
to or made available for a sinking fund for the redemption of any share of such
stock by the Corporation.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
Holders are entitled to receive, out of the assets of the Corporation available
for distribution to stockholders, before any distribution of assets is made to
holders of Common Stock, or any other holders of stock ranking junior to the
Series C Preferred Stock, liquidating distributions in the amount of $10,000.00
per share plus accrued and unpaid dividends. If, upon any liquidation,
dissolution, or winding up of the Corporation, the amounts payable to the
Holders are not paid in full, then the entire assets of the Corporation shall be
distributed ratably among the Holders. After payment of the full amount of the
liquidating distribution to which they are entitled, the Holders shall not be
entitled to any further participation in any distribution of assets by the
Corporation. A consolidation or merger of the Corporation, with or into any
other corporation or corporations, or a sale of all or substantially all of the
assets of the Corporation, shall not be deemed to be a liquidation, dissolution,
or winding up within the meaning of this section.
CONVERSION. The Holders shall have conversion rights as follows (the "Conversion
Rights"):
(i) RIGHT TO CONVERT. At any time or times after the Original Issuance
Date of the shares of Series C Preferred Stock, any Holder shall be
entitled to convert his shares of Series C Preferred Stock into shares
of Common Stock of the Corporation at the Conversion Rate, as herein
defined, without the payment of any additional consideration by the
Holder thereof, at the office of the Corporation or any transfer agent
for such shares.
(ii) CONVERSION RATE. The number of shares of Common Stock issuable
upon conversion of each of the shares of Series C Preferred Stock shall
be determined according to the following formula (the "Conversion
Rate"):
<PAGE>
CONVERSION AMOUNT
-----------------
CONVERSION PRICE
For purposes of this section of Article V, the following terms
shall have the following meanings:
(a) "CONVERSION PRICE" means $5.59.
(b) "CONVERSION AMOUNT" means the amount equal to (A)
the number of shares of Series C Preferred Stock that the Holder is
converting TIMES (B) $10,000.
(iii) MECHANICS OF CONVERSION. The Board of Directors may determine in
its sole discretion whether fractional shares of Common Stock will be
issued upon any conversion of the Series C Preferred Stock. If the
Board of Directors determines not to issue fractional shares of Common
Stock at the conversion, the Corporation will pay, in lieu of any
fractional shares to which the Holder would otherwise be entitled, cash
equal to such fraction multiplied by the Conversion Price then in
effect. Before any Holder shall be entitled to convert the Series C
Preferred Stock into full shares of Common Stock, he shall surrender
the certificate or certificates of Series C Preferred Stock for shares
of Common Stock to be issued in that conversion. The Corporation shall,
as soon as practicable thereafter, issue and deliver at such office to
such Holder, or to his nominee or nominees, a certificate or
certificates for the number of shares of Common Stock and/or fractional
shares of Common Stock, if any, to which he shall be entitled as
aforesaid, together with cash in lieu of any fraction of a share, if
any, to which the Holder may be entitled. Such conversion shall be
deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of the Series C Preferred
Stock to be converted and the person or persons entitled to receive the
shares of Commons Stock issuable upon conversion shall be treated for
all purposes as the record holder or holders of such shares of Common
Stock on such date. Any unpaid and accrued dividends and interest due
and payable at conversion shall be paid to a Holder by the Corporation
in cash or its equivalent or other mutually agreeable form.
(iv) NO IMPAIRMENT. The Corporation will not, by amendment of its
Articles of Incorporation or Bylaws or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but will at all times in good
faith assist in the carrying out of all the provisions of this section
and in the taking of all such action as may be necessary or appropriate
in order to protect the conversion rights of the Holders against
impairment.
<PAGE>
(v) COMMON STOCK RESERVED. The Corporation shall reserve and keep
available out of its authorized but unissued Common Stock such number
of shares of Common Stock as shall from time to time be sufficient to
effect conversion of all issued and outstanding shares of the Series C
Preferred Stock.
