- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
----------------------------------
[ ] TRANSITION REPORT UNDER 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 (407) 269-9680
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (ISSUER'S TELEPHONE
NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK THE NASDAQ STOCK MARKET
REDEEMABLE COMMON STOCK THE NASDAQ STOCK MARKET
PURCHASE WARRANTS
SECURITIES REGISTERED PURSUANT TO SECTION 12(G)
OF THE EXCHANGE ACT:
COMMON STOCK
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(TITLE OF CLASS)
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 REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
<PAGE>
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ X ]
AGGREGATE MARKET VALUE OF THE COMMON EQUITY HELD BY NON-AFFILIATES OF THE
REGISTRANT $8,731,034.00 AS OF APRIL 14, 1999.
AS OF APRIL 15, 1999, 6,676,545 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT WITH RESPECT TO ITS 1998 ANNUAL
MEETING OF SHAREHOLDERS IS INCORPORATED HEREIN BY REFERENCE.
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PART 1 PAGE
Item 1 Business 1
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of
Security Holders 10
Item 4A Executive Officers of the Registrant 10
PART II
Item 5 Market for the Registrant's Common Equity
Securities and Related Stockholder Matters 11
Item 6 Selected Consolidated Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8 Consolidated Financial Statements and Supplementary
Data 35
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures. 35
PART III
Item 10 Directors and Executive Officers of the Registrant 35
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial Owners and
Management 35
Item 13 Certain Relationships and Related Transactions 35
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K 35
<PAGE>
PART I
ITEM 1 -- BUSINESS
GENERAL
Smart Choice Automotive Group, Inc. ("Smart Choice" or the "Company")
currently operates 17 stores in Florida that sell used cars under the "First
Choice" brand name. The Company's First Choice cars are three to six years old,
have less than 80,000 miles and have undergone thorough inspection,
reconditioning and, as necessary, repair. The Company also sells used cars that
may not meet the First Choice criteria through four additional stores in Florida
that operate under the "Team" brand name. Sales of First Choice and Team Cars
are "self financed" through Florida Finance Group, Inc. ("FFG"), a finance
company subsidiary. FFG provides financing for the Company's customers by
originating retail automobile installment sales contracts ("finance receivables"
or "finance contracts") secured by the cars the Company sells. The Company's
customers typically are "credit-impaired", that is, they have limited credit
histories, low incomes and/or past credit problems.
Retail sales of new and used cars in the United States totaled
approximately $673 billion in 1997. Used cars represented approximately 75% of
cars sold in the United States and 55% of total sales in 1997, with
approximately 41 million used cars sold at an average price of $9,029 per unit.
Retail sales of used cars in Florida in 1997 totaled more than $24.4 billion
(over 2 million vehicles). Approximately 36% of Florida's used car sales in 1997
(not including sales of used cars at new car dealerships) occurred at
approximately 2,800 self-financed used car stores.
Management believes that the quality and reliability of the Company's First
Choice cars (i) reduce the probability of product failure (which management
believes is a leading cause of defaults on finance contracts in the Company's
industry), (ii) reduce losses on the Company's repossessions of cars and (iii)
define the First Choice brand. Due to the quality and reliability of its First
Choice cars, the Company is able to provide a 24 month/24,000 mile service
contract to its customers, which is underwritten by a third party. The Company
sells used cars at its First Choice stores for an average retail price of
approximately $9,100, including the service contract on all cars sold. The
Company's Team stores generally sell older and higher mileage cars than First
Choice cars. Team cars, which sell for an average retail price of approximately
$8,100, are primarily cars that have been repossessed by the Company, have been
traded in by customers or have not been sold by the First Choice stores within
approximately 180 days. Cars sold at Team stores are covered by a 12
month/12,000 mile service contract.
The 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. Credit
impaired customers, that is, 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.
<PAGE>
OPERATING STRATEGY
The Company's operating strategy emphasizes the following points:
o 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. The Company
utilizes guidelines in purchasing, inspecting, reconditioning and servicing
First Choice cars to minimize defaults.
o UTILIZE CENTRALIZED CREDIT APPROVAL AND STRICT UNDERWRITING PRACTICES. The
Company separates the credit approval function and sales process for its
used cars. The Company's credit underwriting process strictly adheres to
objective underwriting standards that have resulted in improved collection
experience since February 1997. The Company regularly reviews its
collection results to assess the effectiveness of its underwriting
standards.
o 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's collection policy
includes telephoning a borrower if the borrower's payment is one day late,
and repossession procedures generally begin when the customer is two
payments past due. As of December 31, 1998, 93.6% of the Company's finance
receivables were current.
o 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 reconditions and remarkets
approximately 64% 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 51% (on a retail basis) of the
principal amount of loans charged off for the year ended December 31, 1998.
o INCREASE OPERATING EFFICIENCY. Since late 1997, in an effort to increase
operating efficiency by reducing administrative costs and enhancing
administrative functions, the Company has combined certain administrative
functions, such as accounting, treasury, insurance, employee benefits,
strategic marketing and legal support. During 1998, the Company believes it
further increased its operating efficiency in such areas as advertising,
reconditioning and purchasing and transporting inventory.
o EMPLOY INTEGRATED MANAGEMENT INFORMATION SYSTEMS. Each used car store is
linked to an integrated computer-based management information system (the
"MIS") that allows the Company to obtain "real time" information on its
operations. The Company uses the MIS to transmit data between its
headquarters and its stores, to evaluate store performance daily, monitor
inventory, sales, costs and customer payments and facilitate the Company's
underwriting and collection of its finance contracts.
o 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.
o AVOID THIRD PARTY FINANCE RECEIVABLES. As part of its operating philosophy,
the Company only originates and services finance receivables on used cars
sold at its used car stores. The Company does not intend to purchase third
party finance receivables.
INSURANCE PRODUCTS
During 1998, the Company developed a program offering collision and
liability insurance to its used car customers through a separate subsidiary,
Easy Pay Insurance, Inc.
COMPANY GROWTH
The Company commenced used car sales in January 1997 and expanded
significantly throughout 1997 through acquisitions. In 1998, the Company's
growth has been through internal expansion. The Company regularly reviews its
store locations to assess the effectiveness of its sales operations.
SELF-FINANCED USED CAR STORES The Company currently owns and operates 17
self-financed used car stores under the First Choice name and four 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 60 used cars (ranging from 35 to 130) per store, featuring a wide variety of
makes and models (with ages generally ranging from three to six years) and a
range of sale prices, all of which enable the Company to meet the preferences
and budgets of a wide range of potential customers. The Company believes that by
selling higher quality used cars and providing a service agreement to cover
major repairs, improved customer satisfaction and fewer defaults on finance
contracts result.
The Company provides, through a third-party underwriter, a 24 month/24,000
mile service contract with each used car sold at a First Choice store and a 12
month/12,000 mile service contract to purchasers of the Company's Team cars.
Under the service contracts, the Company's customers may have their First Choice
or Team cars repaired nationally by any one of approximately 375,000 ASE
(Automotive Service Excellence) certified technicians. The Company does not
perform any repairs under these service contracts, which cover most major
repairs due to mechanical breakdown or failure. Customers are responsible for
payment of up to a $100 deductible during each repair visit under the service
contract.
The Company acquires its used cars primarily at auto auctions. All cars are
subjected to a 110 point inspection program, reconditioning and, as necessary,
repair at the Company's reconditioning facilities. The Company outsources all
painting and body work. The Company invests approximately $678 per car in
repairs prior to delivering the cars to the individual stores for sale. The
Company's regional managers determine the number and types of cars for the
stores in their regions. If a car is not sold in 90 days, it is moved to another
First Choice store in the same region for an additional 90 days, after which, if
not sold, it is moved to a Team location or sold wholesale to other dealers.
RECONDITIONING CENTERS. The Company has used 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 December 31, 1998,
the Lakeland operation had 20 bays and was capable of reconditioning
approximately 1,500 cars per month. The Company believes that the parcel of land
could be used to expand reconditioning capacity by adding more bays. The
Lakeland facility also contains the Company's off-site disaster recovery
operations center.
MARKETING AND SALES. A primary focus of the Company's marketing strategy
for its used car stores is its ability to finance consumers with poor credit
histories. The Company has initiated marketing programs designed to attract
credit-impaired customers, assist such customers in re-establishing their
credit, reward those customers who pay on time, develop customer loyalty and
increase referral and repeat business. The Company created value-added programs
for its customers including providing quality cars through a comprehensive
inspection and refurbishment program, a service agreement on all used cars sold
at the Company stores, rapid loan application processing and pre-qualification
over the telephone by calling a toll-free number. The Company reports monthly to
credit bureaus, allowing customers the opportunity to work toward
re-establishing their credit while providing an avenue for them to purchase
newer cars as their credit improves.
In general, the Company's advertising for its used car stores emphasizes
its multiple locations, wide selection of quality used cars, ability to provide
financing to many credit-impaired borrowers and additional value-added programs
such as service agreements and loan pre-qualifications. The Company advertises
extensively in the radio and television media. In addition, management believes
that the Company's upgraded facilities provide effective advertising and attract
drive-by traffic to visit the stores because their appearance fosters the image
of a used car store that offers quality cars. The Company believes that its
advertising and marketing approach creates brand name recognition and promotes
its image as a professional, customer oriented business.
The Company utilizes various telemarketing programs to promote its used
cars. For example, potential customers are contacted within several days of
their visit to a Company store to follow up on leads and obtain information
regarding their experience while at a Company store. In addition, used car
customers with satisfactory payment histories are contacted several months
before contract maturity and are offered an opportunity to purchase another car
with a nominal down payment requirement.
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 92 full-time salespersons at its used car stores as of
December 31, 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 Ugly Duckling Corporation and "superstores"
such as CarMax and AutoNation USA. Others, such as Auto-By-Tel, Calling All
Cars, AutoVantage and Auto Web International are marketing cars on the Internet.
In addition, certain regional and national car rental companies have begun to
operate retail used car lots to dispose of their used rental cars. Many of these
competitors have significantly greater financial, marketing and other resources
than the Company.
The used car superstores typically use a mega-dealer approach with
substantial investments in real estate and extensive inventory at each store. In
contrast, the Company maintains several medium to large stores in each of its
marketing areas. The Company believes that by covering more territory with
multiple locations in a market area rather than having one superstore serving a
large geographic area, the Company's stores are more easily accessible to a
wider population and the Company benefits from more visibility in its market
area. Also, the existence of multiple locations gives the Company greater
flexibility in responding to a change in market conditions.
The Company's used car stores do not directly compete with superstores such
as CarMax or AutoNation which offer newer, more expensive cars than the Company
sells and do not target credit-impaired borrowers. Of the large companies that
have entered the credit-impaired car business, only Ugly Duckling Corporation
has announced an intention to focus on the credit-impaired borrower. However,
the Company believes that it competes effectively with the other self-financed
dealers and can compete effectively with Ugly Duckling Corporation because the
Company's cars are generally newer, lower mileage cars. Further, the Company
provides each customer with a service agreement on each used car sold at the
Company's stores. The Company distinguishes its direct sales and financing
operations from those of typical self-financed used car retailers by providing
multiple locations, upgraded facilities, large inventories of used automobiles,
centralized purchasing, value-added marketing programs and dedication to
customer service. In addition, the Company has developed underwriting guidelines
and techniques to facilitate rapid credit decisions, as well as an integrated,
technology-based corporate infrastructure that enables the Company to monitor
and service its finance contracts. The Company believes that it is the largest
used car store chain in Florida that focuses on credit-impaired customers.
The credit-impaired segment of the used car financing business is also
highly fragmented and very competitive. In recent years, several consumer
finance companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of finance
contracts. In addition, there are numerous financial services companies serving,
or capable of serving, this market. While traditional financial institutions,
such as commercial banks, savings and loans, credit unions and captive finance
companies of major automobile manufacturers, have not consistently serviced
credit-impaired borrowers, the high rates of return earned by companies involved
in credit-impaired financing have encouraged certain of these traditional
institutions to enter, or contemplate entering, this market.
FINANCING CUSTOMERS WITH IMPAIRED CREDIT
The Company offers financing to its customers who purchase used cars at its
used car stores. The Company does not have any loans from persons who are not
customers except for finance contracts purchased in the Company's used car
dealership acquisitions. The Company has established a policy not to acquire
third party originated finance contracts. It provides financing only for its own
customers, thereby relying on its own underwriting standards and not those of
third parties. Sales and financing are separate functions performed by different
Company subsidiaries. All credit and financing review and decisions are made by
experienced financing personnel at the Company's headquarters. The Company uses
a standardized sales contract that typically provides for down payments of
approximately 10% of the purchase price with the balance of the purchase price
financed at an average annual percentage rate of approximately 26% over periods
ranging from 12 to 48 months. The Company finances approximately 98% of the used
car sales 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, and an average length of employment
at his or her current job of approximately 3.3 years and has resided in the same
area for approximately 4.9 years.
CREDIT EVALUATION PROCEDURES. The Company applies uniform underwriting and
credit approval standards in originating its used car loans. The most important
criteria the Company uses in evaluating a loan are the applicant's
creditworthiness, the collateral value of the car, employment and residence
histories, income information, personal references, income and expense
information and credit bureau reports. The sales managers at the Company's used
car stores submit the customer's credit application to the Company's
headquarters in Titusville, Florida, where the customer's creditworthiness is
analyzed. The Company utilizes a credit evaluation system it developed to
determine a customer's creditworthiness. Financing decisions are made by an
experienced loan staff with a minimum of five years of experience and an average
of ten years of experience in car financing. For applicants who fall outside of
the guidelines, the ultimate financing determination is made by senior
management. Further, members of senior management regularly review credit
decisions made by the Company's employees to assure uniformity in underwriting
standards. Periodically, the Company retains credit underwriting consultants to
review the Company's loan quality, collection and underwriting procedures and
recommend areas for improvement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Credit Losses" for information
about the Company's loan loss and delinquency experience.
CONTRACT SERVICING. The Company services its finance contracts through the
use of servicing procedures which have been specifically tailored to the
Company's customers and include: (i) monitoring loans and related collateral,
(ii) accounting for and posting all payments received, (iii) responding to
borrowers' inquiries, (iv) taking all necessary action to maintain the security
interest granted in the financed automobile, (v) investigating delinquencies and
communicating with borrowers to obtain timely payments, (vi) pursuing
deficiencies on loans, and (vii) when necessary, repossessing the financed
automobile.
COLLECTION POLICY. The Company is strict in its collection policies,
believing that by acting promptly and working with the customers, the Company is
able to minimize its loss exposure. The Company employs a credit counselor in
each of its major market areas to work directly with delinquent customers. 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 64% 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 51% (on a retail basis)
of the principal amount of loans and accrued interest charged off for the year
ended December 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. As part of its operating
philosophy, the Company only originates and services finance receivables on used
cars sold at its used car stores and new car dealerships. The Company does not
intend to purchase receivables not originated by the Company.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information system allows the Company to manage
its operations uniformly and efficiently through "real time" information.
Utilizing its MIS, the Company is able to bar code inventory, track sales and
costs, and provide its stores access to inventory available at other Company
stores from one integrated platform. The Company also employs financial software
to facilitate the Company's underwriting and credit approval process, track
collections and monitor its loan portfolio. The Company has assimilated loan
tracking software utilized by the finance companies it acquired in connection
with acquisitions of self-financed used car dealerships. The Company has
installed financial software for its finance contracts that will integrate all
loan monitoring and servicing functions into one uniform system. The Company has
a recovery system in the event of a natural disaster (e.g., hurricanes,
tornadoes, fire, lightning) under which all systems can be rerouted to a remote
location and be fully operational within 24 hours. The Company has the ability
to customize and upgrade its software in-house with its own staff of MIS
personnel and to trouble-shoot any interruptions that may occur. The Company
foresees no material problems in becoming Year 2000 compliant. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company does not have any registered trademarks or service marks.
EMPLOYEES
At December 31, 1998, the Company employed 386 persons, of which 53 were
employed in the Company's executive and administrative offices, 273 were
employed in its Company dealership operations and 86 were employed in the
Company's credit and collection activities. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
relations with its employees to be good.
DISCONTINUED OPERATIONS
In January 1999, management committed to a plan to sell the new car
dealerships in Stuart, Florida which had been acquired in August 1997, and to
sell Eckler's, the Corvette parts and accessories subsidiary acquired in January
1997. The rationale to sell these business segments was to raise capital to
focus on car operations in the self-financed, used car industry.
o CORVETTE PARTS AND ACCESSORIES
Eckler's is a manufacturer and supplier of aftermarket Corvette parts and
accessories. Eckler's generates revenues through catalog sales and, to a limited
extent, showroom sales. For the year ended December 31, 1998, Eckler's accounted
for approximately 13.5% of the Company's revenues. Eckler's has a Reproduction
and Service Part Tooling License Agreement with General Motors Corporation,
Service Parts Operations ("GM") (the "GM Agreement"). Under the GM Agreement,
Eckler's is licensed to manufacture, sell, distribute and market numerous parts
discontinued by GM which Eckler's may sell under the GM Restoration Parts
trademark for various Corvette model years. Eckler's and GM have agreed to enter
into a new GM Agreement with a term through December 31, 2003. Of Eckler's
approximately 95,000 customers, no single customer accounted for more than 5% of
its total revenues during 1998. At December 31, 1998, Eckler's employed 93
persons.
o NEW CAR DEALERSHIPS
The Company owns and operates two new car dealerships in Stuart, Florida, a
Nissan and a Volvo dealership. Stuart Nissan and Stuart Volvo sell new and used
cars at these locations and provide parts and services. These dealerships
accounted for 19.8% of the Company's revenues during the year ended December 31,
1998 and employed approximately 64 persons.
ITEM 2 -- 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. These facilities,
aside from the administration building, are used in Eckler's operations. 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 December 31, 1998 the Company leased 26 facilities, consisting of 24
used car stores and its main reconditioning facility in Lakeland, Florida. In
addition, as noted above, the Company owns the Melbourne, Florida used car
store. The lease on the Lakeland reconditioning facility has been renewed
through May 11, 1999 with additional renewal provisions of four one year terms.
The rent expense on the Company's facilities was approximately $2.7 million
for the twelve months ended December 31, 1998. See "Certain Relationships and
Related Transactions."
In addition, facilities are leased for the discontinued operations--the two
new car dealerships and Eckler's. The lease at the Volvo dealership expires in
2004, while the lease for the Nissan dealership expires in 2003. A
reconditioning center is leased as part of the Stuart Nissan new car dealership.
ITEM 3 -- LEGAL PROCEEDINGS.
During March 1999, certain shareholders of the Company filed two putative
class action lawsuits against the Company and certain of the Company's current
and former officers and directors in the United States District Court for the
Middle District of Florida (collectively, the "Securities Actions"). The
Securities Actions purport to be brought by plaintiffs in their individual
capacity and on behalf of the class of persons who purchased or otherwise
acquired Company publicly traded securities between April 15, 1998 and February
26, 1999. These lawsuits were filed following the Company's announcement on
February 26, 1999 a preliminary determination had been reached that the net
income announced on February 10, 1999 for the fiscal year ended December 31,
1998 was likely overstated in a material, undetermined amount at that time. Each
of the complaints assert claims for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission as well as a claim for the violation of Section 20(a) of the Exchange
Act. The plaintiffs allege that the defendants prepared and issued deceptive and
materially false and misleading statements to the public which caused plaintiffs
to purchase Company securities at artificially inflated prices. The plaintiffs
seek unspecified damages. The Company intends to contest these claims
vigorously. The Company cannot predict the ultimate resolution of these actions
at this time, and there can be no assurance that the litigation will not have a
material adverse impact on our financial condition and results of operations.
The Company is involved in other 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.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
None.
ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT.
NAME AGE POSITION AND OFFICE
Robert J. Abrahams 72 Chairman of the Board
Gary R. Smith 46 President, Chief Executive Officer
Ronald W. Anderson 52 Executive Vice President, Chief Operating Officer
Joseph A. Alvarez 43 Executive Vice President and Chief Sales Officer
Robert J. Downing 41 Senior Vice President and Chief Legal Officer
Robert J. Abrahams has been Chairman of the Board 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 and Chief Executive Officer of the
Company since 1997. From 1990 until January 1997, Mr. Smith was the President,
Chief Executive Officer and owner of Florida Finance Group, Inc. Mr. Smith also
served, from 1981 until January 1997, 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.
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 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, 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 through 1998, he was the principal shareholder
in Downing & Associates, a law firm with offices in Miami, Florida and
previously in Albuquerque and Santa Fe, New Mexico. Mr. Downing also acted as of
counsel to Cohen & Cohen, P.A., a Santa Fe, New Mexico law firm, from 1994 until
1997 and as of counsel to Montgomery & Andrews, P.A., an Albuquerque, New Mexico
law firm, from 1991 until 1992. Mr. Downing holds a Juris Doctor degree from
Columbia University School of Law and a Masters degree in Business
Administration from Columbia University Graduate School of Business.
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, $.01 par value per share ("Common Stock"), and
Redeemable Common Stock Purchase Warrants ("Public Warrants") are listed on the
Nasdaq SmallCap Market. There were approximately 1,431 beneficial holders of the
Common Stock and 246 beneficial holders of the Public Warrants. The following
table sets forth the high and low closing sale prices of Common Stock and the
Public Warrants, as reported by the Nasdaq SmallCap Market, for the periods
indicated.
1997 HIGH LOW
---- ---- ---
COMMON STOCK
First Quarter 6.13 4.63
Second Quarter 6.75 4.00
Third Quarter 7.00 4.19
Fourth Quarter 6.25 3.50
PUBLIC WARRANTS
First Quarter 1.31 .75
Second Quarter 1.88 .75
Third Quarter 1.50 .75
Fourth Quarter 1.16 .50
1998
----
COMMON STOCK
First Quarter 9.13 3.88
Second Quarter 11.94 7.63
Third Quarter 11.63 4.38
Fourth Quarter 4.56 2.88
PUBLIC WARRANTS
First Quarter .72 .31
Second Quarter 1.50 .59
Third Quarter 1.50 .31
Fourth Quarter .44 .16
1999
----
COMMON STOCK
First Quarter 5.25 1.56
PUBLIC WARRANTS
First Quarter .38 .13
Continued inclusion of the Common Stock and Public Warrants on the Nasdaq
SmallCap Market requires the Company to maintain certain criteria such as market
value, public float, capital and surplus. As of October 26, 1998, the Company
was notified by Nasdaq that it was not in compliance with certain listing
criteria which became applicable to SmallCap Market listed companies on that
date. Nasdaq notified the Company that the Common Stock and Public Warrants
would be scheduled for delisting unless the Company earned at least $500,000 net
income for the fiscal year ended December 31, 1998. The Company did not earn
that amount, but because it intends to sell both the two new car dealerships and
its Eckler's business segments and take other actions, believes it will meet the
$2 million net tangible asset requirement upon completing sales on or before
December 31, 1999.
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 in the foreseeable future and intends to retain earnings for the
future operation and expansion of the business. Any determination to declare or
pay dividends in the future will be at the discretion of the Company's Board of
Directors and will depend on the Company's results of operations, financial
condition, any contractual restrictions, considerations imposed by applicable
law and other factors deemed relevant by the Board of Directors. The Company's
current obligations to Finova Capital Corporation, Huntington National Bank, and
Sirrom Capital Corporation restrict the Company's ability to declare or pay
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
Described below are all sales of securities by the Company during the
fourth 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 offerees as "accredited investors."
As of December 1, 1998, the Company issued options to purchase shares of
Common Stock to Gary R. Smith and Robert J. Abrahams in accordance with the 1998
Executive Incentive Compensation Plan. Messrs. Smith and Abrahams each received
stock options to purchase 50,000 shares at an exercise price of $3.38 per share.
ITEM 6 -- SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL INFORMATION.
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 ("Predecessor Acquisition").
Accordingly, the financial statements of the Company for the periods from June
21, 1996 to January 28, 1997 are those of SCHI, which was incorporated on June
21, 1996 and was a development stage company prior to the Predecessor
Acquisition. Eckler's changed its name to Smart Choice Automotive Group, Inc.
after the Predecessor Acquisition. From the date of the Predecessor Acquisition
through February 14, 1997, the Company acquired three automotive sales and
finance companies. Together with Eckler's, these companies are treated and
referred to as 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.
The selected combined consolidated financial data of the Predecessors as of
and for the fiscal years ended December 31, 1994, 1995 and 1996 were derived
from the audited combined financial statements of the four predecessors. The
selected consolidated financial data of the Company was derived from the audited
consolidated financial statements include herein. The selected consolidated
financial data are qualified by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and notes thereto of the Company and
the Predecessors included elsewhere in this report.
<PAGE>
<TABLE>
<CAPTION>
PREDECESSORS THE COMPANY
-------------------------------------------------- ---------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales at used car stores....................... $26,043 $27,521 $33,867 $35,279 $ 78,227
Income on finance receivables.................. 3,194 4,614 5,949 6,899 15,710
Income from insurance and training............ -- -- -- 1,178 1,448
-------- ------------ ------------- ------------- ------------
Total Revenues.................................. 29,237 32,135 39,816 43,356 95,385
Total costs of sales............................ 21,343 23,531 31,219 30,667 70,692
Selling, general and administrative expenses.... 5,328 6,725 7,075 17,599 22,739
Compensation expense related to employee
Stock options................................... -- -- -- 4,650 216
Restructuring charges........................... -- -- -- 2,118 --
--------- ------------ ------------- ------------- ------------
Income (loss) from operations................... 2,566 1,879 1,522 (11,678) 1,738
Interest expense................................ (1,003) (1,577) (2,070) (5,573) (8,752)
Other income (expense).......................... (8) (452) -- (5) 777
Failed offering costs........................... -- -- -- (1,063)
---------- ------------ ------------- ------------- ------------
Net income (loss) from continuing operations.... 1,555 (150) (548) (17,256) (7,300)
Income (loss) from discontinued operations...... (6) 16 (316) (1,393) 429
---------- ------------ ------------- ------------- ------------
Net income (loss)............................... 1,549 (134) (864) (18,649) (6,871)
Net income (loss) applicable to common stock.... 1,549 (134) (864) (18,982) (7,348)
Basic net Income (loss) per common share
from continuing operations..................... -- -- -- $ (3.90) $ (1.18)
Weighted average common shares
outstanding during the period................... -- -- -- 4,430 6,193
</TABLE>
<TABLE>
<CAPTION>
PREDECESSORS THE COMPANY
------------------------------------------------- -----------------------------
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands)
BALANCE SHEET DATA:
Finance receivables, net.................. $11,477 $ 16,399 $ 19,825 $ 33,227 $ 67,185
Inventories............................... 3,781 4,899 5,409 15,516 20,005
Total assets.............................. 21,851 28,569 32,555 89,105 123,592
Total debt................................ 14,563 19,760 23,723 69,654 101,656
Redeemable convertible preferred stock.... -- 477 -- 4,942 --
Total stockholders' equity................ 4,143 3,503 5,854 1,680 8,863
</TABLE>
<PAGE>
ITEM 7 --MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
THIS REPORT CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. 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, YEAR 2000 COMPLIANCE AS WELL AS ASSUMPTIONS RELATING TO THESE
MATTERS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN, CONTEMPLATED
BY OR UNDERLYING ANY SUCH FORWARD-LOOKING STATEMENTS. STATEMENTS CONTAINED IN
THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," IN "RISK FACTORS," IN THE NOTES TO THE FINANCIAL STATEMENTS AND
ELSEWHERE IN THIS 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 in this report.
OVERVIEW
Smart Choice Automotive Group, Inc. currently operates 17 locations in
Florida that sell used cars under the "First Choice" brand name. 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 FFG,
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 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 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 acquirer for accounting
purposes). Accordingly, the financial statements of the Company are those of
SCHI, which was incorporated on June 21, 1996, and was a development stage
company prior to the Predecessor Acquisition.
PREDECESSOR COMPANIES AND LACK OF COMPARABILITY. At approximately the same
time as the Predecessor Acquisition, the Company acquired various automobile
sales and finance companies. The Company accounted for the acquisition of each
of these companies as a purchase, recording the assets purchased and liabilities
assumed at their estimated fair values and including their results of operations
in the consolidated financial statements of the Company from their respective
dates of acquisition. For accounting purposes, the following companies are
treated as Predecessors for purposes of financial statement presentation:
Eckler's, FFG and affiliates, 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 acquirer for accounting purposes, the Company's fiscal year end became
December 31, which was the fiscal year end of SCHI.
RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS
SEGMENT INFORMATION
The Company is comprised of two segments: used car stores and financing of
used car sales. The Company's results of operations are most meaningful when
analyzed and discussed by segment. The Company also has two other segments which
have been discontinued. These segments are discussed separately below under
"Discontinued Operations."
USED CAR STORES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- ----------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Sales at used car stores............... $ 78,227 100.0% $ 35,279 100.0%
Cost of sales at used car stores(a)... 62,668 80.1% 27,951 79.2%
-------- ------ -------- -----
Gross profit........................... 15,559 19.9% 7,328 20.8%
Operating expenses................... 11,148 14.3% 7,256 20.6%
--------- ------ -------- -----
Operating income................... $ 4,411 5.6% $ 72 .2%
========= ==== ========= =====
</TABLE>
(a) Includes intercompany costs from FFG of $5,434 and $2,311 for the
years ended 1998 and 1997, respectively.
Sales at used car stores increased to $78.2 million for the year ended
December 31, 1998 compared to $35.3 million for the same period in 1997. The
increase in sales reflect the sale of 8,338 cars at the 26 used car stores that
were open during the 1998 period as compared to the sale of 3,750 cars at the 20
used car stores that were open during the 1997 period.
Gross profit increased to $15.6 million during the year ended December 31,
1998 from $7.3 million during the year ended December 31, 1997. Gross profit as
a percentage of sales decreased slightly to 19.9% for the year ended December
31, 1998 as compared to 20.8% for the year ended December 31, 1997.
FINANCING OF USED CAR SALES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income on finance receivables(a)........... $ 21,144 100.0% $ 9,209 100.0%
Provisions for credit losses............... (13,371) (63.3)% (4,942) (53.7)%
Operating expense.......................... (2,840) (13.4)% (1,238) (13.4)%
------- ------ ------- -------
Operating income......................... 4,933 23.3% 3,029 32.9%
Interest expense on finance receivables.... (5,629) (26.6)% (2,902) (31.5)%
------- ------- ------- -------
Net income (loss)........................ (696) (3.3)% $ 127 1.4%
======= ======= ======== ======
</TABLE>
(a) Includes intercompany revenues from First Choice Auto Finance,
Inc. ("FCAF") of $5,434 and $2,311 for the years ended 1998 and
1997, respectively.
Income on finance receivables increased to $21.1 million for the year ended
December 31, 1998 from $9.2 million for the same period in 1997. The increase
reflects the increase in the average net finance receivables outstanding to
$63.7 million for the year ended December 31, 1998 from $25.1 million for the
same period of 1997. This increase results from the corresponding increase in
the financing sales of used cars during the year ended December 31, 1998.
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 year ended December 31, 1998 was $13.4 million compared to $4.9
million for the same period in 1997. The increase reflects the significantly
higher amount of finance receivables outstanding.
Interest expense on finance receivables increased to $5.6 million for the
year ended December 31, 1998 from $2.9 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 weighted average interest rate on the
borrowed funds to 10.97% for the year ended December 31, 1998 from 11.45% for
the year ended December 31, 1997.
The net loss for the year ended December 31, 1998 was approximately
$696,000 compared to a net income of $127,000 for the same period in 1997 as a
result of a higher provision for credit losses as a percentage of income on
finance receivables.
COMPARISON OF THE THREE YEARS ENDED DECEMBER 31, 1998
The following comparison of the results of operations for the three years
ended December 31, 1998 compares the results of the Company for the year ended
December 31, 1998 and 1997 to the results of the Predecessors on a combined
basis for the year ended December 31, 1996.
REVENUES. The Company's revenues for the fiscal year ended December 31,
1998 were $95.4 million representing a 120% increase over the revenues of $43.4
million in 1997. The increase was primarily the result of growth of the
Company's receivables portfolio. That growth related to an increase of $42.9
million in the Company's used car sales as a result of the opening of additional
used car stores and increasing the number of car sales per store.
The Company's revenues for the fiscal year ended December 31, 1997 were
$43.4 million representing a 9.0% increase over the revenues of $39.8 million in
1996 for the Predecessors. The increase was primarily the result of the
acquisition of a used car and financing company in 1997 after the Predecessor
Acquisition.
COSTS AND EXPENSES. The Company's cost of sales of used cars sold was $57.2
million for 1998 compared to $25.6 million for the same period during 1997,
representing an increase of $31.6 million, or 123%. The gross profit margins
decreased slightly to 26.8% for the year ended December 31, 1998, compared to
the gross profit margin of 27.3% for the same period in 1997.
The Company's cost of sales of used cars sold was $25.6 million for 1997
compared to $28.3 million during the same period during 1996 for the combined
operations of the Predecessor Acquisition, representing a decrease of $2.7
million, or 9.5%. The gross profit margin increased to 27.3% for the year ended
December 31, 1997, compared to the gross profit margin of 16.3% for the same
period in 1996.
The Company's provision for credit losses was 17.1% of sales of used cars
in 1998 as compared to the provision for credit losses over sales of used cars
in 1997 of 14%. The higher provision primarily reflects the significantly
greater number of finance receivable contracts originated during 1998.
The Company's selling, general and administrative expenses (including
depreciation and amortization) were $22.7 million for 1998, compared to the
selling, general and administrative expenses of $17.6 million for 1997. The
higher amount reflects expenses related to an increase in the number of used car
stores and continued development of the Company's corporate infrastructure.
Selling, general and administrative expenses as a percentage of gross revenues
for 1998 was 23.8% for the year ended December 31, 1998 compared to 40.6% for
the year ended December 31, 1977.
The Company incurred $1 million in charges related to a withdrawn public
offering during 1998 which were not comparable to any charges incurred by the
Company in 1997 and which the Company believes will not recur in the future.
INTEREST EXPENSE AND OTHER INCOME. The Company's interest expense totaled
$8.8 million for 1998, compared to $5.6 million for 1997, an increase of $3.2
million or 57%. This resulted primarily from higher outstanding indebtedness
needed to finance higher levels of finance receivables and inventory as the
Company expanded its operations.
NET LOSS. The Company's net loss for the year ended December 31, 1998 of
$6.9 million was less than the loss of $18.6 million for the year ended December
31, 1997. The net loss for 1997 included one-time charges of $4.6 million for
compensation expense related to employees' stock options and $2.1 million for
restructuring charges.
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 17.3% of outstanding principal balances as of
December 31, 1997 to 15.5% as of December 31, 1998. The following table reflects
activity in the allowance for the year ended December 31, 1998 and 1997.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(Dollars in thousands)
Balance, beginning of period........... $ 6,857 $ --
Balance at dates of acquisitions....... -- 5,628
Provision for credit losses............ 13,371 4,941
Net charge offs........................ (8,070) (3,712)
--------- ---------
Balance, end of period................. $ 12,158 $ 6,857
Allowance as a percentage of
finance receivables.................... 15.5% 17.3%
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 180 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 of repossessions. The following
table sets forth information regarding charge off activity for the Company's
finance receivables for the year ended December 31, 1998 and 1997.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(Dollars in thousands)
Principal Balances:
Collateral repossessed................... $ 17,345 $ 7,920
Other.................................... -- 37
--------- ----------
Total principal balances................. 17,345 7,957
Recoveries, net.......................... (9,275) (4,245)
---------- -----------
Net charge offs.......................... 8,070 3,712
Average principal balances............... $ 63,118 $ 29,037
Net charge offs as a percentage of
Average principal balance outstanding.... 12.8% 12.8%
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 resulted from (i) a
continuing improvement in the application of its underwriting standards and
servicing and collection efforts, (ii) maximization of recoveries on
repossessions and (iii) reduced defaults due to improved operating performance
of used cars sold.
DELINQUENCIES. Analysis of delinquency trends is also considered in
evaluating the adequacy of the allowance. The following table reflects the
principal balance of delinquent finance receivables as a percentage of total
outstanding principal balances of the Company's finance receivables portfolio as
of December 31, 1998 and 1997.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(Dollars in thousands)
Aging Percentages:
Principal balances current.............. 93.6% 91.1%
Principal balances 31 days to 60 days... 2.9 4.0
Principal balances over 60 days......... 3.5 4.9
Total over 31 days...................... 6.4 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 $4.3
million, $(5.9) million and ($97,000) for the years ended December 31, 1998,
1997 and 1996, respectively. Net cash provided from operating activities for the
year ended December 31, 1998 primarily reflected operations adjusted for the
non-cash charges for depreciation, amortization and provision of credit losses,
impairment of goodwill and write down of inventories. The Company used
approximately $5.6 million to expand inventory during 1998. 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 first year start-up expenses by the Company.
Cash used in investing activities was approximately $45.9 million, $26.6
million and $.7 million during the years ended December 31, 1998, 1997, and
1996, respectively. The 1998 amount primarily reflects increases in finance
receivables. 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 $41.8 million,
$33.6 million and $.8 million during the years ended December 31, 1998, 1997,
and 1996, respectively. In 1998, the Company increased its line of credit
borrowings by $32.3 million. The Company raised approximately $5.9 million in
1998 and $4.6 million in 1997 through the sale of preferred stock. During 1997,
the Company increased its line of credit and floorplan borrowings by
approximately $20.6 million. Notes payable increased by $14.2 million during
1997 with the borrowings primarily used for acquisitions and expansion of
operations.
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, was increased to a maximum commitment of $75.0
million, effective May 11, 1998, and was increased again to a maximum $100
million effective November 9, 1998. Under the Finova Revolving Facility, the
Company may borrow the lesser of $100,000 or up to 55% of the gross balance of
eligible finance contracts. The Finova Revolving Facility expires in December
31, 2001, 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 December 31, 1998 and 1997, the principal amount outstanding
under the Finova Revolving Facility was $63.7 million and $31.2 million,
respectively. The Finova Revolving Facility bears interest at the prime rate
plus 2.5% (10.25% as of December 31, 1998). As part of the Finova Revolving
Facility, the Company may finance up to $10 million of its used car inventory
through Finova Capital Corporation. The Company was in violation of certain loan
covenants at December 31, 1998. Finova Capital Corporation granted a waiver of
the violation for December 31, 1998.
During 1998 and 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 $3.2 million at December 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 (9.25% as of
December 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 is in
the process of liquidating the Manheim Facility. As of April 1999, the
outstanding balance was approximately $160,000.
In March 1997 and May 1997, Sirrom Capital Corporation ("Sirrom") loaned
the Company a total of $7.5 million. The Company issued Sirrom a $3.5 million
convertible note that bears interest at 12.0% and is convertible into Common
Stock at a price per of $7.40 per share until its maturity date of June 30,
2000, and a $4.0 million convertible note that bears interest at 12.0% and is
convertible at a price of $15.00 per share until its maturity date of May 12,
2002, subject to adjustment. The Company was in violation of certain loan
covenants at December 31, 1998. Sirrom Capital Corporation granted a waiver of
the violation for December 31, 1998.
In September 1997, the Company completed the private placement of
convertible notes in the aggregate amount of $1,050,000. The notes bear interest
at the rate of 8.0% per annum and, since December 14, 1997, have been
convertible into Common Stock of the Company at a conversion price of 66 2/3% of
the average closing bid price for the five trading days immediately preceding
the effective date of conversion. All of the debt has been converted into Common
Stock as of December 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 December 1997, Raytheon Aircraft Credit Corporation extended credit to
the Company in the amount of $2.2 million to finance the purchase of equipment.
In December 1998, the Company entered into a sale leaseback agreement (the
"Lease") with GE Capital Corporation in the aggregate amount of $2,160,000 in
respect of such equipment. The basic term of the Lease is 120 months at an
interest rate per annum of 9.72% for the first 36 months and an interest rate
per annum of 6.79% for the remainder of the Lease's term.
In October 1997 and January and May 1998, the Company borrowed a total of
$8.5 million from Stephens Inc. ("Stephens"). The Stephens' 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. When the planned sale of
Eckler's occurs, the Notes will have to be satisfied or renegotiated with
different terms. Stephens has extended the maturities on each of the three notes
to April 30, 2000.
In September and December 1997, the Company completed an offering to
institutional investors of 400 units of Series A Redeemable Convertible
Preferred Stock and warrants at a price of $10,000 per unit. Proceeds from the
offering, net of offerings costs, were approximately $3.9 million. Each unit
consisted of one share of Series A Redeemable Convertible Preferred Stock and a
five year warrant to acquire 150 shares of Common Stock for each preferred share
purchased. The exercise prices of the warrants are $16.20 for 45,000 shares and
$10.46 for 15,000 shares. As of December 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. On March 29, 1999, Bankers elected to
convert the $1.0 million, plus accrued interest and received 531,732 shares of
Company 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
$10.00 per share. After November 5, 1999, the Company may, at its option, redeem
the Series B Convertible Preferred Stock for $10,000 per share. In connection
with the issuance of the Series B Convertible Preferred Stock, the Company
agreed to certain limitations on the issuance of additional shares of preferred
stock by the Company.
In June 1998, the Company sold to a private investment group 24.98 shares
of the Company's Series C Convertible Preferred Stock for $10,000 per share for
an aggregate of $249,800. The Series C Convertible Preferred Stock has an 11.0%
dividend per year and is convertible into Common Stock at a conversion rate of
$11.18 per share. After December 2, 1999, the Company may, at its option, redeem
the Series C Convertible Preferred Stock for $10,000 per share. In connection
with the issuance of the Series C Convertible Preferred Stock, the Company
agreed to certain limitations on the issuance of additional shares of preferred
stock by the Company.
In June 1998, the Company sold to a private investment group 350 shares of
the Company's Series D Convertible Preferred Stock for $10,000 per share for an
aggregate of $3.5 million. The Series D Convertible Preferred Stock has an 11.0%
dividend per year for five years and thereafter has a 20% dividend per year and
is convertible into Common Stock at a conversion rate of $12.00 per share. After
June 22, 2001, the Company may, at its option, redeem the Series D Convertible
Preferred Stock for $10,000 per share. In connection with the issuance of the
Series D Convertible Preferred Stock, the Company agreed to certain limitations
on the issuance of additional shares of preferred stock by the Company.
In January 1999, pursuant to a Subordinated Loan Agreement dated as of
January 31, 1999 ("Subordinated Loan Agreement") by and between the Company and
High Capital Funding, LLC ("High Cap"), the Company borrowed $2 million. The
Company issued 1999 Series A Subordinated Notes ("High Cap Notes") to High Cap
and other purchasers in connection with the Subordinated Loan Agreement. The
Notes, which mature on January 31, 2000, bear interest on the unpaid principal
balance at the rate of 15% per annum, payable monthly in arrears. The interest
rate increases to 18% per annum on May 1, 1999 and to 22% per annum on October
1, 1999. The High Cap Notes may be prepaid to any time without permission or
penalty.
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.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would increase the interest expense
related to the Company's existing debt. The Company cannot seek to limit this
risk by increasing interest rates earned on its finance contracts since the
interest charged is at or near the maximum permitted under Florida law. To date,
inflation has not had a significant impact on the Company's operations.
YEAR 2000
At the beginning of the third quarter of 1996, the Company's primary
operating system and its peripherals were made Year 2000 compliant. All new
computer systems and software installations, including the computer systems of
the Company's subsidiaries, 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 amounts incurred to date and expected to be incurred in the
future, in connection with compliance with Year 2000 are not believed by the
Company to be material. The Company is taking into account whether third parties
with which the Company has material relationships are Year 2000 compliant. In
addition, the Company will develop contingency strategies, as appropriate, in
the event the Company encounters a Year 2000 compliance problem in its own, or
in a third party vendor's, software applications.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133) which becomes effective for us July 1,
1999. The Company believes the adoption of SFAS No. 133 will not have a material
impact on the Consolidated Financial Statements.
In June 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-Up
Activities," SOP 98-5 requires costs of start-up activities and organizational
costs, as defined, to be expensed as incurred. The Company does not expect
adoption of the new SOP on January 1, 1999 to materially affect its consolidated
financial statements.
DISCONTINUED OPERATIONS
In January 1999, management made a decision to discontinue the operations
of the new car dealerships segment and the parts and accessories segment in
order to focus on the Company's continuing operations. These two segments are
expected to be sold at a net gain during 1999.
Revenues of the discontinued operations were $46.5 million and $25.2
million in 1998 and 1997, respectively. The Company's discontinued operations
achieved an income of $0.4 million for the year ending December 31, 1998, which
is an increase over a net loss of $1.4 million for the same period in 1996. The
improved performance is primarily due to a significant increase in profitability
for the Corvette parts and accessories segment. The profitability increase is
due to an increasing volume of sales for the year ended December 31, 1998
compared to the same period in 1997.
RISK FACTORS
There are various risks in purchasing the Company's securities or investing
in its business, including those described below.
LIMITED COMBINED OPERATING HISTORY
The Company has only a limited history of operations as a combined entity
upon which to base its results of operations or prospects. The Company should be
evaluated in light of the risks, expenses and difficulties frequently
encountered by similar companies in early stages of operations. Further, the
historical financial results of the companies considered by the Company to be
its Predecessors are presented on a different basis than the historical
financial results of the Company and, therefore, may not be indicative of the
Company's future operating results or financial condition.
HISTORY OF LOSSES
The Company incurred a net loss of approximately $6.9 million for 1998,
reflecting the costs of a withdrawn public offering, and the increase in
provision for credit losses associated with the significant increase in the
amount of finance receivables, and the interest expense incurred on a highly
leveraged capital structure. The Company incurred a net loss of approximately
$18.6 million for 1997, reflecting the costs of integration of the acquired
companies, development of the Company's infrastructure, compensation expense
related to stock options, restructuring charges related to the settlement of
various employment and consulting agreements and costs related to acquisitions
that were not completed. Although the Company has experienced growth in revenues
since January 1997 subsequent to the Predecessor Acquisition, there can be no
assurance that growth and future profitability can be achieved. The Company's
ability to maintain profitability and positive cash flow while implementing its
business strategy will depend on a number of factors, including its ability to:
(i) assimilate and manage past and future expansion, (ii) expand revenue
generating operations while not proportionately increasing its administrative
overhead, (iii) originate finance contracts with an acceptable level of credit
risk, (iv) obtain sufficient financing with acceptable terms to fund expansion,
(v) adapt to the increasingly competitive market in which it operates, (vi)
obtain and purchase adequate supplies of cars, and (vii) collect its finance
receivables. There can be no assurance that the Company will be successful in
maintaining or increasing revenues, earnings or positive cash flows in the
future. Any such failure could have a material adverse effect on the Company's
financial condition, results of operations or cash flows. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ABILITY TO MANAGE GROWTH; RISKS ASSOCIATED WITH EXPANSION AND CHANGES IN
BUSINESS
The Company's future growth will depend in large part on its ability to
open additional used car stores, manage expansion, control costs in its
operations, integrate acquisitions into existing operations, underwrite and
collect finance receivables without significant losses, develop the human
resources necessary to support rapid growth and establish and maintain the
infrastructure necessary to execute its business plan. While the Company is
presently focusing on internal expansion, a significant portion of the Company's
growth historically has resulted from acquisitions of existing used car
dealerships and related businesses, including used car finance companies that
lend primarily to credit-impaired customers. The Company will continue to
consider selected acquisitions under appropriate circumstances. See
"Business--Company Growth."
