U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER 1-14082
-------
SMART CHOICE AUTOMOTIVE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-1469577
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5200 S. WASHINGTON AVENUE, TITUSVILLE, FLORIDA 32780
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(407) 269-9680
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
_____________________
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORT(S), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X__ NO ______
INDICATE NUMBER OR SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
AS OF AUGUST 19, 1998, 6,576,254 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE ISSUED AND OUTSTANDING.
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL STATEMENTS
Item 1.Financial Statements. 3
Condensed Consolidated Balance sheets - 4
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations - 6
Three and Six Months Ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flow - 7
Six Months ended June 30, 1998 and June 30, 1997
Notes to Condensed Consolidated Financial Statements 9
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II OTHER INFORMATION 24
Item 2.Changes in Securities 24
Item 4.Submission of Matters to Vote of Security Holders 25
Item 5.Other Information 25
Item 6.Exhibits and Reports on Form 8-K 26
<PAGE>
PART I
SMART CHOICE AUTOMOTIVE GROUP, INC.
FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS.
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1998 As of December 31, 1997
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,839,650 $ 1,066,949
Accounts receivable 3,821,521 1,773,124
Finance receivables
Principal balances, net 63,156,265 40,084,412
Less: allowance for credit losses (9,336,911) (6,857,265)
- -------------------------------------------------------------------------------------------
Finance receivables, net 53,819,354 33,227,147
Inventories, at cost 17,949,707 15,516,084
Land held for resale -- 1,050,000
Property and equipment, net 9,181,974 9,214,207
Notes receivable -- 46,280
Deferred debt costs, net 308,521 426,823
Goodwill, net 25,236,774 25,562,162
Prepaid expenses 1,799,646 1,008,229
Deposits and other assets 261,081 213,986
- ------------------------------------------------------------------------------------------
$ 116,218,228 $ 89,104 991
- ------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------
As of June 30, 1998 As of December 31,1997
- ---------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 5,925,730 $ 5,259,903
Accrued expenses 3,103,886 4,633,841
Line of credit, net of discount 45,771,017 31,229,600
Floorplans payable 8,482,492 8,287,092
Capital lease obligations 900,809 940,280
Notes payable 31,090,052 29,197,458
Other liabilities 1,028 94,913
- -----------------------------------------------------------------------------------------------------
Total liabilities 95,275,014 79,643,087
- -----------------------------------------------------------------------------------------------------
Redeemable convertible preferred Stock 10,000 4,941,834
Stockholders' equity:
Preferred stock 5,891,410 ---
Common stock 131,075 97,340
Additional paid in capital 30,652,534 24,108,456
Accumulated deficit (15,741,805) (19,685,726)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 20,933,214 4,520,070
- -----------------------------------------------------------------------------------------------------
$ 116,218,228 $ 89,104,991
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VEHICLE AND RELATED REVENUES:
Sales of used vehicles $ 18,756,972 $ 7,003,702 $40,602,531 $11,788,779
Income on finance receivables 4,059,041 1,927,736 6,942,139 1,722,865
Sales of new vehicles 6,225,769 -- 14,349,193 --
Income from parts and accessories 6,047,504 5,473,447 10,411,541 7,972,200
Income from insurance and training 245,810 388,976 426,032 651,256
- ---------------------------------------------------------------------------------------------------
35,335,096 14,793,861 72,731,436 22,135,100
- ---------------------------------------------------------------------------------------------------
COST AND EXPENSES:
Cost of used vehicles sold 12,551,074 5,304,253 26,376,231 7,966,735
Provision for credit losses 2,097,221 499,131 4,418,885 1,548,811
Cost of new vehicles sold 5,400,004 -- 12,587,089 --
Cost of parts and accessories sold 3,879,897 3,347,344 6,676,788 4,909,266
Cost of insurance and training 28,838 23,149 59,595 36,714
- ---------------------------------------------------------------------------------------------------
Selling, general and administrative
expenses 7,102,453 4,938,188 15,082,265 10,019,848
Expenses:
Compensation expenses related to
Employee stock options -- 88,890 -- 3,214,767
- ----------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 31,059,487 14,200,955 66,230,980 27,696,141
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 4,275,609 592,906 7,530,583 (5,561,041)
- ----------------------------------------------------------------------------------------------------
Other expense (income):
Interest expense 2,122,612 1,055,996 4,032,283 1,748,613
Other income (293,513) (104,576) (630,462) (113,749)
Miscellaneous expense 5,340 5,274 21,002 70,218
- ---------------------------------------------------------------------------------------------------
1,834,439 956,694 3,422,823 1,705,082
- ---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 2,441,170 (363,788) 4,107,760 (7,266,123)
PREFERRED STOCK DIVIDENDS 85,964 -- (163,839) --
- ---------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCK HOLDERS $ 2,355,206 $ (363,788) $ 3,943,921 $(7,266,123)
- ---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE
BASIC $ .18 $ (.04) $ .34 $ (.87)
DILUTED $ .18 (.04) $ .33 (.87)
WEIGHTED AVERAGE NUMBER OF SHARES
AND SHARE EQUIVALENTS OUTSTANDING:
BASIC 12,775,914 8,936,308 11,581,852 8,397,713
DILUTED 14,959,064 8,936,308 13,681,830 8,397,713
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
- ------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, 1998 June 30, 1997