(5) UNAUTHORIZED DISTRIBUTIONS. Notwithstanding any other provision of these
Articles, the Corporation will not make any payment due with respect to the
Series C Preferred Stock if (a) after giving effect to that payment, the
Corporation would not be able to pay its debts as they become due in the usual
course of business; or (b) after giving effect to that payment, the
Corporation's total assets would be less than the sum of its total liabilities
plus (unless the Corporation's articles of incorporation permit otherwise) the
amount that would be needed, if the Corporation were to be dissolved at the time
of the payment, to satisfy the preferential rights upon dissolution of any
shareholders whose preferential rights are superior to the Holders of Series C
Preferred Stock; or (c) the Corporation is otherwise prohibited (under then
existing laws) from making any payment due with respect to the Series C
Preferred Stock. Nothing contained herein shall amend, alter, change or repeal
any of the powers, designations, preferences and rights of the Series A
Preferred Shares or Series B Preferred Shares.
(6) REDEMPTION BY CORPORATION. At any time or times more than eighteen (18)
months after the Original Issuance Date of Series C Preferred Stock, the
Corporation may at its option and in the sole discretion of the Corporation's
Board of Directors, (i) call any or all then outstanding shares of Series C
Preferred Stock for cash at the price of $10,000.00 per share plus any unpaid
and accrued dividends and interest as provided above, or (ii) convert any or all
of the then outstanding shares of Series C Preferred Stock into shares of Common
Stock of the Corporation as provided above; provided however, that in no event
may the Corporation convert the Series C Preferred Stock unless and until (a)
the Corporation gives the Holder thirty (30) days prior written notice of its
intent to call or convert, and (b) average last closing sale price per share of
the Common Stock on the NASDAQ for the ten (10) consecutive trading days
immediately preceding the conversion date equals or exceeds one and one-half
(1.5) times the Conversion Price for a period of at least twenty (20)
consecutive trading days prior to the date of such notice, and (c) the shares of
Common Stock into which the shares of Series C Preferred Stock are to be so
called or converted have been registered as provided herein. Upon any such call
or conversion such Holder shall surrender the certificate or certificates for
the shares of Series C Preferred Stock so called or converted. If the
Corporation elects to convert, the Corporation shall issue such Holder shares of
Common Stock for the shares of Series C Preferred Stock so converted. If a
Holder has elected not to register its shares of Common Stock after notice from
the Corporation, as contemplated hereby, then the restrictions set forth in
subsection (c) of this Section on the Corporation's ability to call or convert
that Holder's Series C Preferred Stock shall not apply.
(7) VOTING RIGHTS. Except as expressly required by applicable law, the Holders
will not be
<PAGE>
entitled to vote. However, upon conversion of shares of Series C Preferred Stock
as provided above, the holder of the Common Stock received pursuant to such
conversion shall be entitled to one vote for each share of Common Stock received
upon such conversion.
(8) CERTAIN ADJUSTMENTS. If the outstanding shares of Common Stock of the
Corporation are increased, decreased, changed into or exchanged for a different
number or kind of shares or securities of the Corporation 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 Corporation is not the surviving entity, an
appropriate or proportionate adjustment shall be made in the number and/or kind
of securities allocated to the Series C Preferred Stock.
(9) TERM. If a Holder has not converted all its shares of Series C Preferred
Stock within twenty-four (24) months after the Original Issuance Date, and such
shares have not otherwise been redeemed by the Corporation, then such Holder
may, at its option, receive an amount which is equal to (i) the number of shares
of Series C Preferred Stock which have not been converted or redeemed by the
Corporation as of such date TIMES (ii) $10,000.00, plus all unpaid and accrued
dividends. Exercise of these rights is subject to the consent of the Company,
which shall not be unreasonably withheld.
(10) REGISTRATION RIGHTS.
(a) PIGGYBACK RIGHTS.
(i) If the Corporation at any time after the Original Issuance
Date elects or proposes to register any of its shares of Common Stock
(the "Registration Shares") under the Securities Act of 1933, as
amended (the "1933 Act") on Forms S-1, S-2 or S-3 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 Corporation are to be registered, the
Corporation shall give prompt written notice (the "Registration
Notice") to the Holders of its intention to register the Registration
Shares.