The Company's growth has placed significant demands on all aspects of the
Company's business, including its management, administrative, operational,
financial reporting and other systems personnel. Additional growth by the
Company may further strain the Company's systems and resources, and there can be
no assurance that the Company's systems, resources, procedures and controls will
be adequate to support further expansion of the Company's operations. As growth
continues, the Company will review its management infrastructure, systems and
financial controls, and any acquired used car dealership operations and make
adjustments or complete reorganizations as appropriate. Additionally, from time
to time, the Company may consider the disposition of certain non-core operating
units. Unforeseen capital and operating expenses, liabilities, barriers to entry
in the markets in which the Company has little or no prior experience, or other
difficulties, complications and delays frequently encountered in connection with
the expansion and integration of operations could inhibit the Company's growth.
In order for the Company to recognize the full benefits of a significant
acquisition, it will need to integrate the acquisition with its administrative,
finance, sales, personnel and marketing organizations.
The Company's ability to continue to grow its used car business will also
be dependent upon, among other things, the Company's ability to attract and
retain competent management, the availability of capital to fund expansion and
the availability of suitable store locations and, to a lesser extent, suitable
acquisition candidates. The Company intends to finance expansion through a
combination of its available cash resources, borrowings from financial
institutions and, in appropriate circumstances, the issuance of equity and/or
debt securities. Expansion will have a significant effect on the Company's
financial position and could cause substantial fluctuations in the Company's
quarterly and yearly operating results. Acquisitions are also likely to result
in the recording of significant goodwill and intangible assets on the Company's
financial statements, the amortization of which would reduce reported earnings
in subsequent years. In addition, the issuance of additional shares of Common
Stock and other securities in connection with acquisitions may substantially
dilute the interests of existing shareholders.
The Company's finance receivables portfolio has grown rapidly since the
Company's inception and such growth is expected to continue. This growth creates
the risk that the Company's provision for credit losses will not be sufficient
to cover actual losses on the portfolio. The Company's failure to maintain a
sufficient provision for credit losses could have a material adverse effect on
the Company's financial condition, results of operations or cash flows. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Credit Losses."
The diversion of management's attention required by the integration of
multiple stores, as well as any other difficulties which may be encountered in
the transition and integration process, could have a material adverse effect on
the financial condition, results of operations or cash flows of the Company.
There can be no assurance that the Company will successfully open additional
used car stores, or identify suitable acquisition candidates or that
acquisitions will be consummated on acceptable terms or that the Company will be
able to integrate successfully the expanded operations or manage the related
increase in personnel.
HIGH RISK OF DEFAULTS ON RECEIVABLES PORTFOLIO
The self-financed used car business sells to customers that typically have
limited credit histories, low incomes and/or past credit problems (generally
referred to herein as "credit-impaired customers"). Such customers cannot,
generally, obtain a loan from a local financial institution or from the credit
facilities of a major automobile manufacturer (e.g., General Motors Acceptance
Corporation or Ford Motor Credit Company). One industry report estimated that
between 5% and 40% of any group of loans made to credit-impaired customers will
default during the life of that particular group. Consequently, the Company's
finance contracts have a higher probability of delinquency and default and, as a
result, greater servicing costs than loans made to consumers who pose lesser
credit risks. The Company's profitability depends in part upon its ability to
properly evaluate the creditworthiness of credit-impaired customers and
efficiently service its loans. There can be no assurance that satisfactory
credit performance of the Company's customers will be maintained or that the
rate of future defaults and/or losses will be consistent with prior experience
or at levels that will allow the Company to achieve profitability. Most
borrowers' ability to remit payments in accordance with the terms of their loans
is dependent on their continued employment. An economic downturn resulting in
increased unemployment could cause a significant rise in delinquencies and
defaults, which could have a material adverse effect on the Company's financial
condition, results of operations or cash flows. Moreover, increases in the
delinquency and/or loss rates in the Company's loan portfolio could adversely
affect the Company's ability to obtain or maintain its financing sources. See
"Business--Financing Customers with Impaired Credit" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Credit
Losses."
UNSEASONED LOAN PORTFOLIO
Due to the growth of the Company's loan portfolio during the last eighteen
months, a significant portion of the loan portfolio is unseasoned. Accordingly,
delinquency and loss rates in the portfolio will most likely fluctuate
unpredictably. Cars that serve as collateral will, in most cases, be worth less
than the unamortized principal and interest charges. The resale prices of used
cars will affect the amount realized following repossession of collateral.
Further, the Company may also incur significant legal costs prior to
repossessing a financed vehicle or reselling such vehicle after repossession.
The Company does not intend to purchase insurance to protect against loan
defaults or make up the difference between the principal amount remaining on a
defaulted loan and the net proceeds realized on the resale of a repossessed
vehicle that secured such defaulted loan. There is no assurance that loans made
by the Company to its customers will ultimately be repaid, which would result in
the Company having to write off such loans and would materially and adversely
affect the Company's financial condition, results of operations or cash flows.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Credit Losses."
HIGH LEVERAGE
The Company is highly leveraged. On December 31, 1998, the Company's total
indebtedness (including discontinued operations) was approximately $113.2
million, or 91.6% 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. The Company has a material amount of debt
maturing in the year 2000 and refinancing said debt could result in unfavorable
terms to the Company. 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 any expansion.
If adequate funds are not available on terms acceptable to the Company, 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.
The operation of used car dealerships and finance companies is capital
intensive. The Company requires capital to: (i) acquire and maintain inventories
of cars and parts, (ii) originate finance contracts, (iii) purchase and maintain
service equipment and (iv) maintain its facilities. The Company finances the
purchase of all of its used car inventory and leases most of the properties on
which it conducts business. Consequently, the Company incurs significant
operating, borrowing and fixed occupancy costs. Should the Company's expansion
plans require additional funding or should its capital requirements exceed
current estimates, the Company could be required to seek additional financing in
the future. There can be no assurance that the Company will be able to raise
such financing when needed or on acceptable terms. As a result, the Company may
be forced to reduce or delay additional expenditures or otherwise delay, curtail
or discontinue some or all of its operations. Further, if the Company is able to
access additional capital through borrowings, such debt will increase the
already substantial debt obligations of the Company, which could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The terms of the Company's financing transactions are affected by a number
of other factors which are beyond the control of the Company, including among
others, conditions in the securities and finance markets generally, prevailing
interest rates and prevailing economic conditions. If additional funds are
raised by issuing equity securities, dilution to the holders of Common Stock may
result.
HIGHLY COMPETITIVE MARKET
The market for financing credit-impaired customers is highly competitive.
The Company's competitors include local, regional and national automobile
dealers, used car finance companies and other sources of financing for
automobile purchases, many of which are larger and have greater financial and
marketing resources than the Company. Historically, commercial banks, savings
and loan associations, credit unions, captive finance subsidiaries of automobile
manufacturers and other consumer lenders, many of which have significantly
greater resources than the Company, have not competed for financing for
credit-impaired used car buyers. To the extent that such lenders expand their
activities in the credit-impaired market, the Company's financial condition,
results of operations or cash flows could be materially and adversely affected.
During the past two years, several companies, including large, well-capitalized
public companies, have devoted considerable resources to acquisitions in the
Company's market for credit-impaired customers.
The Company also competes with franchised dealers, individual used car
dealerships, as well as individual buyers and sellers of used cars. Industry
wide gross profit margins on sales of cars generally have been declining, and
the used car market faces increasing competition from non-traditional sources
such as independent leasing companies, brokers, buying services, Internet
companies and used car superstores. Some of the recent market entrants may be
capable of operating on smaller gross margins than the Company. There can be no
assurance that the Company will be able to maintain or increase its size
relative to that of its competitors or to increase profit margins in the face of
increased competition. The Company expects that there will be increasing
competition in the acquisition of other used car dealerships as industry
participants become larger. See "Business--Self-Financed Used Car Stores."
SENSITIVITY TO INTEREST RATES
A substantial portion of the Company's finance contract income results from
the difference between the rate of interest it pays on the funds it borrows and
the rate of interest it earns pursuant to the finance contracts in its
portfolio. While the finance contracts that the Company services bear interest
at fixed rates, the Company's indebtedness generally bears interest at floating
rates. In the event the Company's interest expense increases, the Company would
seek to compensate for such increases by raising the interest rates on its new
finance contracts or by raising the retail sales prices of its cars. To the
extent the Company is unable to do so because of legal limitations or otherwise,
the net margins on the Company's finance contracts would decrease, thereby
adversely affecting the Company's financial condition, results of operations or
cash flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Regulation and Litigation" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have varied in the past and may vary
significantly in the future. Factors causing fluctuations in operating results
include, among other things, seasonality in car purchases, changes in pricing
policies by the Company and its competitors, changes in operating expenses,
changes in the Company's strategy, personnel changes, the failure, delay and
expense in making the Company's software, systems and networks Year 2000
compliant, the effect of acquisitions and general economic factors. The Company
has limited or no control over many of these factors. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indicative of future
performance. Due to all of these factors, it is likely that in some future
period the Company's results of operations will fall below market expectations.
This would likely negatively impact the Company's financial condition, results
of operations or cash flows and cause the price of the Common Stock to decline.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
BUSINESS CYCLES
Sales of motor vehicles historically have been cyclical, fluctuating with
general economic cycles. During economic downturns, the automotive retailing
industry tends to experience the same periods of decline and recession as those
experienced in the general economy. The Company believes that the industry is
influenced by general economic conditions and particularly by consumer
confidence, employment rates, the level of personal discretionary spending,
interest rates and credit availability. There can be no assurance that the
industry will not experience sustained periods of declines in car sales in the
future. Any such declines would have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
POTENTIAL ADVERSE EFFECT OF ECONOMIC SLOWDOWN
The Company's business is directly related to sales of used cars, which are
affected by employment rates, prevailing interest rates and other general
economic conditions. A future economic slowdown or recession could lead to
increased delinquencies, repossessions and credit losses that could hinder the
Company's business and planned expansion. Due to the Company's focus on
credit-impaired customers, its actual rate of delinquencies, repossessions and
credit losses on finance contracts could be higher under adverse conditions than
those experienced in the automobile finance industry in general. Economic
changes are uncertain and weakness in the economy could have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
GEOGRAPHIC CONCENTRATION
The Company's car sales and financing operations are presently concentrated
in the central and southeast regions of Florida. An economic slowdown or
recession, a change in the regulatory or legal environment, natural disasters or
other adverse conditions in Florida could have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
SOURCING USED CARS
The Company acquires a significant amount of its used car inventory through
auctions and, to a lesser extent, from other sources, including wholesalers and
trade-ins at the Company's franchised new car stores. Some of the auctions for
cars are open only to the franchised dealers of specific manufacturers.
Accordingly, there can be no assurance that sufficient inventory will continue
to be available to the Company or will be available at comparable costs,
particularly if changes occur in the type of used cars that are sold in auctions
closed to the Company or if competitive pressures increase as a result of new
entrants into the Company's market. Any reduction in available inventory or
increase in inventory wholesale costs that cannot be reflected in retail market
prices could have a material adverse effect on the Company's financial
condition, results of operations or cash flows. See "Business--Self-Financed
Used Car Stores."
RISKS RELATED TO GOODWILL
As of December 31, 1998, the Company's total assets were approximately
$123.5 million, of which approximately $23.8 million, or approximately 19.3% 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 $331,000. 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
A total of 1,555,650 shares of Common Stock have been reserved for issuance
under the Company's employee compensation plans and certain outstanding option
agreements. The Company also had outstanding, as of December 31, 1998,
convertible notes, public and non-public warrants, convertible preferred stock,
and certain other rights to acquire a total of 2,379,183 shares of Common Stock,
of which all but approximately 680,012 shares of Common Stock have been
registered for resale on registration statements on Form S-3, including 600,000
shares underlying publicly traded warrants. The beneficial owners of 660,012
shares of Common Stock, issuable upon conversion of currently outstanding
convertible preferred stock and debt have registration rights that allow them to
cause the Company to register their shares for sale under certain circumstances.
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..
REGULATION AND LITIGATION
The Company's business is subject to extensive federal, state and local
regulation and supervision. Such regulation, among other things, requires the
Company to limit interest rates, fees and other charges related to finance
contracts, make specified disclosures to consumers and adhere to strict limits
in the repossession and selling of collateral. Such regulations exist primarily
for the benefit of consumers, rather than for the protection of dealers or
finance companies and could limit the Company's discretion in operating its
business. Noncompliance with any applicable statutes or regulations could result
in the suspension or revocation of any license at issue, as well as the
imposition of civil fines and criminal penalties.
Currently, the Company's used car sales activities are conducted and its
finance contracts have been originated in Florida, where existing statutes limit
the interest rate which a lender may charge on consumer finance contracts.
Before the Company expands its operations to states other than Florida, the
Company must consider the impact of usury laws in those states. To the extent
that the interest rates and fees charged by the Company are limited by the
application of maximum allowable interest rates and charges that in the future
may be lower than those currently charged by the Company, the Company's
financial condition, results of operations or cash flows may be adversely
affected. See "Business--Regulation, Supervision and Licensing."
In addition, due to the consumer-oriented nature of the automobile finance
industry, used car dealerships are frequently named as defendants in litigation
involving alleged violations of federal and state consumer lending or other laws
and regulations. There can be no assurance that the Company will not become
subject to such litigation in the future. A significant judgment against the
Company could have a material adverse effect on the Company's financial
condition, results of operations or cash flows. See "Legal Proceedings."
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.
ENVIRONMENTAL RISKS
The Company is subject to federal, state and local laws, ordinances and
regulations which establish various health and environmental quality standards,
and liability related thereto, and provide penalties for violations of those
standards. Under certain laws and regulations, a current or previous owner or
operator of real property may be liable for the cost of removal and remediation
of hazardous or toxic substances or wastes on, under, in or emanating from such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances or wastes. Certain laws, ordinances and regulations may impose
liability on an owner or operator of real property where on-site contamination
discharges into waters of the state, including groundwater. Under certain other
laws, generators of hazardous or toxic substances or wastes that send such
substances or wastes to disposal, recycling or treatment facilities may be
liable for remediation of contamination at such facilities. Other laws,
ordinances and regulations govern the generation, handling, storage,
transportation and disposal of hazardous and toxic substances or wastes, the
operation and removal of underground storage tanks, the discharge of pollutants
into surface waters and sewers, emissions of certain potentially harmful
substances into the air and employee health and safety. The business operations
of the Company are subject to such laws, ordinances and regulations including
the use, handling and contracting for recycling or disposal of hazardous or
toxic substances or wastes, including environmentally sensitive materials such
as motor oil, transmission fluid, antifreeze, freon, waste paint and lacquer
thinner, batteries, solvent, lubricants, degreasing agents, gasoline and diesel
fuels. The Company is subject to other laws, ordinances and regulations as a
result of the past or present existence of underground storage tanks at many of
the Company's properties.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, are amended periodically to require compliance with
new or more stringent standards as of future dates. The Company cannot predict
what other environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist in the
future. Compliance with new or more stringent laws or regulations, stricter
interpretation of existing laws, or the future discovery of environmental
conditions may require expenditures by the Company, some of which may be
material.
NO ANTICIPATED DIVIDENDS
The Company has not paid dividends on its Common Stock since its initial
public offering of Common Stock in 1995, and does not intend to pay any
dividends on its Common Stock for the foreseeable future. It is anticipated that
any earnings which the Company may realize in the foreseeable future will be
retained to finance the development and expansion of its business. In addition,
under certain loan covenants, the Company is prohibited from paying dividends
without the prior consent of the lender. Also, certain series of the Company's
preferred stock provide for cumulative dividends on such preferred stock and
prohibit the payment of dividends on the Common Stock if unpaid dividends are
outstanding on such preferred stock.
NO ASSURANCE OF CONTINUED MARKET FOR COMMON STOCK
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. Continued inclusion on the Nasdaq SmallCap Market requires the Company
to maintain certain criteria such as market value, public float, net tangible
asset value, capital and surplus. The Company is currently not in compliance
with the listing requirements of the Nasdaq SmallCap Market. In the past, the
Company has not met 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. However,
when the Company again did not comply with the listing requirements, Nasdaq
again commenced the delisting process. By letter dated October 26, 1998, Nasdaq
allowed the Company to continue its listing, provided that the Company earn at
least $500,000 net income for the fiscal year ended December 31, 1998. The
Company did not earn that amount, but because it intends to sell both the two
new car dealerships and its Eckler's business segments and take other actions,
believes it will meet the $2 million net tangible asset requirements upon
completing sales on or before December 31, 1999.
If the Company fails to comply with the applicable Nasdaq listing
requirements, it would lose Nasdaq listing and trading in the securities would
be conducted in the over-the-counter market known as the OTC Electronic Bulletin
Board, or the "pink sheets." In such event, purchasers of Common Stock may have
difficulty selling their shares because some brokerage firms will not effect
transactions in securities that are traded in the pink sheets. Further, if for
any reason the Company fails to maintain sufficient qualifications for continued
listing on the Nasdaq SmallCap Market and the market price of the Common Stock
declines to below $5.00 per share, purchasers of Common Stock may have
difficulty selling their shares should they desire to do so because of the penny
stock rules. The Securities and Exchange Commission has adopted regulations
which generally define a penny stock to be any equity security that has a market
price of less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. The shares of Common Stock are currently
exempt from the definition of penny stock because they are quoted on the Nasdaq
SmallCap Market. If they are later removed from listing by the Nasdaq SmallCap
Market, and are traded at a price below $5.00 per share, the shares of Common
Stock may become subject to the penny stock rules that impose burdensome sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and institutional accredited investors, and,
thus, the rules will restrict the ability of broker-dealers to sell the
Company's Common Stock. Some brokerage firms will not effect transactions in
securities if such securities trade below $5.00 per share, and it is unlikely
that any bank or financial institution will accept such securities as
collateral, which could have an adverse effect on the development or maintenance
of a market for such securities.
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 "Executive
Officers of the Registrant."
POTENTIAL INFLUENCE OF EXISTING SHAREHOLDERS
As of December 31, 1998, the Company's directors and executive officers,
their affiliates, and certain principal shareholders owned or had voting control
of approximately 38.4% of the issued and outstanding Common Stock of the
Company. Further, assuming exercise by all of the Company's directors and
executive officers of all of the outstanding options and warrants to purchase
Common Stock held by them, they would control, as of December 31, 1998
approximately 46.7% 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 other shareholders.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of Florida law and the Company's Articles of
Incorporation as amended or Bylaws as amended ("Articles/Bylaws") could,
together or separately, discourage potential acquisition proposals, delay or
prevent a change in control of the Company and limit the price that certain
investors might be willing to pay in the future for the Company's Common Stock.
The Company is subject to the "affiliated transactions" and "control share
acquisition" provisions of the Florida Business Corporation Act (the "FBCA").
Those provisions require, subject to certain exceptions, that an "affiliated
transaction" be approved by a majority of disinterested directors or by the
holders of two-thirds of the voting shares other than those beneficially owned
by an "interested shareholder." Voting rights must also be conferred on "control
shares" acquired in specified control share acquisitions, generally only to the
extent conferred by resolution approved by the shareholders, excluding holders
of shares defined as "interested shares." In addition, the Company's
Articles/Bylaws, among other things, provide for a classified Board of Directors
for the Company and provide that (i) any action required or permitted to be
taken by the shareholders of the Company may be effected only at an annual or
special meeting of shareholders and not by written consent of the shareholders;
(ii) any special meeting of the shareholders may be called only by the Chairman
of the Board, the President or the Chief Executive Officer, or upon the written
demand of the holders of not less than 25% of the votes entitled to be cast at a
special meeting; (iii) an advance notice procedure must be followed for
nomination of directors and for other shareholder proposals to be considered at
annual shareholders' meetings; and (iv) a director may be removed only for cause
upon approval of holders of not less than 662/3% of the Company's voting stock
as such term is used in the Articles/Bylaws. In addition, the Company is
authorized to issue up to 5.0 million shares of preferred stock, in one or more
series, having terms fixed by the Board of Directors without shareholder
approval, including voting, dividend or liquidation rights that could be greater
than or senior to the rights of holders of Common Stock. As of December 31,
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."
PENDING LITIGATION - PUTATIVE CLASS ACTION LAWSUIT
During March 1999, certain shareholders of the Company filed two putative
class action lawsuits against the Company and certain of the Company's current
and former officers and directors in the United States District Court for the
Middle District of Florida (collectively, the "Securities Actions"). The
Securities Actions purport to be brought by plaintiffs in their individual
capacity and on behalf of the class of persons who purchased or otherwise
acquired Company publicly traded securities between April 15, 1998 and February
26, 1999. These lawsuits were filed following the Company's announcement on
February 26, 1999 a preliminary determination had been reached that the net
income announced on February 10, 1999 for the fiscal year ended December 31,
1998 was likely overstated in a material, undetermined amount at that time. Each
of the complaints assert claims for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission as well as a claim for the violation of Section 20(a) of the Exchange
Act. The plaintiffs allege that the defendants prepared and issued deceptive and
materially false and misleading statements to the public which caused plaintiffs
to purchase Company securities at artificially inflated prices. The plaintiffs
seek unspecified damages. The Company intends to contest these claims
vigorously. The Company cannot predict the ultimate resolution of these actions
at this time, and there can be no assurance that the litigation will not have a
material adverse impact on our financial condition and results of operations.
ITEM 7A -- 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%. 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.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of Smart Choice Automotive Group, Inc. are set
forth in Appendix A hereto.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.
The information contemplated by this Item is incorporated by reference to
the Registrant's definitive proxy statement for its 1998 annual meeting of
shareholders.
ITEM 11 -- EXECUTIVE COMPENSATION.
The information contemplated by this Item is incorporated by reference to
the Registrant's definitive proxy statement for its 1998 annual meeting of
shareholders.
ITEM 12. -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contemplated by this Item is incorporated by reference to
the Registrant's definitive proxy statement for its 1998 annual meeting of
shareholders.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contemplated by this Item is incorporated by reference to
the Registrant's definitive proxy statement for its 1998 annual meeting of
shareholders.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets of Smart Choice Automotive Group,
Inc. and Subsidiaries at December 31, 1998 and 1997.
Consolidated Statements of Operations of Smart Choice Automotive
Group, Inc. and Subsidiaries for the years ended December 31,
1998 and 1997 and for the period from inception (June 21, 1996)
through December 31, 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998 and 1997 and for the period from
inception (June 21, 1996) through December 31, 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 and for the period from inception
(June 21, 1996) through December 31, 1996
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
(2) Financial statement schedules
Omitted because not applicable or because data is reflected in
the Notes to Financial Statements
(3) Exhibits
<PAGE>
EXHIBIT LIST HERE
<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 April 15, 1999.
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/ ROBERT J. ABRAHAMS Director April __, 1999
---------------------
Robert J. Abrahams
/S/ GARY R. SMITH President, Chief Executive April __, 1999
- ----------------- Officer and a Director (Principal
Gary R. Smith Executive Officer)
/S/ JOHN HOLDEN, JR. Director April __, 1999
- --------------------
John Holden, Jr.
/S/ LEWIS H. BERMAN Director April __, 1999
- -------------------
Lewis H. Berman
/S/ CRAIG MACNAB Director April __, 1999
- ------------------
Craig Macnab
/S/ Richard M. Todd Chief Accounting Officer April __, 1999
- --------------------
Richard M. Todd
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
<S> <C> <C>
3.1 Amended and Restated Articles Exhibit 3.1 to Form SB-2 Registration Statement, filed on
of Incorporation of Smart September 1, 1995, File No. 33-96520-A.
Choice Automotive Group, Inc.
(the "Company")
3.1.1 Articles of Amendment to Exhibit 3.2 to Form 10-Q filed on May 20, 1997.
Articles of Incorporation of
the Company
3.2 Amended and Restated By-Laws of Exhibit 3.2 to Form SB-2 Registration Statement, filed on
the Company 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.
3.2.4 Fourth Articles of Amendment to Exhibit 3.2.4 to Form S-1 filed on July 17, 1998.
Articles of Incorporation
3.2.5 Fifth Articles of Amendment to Exhibit 3.2.5 to Form S-1 filed on July 17, 1998.
Articles of Incorporation
4.1 Specimen Common Stock Exhibit 4.1 to Form 8-A Registration Statement, filed on
Certificate 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 Registration
Company and American Stock Statement, filed on November 6, 1995, File No. 33-96520-A.
Transfer & Trust Company, as
Warrant 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.
10.1 Eckler Industries, Inc. Exhibit 10.4.1 to Form SB-2 Registration Statement, filed
Retirement and Savings Plan and on September 1, 1995, File No. 33-96520-A.
Trust Agreement, as Amended and
Restated on September 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 filed
Industries, Inc. Retirement and on September 1, 1995, File No. 33-96520-A.
Savings Plan Trust Agreement
Dated March 28, 1994.
10.3 Eckler Industries, Inc. Exhibit 10.6 to Form SB-2 Registration Statement, filed
Non-Qualified Stock Option Plan on September 1, 1995, File No. 33-96520-A.
10.4 Eckler Industries, Inc. 1995 Exhibit 10.7 to Form SB-2 Registration Statement, filed
Combined Qualified and on September 1, 1995, File No. 33-96520-A.
Option Plan
10.5 Registration Rights Agreement by Exhibit 10.15 to Amendment No. 1 to Form SB-2
and among the Company and each Registration Statement, filed on October 13, 1995,
of the Purchasers referred to File No. 33-96520-A.
in Schedule 1 thereto, dated
September 20, 1995.
10.6 Unit Purchase Option Agreement Exhibit 1.2 to Amendment No. 2 to Form SB-2 Registration
between the Company and Argent Statement, filed on November 6, 1995, File No. 33-96520-A.
Securities, Inc. and
Certificate dated November 15,
1995.
10.7 Loan Agreement between the Exhibit 10.19 to Post-Effective Amendment No. 2 to Form
Company and Barnett Bank, N.A. SB-2 Registration Statement, filed on November 14, 1996,
dated September 30, 1996 File No. 33-96520-A.
10.8 Mortgage and Security Agreement Exhibit 10.20 to Post-Effective Amendment No. 2 to Form
between the Company and Barnett SB-2 Registration Statement, filed on November 14, 1996,
Bank, N.A. dated September 30, File No. 33-96520-A.
1996.
10.9 Promissory Note in the amount Exhibit 10.21 to Post-Effective Amendment No. 2 to Form
of $2,400,000 from the Company SB-2 Registration Statement, filed on November 14, 1996,
in favor of Barnett Bank, N.A. File No. 33-96520-A.
dated September 30, 1996.
10.10 Assignment of Loan Documents Exhibit 10.10 to Form 10-K filed on April 14, 1998.
dated November 4, 1997 between
Barnett Bank, N.A. and The
Huntington National Bank
("Huntington")
10.11 Modification of Mortgage Deed Exhibit 10.11 to Form 10-K filed on April 14, 1998.
and 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 maker, Huntington, payee
10.13 Modification of Mortgage and Exhibit 10.13 to Form 10-K filed on April 14, 1998.
Mortgage Note and Extension
Agreement dated December 30,
1997 between the Company and
Huntington.
10.13.1 Modification of Mortgage Note Exhibit 10.13.1 to From S-1 filed on August 21, 1998,
and Extension Agreement dated file no. 333-59375
July 24, 1998 between the
Company and Huntington.
10.14 Merger Agreement between Exhibit 10.1 to Form 8-K, filed on February 12, 1997
Smart Choice Holdings, Inc.
("SCHI"), the Company, Thomas
E. Conlan and Gerald C. Parker
dated December 30, 1997.
10.15 First Amended and Restated Loan Exhibit 4.1 to Form 10-Q, filed on May 20, 1997.
and 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 Exhibit 10.1 to Form 8-K filed on March 5, 1998
Industries, 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.
10.17.3 Loan Extension and Modification Filed herewith.
Agreement between Registrant and
Stephens Inc. dated April 15, 1999.
10.17.4 Extension of Engagement Letter Filed herewith.
between Stephens Inc. and
Registrant dated March 1, 1999.
10.17.5 Warrant Agreement Issued to Filed herewith.
Stephens Inc.
10.18 Promissory note dated February Exhibit 10.9 to Form 8-K filed on March 5, 1998.
24, 1998, First Choice Auto
Finance, Inc., maker, and
Manheim Automotive Financial
Services, Inc., payee.
10.18.1 Guaranty dated March 21, 1997 Exhibit 10.10 to Form 8-K filed on March 5, 1998.
from the Company in favor of
Manheim Automotive Financial
Services, Inc.
10.19 Second Amended and Restated Loan Filed herewith
and Security Agreement dated
November 9, 1998 between FFG,
Liberty Finance Company, Smart
Choice Receivable Holdings
Company and First Choice Auto
Finance, Inc., SC Holdings, Inc.,
the Company and Finova Capital
Corporation.
10.19.1 Guaranty to Finova from the Exhibit 4.5 to form 10-Q, filed on May 20, 1997.
Company dated January 13, 1997.
10.19.2 Guaranty to Finova from SC Filed herewith.
Holdings, Inc. dated
November 9,1998.
10.19.3 Guaranty to Finova from the Filed herewith.
Company.
10.20 Eighth Amended and Restated Exhibit 10.20 to Form S-1 filed on August 21, 1998, File
Promissory Note dated March 27, No. 333-59375
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.
10.20.2 Tenth Amended and Restated Filed herewith.
Promissory Note dated November
9, 1998, between FFG, Liberty
Finance Company, Smart Choice
Receivable Holdings Company and
First Choice Auto Finance, Inc.
10.21 Fourth Amended and Restated Exhibit 10.21 to Form S-1 filed on August 21, 1998,
Schedule to Amended and Restated File No. 333-59375
Loan and Security Agreement,
FFG, borrower, Finova, lender,
dated March 27, 1998.
10.21.1 Fifth Amended and Restated Exhibit 10.2 to Form 10-Q filed on May 15, 1998.
Schedule to Amended and Restated
Loan and Security Agreement,
FFG, borrower, Finova, lender.
10.21.2 Schedule to Second Amended and Filed herewith
Restated Loan and Security
Agreement, dated November 9,
1998, FFG, Liberty Finance
Company and First Choice Auto
Finance, Inc., borrower.
10.21.3 Intercreditor Agreement between Filed herewith.
Manheim Automotive Financial
Services, Inc. and Finova
Capital Corporation.
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 Smith.
10.23 Promissory Note dated January Exhibit 10.2 to Form 10-Q filed on May 20, 1997.
28, 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 Gary R. Smith and Team
Automobile Sales and Finance, Exhibit 10.24 to Form S-1 filed on August 21, 1998, File
Inc. No. 333-59375
10.25 Promissory Note Modification Exhibit 10.25 to Form S-1 filed on August 21, 1998, File
Agreement, dated December 15, No. 333-59375
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 Smith.
10.27 Asset Purchase Agreement among Exhibit 10.17 to Form 8-K, filed on February 26, 1997.
FCAF, Palm Beach Finance and
Mortgage Company ("PBF"), Two
Two Five North Military Corp.
("225"), and David Bumgardner,
and Amendment thereto.
10.28 Loan and Security Agreement Exhibit 10.18 to Form 8-K, filed on February 26, 1997.
between 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, 1997.
FCAF to 225 and PBF.
10.30 9% Convertible Debenture of SCHI Exhibit 10.21 to Form 8-K, filed on February 26, 1997.
to PBF.
10.31 Lease between David Bumgardner Exhibit 10.22 to Form 8-K, filed on February 26, 1997.
as Lessor and FCAF, Lessee,
dated February 13, 1997.
10.32 Indemnification Agreement in Exhibit 10.23 to Form 8-K, filed on February 26, 1997.
favor of PBF and 225 by FCAF,
dated 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
Smith.
10.34 Executive Employment Agreement Exhibit 10.16 to Form 10-Q, filed May 20, 1997.
between the Company and Robert
Abrahams.
10.35 Executive Employment Agreement Exhibit 10.35 to Form 10-Q filed on August 21, 1998,
dated April 11, 1997 between the File No. 333-59375.
Company and Joseph Alvarez.
10.36 Executive Employment Agreement Exhibit 10.36 to Form S-1 filed on August 21, 1998,
between the Company and Ronald File No. 333-59375.
Anderson.
10.36.1 Executive Employment Agreement Exhibit 10.36.2 to Form S-1 filed on August 21, 1998,
dated February 9, 1998 between File No. 333-53975.
the Company and Robert J. Downing.
10.37 Non Qualified Stock Option Exhibit 10.37 to Form S-1 filed on August 21, 1998, File
Agreement dated March 5, 1997 No. 333-53975.
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 S-1 filed on August 21, 1998, File
Agreement dated March 5, 1997 No. 333-59375.
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 S-1 filed on August 21, 1998, File
March 24, 1997 between the No. 333-59375.
Company and Ronald Anderson.
10.41 Non-Qualified Stock Option Exhibit 10.41 to Form S-1 filed on August 21, 1998, File
Agreement dated April 17, 1997 No. 333-59375
between the Company and David
Bumgardner.
10.42 Non-Qualified Stock Option Exhibit 10.42 to Form S-1 filed on August 21, 1998, File
Agreement dated April 17, 1997 No. 333-59375
between the Company and Craig
Macnab.
10.43 Stock Option Agreement dated Exhibit 10.43 to Form S-1 filed on August 21, 1998, File
March 19, 1997 between the No. 333-59375
Company and Gerald Parker.
10.44 Non-Qualified Stock Option Exhibit 10.44 to Form S-1 filed on August 21, 1998, File
Agreement dated April 17, 1997 No. 333-59375
between the Company and Gerald
Parker.
10.45 Non-Qualified Stock Option Exhibit 10.45 to Form S-1 filed on August 21, 1998, File
Agreement dated April 17, 1997 No. 333-59375.
between the Company and Donald
Wojnowski.
10.46.1 Non-Qualified Stock Option Exhibit 10.46.1 to Form S-1 filed on August 21, 1998,
Agreement dated July 29, 1997 File No. 333-59375.
between the Company and
Joseph Alvarez.
10.46.2 Non-Qualified Stock Option Exhibit 10.46.2 to Form S-1 filed on August 21, 1998,
Agreement dated January 29, File No. 333-59375.
1997 between the Company and
Joseph Mohr.
10.46.3 Non-Qualified Stock Option Exhibit 10.46.3 to Form S-1 filed on August 21, 1998,
Agreement dated February 9, File No. 333-59375.
1998 between the Company and
Robert Downing.
10.46.4 Non-Qualified Stock Option Exhibit 10.46.4 to Form S-1 filed on August 21, 1998,
Agreement dated January 29, File No. 333-59375.
1997 between the Company and
Ron Anderson.
10.47 Convertible Senior Promissory Exhibit 10.18 to Form 10-Q, filed May 20, 1997.
Note dated March 13, 1997, the
Company, maker, Sirrom Capital
Corporation ("Sirrom"), payee.
10.48 Convertible Senior Promissory Exhibit 10.19 to Form 10-Q, filed May 20, 1997.
Note dated May 13, 1997, the
Company, maker, Sirrom, payee.
between the Company and Sirrom,
10.49 Amended and Restated Exhibit 10.20 to Form 10-Q, filed May 20, 1997.
Registration Rights Agreement
dated May 13, 1997.
10.50 Asset Purchase Agreement Exhibit 10.1 to Form 8-K filed on July 14, 1997.
dated as of 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 Exhibit 10.1 to Form 8-K filed on October 9, 1997.
by the Company to High Capital
Funding, LLC, and other
purchasers.
10.51.1 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.
10.52 Subordinated Loan Agreement Filed herewith.
dated January 30, 1999, between
High Capital Funding, LLC and
the Company.
10.52.1 Company Form of 1999 Series A Filed herewith.
Subordinated Note.
10.52.2 Guaranty Agreement between SC Filed herewith.
Holdings, Inc., First Choice
Auto Finance, Inc. and High
Capital Funding, LLC.
10.53 Promissory Note, principal Exhibit 10.3 to Form 8-K filed on October 9, 1997.
amount $1,500,000 by Eckler
Industries, Inc., maker,
Stephens Inc., payee.
10.54 Promissory Note, principal Exhibit 10.1 to Form 8-K filed on March 5, 1998.
amount $3,000,000, Eckler
Industries, Inc., maker,
Stephens Inc., payee.
10.55 Guaranty Agreement by the Exhibit 10.4 to Form 8-K filed on October 9, 1997.
Company to Stephens Inc.
10.56 Amendment to Guaranty Agreement Exhibit 10.4 to Form 8-K filed on March 5, 1998.
between the Company and Stephens
Inc.
10.57 Pledge and Security Agreement Exhibit 10.5 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 Exhibit 10.61 to Form S-1 filed on August 21, 1998, File
and Security Agreement dated No. 333-59375
July 21, 1997 between First
Choice Stuart 1, Inc. ("FCS1")
and Nissan Motor Acceptance
Corporation ("NMAC").
10.62 Addendum to Automotive Wholesale Exhibit 10.62 to Form S-1 filed on August 21, 1998, File
Financing and Security Agreement No. 333-59375
10.63 Second Addendum to Automotive Exhibit 10.63 to Form S-1 filed on August 21, 1998, File
Wholesale Financing and Security No. 333-59375
Agreement dated August 11, 1997
between NMAC and FCSI.
10.64 Dealer Capital Loan and Security Exhibit 10.64 to Form S-1 filed on August 21, 1998, File
Agreement dated October 12, No. 333-59375
1995 between B&B Florida
Enterprises, Inc. and NMAC.
10.65 Amendment to Dealer Capital Loan Exhibit 10.65 to Form S-1 filed on August 21, 1998, File
and Security Agreement dated No. 333-59375
September 1, 1997 between NMAC
and FCS1.
10.66 Dealer Equipment Loan and Exhibit 10.66 to Form S-1 filed on August 21, 1998, File
Security Agreement dated October No. 333-59375
12, 1995 between NMAC and B&B
Florida Enterprises, Inc.
10.67 Amendment to Dealer Equipment Exhibit 10.67 to Form S-1 filed on August 21, 1998, File
Loan and Security Agreement No. 333-59375
dated September 1, 1997 between
NMAC and FCSI.
Second Amendment to Dealer Exhibit 10.67 to Form S-1 filed on August 21, 1998, File
Equipment Loan and Security No. 333-59375.
10.67.1 Agreement.
10.67.2 Second Amendment to Dealer Filed herewith.
Capital Loan and Security
Agreement, dated July 29, 1998,
between Nissan Motor Acceptance
Corporation and First Choice
Stuart 1, Inc., dba Stuart
Nissan.
10.68 Nissan Dealer Term Sales and Exhibit 10.68 to Form S-1 filed on August 21, 1998, File
Service Agreement dated August No. 333-59375
29, 1997 between Nissan Motor
Corporation in U.S.A., the
Company, Smart Cars, Inc. and
FCS1.
Wholesale Financing and Security Exhibit 10.69 to Form S-1 filed on August 21, 1998, File
10.69 Agreement dated August 11, 1997 No. 333-59375
between First Choice Stuart 2,
Inc. ("FCS2") and Volvo Finance
North America, Inc.
10.70 Authorized Retailer Agreement Exhibit 10.70 to Form S-1 filed on August 21, 1998, File
between Volvo Cars of North No. 333-59375.
America, Inc. and FCS2.
10.71 Convertible Subordinated Exhibit 10.71 to Form S-1 filed on August 21, 1998, File
Debenture dated November 3, No. 333-59375.
1997, principal amount $750,000,
the Company, maker, Bankers Life
Insurance Company, payee.
10.72 Registration Rights Agreement Exhibit 10.72 to Form S-1 filed on August 21, 1998, File
dated November 3, 1997 between No. 333-59375
the Company and Bankers Life
Insurance Company.
10.73 Settlement Agreement and Release Exhibit 10.73 to Form S-1 filed on August 21, 1998, File
dated January 30, 1998 among the No. 333-59375.
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 S-1 filed on August 21, 1998, File
May 6, 1997 between FCS1 and No. 333-59375.
Thomas DeRita, Jr.
10.75 Promissory Note dated December Exhibit 1075 to Form S-1 filed on August 21, 1998, File
19, 1997, principal amount No. 333-59375.
$2,199,000, First Choice
Melbourne 1, Inc., maker and
Raytheon Aircraft Credit
Corporation, payee.
10.76 Guaranty Agreement by the Exhibit 10.76 to Form S-1 filed on August 21, 1998, File
Company to Raytheon Aircraft No. 333-59375.
Credit Corporation.
10.77 Security Agreement dated Exhibit 10.77 to Form S-1 filed on August 21, 1998, File
December 19, 1997 between First No. 333-59375
Choice Melbourne 1, Inc. and
Raytheon Aircraft Credit
Corporation.
10.78 Registration Rights Agreement Exhibit 10.8 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 Exhibit 10.9 to Form 8-K filed on March 5, 1998.
24, 1998, FCAF, maker, Manheim
Automotive Financial Services,
Inc., payee.
10.80 Guaranty dated March 21, 1997 Exhibit 10.10 to Form 8-K filed on March 5, 1998.
from the Company in favor of
Manheim Automotive Financial
Services, Inc.
10.81 Intentionally Omitted.
10.82 Manheim Automotive Financial Exhibit 10.82 to Form S-1 filed on August 21, 1998, File
Services, Inc. Security No. 333-59375
Agreement dated March 21, 1997
between FCAF and Manheim
Automotive Financial Services,
Inc.
10.83 Promissory Note dated June 17, Exhibit 10.83 to Form S-1 filed on August 21, 1998, File
1997, principal amount $825,000, No. 333-59375
FCAF, maker, Carl Schmidt
Enterprises, Inc., payee.
10.84 Real Estate Mortgage dated June Exhibit 10.84 to Form S-1 filed on August 21, 1998, File
17, 1997, FCAF, mortgagor, Carl No. 333-59375
Schmidt Enterprises, Inc.,
mortgagee.
10.85 Intentionally Omitted.
10.86 Intentionally Omitted.
10.87 Twenty-Fourth Amendment to GM Exhibit 10.87 to Form S-1 filed on August 21, 1998, File
Reproduction and Service Part No. 333-59375
Tooling License Agreement.
10.88 Twenty-Sixth Amendment to GM Exhibit 10.88 to Form S-1 filed on August 21, 1998
Reproduction and Service Part No. 333-59375
Tooling License Agreement.
10.89 Thirty-Fourth Amendment to GM Exhibit 10.89 to Form S-1 filed on August 21, 1998, File
Reproduction Service Part No. 333-593759375
Tooling License Agreement.
10.90 Lease between Florida Auto Exhibit 10.90 to Form S-1 filed on August 21, 1998, File
Auction of Orlando, Inc. and No. 333-59375
First Choice Auto Finance, Inc.
dated May 12, 1997, for
Reconditioning Facility.
10.91 Aircraft Lease between General Filed herewith.
Electric Capital Corporation
and the Company, dated
December 1998.
11.1 Statement re Computation of *
Earnings Per Share.
21.1 List of Subsidiaries. Filed herewith.
23.1 Consent of BDO Seidman, LLP. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
</TABLE>
* Information regarding the computation of earnings per share is set forth in
the Notes to Consolidated Financial Statements.
<PAGE>
APPENDIX "A"
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 - F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets F-3 - F-4
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7 - F-8
Summary of significant accounting policies F-9 - F-13
Notes to consolidated financial statements F-14 - F-46
F-1
<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, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smart Choice
Automotive Group, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ BDO Siedman, LLP
--------------------
BDO Seidman, LLP
Orlando, Florida
April 12, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 1,268,589 $ 1,066,949
Accounts receivable 1,206,710 1,773,124
Finance receivables:
Principal balances, net 79,342,835 40,084,412
Less allowance for credit losses (12,157,569 ) (6,857,265 )
- --------------------------------------------------------------------------------------------------------------------
Finance receivables, net 67,185,266 33,227,147
- --------------------------------------------------------------------------------------------------------------------
Inventories, at cost 20,004,600 15,516,084
Land held for resale - 1,050,000
Property and equipment, net 7,655,324 9,214,207
Notes receivable 425,000 46,280
Deferred financing costs, net of accumulated amortization of $343,063
and $207,508 226,152 426,823
Goodwill, net of accumulated amortization of $1,117,432 and $470,897 23,871,080 25,562,162
Prepaid expenses 1,263,858 1,008,229
Deposits and other assets 485,454 213,986
- --------------------------------------------------------------------------------------------------------------------
$ 123,592,033 $ 89,104,991
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank overdraft $ 3,112,930 $ -
Accounts payable 4,746,157 5,259,903
Accrued expenses 3,664,651 4,633,841
Line of credit, net of discount 63,612,433 31,229,600
Floor plans payable 8,701,968 8,287,092
Capital lease obligations 997,916 940,280
Notes payable 28,343,479 29,197,458
Other liabilities - 94,913
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 113,179,534 79,643,087
- ---------------------------------------------------------------------------------------------------------------------
CONTINGENT REDEMPTION VALUE OF COMMON STOCK PUT OPTIONS 1,539,148 2,840,000
REDEEMABLE CONVERTIBLE PREFERRED STOCK 10,000 4,941,834
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value, authorized 5,000,000 shares; issued
and outstanding 595 shares 5,891,410 -
Common stock $.01 par value, authorized 50,000,000 shares; issued
and outstanding 6,676,545 and 4,867,004 shares 66,765 48,670
Additional paid-in capital 30,054,488 21,317,126
Common stock notes receivable (115,200 ) -
Accumulated deficit (27,034,112 ) (19,685,726 )
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,863,351 1,680,070
- ---------------------------------------------------------------------------------------------------------------------
$ 123,592,033 $ 89,104,991
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 1997 1996 (a)
- ---------------------------------------------------------------------------------------------------------------------
REVENUES:
Sales at used car stores $ 78,227,027 $ 35,279,228 $ -
Income on finance receivables 15,709,539 6,898,694 -
Income from insurance and training 1,448,261 1,177,903 -
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 95,384,827 43,355,825 -
- ---------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Costs of sales at used car stores 57,233,088 25,639,741 -
Provision for credit losses 13,371,169 4,941,983 -
Costs of insurance and training 87,909 85,098 -
Selling, general and administrative expenses 22,739,174 17,599,003 670,616
Compensation expense related to employee and director stock options 215,875 4,649,702 -
Restructuring charges - 2,117,906 -
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 93,647,215 55,033,433 670,616
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,737,612 (11,677,608) (670,616 )
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (8,751,661 ) (5,573,307 ) (33,172 )
Other income (expense), net 777,574 (4,772 ) -
Abandoned public offering costs (1,062,962 ) - -
- ---------------------------------------------------------------------------------------------------------------------
(9,037,049 ) (5,578,079 ) (33,172 )
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (7,299,437 ) (17,255,687) (703,788 )
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 428,838 (1,392,918 ) -
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS (6,870,599) (18,648,605) (703,788 )
\PREFERRED STOCK DIVIDENDS (477,787) (333,333 ) -
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCK $ (7,348,386) $ (18,981,938) $ (703,788)
- ---------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ (1.26) $ (3.97) $ (.26 )
Discontinued operations .07 (.31) --
- ---------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.19) $ (4.28) $ (.26 )
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 6,193,472 4,430,367 2,744,216
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. (A) PERIOD FROM INCEPTION (JUNE 21,
1996) THROUGH DECEMBER 31, 1996.