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,107,760 $ (7,266,123)
Adjustments to reconcile net loss to
Net cash provided by operating activities:
Provision for credit losses 4,418,884 1,222,230
Common stock and options issued for consulting fees 36,376 150,000
(Gain) loss on disposal of fixed assets (43,381) 2,176
Stock option compensation -- 3,214,767
Depreciation and amortization 1,292,302 750,846
Cash provided by (used for):
Accounts receivable (2,442,297) (186,743)
Inventory (2,433,623) (2,368,124)
Prepaid expenses (791,417) 189,081
Accounts payable 665,827 (395,807)
Accrued expenses and other liabilities (1,616,129) 2,689,962
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,194,302 (1,997,735)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in finance receivables (25,011,091) (3,631,742)
Cash for acquisitions, net of cash acquired -- (8,100,020)
Advances to acquired companies prior to acquisition -- (2,744,093)
Increase in deposits (14,608) (822,200)
Increase in deferred acquisition costs (51,717)
Payment of notes receivable 46,280 400,420
Purchase of property and equipment (435,239) (250,192)
Proceeds from disposal of property & equipment 1,093,381 28,475
Other (33,932) (12,471)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (24,355,209) (15,183,540)
- ---------------------------------------------------------------------------------------------------
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP
(CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Six Months Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (3,770,636) (2,408,441)
Proceeds from issuance of notes payable 7,000,000 8,652,812
Increase in deferred debt costs -- (533,322)
Proceeds from issuance of preferred stock 5,891,410 590,000
Purchase of treasury stock -- (13,590)
Proceeds from issuance of convertible debentures -- 300,000
Bank overdraft -- (82,884)
Proceeds from issuance of common stock 245,400 --
Proceeds from line of credit borrowings 14,500,000 9,562,090
Proceeds from floor plan notes payable 195,400 2,105,804
Payment of dividends (39,618) --
Deferred financing costs (33,640) --
Payments on capital lease obligations (54,708) --
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 23,933,608 18,172,469
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,772,701 991,194
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,066,949 --
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,839,650 $ 991,194
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of Smart Choice Automotive Group, Inc. (the "Company"),
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 sales 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 June 30, 1998:
JUNE 30, 1998
- -----------------------------------------------------------------------------
Contractually scheduled payments $ 90,036,501
Less: unearned finance charges (27,831,899)
- -----------------------------------------------------------------------------
Principal balances $ 62,204,602
Add: loan origination costs $ 951,663
- -----------------------------------------------------------------------------
Principal balances, net $ 63,156,265
Less: allowance for credit losses (9,336,911)
- -----------------------------------------------------------------------------
Finance receivables, net $ 53,819,354
- -----------------------------------------------------------------------------
NOTE 3 - PRESENTATION OF DEALERSHIP REVENUES AND COST OF REVENUES
The Company generates revenue from sales at used car stores, sales at new car
dealerships, income on finance receivables, sales of Corvette parts and
accessories and income from insurance and training. Cost of revenues include
cost of sales at used cars stores, the provision for credit losses, cost of
sales at new car dealerships, cost of Corvette parts and accessories, and costs
of insurance and training.
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.
NOTE 4 - EARNINGS PER SHARE
Net earnings per common share amounts are based on the weighted average number
of common shares and potential common shares outstanding as reflected on Exhibit
11 to this Quarterly Report on Form
10-Q.
NOTE 5 - SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131(SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
is effective for fiscal years beginning after December 15, 1997. Management
elected the early adoption of this pronouncement during the first quarter of
1998. SFAS 131 requires that public enterprises report certain information about
reporting segments in financial statements. If 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 24 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
car stores and new car dealerships. The Corvette parts and accessories segment
sells and distributes Corvette parts and accessories throughout the United
States, primarily through its extensive catalog.
The following table shows certain financial information by reportable segment as
of and for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
USED CAR FINANCING NEW CAR CORVETTE CORPORATE CONSOLIDATED
STORES SERVICES DEALERSHIPS PARTS AND AND OTHER
ACCESSORIES
---------------------- ------------- ------------- ------------ ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Sales $ 40,602,531 $ 6,942,139 $ 14,349,193 $ 10,411,541 $ 426,032 $ 72,731,436
Operating income (loss) 7,077,817 1,122,052 (241,522) 1,627,114 (2,054,877) 7,530,584
Depreciation and
amortization 241,541 47,415 23,048 83,504 896,794 1,292,302
Identifiable assets 14,402,881 54,408,783 8,207,635 5,937,558 33,077,771 116,034,628
Capital expenditures 173,796 46,867 30,635 57,968 125,973 435,239
Interest expense 177,017 2,374,407 178,248 13,587 1,289,024 4,032,283
</TABLE>
ITEM NO. 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION 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 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 DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, IN THE NOTES TO THE FINANCIAL STATEMENTS AND ELSEWHERE IN THIS
REPORT DESCRIBE FACTORS, AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE SUCH
DIFFERENCES.