(ii) Within fifteen (15) days after receipt of the
Registration Notice, a Holder may give written notice to the
Corporation of exercise of all, or a portion, of its right to convert
the Series C Preferred Stock (the "Conversion Notice"), stating the
number of shares such Holder elects to be included among the
Registration Shares (which number may include shares held by Holder as
a result of prior exercises of its right to convert the Series C
Preferred Stock, or otherwise) (the "Holder's Included Shares").
(iii) The Corporation shall use reasonable efforts to register
the Holder's
<PAGE>
Included Shares under the 1933 Act and any applicable state securities
acts, if necessary, designated by such Holder in the Conversion Notice.
The Corporation shall have the right to withdraw and discontinue
registration of the Holder'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.
(iv) The Corporation shall not be required to include any of a
Holder's Included Shares in any Registration Statement unless such
Holder agrees, if so requested by the Corporation, to: (i) offer and
sell the Holder's Included Shares to or through an underwriter selected
by the Corporation 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 Holder's Included
Shares to which the Corporation may be required to agree; and (iii)
enter into any underwriting agreement containing customary terms and
conditions. The foregoing shall not require the Holder to sell the
Holder's Included Shares at the time of registration through such
underwriter.
(v) If the offering of the Registration Shares by the
Corporation is, in whole or in part, an underwritten public offering,
and if the managing underwriter determines and advises the Corporation
in writing that the inclusion in such Registration Statement of all of
a Holder's Included 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 such Holder 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.
(vi) The Corporation shall bear all costs and expenses of
registration of the Registration Shares, including Holder's Included
Shares.
(vii) It shall be a condition precedent to the Corporation's
obligation to register any of a Holder's Included Shares that such
Holder provide the Corporation with all information and documents, and
shall execute, acknowledge, seal and deliver all documents reasonably
necessary, to enable the Corporation to comply with the 1933 Act, any
applicable state securities acts, and all applicable laws, rules and
regulations of the SEC or of any state securities law authorities.
(b) DEMAND RIGHT.
(i) If at any time on or after nine (9) months after the
Original Issuance
<PAGE>
Date the Corporation shall receive from the Holders of at least
seventy-five (75%) of the then outstanding Series C Preferred Stock, a
written request that the Corporation effect any registration with
respect to such Holders' Holder's Included Shares, the Corporation
will, as soon as practicable, use its best efforts to effect such
registration (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or
other state securities laws, and appropriate compliance with the 1933
Act) and as would permit or facilitate the sale and distribution of all
or such portion of Holder's Included Shares as are specified in such
request. The Corporation shall be required to effect, pursuant to this
Section 10(b), only one (1) registration of Holder's Included Shares
pursuant to this Section 10(b).
(ii) PROVISO. The Corporation shall not be obligated to
effect, or to take any action to effect, any such registration pursuant
to this Section 10(b):
(a) in any particular jurisdiction in which the
Corporation would be required to execute a general consent to service
of process in effecting such registration, qualification, or
compliance, unless the Corporation is already subject to service in
such jurisdiction and except as may be required by the 1933 Act; or
(b) during the period starting with the date fifteen
(15) days prior to the Corporation's good faith estimate of the date of
filing of, and ending on a date ninety (90) days after the effective
date of, a Corporation-initiated registration, provided that the
Corporation is actively employing in good faith all reasonable efforts
to cause such registration statement to become effective.