F-6
<PAGE>
<TABLE>
<CAPTION>
SMART CHOICE AUTOMOTIVE GROUP, INC.
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
-------------------- -------------------
NUMBER NUMBER
OF OF PAR
SHARES VALUE SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, June 21, 1996 (date of inception) -- $ -- -- $ --
Issuance of founders' shares -- -- 2,744,216 27,442
Net loss -- -- -- --
- -------------------------------------------------------------------- ------ ---------- --------- --------
BALANCE, December 31, 1996 -- -- 2,744,216 27,442
Common stock issued for acquisitions -- -- 2,055,476 20,555
Contribution and retirement of common stock -- -- (165,714) (1,657)
Common stock options granted to employees and directors -- -- -- --
Common stock options and warrants granted to lenders and consultants -- -- -- --
Treasury stock purchased and retired -- -- (1,000 (10
Issuance of common stock for professional services -- -- 8,965 90
Issuance of common stock for conversion of debt -- -- 221,257 2,212
Exercise of common stock options and warrants, net -- -- 3,804 38
Convertible debt issued at a discount -- -- -- --
Common stock issued by stockholders for cancellation of common
stock options granted by the Company -- -- -- --
Contribution to capital -- -- -- --
Contingent liability of put options -- -- -- --
Preferred stock dividend -- -- -- --
Net loss -- -- -- --
- ---------------------------------------------------------------------- ------ ---------- --------- --------
BALANCE, December 31, 1997 -- -- 4,867,004 48,670
Issuance of common stock for conversion of debt -- -- 343,943 3,439
Issuance of common stock for conversion of preferred stock and accrued
dividends -- -- 1,398,962 13,990
Issuance of common stock for services -- -- 4,547 45
Exercise of common stock options, net -- -- 71,250 713
Purchase and retirement of treasury stock -- -- (9,161 (92
Modification to conversion price of debt -- -- -- --
Common stock warrants granted to preferred stockholders -- -- -- --
Common stock options granted to directors -- -- -- --
Decrease in contingent liability of put options -- -- -- --
Preferred stock dividends -- -- -- --
Issuance of preferred stock, net 595 5,891,410 -- --
Net loss -- -- -- --
- ------------------------------------------------------------------- ------ ---------- --------- --------
BALANCE, December 31, 1998 595 $5,891,410 6,676,545 $ 66,765
- -------------------------------------------------------------------- ------ ---------- --------- --------
</TABLE>
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK
PAID-IN NOTES ACCUMULATED
CAPITAL RECEIVABLE DEFICIT TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> C>
BALANCE, June 21, 1996 (date of inception) $ -- $ -- $ -- --
Issuance of founders' shares (21,474 -- -- 5,968
Net loss -- -- (703,788 (703,788)
- --------------------------------------------------------------------- ------------- --------- ---------- ------------
BALANCE, December 31, 1996 (21,474 -- (703,788 (697,820)
Common stock issued for acquisitions 14,393,325 -- -- 14,413,880
Contribution and retirement of common stock 1,657 -- -- --
Common stock options granted to employees and directors 3,809,826 -- -- 3,809,826
Common stock options and warrants granted to lenders and consultants 1,957,953 -- -- 1,957,953
Treasury stock purchased and retired (13,580 -- -- (13,590
Issuance of common stock for professional services 99,716 -- -- 99,806
Issuance of common stock for conversion of debt 1,767,844 -- -- 1,770,056
Exercise of common stock options and warrants, net 41,638 -- -- 41,676
Convertible debt issued at a discount 827,685 -- -- 827,685
Common stock issued by stockholders for cancellation of common
stock options granted by the Company 800,000 -- -- 800,000
Contribution to capital 159,203 -- -- 159,203
Contingent liability of put options (2,840,00) -- -- (2,840,000)
Preferred stock dividend 333,333 -- (333,333) --
Net loss -- -- (18,648,60) (18,648,60)
- --------------------------------------------------------------------- ------------- --------- ---------- ------------
BALANCE, December 31, 1997 21,317,126 -- (19,685,72) 1,680,070
Issuance of common stock for conversion of debt 1,494,277 -- -- 1,497,716
Issuance of common stock for conversion of preferred stock and accrued
dividends 5,042,066 -- -- 5,056,056
Issuance of common stock for services 36,331 -- -- 36,376
Exercise of common stock options, net 403,634 (115,200) -- 289,147
Purchase and retirement of treasury stock (93,808 -- -- (93,900
Modification to conversion price of debt 83,333 -- -- 83,333
Common stock warrants granted to preferred stockholders 254,802 -- -- 254,802
Common stock options granted to directors 215,875 -- -- 215,875
Decrease in contingent liability of put options 1,300,852 -- -- 1,300,852
Preferred stock dividends -- -- (477,787) (477,787)
Issuance of preferred stock, net -- -- -- 5,891,410
Net loss -- -- (6,870,599) (6,870,599)
- --------------------------------------------------------------------- ------------- --------- ---------- ------------
BALANCE, December 31, 1998 $ 30,054,488 $(115,200) $(27,034,11) $ 8,863,351
- --------------------------------------------------------------------- ------------- --------- ---------- ------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 1997 1996(a)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (6,870,599) $ (18,648,605) $(703,788)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation 725,107 445,311 2,132
Amortization 1,489,089 1,239,929 2,249
Gain on disposal of property and equipment 95,324 (8,166) -
Impairment of goodwill 1,045,847 - -
Write-down of inventory 1,094,096 - -
Provision for credit losses 13,371,169 4,941,983 -
Compensation expense related to stock options 215,875 4,649,702 -
Issuance of common stock for services and interest 36,376 374,806 4,968
Stock options and warrants issued to consultants, lenders and others 254,802 1,296,863 -
Modification to conversion price of debt 83,333 - -
Cash provided by (used for), net of effect of acquisitions:
Accounts receivable 172,514 (662,488) (25,000 )
Inventories (5,582,612) (5,969,719) -
Prepaid expenses (255,629) 679,663 -
Accounts payable (513,746) 2,668,636 438,890
Accrued expenses and other liabilities (1,064,103) 3,048,563 183,314
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,296,843 (5,943,522) (97,235 )
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in finance receivables (47,329,288) (13,600,550) -
Cash for acquisitions, net of cash acquired - (7,927,844 ) -
Advances to acquired companies prior to acquisition - (4,230,761 ) -
Purchase of property and equipment (1,148,386 ) (1,356,644 ) (24,586 )
Increase in notes receivable (425,000 ) - (400,000)
Repayments of notes receivable 46,280 530,420 -
Proceeds from disposal of property and equipment 3,253,354 24,425 -
Other (293,572 ) (21,981 ) (244,101)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (45,896,612) (26,582,935) (668,687)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 5,891,410 4,554,812 387,022
Proceeds from sale of common stock - - 1,000
Proceeds from exercise of common stock options and warrants 289,147 1,800 -
Purchase of treasury stock - (13,590 ) -
Increase (decrease) in bank overdraft 3,112,930 (82,884 ) 82,884
Proceeds from line of credit borrowings 32,300,000 16,462,090 -
Proceeds from floor plan notes payable 414,876 4,201,467 -
Proceeds from notes payable 7,096,690 14,163,892 322,000
Repayment of notes payable (6,647,539 ) (5,271,154 ) -
Proceeds from capital lease obligations - 251,722 -
Repayments of capital lease obligations (258,880 ) (67,402 ) -
Payments of dividends (353,566 ) - -
Deferred financing costs (43,659 ) (607,347 ) (26,984 )
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 41,801,409 33,593,406 765,922
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 201,640 1,066,949 -
CASH AND CASH EQUIVALENTS, beginning of year 1,066,949 - -
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,268,589 $ 1,066,949 $ -
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS. (A) PERIOD FROM INCEPTION (JUNE
21, 1996) THROUGH DECEMBER 31, 1996.
F-9
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
UMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Smart
Choice Automotive Group, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
The Company provides sales finance services in connection with the
sale of used cars to individuals residing primarily in Central and
South Florida.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal
government.
REVENUE RECOGNITION
Income on finance receivables is recognized using the interest method.
Direct loan origination costs are deferred and charged against finance
income over the life of the related installment sales contract as an
adjustment of yield.
Revenue from the sale of cars is recognized upon delivery, when the
sales contract is signed and the agreed-upon down payment has been
received.
Parts and accessories sales are recognized upon shipment of products
to customers.
FINANCE RECEIVABLES
The Company originates installment sales contracts from its
Company dealerships. Finance receivables consist of contractually
scheduled payments from installment sales contracts net of
unearned finance charges, direct loan origination costs and an
allowance for credit losses. The Company follows the provisions
of Statement of Financial Accounting Standards No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of
Leases." Unearned finance charges represent the balance of
finance income (interest) remaining from the capitalization of
the total interest to be earned over the original term of the
related installment sales contract. Direct loan origination costs
represent the unamortized balance of costs incurred in the
origination of contracts at the Company's dealerships.
ALLOWANCE FOR
CREDIT LOSSES
The allowance for uncollectible finance receivables is maintained
at a level which, in management's judgment, is adequate to absorb
potential losses inherent in the loan portfolio. The amount of
the allowance is based on management's evaluation of the
collectibility of the loan portfolio, which all originated in the
State of Florida, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, collateral values and economic conditions.
Because of uncertainties associated with regional economic
conditions, collateral values and future cash flows on impaired
loans, it is reasonably possible that management's estimate of
credit losses inherent in the loan portfolio and the related
allowance may change materially in the near term. However, the
amount of 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.
GOODWILL
Goodwill represents acquisition costs in excess of the fair value
of net tangible assets of businesses purchased. These costs are
being amortized over 40 years on a straight-line basis. Goodwill
is evaluated for impairment when events or changes in
circumstances indicate that the carrying amounts of the assets
may not be recoverable. The Company uses an estimate of the
related undiscounted operating income over the remaining life of
goodwill in measuring whether it is recoverable. During the year
ended December 31, 1998, the Company recorded a total write-down
of goodwill of $1,045,847 from an asset sale and an impairment
charge.
DEFERRED FINANCING COSTS
Deferred financing costs include costs related to obtaining
debt financing and are being amortized over the term of the
debt.
INCOME TAXES
The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities.
Measurement of deferred income tax is based on enacted tax
rates and laws that will be in effect when the differences
are expected to reverse, with the measurement of deferred
income tax assets being reduced by available tax benefits
not expected to be realized.
IMPAIRMENT OF LONG-LIVED ASSETS
Assets are evaluated for impairment when events change or
changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable. When any such
impairment exists, the related assets will be written down
to fair value.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LOSS PER COMMON SHARE
Loss per common share is based upon the weighted average
number of common shares outstanding during each period.
Potential common shares for 1998, 1997 and 1996 have not
been included since their effect would be antidilutive.
Potential common shares as of December 31, 1998 include
1,895,375 stock options, warrants exercisable for 919,070
shares, 1,117,135 shares underlying the convertible debt and
536,745 shares underlying the convertible preferred stock.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year
financial statements to confirm with the current year
presentation.
RECENT ACCOUNTING
PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 requires companies to
recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Historically, the Company has not
entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard on July 1, 1999
to affect its consolidated financial statements.
In June 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities and organizational costs, as defined, to
be expensed as incurred. The Company does not expect
adoption of the new SOP on January 1, 1999 to materially
affect its consolidated financial statements.
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Acquisitions
Smart Choice Automotive Group, Inc. (the "Company"),
formerly named "Eckler Industries, Inc.," operates new car
dealerships and used car stores in Florida and underwrites,
finances, and services retail installment contracts
generated from the sale of used cars by its dealerships. The
Company also operates an insurance division as well as
Eckler's, a supplier of Corvette parts and accessories.
On January 28, 1997, pursuant to an Agreement and Plan of
Merger dated December 30, 1996 (the "Agreement"), Eckler
Industries, Inc.("EII") acquired all of the issued and
outstanding shares of common stock of Smart Choice Holdings,
Inc.("SCHI") in exchange for 1,463,969.5 shares of EII Class
A and 788,162 shares of EII Class B, common stock. Under the
terms of the Agreement, the shareholders of SCHI obtained
approximately 64% of the voting rights of EII. Although EII
was the parent of SCHI following the transaction, the
transaction was accounted for as a purchase of EII by SCHI
(a reverse acquisition in which SCHI is considered the
acquirer for accounting purposes), since the shareholders of
SCHI obtained a majority of the voting rights in EII as a
result of the transaction. Accordingly, the financial
statements of the Company for the periods prior to January
28, 1997 are those of SCHI. The purchase price for EII was
computed by valuing the outstanding shares of common stock
of EII (the equivalent of 1,378,750 shares) at $6.75 or
$9,306,563 and acquisition costs of $100,119.
SCHI was incorporated on June 21, 1996 and was a
development-stage corporation prior to January 28, 1997. On
August 16, 1996, SCHI acquired the stock of First Choice
Auto Finance, Inc. ("FCAF"). On January 28, 1997, in
addition to the acquisition of EII, SCHI acquired the stock
of Florida Finance Group, Inc. ("FFG"), Dealer Insurance
Services, Inc. ("DIS") and Dealer Development Services, Inc.
("DDS"). FFG underwrites, finances and services automobile
retail installment contracts and was based in St.
Petersburg, Florida prior to moving to the Company
headquarters in Titusville, Florida. FCAF was incorporated
on March 22, 1994 and had no significant operations or
assets until it acquired the assets of Suncoast Auto
Brokers, Inc. ("SAB"), and Suncoast Auto Brokers
Enterprises, Inc. ("SABE") on January 28, 1997. FCAF, based
at the Company headquarters in Titusville, Florida, now
operates the three used vehicle lots in St. Petersburg and
Tampa, previously operated by SAB and SABE. DIS was based in
Tampa, Florida and provided insurance services for
automobile dealers. DDS was based in Tampa and provided
consulting services and training programs to automobile
dealers. During 1998, DDS had no operations, and the related
goodwill of $794,852 was recorded as an impairment charge.
In September 1998, the net assets of DIS were sold back to
the original seller for $425,000 in the form of a note
receivable from the buyer. A portion of the DIS goodwill of
$250,995 was written off in connection with the sale of the
net assets and a net gain of $201,814 was recorded. The DIS
operations began focusing on providing credit life, warranty
protection and auto insurance to the Company's used car
customers. The purchase price of FFG was $1,181,008 notes
due to the seller, 142,857 shares of common stock valued at
$6.75 per share ($964,285) and acquisition costs of $40,643.
The purchase price of DDS and DIS was $781,000 notes due to
the sellers and acquisition costs of $24,561.
On February 12, 1997, the Company acquired the stock of
Liberty Finance Company ("Liberty"). On the same date, FCAF
acquired the stock of Wholesale Acquisitions, Inc. ("WA"),
and Team Automobile Sales and Finance, Inc. ("Team"). FFG
services the receivables purchased from Liberty, and FCAF
operates the five used vehicle lots previously operated by
WA and Team in Orlando, Florida. The outstanding capital
stock of Liberty and affiliates was acquired for $1,500,000
notes due to the seller, the equivalent of 176,078 shares of
common stock valued at $6.75 per share ($1,188,527) and
$109,249 in acquisition costs.
On February 14, 1997, FCAF acquired the assets of Palm Beach
Finance and Mortgage Company ("PBF") and Two Two Five North
Military Corp. d/b/a Miracle Mile Motors ("MMM"). FFG
services the receivables purchased from PBF, and FCAF
operates the used vehicle lot previously operated by MMM
located in West Palm Beach, Florida. The net assets of PBF
and MMM were acquired for $3,050,000 cash, $1,473,175 notes
due to the seller, 142,857 shares of common stock valued at
$6.75 per share ($964,285) and $53,299 in acquisition costs.
On June 27, 1997, the Company acquired the assets of Strata
Holdings, Inc. ("SHI") and Ready Finance, Inc. ("RFI"). FCAF
operates the three used vehicle lots previously operated by
SHI in West Palm Beach, Florida and FFG services the finance
receivables purchased from RFI. The net assets of SHI and
RFI were acquired for $5,000,000 cash, $4,880,089 notes due
to the seller and $27,271 in acquisition costs.
On June 30, 1997, the Company acquired the assets of Roman
Fedo, Inc. ("FEDO") and Fedo Finance, Inc. ("FFI"). FCAF
operates the used vehicle lot previously operated by FEDO in
West Palm Beach, Florida, and FFG services the finance
receivables purchased from FFI. The assets of FEDO were
acquired for $268,000 cash, 112,500 shares of common stock
valued at $9.00 per share ($1,012,500) and $8,741 in
acquisition costs.
On August 21, 1997, the Company acquired the assets of Jack
Winters Enterprises, Inc. ("Winters"). These assets
consisted of a retail automobile dealership located in
Stuart, Florida for Volvo automobiles and other consumer
vehicles. The business is being operated by First Choice
Stuart 2, Inc., a 100%-owned subsidiary of the Company and
is doing business as Motorcars of Stuart. The purchase price
of Winters was $442,500 cash, $1,200,000 notes due the
seller, 9,161 shares of common stock valued at $10.25 per
share ($93,900) and acquisition costs of $49,540.
On August 29, 1997, the Company acquired the stock of B&B
Enterprises Inc. ("B&B"). B&B operates a retail automobile
dealership located in Stuart, Florida for Nissan automobiles
and other consumer vehicles. The business is being operated
by First Choice Stuart 1, Inc., a 100%- owned subsidiary of
the Company and is doing business as Stuart Nissan. The
purchase price of B&B was 43,273 shares of common stock
valued at $12.625 per share ($546,322) and acquisition costs
of $55,385.
The acquisitions described above have been accounted for
using the purchase method of accounting, and accordingly,
the purchase prices have been allocated to the assets
purchased and the liabilities assumed based upon the fair
values at the dates of acquisition. The excess of the
purchase prices over the fair values of the net assets
acquired was approximately $26,000,000 and has been recorded
as goodwill, which is being amortized on a straight-line
basis over 40 years.
The operating results of the significant acquired businesses
have been included in the consolidated statement of
operations from the dates of acquisition. The following pro
forma information has been prepared assuming certain of the
acquisitions above, which were deemed to be significant
acquisitions, had taken place at the beginning of the
respective periods. The pro forma information includes
adjustments for interest expense that would have been
incurred to finance the purchases, additional depreciation
based on the fair value of property acquired and the
amortization of intangibles arising from the transactions.
The pro forma financial information includes the activities
of ORGANIZATION discontinued operations (see Note 19) and is
not necessarily indicative of the AND results of operations
as they would have been had the transactions been 1.
ACQUISITIONS effected on the assumed dates.
UNAUDITED
-------------------------------
YEAR ENDED DECEMBER 31, 1997 1996
------------------------------------------------------------------------
Total revenues $ 93,247,492 $ 90,158,113
Net loss applicable to common stock (19,884,913 ) (3,803,046 )
Basic loss per common share (4.32 ) (1.34 )
------------------------------------------------------------------------
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,
1998 and 1997:
1998 1997
----------------------------------------------------------------------------
Contractually scheduled payments $ 113,651,628 $ 55,107,232
Less: unearned finance charges (35,127,485 ) (15,510,342 )
----------------------------------------------------------------------------
Principal balances 78,524,143 39,596,890
Add: loan origination costs 818,692 487,522
----------------------------------------------------------------------------
Principal balances, net 79,342,835 40,084,412
Less: allowance for credit losses (12,157,569 ) (6,857,265 )
----------------------------------------------------------------------------
Finance receivables, net $ 67,185,266 $ 33,227,147
----------------------------------------------------------------------------
Finance receivables consist of sales of used cars under installment sale
contracts with maturities that generally do not exceed 48 months. The
receivables bear interest at rates ranging from 25.0% to 29.9% and are
collateralized by the vehicles sold. The Company holds title to the
vehicles until full contract payment is made. Finance receivables are
pledged as collateral under a line of credit agreement (see Note 5).
Changes in the allowance for credit losses are as follows:
YEAR ENDED DECEMBER 31, 1998 1997
---------------------------------------------------------------------------
Balance at beginning of year $ 6,857,265 $ -
Balance at dates of acquisitions - 5,627,937
Loans charged off, net of recoveries (8,070,865 ) (3,712,655 )
Provision for credit losses 13,371,169 4,941,983
---------------------------------------------------------------------------
Balance at end of year $ 12,157,569 $ 6,857,265
---------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED
DECEMBER 31, USEFUL LIFE 1998 1997
------------------------------------------------------------------------------
Land $ 1,177,091 $ 1,177,091
Buildings and improvements 10-40 years 4,421,271 4,263,930
Leasehold improvements 7-39 years 1,043,221 708,009
Machinery and equipment 3-7 years 946,796 909,197
Molds 5-10 years 408,712 310,305
Office equipment and furniture 3-8 years 4,239,758 3,542,413
Transportation equipment 3-10 years 134,946 2,482,521
Signs 7 years 251,201 152,234
------------------------------------------------------------------------------
12,622,996 13,545,700
Less accumulated depreciation 4,967,672 4,331,493
------------------------------------------------------------------------------
$ 7,655,324 $ 9,214,207
------------------------------------------------------------------------------
Property and equipment is pledged as collateral under a line of credit
agreement and various notes payable (see Notes 5 and 6).
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, 1998 1997
----------------------------------------------------------------------------
Accrued compensation $ 1,157,793 $ 855,806
Accrued interest 829,114 411,913
Accrued professional fees 337,984 897,837
Accrued restructuring charges 415,412 1,101,266
Accrued taxes and other 924,348 1,367,019
----------------------------------------------------------------------------
$ 3,664,651 $ 4,633,841
----------------------------------------------------------------------------
The Company has a revolving line of credit with a lender which allows the
Company to borrow the lesser of $100,000,000 or 55% of certain eligible
accounts receivable at prime plus 2.5%. Interest is payable monthly with
all of the outstanding principal due December 2001. The line of credit is
collateralized by substantially all the assets of Florida Finance Group,
Inc. and is guaranteed by Smart Choice Holdings, Inc.; Smart Choice
Automotive Group, Inc.; and First Choice Auto Finance, Inc. The balance at
December 31, 1998 and 1997 under this line of credit was $63,700,000 and
$31,400,000, respectively, and represents the maximum amount available
under the line of credit at these dates. Unamortized debt discount was
$87,567 and $170,400 at December 31, 1998 and 1997, respectively. The line
of credit agreement contains various financial and operating covenants. As
of December 31, 1998, the Company was in violation of the net income
requirement. The lender waived compliance with this covenant through
January 1, 2000.
5. LINE OF CREDIT
The following summarizes certain information about the borrowings
under the line of credit:
1998 1997
-------------------------------------------------------------------------------
Maximum amount outstanding at any month
end $ 65,941,239 $ 31,681,590
Average amount outstanding during the
period 49,591,667 21,921,484
Weighted average interest rate during the
period 10.97% 11.45%
- ------------------------------------------------------------------------------
Interest rates ranged from 10.25% to 11.50% and 11.25% to 11.50%
and interest expense was $5,373,239 and $2,235,954 for the years
ended December 31, 1998 and 1997, respectively.
<PAGE>
6. NOTES PAYABLE Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10% term notes payable, interest payable semiannually, unpaid principal and
interest due April 2000 or upon the sale of all or substantially all of the
outstanding stock or assets of Eckler Industries, Inc. or the completion of
a public offering in which the Company realizes at least $10 million in
gross proceeds, collateralized by substantially all of the assets as well as
all of the issued and outstanding stock of Eckler Industries, Inc. and
guaranteed by Smart Choice Automotive Group, Inc. $ 7,000,000 $ -
Notes payable issued in connection with various acquisitions, interest ranging
from 9% to 12%, payable through June 2002. 4,776,695 6,029,146
12% unsecured convertible note payable, interest payable quarterly, unpaid
principal and interest due May 2002, convertible at a rate of one share of
common stock for every $15.00 of outstanding principal, conversion price
adjustable upon the occurrence of certain events. 4,000,000 4,000,000
12% convertible note payable, net of discount, interest payable quarterly,
unpaid principal and interest due June 2000, originally convertible at a
rate of one share of common stock for every $12.00 of outstanding principal,
conversion price adjustable upon the occurrence of certain events. On
December 31, 1997, the conversion price was adjusted to 90% of the market
price of the Company's common stock. Accordingly, $282,506 of interest
expense has been recorded for the year ended December 31, 1997 for the
difference between the conversion price of the note payable and the fair
market value of the Company's common stock on the date of adjustment. 3,418,125 3,025,125
Prime + 1.5% (9.25% at December 31, 1998) mortgage note payable, principal
payments of $14,405 plus interest payable monthly, outstanding principal and
interest due July 2001, collateralized by property and equipment of Eckler
Industries, Inc. and guaranteed by Eckler Industries, Inc. 2,306,903 2,500,000
Variable rate installment loan payable, principal and interest payable
monthly, outstanding principal and interest due December 2009,
collateralized by certain property of the Company, repaid in 1998. - 2,199,900
Various unsecured notes payable to investors bearing interest at rates ranging
from 10%-16%, interest payable monthly, outstanding principal balances due
through December 2001. 1,270,507 1,699,142
10% term note payable, interest payable monthly, outstanding principal due
upon the earlier of April 2000, or the sale or transfer of all or
substantially all of the outstanding stock or assets of Eckler Industries,
Inc., collateralized by substantially all of the assets as well as all of
the issued and outstanding capital stock of Eckler Industries, Inc. and
guaranteed by Smart Choice Automotive Group, Inc. 1,500,000 1,500,000
9% unsecured convertible notes payable, interest and principal due June 2000,
convertible at a rate of one share of common stock for each $17.50 of
principal, $800,000 was repaid in 1998. 467,601 1,267,601
8% convertible debentures, net of discount (see below) - 965,784
12% unsecured convertible note payable, interest and principal due June 2000,
convertible at a rate of one share of common stock for each $17.50 of
principal. 600,000 1,031,008
Prime plus 1.75% (9.5% at December 31, 1998) notes payable, principal of
$16,871 plus interest payable monthly, unpaid principal and interest due at
various dates through July 2003, secured by substantially all the assets of
First Choice Stuart 1, Inc. and guaranteed by First Choice Auto Finance,
Inc. and Smart Choice Holdings, Inc. The notes are subject to various
financial and operating covenants. As of December 31, 1998, the Company was
in violation of the working capital and cash requirements. The lender has
waived these violations through January 1, 2000. 759,818 894,173
8% note payable, principal and interest of $10,010 payable monthly through
June 2007, collateralized by certain property of the Company. 739,062 797,488
Prime (7.75% at December 31, 1998) unsecured convertible subordinated
debenture, net of discount, interest payable quarterly, unpaid principal and
interest due December 31, 2000, originally convertible at the rate of one
share of common stock for every $18.00 of outstanding principal, conversion
price adjustable upon the occurrence of certain events. On March 6, 1998,
the conversion price was adjusted to 90% of the market price of the
Company's common stock. Accordingly, $83,333 of interest expense has been
recorded for the difference between the conversion price of the debenture
and the fair market value of the Company's common stock on the date of
adjustment. This debenture was converted in March 1999 into 398,799 shares
of common stock. 715,263 697,895
Prime plus 1% unsecured note payable, interest payable monthly, outstanding
principal repaid in 1998. - 600,000
7.75% note payable, principal and interest of $8,683 payable monthly through
December 2003, secured by certain real property of the Company, repaid in
1998. - 498,923
12% convertible debentures (see below) 340,000 410,000
Prime plus 1% note payable, interest payable monthly, principal due upon
demand, repaid in 1998. - 300,000
Various notes payable bearing interest at rates from 6% to 12%, principal and
interest payable through April 2011. 199,505 274,023
10% unsecured note payable, interest payable monthly, outstanding principal
repaid in 1998. - 257,250
Prime plus 1% (8.75% at December 31, 1998) unsecured convertible subordinated
note payable, interest payable quarterly, unpaid principal and interest due
June 1999, originally convertible at a rate of one share of common stock for
every $15.00 of outstanding principal, conversion price adjustable upon the
occurrence of certain events. On December 31, 1997, the conversion price was
adjusted to 90% of the market price of the Company's common stock.
Accordingly, $20,179 of interest expense has been recorded for the year
ended December 31, 1997 for the difference between the conversion price of
the note payable and the fair market value of the Company's common stock on
the date of issuance. This note was converted in March 1999 into 132,933
shares of common stock. 250,000 250,000
- --------------------------------------------------------------------------------------------------------------------
Total notes payable $ 28,343,479 $ 29,197,458
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Aggregate maturities of notes payable over future years are as
follows: 1999 - $3,118,952; 2000 - $14,405,735; 2001 -
$2,737,175; 2002 - $7,528,895; 2003 - $167,342; thereafter -
$385,380.
Unamortized debt discount was $116,610 and $611,196 at December
31, 1998 and 1997, respectively.
8% CONVERTIBLE DEBENTURES
The unsecured convertible debentures bear interest at 8%.
Interest is payable monthly, and all outstanding principal is due
April 1999. The debentures were convertible from December 14,
1997 through April 15, 1998 at a conversion price equal to 66
2/3% of the average closing bid price of the Company's common
stock for the five trading days immediately preceding the
conversion date. Accordingly, $525,000 of interest expense was
recorded for the year ended December 31, 1997 for the difference
between the conversion price of the debentures and the fair
market value of the Company's stock at the time of issuance. The
interest rate and conversion price are both adjustable upon the
occurrence of certain events. During the year ended December 31,
1998, $965,784 of the debentures was converted into 276,523
shares of common stock.
12% CONVERTIBLE DEBENTURES
The convertible debentures bear interest at 12% and were due on
November 19, 1997. The debentures were convertible prior to
November 19, 1997 into the Company's common stock at a rate of
one share of common stock for each $10.00 of outstanding
principal. Additionally, holders of the debentures who did not
convert prior to the maturity date received, for each $20,000
debenture, a warrant to purchase 600 shares of the Company's
common stock at $6.00 per share. The warrants are immediately
exercisable and expire five years from the date of issuance.
During 1998, the maturity date of the convertible debentures was
extended to January 1999 and the interest rate was increased to
15%.
7. FLOOR PLANS PAYABLE Floor plans payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$3,350,000 floor plan line of credit, variable interest rate, interest payable
monthly, principal balance payable at the earlier of the time a vehicle is sold or
360 and 180 days from the time a vehicle is floored for new and used vehicles,
respectively, guaranteed by Smart Choice Automotive Group, Inc., collateralized by
vehicle inventory floored. The line of credit agreement contains certain financial
ratio covenants. $ 3,007,827 $ 3,285,165
$3,750,000 floor plan line of credit, interest at prime plus 1.5% (9.25% at December
31, 1998), interest payable monthly, principal balance payable the earlier of (i) 48
hours from the time of sale of a vehicle or within 24 hours from the time payment is
received from the purchaser of the vehicle or (ii) upon demand, collateralized by
all inventory, fixed assets, holdback reserves, manufacturers' rebates, incentive
payments and intangible assets of First Choice Auto Finance, Inc., guaranteed by
Smart Choice Automotive Group, Inc. 3,190,739 2,659,968
$3,000,000 floor plan line of credit, interest at prime plus 1% (8.75% at December 31,
1998), interest payable monthly, principal payable upon sale of floored vehicle,
guaranteed by Smart Choice Automotive Group, Inc., collateralized by certain assets
of First Choice Stuart 1, Inc. The line of credit is subject to various financial
and operating covenants. As of December 31, 1998 and December 31, 1997, the Company
was in violation of certain of the covenants. The lender has waived these covenants
through January 1, 2000. 2,503,402 2,341,959
- --------------------------------------------------------------------------------------------------------------------
Total $ 8,701,968 $ 8,287,092
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8. INCOME TAXES
The components of deferred income tax assets consist of the following:
DECEMBER 31, 1998 1997
-------------------------------------------------------------------------------
Deferred income tax assets:
Net operating loss carryforwards $ 2,910,000 $ 3,476,000
Accounts receivable 4,672,000 2,589,000
Stock options 1,901,000 1,805,000
Charitable contribution carryforwards 303,000 523,000
Compensation and accrued vacation 915,000 423,000
Depreciation and amortization 626,000 243,000
Inventory and other 103,000 149,000
Warranty reserve 235,000 93,000
-------------------------------------------------------------------------------
Gross deferred income tax assets 11,665,000 9,301,000
Valuation allowance (11,665,000 ) (9,301,000 )
-------------------------------------------------------------------------------
Total deferred income tax assets $ - $ -
-------------------------------------------------------------------------------
The Company's valuation allowance increased by approximately $2,364,000 and
$9,063,000 for the years ended December 31, 1998 and 1997, respectively, which
represents the effect of changes in the temporary differences and net operating
losses. The Company has recorded a valuation allowance to state its deferred tax
assets at estimated net realizable value due to the uncertainty related to
realization of these assets through future taxable income.
At December 31, 1998, the Company had unused federal tax net operating losses
(NOLs) to carry forward against future years' taxable income of approximately
$8,557,000 expiring in various amounts through 2018. As a result of certain
acquisitions, the use of approximately $1,141,000 of the NOLs will be limited
each year under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended, and the provisions of Treasury Regulation 1.1502-21 regarding
separate return limitation years.
9. Committments and Contingencies
LEASES
The Company conducts its operations partially from leased facilities. These
leases are classified as operating leases and expire on various dates
through 2005.
The Company also leases equipment under capital leases which expire on
various dates through 2003. The total capitalized cost for this equipment
is $1,304,807 and $1,004,961 with accumulated depreciation of $509,444 and
$116,015 as of December 31, 1998 and 1997, respectively.
As of December 31, 1998, future minimum lease payments under capital leases
and future minimum rental payments required under operating leases that
have AND initial or remaining noncancelable lease terms in excess of one
year are as follows:
CAPITAL OPERATING
LEASES LEASES
-------------------------------------------------------------------------
1999 $ 368,993 $ 2,257,000
2000 351,203 1,848,000
2001 280,355 1,702,000
2002 189,936 1,158,000
2003 1,737 670,000
Thereafter - 804,000
-------------------------------------------------------------------------
1,192,224 $ 8,439,000
--------------
Less amount representing interest 194,308
------------
Present value of net minimum lease
payments $ 997,916
--------------
Rental expense for the years ended December 31, 1998 and 1997 was
approximately $2,742,000 and $1,524,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements expiring at various
dates through the year 2002. As of December 31, 1998, the Company's total
noncancellable obligation under all employment agreements is approximately
$2,222,000.
LITIGATION
During March 1999, certain shareholders of the Company filed two punitive
class action lawsuits against the Company and certain of the Company's
current and former officers and directors in the United States District
Court for the Middle District of Florida (collectively, the "Securities
Actions"). The Securities Actions purport to be brought by plaintiffs in
their individual capacity and on behalf of the class of persons who
purchased or otherwise acquired Company publicly traded securities between
April 15,1998 and February 26, 1999. These lawsuits were filed following
the Company's announcement on February 26, 1999 a preliminary determination
had been reached that the net income for the year ended December 31, 1998
announced on February 10, 1999 was likely overstated in a material
undetermined amount at that time. Each of the complaints assert claims for
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 of the Securities and Exchange Commission as well as a claim for the
violation of Section 20(a) of the Exchange Act. The plaintiffs allege that
the defendants prepared and issued deceptive and materially false and
misleading statements to the public which caused plaintiffs to purchase
Company securities at artificially inflated prices. The plaintiffs seek
unspecified damages. The Company intends to contest these claims
vigorously. The Company cannot predict the ultimate resolution of these
actions at this time, and there can be no assurance that the litigation
will not have a material adverse impact on the Company's financial
condition and results of operations.
The Company is involved in other legal and administrative proceedings and
claims of various types. While any litigation contains an element of
uncertainty, based upon the opinion of the Company's legal counsel,
management presently believes that the outcome of such proceedings or
claims which are pending or known to be threatened will not have a material
adverse effect on the Company's financial position or results of operations
since the Company has accrued sufficient amounts to cover the costs
expected to be incurred in settlement of these actions.
ENVIRONMENTAL MATTERS
Some of the Company's past and present operations involve activities which
are subject to extensive and changing federal and state environmental
regulations and can give rise to environmental issues. As a result, the
Company is from time to time involved in administrative and judicial
proceedings and administrative inquiries related to environmental matters.
Based on advice of counsel, management believes that the outcome of these
matters will not have a material impact on the Company's financial
position.
10. Redeemable Convertible Preferred Stock
During December 1996 and January 1997, the Company sold 395,000 shares of
Series A redeemable convertible preferred stock. Proceeds from these
offerings, net of offering costs, were approximately $977,000. The
liquidation preference of each preferred share is $2.00. Upon the
completion of an initial public offering of the Company that raises a
minimum of $20 million in gross proceeds, each preferred share will be
converted automatically into the higher of: (i) one share of the Company's
$.01 par value common stock or (ii) that number of shares of common stock
having a value (as measured by a public offering sale price) equal to
$9.00. The holders of the Series A shares may require, by a two-thirds vote
of the issued and outstanding Series A shares, that the Company offer to
redeem the Series A shares at any time after September 30, 1998. The
redemption price will equal $2.00 per share. As of December 31, 1998, all
of these Series A shares had been exchanged for 526,500 shares of common
stock of the Company.
On September 30, 1997, the Company completed an offering of 300 units of
Series A redeemable convertible preferred stock and warrants at $10,000 per
unit. Proceeds from the offering, net of offering costs, were approximately
$2,965,000. Each unit consists of one share of Series A redeemable
convertible preferred stock and one warrant to acquire 150 shares of common
stock for each preferred share purchased at a price equal to $16.20 per
share. The warrants expire five years after the date of issuance. The
preferred stock is convertible into shares of common stock at a conversion
price which, at the option of the buyer, is either fixed at a rate of 135%
of the market price of common stock on the date of issuance of the
preferred stock, or floating at a rate of 100% of the market price of the
common stock if converted during the period 90 days after the issuance of
the preferred stock and 90% of the market price if converted at any time
after that 90-day period. Accordingly, since none of the preferred stock
was converted 90 days after issuance, a preferred stock dividend of
$333,333 ($.08 per share) has been recorded for the year ended December 31,
1997 for the difference between the discounted conversion price of the
preferred stock and the fair market value of the Company's common stock at
the time of issuance. The preferred stock is redeemable at the option of
the buyer upon the occurrence of certain events at a price per share that
is also dependent upon the occurrence of certain events.
On December 10, 1997, the Company issued an additional 100 units of the
Series A redeemable convertible preferred stock and associated warrants for
net proceeds of $1,000,000. Each unit consists of one share of Series A
redeemable convertible preferred stock and one warrant to acquire 150
shares of common stock for each preferred share purchased at a price equal
to $10.46 per share. The warrants expire five years after the date of
issuance. The preferred stock has features identical to that of the Series
A redeemable convertible preferred stock issued on September 30, 1997. As
of December 31, 1998, all but one share of Series A redeemable convertible
preferred stock issued in September 1997 and December 1997 had been
converted into 872,462 shares of common stock.
11. Preferred Stock
In May 1998, the Company sold to a private investment group 220 shares of
the Company's Series B convertible preferred stock for $10,000 per share.
Proceeds from this offering, net of offering costs, were approximately
$2,200,000. The Series B convertible preferred stock accrues dividends at a
rate of 11% per year and is convertible into common stock at a conversion
rate of $10.00 per share. After November 5, 1999, the Company may, at its
option, redeem the Series B convertible preferred stock for $10,000 per
share. In connection with the issuance of the Series B convertible
preferred stock, the Company agreed to certain limitations on the issuance
of additional shares of preferred stock by the Company.
In June 1998, the Company sold to a private investment group 24.98 shares
of the Company's Series C convertible preferred stock for $10,000 per
share. Proceeds from this offering, net of offering costs, were
approximately $249,800. The Series C convertible preferred stock accrues
dividends at a rate of 11.0% per year and is convertible into common stock
at a conversion rate of $11.18 per share. After December 2, 1999, the
Company may, at its option, redeem the Series C convertible preferred stock
for $10,000 per share. In connection with the issuance of the Series C
convertible preferred stock, the Company agreed to certain limitations on
the issuance of additional shares of preferred stock by the Company.
In June 1998, the Company sold to a private investment group 350 shares of
the Company's Series D convertible preferred stock for $10,000 per share.
Proceeds from this offering, net of offering costs, were approximately
$3,441,600. The Series D convertible preferred stock accrues dividends at a
rate of 11.0% per year for five years, after which the rate increases to
20% per year. The Series D convertible preferred stock is convertible into
common stock at a conversion rate of $12.00 per share. After June 22, 2001,
the Company may, at its option, redeem the Series D convertible preferred
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 11. PREFERRED STOCK preferred stock by
the Company.
12. Contingent Redemption Value of Put Options
In connection with the acquisitions in January and February 1997
("Predecessor Acquisition"), two founding stockholders of SCHI each
received 588,695 shares of common stock of the Company in exchange for
shares of SCHI common stock. Each of the two founding stockholders were
also beneficiaries under two trusts, the Management Trust and the Finance
Trust. As part of the Predecessor Acquisition, these trusts received a
total of 710,000 shares of common stock in exchange for the SCHI common
stock. The founding stockholders have the sole right to receive any
proceeds of the sale of the common stock held by the trusts.
The trusts shall, after the first to occur of the satisfaction of the
purposes of the trusts and the exercise or expiration of all options
granted with respect to the shares of the Company's common stock on
February 15, 2007, cause shares of common stock held by the trust to be
purchased by the Company (the "Put Options"). The purchase price per share
for the Finance Trust is $4.00 and for the Management Trust is the average
of the closing market price for 20 days immediately preceding the date of
the trustees' notice regarding such purchase by the Company. Accordingly,
the redemption value of the Put Option of $1,539,148 and $2,840,006 as of
December 31, 1998 and 1997, respectively represents the options' price
multiplied by the number of shares under option, and is presented in the
accompanying consolidated balance sheet as "Contingent Redemption Value of
Common Stock Put Options." The decrease in the redemption value of
$1,300,852 during 1998 was recorded as additional paid-in capital.
Options were granted to employees and lenders under these trusts. The
trusts will receive the proceeds, if any, from the exercise of these
options. Since these options were not granted by the Company and their
exercise will not result in the issuance of any additional common stock,
they have been excluded from the tables included in Note 13.
13. Capital Stock
INCREASE IN PAR VALUE AND STOCK SPLIT
In March 1997, the Company authorized an increase in the par value of its
common stock from $.001 to $.01. On July 23, 1998, the Board of Directors
authorized a 1-for-2 reverse stock split with respect to the common stock.
All common share information included in the accompanying financial
statements has been retroactively adjusted to give effect to the increase
in par value and the reverse stock split.
STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been recognized for
options granted to employees at exercise prices which equal or exceed the
market price of the Company's common stock at the date of grant. Options
granted at exercise prices below market prices are recognized as
compensation cost measured as the difference between market price and
exercise price at the date of grant.
Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting
for Stock-Based Compensation," requires the Company to provide pro forma
information regarding net income and earnings per share as if compensation
cost for the Company's employee stock options had been determined in
accordance with the fair market value based on the method prescribed in FAS
123. The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended December
31, 1998 and 1997, respectively: no dividend yield, an expected life of 5.0
and 4.9 years; expected volatility of 75% and 61%, and a risk-free interest
rate of 5.6% and 6%.
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:
YEAR ENDED DECEMBER 31, 1998 1997 1996
-------------------------------------------------------------------------------
Net loss applicable to common
stock from continuing operations
As reported $ (7,777,224) $ (17,589,020) $ (703,788)
Pro forma (7,998,224 ) (21,177,799) (703,788)
Basic loss per common share from
continuing operations
As reported $ (1.26 $ (3.97 $ (.26 )
Pro forma (1.29 ) (4.76 ) (.26 )
Net loss applicable to common stock
As reported $ (7,348,386) $(18,981,938) $ (703,788)
Pro forma (7,569,386 ) (22,570,717) (703,788)
Basic loss per common share
As reported $ (1.19) $ (4.28) $ (.26 )
Pro forma (1.22 ) (5.09 ) (.26 )
-------------------------------------------------------------------------------
The following table summarizes information about employee plan and non-plan
stock option activity for the periods ended December 31, 1998, 1997 and
1996:
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
EXERCISE OPTIONS
SHARES PRICE GRANTED
- -----------------------------------------------------------------------------
Outstanding, December 31, 1996 - $ - $ -
Acquired in merger 87,500 5.32 -
Granted, at market value 419,000 9.78 5.56
Granted, above market value 15,000 13.00 7.10
Granted, below market value 25,000 8.14 5.06
Exercised (6,250 ) 5.00 -
Forfeited (1,500 ) 9.76 -
- -----------------------------------------------------------------------------
Outstanding, December 31, 1997 538,750 9.12 -
Granted, at market value 909,200 8.17 5.27
Exercised (5,000 ) 5.50 -
Forfeited (104,575) 9.39 -
- ----------------------------------------------------------------------------
Outstanding, December 31, 1998 1,338,375 $8.47 $ -
- -----------------------------------------------------------------------------
At December 31, 1998 and 1997, a total of 413,250 and 301,250 options were
exercisable at a weighted-average exercise price of $7.34 and $8.48,
respectively.