The following discussion and analysis regarding the Company's
consolidated financial position and consolidated results of operations should be
read in conjunction with the financial statements and related notes thereto
included elsewhere.
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 operated 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 also owns two new car dealerships in Florida, manufactures
and sells Corvette parts and accessories through its subsidiary "Eckler's, sells
insurance and provides dealership training services.
THE PREDECESSOR ACQUISITION. On January 28, 1997, the Company, which was
then named Eckler Industries, Inc., and was operating exclusively in the
Corvette parts and accessories business, acquired Smart Choice Holdings, Inc.,
("SCHI") the ("Predecessor Acquisition") through a merger between SCHI and an
acquisition subsidiary of Eckler's. SCHI was engaged in the business of
acquiring various automobile sales and finance companies. After the Predecessor
Acquisition, the Company's name was changed to Smart Choice Automotive Group,
Inc.
In the Predecessor Acquisition, shareholders of SCHI were issued Common
Stock having a majority of the voting rights of the Company. Therefore, the
Predecessor Acquisition was accounted for as a purchase of Eckler's by SCHI (a
reverse acquisition in which SCHI was considered the acquirer for accounting
purposes).
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE 30,
1997
REVENUES. The Company's revenues were $35.3 million for the three months
ended June 30, 1998 compared to $14.8 million for the same period in 1997. The
increase for the second quarter of 1998 reflects primarily the increase to 24
used car stores at June 30, 1998 as compared to 10 used car stores at June 30,
1997.
COSTS AND EXPENSES. Cost of sales increased to $24.0 million for the
three months ended June 30, 1998 compared to $9.2 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. As a
percent of sales, the cost of sales at the used car stores declined to 66.9%
from 75.7% 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 64.2% from 61.7% of sales,
reflecting an increase in sales of lower margin items.
The Company's selling, general and administrative expenses increased to
$7.1 million for the three months ended June 30, 1998 from $4.9 million for the
same period in 1997.
INTEREST EXPENSE AND OTHER INCOME. Interest expense totaled $2.1 million
for the three months ended June 30, 1998 compared to $1.1 million for the same
period in 1997, an increase of 91%. 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 $.3 million for the three months ended June 30,
1998 compared to $105,000 for the same period in 1997. The 1998 amount is
comprised primarily of commissions on insurance sales ($117,457) and additional
fees generated at the new car dealerships ($120,000).
NET INCOME. Net income totaled $2.4 million for the three months ended
June 30, 1998 as compared to a net loss of $.4 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 car 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
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at used car stores................... $ 18,757 100.0% $ 7,004 100.0%
Cost of sales at used car stores........... 12,551 66.9 5,304 75.7
------ ---- ----- ----
Gross profits..................... 6,206 33.1 1,700 24.3
Operating expenses......................... 3,701 19.7 1,356 19.4
----- ---- ----- ----
Operating income................. $ 2,505 13.4% $ 344 4.9%
</TABLE>
Sales at used car stores increased to $18.8 million for the three months
ended June 30, 1998 compared to $7.0 million for the same period in 1997. The
increase in sales reflects the sale of 2,119 cars at the 24 used car stores that
were open during the 1998 period as compared to the sale of 680 cars at the 10
used car stores that were open during the 1997 period. In addition, the average
number of used cars sold per store increased to 88 cars for the three months
ended June 30, 1998 as compared to average sales of 68 used cars for the same
period of 1997.
Gross profit increased to $6.2 million during the three months ended
June 30, 1998 from $1.7 million during the three months ended June 30, 1997.
Gross profit as a percentage of sales increased to
33.1% for the three months ended June 30, 1998 as compared to 24.3% for the
three months ended June 30, 1997. The improvement resulted primarily from
management's focus on increasing gross margins, as well as a higher average
sales volume per store.
Operating expenses relating to sales at used car stores increased to
$3.7 million from $1.4 million as a result of the increase in the number of used
car stores.
FINANCING OF USED CAR SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income on finance receivables............. $ 4,059 100.0% $ 1,928 100.0%
Provision for credit losses............... 2,097 62.7 499 25.9
Operating expenses........................ 725 17.9 449 23.3
-------- ---- --- ----
Operating income................... 1,237 19.4 980 50.8
Interest expenses on finance receivables... 1,267 31.2 639 33.1
-------- ---- --- ----
Net income (loss).................. $ (30) (11.8)% $ 341 17.7%
</TABLE>
Income on finance receivables increased to $4.0 million for the three
months ended June 30, 1998 from $1.9 million for the same period in 1997. The
increase reflects the increase in the average net finance receivables
outstanding to $59.0 million for the three months ended June 30, 1998 from $26.7
million for the same period of 1997. This increase results from the
corresponding increase in sales of used cars during the three months ended June
30, 1998.
Interest expense on finance receivables increased to $1.3 million for
the three months ended June 30, 1998 from $.6 million 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 June 30, 1998 from 11.5% for the three
months ended June 30, 1997.