(iii) DEFERRAL OF REGISTRATION. The Corporation shall file a
registration statement covering Holder's Included Shares so requested
to be registered as soon as practicable after receipt of the request of
the Holder; PROVIDED, HOWEVER, that if (a) in the good faith judgment
of the Board of Directors of the Corporation such registration would be
materially detrimental to the Corporation because there exist bona fide
financing, acquisition or other activities of the Corporation and the
Board of Directors of the Corporation concludes, as a result, that it
is essential to defer the filing of such registration statement at such
time, and (b) the Corporation shall furnish to the Holder a certificate
signed by the President of the Corporation stating that in the good
faith judgment of the Board of Directors of the Corporation, it would
be materially detrimental to the Corporation for such registration
statement to be filed in the near future and that it is, therefore,
essential to defer the filing of such registration statement, then the
Corporation shall have the right to defer such filing (except as
provided in subsection 10(ii)(b) above) for a period of not more than
ninety (90) days after receipt of the request of the Holder, and,
provided further, that the Corporation shall not defer its obligation
in this manner more than once in any twelve-month period.
<PAGE>
The registration statement filed pursuant to the request of
the Holder may, subject to the provisions of Section 10(a) and 10(b)
hereof, include other securities of the Corporation, with respect to
which registration rights have been granted, and may include securities
of the Corporation being sold for the account of the Corporation,
provided all the Holder's Included Shares for which the Holder has
requested registration shall be covered by such registration statement
before any other securities are included.
(iv) PROCEDURES. In any registration pursuant to this Section
10(b), if the Corporation shall request inclusion of securities to be
sold for its own account, or if other persons entitled to incidental
registrations shall request inclusion in such registration, the Holder
shall offer to include such securities in the underwriting and may
condition such offer on the acceptance by the Corporation or such other
persons of the further applicable provisions hereof. The Corporation
shall (together with all such other persons proposing to distribute
their securities through such underwriting) enter into an agreement in
customary form with the representative of the underwriter or
underwriters acceptable to the Corporation. Notwithstanding any other
provision of this Section, if the representative of the underwriters
advises the Holder of the need to offer for sale only the Aggregate
Underwriter Shares, the number of shares to be included in the
underwriting or registration shall be allocated as set forth in Section
10(a)(v) hereof.
SECOND:
Pursuant to Section 607.0602 of the Florida Business Act, the Board of
Directors adopted this Amendment to Article V of the Articles of Incorporation
effective as of June 2, 1998 without shareholder action.
IN WITNESS WHEREOF, the undersigned authorized officer of the
Corporation has executed this instrument this 2nd day of June, 1998.
/s/ JOSEPH E. MOHR
----------------------------
Joseph E. Mohr
Executive Vice President and
Chief Financial Officer
EXHIBIT 3.2.5
FIFTH ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
SMART CHOICE AUTOMOTIVE GROUP, INC.
Pursuant to the provisions of Sections 607.1006 and 607.0602 of the
Florida Business Corporation Act, the Corporation adopts the following Articles
of Amendment to its Articles of Incorporation:
FIRST:
ARTICLE V
Article V of the Articles of Incorporation of the Corporation is hereby
amended by inserting the following words at the end of such article:
SERIES D CONVERTIBLE PREFERRED STOCK
Three hundred Fifty (350) shares of the authorized and unissued shares of $0.01
par value per share Preferred Stock of the Corporation are hereby designated
"Series D Convertible Preferred Stock" (the "Series D Preferred Stock") with the
following powers, preferences and rights, and the qualifications, limitations
and restrictions hereon:
(1) RANK. The Series D Preferred Stock shall rank, with respect to dividend
rights and rights upon liquidation, dissolution or winding up of the
Corporation, senior to the Common Stock and any subsequent issues of stock,
whether common or preferred.