The following table summarizes information about non-plan stock option
activity issued to non-employees for the periods ended December 31, 1998,
1997 and 1996:
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
EXERCISE OPTIONS
SHARES PRICE GRANTED
- --------------------------------------------------------------------------------
Outstanding - inception - $ - $ -
Granted, above market value 145,000 9.50 -
- --------------------------------------------------------------------------------
Outstanding, December 31, 1996 145,000 9.50 -
Acquired in merger 522,000 7.62 -
Granted, at market value 116,250 10.12 5.16
Granted, above market value 150,000 16.34 4.56
Forfeited (340,000) 7.58 -
Expired (20,000 ) 10.00 -
- --------------------------------------------------------------------------------
Outstanding, December 31, 1997 573,250 10.82 -
Granted, at market value 43,750 6.34 4.16
Granted, above market value 6,250 8.75 5.42
Exercised (66,250 ) 5.69 -
- --------------------------------------------------------------------------------
Outstanding, December 31, 1998 557,000 $10.14 $ -
- --------------------------------------------------------------------------------
At December 31, 1998, 1997 and 1996, a total of 532,000, 498,250 and
131,000 options were exercisable at a weighted-average exercise price of
$10.17, $10.28 and $9.84, respectively.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER EXERCISE REMAINING NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
------------------------------------------------------------------------------
**
$3.38 to $5.00 254,250 $4.10 3.9 years 156,250 $3.96
$6.00 to $8.50 96,975 7.59 3.7 years 32,500 7.15
$9.00 to $13.00 987,150 9.68 4.0 years 224,500 9.72
-------------------------------------------------------------------------------
1,338,375 $8.47 413,250 $7.34
-------------------------------------------------------------------------------
NON-EMPLOYEE
NON-PLAN
OPTIONS
$3.52 to $6.00 127,500 $5.24 3.0 years 127,500 $5.24
$8.75 to $13.00 379,500 10.82 3.2 years 354,500 10.90
$17.50 50,000 17.50 3.0 years 50,000 17.50
-------------------------------------------------------------------------------
557,000 $10.14 532,000 $10.17
-------------------------------------------------------------------------------
COMMON STOCK OPTIONS ISSUED - COMPENSATION
During the years ended December 31, 1998 and 1997, compensation
expense of $215,875 and $3,809,826 was recognized on common stock
options granted to employees and directors, respectively.
COMMON STOCK OPTIONS ISSUED - CONSULTANTS
During the year ended December 31, 1997, options granted to
consultants were valued at $607,700 in accordance with FAS 123.
COMMON STOCK ISSUED - PROFESSIONAL FEES
During the year ended December 31, 1997, the Company issued 8,965
shares of common stock as payment for professional services. The
shares were valued at $99,806, which represents the fair value of the
stock on the date of issuance.
COMMON STOCK OPTIONS AND WARRANTS ISSUED - LENDERS
During 1997, the Company entered into various agreements with lending
institutions and issued options and warrants to purchase 236,250
shares of the Company's common stock at exercise prices ranging from
$4.00 to $24.00 per share. The options and warrants expire at various
dates ranging from December 1999 through August 2002. During 1998, the
exercise price of certain of the options and warrants was reduced
pursuant to the provisions of the individual option and warrant
agreements.
The above common stock options and warrants were valued at $1,350,253
in accordance with the provisions of FAS 123. This amount was recorded
as debt discount and is being amortized over the life of the related
debt. Interest expense related to these options and warrants was
$577,419 and $466,979 for the years ended December 31, 1998 and 1997,
respectively.
COMMON STOCK WARRANTS ISSUED - PREFERRED STOCKHOLDERS
During the year ended December 31, 1998, the Company issued common
stock warrants to purchase 40,000 shares of common stock at exercise
prices ranging from $10.46 to $16.20 per share to certain of its
preferred stockholders. The warrants were valued at $254,802 in
accordance with the provisions of FAS 123. This amount was recorded as
penalty expense and is included as selling, general and administrative
expenses in the accompanying consolidated statements of operations.
COMMON STOCK ISSUED - DEBT CONVERSION
During the year ended December 31, 1998, the Company issued 343,943
shares of common stock in conversion of debt amounting to $1,497,716.
During the year ended December 31, 1997, the Company issued 221,257
shares of common stock in conversion of debt amounting to $1,770,056.
COMMON STOCK - INCENTIVE PLAN
During 1998, the Company's Board of Directors and stockholders
approved the 1998 Executive Incentive Compensation Plan (the "Plan").
This Plan provides for grants of stock options, stock appreciation
rights, restricted stock, deferred stock dividend equivalents and
other forms of stock-based and non stock-based compensation. The Plan
provides that up to 750,000 shares of the Company's common stock may
be granted as awards under the Plan.
STOCK WARRANTS
At December 31, 1998, the Company had the following stock warrants
outstanding:
NUMBER OF
UNDERLYING EXERCISE
EXPIRATION DATE SHARES PRICE
------------------------------------------------------------------------------
December 31, 1999 35,000 $ 4.00
November 8, 2000 6,250 $ 12.00
November 14, 2000 642,000 $ 13.00
March 30, 2001 10,000 $ 8.40
August 29, 2002 26,250 $ 4.75
September 30, 2002 45,000 $ 16.20
November 19, 2002 16,560 $ 6.00
December 10, 2002 15,000 $ 10.46
December 24, 2002 45,000 $ 8.00
December 30, 2002 600 $ 6.00
January 29, 2003 37,410 $ 10.00
June 1, 2003 10,001 $ 10.46
June 1, 2003 29,999 $ 16.20
------------
919,070
------------
At December 31, 1998, 919,070 of the warrants were exercisable.
SHARES RESERVED
At December 31, 1998, the Company has reserved approximately
11,985,000 shares of common stock for future issuance under all of the
above arrangements, the convertible debt and the convertible preferred
stock.
During the fourth quarter of 1997, after all acquisitions were
completed, the Company implemented a restructuring program (the
"Program") designed to enhance overall competitiveness and efficiency
through the reduction of operating costs. The Program resulted in a
charge to operations of $2,117,906. The charge consists primarily of
costs related to employment contract terminations and severance pay.
At December 31, 1998 and 1997, approximately $415,000 and
RESTRUCTURING $1,101,266 related to disputed employment termination
claims was included in 14. CHARGE accrued expenses.
15. Retirement Benefit Plan
The Company sponsors a defined contribution pension plan for all
employees meeting certain eligibility requirements. The plan provides
for voluntary employee contributions and contributions by the Company
to be determined at the discretion of the Board of Directors. The
Company made no contribution to the plan for the years ended December
31, 1998 and 1997.
16. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
YEAR ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------
Cash paid for interest $ 8,611,127 $ 4,228,339
- --------------------------------------------------------------------------------
Noncash investing and financing activities:
Notes payable and capital lease obligations
incurred in connection with the purchase of
property and equipment $ 316,516 $ 3,722,670
Notes payable issued in connection with
acquisitions - 11,015,272
Modification to conversion price of debt 83,333 -
Increase (decrease) in contingent liability of
put options (1,300,852 ) 2,840,000
Common stock issued in connection with
acquisitions - 14,413,880
Common stock issued for conversion of debt 1,497,716 1,770,056
Common stock options granted to employees and
directors 215,875 3,809,826
Common stock options and warrants issued to
consultants, lenders and others 254,802 1,957,953
Common stock issued for services 36,376 99,806
Common stock issued by stockholders for
cancellation of common stock options granted
by the Company - 800,000
Common stock issued for stock notes receivable 115,200 -
Contribution to capital by stockholder - 159,203
Debt discount on convertible debt - 827,685
Common stock issued for conversion of
preferred stock and accrued dividends 4,931,835 -
Purchase of treasury stock for reduction of
accounts receivable and acquisition debt 93,900 -
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to
determine such amounts:
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of
judgment and, therefore, cannot be determined with precision. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
instrument. Changes in assumptions could significantly affect these
estimates.
Since the fair value is estimated as of December 31, 1998, the amounts that
will actually be realized or paid in settlement of the instruments could be
significantly different.
CASH AND CASH EQUIVALENTS
The carrying amount is assumed to be the fair value because of the
liquidity of these instruments.
FINANCE RECEIVABLES, NET
The carrying amount is assumed to be the fair value because of the relative
short maturity and repayment terms of the portfolio as compared to similar
instruments.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value because of the short maturity
of these instruments.
NOTES PAYABLE
The terms of the Company's notes payable approximates the terms in the
market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise
and Related Information." SFAS 131 requires that public enterprises report
certain information about reporting segments in financial statements. It
also requires the disclosure of certain information regarding services
provided, geographic areas of operation and major customers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intercompany revenues are
market based. The Company evaluates performance based on operating earnings
of the respective business units.
The Company's continuing operations are classified into two reportable
segments. The used car stores segment operates a network of 26 used car
stores in Florida. The Company primarily sells used vehicles to
payment-sensitive non-prime customers who, most likely, would be unable to
purchase a vehicle without financing through the Company's financing
services segment. These segments exclude the activities of the discontinued
operations (see Note 18).
The following table shows certain financial information by reportable
segment as of and for the years ended December 31, 1998, 1997 and 1996 and
excludes the operations of the discontinued segments:
<TABLE>
<CAPTION>
USED CAR FINANCING CORPORATE DISCONTINUED
STORES SERVICES AND OTHER OPERATIONS COMBINED
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Revenue from external customers $ 78,227,027 $ 15,709,539 $ 1,448,261 $ - $ 95,384,827
Intercompany revenues - 5,434,451 - - 5,434,451
Operating income (loss) 4,411,292 4,933,046 (7,606,726 ) - 1,737,612
Depreciation and amortization 181,377 69,469 1,690,551 272,799 2,214,196
Interest expense 300,527 5,629,078 2,822,056 - 8,751,661
Abandoned public offering costs - - 1,062,962 - 1,062,962
Identifiable assets 15,918,151 66,174,394 16,913,961 24,585,527 123,592,033
Capital expenditures 447,039 266,709 409,155 341,999 1,464,902
1997
Revenue from external customers $ 35,279,228 $ 6,898,694 $ 1,177,903 $ - $ 43,355,825
Intercompany revenues - 2,310,962 - - 2,310,962
Operating income (loss) 71,502 3,028,598 (14,777,708) - (11,677,608)
Depreciation and amortization 41,709 8,078 1,270,695 364,758 1,685,240
Compensation expense related to
options - - 4,649,702 - 4,649,702
Restructuring charges - - 2,117,906 - 2,117,906
Interest expense 153,405 2,902,039 2,517,863 - 5,573,307
Identifiable assets 10,273,420 34,763,399 18,719,167 25,349,005 89,104,991
Capital expenditures (exclusive of
acquisitions) 1,494,370 178,238 3,182,884 223,822 5,079,314
1996
Revenue from external customers $ - $ - $ - $ - $ -
Operating income (loss) - - (670,616 ) - (670,616 )
Depreciation and amortization - - 4,381 - 4,381
Interest expense - - 33,172 - 33,172
Identifiable assets - - 716,290 - 716,290
Capital expenditures - - 24,586 - 24,586
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
In January 1999, management of the Company made a decision to discontinue
the operations of the new car dealerships segment and the parts and
accessories segment in order to focus the Company's continuing operations
exclusively on the retail sale of used cars through its used car stores, as
well as the financing of the used cars sold. The new car dealerships
segment operates two new car dealerships in Florida. The parts and
accessories segment sells and distributes Corvette parts and accessories
throughout the United States, primarily through its extensive catalog.
These two segments are expected to be sold during 1999 at a net gain.
Revenues of the discontinued operations were $46,499,679 and $25,247,834
during 1998 and 1997, respectively. Consolidated interest that is not
attributable to other operations of the Company was allocated to
discontinued operations based upon net assets of the discontinued
operations to the total net assets of the consolidated Company. The amount
of interest allocated to discontinued operations was $584,587 and $487,989
during 1998 and 1997, respectively.
19. DISCONTINUED OPERATIONS
The net assets of the discontinued operations included in the December 31,
1998 and 1997 consolidated balance sheets consist of the following:
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------
Cash and cash equivalents $ 448,596 $ 489,509
Accounts receivable 857,293 854,382
Inventories 6,776,414 7,602,221
Notes receivable - 46,280
Prepaid expenses 960,582 666,512
Property and equipment, net 4,187,687 4,098,723
Goodwill, net 11,286,075 11,580,303
Other assets 68,880 11,075
Accounts payable (1,405,617 ) (1,663,149 )
Accrued expenses (625,187 ) (696,467 )
Notes payable (3,066,721 ) (5,189,282 )
Floor plans payable (5,511,229 ) (5,627,123 )
Capital lease obligations (147,817 ) (234,381 )
- ----------------------------------------------------------------------------
Net assets of discontinued operations $ 13,828,956 $ 11,938,603
- ----------------------------------------------------------------------------
20. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998 and 1997, the Company recorded the following
adjustments:
1998 1997
-----------------------------------------------------------------------------
Expense costs of abandoned public offering $ 1,062,962 $ 479,406
Restructuring charge - 2,117,906
Expense related to stock options, warrants and
beneficial conversion feature 554,010 1,405,087
Increase in allowance for credit losses and
other adjustments to finance receivables 3,314,012 -
Inventory write-downs 1,094,096 -
Write-down of goodwill from asset sale and
impairment 1,045,847 -
-----------------------------------------------------------------------------
The effect of the above 1998 fourth quarter adjustments on previous quarters is
as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, SEPTEMBER 30,
1998 1998
- -------------------------------------------------------------------------------
Quarterly adjustment $ 1,115,783 $ 3,661,616
- -------------------------------------------------------------------------------
Net income (loss) applicable to common stock:
As reported $ 2,355,206 $ 1,627,992
As restated 1,239,423 (2,033,624 )
Basic earnings (loss) per share:
As reported $ 0.36 $ 0.25
As restated 0.19 (0.34 )
Diluted earnings (loss) per share:
As reported $ 0.36 $ 0.23
As restated 0.17 (0.34 )
- --------------------------------------------------------------------------------
MODIFICATION AGREEMENT
This Modification Agreement (the "Agreement") is made and entered into as
of the ___ day of April, 1999 by and among Stephens Holding Company ("Holder"),
Stephens Inc. ("Stephens"), Eckler Industries, Inc. ("Maker") and Smart Choice
Automotive Group, Inc. (the "Company").
This Agreement relates to (i) that certain promissory note dated as of
October 3, 1997 from Eckler Industries, Inc. to the order of Stephens in the
face principal amount of $1,500,000 ("Note 1"), which has subsequently been
assigned to Holder; (ii) that certain promissory note dated as of January 23,
1998 from Eckler Industries, Inc. to the order of Stephens in the face principal
amount of $3,000,000 ("Note 2"), which has subsequently been assigned to Holder;
(iii) that certain promissory note dated as of May 11, 1998 from Eckler
Industries, Inc. to the order of Stephens in the face principal amount of
$4,000,000 ("Note 3"), which has subsequently been assigned to Holder (Note 1,
Note 2 and Note 3 are herein collectively called the "Notes"); (iv) the guaranty
agreement of each of the above-described Notes by the Company, as amended by
prior written instruments, if any, among the parties thereto (collectively
called the "Guaranty"); (v) any and all pledges, security agreements and other
instruments and documents that secure, effect or perfect any rights or interests
of Holder or its predecessor in interest relating to the above-described Notes;
(vi) the potential sale of Maker with the assistance of Stephens and
modification of certain terms and conditions previously agreed to and set forth
in that certain engagement letter dated December 23, 1997 from Stephens to the
Company ("Engagement Letter") and as extended by that certain Extension to
Engagement Letter dated March 1, 1999 ("Extension Letter"); and (vii) waiver of
certain fees, costs and expenses previously incurred in connection with the
Company's 1998 withdrawn secondary offering. The parties acknowledge that they
desire to extend the maturity dates of the Notes and to the extent that it may
be necessary, for Holder to waive any defaults which may now exist. For and in
consideration of the premises and of the mutual promises and covenants
hereinafter set forth, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows: 1. The Company hereby
agrees that it will accept any cash offer to purchase the stock, assets or
business of Maker (excluding the land and buildings) recommended by Stephens on
or before December 31, 1999, provided that the amount of such cash proceeds
equals or exceeds $10.0 million (excluding any and all lease or other income or
proceeds therefrom), provided however, that Stephens or any of its affiliates,
agents or representatives, agrees to waive any and all fees and claims for
reimbursement for costs and expenses to which Stephens, its affiliates, agents
or representatives, may be entitled to now or in the future, in connection with
the sale of the Maker, including without limitation, any and all such fees and
reimbursements as set forth in the Engagement Letter and Extension Letter. The
Company and the Maker hereby agree to fully cooperate and to exercise their
reasonable best efforts to promptly close any cash offer recommended by
Stephens. The Company hereby reaffirms and agrees that the Company shall repay
in full all of the indebtedness evidenced by the Notes at the closing of the
sale of such stock, assets or business of Maker. 2. Stephens, on behalf of
Stephens and its affiliates, agents and representatives, agrees to waive any and
all claims any and all of such parties has or may have to fees reimbursement or
for costs and expenses incurred in connection with, arising out of or related to
that certain secondary offer of the Company's Common Stock filed with the
Securities and Exchange Commission on July 17, 1998, and as amended by that
certain preliminary offering Prospectus of the Company dated August 21, 1998. 3.
Further provided, that the Company hereby agrees that if the Notes have not been
repaid in full on or before April 30, 2000, then, upon request by Holder, the
Company shall transfer ownership of the stock, assets and business of Maker to
Holder, or its designee, in full satisfaction of the indebtedness represented by
the then outstanding amount of the Notes and that, in conjunction with such
transfer, the Company shall permit Maker to continue to use and occupy the
offices, warehouse spaces and other business premises of Maker, as used and
occupied by Maker during the year preceding the date of this Agreement, subject
to payment of rent for a period of five (5) years at the then current rent paid
by Eckler's on the premises. 4. The Company hereby agrees that if the Company
issues debt or equity securities, including (but not limited to) securitization
or other sale or financing of chattel paper or receivables but excluding the
financing of this chattel paper through FINOVA in the ordinary course of
business consistent with its past practices and excluding floor plan financing,
prior to the repayment in full of the Notes, the net proceeds of which equal or
exceed $10.0 million, the Company shall repay the Notes in full out of such
proceeds. 5. The Company hereby re-affirms the rights granted to Stephens to
serve as the lead managing underwriter for the Company and any of its
subsidiaries or affiliates and to serve as financial advisor and/or investment
banker for the Company and any of its subsidiaries or affiliates on the terms
and conditions set forth in Section 4 of that certain Amendment to Guaranty
Agreement dated as of January 23, 1998 by and among the Company, the Maker and
Stephens, and the Company hereby confirms the date through which such rights
shall be applicable through January 31, 2001. 6. Promptly following execution of
this Agreement, the Company shall issue to Stephens warrants to purchase
_________ shares of the Common Stock of the Company at an exercise price of
$_____ per share. Such warrants shall be exercisable for a period of twelve (12)
months and shall also contain the other terms and conditions set forth in the
warrant agreement attached hereto as Exhibit "A". Stephens agrees that to the
extent the Company incurs an expense related to the value of any such warrants,
Stephens agrees to reimburse the Company in the amount of such expense. 7. Upon
the closing of the sale of the stock, assets or business of Maker as described
above, the Company shall issue to Stephens warrants to purchase 300,000 shares
of the common stock of the Company, if such closing occurs on or before August
31, 1999 and warrants to purchase 250,000 shares of the common stock of the
Company, if such closing occurs after August 31, 1999 and on or before December
31, 1999 and warrants to purchase 200,000 shares of the common stock of the
Company, if such closing occurs after December 31, 1999 but prior to April 30,
2000, at an exercise price equal to the greater of (x) the product of ___ times
the average closing price of such common stock for the ten trading days
preceding the date of such closing and (y) the closing price of such common
stock on the date of such closing. All of the aforementioned warrants shall be
exercisable for a period of twelve (12) months and shall also contain the other
terms and conditions set forth in the warrant agreement attached hereto as
Exhibit "A". Stephens agrees that to the extent the Company incurs an expense
related to the value of any such warrants, Stephens agrees to reimburse the
Company in the amount of such expense. 8. Holder hereby agrees to extend the
maturity date of the Notes to April 30, 2000, on which date all unpaid principal
and all accrued and unpaid interest on the Notes shall be due and payable in
full. Maker shall continue to pay interest on the Notes at the same intervals
and at the same times provided for in each of the Notes, respectively, until the
maturity date thereof, as amended hereby. All other terms and provisions of the
Notes shall remain in full force and effect, except as explicitly amended hereby
or as explicitly amended by a prior written amendment thereto executed by the
parties thereto. 9. The Company hereby consents to the extension of the maturity
date of the Notes and to all other modifications of the Notes effected by this
Agreement or by any prior written modification or amendment of any of the Notes
executed by the parties thereto, and the Company hereby re-affirms its agreement
to guarantee the Notes on the terms and conditions set forth in the Guaranty
Agreement of the Company, as amended, under which the Company has agreed to
guarantee payment and performance of the Notes, except only to the extent
amended by this Agreement. 10. Each party hereto for itself, and its successors
and assigns, hereby waives, releases, and discharges the other parties hereto
and their respective successors, assigns, officers, directors, shareholders,
employees, agents and representatives, from any and all claims, actions,
obligations, damages, and liabilities (known or unknown and, past, present, or
future), which the releasing party or its successors and assigns, has (or may
have) by reason of any matter, cause, or transaction with respect to the Notes,
Engagement Letter, and the Extension Letter, and matters contemplated thereby,
and/or occurring before the effective date of this Agreement. In witness
whereof, the parties hereto have executed and delivered this Agreement as of the
15th day of April, 1999.
HOLDER: COMPANY:
STEPHENS HOLDING COMPANY SMART CHOICE AUTOMOTIVE
GROUP, INC.
BY: ________________________ BY: ___________________________
NAME: ________________________ NAME: ___________________________
TITLE: ________________________ TITLE: ___________________________
MAKER:
STEPHENS INC. ECKLER INDUSTRIES, INC.
BY: ________________________ BY: ___________________________
NAME: ________________________ NAME: ___________________________
TITLE: ________________________ TITLE: ___________________________
March 1, 1999
Mr. Gary Smith
Chief Executive Officer
Smart Choice Automotive Group
5200 S. Washington Avenue
Titusville, FL 32780
RE: Extension of Engagement Letter
Dear Mr. Smith:
This letter refers to that certain engagement letter (the "Engagement
Letter") dated December 23, 1997 from Stephens Inc. ("Stephens") to Smart Choice
Automotive Group, Inc. (the "Company"), which was accepted by the Company on
December 26, 1997, under which Stephens serves as exclusive financial advisor to
the Company in connection with the proposed divestiture of Eckler Industries,
Inc. ("Eckler"). Stephens and the Company agree that a divestiture of Eckler is
in the long-term best interest of the Company. The Company hereby agrees to
extend the term of the Engagement Letter for one additional year under the same
terms, conditions and provisions thereof and to extend the Engagement Period
thereunder until December 26, 1999; provided however, that if Gerald Parker or
Ralph Eckler or any of their respective affiliates shall be the purchaser of
Eckler, then the amount of Stephens Success Fee under the Engagement Letter
shall be reduced by fifty percent (50%) and provided further that the Company
and Eckler shall refer to Stephens all potential purchasers that contact the
Company or Eckler. Except as otherwise stated above, all of the terms,
conditions and provisions of the Engagement Letter shall remain in full force
and effect.
Stephens will, if requested by the Board of Directors, render an opinion as
to the fairness, from a financial point of view, of the consideration payable by
the Company, or the exchange ratio, as the case may be, in connection with the
Transaction. If requested by the Board of Directors, our opinion shall be
delivered in writing. The nature and scope of the investigation and analysis
which we will conduct in order to be able to render our opinion, as well as the
form and substance of our opinion, will be such as we consider appropriate. It
is understood and agreed that any information or advice rendered by Stephens or
its representatives in connection with its engagement hereunder is solely for
the confidential use of the Board of Directors of the Company in its evaluation
of a Transaction. The Company may not publish or refer to our opinion (either in
its entirety or through excerpts or summaries), disclose the existence of our
engagement hereunder or describe or characterize the advice provided by us to
the Company, whether formal or informal, or otherwise refer to Stephens, nor may
the Company authorize any other person or entity to do any of the foregoing,
without the prior written approval of Stephens.
Any opinion rendered by Stephens and a summary discussion of Stephens'
underlying analyses and role as financial advisor to the Board may be included
in a proxy statement mailed to the Company's shareholders in connection with a
transaction provided that such opinion is reproduced in its entirety and
Stephens approves such disclosure prior to the filing of such proxy statement
with the United States Securities and Exchange Commission.
If this letter correctly states our agreement, please so indicate by
signing below and returning a signed copy to us.
We look forward to continuing to work with you.
Very truly yours,
STEPHENS INC.
BY: /s/ David Linch
-------------------
David Linch
Managing Director
ACCEPTED THIS 1st DAY OF MARCH, 1999.
SMART CHOICE AUTOMOTIVE GROUP, INC.
BY: /s/ Gary R. Smith
- ---------------------
Title: President and CEO
WARRANT AGREEMENT
This Warrant Agreement (the "Agreement") dated this _____ day of April,
1999, by and between Smart Choice Automotive Group, Inc., a Florida corporation
(the "Company"), and Stephens Inc., an Arkansas corporation ("Stephens")
(Stephens and any subsequent assignee or transferee hereof are hereinafter
referred to as "Holder" or "Holders").
WITNESSETH:
For and in consideration of $10.00 in hand paid and other good and valuable
consideration, the receipt of sufficiency of which is hereby acknowledged by the
Company, the parties hereto agree as follows:
Section 1. Grant of Warrant; Term. The Company hereby grants to Holder the
right to purchase up to shares of Common Stock of the Company (the "Common
Stock") on the terms set forth herein. The shares of Common Stock issuable upon
exercise of this Warrant are hereinafter referred to as the "Shares." This
Warrant shall be exercisable immediately upon its issuance and at any time
thereafter until 11:59 p.m. on the day immediately preceding the fifth
anniversary of the date of this Agreement.
The period during which any Shares subject to this Warrant may be exercised
shall be referred to as the "Exercise Period."
Section 2. Exercise Price. The exercise price (the "Exercise Price") per
share for which all or any of the Shares may be purchased pursuant to the terms
of this Warrant shall be $ per share.
Section 3. Exercise. The rights represented by this Warrant may be
exercised at any time within the Exercise Period above specified, in whole or in
part, by (i) the surrender of this Warrant (with the purchase form at the end
hereof properly executed) at the principal executive office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the Holder); and (ii) payment to the Company of the Exercise Price
then in effect for the number of shares of Common Stock specified in the
above-mentioned purchase form, together with applicable stock transfer taxes, if
any. This Warrant shall be deemed to have been exercised, in whole or in part to
the extent specified immediately prior to the close of business on the date this
Warrant is surrendered and payment is made in accordance with the foregoing
provisions hereof, and the person or persons in whose name or names the
certificates for shares of Common Stock shall be issuable upon such exercise
shall become the holder or holders of record of such shares of Common Stock at
that time and date. The certificate or certificates for the shares of Common
Stock so purchased shall be delivered to such person or persons within a
reasonable time, not exceeding thirty (30) days, after this Warrant shall have
been exercised.
Section 4. Covenants and Conditions. This Agreement is subject to the
following:
(a) Holder acknowledges that neither this Warrant nor the Shares have
been registered under the Securities Act of 1933, as amended ("Securities
Act"), or any state securities laws ("Blue Sky Laws"). Holder agrees that
this Warrant has been acquired for investment purposes and not with a view
to distribute or resell and that neither this Warrant nor the Shares may be
sold or otherwise transferred without (i) an effective registration
statement for such Warrant or Shares under the Securities Act and such
applicable Blue Sky Laws, or (ii) an opinion of counsel, which opinion and
counsel shall be reasonably satisfactory to the Company and its counsel,
that registration is not required under the Securities Act or under any
applicable Blue Sky Laws. At the request of Holder, and subject to the
provisions of Section 8 of this Warrant, the Company shall include the
Shares (or any portion thereof requested by Holder) in any registration
statement filed by the Company for sale of its Common Stock to the public,
provided that such registration statement is filed before the seventh
anniversary of the date of this Agreement.
(b) The Holder and the Company agree to execute such other documents
and instruments as counsel for the Company or the Holder reasonably deems
necessary to effect the compliance of the issuance of this Warrant and the
issuance or transfer of any Shares of Common Stock (or other securities or
property) upon or following exercise of this Warrant in all material
respects with applicable federal and state securities laws.
(c) Holder represents and warrants that it is an "accredited investor"
as such term is defined in Section 501(a) of Regulation D promulgated under
the Securities Act.
(d) The Company covenants, agrees and warrants to Holder that all
Shares which may be transferred or issued to Holder or upon Holder's
request upon exercise of this Warrant have been and will be, upon issuance
thereof following valid exercise of this Warrant, legally and validly
issued and outstanding, fully paid and nonassessable, free from all taxes,
liens, charges and preemptive rights with respect thereto or to the
transfer or reissuance thereof, excluding only any restrictions imposed by
federal and state securities laws applicable to any subsequent transfer of
the Shares.
Section 5. Transfer of Warrant. Subject to provisions of Section 4 hereof,
the Warrant may be transferred, in whole or in part, to any person or business
entity, by delivery to the Company of evidence of such transfer.
Section 6. Adjustments Upon Changes in Stock. The Exercise Price and other
terms of this Warrant shall be adjusted from time to time as follows:
(a) In case the Company shall hereafter (i) pay a dividend or make a
distribution generally 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 Company, or (v) issue rights or warrants or
other securities generally to the holders of its outstanding Shares of
Common Stock; then and in any such events, the Exercise Price and the
securities to be issued upon exercise of this Warrant in effect immediately
prior to such action shall be adjusted so that the holder of this Warrant
shall thereafter be entitled to receive the number of shares of Common
Stock or other securities of the Company which it would have owned
immediately following such action had this Warrant been exercised
immediately prior to the record date for such transaction. 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
exercising this Warrant 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 Company, the Board of Directors of the Company shall
determine, on the basis of the opinion of an independent financial advisor,
the equitable allocation of the adjusted Exercise Price between or among
shares of such classes of capital stock or shares of Common Stock and other
capital stock.
(b) Whenever the Exercise Price or other terms of this Warrant are
adjusted as herein provided, the Company shall give at least ten days'
prior written notice to the Holder summarizing the action, transaction or
event that will result in such Exercise Price adjustment, stating (if
applicable) the record date thereof, the planned effective date of such
action, transaction or event and the planned closing date (if applicable)
of such action, transaction or event; and upon the occurrence of such
action, transaction or event, the Company shall promptly deliver to the
Holder a notice stating that the Exercise Price or other terms of this
Warrant have been adjusted and setting forth the adjusted Exercise Price
and the terms of any other applicable adjustments.
(c) In the event that at any time as a result of an adjustment made
pursuant to subparagraph (a) of this Section 6, the Holder thereafter
surrendering this Warrant for exercise shall become entitled to receive any
securities of the Company other than the Shares of Common Stock, thereafter
the Exercise Price of such other shares so receivable upon exercise of this
Warrant 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)
hereof.
(d) Notwithstanding any other provision herein to the contrary, in
case of any consolidation or merger to which the Company is party other
than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of
a third corporation into the Company), then the Holder shall have the right
thereafter to exercise this Warrant for the kind and amount of securities,
cash or other property which he would have owned or been entitled to
receive immediately after such consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
record date for such consolidation, merger, statutory, exchange, sale or
conveyance, and in any such case, if necessary, appropriate adjustment
shall be made in the application of the exercise and adjustment provisions
set forth herein with respect to the rights and interests thereafter of the
Holders of the Warrant, to the end that the provisions regarding conversion
and adjustment set forth herein shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the
exercise of this Warrant. The above provisions of this Section 6(d) shall
similarly apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances.
Section 7. Other Adjustments.
(a) If the Holder believes that all or any portion of this Warrant or
of any securities or other property to be issued or transferred to Holder
upon exercise of this Warrant would constitute underwriting compensation
pursuant to NASD Rule 2710 (or any successor or substitute for said rule)
(the "Corporate Financing Rule"), then Holder, at Holder's sole option,
may, by giving written notice thereof to the Company, increase the Exercise
Price for exercise of this Warrant to an increased Exercise Price
determined by Holder or decrease the number of Shares (or other securities
or the amount of other property) subject to this Warrant to such decreased
number of Shares (or other securities or amount of other property)
determined by Holder, or both.
(b) If Holder serves as an underwriter for any public offering for the
Company for which the NASD determines that this Warrant is wholly or
partially included as underwriting compensation for Holder in connection
with such underwriting, then this Warrant and any Shares or other
securities subject to this Warrant shall not be sold, transferred,
assigned, pledged or hypothecated, except as permitted by the Corporate
Financing Rule, for a period of one (1) year following the effective date
of the offering, and any certificates hereafter issued representing this
Warrant or any Shares or other securities subject to this Warrant shall
bear an appropriate legend describing this restriction and stating the time
period for which this restriction is applicable.
Section 8. Registration.
(a) (i) The Company agrees that if at any time after the date
hereof the Company shall propose to file a registration statement with
respect to any of its Common Stock on a form suitable for a secondary
offering (excluding a Form S-8, S-4 or similar registration form) it
will give notice in writing to such effect to the Holders at least
thirty (30) days prior to such filing, and, at the written request of
any such registered holder, made within ten (10) days after the
receipt of such notice, will include therein at the Company's cost and
expense (including the fees and expenses of counsel to such Holders,
but excluding underwriting discounts, commissions and filing fees
attributable to the Shares included therein) such of the Shares as
such Holders shall request; provided, however, that if the offering
being registered by the Company is underwritten and if the
representative of the underwriters certifies in writing that the
inclusion therein of the Shares would materially and adversely affect
the sale or marketability of the securities to be sold by the Company
thereunder, then the Company shall be required to include in the
offering only that number of securities owned by shareholders,
including the Shares issuable upon exercise of this Warrant, which the
underwriters determine in their sole discretion will not adversely
affect the success of the offering (such securities so included to be
apportioned pro rata among all selling shareholders according to the
total amount of such securities entitled to be included therein) but
for this provision and any other similar cutback provisions to which
other selling shareholders are subject.
(ii) The Company shall have the right to withdraw and discontinue
registration of the Holder's Shares at any time prior to the effective
date of such registration statement if the registration of the Shares
is withdrawn or discontinued.
(iii) The Company shall not be required to include any of a
Holder's Shares in any registration statement unless such Holder
agrees, if so requested by the Company, to: (a) offer and sell the
Holder's Shares to or through an underwriter selected by the Company
and, to the extent possible, on substantially the same terms and
conditions under which the Shares are to be offered and sold; (b)
comply with any arrangement, terms and conditions with respect to the
offer and sale of the Holder's Shares to which the Company may be
required to agree; and (c) enter into any underwriting agreement
containing customary terms and conditions.
(b) Whenever required under this Agreement to use its reasonable
efforts to effect the registration of any of the Shares, the Company shall,
as expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange Commission
(the "Commission") a registration statement covering such Shares and
use its best efforts to cause such registration statement to be
declared effective by the Commission as expeditiously as possible and
to keep such registration effective until the earlier of (A) the date
when all Shares covered by the registration statement have been sold
or (B) two hundred seventy (270) days from the effective date of the
registration statement; provided, that before filing a registration
statement or prospectus or any amendment or supplements thereto, the
Company will furnish to each Holder of Shares covered by such
registration statement and the underwriters, if any, copies of all
such documents proposed to be filed (excluding exhibits, unless any
such person shall specifically request exhibits), which documents will
be subject to the review of such Holders and underwriters, and the
Company will not file such registration statement or any amendment
thereto or any prospectus or any supplement thereto (including any
documents incorporated by reference therein) with the Commission if
(A) the underwriters, if any, shall reasonably object to such filing
or (B) if information in such registration statement or prospectus
concerning a particular selling Holder has changed and any Holder of
Shares or the underwriters, if any, shall reasonably object.
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the
period referred to in Section 8(b)(i) and to comply with the
provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement, and cause the
prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed with the Commission pursuant to
Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder(s) of Shares such numbers of
copies of such registration statement, each amendment thereto, the
prospectus included in such registration statement (including each
preliminary prospectus), each supplement thereto and such other
documents as they may reasonably request in order to facilitate the
disposition of the Shares owned by them.
(iv) Use its best efforts to register and qualify under such
other securities laws of such jurisdictions as shall be reasonably
requested by any selling Holder of Shares and do any and all other
acts and things which may be reasonably necessary or advisable to
enable such selling Holder to consummate the disposition of the Shares
owned by such Holder, in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a
condition thereto to qualify to transact business or to file a general
consent to service of process in any such states or jurisdictions.
(v) Promptly notify each selling Holder of Shares of the
happening of any event as a result of which the prospectus included in
such registration statement contains an untrue statement of a material
fact or omits any fact necessary to make the statements therein not
misleading and, at the request of any such Holder, the Company will
prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Shares, such prospectus
will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all such Shares
not later than the effective date of such registration statement.
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for such offering) and take
all such other actions as the underwriters, if any, reasonably request
in order to expedite or facilitate the disposition of such Shares
(including, in connection with a registration statement requested
pursuant to Section 8(a), effecting a stock split or a combination of
shares).
(viii) Make available for inspection by any selling Holder of
Shares or any underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other
agent retained by any such selling Holder or underwriter, all
financial and other records, pertinent corporate documents and
properties of the Company, and cause the officers, directors,
employees and independent accountants of the Company to supply all
information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration
statement.
(ix) Promptly notify the selling Holder(s) of Shares and the
underwriters, if any, of the following events and (if requested by any
such person) confirm such notification in writing: (A) the filing of
the prospectus or any prospectus supplement and the registration
statement and any amendment or post-effective amendment thereto, with
respect to the registration statement or any post-effective amendment
thereto, the declaration of the effectiveness of such documents, (B)
any requests by the Commission for amendments or supplements to the
registration statement or the prospectus or for additional
information, (C) the issuance or threat of issuance by the Commission
of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose and
(D) the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threat of initiation of any
proceeding for such purposes.
(x) Make every reasonable effort to prevent the entry of any
order suspending the effectiveness of the registration statement and
obtain at the earliest possible moment the withdrawal of any such
order, if entered.
(xi) Cooperate with the selling Holder(s) of Shares and the
underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing the Shares to be sold and not
bearing any restrictive legends, and enable such Shares to be in such
lots and registered in such names as the underwriters may request at
least two (2) business days prior to any delivery of the Shares to the
underwriters.
(xii) Provide a CUSIP number for all the Shares not later than
the effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an
underwritten offering, (A) make such representations and warranties to
the selling Holder(s) of Shares and the underwriters, if any, with
respect to the Shares and the registration statement as are
customarily made by issuers in similar offerings; (B) use its best
efforts to obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
selling Holders of Shares and the underwriters, if any, such letters
to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters by underwriters in connection with
similar offerings; (C) deliver such documents and certificates as may
be reasonably requested (1) by the Holders of a majority of the Shares
being sold, and (2) by the underwriters, if any, to evidence
compliance with clause (A) above and with any customary conditions
contained in the underwriting agreement or other agreement entered
into by the Company; and (D) obtain opinions of counsel to the Company
and updates thereof (which counsel and which opinions shall be
reasonably satisfactory to the underwriters, if any), covering the
matters customarily covered in opinions requested in similar offerings
and such other matters as may be reasonably requested by the selling
Holders of Shares and underwriters or their counsel. If customary for
similar offerings, such counsel shall also state that no facts have
come to the attention of such counsel which cause them to believe that
such registration statement, the prospectus contained therein, or any
amendment or supplement thereto, as of their respective effective or
issue dates, contains any untrue statement of any material fact or
omits to state any material fact necessary to make the statements
therein not misleading (except that no statement need be made with
respect to any financial statements, notes thereto or other financial
data or other expertized material contained therein). If for any
reason the Company's counsel is unable to give such opinion, the
Company shall so notify the Holders of the Shares and shall use its
best efforts to remove expeditiously all impediments to the rendering
of such opinion.
(xiv) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than
forty-five (45) days after the end of any twelve-month period (or
ninety (90) days, if such period is a fiscal year) (A) commencing at
the end of any fiscal quarter in which the Shares are sold to
underwriters in a firm or best efforts underwritten offering, or (B)
if not sold to underwriters in such an offering, beginning with the
first month of the first fiscal quarter of the Company commencing
after the effective date of the registration statement, which
statements shall cover such twelve-month periods.
(c) After the date hereof, the Company shall not grant to any holder
of securities of the Company any registration rights which have a priority
greater than or equal to those granted to Holder(s) pursuant to this
Warrant without the prior written consent of the Holder(s).
(d) The Company's obligations under Sections 8(a) and (b) above with
respect to each Holder of Shares are expressly conditioned upon such
Holder's furnishing to the Company in writing such information concerning
such Holder and the terms of such Holder's proposed offering as the Company
shall reasonably request for inclusion in the registration statement and
such Holder executing, acknowledging, sealing and delivering all documents
reasonable necessary to enable the Company to comply with the Securities
Act, any applicable Blue Sky Laws, and any applicable laws, rules and
regulations of the commission, NASD and Blue Sky Law authorities and
administrators. If any registration statement including any of the Shares
is filed, then the Company shall indemnify each Holder thereof (and each
underwriter for such Holder and each person, if any, who controls such
underwriter within the meaning of the Securities Act) from any loss, claim,
damage or liability arising out of or based upon any untrue statement of a
material fact contained in such registration statement or any omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein no misleading, except for any such statement or
omission based on information furnished in writing by such Holder of the
Shares expressly for use in connection with such registration statement;
and such Holder shall indemnify the Company (and each of its officers and
directors who has signed such registration statement, each other director
and each other person, if any, who controls the Company within the meaning
of the Securities Act, each underwriter for the Company and each person, if
any, who controls such underwriter within the meaning of the Securities
Act) and each other such Holder against any loss, claim, damage or
liability arising out of or based upon any such statement or omission which
was made in reliance upon, and strictly in conformity with, information
furnished in writing to the Company by such Holder of the Shares expressly
for use in connection with such registration statement.
(e) For purposes of this Section 8, all of the Shares shall be deemed
to be issued and outstanding, and all Holders shall be deemed to be holders
of such Shares.
Section 9. Article and Section Headings. Numbered and titled article and
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Agreement.
Section 10. Notice. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be supplied in writing
and of which receipt has been acknowledged in writing. The date of personal
delivery or telecopy or two (2) business days after the date of mailing (or the
next business day after delivery to such courier service), as the case may be,
shall be the date of such notice, election or demand. For the purpose of this
Agreement;
The Address of Holder is: Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
Attn: Legal Department
Facsimile: ____________________
The Address of Company is: Smart Choice Automotive Group, Inc.
5200 South Washington Avenue
Titusville, Florida 32780
Attn: Robert J. Downing, Esq.
Chief Legal Officer
Facsimile: (407) 264-0367
Section 11. Severability. If any provision(s) of this Agreement or the
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons circumstances shall not be affected thereby
and shall be enforced to the greatest extent permitted by law.
Section 12. Entire Agreement. This Agreement between the Company, Stephens
and Holder represents the entire agreement between the parties concerning the
subject matter hereof, and all oral discussions and prior agreements are merged
herein.
Section 13. Governing Law and Amendments. This Agreement shall be construed
and enforced under the laws of the State of Florida applicable to contracts to
be wholly performed in such state. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
Section 14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
Company
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/
--------------------------------------------
Title:
Holder
STEPHENS INC.
By: /s/
--------------------------------------------
Title:
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
FLORIDA FINANCE GROUP INC.
LIBERTY FINANCE COMPANY
SMART CHOICE RECEIVABLES HOLDING COMPANY
FIRST CHOICE AUTO FINANCE, INC.
Co-Borrowers
Florida Finance Group, Inc.'s FEID No.59-2385410
Liberty Finance Company's FEID No. 59-2530982
Smart Choice Receivables Holding Company's FEID No. 88-0381833
First Choice Auto Finance, Inc.'s FEID No. 59-3231285
5200 S. WASHINGTON
TITUSVILLE, FLORIDA 32780-7316
Address for Florida Finance Group, Inc., Liberty Finance Company and
First Choice Auto Finance, Inc.