A high percentage of the Company's customers do not make all of their
contractually scheduled payments on their finance contracts, requiring the
Company to charge off the remaining principal balance and accrued interest, net
of recoveries on repossessed cars. The Company maintains on its balance sheet an
allowance for credit losses to absorb such losses. To accrue to the allowance,
the Company records an expense (the "provision") based upon its estimate of
future credit losses on finance receivables originated. The provision for credit
losses for the three months ended June 30, 1998 was $2.1million compared to $.5
million for the same period in 1997. The increase reflects the significantly
higher amount of finance receivables outstanding.
Operating income for the three months ended June 30, 1998 was
approximately $1.2 million compared to an operating income of $1.0 million for
the same period in 1997 as a result of a lower provision for credit losses as a
percentage of income on finance receivables.
NEW CAR DEALERSHIPS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at new car dealerships................... $ 6,226 100.0% -- --
Cost of sales at new car dealership............ 5,400 86.7 -- --
----- ------
Gross profit........................... 826 13.3 -- --
Operating expenses............................. 1,004 16.2 -- --
----- ----
Operating loss........................ $ (178) (2.9)% -- --
</TABLE>
The Company acquired two new car dealerships in August 1997. Sales at
new car dealerships were $6.2 million during the three months ended June 30,
1998. During the three months ended June 30, 1998, the Company sold 275 cars at
its two new car dealerships. The gross profit on sales at the new car
dealerships was $.8 million during the three months ended June 30, 1998.
The Company's operating expenses of $1.0 million during the three months
ended June 30, 1998 exceeded the gross profit during such period, resulting in
an operating loss at the new car dealerships of $178,000.
CORVETTE PARTS AND ACCESSORIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales of Corvette parts and accessories..... $ 6,048 100.0% $ 5,268 100.0%
Cost of Corvette parts and accessories...... 3,880 64.2 3,250 61.7
----- ---- ----- -----
Gross profit........................ 2,168 35.8 2,018 38.3
Operating expenses.......................... 1,141 18.8 1,173 22.3
----- ---- ----- -----
Operating income (loss)............ $ 1,027 17.0% $ 845 16.0%
</TABLE>
Sales of Corvette parts and accessories increased to $6 million for the
three months ended June 30, 1998 compared to $5.3 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 $2.2 million for the three months
ended June 30, 1998 from $2.0 million for the three months ended June 30, 1997,
the gross margin on sales of Corvette parts and accessories declined to 35.8%
during the three months ended June 30, 1998 from 38.3 % during the three months
ended June 30, 1997 as a result of sales of lower margin items in the 1998
period.
The decrease in operating expenses to $1.1 million during the three
months ended June 30, 1998 as compared to $1.2 million during the three months
ended June 30, 1997 was due to the reallocation of certain expenses to corporate
overhead.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. The Company's revenues were $72.7 million for the six months
ended June 30, 1998 compared to $22.1 million for the same period in 1997. The
increase for the first six months of 1998 reflects primarily the increase to 24
used car stores at June 30, 1998 as compared to 10 used car stores at June 30,
1997. In addition, the 1997 first six months revenues reflect less than a full
six months of operations of the Predecessors, whereas the 1998 first six months
revenues reflect a full six months of operations of all of the used car
companies acquired by the Company during 1997 and of two new car dealerships
acquired in August 1997, as well as an increase in the average number of used
cars sold during the period.
COSTS AND EXPENSES. Cost of sales increased to $50.1 million for the six
months ended June 30, 1998 compared to $14.5 million for the same period in
1997. The increase in cost of sales at the used car stores primarily reflects
the opening of additional used car store locations as discussed above and, to a
lesser extent, inclusion in the first six months of 1998 of a full six months of
operations of the Predecessors. As a percent of sales, the cost of sales at the
used car stores declined to 65.0% from 67.6% in 1997, reflecting management's
focus on increasing gross margins as well as an increase in average sales volume
per store. The cost of sales for the Corvette parts and accessories increased to
64.1% from 61.6% of sales, reflecting an increase in sales of lower margin
items.
The Company's selling, general and administrative expenses increased to
$15.1 million for the six months ended June 30, 1998 from $10.0 million for the
same period in 1997 excluding $1.7 million in settlement payments to terminated
employees and consultants of the Predecessors during the six months ended June
30, 1997. The results reflect a decrease as a percentage of revenues to 20.7% in
the first six months of 1998 from 45.3% in the comparable 1997 period as a
result of better utilization of the Company's infrastructure, including
centralized marketing, accounting and management information functions.
During the first six months of 1997, the Company recognized a charge of
$3.2 million for compensation expense related to employee and director stock
options. The Company did not have a comparable expense during the six month
period ended June 30, 1998.
INTEREST EXPENSE AND OTHER INCOME. Interest expense totaled $4.0 million
for the six months ended June 30, 1998 compared to $1.7 million for the same
period in 1997, an increase of 131%. The increase resulted primarily from higher
outstanding indebtedness needed to finance higher levels of finance receivables
and inventory as the Company expanded its operations.
Other income totaled $.6 million for the six months ended June 30, 1998
compared to $44,000 for the same period in 1997. The 1998 amount is comprised
primarily of additional fees generated at the new car dealerships ($338,000) and
recoupment of prior year's expenses ($166,000).