(2) DIVIDENDS. Each holder of shares of the Series D Preferred Stock (the
"Holder", collectively, the "Holders") shall be entitled to receive out of the
assets of the Corporation legally available therefore, cumulative cash dividends
at the rate per annum of eleven (11%) percent payable monthly in arrears for a
period of sixty (60) months, and thereafter at the rate per annum of twenty
(20%) percent payable monthly in arrears, accruing from the date of original
issuance ("Original Issuance Date"). In the event that a Holder is not paid
dividends within ten (10) days of the due dates for such payments, in accordance
with the foregoing, such Holder shall be entitled to receive dividends at a
dividend rate which is five percent (5%) per annum greater than the dividend
rate then in effect, until all accrued dividends have been paid. If the
Corporation remains in default on the monthly dividend payments to a Holder for
a period of greater than ninety (90) days, and such default is continuing for a
period of thirty (30) days after written notice of such default is sent by a
Holder to the Corporation, a Holder may, at its option, receive an amount which
is equal to (i) the number of shares of Series D Preferred Stock which have not
been converted by such Holder as of such date, TIMES, (ii) $10,000.00, plus all
unpaid and accrued dividends and interest in exchange for such shares of Series
D Preferred Stock. Unless full cumulative dividends on the Series D Preferred
Stock to which Holders are entitled have been paid or are declared and a sum
sufficient for the payment thereof has been set apart for the payment of such
dividends, no dividend shall be declared or paid or set aside for payment or
other distribution declared or made upon the Common Stock of the Corporation or
on any other stock of the Corporation ranking junior to or on parity with the
Series D Preferred Stock as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration or any monies to be paid
to or made available for a sinking fund for the redemption of any share of such
stock by the Corporation.
(3) LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
Holders are entitled to receive, out of the assets of the Corporation available
for distribution to stockholders, before any distribution of assets is made to
holders of Common
<PAGE>
Stock, or any other holders of stock ranking junior to the Series D
Preferred Stock, liquidating distributions in the amount of $10,000.00
per share plus accrued and unpaid dividends. If, upon any liquidation,
dissolution, or winding up of the Corporation, the amounts payable to
the Holders are not paid in full, then the entire assets of the
Corporation shall be distributed ratably among the Holders. After
payment of the full amount of the liquidating distribution to which
they are entitled, the Holders shall not be entitled to any further
participation in any distribution of assets by the Corporation. A
consolidation or merger of the Corporation, with or into any other
corporation or corporations, or a sale of all or substantially all of
the assets of the Corporation, shall not be deemed to be a liquidation,
dissolution, or winding up within the meaning of this section.
(4) CONVERSION. The Holders shall have conversion rights as follows (the
"Conversion Rights"):
(i) RIGHT TO CONVERT. At any time or times after the Original Issuance
Date of the shares of Series D Preferred Stock, any Holder shall be
entitled to convert his shares of Series D Preferred Stock into shares
of Common Stock of the Corporation at the Conversion Rate, as herein
defined, without the payment of any additional consideration by the
Holder thereof, at the office of the Corporation or any transfer agent
for such shares.
(ii) CONVERSION RATE. The number of shares of Common Stock issuable
upon conversion of each of the shares of Series D Preferred Stock shall
be determined according to the following formula (the "Conversion
Rate"):
CONVERSION AMOUNT
-----------------
CONVERSION PRICE
For purposes of this section of Article V, the following terms shall
have the following meanings:
(a) "CONVERSION PRICE" means $6.00, subject to adjustment as provided
in Section 8 hereof.
(b) "CONVERSION AMOUNT" means the amount equal to (A) the number of
shares of Series D Preferred Stock that the Holder is converting TIMES
(B) $10,000.
(iii) MECHANICS OF CONVERSION. The Board of Directors may
determine in its sole discretion whether fractional shares of Common
Stock will be issued upon any conversion of the Series D Preferred
Stock. If the Board of Directors determines not to issue fractional
shares of Common Stock at the conversion, the Corporation will pay, in
lieu of any fractional shares to which the Holder would otherwise be
entitled, cash equal to such fraction multiplied by the fair market
value of a share of common stock on the conversion date. The fair
market value of a share of Common Stock shall be determined by taking
the average last closing sale price per share of Common Stock for the
twenty (20) consecutive trading days immediately preceding the
conversion date. Before any Holder shall be entitled to convert the
Series D Preferred Stock into full shares of Common Stock, he shall
surrender the certificate or certificates of Series D Preferred Stock
for shares of Common Stock to be issued in that conversion. The
Corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such Holder, or to his nominee or nominees, a
certificate or certificates for the number of shares of Common Stock
and/or fractional shares of Common Stock, if any, to which he shall be
entitled as aforesaid, together with cash in lieu of any fraction of a
share, if any, to which the Holder may be entitled. Such conversion
shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of the Series D
Preferred Stock to be converted and the person or persons entitled to
receive the shares of Common Stock issuable upon conversion shall be
treated for all purposes as the record holder or holders of such shares
of
<PAGE>
Common Stock on such date. Any unpaid and accrued dividends shall be
paid to a Holder by the Corporation in cash or its equivalent or other
mutually agreeable form.