P.O. BOX 50102
HENDERSON, NEVADA 89016
Address for Smart Choice Receivables Holding Company
$100,000,000.00
Amount of Loan
NOVEMBER 9, 1998
(DATE)
<PAGE>
REDISCOUNT FINANCE
TABLE OF CONTENTS
1. DEFINITIONS 5
1.1. ACCOUNT DEBTOR 5
1.2. AGREEMENT 6
1.3. BUSINESS DAY 6
1.4. CHARGE OFFS 6
1.5. CODE 6
1.6. COLLATERAL 6
1.7. COLLATERAL PERFORMANCE PERCENTAGE 6
1.8. COLLATERAL RECOVERY RATE 6
1.9. COMMONLY CONTROLLED ENTITY 6
1.10. COST OF GOODS SOLD 6
1.11. DEFAULT 6
1.12. DISTRIBUTIONS 6
1.13. ELIGIBLE INVENTORY 6
1.14. ELIGIBLE RECEIVABLES 6
1.15. ERISA 7
1.16. GAAP 7
1.17. GUARANTOR 7
1.18. GUARANTY AGREEMENT 7
1.19. GOVERNING RATE 7
1.20. INCLUDED REBATE PERCENTAGE 7
1.21. INCLUDED REBATES 7
1.22. INDEBTEDNESS 7
1.23. INVENTORY 7
1.24. INVENTORY BORROWER 7
1.25. INVENTORY CREDIT FACILITY 8
1.26. LEVERAGE RATIO 8
1.27. LOAN DOCUMENTS 8
1.28. MAXIMUM RATE 8
1.29. NET INCOME 8
1.30. NONPAYMENT NET RECEIVABLE REDUCTIONS 8
1.31. NOTE 8
1.32. PLAN 8
1.33. RECEIVABLES 8
1.34. RECEIVABLES BORROWERS 8
1.35. RECEIVABLES CREDIT FACILITY 8
1.36. REQUEST FOR ADVANCE 8
1.37. SCHEDULE 8
1.38. SUBORDINATED DEBT 8
1.39. TANGIBLE NET WORTH 8
2. LOAN 8
2.1. AMOUNT OF LOAN 8
2.2. INTEREST RATE 9
2.3. PAYMENTS 9
2.4. PAYMENT DUE ON A NON-BUSINESS DAY 9
2.5. MANDATORY PAYMENTS 9
2.6. VOLUNTARY PREPAYMENTS 9
<PAGE>
2.7. MAXIMUM INTEREST; CONTROLLING AGREEMENT 9
2.8. INTEREST AFTER DEFAULT 10
2.9. STATEMENT OF ACCOUNT 10
2.10. APPLICATION OF PAYMENTS 11
2.11. ALLOCATION OF PAYMENTS 11
2.12. ADVANCES TO LEAD BORROWER 11
2.13. APPOINTMENT OF AGENT 11
2.14. TERMINATION FEE 12
2.15. INVENTORY CREDIT LINE 12
2.16. RECEIVABLES CREDIT FACILITY 12
3. SECURITY 12
3.1. SECURITY INTEREST 12
3.2. FINANCING STATEMENTS AND FURTHER
ASSURANCES 12
3.3. PLEDGE OF RECEIVABLES 13
3.4. FAILURE TO DELIVER 13
3.5. NOTICE OF COLLATERAL ASSIGNMENT 13
3.6. LOCATION OF RECEIVABLES 13
3.7. RECORDS AND INSPECTIONS 13
3.8. ADDITIONAL DOCUMENTS 13
3.9. COLLECTION 13
3.10. BLOCKED ACCOUNTS 13
3.11. PROTECTION OF RECEIVABLE RECORDS 14
3.12. USE OF COLLECTIONS AND MODIFICATION
OF RECEIVABLES 14
3.13. USE OF PROCEEDS 14
3.14. RETURN OF COLLATERAL 14
3.15. LENDER'S PAYMENT OF CLAIMS 14
3.16 CROSS COLLATERALIZATION 14
4. CONDITIONS OF CLOSING; SUBSEQUENT ADVANCES 14
4.1. INITIAL ADVANCE 14
4.2. SUBSEQUENT ADVANCES 15
4.3. ORAL REQUEST FOR ADVANCE 16
4.4. ALL ADVANCES TO CONSTITUTE ONE LOAN 16
4.5. ADVANCES 16
5. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND
GUARANTOR 16
5.1. REPRESENTATIONS AND WARRANTIES 16
5.2. WARRANTIES AND REPRESENTATIONS AS TO
ELIGIBLE RECEIVABLES 18
6. COVENANTS AND OTHER AGREEMENTS 19
6.1. AFFIRMATIVE COVENANTS 19
6.2. NEGATIVE COVENANTS 19
6.1. REPORTING REQUIREMENTS AND ACCOUNTING
PRACTICES 20
6.2. PLEDGE OF RECEIVABLES 20
6.3. ACCOUNT DEBTORS' ADDRESSES 21
6.4. FINANCIAL REPORTS 21
6.5. FINANCIAL STATEMENTS OF GUARANTORS 21
6.6. NOTICE OF CHANGES 21
7. EVENTS OF DEFAULT AND REMEDIES 21
7.1. EVENTS OF DEFAULT 21
7.2. ACCELERATION OF THE INDEBTEDNESS 22
7.3. LOUISIANA CONFESSION OF JUDGMENT 22
7.4. REMEDIES 23
7.5. NO WAIVER 24
<PAGE>
7.6. APPLICATION OF PROCEEDS 24
7.7. APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT 24
8. EXPENSES AND INDEMNITIES 25
8.1. REIMBURSEMENT FOR EXPENSES 25
8.2. LENDER'S EXPENSES AND ATTORNEY'S FEES 25
8.3. GENERAL INDEMNIFICATION 25
9.2. PARTICIPATIONS 25
9.3. SURVIVAL OF AGREEMENTS 26
9.4. NO OBLIGATION BEYOND MATURITY 26
9.5. PRIOR AGREEMENTS SUPERSEDED 26
9.6. PARTIES BOUND 26
9.7. NUMBER AND GENDER 26
9.8. NO THIRD PARTY BENEFICIARY 26
9.9. EXECUTION IN COUNTERPARTS 26
9.10. SEVERABILITY OF PROVISIONS 26
9.11. HEADINGS 26
9.12. SCHEDULES AND EXHIBITS 26
9.13. FURTHER INSTRUMENTS 26
9.14. LENDER'S EXPENSES AND ATTORNEY'S FEES 26
9.15. GOVERNING LAW 27
9.16. JURISDICTION AND VENUE 27
9.17. WAIVER 27
9.18. ADVICE OF COUNSEL 27
9.19. WAIVER OF RIGHT TO TRIAL BY JURY 27
<PAGE>
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BORROWER: FLORIDA FINANCE GROUP INC.
LIBERTY FINANCE COMPANY
FIRST CHOICE AUTO FINANCE, INC.
ADDRESS: 5200 S. WASHINGTON
TITUSVILLE, FLORIDA 32780-7316
BORROWER: SMART CHOICE RECEIVABLES HOLDING COMPANY
ADDRESS: P. O. BOX 50102
HENDERSON, NV 89016
DATE:
THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into on
the above date between FINOVA CAPITAL CORPORATION, a Delaware corporation
("Lender"), whose corporate address is Dial Tower, Dial Corporate Center,
Phoenix, Arizona 85077 and whose Rediscount Finance Office address is 13355 Noel
Road, Suite 800, Dallas, Texas 75240 and the borrowers named above (collectively
referred to herein as the "Borrowers" and singularly as "Borrower"), all of
whose chief executive offices are located at the above addresses (collectively
referred to herein as "Borrowers' Address"), as an amendment and restatement to
that certain Loan and Security Agreement, dated February 24, 1994 and that
certain First Amended and Restated Loan and Security Agreement, dated February
4, 1997, and not an extinguishment of any obligations evidenced thereby. The
terms and provisions set forth herein and in the other documents executed in
conjunction herewith shall supersede all prior agreements.
Each Borrower shall be separately defined as set forth in the Schedule. All
representations, warranties, covenants, agreements, undertaking or other
obligations of Borrowers as set forth in this Agreement and all other Loan
Documents are made by each Borrower as if separately set forth for each Borrower
in this Agreement and the other Loan Documents. All financial covenants and
ratios set forth herein shall be applied to the Borrowers in the aggregate,
except as otherwise specifically set forth in the Loan Documents.
1. DEFINITIONS
1.1. ACCOUNT DEBTOR. The term "Account Debtor" shall mean any person or persons
that are an obligor in any contractual arrangement with Borrower or any
co-signor in respect of any Receivable.
1.2. AGREEMENT. The term "Agreement" shall mean this Loan and Security
Agreement and any amendment, modifications or extension hereof.
1.3. BUSINESS DAY The term "Business Day" shall mean a day, other than a
Saturday or Sunday, on which commercial banks are open for business to the
public in Phoenix, Arizona and New York, New York.
1.4. CHARGE OFFS. The term "Charge Offs" shall mean the amount due (including
the principal balance plus all earned fees and charges) pursuant to a Receivable
on the date that Borrower charges off such Receivable as uncollectible, pursuant
to Borrower's policies and/or procedures.
1.5. CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
1.6. COLLATERAL. The term "Collateral" shall have the meaning set forth in
Section 3.1. hereof.
1.7. COLLATERAL PERFORMANCE PERCENTAGE. The term "Collateral Performance
Percentage" shall mean, on any date of determination, the percentage determined
by the aggregate of all of the outstanding balances, including accrued interest,
for all Receivables that are sixty (60) days or more past due or are otherwise
ineligible Receivables divided by the aggregate of all of the outstanding
balances, including accrued interest, for all Receivables.
1.8. COLLATERAL RECOVERY RATE. The term "Collateral Recovery Rate" shall mean,
for any period of determination, (i) the total cash collected from all
Receivables (including but not limited to all cash proceeds from charge off
recoveries, with such charge off recoveries calculated at wholesale value),
divided by (ii) the sum of (a) the Included Rebates plus (b) the total cash
collected from all Receivables (excluding all cash proceeds from charge off
recoveries) plus (c) the aggregate of all Charge Offs for that period.
1.9. COMMONLY CONTROLLED ENTITY. The term "Commonly Controlled Entity" shall
mean an entity, whether or not incorporated, which is under common control with
Borrower within the meaning of Section 414(b) or (c) of the Code.
1.10. COST OF GOODS SOLD. The term "Cost of Goods Sold" shall mean, with
respect to the vehicle that secures the repayment of a Receivable, the sum of
(i) the direct cost paid for such vehicle, (ii) reconditioning costs, (iii)
taxes paid with respect to the sale of such vehicle, (iv) cost of registration
and application for title and (v) all commissions paid by Borrower with respect
to the sale of such vehicle that generated such Receivable.
1.11. DEFAULT. The term "Default" shall mean an event which with the passage of
time or notice or both would constitute an Event of Default (as defined in
Section 7.1).
1.12. DISTRIBUTIONS. The term "Distributions" shall mean any dividends or other
distribution of earnings to Borrower's shareholders.
1.13. ELIGIBLE INVENTORY. The term "Eligible Inventory" shall mean Inventory of
Borrower that are acceptable to Lender, in its reasonable discretion, and, in
each case, that meet, at a minimum, all of the following requirements (i)
consist of motor vehicles available for resale to consumers, which are not
obsolete or unmerchantable (ii) do not exceed the Maximum Mileage of Eligible
Inventory (SCHEDULE SECTION 1.13.A.), the Maximum Age of Eligible Inventory
(SCHEDULE SECTION 1.13.B.) or the Maximum Cost of Eligible Inventory (SCHEDULE
SECTION 1.13.C.); (iii) meets all standards imposed by any governmental agency
or authority; (iv) conforms in all respects to the warranties and
representations set forth herein; (v) is at all times subject to Lender's duly
perfected, first priority security interest; (vi) is situated at a First Choice
location (SCHEDULE SECTION 3.2); (v) Lender has in its possession, the
certificate of title or other similar document (with all prior liens released),
together with applicable assignments or other transfer documents which if file
with the appropriate governmental agency could transfer such title to Borrower;
(vi) such vehicle is not purchased from an entity that has any common ownership,
direct or indirect, with that of Borrower; (vi) such vehicle has not been
repossessed by Borrower or any entity that has any common ownership, direct or
indirect, with that of Borrower; and (vii) such vehicle not be owned by Borrower
for more than the Maximum Ownership (SCHEDULE SECTION 1.3.D.)
1.14. ELIGIBLE RECEIVABLES. The term "Eligible Receivables" shall mean those
Receivables of Borrower that are acceptable to Lender, in its reasonable
discretion, and, in each case, that meet, at a minimum, all of the following
requirements: (i) arise from the extension of credit, the sale and delivery of a
vehicle or the rendering of services in connection with such sale in the
ordinary course of Borrower's business; (ii) represent a valid and binding
obligation enforceable in accordance with its terms for the amount outstanding
thereof without offset, counterclaim or defense (whether actual or alleged);
(iii) comply in all respects with all applicable laws and regulations,
including, but not limited to, truth in lending and credit disclosure laws and
regulations; (iv) all amounts and information appearing thereon or furnished to
Lender in connection therewith are true and correct and undisputed by the
Account Debtor thereon or any guarantor thereof; (v) Borrower and the Account
Debtor are not engaged in any litigation regarding nonpayment of the Receivable;
(vi) to the best knowledge of Borrower neither the Account Debtor thereon nor
any guarantor thereof is subject to any receivership, insolvency or bankruptcy
proceeding, is insolvent or has failed to meet its debts as they mature; (vii)
Borrower has good and sufficient right to pledge, assign and deliver the
Receivables free from all liens, claims, encumbrances or security interests
whatsoever, except as granted in this Agreement; (viii) neither the Account
Debtor thereon nor any guarantor thereof is employed by, related to or
affiliated with Borrower; (ix) to the best knowledge of Borrower no condition
exists that materially or adversely affects the value of the Receivable or
jeopardizes any security therefor; (x) if the Receivable arose from the sale of
goods, such goods have been delivered and accepted by the Account Debtor and are
still subject to the lawful possession and control of the Account Debtor and
have not been otherwise returned to or repossessed by Borrower; (xi) is not a
renewal or extension of any Receivable previously ineligible hereunder; (xii)
the original principal amount thereof does not exceed the Maximum Amount of an
Eligible Receivable (SCHEDULE SECTION 1.14.A.) and the original term thereof
does not exceed the Maximum Term of an Eligible Receivable (SCHEDULE SECTION
1.14.B.); (xiii) meets the Eligibility Test and has been reported to Lender in
compliance with the Aging Procedures (SCHEDULE SECTION 1.14.C.); (xiv) is not
evidenced by a judgment or has not been reduced to judgment; (xv) is not an open
account; (xvi) is evidenced by a written payment agreement, bearing interest or
containing a time price differential, which has been executed by the Account
Debtor; (xvii) the Account Debtor thereunder is a legal resident of the United
States; (xviii) payments under the Receivable are to be made in United States
dollars; (xix) the number of days between contractual payment dates of the
Receivable does not exceed thirty-one (31) days, and (xxi) with respect to the
Receivable, Lender has in Lender's possession the original contract or agreement
that evidences the primary payment obligation of the Account Debtor and the
original certificate of title or other evidence of title, pursuant to applicable
law, or evidence that such certificate of title or other evidence has been
properly applied for with the proper state agency or department for the issuance
of such certificate or other evidence, satisfactory in form and substance to
Lender.
1.15. ERISA. The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time.
1.16. GAAP. The term "GAAP" shall mean generally accepted accounting principles
and other standards as promulgated by the American Institute of Certified Public
Accountants.
1.17. GUARANTOR. The term "Guarantor" shall mean any person or persons who
execute a guaranty agreement in favor of Lender guaranteeing the repayment of
the Borrower's Indebtedness to Lender (SCHEDULE SECTION 1.17).
1.18. GUARANTY AGREEMENT. The term "Guaranty Agreement" shall mean that certain
agreement executed by the Guarantor, in a form and substance approved by Lender.
1.19. GOVERNING RATE. The term "Governing Rate" shall mean the "Prime" rate
publicly announced by Citibank N.A., New York, New York (or such other "money
center" bank as Lender, in its sole discretion, may select from time to time,
but shall not be more than the highest rate of the five largest banks in the
Continental United States as their respective corporate base, reference, prime
or similar benchmark rate), provided however, that such rate may not be the
lowest rate charged to such bank's customers.
1.20. INCLUDED REBATE PERCENTAGE. The term "Included Rebate Percentage" shall
mean, for any period of determination, the percentage determined by dividing (i)
the aggregate of all Charge Offs for that period, by (ii) the Nonpayment Net
Receivable Reductions for that period.
1.21. INCLUDED REBATES. The term "Included Rebates" shall mean, for any period
of determination, (i) the aggregate of all rebates of interest for that period,
multiplied by (ii) the Included Rebate Percentage.
1.22. INDEBTEDNESS. The term "Indebtedness" shall mean all amounts advanced
hereunder by Lender to Borrower together with all other amounts owing or
becoming owing to Lender by Borrower, direct or indirect, absolute or
contingent, now or hereafter existing, whether pursuant to the terms of this
Agreement or any document or instrument evidencing or securing the transaction
contemplated hereby.
1.23. INVENTORY. The term "Inventory" shall mean all of Borrower's now owned
and hereafter acquired motor vehicles, wherever located, held for sale to
consumer, that are not vehicles primarily used for a commercial purpose or for a
off-road purpose and all documents of title or other documents representing
ownership of such assets.
1.24. INVENTORY BORROWER. The term "Inventory Borrower" shall mean First Choice
Auto Finance, Inc..
1.25. INVENTORY CREDIT FACILITY. The term "Inventory Credit Facility" shall
mean the credit facility as set forth in Section 2.15.
1.26. LEVERAGE RATIO. The term "Leverage Ratio" shall mean, at any date of
determination, total liabilities of Borrower, including the outstanding balance
of the Indebtedness, less the outstanding balance due pursuant to all
Subordinated Debt, divided by the sum of the amount of Borrower's Tangible Net
Worth plus the outstanding balance due pursuant to all Subordinated Debt.
1.27. LOAN DOCUMENTS. The term "Loan Documents" shall mean this Agreement, the
Note, the Schedule, the Guaranty, Subordination Agreements, Agency and Custodian
Agreements and all other documents executed in connection with this Agreement,
together with any and all renewals, amendments, restatements or replacements of
such documents.
1.28. MAXIMUM RATE. The term "Maximum Rate" shall mean the highest lawful and
nonusurious rate of interest applicable to the Note made and delivered by
Borrower to Lender in connection herewith, that at any time or from time to time
may be contracted for, taken, reserved, charged, or received on the Note and the
Indebtedness under the laws of the United States and the laws of such states as
may be applicable thereto, that are in effect or, to the extent allowed by such
laws, that may be hereafter in effect and that allow a higher maximum
nonusurious and lawful interest rate than would any applicable laws now allow.
1.29. NET INCOME. The term "Net Income" shall mean with respect to any fiscal
period, the net earnings of Borrower (excluding all extraordinary gains or
nonrecurring income) before provision for income taxes for such fiscal period of
Borrower, all as reflected on the financial statements of Borrower supplied to
Lender pursuant to Sections 5.4(A) and 5.4(B) hereof.
1.30. NONPAYMENT NET RECEIVABLE REDUCTIONS. The term "Nonpayment Net Receivable
Reductions" shall mean, for any period of determination, the sum of (i) the
aggregate of all Charge Offs for that period, plus (ii) the aggregate of all net
refinanced balances of Receivables for that period.
1.31. NOTE. The term "Note" shall mean the promissory note of even date
herewith, and all renewals, extensions, or modifications executed by Borrower
and payable to the order of Lender.
1.32. PLAN. The term "Plan" shall mean any pension plan that is covered by
Title IV of ERISA and with respect to which Borrower or a Commonly Controlled
Entity is an "Employer" as defined in Section 3(5) of ERISA.
1.33. RECEIVABLES. The term "Receivables" shall mean all accounts of Borrower
and any other right of Borrower to receive payment, including, without
limitation, all loans, extensions of credit or Borrower's right to payment for
goods sold or services rendered by Borrower.
1.34. RECEIVABLES BORROWERS. The term " Receivables Borrowers" shall mean,
collectively, Florida Finance Group, Inc., Liberty Finance Company and Smart
Choice Receivables Holding Company.
1.35. RECEIVABLES CREDIT FACILITY. The term "Receivables Credit Facility" shall
mean the credit facility as set forth in Section 2.16.
1.36. REQUEST FOR ADVANCE. The term "Request for Advance" shall mean a written
request for an advance in the form of Exhibit "A" attached hereto and made a
part hereof.
1.37. SCHEDULE. The term "Schedule" shall mean the schedule executed in
conjunction with this Agreement of even date herewith, as may be amended from
time to time, upon written agreement of Lender and Borrower.
1.38. SUBORDINATED DEBT. The term "Subordinated Debt" shall mean the aggregate
amount of any indebtedness of Borrower to persons other than Lender that by its
terms is subordinated to the prior payment in full of the Indebtedness pursuant
to a subordination and standstill agreement, in a form and substance
satisfactory to Lender, entered into by all holders of Subordinated Debt.
1.39. TANGIBLE NET WORTH. The term "Tangible Net Worth" shall mean, at any time
of determination, the shareholder's equity of Borrower determined in accordance
with GAAP minus the aggregate amount of all intangible assets and all assets
consisting of obligations due to Borrower from shareholders, directors,
officers, or any affiliate of Borrower or any Guarantor hereunder.
2. LOAN
2.1. AMOUNT OF LOAN. Subject to the terms, covenants and conditions hereinafter
set forth, Lender agrees upon the Borrower's request from time to time, until
the Maturity Date, to make advances to Borrower (collectively, the "Loan"), in
an aggregate amount not to exceed at any time outstanding the lesser of the
following: (i) the Amount of Revolving Credit Line (Schedule Section 2.1.A.) or
(ii) the sum of (a) the Availability on Eligible Receivables (Schedule Section
2.1.B.), (b) the Availability on Eligible Inventory (Schedule Section 2.1. C.).
Within the limits of this Section 2.1, Borrower may borrow, repay and reborrow
the advances. The Loan shall be evidenced by the Note.
2.2. INTEREST RATE. The outstanding principal balance of Loan shall bear
interest at the Stated Interest Rate (Schedule Section 2.2). If Lender is ever
prevented from charging or collecting interest at the rate set forth in Stated
Interest Rate Section (i) because interest at such rate would exceed interest at
the Maximum Rate, then the rate set forth in Stated Interest Rate Section (i)
shall continue to be the Maximum Rate until Lender has charged and collected the
full amount of interest chargeable and collectable had interest at the rate set
forth in Stated Interest Rate Section (i) always been lawfully chargeable and
collectible. As the Governing Rate changes, the rate set forth in Stated
Interest Rate Section (i) shall be increased or decreased (subject to the
Maximum Rate) on the first day of each calendar month to correspond with the
change in the Governing Rate then in effect and shall remain fixed at such rate
until the first day of the next succeeding calendar month, notwithstanding
fluctuations in the Governing Rate during the month. All changes in the
Governing Rate shall be made without notice to Borrower. The monthly interest
due on the principal balance of the Loan outstanding shall be computed for the
actual number of days elapsed during the month in question on the basis of a
year consisting of three hundred sixty (360) days and shall be calculated by
determining the average daily principal balance outstanding for each day of the
month in question. The daily rate shall be equal to 1/360th times the Stated
Interest Rate (but shall not exceed the Maximum Rate).
2.3. PAYMENTS. All payments made by mail or other physical delivery
methods to Lender shall be payable at FINOVA Capital Corporation, File No.
96425, P. O. Box 1067, Charlotte, NC 28201-1067. All payments made by wire
transfer or other method of electronic transfer methods to Lender shall be
payable to FINOVA Capital Corporation, Citibank, New York, New York, ABA# 021
000 089, Account Name: FINOVA Capital Corp., Account Number: 4068-0485,
Reference: Rediscount Finance, ZQX(Client Acct. #XXX )ZQX.) All payments
received pursuant to this Agreement by wire transfer or other electronic
transfer method, where immediate credit occurs, shall be applied to Borrower's
Indebtedness on the Business Day of actual receipt of such payment by Lender's
depository bank, payments received by any other method shall be applied to
Borrower's Indebtedness three (3) Business Days after the actual receipt of such
payment by Lender's depository bank if such payment is credited to Lender's
account. The Indebtedness shall be due and payable as follows:
A. Accrued but unpaid interest for each calendar month during the term
hereof shall be due and payable, in arrears, on or before the fifteenth (15th)
day of the immediately succeeding calendar month.
B. Costs, fees and expenses payable pursuant to this Agreement shall be due
and payable by Borrower to Lender or to such other person(s) designated by
Lender in writing on demand; and
C. The entire outstanding balance of the Indebtedness shall be due and payable,
if not prepaid, on the Maturity Date (Schedule Section 2.3.).
2.4. PAYMENT DUE ON A NON-BUSINESS DAY. If any payment of the Indebtedness
falls due on a day other than a Business Day, then such due date shall be
extended to the next succeeding Business Day.
2.5. MANDATORY PAYMENTS. Provided that Borrower is not otherwise in Default
hereunder, if at any time the amount advanced by Lender to Borrower exceeds the
maximum amount of the Loan allowed pursuant to Section 2.1, Borrower shall
immediately and without notice, repay to Lender an amount sufficient to
eliminate such excess, or, at Lender's option, assign and deliver additional
Eligible Receivables sufficient for such purpose. In the event Borrower sells,
transfers, assigns or otherwise disposes of all or any portion of its
Receivables, other than in the ordinary course of business, Borrower shall apply
all proceeds of any such sale, transfer, assignment or other disposition to
reduce the outstanding balance of the Indebtedness.
2.6 VOLUNTARY PREPAYMENTS. Borrower may, at its option, voluntarily prepay the
Indebtedness in full at any time and request a termination of Lender's security
interest in the collateral, provided, however, that Borrower has given Lender
ninety (90) days written notice of any such intention to prepay the Indebtedness
in full, Borrower requests Lender to terminate its security interest in the
Collateral and as liquidated damages, not as a penalty, pays to Lender the
amount of liquidated damages ("Liquidated Damages") (Schedule Section 2.6).
Borrower may not make such prepayment prior to the expiration of such ninety
(90) day period. Upon written notice of Borrower's intent to prepay the
Indebtedness in full, the commitment by Lender to advance funds to Borrower and
all the obligations of Lender shall terminate on the expiration of said ninety
(90) day notice period, and the entire amount of the Indebtedness shall be due
and payable on such date.
2.7. MAXIMUM INTEREST; CONTROLLING AGREEMENT. The contracted for rate of
interest of the Loan without limitation, shall consist of the following: (i) the
Stated Interest Rate, calculated and applied to the principal balance of the
Note in accordance with the provisions of the Note and this Agreement; (ii)
interest after Event of Default or due date, calculated and applied to the
amounts due under the Note in accordance with the provisions thereof; and (iii)
all Additional Sums (as herein defined), if any. Borrower agrees to pay an
effective contracted for rate of interest which is the sum of the
above-referenced elements.
All fees, charges, goods, things in action or any other sums or things of
value (other than amounts described in the immediately previous paragraph), paid
or payable by Borrower (collectively, the "Additional Sums"), whether pursuant
to the Note, this Agreement or any other documents or instruments in any way
pertaining to this lending transaction, or otherwise with respect to this
lending transaction, that under any applicable law may be deemed to be interest
with respect to this lending transaction, for the purpose of any applicable law
that may limit the maximum amount of interest to be charged with respect to this
lending transaction, shall be payable by Borrower as, and shall be deemed to be,
additional interest and for such purposes only, the agreed upon and "contracted
for rate of interest" of this lending transaction shall be deemed to be
increased by the rate of interest resulting from the inclusion of the Additional
Sums.
It is the intent of the parties to comply with the usury law ("Applicable
Usury Law") applicable pursuant to the terms of the preceding paragraph or such
other usury law which is applicable if the law chosen by the parties is not
applicable. Accordingly, it is agreed that notwithstanding any provisions to the
contrary in the Loan Documents, or in any of the documents securing payment
hereof or otherwise relating hereto, in no event shall the Loan Documents or
such documents require the payment or permit the collection of interest in
excess of the maximum contract rate permitted by the Applicable Usury Law. In
the event (a) any such excess of interest otherwise would be contracted for,
charged or received from Borrower or otherwise in connection with the loan
evidenced hereby, or (b) the maturity of the indebtedness evidenced by the Loan
Documents is accelerated in whole or in part, or (c) all or part of the
principal or interest of the Loan Documents shall be prepaid, so that under any
of such circumstances the amount of interest contracted for, charged or received
in connection with the loan evidenced hereby, would exceed the maximum contract
rate permitted by the Applicable Usury Law, then in any such event (1) the
provisions of this paragraph shall govern and control, (2) neither Borrower nor
any other person or entity now or hereafter liable for the payment hereof will
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum contract rate permitted by the Applicable Usury Law, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount hereof or refunded to Borrower,
at Lender's option, and (4) the effective rate of interest will be automatically
reduced to the maximum amount of interest permitted by the Applicable Usury Law.
It is further agreed, without limiting the generality of the foregoing, that to
the extent permitted by the Applicable Usury Law; (x) all calculations of
interest which are made for the purpose of determining whether such rate would
exceed the maximum contract rate permitted by the Applicable Usury Law shall be
made by amortizing, prorating, allocating and spreading during the period of the
full stated term of the loan evidenced hereby, all interest at any time
contracted for, charged or received from Borrower or otherwise in connection
with such loan; and (y) in the event that the effective rate of interest on the
loan should at any time exceed the maximum contract rate allowed under the
Applicable Usury Law, such excess interest that would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law shall be
paid to Lender from time to time, if and when the effective interest rate on the
loan otherwise falls below the maximum amount permitted by the Applicable Usury
Law, to the extent that interest paid to the date of calculation does not exceed
the maximum contract rate permitted by the Applicable Usury Law, until the
entire amount of interest which would have otherwise been collected had there
been no ceiling imposed by the Applicable Usury Law has been paid in full.
Borrower further agrees that should the maximum contract rate permitted by the
Applicable Usury Law be increased at any time hereafter because of a change in
the law, then to the extent not prohibited by the Applicable Usury Law, such
increases shall apply to all indebtedness evidenced hereby regardless of when
incurred; but, again to the extent not prohibited by the Applicable Usury Law,
should the maximum contract rate permitted by the Applicable Usury Law be
decreased because of a change in the law, such decreases shall not apply to the
indebtedness evidenced hereby regardless of when incurred.
2.8 INTEREST AFTER DEFAULT. Upon the occurrence and during the continuation
of an Event of Default, Borrower shall pay Lender interest on the daily
outstanding balance of Borrower's loan account at a rate per annum which is
greater of (not to exceed the Maximum Rate): (i) the four percent (4%) in excess
of the highest Stated Interest Rate which would otherwise be applicable thereto
pursuant to the Schedule (Schedule Section 2.2), or (ii) sixteen percent (16%).
2.9 STATEMENT OF ACCOUNT. Lender shall provide Borrower, each month, with a
statement of Borrower's account, prepared from Lender's records, which shall
conclusively be deemed correct and accepted by Borrower, unless Borrower gives
Lender a written statement of exceptions within thirty (30) days after receipt
of such statement.
2.10. APPLICATION OF PAYMENTS. The amount of all payments or amounts received
by Lender with respect to the Indebtedness shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the date
of such payment, including any Interest After Default; (ii) then, to any late
fees, overdue risk assessments, examination fees and expenses, collection fees
and expenses and any other fees and expenses due to Lender hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Indebtedness; provided, however, while a Default exists under the Loan
Documents, each payment hereunder shall be applied to amounts owed to Lender by
Borrower as Lender it is sole discretion may determine. In calculating interest
and applying payments as set forth above; (a) interest shall be calculated and
collected through the date a payment is actually applied by Lender under the
terms of this Agreement; (b) interest on the outstanding balance shall be
charged during any grace period permitted hereunder; (c) at the end of each
month, all accrued and unpaid interest and other charges provided for hereunder
shall be added to the principal balance of the Loan; and (d) to the extent that
Borrower makes a payment or Lender receives any payment or proceeds of the
Collateral for Borrower's benefit that is subsequently invalidated, set aside or
required to be repaid to any other person or entity, then, to such extent, the
obligations intended to be satisfied shall be revived and continue as if such
payment or proceeds had not been received by Lender and Lender may adjust the
outstanding balance of the Indebtedness as Lender, in its sole discretion, deems
appropriate under the circumstances.
2.11. ALLOCATION OF PAYMENTS. All payments and collections shall be deemed to
be comprised of a pro rata remittance or payment made by each Borrower, based
upon the proportion that the Eligible Receivables of each Borrower bears to the
aggregate of all Eligible Receivables of the Borrowers, as of the date on which
such remittance or payment is received by Lender. In the event such remittance
or payment shall be made by the Lead Borrower, acting as agent or trustee for
the other Borrowers, each Borrower shall be deemed to have made their
proportionate amount of such remittance or payment to Lender by and through such
agent or trustee.
2.12 ADVANCES TO LEAD BORROWER. Borrower does hereby irrevocably agree that in
the event Lender makes advances to Lead Borrower, as agent or trustee for each
of Borrower, as contemplated in Section 2.13, each such advance shall be deemed
to be made to each Borrower based upon a proportion that each Borrower's
Eligible Receivables bear to the aggregate of all Eligible Receivables of
Borrower, notwithstanding any subsequent disbursement of said advance by the
Lead Borrower, acting as agent or trustee for the Borrowers. In the event that
the actual advances, direct or indirect, received by Lead Borrower or any other
Borrower or the balance due to Lender as shown in the records of any Borrower
shall be disproportionate when compared to the proportion of the Eligible
Receivables of each Borrower, whether by way of subsequent disbursements by Lead
Borrower, acting as agent or trustee, by way of Lender electing to make advances
to each Borrower, as contemplated in Section 2.13 or otherwise, such
disproportionalities shall be deemed to have occurred by virtue of loans made
between and among Borrowers.
2.13. APPOINTMENT OF AGENT. Lender agrees that, in the sole discretion of
Lender, Borrower may, by written notice to Lender, designate a Lead Borrower to
receive advances from Lender, make payments to Lender, communicate with Lender
and generally represent the interests of the Borrowers with respect to the
subject matter of this Agreement; notwithstanding the foregoing, Lender may, at
its sole discretion and upon notice to each of the Borrowers, make advances
directly to each of the Borrowers, require that payments due hereunder be made
to Lender by each of the Borrowers, require each of the Borrowers to communicate
directly with Lender, for its own account, and generally deal independently and
separately with each of the Borrowers. Until so notified by Lender, each of the
Borrowers hereby agree that any and all funds advanced by Lender pursuant to the
terms of this Agreement, shall be advanced to the Lead Borrower and may be
deposited or transferred into the general corporate account of Lead Borrower, as
agent and/or trustee for Borrowers. Lead Borrower hereby agrees to keep detailed
and accurate records of all such disbursements made to any other Borrowers. Lead
Borrower hereby agrees to keep detailed and accurate records of all loans and
dealings between or among Lead Borrower and the other Borrowers. Borrowers agree
to furnish copies of such records to Lender upon request. Each Borrower, other
than the Lead Borrower hereby irrevocably makes, constitutes, designates and
appoints Lead Borrower as its agent and/or trustee with full power to receive
all notices, request all Advances hereunder and to deal generally with Lender as
agent and/or trustee for the Borrowers and Lead Borrower is hereby granted full
power and authority to bind the Borrowers in respect of any term, condition,
covenant or undertaking embraced in this Agreement. Lender may, without
liability or responsibility to the Borrowers rely upon the instructions or other
communications of Lead Borrower on behalf of each of the Borrowers in connection
with any notifications, requests or communications required or permitted to be
given hereunder with the same force and effect as if actually given by each
Borrower; each Borrower hereby agrees to indemnify and hold Lender harmless from
and against any liability, claim, suit, action, penalty, fine or damage arising
out of or incurred in connection with Lender's reliance upon communications from
Lead Borrower on behalf of the Borrowers. It is specifically understood and
agreed that any Advance made hereunder by Lender to Lead Borrower shall be
considered and treated as an Advance to the Borrowers and each Borrower shall be
jointly and severally liable therefor.
2.14. TERMINATION FEE. Borrower agrees to pay Lender a Termination Fee
(Schedule 2.14) upon the termination of the credit facility evidenced by the
Loan Documents. This Termination Fee shall be due and payable together with the
payment in full of the outstanding balance of the Indebtedness, whether by a
voluntary prepayment in full by Borrower together with a request for Lender to
terminate Lender's security interest in the Collateral, the acceleration of the
outstanding balance of the Indebtedness upon an Event of Default or upon the
expiration of the term hereof, as such term may be extended from time to time.
This Termination Fee shall be included as an Additional Sum as defined in
Section 2.7 of the Agreement.
2.15. INVENTORY CREDIT LINE. The Inventory Credit Line shall be that portion of
the Amount of the Revolving Credit Line, that shall not exceed the Availability
on Eligible Inventory. Advances pursuant to the Inventory Credit Line shall only
be made directly to First Choice, based upon the Eligible Inventory of First
Choice.
The Stated Interest Rate applicable to the that portion of the outstanding
balance of the Indebtedness applicable to the Inventory Credit Line shall be at
the Inventory Stated Interest Rate (Schedule Section 2.2.). The Receivables
owned or held by First Choice shall not be eligible Receivables hereunder and
the Inventory owned or held by the Receivables Borrowers shall not be eligible
Inventory hereunder.
Inventory Borrower shall provide Lender such reporting and information as
requested by Lender with respect to all Inventory, including but not limited to
the reports and information set forth in Section 6.4.A. Notwithstanding any
provision contained in the Loan Documents to the contrary, in addition to all
other audit costs and expenses due and payable hereunder, Inventory Borrower
shall reimburse Lender for all of Lender's expenses with respect to the audit or
checks with respect to Inventory, as required by Lender.
2.18 RECEIVABLES CREDIT FACILITY. The Receivables Credit Facility shall be
that portion of the Amount of the Revolving Credit Line, that shall not exceed
the Availability on Eligible Receivables. Advances pursuant to the Receivables
Credit Facility shall only be made directly to the Lead Lender or any of the
Receivable Borrowers, pursuant to the terms of the Loan Documents, based upon
the Eligible Receivables of the Receivable Borrowers.
The Stated Interest Rate applicable to the that portion of the outstanding
balance of the Indebtedness applicable to the Receivables Credit Facility shall
be at the Receivables Stated Interest Rate (Schedule Section 2.2.).
3. SECURITY
3.1. SECURITY INTEREST. To secure the prompt payment to Lender of the
Indebtedness and any and all other obligations now existing or hereinafter
arising owed by Borrower to Lender, Borrower hereby irrevocably grants to Lender
a first and continuing security interest in the following property and interests
in property of Borrower, whether now owned or existing or hereafter acquired or
arising and wheresoever located:
A. All Receivables and all accounts, chattel paper, instruments, contract rights
and general intangibles, all of Borrower's right, remedies, security, liens,
guaranties, or other contracts of suretyship with respect thereto, all deposits
or other security or support for the obligation of any Account Debtor thereunder
and credit and other insurance acquired by Account Debtor or the Borrower in
connection therewith.
B. All Inventory, new or used, including, but not limited to parts and
accessories;
C. All bank accounts of Borrower;
D. All monies, securities and property, now or hereafter held, received by, or
entrusted to, in the possession or under the control of Lender or a bailee of
Lender;
E. All accessions to, substitutions for and all replacements, products and
proceeds of the foregoing, including, without limitation, proceeds of insurance
policies referenced in Section 3.1.A above (including but not limited to claims
paid and premium refunds); and
F. All books and records (including, without limitation, customer lists, credit
files, tapes, ledger cards, computer software and hardware, electronic data
processing software, computer printouts and other computer materials and
records) of Borrower evidencing or containing information regarding any of the
foregoing.
3.2. FINANCING STATEMENTS AND FURTHER ASSURANCES. Borrower hereby agrees to
execute UCC-1 Financing Statements, in the form and substance of Exhibit "B"
hereto, and any other instruments or documents reasonably necessary to evidence,
preserve or protect Lender's security interest in the Collateral. Borrower
agrees that financing statements shall be filed covering all of Borrower's
locations (Schedule Section 3.2.).
Upon Lender's request, Borrower agrees to deliver to Lender, at such places
as Lender may reasonably designate, schedules executed by Borrower, listing the
Receivables and fully and correctly specifying in adequate detail the aggregate
unmatured unpaid face amount of each Receivable and the amount of the deferred
installments thereof falling due each month. These schedules shall be in form
and tenor satisfactory to or supplied by Lender. All schedules delivered and
Collateral pledged to Lender shall be assigned to Lender pursuant to the
"Schedule of Receivables and Assignment" in the form and substance of Exhibit
"E" attached hereto. Borrower further warrants and agrees that in each case
where the terms of any Receivable require the Borrower or the Account Debtor
named in such Receivable to place or carry fire insurance or other insurance in
respect of the merchandise or property to which such Receivable relates, the
Borrower shall or shall cause the Account Debtor to maintain such insurance
until the full amount of such Receivable is collected and if not, Lender, at its
option, may place and maintain such insurance, charging the cost thereof to
Borrower.
3.3. PLEDGE OF RECEIVABLES. Borrower hereby agrees to pledge all Receivables
and, if so requested by Lender, Borrower shall deliver to Lender all documents
evidencing Receivables of Borrower, no less often than on the twentieth (20th)
day of each calendar month during the term of this Agreement, together with the
Schedule of Receivables and Assignment, as set forth in Section 3.2 hereof.
3.4. FAILURE TO DELIVER. Failure to deliver physical possession of any
instruments, documents or writings in respect of any Receivable to Lender shall
not invalidate Lender's security interest therein. To the extent that possession
may be required by applicable law for the perfection of Lender's security
interest, the original chattel paper and instruments representing the
Receivables shall be deemed to be held by Lender, although kept by the Borrower
as the custodial agent of Lender.
3.5. NOTICE OF COLLATERAL ASSIGNMENT. All contracts, documents or instruments
representing or evidencing a Receivable shall contain (by way of stamp or other
method reasonably satisfactory to Lender) the following language: "Pledged to
FINOVA Capital Corporation as Collateral".
3.6. LOCATION OF RECEIVABLES. Borrower shall, at any reasonable time and at
Borrower's own expense, upon Lender's request, physically deliver to Lender all
Receivables (including any instruments, documents or writings in respect of any
Receivable together with all instruments, documents or writings in respect of
any collateral securing each Receivable) assigned to Lender to any reasonable
place or places designated by Lender. All Receivables shall, regardless of their
location, be deemed to be under Lender's dominion and control (with files so
labeled) and deemed to be in Lender's possession.
3.7 RECORDS AND INSPECTIONS. Borrower shall at all times keep complete and
accurate records pertaining to the Collateral, which records shall be current on
a daily basis and located only at the locations (Schedule Section 3.2.). Lender
by or through any of its officers, agents, employees, attorneys or accountants,
shall have the right to enter any such locations, upon reasonable prior notice,
at any reasonable time or times during regular business hours, for so long as
Lender may desire, to inspect the Collateral and to inspect, audit and make
extractions or copies from the books, records, journals, orders, receipts,
correspondence or other data relating to the Collateral or this Agreement.
3.8. ADDITIONAL DOCUMENTS. Borrower hereby agrees to execute any additional
documents or financing statements which Lender deems necessary in its reasonable
discretion in order to evidence Lender's security interest in the Collateral.
Borrower shall not allow any financing statement or notice of assignment of
accounts receivable, other than those executed in connection with this
Agreement, to be on file in any public office covering any Collateral, proceeds
thereof or other matters subject to the security interest granted to Lender.
3.9. COLLECTION. Borrower agrees at its own expense to promptly and diligently
collect each installment of all Receivables in trust for the exclusive account
of Lender, to hold Lender harmless from any and all loss, damage, penalty,
liability, fine or expense arising from such collection by Borrower or its
agents and to faithfully account therefor to Lender. During the continuance of
any Event of Default, Lender expressly retains the unqualified right at any time
it so elects to take over the collection of the Receivables.
3.10. BLOCKED ACCOUNTS. At Lender's request, any checks, notes, drafts or any
other payment upon and/or proceeds of the Collateral received by Borrower (or
any subsidiaries, divisions, affiliates, proprietorships, shareholders,
directors, officers, employees, agents or those persons acting for or in concert
with Borrower), shall no later than the next Business Day following receipt
thereof, be delivered to Lender, at Lender's address set forth above, for
application on account of the Indebtedness and shall be reflected in the
Statement of Account as provided in Section 2.9 herein, until such time as
Lender has established a depository account at a bank for the deposit of such
payments, made arrangements for such deposits to be transferred to Lender daily
and thereafter established a lock-box arrangement or otherwise. Borrower shall
(i) deposit or cause all Items, as defined below, to be deposited in the special
account so established by Lender or transfer all Items to Lender for application
on account of the Indebtedness and to be reflected in the Statement of Account
as provided in Section 2.9 herein and (ii) maintain copies of all checks or
other items of payment and deposit slips related thereto, together with a
collection report in a form satisfactory to Lender. All cash payments, checks,
drafts, or similar items of payment upon and/or proceeds of the Receivables
(collectively "Items") by or for the account of Borrower shall be the sole and
exclusive property of Lender immediately upon the earlier of the receipt of such
Items by Lender or the receipt of such Items by Borrower; provided, however,
that no such Item received by Lender shall constitute payment to Lender and be
applied to reduce the Indebtedness until the later of: (i) three (3) Business
Days from collection of such Item by Lender's depository bank, or (ii) such Item
being actually collected by Lender's depository bank and such collection being
credited to Lender's account. Notwithstanding anything to the contrary herein,
all such items of payment shall be deemed not received if the same is
subsequently dishonored or not duly credited to Lender's depository account for
any reason whatsoever.
3.11. PROTECTION OF RECEIVABLE RECORDS. Borrower hereby agrees to take the
following protective actions to prevent destruction of Borrower's Collateral and
records pertaining to such Collateral: (i) if Borrower maintains its Collateral
records on a manual system such records shall be kept in a fire proof cabinet or
on no less than a monthly basis, a record of all payments on Receivables and all
other matters relating to the Collateral shall be placed in an off site safety
deposit box (and Lender shall have access to such safety deposit box); or (ii)
if the Collateral records are computerized, Borrower agrees to create a tape or
diskette "back-up" of the computerized information and upon the request of
Lender, provide Lender with a tape or diskette copy of such "back-up"
information.
3.12. USE OF COLLECTIONS AND MODIFICATION OF RECEIVABLES. Provided that Lender
has not required that Borrower remit all collections or proceeds of Collateral
to Lender, Borrower may use or dispose of the funds received on the Receivables
in the ordinary course of business (including returned or repossessed goods);
and unless an Event of Default is continuing, Borrower may collect or compromise
accounts or obligations and accept returned goods or make repossessions, as
Borrower shall determine based upon its reasonable discretion.
3.13. USE OF PROCEEDS. Borrower shall use the proceeds of the Loan as a
distribution to Borrower's shareholder, provided such distribution does not
create a Default hereunder, for such shareholder to effect the acquisitions
contemplated to occur on or about the date of this Agreement (as previously
disclosed to Lender), in the ordinary course of business, in its operations for
costs incurred in the creation or purchasing of Receivables, or for payments to
Lender hereunder.
3.14. RETURN OF COLLATERAL. Upon the payment in full or renewal of any
Receivable to which the written documents evidencing such Receivable are held by
Lender, Borrower shall submit all requests for the return of such documents
pursuant to the "Request For Return of Collateral" form, a copy of which is
attached hereto as Exhibit "C".
3.15. LENDER'S PAYMENT OF CLAIMS. Lender may, in its sole discretion, discharge
or obtain the release of any security interest, lien, claim or encumbrance
asserted by any person against the Collateral. All sums paid by Lender in
respect thereof shall be payable, on demand, by Borrower to Lender and shall be
a part of the Indebtedness.
3.16 CROSS COLLATERALIZATION. Each Borrower agrees that the Collateral of
each Borrower pledged hereunder shall secure all of the obligations of the
Borrowers to Lender hereunder. Upon and after an Event of Default by any
Borrower, Lender may pursue all rights and remedies it may have against all or
any part of the Collateral regardless of the status of legal title to such
Collateral. Each Borrower hereby acknowledges that this Cross Collateralization
of their Collateral is in consideration of Lender's extending the credit
hereunder and mutually beneficial to each Borrower.