NET INCOME. Net income totaled $4.1 million for the six months ended
June 30, 1998 as compared to a net loss of $7.3 million for the same period in
1997. The improvement resulted primarily from the refocusing of the Company's
strategy, the restructuring of its operations during the last quarter of 1997
and increased levels of business activities.
SEGMENT INFORMATION
The Company is comprised of four segments: used car stores, financing of
used car sales, new car dealerships and Corvette parts and accessories. The
Company's results of operations are most meaningful when analyzed and discussed
by segment.
USED CAR STORES
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at used car stores.............. $ 40,603 100.0% $ 11,789 100.0%
Cost of sales at used car stores...... 26,376 65.0 7,967 67.6
------ ---- ----- ----
Gross profits................ 14,227 35.0 3,822 32.4
Operating expenses.................... 7,149 17.6 2,031 17.2
----- ---- ----- ----
Operating income............ $ 7,078 17.4% $ 1,791 15.2
</TABLE>
Sales at used car stores increased to $40.6 million for the six months
ended June 30, 1998 compared to $11.8 million for the same period in 1997. The
increase in sales reflects the sale of 4,435 cars at the 24 used car stores that
were open during the 1998 period as compared to the sale of 1,096 cars at the 10
used car stores that were open during the 1997 period. In addition, the average
number of used cars sold per store increased to 185 cars for the six months
ended June 30, 1998 as compared to average sales of 110 used cars for the same
period of 1997.
Gross profit increased to $14.2 million during the six months ended June
30, 1998 from $3.8 million during the six months ended June 30, 1997. Gross
profit as a percentage of sales increased to 35.0% for the six months ended June
30, 1998 as compared to 32.4% for the six months ended June 30, 1997. The
improvement resulted primarily from management's focus on increasing gross
margins, as well as a higher average sales volume per store.
Operating expenses relating to sales at used car stores increased to
$7.1 million from $2.0 million as a result of the increase in the number of used
car stores.
FINANCING OF USED CAR SALES
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income on finance receivables............ $ 6,942 100.0% $ 1,723 100.0%
Provision for credit losses.............. 4,418 78.5 1,549 90.0
Operating expenses....................... 1,401 20.2 803 46.5
-------- ---- -------- ----
Operating income loss.............. 1,123 1.3 (629) 36.5
Interest expense on finance receivables.. 2,374 34.2 1,031 59.8
-------- ---- -------- ----
Net income (loss)................. $ (1,251) (32.9)% $ (1,660) (96.3)%
</TABLE>
Income on finance receivables increased to $6.9 million for the six
months ended June 30, 1998 from $1.7 million for the same period in 1997. The
increase reflects the increase in the average net finance receivables
outstanding to $52.5 million for the six months ended June 30, 1998 from $19.9
million for the same period of 1997. This increase results from the
corresponding increase in sales of used cars during the six months ended June
30, 1998.
Interest expense on finance receivables increased to $2.4 million for
the six months ended June 30, 1998 from $1.0 million for the same period in
1997. The increase reflects the higher level of finance receivables, which was
only partially offset by the reduction in the interest rate on the borrowed
funds, to 11.0% for the six months ended June 30, 1998 from 11.5% for the six
months ended June 30, 1997.
A high percentage of the Company's customers do not make all of their
contractually scheduled payments on their finance contracts, requiring the
Company to charge off the remaining principal balance and accrued interest, net
of recoveries on repossessed cars. The Company maintains on its balance sheet an
allowance for credit losses to absorb such losses. To accrue to the allowance,
the Company records an expense (the "provision") based upon its estimate of
future credit losses on finance receivables originated. The provision for credit
losses for the six months ended June 30, 1998 was $4.4 million compared to $1.5
million for the same period in 1997. The increase reflects the significantly
higher amount of finance receivables outstanding.
The net loss for the six months ended June 30, 1998 was approximately
$1.7 million compared to a net loss of $1.7 million for the same period in 1997
as a result of a lower provision for credit losses as a percentage of income on
finance receivables. Net losses resulted from the recognition of the provision
for credit losses on the significant increase in finance receivables originated
during the first six months of 1998 and 1997.
NEW CAR DEALERSHIPS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales at new car dealerships................. $ 14,349 100.0% -- --
Cost of sales at new car dealerships......... 12,587 87.7 -- --
------ ----
Gross profit......................... 1,762 12.3 -- --
Operating expenses........................... 2,003 14.0 -- --
----- ----
Operating loss...................... $ (241) (1.7)% -- --
</TABLE>
The Company acquired two new car dealerships in August 1997. Sales at
new car dealerships were $14.3 million during the six months ended June 30,
1998. During the six months ended June 30, 1998, the Company sold 675 cars at
its two new car dealerships. The gross profit on sales at the new car
dealerships was $1.8 million during the six months ended June 30, 1998.
The Company's operating expenses of $2.0 million during the six months
ended June 30, 1998 exceeded the gross profit during such period, resulting in
an operating loss at the new car dealerships of $241,000.