(iv) NO IMPAIRMENT. The Corporation will not, by amendment of
its Articles of Incorporation or Bylaws or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but will at all times in good
faith assist in the carrying out of all the provisions of this section
and in the taking of all such action as may be necessary or appropriate
in order to protect the conversion rights of the Holders against
impairment.
(v) COMMON STOCK RESERVED. The Corporation shall reserve and
keep available out of its authorized but unissued Common Stock such
number of shares of Common Stock as shall from time to time be
sufficient to effect conversion of all issued and outstanding shares of
the Series D Preferred Stock.
(5) UNAUTHORIZED DISTRIBUTIONS. Notwithstanding any other provision of these
Articles, the Corporation will not make any payment due with respect to the
Series D Preferred Stock if (a) after giving effect to that payment, the
Corporation would not be able to pay its debts as they become due in the usual
course of business; or (b) after giving effect to that payment, the
Corporation's total assets would be less than the sum of its total liabilities
plus (unless the Corporation's articles of incorporation permit otherwise) the
amount that would be needed, if the Corporation were to be dissolved at the time
of the payment, to satisfy the preferential rights upon dissolution of any
shareholders whose preferential rights are superior to the Holders of Series D
Preferred Stock; or (c) the Corporation is otherwise prohibited (under then
existing laws) from making any payment due with respect to the Series D
Preferred Stock. Nothing contained herein shall amend, alter, change or repeal
any of the powers, designations, preferences and rights of the Series A
Preferred Shares, Series B Preferred Shares, or Series C Preferred Shares.
(6) MANDATORY CONVERSION BY CORPORATION/REDEMPTION BY CORPORATION.
(a) At any time or times more than thirty-six (36) months after
the Original Issuance Date of Series D Preferred Stock, the
Corporation may at its option and in the sole discretion of
the Corporation's Board of Directors, convert any or all of
the then outstanding shares of Series D Preferred Stock into
shares of Common Stock of the Corporation as provided above;
provided however, that in no event may the Corporation convert
the Series D Preferred Stock unless and until (a) the
Corporation gives the Holder written notice of (which cannot
be given prior to that date which is two (2) years and eleven
(11) months after the Original Issuance Date and which shall
set forth the date the conversion is to be effective) its
intent to call or convert, (b) the average last closing sale
price per share of the Common Stock for the twenty (20)
consecutive trading days immediately preceding the date of
such notice equals or exceeds two (2.0) times the Conversion
Price then in effect, (c) such notice is given within ten (10)
days after the last day of the twenty (20) consecutive trading
day period, and (d) the conversion occurs within fifteen (15)
days after the last day of the twenty (20) consecutive trading
day period. Upon any such call or conversion such Holder shall
surrender the certificate or certificates for the shares of
Series D Preferred Stock so called or converted. If the
Corporation elects to convert, the Corporation shall issue
such Holder shares of Common Stock for the shares of Series D
Preferred Stock so converted.
<PAGE>
(b) At any time or times more than sixty (60) months after the
Original Issuance Date of Series D Preferred Stock, the
Corporation may at its option and in the sole discretion of
the Corporation's Board of Directors, call any or all the
outstanding shares of Series D Preferred Stock for cash at a
price of $10,000.00 per share plus any unpaid and accrued
dividends as provided above, provided that the Corporation
gives the Holder thirty (30) days prior written notice of its
intent to call.
(c) If the Corporation at any time or times elects to convert or
call less them all the shares of Series D Preferred Stock in
accordance with this Section 6, then the number of shares of a
Holder so called or converted shall be determined among the
Holders PRO RATA based on the aggregate number of shares held
by such Holder.