4. CONDITIONS OF CLOSING; SUBSEQUENT ADVANCES
4.1. INITIAL ADVANCE. The obligation of Lender to make the initial advance
hereunder is subject to the fulfillment, to the satisfaction of Lender and its
counsel, of each of the following conditions prior to the initial advance
hereunder:
A. Loan Documents. Lender shall have received each of the following Loan
Documents: (i) this Loan and Security Agreement executed by the respective
parties; (ii) Schedule to Loan and Security Agreement executed by the respective
parties; (iii) the Note executed by Borrower; (iv) Guaranty Agreement executed
by the respective Guarantors; (v) such Blocked Account or Dominion Account
agreements as it shall determine; and (vi) such other documents, instruments and
agreements in connection herewith as Lender shall reasonably require, executed,
certified and/or acknowledged by such parties as Lender shall designate;
B. Terminations by Existing Lender. Borrower's existing lender(s) shall have
executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interests in the Collateral
in form and substance satisfactory to Lender in its sole discretion;
C. Charter Documents. Lender shall have received copies of Borrower's By-laws
and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary or Assistant
Secretary of Borrower;
D. Good Standing. Lender shall have received a certificate of corporate status
with respect to Borrower and each corporate Guarantor, dated within ten (10)
days of the Closing Date, by the Secretary of State of the state of
incorporation of Borrower and such Guarantor, which certificate shall indicate
that Borrower and such Guarantor are in good standing in such state;
E. Foreign Qualification. Lender shall have received certificates of corporate
status with respect to Borrower and each corporate Guarantor, each dated within
ten (10) days of the Closing Date, issued by the Secretary of State of each
state in which such party's failure to be duly qualified or licensed would have
a material adverse effect on its financial condition or assets, indicating that
such party is in good standing;
F. Authorizing Resolutions and Incumbency. Lender shall have received a
certificate from the Secretary or Assistant Secretary of Borrower and each
corporate Guarantor attesting to (i) the adoption of resolutions of each
respective Board of Directors authorizing the borrowing of money from Lender or
the guaranty of the Indebtedness, as the case may be, and execution and delivery
of this Agreement and the other Loan Documents to which Borrower and Guarantor
are a party, and authorizing specific officers of Borrower and Guarantor to
execute same, and (ii) the authenticity of original specimen signatures of such
officers;
G. Initial Availability Report. Lender shall have received an Availability
Report from Borrower executed by an authorized corporate officer of Borrower;
H. Property Insurance. If applicable, Lender shall have received the insurance
certificates and certified copies of policies required herein, along with a
Lender's Loss Payable Endorsement naming Lender as sole loss payee, all in form
and substance satisfactory to Lender and its counsel;
I. Searches; Certificates of Title. Lender shall have received searches
reflecting the filing of its financing statements and other filings in such
jurisdictions as it shall determine, and shall have received certificates of
title with respect to the Collateral which shall have been duly executed in a
manner sufficient to perfect all of the security interests granted to Lender;
J. Fees. Borrower shall have paid all fees payable by it on the Closing Date
pursuant to this Agreement;
K. Opinion of Counsel. Lender shall have received an opinion of Borrower's
counsel covering such matters as Lender shall determine in its sole discretion;
L. Solvency Certificate. If requested by Lender, a signed certificate of the
Borrower's duly elected Chief Financial Officer concerning the solvency and
financial condition of Borrower, on Lender's standard form;
M. Blocked and Pledged Accounts. If applicable, the Blocked Account and/or
Pledged Account referred to in Section 3.10 hereof shall have been established
to the satisfaction of Lender in its sole discretion; and
N. Warrants Agreement. A signed warrants agreement executed by Eckler
Industries, Inc.
O. Voting Agreement. All of the voting rights with respect to the stock in
Eckler Industries, Inc. owned or held by Gerald C. Parker and Thomas Conlan,
directly or indirectly, shall be held by Gary Smith pursuant to a certain Voting
Agreement, in a form and substance acceptable to Lender.
P. Stock Exchange Agreement. Borrowers' shareholders have completed and closed
all matters with respect to a stock exchange agreement with Smart Choice
Automotive Holdings, Inc. ("Holdings"), wherein all of the ownership of Borrower
is held by Holdings, in a form and substance satisfactory to Lender.
Q. Other Matters. All other documents and legal matters in connection with the
transactions contemplated by this Agreement shall have been delivered, executed
and recorded and shall be in form and substance satisfactory to Lender and its
counsel.
4.2. SUBSEQUENT ADVANCES. The obligation of Lender to make any advance
hereunder (including the initial advance) shall be subject to the further
conditions precedent that, on and as of the date of such advance: (a) the
representations and warranties of Borrower set forth in this Agreement shall be
accurate, before and after giving effect to such advance or issuance and to the
application of any proceeds thereof; (b) no Default or Event of Default has
occurred and is continuing, or would result from such advance or issuance or
from the application of any proceeds thereof; (c) no material adverse change has
occurred in the Borrower's business subsequent to the immediately preceding
advance hereunder, operations, financial condition, or assets or in the prospect
of repayment of the Indebtedness; (d) Lender shall have received such other
approvals, opinions or documents as Lender shall reasonably request; and (e)
Borrower shall submit to Lender a completed Request for Advance Report in the
form and substance of Exhibit "A" attached hereto, on the date such advance is
requested or shall have complied with the provisions concerning oral advances
hereunder as set forth in Section 4.3 hereof.
4.3. ORAL REQUEST FOR ADVANCE. All oral requests for advances shall be made
only by an authorized agent of Borrower designated by or acting under the
authority of a resolution of the Board of Directors of Borrower, a duly
certified or executed copy of which shall be furnished to Lender prior to any
oral request. Lender shall be entitled to rely upon such authorization until
written notice to the contrary is received by Lender. Borrower covenants and
agrees to furnish to Lender written confirmation of any such oral request within
two (2) days after such oral request, in a form set forth on Exhibit "A"
attached hereto and incorporated herein, but any such loan or advance shall be
deemed to be made under and entitled to the benefits of this Agreement and any
other documents or instruments executed in connection herewith irrespective of
any failure by Borrower to furnish such written confirmation. Any loan or
advance shall be conclusively presumed to have been made under the terms of this
Agreement, to or for the benefit of Borrower, when made pursuant to the terms of
any written agreement executed in connection herewith; or in accordance with
such requests and directions; or when an advance is deposited to the credit of
the account of any person or persons, corporation or corporations comprising
Borrower, regardless of the fact that persons other than those authorized
hereunder may have authority to draw against such account or regardless of the
fact that the advance was not made or deposited for the benefit of all persons
or corporations comprising Borrower.
4.4 ALL ADVANCES TO CONSTITUTE ONE LOAN. All evidences of credit, loans and
advances made by Lender to Borrower under this Agreement and any other documents
or instruments executed in connection herewith shall constitute one loan, and
all indebtedness and obligations of Borrower to Lender under this Agreement and
all other such documents and instruments shall constitute one general obligation
secured by Lender's security interest in all of the Collateral and by all other
security interests, liens, claims and encumbrances heretofore, now, or at any
time or times hereafter granted by Borrower to Lender. Borrower agrees that all
of the rights of Lender set forth in this Agreement shall apply to any
modification of or supplement to this Agreement and any other such documents and
instruments.
4.5 ADVANCES. Lender shall have the right in Lender's discretion, subject to
availability hereunder on behalf of and without notice to Borrower, to make and
use advances to pay Lender for any amounts due to Lender pursuant to this
Agreement or otherwise, to cure any default hereunder, notwithstanding the
expiration of any applicable cure period.
5. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND GUARANTOR.
5.1 REPRESENTATIONS AND WARRANTIES. Borrower and Guarantor hereby continuously
represent and warrant to Lender as follows:
A. Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation, is duly qualified to
do business and is in good standing as a foreign corporation in all states where
the failure to be so qualified would have a material adverse effect on Borrower
or its assets or business, has all necessary corporate power and authority to
enter into this Agreement and each of the documents and instruments relating
hereto and to perform all of its obligations hereunder and thereunder.
Simultaneously, with the execution of this Agreement, all of the outstanding
stock of Borrower shall be owned by Smart Choice Holdings, Inc.
All of the outstanding stock of Borrower's sole shareholder, Smart Choice
Holdings, Inc. is owned by Eckler Industries, Inc.;
B. Borrower operates its business only under the assumed names (Schedule Section
5.1.) and has not used any other assumed name for the operation of its business
activities for the previous seven (7) years.
C. Borrower has all requisite corporate right and power and is duly authorized
and empowered to enter into, execute, deliver and perform this Agreement and all
documents and instruments relating hereto and this Agreement and all documents
and instruments relating hereto are the legal, valid and binding obligations of
Borrower and are enforceable against Borrower in accordance with their terms,
except as may be limited by bankruptcy, insolvency and other such laws affecting
creditors' rights generally, and by general equitable principles.
D. Each Guarantor is competent to enter into this Agreement and the Guaranty and
to perform all of Guarantor's obligations thereunder.
E. The execution, delivery and performance by Borrower of this Agreement does
not and shall not (i) violate any provision of any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award presently in effect
having applicability to Borrower; (ii) violate any provision of its Articles of
Incorporation or Bylaws; or (iii) result in a breach of or constitute a default
under any indenture or loan or credit agreement or any other agreement, lease or
instrument to which Borrower is a party or by which it or any of its assets or
properties may be bound or affected; and Borrower is not in default of any such
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award or any such indenture, agreement, lease or instrument.
F. No consent, approval, license, exemption of or filing or registration with,
giving of notice to, or other authorization of or by, any court, administrative
agency or other governmental authority is or shall be required in connection
with the execution, delivery or performance by Borrower for the valid
consummation of the transactions contemplated by this Agreement.
G. No event has occurred and is continuing which constitutes a Default or an
Event of Default, as defined in this Agreement. There is no action, suit,
proceeding or investigation pending or, to Borrower's knowledge, threatened
against or affecting Borrower before or by any court, administrative agency or
other governmental authority that brings into question the validity of the
transactions contemplated hereby, or that might result in any material adverse
effect on the businesses, assets, properties or financial conditions of Borrower
or Guarantor.
H. Borrower and/or Guarantor are not in default in the payment of any taxes
levied or assessed against either of them or any of their assets or properties,
except for taxes being contested in good faith and by appropriate proceedings.
I. Borrower and Guarantor have good and marketable title to their assets and
properties as reflected in their financial statements furnished to Lender.
J. Each of the financial statements furnished to Lender by the Borrower and
Guarantor was prepared in accordance with GAAP and fairly and accurately
reflects their financial condition as of the date thereof in all material
respects; and each hereby certifies that there have been no material adverse
changes in their condition, financial or otherwise, since the date of such
statements, and there are no contingent liabilities not provided for or
disclosed in such statements.
K. Neither this Agreement, any Availability Report or any statement or document
referred to herein or delivered to Lender by Borrower and/or Guarantor contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements made herein or therein not misleading.
L. Borrower has good, indefeasible and merchantable title to and ownership of
the Collateral, free and clear of all liens, claims, security interests and
encumbrances, except those of Lender and except where such liens, claims,
charges, security interests and encumbrances are removed contemporaneously with
the execution of this Agreement or are subordinate to those of Lender, in a form
and substance acceptable to Lender.
M. All books, records and documents relating to the Collateral are and shall be
genuine and in all respects what they purport to be; the original amount and the
unpaid balance of each Receivable shown on the books and records of Borrower and
in the schedules represented as owing by each Account Debtor is and shall be the
correct amount actually owing or to be owing by such Account Debtor at maturity;
Borrower has no knowledge of any fact which would impair the validity or
collectibility of any of the Receivables; and the payments shown to have been
made by each Account Debtor on the books and records of Borrower shall reflect
the amounts of and dates on which said payments were actually made.
N. Borrower has places of business only at the locations (Schedule Section
3.2.). Borrower shall not begin or do business (either directly or through
subsidiaries) at other locations or cease to do business at any of the above
locations or at Borrower's principal place of business without first notifying
Lender.
O. The present value of all benefits vested under all Plans of Borrower or any
Commonly Controlled Entity (based on the assumptions used to fund the Plans) did
not, as of the last annual valuation date (which in case of any Plan was not
earlier than December 31, 1982) exceed the value of the assets of the Plans
applicable to such vested benefits.
P. The liability to which Borrower or any Commonly Controlled Entity would
become subject under Sections 4063 or 4064 of ERISA if Borrower or any Commonly
Controlled Entity were to withdraw from all Multi-employer Plans or if such
Multi-employer Plans were to be terminated as of the valuation date most
closely preceding the date hereof, is not in excess of Twenty Five Thousand
Dollars ($25,000.00);
Q. Borrower is not engaged nor shall it engage, principally or as one of its
important activities, in a business of extending credit for the purpose of
"purchasing" or "carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulations G or X of the Board of Governors of
the Federal Reserve System as now and from time to time hereafter in effect. No
part of the proceeds of any advances hereunder shall be used for "purchasing" or
"carrying" "margin stock" as so defined or for any purpose which violates, or
which would be inconsistent with, the provisions of the Regulations of such
Board of Governors. If requested by Lender, Borrower shall furnish to Lender a
statement in conformity with the requirement of Federal Reserve Form G-3
referred to in said Regulation G to the foregoing effect. All of the outstanding
securities of Borrower have been offered, issued, sold and delivered in
compliance with, or are exempt from, all federal and state laws and rules and
regulations of federal and state regulatory bodies governing the offering,
issuance, sale and delivery of securities.
R. Borrower is not an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
S. Each of the Exhibits and Schedules to this Agreement contain true, complete
and correct information.
T. To the best of Borrower's knowledge, the land and improvements owned or
leased by Borrower for use in its business operations are free of dangerous
levels of contaminates, oils, asbestos, radon, PCB's, hazardous substances or
waste as defined by federal, state or local environmental laws, regulations or
administrative orders or other materials, the removal of which is required or
the maintenance of which is prohibited, regulated or penalized by any federal,
state or local governmental authority.
U. Borrower is solvent, generally able to pay its obligations as they become
due, has sufficient capital to carry on its business and transactions and all
businesses and transactions in which it intends to engage, and the current value
of Borrower's assets, at fair saleable valuation, exceeds the sum of its
liabilities. Borrower shall not be rendered insolvent by the execution and
delivery of the Loan Documents and the consummation of the transactions
contemplated thereby and the capital remaining in Borrower is not now and shall
not foreseeably become unreasonably small to permit Borrower to carry on its
business and transactions and all businesses and transactions in which it is
about to engage. Borrower does not intend to, nor does it reasonably believe it
shall, incur debts beyond its ability to repay the same as they mature.
V. Lender has a perfected security interest in favor of Lender in all of
Borrower's right, title and interest in the Collateral (subject to physical
possession of instruments, if any, and endorsements of title respecting titled
Collateral, if such endorsements of title are necessary for perfection of such
security interest), prior and superior to any other security interest or lien,
except any statutory or constitutional lien for taxes not yet due and payable.
W. There are no material actions, suits or proceedings pending, or, to
Borrower's knowledge, threatened against or affecting the assets of Borrower or
the consummation of the transactions contemplated hereby, at law, or in equity,
or before or by any governmental authority or instrumentality or before any
arbitrator of any kind. Neither Borrower nor Guarantor is subject to any
judgment, order, writ, injunction or decree of any court or governmental agency.
There is not a reasonable likelihood of an adverse determination of any pending
proceeding which would, individually or in the aggregate, have a material
adverse effect on the business operations or financial condition of Borrower or
Guarantor.
5.2. WARRANTIES AND REPRESENTATIONS AS TO ELIGIBLE RECEIVABLES. With respect to
Eligible Receivables, Borrower and Guarantor continuously warrant and represent
to Lender that during the term of this Agreement and so long as any of the
Indebtedness remains unpaid: (i) in determining which Receivables are "Eligible
Receivables," Lender may rely upon all statements or representations made by
Borrower; and (ii) those Receivables designated as Eligible Receivables meet
each requirement set forth below at the time any request for advance is provided
to Lender.
A. The Eligible Receivables are genuine; are in all respects what they purport
to be; and are evidenced by at least one executed original instrument,
agreement, contract or document which has been or shall be delivered to Lender;
B. The Eligible Receivables represent undisputed, bona fide transactions
completed in accordance with the terms and provisions contained in any documents
related thereto;
C. The amounts of the face value shown on any schedule of Receivables provided
to Lender, and/or all invoices or statements delivered to Lender with respect to
any Eligible Receivables, are actually and absolutely owing to Borrower and are
not contingent for any reason;
D. No set-offs, counterclaims or disputes as to payments or liability thereon
exist or have been asserted with respect thereto and Borrower has not made any
agreement with any Account Debtor thereunder for any deduction therefrom, except
a discount or allowance allowed by Borrower in the ordinary course of its
business for prompt payment, all of which discounts or allowances are reflected
in the calculation of the outstanding amount of the Receivable;
E. No facts, events or occurrences exist that, in any way, impair the validity
or enforcement thereof or tend to reduce the amount payable thereunder from the
amount of the Receivable shown on any schedule, or on all contracts, invoices or
statements delivered to Lender with respect thereto;
F. All Account Debtors in connection with Eligible Receivables: (i) had the
capacity to contract at the time any contract or other document giving rise to
the Receivable was executed; and (ii) generally have the ability to pay their
debts as become due;
G. Within Borrower's knowledge, no proceedings or actions are threatened or
pending against any Account Debtor that might result in any material adverse
change in the Account Debtor's financial condition;
H. The Eligible Receivables have not been assigned or pledged to any person or
entity, other than Lender;
I. The goods giving rise to the Eligible Receivables are not, and were not at
the time of the sale, rental and/or lease thereof, subject to any lien, claim,
encumbrance or security interest except those of Lender, those removed or
terminated prior to the date hereof or those subordinated to Lender's security
interest, by a subordination and standstill agreement acceptable to Lender;
J. The End of Month Delinquency set forth in Section 12 of the Availability
Report shall be delivered to Lender by Borrower hereunder as determined pursuant
to the Aging Procedures and Eligibility Test (Schedule Section 1.14.D.).
6. COVENANTS AND OTHER AGREEMENTS
6.1 AFFIRMATIVE COVENANTS. During the term of this Agreement and so long as
any of the Indebtedness remains unpaid, Borrower and Guarantor agree and
covenant, jointly and severally, that they shall:
A. Pay or cause to be paid currently all of their expenses, including all
payments on their obligations whenever due, as well as all payments of any and
all taxes of whatever nature when due. This provision shall not apply to taxes
or expenses which are due, but which are challenged in good faith.
B. Maintain, preserve, and protect the Collateral, including, but not limited
to, keeping documents, instruments or other written records otherwise evidencing
the Collateral in accordance with Section 3.11 hereof.
C. Furnish to Lender written notice as to the occurrence of any Default or Event
of Default hereunder.
D. Furnish to Lender notice of: (i) any development related to the business,
financial condition, properties or assets of Borrower or Guarantor, that would
have or has a materially adverse effect on such business, financial condition,
properties or assets, or ability to perform their obligations under this
Agreement and (ii) any material and adverse litigation or investigation to which
either of them may be a party.
E. Carry on and conduct their business in the same manner and in the same fields
of enterprise as they are presently engaged, and Borrower shall preserve its
corporate existence, licenses or qualifications as a domestic corporation in the
jurisdiction of its incorporation and as a foreign corporation in every
jurisdiction in which the character of its assets or properties or the nature of
the business transacted by it at any time makes qualification as a foreign
corporation necessary and the failure to be so qualified would have a material
adverse effect on Borrower or its assets or business, and to maintain all other
material corporate rights and franchises, provided, however, nothing herein
shall be construed to prevent Borrower from closing any retail location in the
good faith exercise of its business judgment.
F. Comply, and cause each affiliate to comply, with all statutes, governmental
rules and regulations applicable to them.
G. Permit and authorize Lender, without notifying Borrower or Guarantor, to make
such inquiries through business credit or other credit reporting services
concerning Borrower or Guarantor as Lender shall deem appropriate.
H. Provide Lender with evidence of insurance issued by a reputable carrier, as
reasonably required by Lender. This insurance shall reflect Lender as a loss
payee or additional insured, as required by Lender, and contain a provision that
Lender shall be notified by the carrier thirty (30) days prior to the
termination or cancellation of any such insurance. Borrower shall maintain
insurance, with respect to all Inventory, in an amount equal to or greater than
the cost of such Inventory.
6.2. NEGATIVE COVENANTS. During the term of this Agreement and until the
Indebtedness has been paid in full, Borrower and Guarantor covenant and agree
that they shall not, without Lender's prior written consent, which consent shall
not be unreasonably withheld, do any of the following:
A. Incur or permit to exist any mortgage, pledge, title retention lien or other
lien, encumbrance or security interest with respect to the Collateral now owned
or hereafter acquired by Borrower, except liens in favor of Lender.
B. Delegate, transfer or assign any of their obligations or liabilities under
this Agreement, or any part thereof, to any other person or entity.
C. Be a party to or participate in: (i) any merger or consolidation; (ii) any
purchase or other acquisition of all or substantially all of the assets or
properties or shares of any class of, or any partnership or joint venture
interest in, any other corporation or entity; (iii) any sale, transfer,
conveyance or lease of all or substantially all of Borrower's assets or
properties; or (iv) any sale or assignment with or without recourse of any
Receivables. Notwithstanding the foregoing to the contrary, the negative
covenants set forth in sections (i), (ii) and (iii) in this Section 6.2.C.,
shall not restrict Borrower from participating in the acquisitions or mergers
presented to Lender prior to the date hereof and such do not otherwise cause a
Default hereunder.
D. Cause or take any of the following actions with respect to Borrower: (i)
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower's outstanding securities, except in satisfaction of claims for
indemnification against sellers of businesses; or (ii) purchase or acquire,
directly or indirectly, any shares of capital stock, evidences of indebtedness
or other securities of any person or entity.
E. Amend, supplement or otherwise modify Borrower's Articles of Incorporation or
Bylaws which would have a material adverse effect on the condition and
operations, prospects or financial condition of the Borrower.
F. Incur, assume or suffer to exist any debt (including capitalized leases)
other than (i) the Indebtedness, (ii) accounts payable incurred in the ordinary
course of business, (iii) Subordinated Debt, or (iv) other debt consented to in
writing by Lender.
G. Directly or indirectly make loans to, invest in, extend credit to, or
guaranty the debt of any person or entity, other than in the ordinary course of
Borrower's business.
H. Amend, modify, or otherwise change in any material respect any material
agreement, instrument, or arrangement (written or oral) by which Borrower, or
any of its assets, are bound.
I. Allow Borrower to be managed, directly or indirectly, by any person or entity
other than the senior management that controls the management of Borrower as of
the date hereof, or any replacements thereof reasonably satisfactory to Lender.
J. Permit the Leverage Ratio to be more than the Leverage Ratio Limit (Schedule
Section 6.2.A.).
K. Permit the Net Income to be less than the Minimum Net Income requirement
(Schedule Section 6.2.B.).
L. Make or allow Distributions, in the aggregate, to exceed the distributions
limitation (Schedule Section 6.2.C.); provided, however, that no Distribution
shall be made, at any time that a Default or an Event of Default shall exist,
without waiver in writing by Lender.
M. With respect to First Choice, have cash sales of more than ten percent
(10%) of retail sales per calendar month.
N. With respect to First Choice, request a duplicate certificate of title or
similar document, without the prior written consent of Lender.
6.1. REPORTING REQUIREMENTS AND ACCOUNTING PRACTICES. Borrower shall maintain
(i) a modern system of accounting in accordance with GAAP or other systems of
accounting acceptable to Lender and (ii) standard operating procedures
applicable to all of its locations with respect to the handling and disposition
of cash receipts and other proceeds of Collateral on a daily basis, including
the depositing thereof, aging of account receivables, record keeping and such
other matters as Lender may reasonably request. For the purpose of determining
compliance with the covenants and representations in the Loan Documents, Lender
shall have the right to recast any financial statement or report presented to
Lender by or on behalf of Borrower to comply with GAAP.
6.2. PLEDGE OF RECEIVABLES. Borrower hereby agrees to pledge all Receivables
and deliver documentation evidencing such Receivables (the original contract or
agreement that evidences Account Debtor's primary payment obligation to Borrower
("Payment Agreement") and a certificate of title or application therefore in the
name of Account Debtor, with the Borrower as the only secured party, of the
collateral that secures such payment obligation to Lender ["Certificate of
Title"]), no less often than on the twentieth (20th) day of each calendar month
during the term of this Agreement. If such evidence of title of the collateral
securing a pledged Receivable is not delivered to Lender with the original
Receivable documentation, Borrower shall deliver evidence that such original
title has been applied for in the name of the respective Account Debtor with
Borrower as the only secured party ("White Slip"), in a form and substance
satisfactory to Lender, and such evidence of title shall be delivered to Lender
not later than fifteen (15) days after such evidence of title is received by
Borrower. Any Receivable for which Borrower has not delivered the original
Payment Obligation and the Certificate of Title or White Slip, such Receivables
shall not be an Eligible Receivable hereunder, until such delivery is made.
Borrower will deliver monthly, with the delivery of the documentation evidencing
the Receivables above, a "Vehicle Title Exception Report" listing all
Certificates of Titles which have not been received by Lender or are due from
the appropriate state motor vehicle department.
6.3 ACCOUNT DEBTORS' ADDRESSES. Borrower agrees to furnish to Lender from time
to time, promptly upon request, a list of all Account Debtors' names and their
most current addresses. Borrower agrees that Lender may from time to time,
consistent with standard or generally accepted auditing practices, verify the
validity, amount and any other matters relating to the Receivables by means of
mail, telephone or otherwise, in the name of Borrower and during the continuance
of an Event of Default in the name of Lender or such other name as Lender may
choose.
6.4 FINANCIAL REPORTS. Borrower shall furnish to Lender the following
financial statements and reports, in a form satisfactory to Lender:
A. As soon as practicable and in any event mailed within twenty (20) days after
the end of each fiscal month: (i) "Availability Report," in the form and
substance of Exhibit "D" attached hereto; (ii) Statement of Accounts Receivable
showing the detailed aging of each Receivable according to the procedures
(Schedule Section 1.14.D.); (iii) a monthly Profit and Loss Statement and
Balance Sheet, certified by Borrower's chief financial officer or equivalent
duly elected officer of Borrower; (iv) Schedule of Receivables and Assignment in
the form and substance of Exhibit "E" attached hereto; and (v) with respect to
First Choice's inventory, weekly availability reports (reflecting additions and
deletions), with the original title (open status), the purchase invoice and
applicable Black Book valuation of each vehicle, and monthly availability report
(as a summary of the weekly reports) with a detailed aging of all inventory by
location.
B. Within one hundred twenty (120) days after the end of each of Borrower's
fiscal years, annual financial statements, or consolidated statements, as the
case may be, of Borrower prepared in accordance with GAAP, consistently applied
and certified by its chief financial officer or equivalent duly elected officer.
The financial statements shall consist of a balance sheet as of the end of such
fiscal year and comparative statements of earnings, cash flows, and change in
stockholders' equity for such fiscal year (Schedule Section 6.6.).
C. With reasonable promptness, such other financial data as Lender may
reasonably request, including but not limited to tax returns, business plans and
reports.
Together with each delivery of financial statements required by subsections
A, B and C above, Borrower shall deliver to Lender and shall cause each of its
subsidiaries to deliver to Lender, if requested by Lender, a certificate in form
satisfactory to Lender, certifying that no Default or Event of Default exists
under this Agreement as of the date of such certificate, or if a Default or an
Event of Default exists, specifying the nature and period of existence thereof
and what action Borrower proposes to take with respect thereto.
6.5. FINANCIAL STATEMENTS OF GUARANTORS. Each of the Guarantors (Schedule
Section 1.17.) shall furnish to Lender annual financial statements in form
reasonably satisfactory to Lender and certified by such Guarantor and a copy of
each Guarantor's Federal Income Tax Return (including all schedules thereto and
amendments thereof) filed during the term hereof, within thirty (30) days of the
filing of the same.
6.6 NOTICE OF CHANGES. Borrower shall promptly notify Lender in writing of
any change of its officers, directors or key employees; change of location of
its principal offices, change of location of any of its principal assets; any
acquisition, disposition or reorganization of any corporate subsidiary,
affiliate or parent of Borrower; change of Borrower's name; death or withdrawal
of any partner (if Borrower is a partnership); any sale or purchase out of the
regular course of Borrower's business; litigation of which Borrower or a
Guarantor is a party; and any other material change in the business or financial
affairs of Borrower.
7. EVENTS OF DEFAULT AND REMEDIES
7.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following
events shall constitute an "Event of Default":
A. If any payment of principal or interest or any other amount due Lender is not
paid within five (5) days after the same shall be due and payable.
B. If Borrower or Guarantor fails or neglects to perform, keep or observe any of
the terms, provisions, conditions or covenants, contained in this Agreement, any
of the other Loan Documents or any other agreement or document executed in
connection with the transactions contemplated by this Agreement or if any
representation, warranty or certification made by Borrower herein or in any
certificate or other writing delivered pursuant hereto shall prove to be untrue
in any material respect as of the date upon which the same was made or at any
time thereafter, and the same is not cured to Lender's satisfaction within ten
(10) days after Lender has given written notice to Borrower identifying such
Default, provided that if such Default can be reasonably cured within thirty
(30) days after Lender has given written notice to Borrower identifying such
Default, Borrower shall have thirty (30) days after Lender has given written
notice to Borrower identifying such Default, provided Borrower is continuously
and diligently pursuing such cure during such thirty (30) days.
C. If the validity or enforceability of any lien, charge, security interest,
mortgage, pledge or other encumbrance granted to Lender to secure the
Indebtedness shall be impaired in any respect or to any degree, for any reason,
or if any other lien, charge, security interest, mortgage, pledge or other
encumbrance shall be created or imposed upon the Collateral unless such lien,
charge, security interest, mortgage, pledge or other encumbrance is subordinate
to that of Lender, pursuant to a subordination and standstill agreement in a
form and substance acceptable to Lender.
D. If any judgment against Borrower not covered by insurance in an amount in
excess of Twenty-Five Thousand Dollars ($25,000.00), or any attachment or other
levy against the properties or assets of Borrower with respect to a claim for
any amount in excess of Twenty-Five Thousand Dollars ($25,000.00), remains
unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period
of thirty (30) days.
E. Default in the payment of any sum due under any instrument of indebtedness
for borrowed money, in the aggregate outstanding balance in excess of One
Hundred Thousand Dollars ($100,000.00), owed by Borrower or any Guarantor to any
person, or any other default under such instrument of indebtedness for borrowed
money that permits such indebtedness for borrowed money to become due prior to
its stated maturity or permits the holders of such indebtedness for borrowed
money to elect a majority of the board of directors or manage the business of
Borrower or any Guarantor.
F. If a court or governmental authority of competent jurisdiction shall enter an
order, judgment or decree appointing, with or without Borrower's or Guarantor's
consent or acquiescence, a receiver, custodian, liquidator, trustee or other
officer with similar powers of Borrower or Guarantor or of the whole or any
substantial part of its properties or assets, or approving a petition filed
against Borrower or Guarantor seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the federal
bankruptcy laws or any other applicable law, and such order, judgment or decree
shall remain unvacated, unstayed or not set aside for an aggregate of thirty
(30) days (whether or not consecutive) from the date of the entry thereof or if
any petition seeking such relief shall be filed against Borrower or Guarantor
and such petition shall not be dismissed within thirty (30) days.
G. An event shall occur which shall have a material adverse affect on the
operations or financial condition of the Borrower or Guarantor.
H. If either Borrower or Guarantor shall: (i) be generally not paying their
respective debts as they become due; (ii) file a petition in bankruptcy or a
petition to take advantage of any insolvency act or other act for the relief or
aid of debtors; (iii) make an assignment for the benefit of their creditors;
(iv) consent to or acquiesce in the appointment of a receiver, custodian,
liquidator, trustee or other officer with similar powers of either of their
properties or assets; (v) file a petition or answer seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under the federal bankruptcy laws or any other applicable law; (vi) be
adjudicated insolvent or be liquidated; (vii) admit in writing either of their
inability to pay debts as they become due; (viii) voluntarily suspend
transaction of usual business; or (ix) take any action, corporate or otherwise,
for the purpose of any of the foregoing.
I. Any of the following shall occur: (i) entry of a court order that enjoins,
restrains or in any way prevents Borrower from conducting all or any material
part of its business affairs in the ordinary course of business or (ii)
withdrawal or suspension of any license or authority required for the conduct of
any material part of Borrower's business.
J. If any Guarantor gives notice of termination or terminates its liability
pursuant to the Guaranty Agreement executed in conjunction with this Agreement.
7.2. ACCELERATION OF THE INDEBTEDNESS. During the continuance of an Event of
Default, the outstanding principal balance together with all accrued but unpaid
interest on the Indebtedness and all other sums due and payable by Borrower to
Lender hereunder may, at the option of Lender and without demand, presentment,
notice of dishonor, notice of intent to demand or accelerate payment, diligence
in collecting, grace, notice and protest or a legal process of any kind, all of
which are hereby expressly waived, be declared, and immediately shall become due
and payable.
7.3. LOUISIANA CONFESSION OF JUDGMENT. In the event that Borrower is domiciled
in, or Collateral is located in, Louisiana, and to the extent of such domicile
or location where Louisiana law is applicable to this Agreement:
A. Borrower hereby confesses judgment, up to the full amount of principal,
interest and attorney's fees and for any sums that Lender may advance during the
life of this Agreement for the payment of premiums of insurance, taxes and
assessments or for the protection and preservation of this Agreement as
authorized elsewhere in this Agreement, and does by these presents, consent,
agree and stipulate that, in the event of any payment of principal or interest
due hereunder not being promptly and fully paid when the same becomes due and
payable, or in the event of failure to comply with any of the obligations set
forth herein, the Indebtedness shall, at the option of Lender become due and
payable, and it shall be lawful for Lender, without making a demand and without
notice or putting in default, the same being hereby expressly waived, to cause
all and singular the Collateral herein secured to be seized and sold by
executory process issued by any competent court or to proceed with enforcement
of its security interest in any other manner provided by law; and
B. Borrower hereby expressly waives: (a) the benefit of appraisement, as
provided in Articles 2332, 2336, 2723, and 2724, Louisiana Code of Civil
Procedure, and all other laws conferring the same; (b) the demand and three (3)
days delay according by Articles 2639 and 2721, Louisiana Code of Civil
Procedure, and all other laws conferring the same; (c) the notice of seizure
required by Articles 2293 and 2721, Louisiana Code of Civil Procedure, and all
other laws conferring the same; (d) the three (3) days delay provided by
Articles 2331 and 2722, Louisiana Code of Civil Procedure, and all other laws
conferring the same; and (e) the benefit of the other provisions of Articles
2331, 2722 and 2723, Louisiana Code of Civil Procedure, and all other Articles
not specifically mentioned above; and Borrower expressly agrees to the immediate
seizure of the Collateral in the event of suit thereon.
7.4 REMEDIES. During the continuance of an Event of Default, Lender shall have
the following rights and remedies, which individual remedies shall be
non-exclusive, cumulative and in addition to each and every other remedy set
forth in the Loan Documents or in this Agreement:
A. All of the rights and remedies of a secured party under the Uniform
Commercial Code as enacted in the State of Arizona, as amended, or other
applicable law.
B. The right, to the fullest extent permissible by law, to: (i) enter upon the
premises of Borrower, or any other place or places where the Collateral is
located and kept, without any obligation to pay rent to Borrower, through
self-help and without judicial process, without first obtaining a final judgment
or giving Borrower notice and opportunity for a hearing on the validity of
Lender's claim, and remove the Collateral therefrom to the premises of Lender or
any agent of Lender, for such time as Lender may desire, in order to effectively
collect and liquidate the Collateral; and/or (ii) require Borrower to assemble
the Collateral and make it available to Lender at a place to be designated by
Lender, in Lender's reasonable discretion.
C. The right to sell or otherwise dispose of any or all Collateral in its then
condition at public or private sale or sales, in lots or in bulk, for cash or on
credit, all as Lender, in its discretion, may deem advisable; provided that such
sales may be adjourned from time to time with or without notice. The requirement
of reasonable notice to Borrower of the time and place of any public sale of the
Collateral or of the time after which any private sale either by Lender or at
its option, a broker, or any other intended disposition thereof is to be made,
shall be met if such notice is mailed, postage prepaid, to Borrower at the
address of Borrower designated herein at least ten (10) Business Days before the
date of any public sale or at least ten (10) Business Days before the time after
which any private sale or other disposition is to be made unless applicable law
requires otherwise.
Lender shall have the right to conduct such sales on Borrower's premises or
elsewhere and shall have the right to use Borrower's premises without charge for
such sales for such time or times as Lender may see fit. Lender is hereby
granted a license or other right to use, without charge, Borrower's labels,
copyrights, rights of use of any name, trade secrets, trade names, trademarks
and advertising matter, or any property of a similar nature, as it pertains to
the Collateral, in advertising for sale and selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
Lender's benefit. Lender agrees to hold Borrower harmless from any liability
arising out of Lender's use of Borrower's premises, labels, copyrights, rights
of use of any name, trade secrets, trade names, trademarks and advertising
matter, or any property of a similar nature as it pertains to advertising for
sale, marshaling or selling the Collateral.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination thereof,
and Lender may purchase all or part of the Collateral at public or, if permitted
by law, private sale and, in lieu of actual payment of such purchase price, may
set off the amount of such price against the Indebtedness owing by Borrower to
Lender. The proceeds realized from the sale of any Collateral shall be applied
first to reasonable costs and expenses, attorney's fees, expert witness fees
incurred by Lender for collection and for acquisition, completion, protection,
removal, storage, sale and delivery of the Collateral; second to all payments,
other than principal and interest, due under this Agreement; third to interest
due upon any of the Indebtedness; fourth to the principal balance owing on the
Indebtedness; and fifth the remainder, if any, to Borrower, its successors or
assigns, or to whomsoever may be lawfully entitled to receive the same. If any
deficiency shall arise, Borrower shall remain liable to Lender therefor.
D. In the event that Borrower is domiciled in, or Collateral is located in,
Louisiana, and to the extent of such domicile or location where Louisiana law is
applicable to this Agreement, the right to cause all and singular the
hereinabove described Collateral to be seized and sold under executory process
without appraisement, appraisement being hereby expressly waived, as an entirety
or in parcels, as Lender may determine, to the highest bidder for cash.
E. The right to appoint or seek appointment of a receiver, custodian or trustee
of Borrower or any of its properties or assets pursuant to court order.
F. The right to cease all advances hereunder.
G. All other rights and remedies that Lender may have at law or in equity.
7.5. NO WAIVER. No delay, failure or omission of Lender to exercise any right
upon the occurrence of any Default or Event of Default shall impair any such
right or shall be construed to be a waiver of any such Default or Event of
Default or an acquiescence therein. Lender may, from time to time, in a writing
waive compliance by the other parties with any of the terms of this Agreement
and its rights and remedies upon any Default or Event of Default, and, Borrower
agrees that no waiver by Lender shall ever be legally effective unless such
waiver shall be acknowledged and agreed in writing by Lender. No waiver of any
Default or Event of Default shall impair any right or remedy of Lender not
specifically waived. No single, partial or full exercise of any right of Lender
shall preclude any other or further exercise thereof. No modification or
amendment of or supplement to this Agreement or any other written agreement
between the parties hereto shall be valid or effective (or serve as a basis of
reliance by way of estoppel) unless the same is in writing and signed by the
party against whom it is sought to be enforced. The acceptance by Lender at any
time and from to time of a partial payment or partial performance of any of
Borrower's obligations set forth herein shall not be deemed a waiver, reduction,
modification or release from any Default or Event of Default then existing. No
waiver by Lender of any Default or Event of Default shall be deemed to be a
waiver of any other existing or any subsequent Default or Event of Default.
7.6 APPLICATION OF PROCEEDS. If an Event of Default shall have occurred and
is continuing, all amounts received by Lender on account of any Indebtedness and
realized by Lender with respect to the Collateral, including any sums which may
be held by Lender, or the proceeds of any thereof, shall be applied in the same
manner as proceeds of Collateral as set forth in Section 7.4.C. hereof.
7.7 APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Borrower irrevocably
designates, makes, constitutes and appoints Lender (and all persons reasonably
designated by Lender), with full power of substitution, as Borrower's true and
lawful attorney-in-fact (and not agent-in-fact) and Lender, or Lender's agent,
may, without notice to Borrower, and at such time or times thereafter as Lender
or said agent, in its discretion, may determine, in Borrower's or Lender's name,
at no duty or obligation on Lender, do the following:
A. All acts and things necessary to fulfill Borrower's administrative duties
pursuant to this Agreement, including, but not limited to, the execution of
financing statements;
B. During the continuance any Default, all acts and things necessary to fulfill
Borrower's obligations under this Agreement and the Loan Documents, except as
set forth in Section 7.7.C below, at the cost and expense of Borrower.
C. In addition to, but not in limitation of the foregoing, at any time or times
during the continuance of an Event of Default, Lender shall have the right: (i)
to enter upon Borrower's premises and to receive and open all mail directed to
Borrower and remove all payments to Borrower on the Receivables; however, Lender
shall turn over to Borrower all of such mail not relating to Receivables; (ii)
in the name of Borrower, to notify the Post Office authorities to change the
address for the delivery of mail addressed to Borrower to such address as Lender
may designate (notwithstanding the foregoing, for the purposes of notice and
service of process to or upon Borrower as set forth in this Agreement, Lender's
rights to change the address for the delivery of mail shall not give Lender the
right to change the address for notice and service of process to or upon
Borrower in this Agreement); (iii) demand, collect, receive for and give
renewals, extensions, discharges and releases of any Receivable; (iv) institute
and prosecute legal and equitable proceedings to realize upon the Receivables;
(v) settle, compromise, compound or adjust claims in respect of any Receivable
or any legal proceedings brought in respect thereof; (vi) generally, sell in
whole or in part for cash, credit or property to others or to itself at any
public or private sale, assign, make any agreement with respect to or otherwise
deal with any of the Receivables as fully and completely as though Lender were
the absolute owner thereof for all purposes, except to the extent limited by any
applicable laws and subject to any requirements of notice to Borrower or other
persons under applicable laws; (vii) take possession and control in any manner
and in any place of any cash or non-cash items of payment or proceeds of
Receivables; (viii) endorse the name of Borrower upon any notes, acceptances,
checks, drafts, money orders, chattel paper or other evidences of payment of
Receivables that may come into Lender's possession; and (ix) sign Borrower's
name on any instruments or documents relating to any of the Collateral, or on
drafts against Account Debtors.
The appointment of Lender as attorney-in-fact for Borrower is coupled with an
interest and is irrevocable, until this Agreement is terminated, the
Indebtedness has been paid in full and Lender's security interest in the
Collateral has been terminated.
8.EXPENSES AND INDEMNITIES
8.1. REIMBURSEMENT FOR EXPENSES. Upon the occurrence of a Default, except as
set forth in the Schedule Section 8.1., Borrower agrees to reimburse Lender,
upon demand, for all reasonable out-of-pocket expenses (including costs of
establishing and maintaining accounts or arrangements set forth in Section 3.10,
attorney's fees, expert witness fees and legal expenses) incurred in connection
with the evaluation of collateral, preservation of collateral, or collection of
the Indebtedness.
8.2. LENDER'S EXPENSES AND ATTORNEY'S FEES. UPON AND AFTER AN EVENT OF DEFAULT,
LENDER SHALL BE ENTITLED TO RECOVER FROM BORROWER AND GUARANTORS ALL OF LENDER'S
ATTORNEY'S FEES AND REASONABLE COSTS AND EXPENSES INCURRED IN THE EXERCISE OF
LENDER'S RIGHTS SET FORTH IN THIS AGREEMENT, AND ALL DAMAGES SUSTAINED BY LENDER
BY REASON OF MISREPRESENTATION, BREACH OF WARRANTY OR BREACH OF COVENANT OF
BORROWER HEREIN, EXPRESSED OR IMPLIED, WHETHER CAUSED BY THE ACTS OR DEFAULTS OF
BORROWER, ACCOUNT DEBTORS OR OTHERS; INCLUDING WITHOUT LIMITATION, ALL
ATTORNEY'S FEES ARISING FROM SUCH SERVICES, EXPERT WITNESS FEES AND ANY
EXPENSES, COSTS AND CHARGES RELATING THERETO, AND ALL OF THE FOREGOING SHALL
CONSTITUTE PART OF THE INDEBTEDNESS SECURED BY THE COLLATERAL AND SHALL BE
PAYABLE ON DEMAND.
8.3. GENERAL INDEMNIFICATION. Borrower hereby agrees to indemnify and hold
Lender harmless from and against any and all claims, liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements (collectively "Claim" or "Claims") of any kind or nature
whatsoever, asserted by any party other than Borrower, or with respect to
Borrower only as otherwise provided in this Agreement or pursuant to applicable
law regarding Lender's obligations to Borrower, which may be imposed on,
incurred by or asserted against Lender, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Lender) in any way relating to or arising out of the Loan Documents or
any action taken or omitted by Lender, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Lender) under the Loan Documents, except to the extent such indemnified
matters are finally found by a court to be caused by Lender's gross negligence
or wilful misconduct.
9. MISCELLANEOUS
9.1. NOTICES. All notices, demands, billings, requests and other written
communications hereunder shall be deemed to have been properly given: (i) upon
personal delivery; (ii) on the third Business Day following the day sent, if
sent by registered or certified mail; (iii) on the next Business Day following
the day sent, if sent by overnight express courier; or (iv) on the day sent or
if such day is not a Business Day on the next Business Day after the day sent if
sent by telecopy providing the receiving party has acknowledged receipt by
return telecopy, in each case, to Lender, Borrower or Guarantors at its address
and/or telecopy number as set forth in this Agreement or Schedule Section 9.1,
or at such other address and/or telecopy number as either party may designate
for such purpose in a written notice given to the other party.
Lender shall have the right, on or after initial funding pursuant to the
terms of this Agreement, but subject to Borrower's reasonable approval as to the
form, content and recipients thereof, to issue a press release or other brochure
announcing the consummation of the Loan Documents and to distribute that
information to third parties in the normal course of Lender's business, at no
cost to Borrower.
9.2. PARTICIPATIONS. Borrower and Guarantors acknowledge and agree that Lender
may from time to time sell or offer to sell interests in the Indebtedness and
the Loan Documents to one or more participants. Borrower and Guarantors
authorize Lender to disseminate any information it has pertaining to the
Indebtedness, including without limitation, complete and current credit
information on Borrower and any of its principals and Guarantors, to any such
participant or prospective participant.
9.3 SURVIVAL OF AGREEMENTS. All of the various representations, warranties,
covenants and agreements of Borrower (including without limitation, any
agreements to pay costs and expenses and to indemnify Lender) in the Loan
Documents shall survive the execution and delivery of the Loan Documents and the
performance under such Loan Documents, and shall further survive until one (1)
year and one (1) month after all of the Indebtedness is paid in full to Lender
and all of Lender's obligations to Borrower under the Loan Documents are
terminated.
9.4. NO OBLIGATION BEYOND MATURITY. Borrower agrees and acknowledges that upon
the Maturity Date, Lender shall have no obligation to renew, extend, modify or
rearrange the Loan and shall have the right to require all amounts due and owing
under the Loan to be paid in full upon such date.
9.5. PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and only
agreement of the parties hereto and supersedes any prior understandings or
written or oral agreements between the parties respecting the subject matter of
this Agreement. No provision of this Agreement or other document or instrument
relating hereto may be modified, waived or terminated except by instrument in
writing executed by the party against whom a modification, waiver or termination
is sought to be enforced.