CORVETTE PARTS AND ACCESSORIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales of Corvette parts and accessories..... $ 10,411 100.0% $ 7,972 100.0%
Cost of Corvette parts and accessories...... 6,677 64.1 4,909 61.6
--------- ------ -------- -----
Gross profit........................ 3,734 35.9 3,063 38.4
Operating expenses.......................... 2,107 20.3 2,817 35.3
--------- ------ -------- ----
Operating income................... $ 1,627 15.6% $ 246 3.1%
</TABLE>
Sales of Corvette parts and accessories increased to $10.4 million for
the six months ended June 30, 1998 compared to $8.0 million for the same period
in 1997. The increase in sales reflects an additional mailing of Eckler's mail
order catalog in late 1997.
Although gross profit increased to $3.7 million for the six months ended
June 30, 1998 from $3.1million for the six months ended June 30, 1997, the gross
margin on sales of Corvette parts and accessories declined to 35.9% during the
six months ended June 30, 1998 from 38.4 % during the six months ended June 30,
1997 as a result of sales of lower margin items in the 1998 period.
The decrease in operating expenses to $2.1 million during the six months
ended June 30, 1998 as compared to $2.8 million during the six months ended June
30, 1997 was due to the reallocation of certain expenses to corporate overhead.
CREDIT LOSSES
GENERAL. The Company has established an allowance to cover anticipated
credit losses on the finance receivables currently in its portfolio. The
allowance has been established by the recognition in the Company's statements of
operations of the provision for credit losses attributed to finance receivables
originated by the Company.
The allowance decreased from 17.1% of outstanding principal balances as
of December 31, 1997 to 15.0% as of June 30, 1998. The following table reflects
activity in the allowance for the six months ended June 30, 1998 and 1997 and
for the year ended December 31, 1997.
SIX MONTHS ENDED
JUNE 30,
-----------------------
YEAR ENDED
DECEMBER 31,
1998 1997 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance, beginning of period.............. $ 6,857 -- --
Balance at dates of acquisitions.......... -- $ 5,628 $ 5,628
Provision for credit losses............... 4,419 3,469 4,941
Net charge offs........................... (1,939) (2,785) (3,712)
-------- -------- --------
Balance, end of period.................... $ 9,337 $ 6,312 $ 6,857
Allowance as a percentage of finance
receivables............................... 15.0% 19.0% 17.1%
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 six months ended June
30, 1998 and 1997 and for the year ended December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
YEAR ENDED
DECEMBER 31,
1998 1997 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal Balances........................
Collateral repossessed.................... $ 5,887 $ 3,818 $ 7,920
Other..................................... -- 36 37
--------- -------- --------
Total principal balances.................. 5,887 3,854 7,957
Recoveries, net........................... (3,948) (1,069) (4,245)
--------- -------- --------
Net charge offs........................... 1,939 2,785 3,712
Average principal balances................ 52,547 19,907 27,325
Net charge offs as a percentage of
average principal balance outstanding.... 3.7% 14.0% 13.6%
</TABLE>
DELINQUENCIES. Analysis of delinquency trends is also considered in
evaluating the adequacy of the allowance. The following table reflects the
principal balance of delinquent finance receivables as a percentage of total
outstanding principal balances of the Company's finance receivables portfolio as
of June 30, 1998 and 1997 and as of December 31, 1997.
AS OF JUNE 30,
AS OF
DECEMBER 31,
1998 1997 1997
---- ---- ----
Aging Percentages:
Principal balances current................... 94.7% 88.0% 91.1%
Principal balances 31 days to 60 days........ 2.2 5.9 4.0
Principal balances over 60 days.............. 3.1 6.1 4.9
Total over 31 days ........................ 5.3 12.0 8.9
The Company's improved delinquency experience on its finance receivables
portfolio is primarily attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in finance
receivables, car inventory, parts and accessories inventory, property and
equipment, and working capital for general corporate purposes. Funding sources
potentially available to the Company include operating cash flow, third-party
investors, financial institution borrowings, borrowings against finance
receivables and the securitization of its finance receivables.
Net cash provided by (used for) operating activities was approximately
$3.6 million and ($2.0) million for the six month periods ended June 30, 1998
and 1997, respectively. Net cash provided from operating activities in the first
six months of 1998 primarily reflected the net income for the period which was
partially offset by increases in accounts receivable and inventory. The increase
from the first six months of 1997 was primarily a result of the large net loss
in the first six months of 1997.
Cash used in investing activities was approximately $24.8 million and
$15.2 million during the six months ended June 30, 1998 and 1997, respectively.
The 1998 amount primarily reflects increases in finance receivables. The 1997
amount reflects an increase in finance receivables associated with acquisitions
during the first six months of 1997.
Cash provided by financing activities was approximately $23.9 million
and $18.2 million during the six months ended June 30, 1998 and 1997,
respectively. In the first six months of 1998, the Company increased its notes
payable on finance receivables by $14.5 million and borrowed $7.0 million. In
the first six months of 1997, the Company raised approximately $0.6 million
through a sale of preferred stock and increased its line of credit and floorplan
borrowings by approximately $11.7 million.