(7) VOTING RIGHTS. Except as expressly required by applicable law, the Holders
will not be entitled to vote. However, upon conversion of shares of Series D
Preferred Stock as provided above, the holder of the Common Stock received
pursuant to such conversion shall be entitled to one vote for each share of
Common Stock received upon such conversion.
(8) ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall be adjusted from
time to time as follows:
(a) In case the Corporation shall hereafter (i) pay a dividend or
make a distribution on its Common Stock in shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock
into a greater number of shares, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares, or
(iv) issue by reclassification of its Common Stock any shares
of capital stock of the Corporation, the Conversion Price in
effect immediately prior to such action shall be adjusted so
that the Holder shall thereafter be entitled to receive the
number of shares of Common Stock or other capital stock of the
Corporation which it would have owned immediately following
such action had the Series D Preferred Stock been converted
immediately prior thereto. An adjustment made pursuant to this
subparagraph (a) shall become effective immediately after the
record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this
subparagraph (a), the Holder thereafter surrendering the
Series D Preferred Stock for conversion shall become entitled
to receive shares of two or more classes of capital stock or
shares of Common Stock and other capital stock of the
Corporation, the Board of Directors of the Corporation shall
determine, on the basis of the opinion of an independent
financial advisor, the allocation of the adjusted Conversion
Price between or among shares of such classes of capital stock
or shares of Common Stock and other capital stock.
(b) In case the Corporation shall hereafter issue rights or
warrants to holders of its outstanding shares of Common Stock
generally entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the current
market price per share (as determined pursuant to subparagraph
(d) of this paragraph) of the Common Stock on the record date
mentioned in this subparagraph (b) below, the Conversion Price
of the shares of Common Stock shall be adjusted so that the
same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the date of
issuance of such rights or warrants by a fraction the
numerator of which shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered
<PAGE>
would purchase at such current market price, and the
denominator of which shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock
offered for subscription or purchase. Such adjustment shall
become effective immediately after the record date for the
determination of stockholders entitled to receive such rights
or warrants.
(c) In case the Corporation shall hereafter distribute to holders
of its outstanding Common Stock generally evidences of its
indebtedness or assets (excluding any cash dividend paid from
retained earnings of the Corporation and dividends or
distributions payable in stock from which adjustment is made
pursuant to subparagraph (a) of this paragraph) or rights or
warrants to subscribe to securities of the Corporation
(excluding those referred to in subparagraph (b) of this
paragraph), then in each such case the Conversion Price of the
shares of Common Stock shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the date of such
distribution by a fraction the numerator of which shall be the
current market price per share (determined as provided in
subparagraph (d) of this paragraph) of the Common Stock on the
record date mentioned in this subparagraph (c) below less the
then fair market value (as determined by the Board of
Directors, whose determination shall be conclusive) of the
portion of the evidences of indebtedness or assets so
distributed to the holder of one share of Common Stock or of
such subscription rights or warrants applicable to one share
of Common Stock, and the denominator of which shall be such
current market price per share of Common Stock. Such
adjustment shall become effective immediately after the record
date for the determination of stockholders entitled to receive
such distribution.
(d) For the purpose of any computation under subparagraphs (a),
(b) or (c) of this paragraph, the current market price per
share of Common Stock on any date shall be deemed to be the
average of the last closing sale prices for the twenty (20)
consecutive trading days (each, a "Trading Day") before the
day in question. The market price for each such Trading Day
shall be (i)_in the case of a security listed or admitted to
trading on any securities exchange, the last reported sale
price, regular way (as determined in accordance with the
practices of such exchange), on such day, or if no sale takes
place on such day, the average of the closing bid and asked
prices on such day (and in the case of a security traded on
more than one national securities exchange, at such price or
such average, upon the exchange on which the volume of trading
during the last calendar year was the greatest), (ii)_in the
case of a security not then listed or admitted to trading on
any securities exchange, the last reported sale price on such
day, or if no sale takes place on such day, the average of the
closing bid and asked prices on such day, as reported by a
reputable quotation service designated by the Corporation,
(iii)_in the case of a security not then listed or admitted to
trading on any securities exchange and as to which no such
reported sale price or bid and asked prices are available, the
average of the reported high bid and low asked prices on such
day, as reported by a reputable quotation service, or the WALL
STREET JOURNAL, or if there are no bid and asked prices on
such day, the average of the high bid and low asked prices, as
so reported, on the most recent day (not more than 30 days
prior to the date in question) for which prices have been so
reported, and (iv)_in the case of a security determined by the
Corporation's Board of Directors as not having an active
quoted market or in the case of other property, such fair
market value as shall be determined by the Board of Directors.