9.6. PARTIES BOUND. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors and assigns, except as
otherwise expressly provided for herein. Borrower and Guarantor shall not assign
any of their respective rights or obligations pursuant this Agreement.
9.7. NUMBER AND GENDER. Whenever used herein, the singular number shall
include the plural and the plural the singular, and the use of any gender shall
be applicable to all genders. The duties, covenants, obligations and warranties
of Borrower in this Agreement shall be joint and several obligations of Borrower
and of each Borrower if more than one.
9.8. NO THIRD PARTY BENEFICIARY. This Agreement is for the sole benefit of
Lender and Borrower and is not for the benefit of any third party.
9.9. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original, and all
of which taken together shall constitute but one and the same instrument.
9.10. SEVERABILITY OF PROVISIONS. Any provision which is determined to be
unconscionable, against public policy or any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
9.11. HEADINGS. The Article and Section headings used in this Agreement are for
convenience only and shall not affect the construction of this Agreement.
9.12. SCHEDULES AND EXHIBITS. Any and all exhibits hereto are hereby expressly
incorporated by reference as though fully set forth at that point verbatim. All
terms and provisions as defined or set forth in Article 1 and in any Schedule
are hereby incorporated into and made a part of this Agreement. Each reference
in this Agreement and the Schedule hereto to any information or definitions
contained in Article 1 or the Schedule shall mean and refer to the information
or definitions as set forth in Article 1 and the Schedule unless the context
specifically requires otherwise. Any terms used in Article 1 and in the Schedule
which are not defined shall have the meanings ascribed to such terms, as of the
date of this Agreement, by the Uniform Commercial Code as enacted in the State
of Arizona to the extent the same are defined therein.
9.13. FURTHER INSTRUMENTS. Borrower and Guarantors shall from time to time
execute and deliver, and shall cause each of Borrower's subsidiaries to execute
and deliver, all such amendments, supplements and other modifications hereto and
to the other Loan Documents and all such financing statements or continuation
statements, instruments of further assurance and any other instruments, and
shall take such other actions, as Lender reasonably requests and deems necessary
or advisable in furtherance of the agreements contained herein.
9.14. LENDER'S EXPENSES AND ATTORNEY'S FEES. UPON AND AFTER AN EVENT OF
DEFAULT, LENDER SHALL BE ENTITLED TO RECOVER FROM BORROWER AND GUARANTORS ALL OF
LENDER'S ATTORNEY'S FEES AND REASONABLE COSTS AND EXPENSES INCURRED IN THE
EXERCISE OF LENDER'S RIGHTS SET FORTH IN THIS AGREEMENT, AND ALL DAMAGES
SUSTAINED BY LENDER BY REASON OF MISREPRESENTATION, BREACH OF WARRANTY OR BREACH
OF COVENANT OF BORROWER HEREIN, EXPRESSED OR IMPLIED, WHETHER CAUSED BY THE ACTS
OR DEFAULTS OF BORROWER, ACCOUNT DEBTORS OR OTHERS; INCLUDING WITHOUT
LIMITATION, ALL ATTORNEY'S FEES ARISING FROM SUCH SERVICES, EXPERT WITNESS FEES
AND ANY EXPENSES, COSTS AND CHARGES RELATING THERETO, AND ALL OF THE FOREGOING
SHALL CONSTITUTE PART OF THE INDEBTEDNESS SECURED BY THE COLLATERAL AND SHALL BE
PAYABLE ON DEMAND.
9.15. GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED BY BORROWER
AND GUARANTOR AND ACCEPTED BY LENDER IN MARICOPA COUNTY, ARIZONA AND SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO
THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ARIZONA.
9.16. JURISDICTION AND VENUE. TO INDUCE THE LENDER TO ENTER INTO THIS
AGREEMENT, BORROWER, GUARANTORS AND LENDER IRREVOCABLY AGREE THAT, SUBJECT TO
THE LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT,
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR
THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE COUNTY OF
MARICOPA, STATE OF ARIZONA. BORROWER, GUARANTORS AND LENDER HEREBY CONSENT AND
SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN
SAID COUNTY AND STATE AND WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON
BORROWER, AND AGREE THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED
MAIL DIRECTED TO BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE SECTION 9.16 AND
SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF.
9.17 WAIVER. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT AND TO THE
EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWER AND EACH GUARANTOR HEREBY
WAIVES (i) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST,
DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, AND ONE OR MORE
EXTENSIONS OR RENEWALS OF ANY OR ALL ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY THE LENDER ON
WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS
WHATEVER THE LENDER MAY DO IN THIS REGARD; (ii) ALL RIGHTS TO NOTICE AND HEARING
PRIOR TO THE LENDER'S TAKING POSSESSION OR CONTROL OF, OR THE LENDER'S REPLEVIN,
ATTACHMENT OR LEVY ON OR OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT
BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE LENDER TO EXERCISE ANY OF THE
LENDER'S REMEDIES; AND (iii) THE BENEFIT OF ALL VALUATION, APPRAISEMENT OR
EXEMPTION LAWS.
9.18. ADVICE OF COUNSEL. BORROWER AND EACH GUARANTOR ACKNOWLEDGES THAT THEY
HAVE BEEN REPRESENTED AND ADVISED BY INDEPENDENT LEGAL COUNSEL WITH RESPECT TO
THE NEGOTIATION, EXECUTION AND ACCEPTANCE OF THIS AGREEMENT AND THE TRANSACTION
GOVERNED BY THIS AGREEMENT AND SPECIFICALLY WITH RESPECT TO THE PROVISIONS
CONTAINED IN SECTIONS 8.3, 9.15, 9.16, 9.17, 9.18, 9.19 and 9.20 HEREOF AND HAS
RELIED UPON THE ADVICE OF ITS INDEPENDENT LEGAL COUNSEL IN AGREEING TO THE TERMS
AND CONDITIONS HEREIN AND IN EXECUTING AND DELIVERING THIS AGREEMENT, AND THAT
THEY HAVE FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT AS THE PRODUCT OF
ARMS' LENGTH NEGOTIATIONS.
9.19. WAIVER OF RIGHT TO TRIAL BY JURY. LENDER, BORROWER AND GUARANTORS HEREBY
COVENANT AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF ANY
MATTER ARISING OUT OF THIS AGREEMENT, THE DOCUMENTS EXECUTED IN CONNECTION
HEREWITH, ANY WRITTEN AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER NOW EXISTING
OR HEREAFTER ARISING OR IN ANY WAY RELATED TO, CONNECTED WITH OR INCIDENTAL TO
THE DEALINGS OF THE PARTIES HERETO OR TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL BE TO A
COURT OF COMPETENT JURISDICTION AND NOT TO A JURY; LENDER, BORROWER AND EACH
GUARANTOR HEREBY EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY. ANY
PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
9.20. TIME OF ESSENCE Subject to any grace periods, cure periods or other such
provisions herein, time is of the essence for the performance the obligations
set forth in this Agreement and the Loan Documents.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first set forth above.
BORROWER:
FLORIDA FINANCE GROUP INC.
By: /s/ Charles D. Bonanno
- ---------------------------
Charles D. Bonanno, Executive Vice President (Date)
LIBERTY FINANCE COMPANY.
By: /s/ Charles D. Bonanno
- ---------------------------
Charles D. Bonanno, Executive Vice President (Date)
SMART CHOICE RECEIVABLES HOLDING COMPANY
By: /s/ Charles D. Bonanno
- ---------------------------
Charles D. Bonanno, Assistant Vice President (Date)
FIRST CHOICE AUTO FINANCE, INC.
By: /s/ Charles D. Bonanno
- ---------------------------
Charles D. Bonanno, Assistant Vice President (Date)
RANTORS:
SC HOLDINGS, INC.
By: /s/ Charles D. Bonanno
- ---------------------------
Charles D. Bonanno, Assistant Vice President (Date)
Smart Choice Automotive Group, Inc.
By: /s/ Charles D. Bonanno
- ---------------------------
Charles D. Bonanno, Assistant Vice President (Date)
LENDER:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By: /s/ Stephen J. Thomas
- --------------------------
Stephen J. Thomas, Vice President (Date)
<PAGE>
EXHIBIT "A"
REQUEST FOR ADVANCE FORM
FLORIDA FINANCE GROUP, INC.
FIRST CHOICE AUTO FINANCE, INC.
To: FINOVA Capital Corporation
13355 Noel Road
Suite 800
Dallas, Texas 75240
Re: Loan and Security Agreement (as amended from time to time, the "Loan
Agreement"), dated as of ______________, by and among FINOVA Capital
Corporation and FLORIDA FINANCE GROUP INC.
Date of Request:______________, 199__
This Advance Request is delivered pursuant to Section 4.2 of the Loan
Agreement. All terms defined in the Loan Agreement shall have the same meaning
herein, except as expressly stipulated otherwise herein.
I. (i) Total Receivables at Request Date: ______________________
(ii) Less:
(A) Unearned finance charges/insurance/fees ( )
(B) Net Ineligible Receivables ( )
Total Eligible Receivables
(I.(i) minus I.(ii)(A) and (B)) ______________
II. (i) Gross Availability:
Advance Rate ________% x Total Eligible Receivables _______________
(ii) Less Current Outstanding Balance of Indebtedness (_______________)
(iii)Net Availability (II.(i) minus II.(ii)) _______________
(iv) Request for Advance _______________
Availability after Advance (II.(iii) minus II.(iv)) _______________
Borrower hereby certifies that:
a. upon making the Advance, the principal balance of the outstanding Advances
made by the Lender shall be equal to or less than the lesser of (i) the
Amount of Revolving Loan Credit Line or (ii) the Availability on Eligible
Receivables.
b. the representations and warranties made in the Loan Agreement are true and
correct in all material respects as of the date hereof;
c. no Event of Default or a Default has occurred and is continuing or would be
caused by the Advance requested hereby;
d. Borrower has performed and complied in all material respects with all
agreements and conditions required to be performed or complied with by it
under the Loan Documents.
e. all necessary authorizations and approvals contemplated by the Loan
Documents have been duly obtained and are in full force and effect; and
f. the proceeds of the requested Advance shall be used for the purposes set
forth in Section 3.13 of the Loan Agreement.
FLORIDA FINANCE GROUP, INC.
FIRST CHOICE AUTO FINANCE, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
<PAGE>
EXHIBIT "B"
SAMPLE FINANCING STATEMENT
To be filed with the Secretary of State
of the State of
FINANCING STATEMENT
This Financing Statement is presented to a Filing Officer for filing pursuant to
the _____ Uniform Commercial Code.
1. The name and address of the Debtor ("Debtor") is:
______________________________________
______________________________________
______________________________________
Taxpayer Identification Number:______________________
2. The name and address of the Secured Party ("Secured Party") is:
FINOVA Capital Corporation
Dial Tower
Dial Corporate Center
Phoenix, Arizona 85077
Attn: Vice President - Law Department
3. Debtor hereby grants a security interest to Secured Party in, and
this Financing Statement covers, the following types of
collateral whether now owned or hereafter acquired and wherever
located ("Collateral"):
A. All accounts and any other rights of Debtor to receive payment;
including, without limitation, all loans, extensions of credit or
Debtor's right to payment for goods sold or services rendered by
Debtor and all chattel paper, instruments, contract rights and
general intangibles, all of Debtor's right, remedies, security,
liens, guaranties, or other contracts of suretyship with respect
thereto, all deposits or other security or support for the
obligation thereunder and credit and other insurance acquired by
the obligor thereon or the Debtor in connection therewith;
B. All Inventory, new or used, including, but not limited to,
parts and accessories;
C. All bank accounts of Debtor;
D. All monies, securities and property, now or hereafter held,
received by, or entrusted to in the possession or under the
control of Secured Party or a bailee of Secured Party;
E. All accessions to, substitutions for and all replacements,
products and proceeds of the foregoing, including, without
limitation, proceeds (including but not limited to claims paid
and premium refunds) of insurance policies referenced in Section
A above; and
F. All books and records (including, without limitation, customer
lists, credit files, tapes, ledger cards, computer software and
hardware, electronic data processing software, computer programs,
printouts and other computer materials and records) of Debtor
evidencing or containing information regarding any of the
foregoing.
This Financing Statements covers all of the foregoing, whether located at
those locations set forth on Exhibit "A" attached hereto and fully incorporated
herein for all purposes; or elsewhere.
SECURED PARTY: DEBTOR:
FINOVA CAPITAL CORPORATION
By:_____________________________ By:__________________________
(Signature) (Signature)
________________________________ _____________________________
(Printed Name and Title) (Printed Name and Title)
<PAGE>
EXHIBIT "C"
Rediscount Finance
REQUEST FOR RETURN OF COLLATERAL
To: FINOVA Capital Corporation
13355 Noel Road
Suite 800
Dallas, Texas 75240
From: FLORIDA FINANCE GROUP INC.
4037 66th Street North
St. Petersburg, Florida 33709
By: ____________________________ (Authorized Agent)
Please return the collateral you are holding on the following accounts which
have been paid-out or renewed during the period from ____________________
to___________________________ ;
INSTRUCTIONS: Please list accounts in NUMERICAL ORDER and designate the reason
for request (P/O - Paid Out; R - Renewed; L - Legal; C/O - Charge-off). Send
this form to FINOVA; a copy shall be returned to you along with collateral
requested.
Borrower Loan/Account Date of Reason for Name of Account
Branch Number Loan Request Debtor
Office
_______ ____________ _________ _________ _________________
The Collateral for the above loans and/or accounts is being returned to you.
Date Collateral Requested:___________________________
Date Collateral Mailed:______________________________
FINOVA Representative Responsible for
Return of Collateral: _______________________________
(Signature) (Date)
FINOVA Managing Account Executive
Authorization for Return:____________________________
(Signature) (Date)
<PAGE>
Rediscount Finance
AVAILABILITY REPORT
(Per attached report)
SCHEDULE OF RECEIVABLES AND ASSIGNMENT
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assignor hereby assigns, transfers,
sets over, and delivers in pledge to FINOVA Capital Corporation, (hereinafter
called the "Assignee"), its successors or assigns, each and every of the
Accounts, Notes, Security Agreements, Conditional Sale Contracts, Lease
Agreements, Chattel Mortgages, Deeds of Trust, Contracts, Drafts, Acceptances,
and other lien instruments, obligations, claims, chooses-in-action and
receivables (hereinafter collectively designated as "Receivables") identified by
account no._______ through no.______, inclusive, made/purchased during the
period from ________________________ through _________________, inclusive,
totaling $_______________ as evidenced by the individual notes/instruments and
listing of the receivables assigned herein which is attached hereto with the
same force and effect as if each account was individually listed and set forth
hereon in detail, together with all right, title and interest of the undersigned
in and to the same and in and to the merchandise, equipment and property
described in the Receivables or thereto appertaining, and together with all
monies owing or to become due thereon, and any and all notes, drafts,
acceptances, evidences of indebtedness, contracts, mortgages, deeds of trust,
liens, security, collateral, guaranties, rights, remedies and powers thereto
relating or appertaining, and all proceeds of any of the foregoing, with full
right and irrevocable power and authority in said assignee, and its assigns for
sole benefit and use of said assignee and its assigns, at any and all times to
collect, enforce, sue on, sell, transfer, assign, pledge, compromise and
discharge the same, or otherwise deal therewith as the absolute property of the
Assignee and its assigns. The term "Receivables" wherever used herein shall be
deemed to also include any other receivables assigned to or acquired by Assignee
in substitution or replacement of any of the original receivables or in addition
thereto. All capitalized terms used, but not defined herein, shall have the
respective meanings ascribed to such terms in that certain Loan and Security
Agreement by and among FINOVA Capital Corporation, assignor and the guarantor
named therein, dated ________, 199_ (the "Loan Agreement"). Reference is made to
the Loan Agreement for a statement of additional terms, conditions and
provisions with respect to the Receivables.
And for value received, the undersigned hereby represents, covenants, and
warrants to FINOVA Capital Corporation, its successors and assigns, that said
receivables are genuine and in all respects what they purport to be; that the
undersigned has no knowledge of any fact which would impair the validity of any
said receivable; that said receivables are valid and subsisting and that the
undersigned has good right to pledge and transfer the same; that the amounts
owing thereon are not disputed by the Account Debtor; that the payment thereof
is not contingent on the fulfillment of any warranties or conditions past or
future; and that there is now owing by the Account Debtor named in each such
receivable the total amount of unpaid balance as shown above and that the amount
thereof is not subject to any dispute or counterclaims; and that the undersigned
hereby warrants and represents that the Receivables assigned hereunder are
Eligible Receivables as of the date hereof, as defined in the Loan Agreement.
The undersigned further covenants and warrants that no prior transfer or
assignment of any said receivables has been made.
FLORIDA FINANCE GROUP INC.
FIRST CHOICE AUTO FINANCE, INC.
Date:______________________ By:_______________________________
Name:
Title:
<PAGE>
LISTING OF ASSIGNED RECEIVABLES
(Attachment to Schedule of Receivables and Assignment)
ACCOUNT TELEPHONE RENEWAL(R) TOTAL
NAME ADDRESS NUMBER NEW LOAN(N) PAYMENTS TERM PAYMENT
______ ________ ________ ___________ __________ _____ _________
FLORIDA FINANCE GROUP INC.
Date: ____________________ By:___________________________
Name:
Title:
GUARANTY
(CONTINUING/UNLIMITED)
TO: FINOVA CAPITAL CORPORATION
Ladies/Gentlemen:
1. THE GUARANTEED DEBT. In consideration of any and all loans, advances,
acceptances and extensions of credit made by FINOVA CAPITAL CORPORATION, a
Delaware corporation, ("FINOVA") to, for the account of, or on behalf of FLORIDA
FINANCE GROUP, INC., a Florida corporation, LIBERTY FINANCE COMPANY, a Florida
corporation, SMART CHOICE RECEIVABLES HOLDING COMPANY, a Delaware corporation
and FIRST CHOICE AUTO FINANCE, INC.. a Florida corporation (collectively
referred to herein as "Borrower") and as an inducement for FINOVA to make future
loans, advances, acceptances and extensions of credit to, for the account of, or
on behalf of Borrower, the undersigned (the "Guarantor"), absolutely and
unconditionally guarantees to FINOVA the punctual payment in full at maturity,
whether due pursuant to acceleration or otherwise, of the principal, interest
and other sums due or to become due from Borrower to FINOVA (collectively the
"debt") at any time and from time to time from the date of this Guaranty until
termination under or pursuant to that certain Amended and Restated Loan and
Security Agreement ("Loan Agreement") and other documents executed in
conjunction therewith, dated February 4, 1997, as amended from time to time, by
and among FINOVA, Borrower and Guarantor.
2. DURATION. This Guaranty shall operate as a continuing guaranty and shall
terminate as to the Guarantor only upon written notice signed by the Guarantor
and actually received by FINOVA, effective as of the opening of business on the
day following the date of receipt. Such termination shall be effective only as
to that portion of the debt incurred after such termination date, and this
Guaranty shall remain in full force and effect as to all debt incurred before
that time. Regardless of when a renewal or extension of pre-termination debt
occurs (with or without adjustment of interest rate or other terms), the debt is
deemed to have been incurred prior to termination to the extent of the renewal
or extension, and to be fully covered by this Guaranty. This Guaranty shall be
binding upon the undersigned Guarantor and its successors and assigns, jointly
and severally, and shall inure to the benefit of FINOVA and its successors and
assigns.
3. NO CONDITIONS. This is an unconditional Guaranty; it is unlimited as to
time, until termination. The Guarantor warrants that there are no conditions,
oral or otherwise, on the effectiveness of this Guaranty. This writing
constitutes the entire agreement of the parties regarding the Guaranty.
4. DISCLOSURE OF CONDITION OF BORROWER. The Guarantor warrants and
represents to FINOVA that: (a) this Guaranty is executed at the Borrower's
request; (b) the Guarantor has established adequate means of obtaining from the
Borrower on a continuing basis financial and other information pertaining to the
Borrower's affairs or business; and (c) the Guarantor is now and will be
familiar with the affairs, business, operation and condition of the Borrower and
its assets. The Guarantor hereby waives any duty on the part of FINOVA to
disclose to the Guarantor any matter relating to the affairs, business,
operation or condition of the Borrower and its assets now known or hereafter
known to FINOVA during the life of this continuing Guaranty. With respect to any
debt of the Borrower to FINOVA, FINOVA need not inquire into the powers of the
Borrower or the officers, directors or agents acting or purporting to act on its
behalf, and any debt created in reliance upon the professed exercise of such
powers shall be guaranteed hereunder.
5. COLLATERALIZATION. The Guarantor agrees that FINOVA shall have a second
lien on all of Guarantor's Collateral, including but not limited to inventory,
new or used, including but not limited to parts and accessories, now owned or
existing or hereafter acquired and wheresoever located (the "Collateral"); and
that the total outstanding balance of the all indebtedness of Guarantor to any
first lien holder(s) of the Collateral, on any date of determination, shall not
exceed Ten Million Dollars ($10,000,000.00). The security interest securing the
payment of this Guaranty shall be pursuant to that certain Security Agreement of
even date herewith by among and between FINOVA and Guarantor. Guarantor hereby
acknowledges that the grant of this security interest and the execution of this
Guaranty and that certain security agreement are in consideration of FINOVA's
extending credit under the Loan Agreement and that Guarantor shall receive a
materially financial and economic benefit from the extension of credit by FINOVA
to Borrower.
6. WAIVERS REGARDING THE GUARANTEED DEBT. The Guarantor expressly waives
the following: notice of the incurring of debt by the Borrower; notice of
default on the debt or intent to accelerate; notice of acceleration; notice of
intent to accelerate; the acceptance of this Guaranty by FINOVA; presentment and
demand for payment, protest, notice of protest and notice of dishonor or
nonpayment of any instrument evidencing debt of the Borrower; any right to
require the pursuit of any remedies against the Borrower or any other guarantor,
including commencement of suit, before enforcing this Guaranty (this is a
guaranty of payment, not a guaranty of collection); any right to have security
or the right of setoff applied before enforcing this Guaranty; and any and all
right of subornation to FINOVA's rights against the Borrower, other guarantors
or any other person or entity; all diligence in collection and failure or delay
by FINOVA in protection or exercise of FINOVA's rights against Borrower; and any
other action or any other encumbrance whatsoever which might constitute a
defense to the enforcement of this Guaranty.
The Guarantor hereby consents and agrees that renewals and extensions of
time of payment (including interest rate adjustments), surrender, release,
exchange, substitution, dealing with or taking of additional collateral,
modifying any obligations of, taking or release of other guarantors, abstaining
from taking advantage of or realizing upon any collateral security or other
guaranty and any and all other forbearances or indulgences granted by FINOVA to
the Borrower or any other party may be made, granted or effected by FINOVA
without notice to the Guarantor and without affecting in any manner Guarantor's
liability hereunder. The Guarantor hereby expressly consents to any impairment
of collateral including, but not limited to, failure to perfect a security
interest and release of collateral.
Any adjustment or compromise may be made by FINOVA with the Borrower or any
other party to the debt, and a lesser sum than the face amount thereof may be
accepted in full payment and discharge. Any of the collateral or other security
granted by the Borrower or any other party which FINOVA may hold or which may
come to it or its possession may be released or otherwise dealt with by FINOVA
in all respects as if this Guaranty were not in existence and the obligation of
the Guarantor shall in no way be affected thereby. The Guarantor hereby waives
and foregoes any right in respect of any such action by FINOVA.
6. FINOVA'S COLLECTION RIGHTS AGAINST GUARANTOR. The Guarantor agrees to
pay to FINOVA any and all costs, expenses and reasonable attorney's fees paid or
incurred by FINOVA in collecting or endeavoring to collect the debt of the
Borrower or in enforcing or endeavoring to enforce this Guaranty, unless
recovery of attorney's fees is invalid under applicable state or federal law. In
addition to its other rights and remedies under this Guaranty, FINOVA may
require, at FINOVA's option, collateral security to support the Guarantor'
obligations upon Borrower's default of any loan agreement with FINOVA if
thereupon FINOVA reasonably deems itself insecure; if such a requirement is
imposed, now or in the future, FINOVA shall have any rights and remedies
contained in any mortgage, security agreement or other document executed by the
Guarantor. If the Guarantor refuses to execute such documents, the debt of the
Borrower shall, for the purposes of this Guaranty, be deemed to have matured.
7. BANKRUPTCY OF BORROWER. Guarantor agrees that this Guaranty shall not be
discharged except (subject to the limitations expressly contained herein) by
complete performance of Borrower's obligations to FINOVA and further agree that
the obligations of the Guarantor hereunder shall not be discharged, reduced or
affected in any way by any receivership, insolvency, bankruptcy or other
proceedings affecting the Borrower or any of its assets or the release or
discharge of the Borrower from the performance of any obligations to FINOVA,
whether by operation of law or otherwise or any other cause, whether similar or
dissimilar to the foregoing.
8. ASSIGNMENT. FINOVA may assign its rights hereunder in whole or in part
and upon any such assignment all the terms and provisions of this Guaranty shall
inure to the benefit of such assignee, to the extent so assigned.
9. MATURITY, PAYMENT. The Guarantor agrees that if the maturity of any of
the debt is accelerated by bankruptcy or otherwise, such maturity shall also be
deemed accelerated for the purpose of this Guaranty without demand or notice of
any kind to the Guarantor. Guarantor further agrees that, to the extent that the
Borrower or any other Person makes a payment to FINOVA on account of the
Indebtedness, or FINOVA receives any proceeds of collateral, which payment or
any part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside, or otherwise required to be repaid to the Borrower or
any other party, including without limitation, it's estate, trustee or receiver,
under any bankruptcy, insolvency, or other similar law, whether state or federal
or under any common law or equitable claim; then to the extent of such payment
or repayment, the obligation or part thereof which has been paid, reduced or
satisfied by such amount shall be reinstated and continued in full force and
effect as of the date such initial payment, reduction or satisfaction occurred.
The Guarantor shall defend and indemnify FINOVA of and from any claim or loss
under this paragraph including FINOVA's attorneys' fees and expenses in the
defense of any such action or suit. The Guarantor will, forthwith upon notice
from FINOVA of the Borrower's failure to pay any debt at maturity, pay to FINOVA
at FINOVA's principal offices the amount due and unpaid by the Borrower and
guaranteed hereby. The failure of FINOVA to give this or any notice shall not in
any way release the Guarantor hereunder.
10. NO ORAL MODIFICATIONS. This Guaranty shall not be suspended, amended,
released, terminated or modified in any manner except by an instrument in
writing signed by all parties to be bound.
11. WAIVER OF DEFAULT. No waiver by FINOVA of any default of any provision
of this Guaranty Agreement shall be deemed a waiver of any other pre-existing or
subsequently existing default, nor shall any such waiver by FINOVA be deemed a
continuing waiver. No delay or omission by FINOVA in exercising any right
hereunder, at any law or in equity, or otherwise, shall impair any such right or
be construed as a waiver thereof, acquiescence therein, nor shall any single or
partial exercise of any right preclude other or further exercise of any other
right that may exist or that may thereafter exist.
12. INDEMNIFICATION. In the event of the breach of this Guaranty, by
Guarantor, Guarantor hereby agrees to indemnify and hold FINOVA harmless from
any and all resulting claims and damages, including attorney's fees, and all
other costs.
13. GOVERNING LAW. This Guaranty is executed and delivered by Guarantor and
is performable in Maricopa County, Arizona, and shall be governed by and
construed in accordance with the laws of the State of Arizona.
14. JURISDICTION AND VENUE. Any suit, action or proceeding against
Guarantor with respect to this Guaranty, the Loan Documents, as such term is
defined in the Loan Agreement, or any judgment entered by any court in respect
thereof, may be brought in any local, state or federal court in the State of
Arizona located in Maricopa County and hereby submit to the nonexclusive
jurisdiction of such courts for the purpose of any such suit, action or
proceeding. Guarantor hereby further irrevocably consents to the service of
process in any suit, action or proceeding in said court by the mailing thereof
by Lender by registered or certified mail, postage thereon prepaid, to Guarantor
at its address set forth in the Loan Agreement. Guarantor hereby irrevocably
waives any objections which it may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of or relating to this Guaranty or
the Loan Documents brought in any local, state or federal court of the State of
Arizona located in Maricopa County and hereby further irrevocably waives any
claim that any such suit, action or proceeding brought in any such court has
been brought in any inconvenient forum.
15. WAIVER OF RIGHT TO TRIAL BY JURY. GUARANTOR AND FINOVA HEREBY COVENANT
AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF ANY MATTER
ARISING OUT OF THIS GUARANTY, THE LOAN DOCUMENTS OR TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL
BE TO A COURT OF COMPETENT JURISDICTION AND NOT TO A JURY; GUARANTOR HEREBY
EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY. ANY PARTY MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
16. ADVICE OF COUNSEL. Guarantor acknowledges that it has been advised by
counsel with respect to the transaction governed by this Guaranty and
specifically with respect to the terms of Sections 13, 14 and 15.
IN WITNESS WHEREOF, this Guaranty has been executed and delivered to FINOVA
by the undersigned Guarantor effective on the 9th day of November, 1998.
SC HOLDINGS, INC.
a Florida corporation
By: /s/ Charles D. Bonanno,
-----------------------------
Charles D. Bonanno
Assistant Vice President
THE STATE OF TEXAS
ss.
COUNTY OF DALLAS
BE IT REMEMBERED, that on 9th day of November, 1998, before me, the
undersigned, a Notary Public within and for the County and State aforesaid, came
Charles D. Bonanno, Assistant Vice President of SC Holdings, Inc., who is
personally known to me to be the same person who executed the within instrument
of writing, and duly acknowledged the execution of the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year last above written.
NOTARY PUBLIC, STATE OF
My commission expires:
GUARANTY
(CONTINUING/UNLIMITED)
TO: FINOVA CAPITAL CORPORATION
Ladies/Gentlemen:
1. THE GUARANTEED DEBT. In consideration of any and all loans, advances,
acceptances and extensions of credit made by FINOVA CAPITAL CORPORATION, a
Delaware corporation, ("FINOVA") to, for the account of, or on behalf of FLORIDA
FINANCE GROUP, INC., a Florida corporation, LIBERTY FINANCE COMPANY, a Florida
corporation, SMART CHOICE RECEIVABLES HOLDING COMPANY, a Delaware corporation
and FIRST CHOICE AUTO FINANCE, INC.. a Florida corporation (collectively
referred to herein as "Borrower") and as an inducement for FINOVA to make future
loans, advances, acceptances and extensions of credit to, for the account of, or
on behalf of Borrower, the undersigned (the "Guarantor"), absolutely and
unconditionally guarantees to FINOVA the punctual payment in full at maturity,
whether due pursuant to acceleration or otherwise, of the principal, interest
and other sums due or to become due from Borrower to FINOVA (collectively the
"debt") at any time and from time to time from the date of this Guaranty until
termination under or pursuant to that certain Amended and Restated Loan and
Security Agreement ("Loan Agreement") and other documents executed in
conjunction therewith, dated February 4, 1997, as amended from time to time, by
and among FINOVA, Borrower and Guarantor.
2. DURATION. This Guaranty shall operate as a continuing guaranty and shall
terminate as to the Guarantor only upon written notice signed by the Guarantor
and actually received by FINOVA, effective as of the opening of business on the
day following the date of receipt. Such termination shall be effective only as
to that portion of the debt incurred after such termination date, and this
Guaranty shall remain in full force and effect as to all debt incurred before
that time. Regardless of when a renewal or extension of pre-termination debt
occurs (with or without adjustment of interest rate or other terms), the debt is
deemed to have been incurred prior to termination to the extent of the renewal
or extension, and to be fully covered by this Guaranty. This Guaranty shall be
binding upon the undersigned Guarantor and its successors and assigns, jointly
and severally, and shall inure to the benefit of FINOVA and its successors and
assigns.
3. NO CONDITIONS. This is an unconditional Guaranty; it is unlimited as to
time, until termination. The Guarantor warrants that there are no conditions,
oral or otherwise, on the effectiveness of this Guaranty. This writing
constitutes the entire agreement of the parties regarding the Guaranty.
4. DISCLOSURE OF CONDITION OF BORROWER. The Guarantor warrants and
represents to FINOVA that: (a) this Guaranty is executed at the Borrower's
request; (b) the Guarantor has established adequate means of obtaining from the
Borrower on a continuing basis financial and other information pertaining to the
Borrower's affairs or business; and (c) the Guarantor is now and will be
familiar with the affairs, business, operation and condition of the Borrower and
its assets. The Guarantor hereby waives any duty on the part of FINOVA to
disclose to the Guarantor any matter relating to the affairs, business,
operation or condition of the Borrower and its assets now known or hereafter
known to FINOVA during the life of this continuing Guaranty. With respect to any
debt of the Borrower to FINOVA, FINOVA need not inquire into the powers of the
Borrower or the officers, directors or agents acting or purporting to act on its
behalf, and any debt created in reliance upon the professed exercise of such
powers shall be guaranteed hereunder.
5. COLLATERALIZATION. The Guarantor agrees that FINOVA shall have a second
lien on all of Guarantor's Collateral, including but not limited to inventory,
new or used, including but not limited to parts and accessories, now owned or
existing or hereafter acquired and wheresoever located (the "Collateral"); and
that the total outstanding balance of the all indebtedness of Guarantor to any
first lien holder(s) of the Collateral, on any date of determination, shall not
exceed Ten Million Dollars ($10,000,000.00). The security interest securing the
payment of this Guaranty shall be pursuant to that certain Security Agreement of
even date herewith by among and between FINOVA and Guarantor. Guarantor hereby
acknowledges that the grant of this security interest and the execution of this
Guaranty and that certain security agreement are in consideration of FINOVA's
extending credit under the Loan Agreement and that Guarantor shall receive a
materially financial and economic benefit from the extension of credit by FINOVA
to Borrower.
6. WAIVERS REGARDING THE GUARANTEED DEBT. The Guarantor expressly waives
the following: notice of the incurring of debt by the Borrower; notice of
default on the debt or intent to accelerate; notice of acceleration; notice of
intent to accelerate; the acceptance of this Guaranty by FINOVA; presentment and
demand for payment, protest, notice of protest and notice of dishonor or
nonpayment of any instrument evidencing debt of the Borrower; any right to
require the pursuit of any remedies against the Borrower or any other guarantor,
including commencement of suit, before enforcing this Guaranty (this is a
guaranty of payment, not a guaranty of collection); any right to have security
or the right of setoff applied before enforcing this Guaranty; and any and all
right of subornation to FINOVA's rights against the Borrower, other guarantors
or any other person or entity; all diligence in collection and failure or delay
by FINOVA in protection or exercise of FINOVA's rights against Borrower; and any
other action or any other encumbrance whatsoever which might constitute a
defense to the enforcement of this Guaranty.
The Guarantor hereby consents and agrees that renewals and extensions of
time of payment (including interest rate adjustments), surrender, release,
exchange, substitution, dealing with or taking of additional collateral,
modifying any obligations of, taking or release of other guarantors, abstaining
from taking advantage of or realizing upon any collateral security or other
guaranty and any and all other forbearances or indulgences granted by FINOVA to
the Borrower or any other party may be made, granted or effected by FINOVA
without notice to the Guarantor and without affecting in any manner Guarantor's
liability hereunder. The Guarantor hereby expressly consents to any impairment
of collateral including, but not limited to, failure to perfect a security
interest and release of collateral.
Any adjustment or compromise may be made by FINOVA with the Borrower or any
other party to the debt, and a lesser sum than the face amount thereof may be
accepted in full payment and discharge. Any of the collateral or other security
granted by the Borrower or any other party which FINOVA may hold or which may
come to it or its possession may be released or otherwise dealt with by FINOVA
in all respects as if this Guaranty were not in existence and the obligation of
the Guarantor shall in no way be affected thereby. The Guarantor hereby waives
and foregoes any right in respect of any such action by FINOVA.
6. FINOVA'S COLLECTION RIGHTS AGAINST GUARANTOR. The Guarantor agrees to
pay to FINOVA any and all costs, expenses and reasonable attorney's fees paid or
incurred by FINOVA in collecting or endeavoring to collect the debt of the
Borrower or in enforcing or endeavoring to enforce this Guaranty, unless
recovery of attorney's fees is invalid under applicable state or federal law. In
addition to its other rights and remedies under this Guaranty, FINOVA may
require, at FINOVA's option, collateral security to support the Guarantor'
obligations upon Borrower's default of any loan agreement with FINOVA if
thereupon FINOVA reasonably deems itself insecure; if such a requirement is
imposed, now or in the future, FINOVA shall have any rights and remedies
contained in any mortgage, security agreement or other document executed by the
Guarantor. If the Guarantor refuses to execute such documents, the debt of the
Borrower shall, for the purposes of this Guaranty, be deemed to have matured.
7. BANKRUPTCY OF BORROWER. Guarantor agrees that this Guaranty shall not be
discharged except (subject to the limitations expressly contained herein) by
complete performance of Borrower's obligations to FINOVA and further agree that
the obligations of the Guarantor hereunder shall not be discharged, reduced or
affected in any way by any receivership, insolvency, bankruptcy or other
proceedings affecting the Borrower or any of its assets or the release or
discharge of the Borrower from the performance of any obligations to FINOVA,
whether by operation of law or otherwise or any other cause, whether similar or
dissimilar to the foregoing.
8. ASSIGNMENT. FINOVA may assign its rights hereunder in whole or in part
and upon any such assignment all the terms and provisions of this Guaranty shall
inure to the benefit of such assignee, to the extent so assigned.
9. MATURITY, PAYMENT. The Guarantor agrees that if the maturity of any of
the debt is accelerated by bankruptcy or otherwise, such maturity shall also be
deemed accelerated for the purpose of this Guaranty without demand or notice of
any kind to the Guarantor. Guarantor further agrees that, to the extent that the
Borrower or any other Person makes a payment to FINOVA on account of the
Indebtedness, or FINOVA receives any proceeds of collateral, which payment or
any part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside, or otherwise required to be repaid to the Borrower or
any other party, including without limitation, it's estate, trustee or receiver,
under any bankruptcy, insolvency, or other similar law, whether state or federal
or under any common law or equitable claim; then to the extent of such payment
or repayment, the obligation or part thereof which has been paid, reduced or
satisfied by such amount shall be reinstated and continued in full force and
effect as of the date such initial payment, reduction or satisfaction occurred.
The Guarantor shall defend and indemnify FINOVA of and from any claim or loss
under this paragraph including FINOVA's attorneys' fees and expenses in the
defense of any such action or suit. The Guarantor will, forthwith upon notice
from FINOVA of the Borrower's failure to pay any debt at maturity, pay to FINOVA
at FINOVA's principal offices the amount due and unpaid by the Borrower and
guaranteed hereby. The failure of FINOVA to give this or any notice shall not in
any way release the Guarantor hereunder.
10. NO ORAL MODIFICATIONS. This Guaranty shall not be suspended, amended,
released, terminated or modified in any manner except by an instrument in
writing signed by all parties to be bound.
11. WAIVER OF DEFAULT. No waiver by FINOVA of any default of any provision
of this Guaranty Agreement shall be deemed a waiver of any other pre-existing or
subsequently existing default, nor shall any such waiver by FINOVA be deemed a
continuing waiver. No delay or omission by FINOVA in exercising any right
hereunder, at any law or in equity, or otherwise, shall impair any such right or
be construed as a waiver thereof, acquiescence therein, nor shall any single or
partial exercise of any right preclude other or further exercise of any other
right that may exist or that may thereafter exist.
12. INDEMNIFICATION. In the event of the breach of this Guaranty, by
Guarantor, Guarantor hereby agrees to indemnify and hold FINOVA harmless from
any and all resulting claims and damages, including attorney's fees, and all
other costs.
13. GOVERNING LAW. This Guaranty is executed and delivered by Guarantor and
is performable in Maricopa County, Arizona, and shall be governed by and
construed in accordance with the laws of the State of Arizona.
14. JURISDICTION AND VENUE. Any suit, action or proceeding against
Guarantor with respect to this Guaranty, the Loan Documents, as such term is
defined in the Loan Agreement, or any judgment entered by any court in respect
thereof, may be brought in any local, state or federal court in the State of
Arizona located in Maricopa County and hereby submit to the nonexclusive
jurisdiction of such courts for the purpose of any such suit, action or
proceeding. Guarantor hereby further irrevocably consents to the service of
process in any suit, action or proceeding in said court by the mailing thereof
by Lender by registered or certified mail, postage thereon prepaid, to Guarantor
at its address set forth in the Loan Agreement. Guarantor hereby irrevocably
waives any objections which it may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of or relating to this Guaranty or
the Loan Documents brought in any local, state or federal court of the State of
Arizona located in Maricopa County and hereby further irrevocably waives any
claim that any such suit, action or proceeding brought in any such court has
been brought in any inconvenient forum.
15. WAIVER OF RIGHT TO TRIAL BY JURY. GUARANTOR AND FINOVA HEREBY COVENANT
AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF ANY MATTER
ARISING OUT OF THIS GUARANTY, THE LOAN DOCUMENTS OR TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL
BE TO A COURT OF COMPETENT JURISDICTION AND NOT TO A JURY; GUARANTOR HEREBY
EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY. ANY PARTY MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
16. ADVICE OF COUNSEL. Guarantor acknowledges that it has been advised by
counsel with respect to the transaction governed by this Guaranty and
specifically with respect to the terms of Sections 13, 14 and 15.
17. PRIOR AGREEMENTS. This Amended and Restated Guaranty Agreement is
executed in conjunction with that certain Second Amended and Restated Loan and
Security Agreement. This Guaranty is to serve in lieu of and in substitution for
any and all previous guaranties executed by the Guarantors with respect to the
debt of Borrowers or any of Borrower to FINOVA. To the extent, this Guaranty is
secured by liens granted to FINOVA on certain collateral, this Guaranty is a
continuation of Guarantors obligations to FINOVA and such obligations and liens,
mortgages, deeds of trust or security interests are not extinguished by this
Guaranty Agreement but are hereby renewed and extended. This Guaranty revokes
all such previous guaranties and the terms, conditions and provisions thereof
shall have no further force or effect.
IN WITNESS WHEREOF, this Guaranty has been executed and delivered to FINOVA
by the undersigned Guarantor effective on the 9th day of November, 1998.
Smart Choice Automotive Group, Inc.
a Florida corporation
By: /s/ Charles D. Bonanno,
-----------------------------
Charles D. Bonanno
Assistant Vice President
THE STATE OF TEXAS
ss.
COUNTY OF DALLAS
BE IT REMEMBERED, that on 9th day of November, 1998, before me, the
undersigned, a Notary Public within and for the County and State aforesaid, came
Charles D. Bonanno, Vice President of Smart Choice Automotive Group, Inc., who
is personally known to me to be the same person who executed the within
instrument of writing, and duly acknowledged the execution of the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year last above written.
NOTARY PUBLIC, STATE OF
My commission expires:
Rediscount Finance
TENTH AMENDED AND RESTATED
PROMISSORY NOTE
$100,000,000.00 PHOENIX, ARIZONA NOVEMBER 9, 1998
FOR VALUE RECEIVED, the undersigned ("MAKER"), hereby unconditionally
promises to pay to the order of FINOVA CAPITAL CORPORATION, a Delaware
corporation ("HOLDER"), at HOLDER's branch address at 13355 Noel Road, Suite
800, Dallas, Texas 75240, or at such other place as HOLDER may designate in
writing, the principal sum of One Hundred Million Dollars ($100,000,000.00) or
so much thereof as shall be outstanding from time to time, with interest thereon
at the Stated Interest Rate calculated on the average daily balance outstanding,
as follows:
1. DEFINITIONS. When used herein, the following terms have the meanings given
in this paragraph:
A. LOAN AGREEMENT. The term "Loan Agreement" shall mean that certain
Second Amended and Restated Loan and Security Agreement, dated of even date
herewith, entered into by and between FINOVA CAPITAL CORPORATION, as
Lender, and MAKER, as Borrower, and all amendments, substitutions, renewals
and extensions thereof. All capitalized terms used herein which are not
expressly defined herein shall have the meanings ascribed to them in the
Loan Agreement.
B. MAXIMUM RATE. The term "Maximum Rate" shall mean the highest lawful
rate of interest applicable to this NOTE. In determining the Maximum Rate,
due regard shall be given to all payments, fees, charges, deposits,
balances and agreements which may constitute interest or be deducted from
principal when calculating interest.
2. PAYMENT. The principal and interest of this NOTE are payable as follows:
A. Accrued but unpaid interest for each calendar month during the term
hereof shall be due and payable monthly, in arrears, on the fifteenth
(15th) day of the immediately succeeding calendar month commencing November
15, 1998. All outstanding principal together with all accrued and unpaid
interest shall be due and payable, if not sooner paid on December 31, 2001.
All payments received hereunder shall be applied as set forth in the Loan
Agreement.
B. Notwithstanding the foregoing, principal shall be immediately due
and payable without written notice and demand from Lender in such amounts
so that the outstanding balance hereunder does not, at anytime, exceed the
permitted amount of the Loan as determined pursuant to Section 2.1 of the
Loan Agreement. The amount of such payments shall be determined by HOLDER
pursuant to the terms of the Loan Agreement and based upon the principal
balance of this NOTE then outstanding as determined pursuant to the Loan
Agreement and as shown on the books and records of HOLDER, maintained in
accordance with its usual practice, the entries of which being prima facie
evidence of the existence and amounts as therein recorded.
C. All of the principal hereunder may be prepaid in full at any time;
however, such voluntary prepayments shall be subject to the voluntary
prepayment provisions set forth in the Loan Agreement.
3. PRINCIPAL BALANCE. The unpaid principal balance of this NOTE at any time
shall be the total amounts loaned or advanced hereunder by HOLDER, less the
amount of payments or prepayments of principal made hereon by or for the account
of MAKER. It is contemplated that by reason of payments or prepayments hereon
there may be times when no indebtedness is owing hereunder; but notwithstanding
such occurrences, this NOTE shall remain valid and shall be in force and effect
as to loans or advances made pursuant to and under the terms of this NOTE
subsequent to each such occurrence. All loans or advances and all payments or
prepayments made hereunder on account of principal or interest may be evidenced
by HOLDER, or any subsequent holder, maintaining in accordance with its usual
practice an account or accounts evidencing the indebtedness of MAKER resulting
from all loans or advances and all payments or prepayments hereunder from time
to time in the amounts of principal and interest payable and paid from time to
time hereunder, in which event, in any legal action or proceeding in respect of
this NOTE, subject to Section 2.9 of the Loan Agreement, the entries made in
such account or accounts shall be prima facie evidence of the existence and
amounts of the obligations of MAKER therein recorded. In the event that the
unpaid principal amount hereof, at any time and for any reason, exceeds the
maximum amount hereinabove specified, MAKER covenants and agrees to pay the
excess principal amount immediately without notice or demand; such excess
principal amount shall in all respects be deemed to be included among the loans
or advances made pursuant to the other terms of this NOTE and shall bear
interest at the rate hereinabove stated.