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 renegotiations. The Finova Revolving Facility is
secured by substantially all of the Company's finance receivables. As of June
30, 1998 and December 31, 1997, the principal amount outstanding under the
Finova Revolving Facility was $45.9 million and $31.4 million, respectively. The
Finova Revolving Facility bears interest at the prime rate plus 2.5% (11.0% as
of June 30, 1998).
In the first six months of 1998 and in 1997, the Company financed its
used car inventory through a line of credit with Manheim Automotive Financial
Services, Inc. (the "Manheim Facility") which had an outstanding balance of $2.5
million at June 30, 1998 and $2.7 million at December 31, 1997. The maximum
commitment under the Manheim Facility is $3.75 million. The Manheim Facility is
secured by the Company's used car inventory and bears interest at 1.5% over the
prime rate (10.0% as of June 30, 1998). Amounts outstanding are payable on the
earlier of the day after a car is sold or 180 days after the floorplan advance.
The Company finances its new car inventory through manufacturer
floorplan facilities. The Company's floorplan facility with Volvo Finance North
America, Inc. has a maximum commitment of $3.3 million, bears interest at 1.0%
above the prime rate (9.5% as of June 30, 1998), and at June 30, 1998 and
December 31, 1997 had outstanding balances of $3.2 million and $3.3 million,
respectively. The Company's floorplan facility with Nissan Motor Acceptance
Corporation has a $3.0 million maximum commitment, bears interest at 1.0% above
prime (9.5% as of June 30, 1998), and at June 30, 1998 and December 31, 1997 had
outstanding balances of $2.8 million and $2.3 million, respectively.
In 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 1200
shares of Common Stock for each preferred share purchased. The exercise price of
the warrants are $8.10 for 90,000 shares and $5.23 for 30,000 shares. As of June
30, 1998 all but one share of the Series A Redeemable Convertible Preferred
Stock had been converted into Common Stock.
In May 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.
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 until June 2003 when the dividend rate increases to 20% 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.
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 business 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 of Eckler's existing core
applications are to be modified and tested for Year 2000 compliance no later
than the last quarter of 1998. All new computer systems and software
installations, including the computer systems of the Company's subsidiaries
other than Eckler's, are currently Year 2000 compliant. All other systems
including the Company's local and wide area networks, telephone systems,
uninterruptible power supply systems and historical information are or are
expected to be in compliance no later than the fourth quarter of 1998. The
Company continues to evaluate other computerized equipment to include security
systems, fire control systems and power control systems to determine whether
they are Year 2000 compliant. The anticipated expense associated with the year
2000-compliance project will not include additional hardware cost or external
staffing. The Company's computer systems and software are generally new and are
Year 2000 compliant. All systems are expected to be in compliance by the last
quarter of 1998.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130") and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective for periods
beginning after December 15, 1997. Adoption of these standards 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 June 30,
1998.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 required companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derviative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (I) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the
Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the Company does not expect
adoption of the new standard on January 1, 2000 to affect its financial
statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 revolving credit facility with Finova Capital Corporation
is based on the prime rate plus 2.5 percent. 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 because of the liquidity of these instruments. 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. The
carrying amount of accounts payable and accrued expenses approximates fair value
because of 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.
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Described below are the sales of securities by the Company during the
second quarter of 1998 that were not registered under the Securities Act of
1933, as amended (the "1933 Act"). On the issuance of these securities the
Company relied on the exemption from registration under the 1933 Act set forth
in Section 4(2) thereof, based on established criteria for effecting a private
offering, including the number of offerees for each transaction, access to
information regarding the Company, disclosure of information by the Company,
restrictions on resale of the securities offered, investment representations by
the purchasers, and the qualification of the offerees as "accredited investors."
On various dates during the three months ended June 30, 1998, the
Company issued Common Stock to holders of the Company's Series A Redeemable
Convertible Preferred Stock (the "Series A Preferred Stock"), on conversion of
Series A Preferred Stock. The Company had issued the Series A Preferred Stock in
1997 to institutional investors. The Series A Preferred 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 958,000 shares of Common
Stock were issued in the second quarter of 1998 on conversion of the Series A
Preferred Stock.
On various dates during the three months ended June 30, 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 conversion. A total of
280,000 shares of Common Stock were issued in the second quarter of 1998 on
conversion of the Notes.
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.
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.
ITEM 3. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On June 24, 1998, the Company held its 1998 annual meeting of
shareholders (the "Annual Meeting"). At the Annual Meeting directors were
elected as set forth below and the shareholders of the Company approved the
following matters by the votes indicated:
1. The following persons were elected to serve as directors of the
Company for the terms indicated:
TERM WITHHOLD
CLASS (YEARS) FOR AUTHORITY
Robert J. Abrahams I 3 8,758,465 101,640
Gary R. Smith I 3 8,758,465 101,630
Craig Macnab I 3 8,758,465 101,630
Jeffrey Congdon II 2 8,758,465 101,630
John W. Holden, Jr. II 2 8,758,465 101,630
Gerald C. Parker III 1 8,758,465 101,630
Donald J. Wojnowski, Jr. III 1 8,758,475 101,630
2. Approval of an amendment to the Company's Bylaws to provide for
classification of the Company's Board of Directors into three
classes serving staggered terms as described above. For -
5,125,414; against - 156,300; abstain - 43,116.