(e) In any case in which the provisions of subparagraphs (a)
through (c) of this paragraph shall require that an adjustment
be made immediately following a record date, the Corporation
may elect to defer (but only until five business days
following the filing by the Corporation with the Holder of the
certificate of independent public accountants described in
subparagraph (g) below) issuing to the Holder if converted
after such record date the shares
<PAGE>
of Common Stock issuable upon such conversion over and above
the shares of Common Stock issuable upon such conversion on
the basis of the Conversion Price prior to adjustment.
(f) Whenever the Conversion Price is adjusted as herein provided,
the Corporation shall promptly deliver to the Holder (i) a
certificate of a firm of independent public accountants
setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment and the manner of computing the same, which
certificate shall be conclusive evidence of the correctness of
such adjustment and (ii) a notice stating that the Conversion
Price has been adjusted and setting forth the adjusted
Conversion Price.
(g) In the event that at any time as a result of an adjustment
made pursuant to subparagraph (a) of this paragraph, the
Holder thereafter surrendering the Series D Preferred Stock
for conversion shall become entitled to receive any shares of
the Corporation other than shares of Common Stock, thereafter
the Conversion Price of such other shares so receivable upon
conversion of the Series D Preferred Stock or any portion
hereof shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in
subparagraphs (a) through (g) hereof.
(9) LIMITATIONS ON ISSUANCES OF ADDITIONAL SHARES OF SERIES A REDEEMABLE
CONVERTIBLE PREFERRED STOCK, SERIES B PREFERRED STOCK, SERIES C PREFERRED STOCK
AND OTHER CONVERTIBLE PREFERRED STOCK. The Corporation will not (i) issue or
re-issue any additional shares of Series A Redeemable Convertible Preferred
Stock, Series B Preferred Stock (except for issuing an additional eighty (80)
shares of Series B Preferred Stock), or Series C Preferred Stock, including
without limitation, any such shares which have been converted to shares of
Common Stock, or (ii) issue or re-issue shares of Series D Preferred Stock such
that the number of issued and outstanding shares of Series D Preferred Stock
would exceed Three Hundred and Fifty (350) (based on a stated value per share of
$10,000), or (iii) issue any shares of Convertible Preferred Stock which rank,
with respect to dividend rights or rights upon liquidation, dissolution and
winding up on Corporation, senior to the Series D Preferred Stock.
SECOND:
Pursuant to Section 607.0602 of the Florida Business Act, the Board of
Directors adopted this Amendment to Article V of the Articles of Incorporation
effective as of June 22, 1998 without shareholder action.
IN WITNESS WHEREOF, the undersigned authorized officer of the
Corporation has executed this instrument this 22nd day of June, 1998.
/s/ JOSEPH E. MOHR
----------------------------
Joseph E. Mohr
Executive Vice President and
Chief Financial Officer
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
July 17, 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 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
July 17, 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
July 17, 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
July 17, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use of our audit report of B & B Enterprises of Florida, Inc.
for the year ended December 31, 1996 to be included in the filing of Form S-1
Registration Statement under the Securities Act of 1933 dated July 17, 1998.
/s/ ROSENFIELD & COMPANY, P.A.
- ------------------------------
Rosenfield & Company, P.A.
July 16, 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 dated 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
July 17, 1998