3. Approval of the Company's 1998 Executive Incentive Compensation
Plan. For - 5,023,799; against - 207,686; abstain - 40,416.
4. Approval of a specific stock option grant of 12,500 shares of
Common Stock to each of the Company's outside directors as their
1998 director compensation. For - 5,053,654; against - 209,269;
abstain - 59,905.
5. Approval of a specific stock grant of 2,000 shares of Common
Stock to each of 24 of the Company's automobile sales managers to
vest if sales goals are met. For - 5,127,461; against - 166,889;
abstain - 30,380.
ITEM 4. OTHER INFORMATION
The Securities and Exchange Commission (the "SEC") recently amended its
proxy rules to provide that a registrant, such as the Company, may specify, in
its proxy statement or form of proxy for its annual meeting of stockholders,
that proxies solicited by the registrant will confer discretionary authority to
vote with regard to matters not identified in the proxy statement that may be
raised at the meeting, if the registrant first mailed its proxy materials for
the prior year's annual meeting of stockholders, or by such other date as may be
specified in an advance notice provision adopted by the registrant. The Company
has not adopted an advance notice provision. The Company first mailed its proxy
materials for its 1998 Annual Meeting of Stockholders on May 22, 1998. Under the
SEC's amended rules, the 45-day deadline for notice to the Company of matters to
be raised at the Company's 1999 Annual Meeting of Stockholders is thus March 8,
1999. Any stockholder who wishes to have a proposal included in the Company's
proxy statement for its 1999 Annual Meeting of Stockholders must submit the
proposal to the Company by January 22, 1999.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT FILED HEREWITH OR INCORPORATED BY
LIST EXHIBIT DESCRIPTION REFERENCE TO:
<S> <C> <C>
3.1 Third Articles of Amendment to Exhibit 3.1 to Form 10-Q filed on May
Articles of Incorporation. 15, 1998.
3.2 Fourth Articles of Amendment to Exhibit 3.2.4 to Form S-1 filed on
Articles of Incorporation. July 17, 1998.
3.3 Fifth Articles of Amendment to Exhibit 3.2.5 to Form S-1 filed on
Articles of Incorporation. July 17, 1998.
11.0 Statement re computation of per Filed herewith.
share earnings.
27.0 Financial Data Schedule. Filed herewith.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on August 19, 1998.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /S/ GARY R. SMITH
--------------------------------------------
Gary R. Smith
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/S/ GARY R. SMITH President and Chief Executive August 19, 1998
- ------------------- Officer, Director
Gary R. Smith
/S/ JOSEPH E. MOHR Chief Financial Officer, August 19, 1998
- ------------------- (Principal Financial and
Joseph E. Mohr Accounting Officer)
Earnings (Loss) Per Share
A summary of the reconciliation from basic earnings (loss) per share to
diluted earnings (loss) per share for the three and six month periods ended June
30, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) 2,441,170 (363,788) 4,107,760 (7,266,123)
Preferred stock dividends 85,964 -- 163,839 --
--------- ----------- --------- ----------
Net income available to common stock holders 2,355,206 363,788 3,943,921 7,266,123
========= =========== ========= ==========
Basic EPS-weighted average shares outstanding 12,775,914 8,936,308 11,581,852 8,397,713
========== ========= ========== =========
Basic earnings (loss) per share $ 0.18 $ (0.04) $ 0.34 $(0.87)
====== ======== ====== =======
Basic EPS-weighted average shares outstanding 12,775,914 -- 11,581,852 --
Effect of diluted securities:
Options and warrants 409,908 -- 294,270 --
Convertible debt 1,806,603 -- 1,806,603 --
---------- ----------
Dilutive EPS-weighted average shares outstanding 14,992,425 -- 13,682,725 --
========== ==========
Diluted Earnings (loss) per share $ 0.18 -- $ 0.33 --
====== ======
Preferred Stock not included in diluted EPS since
antidilutive 651,421 -- 651,421 --
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Form 10-Q For The Quarterly Period Ending June 30, 1998
</LEGEND>
<CIK> 0000949091
<NAME> Smart Choice Automotive Group, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Jun-30-1998
<CASH> 3,840
<SECURITIES> 0
<RECEIVABLES> 66,978
<ALLOWANCES> 9,337
<INVENTORY> 17,950
<CURRENT-ASSETS> 79,431
<PP&E> 13,949
<DEPRECIATION> 4,767
<TOTAL-ASSETS> 116,218
<CURRENT-LIABILITIES> 63,283
<BONDS> 31,090
10
5,891
<COMMON> 131
<OTHER-SE> 14,793
<TOTAL-LIABILITY-AND-EQUITY> 116,218
<SALES> 73,362
<TOTAL-REVENUES> 72,731
<CGS> 50,119
<TOTAL-COSTS> 65,201
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,419
<INTEREST-EXPENSE> 4,032
<INCOME-PRETAX> 4,108
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,108
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
</TABLE>