4. ADVANCES. This Promissory Note is the "Note" referred to in the Loan
Agreement and the Holder is entitled to all the rights, remedies and benefits of
the Lender thereunder. Reference is hereby made to the Loan Agreement for the
terms and conditions under which this Note is to be made and to be repaid.
5. DEFAULT, REMEDIES. Upon the occurrence and during the continuance of
any one or more of the Events of Default set forth in the Loan Agreement, at the
option of the holder of this NOTE, the entire unpaid principal balance and
accrued and unpaid interest hereon shall at once become due and payable without
notice or demand and the Holder may foreclose and enforce all liens and security
interests securing this NOTE.
If this NOTE is not paid when due, whether at maturity or by
acceleration, or if it is collected through a bankruptcy, probate, or other
judicial proceeding, whether before or after maturity, MAKER agrees to pay
attorney's fees, together with all actual expenses of collection and litigation
and costs of court incurred by the Holder, whether or not suit is actually filed
or not.
6. WAIVER. MAKER and all other makers, signers, sureties, guarantors
and endorsers of this NOTE waive demand, presentment, notice of dishonor, notice
of intent to demand or accelerate payment hereof, diligence in the collecting,
grace, notice and protest, and agree to one or more extensions for any period or
periods of time and partial payments, before or after maturity, without
prejudice to HOLDER.
7. SECURITY. This NOTE is secured by certain security interests as set
forth in the Loan Agreement.
8. CONTROLLING AGREEMENT. The contracted for rate of interest of the
Loan without limitation, shall consist of the following: (i) the Stated Interest
Rate, calculated and applied to the principal balance of the Note in accordance
with the provisions of this Note and the Loan Agreement; (ii) interest after
Event of Default or due date, calculated and applied to the amounts due under
this Note in accordance with the provisions thereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective contracted
for rate of interest which is the sum of the above-referenced elements.
All fees, charges, goods, things in action or any other sums or things
of value (other than amounts described in the immediately previous paragraph),
paid or payable by Borrower (collectively, the "Additional Sums"), whether
pursuant to this Note, the Loan Agreement or any other documents or instruments
in any way pertaining to this lending transaction, or otherwise with respect to
this lending transaction, that under any applicable law may be deemed to be
interest with respect to this lending transaction, for the purpose of any
applicable law that may limit the maximum amount of interest to be charged with
respect to this lending transaction, shall be payable by Borrower as, and shall
be deemed to be, additional interest and for such purposes only, the agreed upon
and "contracted for rate of interest" of this lending transaction shall be
deemed to be increased by the rate of interest resulting from the inclusion of
the Additional Sums.
It is the intent of the parties to comply with the usury law
("Applicable Usury Law") applicable pursuant to the terms of the preceding
paragraph or such other usury law which is applicable if the law chosen by the
parties is not applicable. Accordingly, it is agreed that notwithstanding any
provisions to the contrary in this NOTE, or in any of the documents securing
payment hereof or otherwise relating hereto, in no event shall this NOTE or such
documents require the payment or permit the collection of interest in excess of
the maximum contract rate permitted by the Applicable Usury Law. In the event
(a) any such excess of interest otherwise would be contracted for, charged or
received from Maker or otherwise in connection with the loan evidenced hereby,
or (b) the maturity of the indebtedness evidenced by this NOTE is accelerated in
whole or in part, or (c) all or part of the principal or interest of this NOTE
shall be prepaid, so that under any of such circumstances the amount of interest
contracted for, charged or received in connection with the loan evidenced
hereby, would exceed the maximum contract rate permitted by the Applicable Usury
Law, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Maker nor any other person or entity now or hereafter
liable for the payment hereof will be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum contract rate
permitted by the Applicable Usury Law, (3) any such excess which may have been
collected shall be either applied as a credit against the then unpaid principal
amount hereof or refunded to Maker, at Holder's option, and (4) the effective
rate of interest will be automatically reduced to the maximum amount of interest
permitted by the Applicable Usury Law. It is further agreed, without limiting
the generality of the foregoing, that to the extent permitted by the Applicable
Usury Law; (x) all calculations of interest which are made for the purpose of
determining whether such rate would exceed the maximum contract rate permitted
by the Applicable Usury Law shall be made by amortizing, prorating, allocating
and spreading during the period of the full stated term of the loan evidenced
hereby, all interest at any time contracted for, charged or received from Maker
or otherwise in connection with such loan; and (y) in the event that the
effective rate of interest on the loan should at any time exceed the maximum
contract rate allowed under the Applicable Usury Law, such excess interest that
would otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law shall be paid to Holder from time to time, if and when the
effective interest rate on the loan otherwise falls below the maximum amount
permitted by the Applicable Usury Law, to the extent that interest paid to the
date of calculation does not exceed the maximum contract rate permitted by the
Applicable Usury Law, until the entire amount of interest which would have
otherwise been collected had there been no ceiling imposed by the Applicable
Usury Law has been paid in full. Maker further agrees that should the maximum
contract rate permitted by the Applicable Usury Law be increased at any time
hereafter because of a change in the law, then to the extent not prohibited by
the Applicable Usury Law, such increases shall apply to all indebtedness
evidenced hereby regardless of when incurred; but, again to the extent not
prohibited by the Applicable Usury Law, should the maximum contract rate
permitted by the Applicable Usury Law be decreased because of a change in the
law, such decreases shall not apply to the indebtedness evidenced hereby
regardless of when incurred.
9. APPLICABLE LAW. This NOTE shall be construed in accordance with the
laws of the State of Arizona and the laws of the United States applicable to
transactions in the State of Arizona.
10. NO WAIVER. No delay on the part of the HOLDER in the exercise of
any power or right under this NOTE, or under the LOAN AGREEMENT or any other
instrument executed in connection herewith, shall operate as a waiver thereof,
nor shall a single or partial exercise of any power or right preclude other or
further exercise thereof or exercise of any other power or right. Enforcement by
HOLDER of any security for the payment hereof shall not constitute any election
by it of remedies so as to preclude the exercise of any other remedy available
to it.
11. SUCCESSORS, ASSIGNS. The term "HOLDER" shall include all of
HOLDER's successors and assigns to whom the benefits of this NOTE shall inure.
12. RENEWAL AND EXTENSION. This Tenth Amended and Restated Promissory
Note is executed in conjunction with that certain Schedule to Second Amended and
Restated Loan and Security Agreement of even date herewith, by and between
HOLDER, MAKER and Guarantors. This Tenth Amended and Restated Promissory Note is
given in renewal, extension and rearrangement of and not in payment,
satisfaction or extinguishment of that certain Promissory Note in the original
principal amount of Two Million Dollars ($2,000,000.00), dated February 24,
1994, (the "Prior Note") executed by MAKER in favor of Greyhound Financial
Corporation, the same being amendments, renewals and extensions of prior
instruments as referenced in the Prior Note, that certain Amended and Restated
Promissory Note in the original principal amount of Four Million Dollars
($4,000,000.00), dated June 8, 1995, ("Amended Note") executed by Maker in favor
of FINOVA Capital Corporation, that certain Second Amended and Restated
Promissory Note, dated May 13, 1996 ("Second Amended Note") in the stated
principal amount of Five Million Dollars ($5,000,000.00), executed by Maker in
favor of FINOVA Capital Corporation, that certain Third Amended and Restated
Promissory Note, dated October 15, 1996 ("Third Amended Note") in the stated
principal amount of Five Million Dollars ($5,000,000.00), that certain Fourth
Amended and Restated Promissory Note, dated February 4, 1997 ("Fourth Amended
Note") in the stated principal amount of Twenty Million Dollars
($20,000,000.00), that certain Fifth Amended and Restated Promissory Note, dated
April 22, 1997 ("Fifth Amended Note") in the stated principal amount of Thirty
Five Million Dollars ($35,000,000.00). that certain Sixth Amended and Restated
Promissory Note, dated May 7, 1997 ("Sixth Amended Note") in the stated
principal amount of Thirty-Five Million Dollars ($35,000,000.00), that certain
Seventh Amended and Restated Promissory Note, dated December 30, 1997, in the
stated principal amount of Thirty-Five Million Dollars ($35,000,000.00), that
certain Eighth Amended and Restated Promissory Note, dated March 27, 1998
("Eighth Amended Note"), in the stated principal amount of Forty-Two Million
Five Hundred Thousand Dollars ($42,500,000.00) and that certain Ninth Amended
and Restated Promissory Note in the stated principal amount of Seventy Five
Million Dollars ($75,000,000.00), dated May 11, 1998 ("Ninth Amended Note").
This Tenth Amended and Restated Promissory Note is secured by liens granted to
HOLDER on certain collateral and is a continuation of MAKER'S obligations to
HOLDER and such obligations and liens, mortgages, deeds of trust or security
interests are not extinguished by this Tenth Amended and Restated Promissory
Note, but are hereby renewed, extended, recognized and preserved in full to
secure payment of this Tenth Amended and Restated Promissory Note and all sums
due or to become due and payable under the Loan Documents.
MAKER:
FLORIDA FINANCE GROUP, INC.
A FLORIDA CORPORATION
BY: /s/ Charles D. Bonanno
---------------------------
CHARLES D. BONANNO, EXECUTIVE VICE PRESIDENT
LIBERTY FINANCE COMPANY
A FLORIDA CORPORATION
BY: /s/ Charles D. Bonanno
---------------------------
CHARLES D. BONANNO, EXECUTIVE VICE PRESIDENT
SMART CHOICE RECEIVABLES
HOLDING COMPANY,
A DELAWARE CORPORATION
BY: /s/ Charles D. Bonanno
---------------------------
CHARLES D. BONANNO, EXECUTIVE VICE PRESIDENT
FIRST CHOICE AUTO FINANCE, INC.
A FLORIDA CORPORATION
BY: /s/ Charles D. Bonanno
---------------------------
CHARLES D. BONANNO, EXECUTIVE VICE PRESIDENT
SCHEDULE TO
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BORROWER: FLORIDA FINANCE GROUP INC.
LIBERTY FINANCE COMPANY
FIRST CHOICE AUTO FINANCE, INC.
ADDRESS: 5200 S. WASHINGTON
TITUSVILLE, FLORIDA 32780-7316
BORROWER: SMART CHOICE RECEIVABLES HOLDING COMPANY
ADDRESS: P. O. BOX 50102
HENDERSON, NEVADA 89016
DATE: NOVEMBER 9, 1998
<PAGE>
This Schedule to Second Amended and Restated Loan and Security Agreement
("Schedule") is executed in conjunction with a certain Second Amended and
Restated Loan and Security Agreement ("Agreement") of even date herewith, by and
between FINOVA Capital Corporation, as Lender, and the above Borrowers, as
Borrower. The terms and provisions of this Schedule shall supersede all prior
schedules. All references to Section numbers herein refer to Sections in the
Agreement.
1.A. BORROWERS (SECTION 1).
All references to "Borrower" in any and all Loan Documents shall mean all
Borrowers, as co-borrowers, jointly and severally, except as otherwise
specifically set forth herein:
Florida Finance Group, Inc. - "FFG" or "Lead Borrower"
Liberty Finance Company - "Liberty"
Smart Choice Receivables Holding Company - "Smart Choice Receivables"
First Choice Auto Finance, Inc. - "First Choice"
The term "Receivable Borrowers" shall mean FFG, Liberty and
Smart Choice Receivables.
The term "Inventory Borrower" shall mean First Choice.
1.13.A. MAXIMUM MILEAGE OF ELIGIBLE INVENTORY (SECTION 1.13)
The term "Maximum Mileage of Eligible Inventory" shall mean, with respect
to each item of Inventory, the actual mileage, according to the odometer of
the vehicle, eighty thousand (80,000) miles.
1.13.B. MAXIMUM AGE OF ELIGIBLE INVENTORY (SECTION 1.13)
The term "Maximum Age of Eligible Inventory" shall mean, with respect to
each item of Inventory, the number years from the year of determination to
the model year, eight (8) years.
1.13.C. MAXIMUM COST OF ELIGIBLE INVENTORY (SECTION 1.13)
The term "Maximum Cost of Eligible Inventory" shall mean, with respect to
each item of Inventory, the purchase price of such item of Inventory shall
be Six Thousand Dollars ($6,000.00). Only that portion of the purchase
price that exceeds Six Thousand Dollars ($6,000.00) shall be ineligible for
the purposes of determining availability.
1.13.D. MAXIMUM OWNERSHIP (SECTION 1.13)
The term "Maximum Ownership" shall mean one hundred twenty (120) days from
the date of the invoice that evidences the purchase of each vehicle of
Inventory by First Choice.
1.14.A. MAXIMUM AMOUNT OF AN ELIGIBLE RECEIVABLE (SECTION 1.14).
The term "Maximum Amount of an Eligible Receivable" shall mean the sum of
Twenty Thousand Dollars ($20,000.00) remaining due thereon at any date of
determination.
1.14.B. MAXIMUM TERM OF AN ELIGIBLE RECEIVABLE (SECTION 1.14).
The "Maximum Term of an Eligible Receivable" shall be Forty-Eight (48)
months remaining until the due date of such Eligible Receivable at any date
of determination.
1.14.C. AGING PROCEDURES AND ELIGIBILITY TEST (SECTION 1.14.)
AGING PROCEDURES FOR A CONTRACTUAL AGING:
1. No payment missed or due = Current.
2. 1 to 30 days past due = "30 day Account".
3. 31 to 60 days past due = "60 day Account".
4. 61 or more days past due = "60 + day Account"
For the purpose ONLY of calculating the aging of any Receivable hereunder,
provided any such extension is after one hundred eighty (180) days of any
Receivable from the origination date of such Receivable, Borrower may grant an
Account Debtor one (1) extension of the principal portion of a monthly payment
due on any Receivable within any twelve (12) month period that would allow such
Receivable to avoid being classified in a different "past due or missed" payment
category set forth above. All extensions within any twelve (12) month period in
excess of one (1) will not be used to delay or defer aging of such Receivable.
This extension exception shall be applicable to extensions granted on or after
November 9, 1998.
ELIGIBILITY TEST:
The term "Eligibility Test" shall mean the test to determine the eligibility of
a Receivable for the purposes of Section 1.14 hereof, that test, being as
follows: no payment due on said Receivable remains unpaid more than sixty (60)
days from the specific date on which such payment was due pursuant to the terms
of said Receivable.
1.15 GUARANTOR (WHETHER ONE OR MORE) (SECTION 1.15)
SC Holdings, Inc.
Smart Choice Automotive Group, Inc. (formerly known as Eckler Industries,
Inc.)
2.1.A. AMOUNT OF REVOLVING CREDIT LINE (SECTION 2.1):
The Amount of Revolving Credit Line shall be One Hundred Million Dollars
($100,000,000.00)
The Amount of the Inventory Credit Line shall be Ten Million Dollars
($10,000,000.00)
2.1.B. AVAILABILITY ON ELIGIBLE RECEIVABLES (SECTION 2.1):
The "Availability on Eligible Receivables" shall be an amount equal to,
with respect to all Eligible Receivables, on the date of determination, the
sum of the following:
(i) Sixty percent (60%) of the aggregate unmatured and unpaid amount
due to Borrower from the Account Debtor named thereon, including all
unearned finance charges, time price differentials, insurance fees,
discounts, holdbacks and other fees and charges pursuant to the
Eligible Receivables with an origination date on or before June 30,
1998;
(ii) Fifty-five percent (55%) of the aggregate unmatured and unpaid
amount due to Borrower from the Account Debtor named thereon,
including all unearned finance charges, time price differentials,
insurance fees, discounts, holdbacks and other fees and charges
pursuant to the Eligible Receivables with an origination date after
June 30, 1998.
Notwithstanding any provision contained in the Loan Documents to the
contrary, if for the twelve (12) calendar month period immediately prior to
any date of determination, the Collateral Recovery Rate is less than
seventy-two and one-half percent (72.50%), or if on any date of
determination, the Collateral Performance Percentage is greater than ten
percent (10.0%), then in either event, Lender, in its sole and absolute
discretion, may modify the Availability on Eligible advance percentage set
forth above.
2.1.C. AVAILABILITY ON ELIGIBLE INVENTORY (SECTION 2.1)
The "Availability on Eligible Inventory" shall be lesser of (i) the Amount
of the Inventory Credit Line, (ii) the aggregate amount with respect to all
Eligible Inventory of the lesser of (a) fifty percent (50%) of the invoice
cost (as evidence by a bill of sale or other documents evidencing the
purchase price of such Inventory, or (b) fifty percent (50%) of the "clean
value" Black Book (pursuant to the most current edition of the "Black Book"
as published by National Auto Research Division, Hearst Business Media
Corporation, for the market area of Borrower).
2.2. STATED INTEREST RATE (SECTION 2.2).
The Receivables Stated Interest Rate shall be the lesser of (i) the
Governing Rate (a) if the effective rate of advance is greater than fifty
percent (50%) for the month of determination, plus two and one-half percent
(2.50%) per annum, (b) if the effective rate of advance is greater than
forty percent (40%) but equal to or less than fifty percent (50%), plus two
and one-quarter percent (2.25%), or (c) if the effective rate of advance,
for the month of determination, is equal to or less than forty percent
(40%), plus one and one-half percent (1.50%); or (ii) the Maximum Rate. For
the purpose of determining the Receivable Stated Rate, the term "effective
rate of advance" shall mean the daily average of the outstanding balance of
the Indebtedness for the calendar month immediately preceding the date of
determination, less the daily average outstanding balance of the
Indebtedness advanced to First Choice pursuant to the Inventory Credit
Facility for the same period, divided by the aggregate outstanding balance
of all Eligible Receivables on the date of determination.
The Inventory Stated Interest Rate shall be the lesser of (a) the Governing
Rate plus three percent (3.00%) per annum; or (b) the Maximum Rate.
2.3.B. MATURITY DATE (SECTION 2.3.C).
The primary term of this Agreement shall expire on December 31, 2001. If
Borrower desires to extend the primary term or any term thereafter of this
Agreement, Borrower shall give Lender notice of its intent to extend the
term no earlier than one hundred and eighty (180) days and no later than
one hundred and fifty (150) days prior to any expiration date of this
Agreement. Upon the receipt by Lender of Borrower's notice to extend the
term of this Agreement, if Lender desires to renew and extend the term of
this Agreement, Lender shall give Borrower notice of Lender's intent to
extend the term of this Agreement, within sixty (60) days of Lender's
receipt of Borrower's notice to extend. If Lender does not give Borrower
notice of Lender's intent to extend the term of this Agreement within the
sixty (60) days period, then it shall be deemed that Lender does not intend
to renew and extend the term of this Agreement. Notwithstanding the
foregoing, the Borrower's obligation pursuant to this Agreement shall
remain in full force and effect until the Indebtedness due and owing to
Lender has been paid in full.
2.6. LIQUIDATED DAMAGES (SECTION 2.6).
The amount of "Liquidated Damages" shall be as follows:
None.
2.14 TERMINATION FEE (SECTION 2.14).
The amount of the "Termination Fee shall be Three Million Dollars
($3,000,000.00).
3.2. BUSINESS LOCATIONS OF BORROWER (SECTIONS 3.2, 3.6 AND 5.1.N.).
All locations are as set forth on the attach List of Locations
5.1.B. BORROWER'S TRADENAMES (WHETHER ONE OR MORE)(SECTION 5.1.B.)
As set forth in List of Tradenames attached hereto
6.2.A. LEVERAGE RATIO LIMIT (SECTION 6.2.J).
None.
6.2.B. MINIMUM NET INCOME (SECTION 6.2.K).
The Minimum Net Income for each Borrower and Smart Choice Automotive Group,
Inc., other than Smart Choice Receivables Holdings, Inc., shall be at least
One Dollar ($1.00) in each fiscal quarter.
6.2.C. DISTRIBUTIONS LIMITATION (SECTION 6.2.L).
No Distributions without the prior written consent of Lender.
6.3.C. ANNUAL FINANCIAL STATEMENTS (SECTION 6.3).
Annual audited financial statements shall be prepared by independent
certified public accountants, reasonably acceptable to Lender.
8.1. REIMBURSEMENT OF EXPENSES (SECTION 8.1).
(i) Borrowers shall reimburse Lender an amount not to exceed Seven
Thousand Five Hundred Dollars ($7,500.00), for legal fees and expenses
incurred in the due diligence with respect to, negotiations,
preparation and closing of this Second Amended and Restated Loan and
Security Agreement and the other Loan Documents executed in connection
therewith.
(ii) Borrowers shall reimburse Lender an amount not to exceed Five Thousand
Dollars ($5,000.00) for audit fees on a quarterly basis.
9.1. NOTICES (SECTION 9.1).
Lender: FINOVA Capital Corporation
(copy each office below with all notices)
CORPORATE FINANCE OFFICE:
FINOVA Capital Corporation
355 South Grand Avenue, Suite 2400
Los Angeles, CA 90071
Attn: John J. Bonano, Senior Vice President
Telephone: (213) 253-1600
Telecopy No.: (213) 625-0268
CORPORATE OFFICE:
FINOVA Capital Corporation
1850 N. Central Avenue
Phoenix, AZ 85077
Attn: Joseph R. D'Amore, Senior Counsel
Telephone: (602) 207-4900
Telecopy No.: (602) 207-5543
REDISCOUNT FINANCE OFFICE:
FINOVA Capital Corporation
13355 Noel Road, Suite 800
Dallas, TX 75240
Attn: Douglas M. Fraser (Account Executive)
Telephone: (972) 458-5600
Telecopy No.: (972) 458-5650
Borrower: Florida Finance Group, Inc.
Liberty Finance Company
First Choice Auto Finance, Inc.
5200 S. Washington
Titusville, Florida 32780-7316
Telephone: 407-269-9680
Telecopy No.:407-268-2959
Borrower: Smart Choice Receivables Holding Company
P. O. Box 50102
Henderson, NV 89016
Telephone: (702) 598-3738
Telecopy No.: (702) 598-3651
Guarantors: SC Holdings, Inc.
Smart Choice Automotive Group, Inc.
5200 S. Washington
Titusville, Florida 32780-7316
Telephone: 407-269-9680
Telecopy No.:407-264-0376
9.16. AGENT FOR SERVICE OF PROCESS (SECTION 9.16).
Gary Smith, whose address is 5200 S. Washington, Titusville, Florida 32780-7316
(Agent)
IN WITNESS WHEREOF, the parties have executed this Schedule on the day and
year first set forth above.
LENDER:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By: /S/ Stephen J. Thomas
--------------------------------------------
Stephen J. Thomas, Vice President (Date)
BORROWERS:
FLORIDA FINANCE GROUP INC.
By: /s/ Charles D. Bonanno
------------------------------------------
Charles D. Bonanno, (Date)
Executive Vice President
LIBERTY FINANCE COMPANY
By /s/ Charles D. Bonanno
------------------------------------------
Charles D. Bonanno, (Date)
Executive Vice President
SMART CHOICE RECEIVABLES HOLDING COMPANY
By: /s/ Charles D. Bonanno
------------------------------------------
Charles D. Bonanno, (Date)
Executive Vice President
FIRST CHOICE AUTO FINANCE, INC.
By: /s/ Charles D. Bonanno
------------------------------------------
Charles D. Bonanno, (Date)
Executive Vice President
SC HOLDINGS, INC.
By /s/ Charles D. Bonanno
------------------------------------------
Charles D. Bonanno, (Date)
Executive Vice President
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ Charles D. Bonanno
------------------------------------------
Charles D. Bonanno, (Date)
Executive Vice President
MANHEIM AUTOMOTIVE FINANCIAL SERVICES, INC.
1400 LAKE HEARN DRIVE
ATLANTA, GEORGIA 30319
NOVEMBER 5, 1998
FINOVA Capital Corporation
13355 Noel Road, Suite 800
Dallas, Texas 75240
Re: First Choice Auto Finance, Inc. ("Dealer")
Gentlemen:
As a condition for the advancement of funds pursuant to that certain credit
facility ("Credit Facility") entered into by Dealer, as Borrower, and by FINOVA
Capital Corporation ("FINOVA"), as Lender, Manheim Automotive Financial
Services, Inc. ("Floor Plan Lender") hereby agrees as follows:
1. That its security interest, if any, in the following described property
(the "Property") of Dealer shall be subordinated to the interest of FINOVA:
Accounts and chattel paper generated by the Dealer's sale of vehicles
("Receivables"), proceeds derived from the collection and/or
liquidation of any of the Receivables, including but not limited to
cash payments, returned or repossessed vehicles securing such
Receivables, and those vehicles that have been sold by Dealer and
previously securing any Receivable(s).
Notwithstanding the foregoing to the contrary, Floor Plan Lender does
not release its security interest in those vehicles which are not
securing any of the Receivables pledged to FINOVA and specifically
financed by Floor Plan Lender with Dealer under financing
accommodations and in which Floor Plan Lender holds a security
interest and Floor Plan Lender's obligation with respect to such
vehicles has not been paid off.
2. That on and after the date of this letter, Floor Plan Lender shall not
provide new or additional financing for any vehicles of Dealer.
3. That upon payment to Floor Plan Lender in full for all vehicles which it is
financing as of the date hereof, that Floor Plan Lender shall immediately
release any and all security interest and liens it holds on the assets of
Dealer.
Floor Plan Lender agrees that upon Floor Plan Lender's release of its
security interest in any vehicle, as set forth herein, Floor Plan Lender shall
not have any security interest in such vehicle thereafter, including, but not
limited to, the return or repossession of such vehicle, and such vehicle shall
not be financed or otherwise floor planned by Floor Plan Lender thereafter.
Nothing herein contained shall be construed as limiting any security
interest of either party in the Property as to anyone except each other. If a
third party, including Dealer's trustee in bankruptcy, should assert a security
interest or other right in any item of Property and have, under any applicable
rule of law, priority over the senior party, but not over the junior party,
then, as to such item of Property, this Agreement shall be null and void.
When accepted by you and returned to us, this Agreement shall remain in
effect until Floor Plan Lender is paid in full.
This Agreement shall be binding upon and for the benefit of the
successors and assigns of Floor Plan Lender and shall be binding upon and inure
to the benefit of the successors and assigns of FINOVA (including successors and
assigns of the Property).
FINOVA and Floor Plan Lender knowingly, voluntarily and intentionally waive
any and all rights either party may have to a trial by jury and elect a bench
trial in the event of any litigation based on, or arising out of, or in
connection with, this Agreement, or any course of conduct, course of dealing,
verbal or written statements, or actions between Floor Plan Lender and FINOVA.
This provision is a material inducement for entering into this Agreement.
If this meets with your approval, please execute and return one copy of
this letter to Floor Plan Lender, and the same constitute an agreement as of the
date of acceptance by you and return to Floor Plan Lender.
Very truly yours,
MANHEIM AUTOMOTIVE FINANCIAL SERVICES, INC.
By: /s/ Michael J. Wynn
-------------------------------------------------
Michael J. Wynn
_________________________________________________
(Printed Name and Title)
ACCEPTED AND AGREED THIS 8th DAY OF November, 1998.
FINOVA CAPITAL CORPORATION
By: /s/ J. Steven Cummack
- -----------------------------------------
J. Steven Cummack, Senior Vice President
_________________________________________
(Printed Name and Title)
The undersigned Dealer acknowledges receipt of a copy of the foregoing
Subordination Agreement.
FIRST CHOICE AUTO FINANCE, INC.
By: /s/ Donna Siebel
- -------------------------------------------
Donna Siebel, Vice President
___________________________________________
(Printed Name and Title) (Date)
Smart Choice Automotive Group, Inc.
Subordinated Loan Agreement
Dated as of January 31, 1999
BORROWER: Smart Choice Automotive Group, Inc. ("SMCH" or
"Company")
LENDERS: High Capital Funding, LLC and other purchasers
(collectively "Purchaser(s)"). All Purchaser(s)
shall be "accredited investors" as defined by Rule
501 of Regulation D.
NOTES: Subordinated notes maturing on January 31, 2000.
The subordinated notes will be issued in one series
designated as "Smart Choice Automotive Group, Inc.
1999 Series A Subordinated Notes (the "Note(s)").
The Note(s) will be substantially in the form
(except for the security and collateral provisions)
of the Promissory Note dated September 30, 1997
between SMCH's subsidiary Eckler Industries, Inc.
and Stephens Inc.
INVESTMENT SIZE: $3,000,000. $2,000,000 of Notes shall be purchased
at the Initial Closing and an additional $1,000,000
may be purchased on or before April 30, 1999.
INTEREST: 15% annual rate, payable monthly in arrears in
cash. Interest shall be payable on the first day of
each month. The interest rate shall increase to
18% on May 1, 1999 and to 22% on October 1, 1999.
SUBORDINATION: The Note(s) shall be subordinated to the Senior
Debt listed on the Schedule of Senior Debt attached
hereto.
GUARANTORS: The Note(s) shall be guaranteed by SMCH's
subsidiaries, First Choice Auto Finance, Inc.
and SC Holdings, Inc. The guarantee will be
substantially (except for the security and
collateral provisions) in the form of the
guarantee used in the loan transaction between
SMCH's subsidiary Eckler Industries, Inc. and
Stephens Inc. on September 30, 1997.
PREPAYMENT: The Notes may be prepaid in whole or in part at any
time or times, without premium or penalty.
TRANSFERABILITY: The Notes shall be freely transferable by
Purchaser(s) or any subsequent holder(s)
("Holders") provided such transfer is in compliance
with applicable United States and state securities
laws, and further provided that the Purchaser(s),
and any subsequent Holders, represent and warrant
that they have acquired the Notes for investment
purposes only, and not with a view toward making a
public offering.
ESCROW OF NOTE(S): To facilitate the delivery of the Note(s)
upon receipt of payment from Purchaser(s), the
Company shall deliver to David A. Rapaport, Esq.,
as escrow agent (the "Escrow Agent") within
one (1) day of the mutual execution of this
Term Sheet, twent-five (25) Notes which have
been duly executed by the Company but which are
blank as to name and address of the Purchaser(s),
principal amount and date of issuance ("Issue
Date").
The Escrow Agent shall upon receipt of good funds
for the purchase of a Note fill in the name and
address of the Purchaser(s), principal amount and
Issue Date. The Escrow Agent shall deliver the
completed Note to the Purchaser(s) and the escrowed
funds together with a copy of the completed Note to
the Company. Upon issuance of the entire $3,000,000
of Notes, the Escrow Agent shall return any
remaining unissued blank Notes to the Company.
REPRESENTATIONS,
WARRANTIES AND COVENANTS
OF SMCH: SMCH makes the following representations and
warranties to the Purchaser(s):
(a) ORGANIZATION, GOOD STANDING AND POWER. The
Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the
State of Florida and has the requisite corporate
power to own, lease and operate its properties and
assets and to conduct its business as it is now
being conducted.
(b) AUTHORIZATION; ENFORCEMENT. The Company has the
requisite corporate power and authority to enter
into and perform this Subordinated Loan Agreement
and the Escrow Agreement and to issue and sell the
Note(s) in accordance with the terms hereof. The
execution, delivery and performance of this
Subordinated Loan Agreement and the Escrow
Agreement by the Company and the consummation by it
of the transactions contemplated hereby and thereby
have been duly and validly authorized by all
necessary corporate action on behalf of the
Company, and no further consent or authorization of
the Company or its Board of Directors or
stockholders is required. This Subordinated Loan
Agreement has been duly executed and delivered by
the Company. Each of this Subordinated Loan
Agreement and the Escrow Agreement constitutes, or
shall constitute when duly executed and delivered
by all parties thereto, a valid and binding
obligation of the Company enforceable against the
Company in accordance with its terms, except as
such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally
the enforcement of, creditor's rights and remedies
or by other equitable principles of general
application.
(c) SENIOR INDEBTEDNESS. SMCH represents and
warrants that the Schedule of Senior Indebtedness
attached hereto is full and complete in all
material respects and that there is no indebtedness
to which the Notes will be subordinated not
listed on such schedule.
(d) ISSUANCE OF NOTE(S). The Note(s) to be
delivered to the Escrow Agent have been duly
authorized by all necessary corporate action.
(e) INVENTORY MAINTENANCE. The SMCH "DAILY
INV-DRAFT REPORT" (the "Report") as of the date
hereof, is attached to this Subordinated Loan
Agreement. SMCH agrees to maintain an inventory of
used cars ("Inventory") of not less than
$13,000,000 (as listed under the "Accounting"
column of the Report) while any Note(s) are
outstanding. SMCH agrees to fax to HCF a copy of
the Report for each day any Note(s) remain
outstanding. If at any time, or from time to time,
the value of the Inventory is less than
$13,000,000, HCF, on behalf of Holder(s), shall
have the right on seven (7) days prior written
notice (the "Mandatory Prepayment Notice") to
require SMCH to reduce the aggregate principal
amount of Note(s) then outstanding by the amount by
which the Inventory is less than $13,000,000
("Mandatory Prepayment"). SMCH shall remit to the
Escrow Agent the amount of the Mandatory Prepayment
within such seven (7) day period. HCF shall notify
the Escrow Agent in writing (with a copy to SMCH)
within two days of Escrow Agent's receipt of any
such Mandatory Prepayment as to the allocation of
the aggregate Mandatory Prepayment among the
Holders, and the Escrow Agent shall make payments
to the Holders in accordance with such allocation.
The failure by SMCH to make a Mandatory Prepayment
to the Escrow Agent in accordance with a Mandatory
Prepayment Notice shall be a material default
resulting in immediate acceleration of all
principal and interest under the Note(s).
REPRESENTATIONS, HCF hereby makes the following representations and
WARRANTIES AND COVENANTS warranties to the Company:
OF HCF:
(a) ACCREDITED PURCHASER. HCF and each of the
other Purchasers of the Notes is an "accredited
investor" as defined in Regulation D promulgated
under the Securities Act.
(b) ORGANIZATION, GOOD STANDING AND POWER. HCF is
a limited liability company organized, validly
existing and in good standing under the laws of the
State of Delaware and has the requisite power to
own, lease and operate its properties and assets
and to conduct its business as it is now being
conducted.
(c) AUTHORIZATION; ENFORCEMENT. HCF has the
requisite power and authority to enter into and
perform this Subordinated Loan Agreement and the
Escrow Agreement and to purchase the Note(s) in
accordance with the terms hereof. The execution,
delivery and performance of this Subordinated Loan
Agreement and the Escrow Agreement by HCF and the
consummation by it of the transactions contemplated
hereby and thereby have been duly and validly
authorized by all necessary action, and no further
consent or authorization of HCF, its manager or its
members is required. This Subordinated Loan
Agreement has been duly executed and delivered by
HCF. Each of this Subordinated Loan Agreement and
the Escrow Agreement constitutes, or shall
constitute when duly executed and delivered by
all parties thereto, a valid and binding obligation
of HCF enforceable against HCF in accordance with
its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation,
conservatorship, receivership or
similar laws relating to, or affecting generally
the enforcement of, creditor's rights and remedies
or by other equitable principles of general
application.
EVENT OF DEFAULT: Normal and customary events of default:
non-payment of interest, bankruptcy, breach of
representations and warranties, etc. Failure of
SMCH to maintain an inventory of used cars of not
less than $13,000,000. Failure of SMCH to make any
Mandatory Prepayment.
PURCHASE OF NOTE(S): (a) Purchaser(s) shall deposit with the Escrow
Agent $2,000,000 for the purchase of the first
Note(s) ("Initial Note(s)") within two business
days of the mutual execution of this Subordinated
Loan Agreement. The Escrow Agent shall wire to the
Company the $2,000,000 purchase price for the
Initial Note(s) within one business day of the
later of (i) the receipt from SMCH of the twenty
(20) executed Note(s); (ii) the receipt from
Purchaser(s) of the initial $2,000,000; and (iii)
the receipt of the legal opinion of Robert J.
Downing, Esq., Chief Legal Counsel of SMCH,
satisfactory in form and substance to HCF and its
counsel, to the matters set forth in subsections
(a), (b), (c) and (d) of the above SMCH
Representations, Warranties and Covenants section.
(b) Purchaser(s) may deposit with the Escrow Agent
up to an additional $1,000,000 on or before March
31, 1999.
NO DEBT OR SECURITIES
ISSUANCE OR REPURCHASE: (a) SMCH shall not incur any indebtedness nor issue
any debt securities in an amount greater than
$100,000 in any transaction or series of
transactions, except to existing lenders or holders
of its debt securities, including without
limitation floor plan financing, without the prior
written consent of HCF. SMCH shall not issue any
equity securities generally (except upon the
exercise or conversion of presently outstanding
options, warrants, convertible notes or convertible
preferred stock, or except to employees or
directors, or except to consultants pursuant to
shareholder approved plans or agreements) while the
Note(s) is outstanding without the prior written
consent of HCF.
(b) SMCH shall not repurchase any of its
outstanding securities or prepay any outstanding
indebtedness which is pari passu or subordinate to
the Note(s) while there is any principal or
interest outstanding under the Note(s).
JURISDICTION AND CHOICE
OF LAW: This Subordinated Loan Agreement, the Note(s) and
the Escrow Agreement shall be governed by the laws
of the state of Georgia and all of the parties to
such agreements and Note(s) agree to submit to the
personal jurisdiction of the state and Federal
courts located in Fulton County, Georgia.
LEGAL: FEES: SMCH shall pay the fees of HCF's outside
counsel not to exceed $5,000.
BINDING AGREEMENT: The parties shall be
legally bound by the above terms and shall execute
such further documents as may be required to
implement the provisions of this Subordinated Loan
Agreement, including without limitation the
Note(s), the Guarantee Agreements and the Escrow
Agreement.
Agreed to and Accepted by:
Smart Choice Automotive Group, Inc.
MARCH 19, 1999 as of
BY: /s/ Lillian Clover JANUARY 31, 1999
- ------------------------------------------------------------
Lillian Clover Date
Assistant Secretary
High Capital Funding, LLC
MARCH 19, 1999 as of
BY: /s/ Latrobe Laidlaw JANUARY 31, 1999
- ------------------------------------------------------------
Latrobe Laidlaw Date
Director of Operations
MARCH 19, 1999 as of
/s/ David A. Rapaport JANUARY 31, 1999
- -----------------------------------------------------------
David A. Rapaport, Esq. Date
Escrow Agent
SMART CHOICE AUTOMOTIVE GROUP, INC.
1999 SERIES A SUBORDINATED NOTE
1. DATE AND PARTIES. This Smart Choice Automotive Group, Inc. 1999 Series A
Subordinated Note ("Note") is dated as of February 1, 1999, and the parties and
their mailing addresses and Borrower's tax identification number are as follows:
BORROWER: SMART CHOICE AUTOMOTIVE GROUP, INC.
5200 South Washington Avenue
Titusville, Florida 32780
Tax ID Number: 59-1469577
HOLDER: HIGH CAPITAL FUNDING, LLC
333 Sandy Springs Circle, Suite 230
Atlanta, GA 30328
13-3921591
2. PROMISE TO PAY. For value received, Borrower promises to pay to the
order of Holder, in accordance with the provisions of this Note, at Holder's
office at the address above, or at such other place as Holder may designate in
writing, the principal sum of SEVEN HUNDRED TWENTY-FIVE THOUSAND DOLLARS
($725,000) plus interest from the date of disbursement on the unpaid principal
balance at the rate of 15% per annum, payable monthly in arrears in cash.
Interest shall be payable on the first day of each month. The interest rate
shall increase to 18% per annum on May 1, 1999 and to 22% per annum on October
1, 1999.
After the Maturity Date (defined herein), whether by acceleration or
otherwise, this Note shall bear interest at 30% per annum, but not to exceed the
maximum rate allowed by law, until paid in full. The interest permitted by this
Note is limited to the maximum lawful amount of interest ("Maximum Lawful
Interest") permitted under applicable federal and state laws, whichever is
greater. If the interest accrued and collected exceeds the Maximum Lawful
Interest as of the time of collection, such excess shall be applied to reduce
the principal amount outstanding. If or when no principal amount is outstanding,
any excess interest shall be refunded to Borrower. All fees and charges accrued,
assessed, or collected which constitute interest shall be amortized and
pro-rated over the full term of the Note for purposes of determining the Maximum
Lawful Interest.
3. ADVANCE AND FUNDING PROVISIONS/LOAN DOCUMENTS. This Note is a Term Note.
No advances will be made after the initial advance. This Note is made and
entered into pursuant to the terms and provisions of that certain Subordinated
Loan Agreement, dated as of January 31, 1999, by and between the Borrower and
High Capital Funding, LLC (the "Subordinated Loan Agreement"), the terms and
provisions of which are incorporated herein by reference. This Note, the
Subordinated Loan Agreement, Escrow Agreement, Guarantees and other documents
executed in connection herewith and therewith are hereinafter collectively
referred to as the "Loan Documents".
4. TERMS OF PAYMENT. All principal advanced under this Note and all
interest accrued under this Note are due and payable to Holder and shall be paid
to Holder as follows:
All unpaid interest then accrued is due and payable in monthly payments
on the first day of each month, beginning on the first day of April,
1999, and continuing on the same day of each month thereafter, with one
final payment on the thirty-first (31st) day of January, 2000 (the
"Maturity Date") in amount equal to the entire principal balance then
outstanding under this Note, plus all unpaid interest then accrued
under the terms of this Note.
This Note may be prepaid in whole or in part at any time without premium or
penalty.
If at any time, or from time to time, the value of Inventory (as defined in
the Subordinated Loan Agreement) is less than $13,000,000, High Capital Funding,
LLC ("HCF"), on behalf of all Holder(s), shall have the right on seven (7) days
prior written notice (the "Mandatory Prepayment Notice") to require Borrower to
reduce the aggregate principal amount of all Note(s) then outstanding by the
amount by which the Inventory is less than $13,000,000 (a "Mandatory
Prepayment"). Borrower shall remit to the Escrow Agent (as defined in the
Subordinated Loan Agreement) the amount of the Mandatory Prepayment within such
seven- (7) day period. HCF shall notify the Escrow Agent in writing (with a copy
to Borrower), within two days of Escrow Agent's receipt of any such Mandatory
Prepayment, as to the allocation of the aggregate Mandatory Prepayment among the
Holders; and Escrow Agent shall make payment to the Holders in accordance with
such allocation. Borrower's failure to make a Mandatory Prepayment to the Escrow
Agent in accordance with a Mandatory Prepayment Notice shall be a material
default resulting in immediate acceleration of all principal and interest under
this and all other Note(s).
This Note is also guaranteed under Guaranty Agreement of even date herewith
by FIRST CHOICE AUTO FINANCE, INC. and SC HOLDINGS, INC. in favor of Holder.
5. RECEIPT OF COPY. By signing this Note, Borrower acknowledges that it has
read this entire Note and Exhibits, if any, prior to execution and that it
received a copy (copies) of this Note. Borrower agrees to all provisions of this
Note and undertakes to perform all obligations of Borrower hereunder.
6. EVENTS OF DEFAULT. Borrower shall be in default upon the occurrence of
any of the following events, circumstances, or conditions ("Events of Default"):
(a) Failure by Borrower to make any payment to Holder when due;
(b) A default or breach under any of the terms of this Note or any
other Loan Document (as herein defined) (other than those defaults
expressly set forth in this paragraph 6 and other than a failure to
make payment to any Holder when due, or to provide daily SMCH INV-DRAFT
REPORTS within 24 hours after written notice from any Holder) which is
not fully cured within 10 days after written notice from any Holder;
(c) A default or breach under any of the terms of any note, loan
agreement, security agreement, subordination agreement, mortgage, deed
of trust, deed to secure debt, assignment of beneficial interest,
guaranty agreement, trust deed or any other document or instrument
evidencing, guaranteeing, or securing any other obligations of Borrower
which is not fully cured within ten (10) days after written notice from
Holder or within any applicable cure period, whichever is longer;
(d) The making or furnishing of any verbal or written representation,
statement, or warranty to Holder which is false or incorrect in any
material respect or the failure to furnish facts necessary to prevent
any statement made, by or on behalf of Borrower or any Guarantor of
the Note or other obligations of Borrower, to Holder from being
materially misleading;
(e) The dissolution, liquidation or insolvency of Borrower, the
appointment of a receiver by or on the behalf of Borrower, the
assignment for the benefit of creditors by or on behalf of Borrower,
the voluntary or involuntary termination of existence by Borrower or
any Guarantor or the commencement of a case or proceeding under any
present or future federal or state insolvency, bankruptcy,
reorganization, composition or debtor relief law by or against Borrower
or any Guarantor of the Note or other obligation of Borrower to Holder;
(f) Entry of a final, non-appealable judgment or judgments against
Borrower or any Guarantor which, either individually or in the
aggregate, exceed(s) $50,000.00 and which is/are not paid within the
longer of 30 days or such other period as required by such judgment(s)
and/or applicable law;
(g) A material adverse change in the financial condition of Borrower
or any Guarantor; or a reasonable belief by Holder at any time that
Holder is insecure, that the prospect of any payment is impaired;
(h) Failure of Borrower or of any Guarantor to pay and provide proof of
payment of any tax, assessment, rent, insurance premium, or escrow
payment on or before its due date;
(i) Without the prior written consent of Holder: (i) transfer of
ownership or control of the business of Borrower or any Guarantor or
more than fifty percent (50%) of the ownership or control of Borrower
or any Guarantor, whether by transfer of shares, partnership interest,
joint venture, pledge or otherwise; or (ii) any action by Borrower or
any Guarantor to become a party to any merger or consolidation wherein
the Borrower or Guarantor is not the surviving entity;
(j) Without first having given Holder thirty (30) days' prior written
notice: (i) any action by Borrower or any Guarantor to guarantee or
otherwise in any way become liable or be responsible for the
indebtedness or obligation of any other person or entity; (ii) any
action by Borrower or any Guarantor to acquire by purchase, lease or
otherwise all or substantially all of the assets or capital stock of
any entity; (iii) any expansion, acquisition or entry into any
additional businesses or lines of business or establishment of
business locations other than their present businesses; (iv) the
establishment of any subsidiary, partnership or joint venture for such
purpose; or (v) any material change in the management or business of
the Borrower or any Guarantor or entry into any management contract
delegating effective management or control to third parties;
(k) (i) The termination of any guaranty of the Note by any Guarantor,
or (ii) default on any debt owed by Borrower or any Guarantor to any
other creditor(s) which, unless waived, would permit such other
creditor(s) to accelerate the date for payment of any one or more
obligation(s) of Borrower or any Guarantor in the amount of $50,000 or
more (either individually or in the aggregate);
(l) Use of any portion of the loan proceeds in any transaction which
is likely to cause Holder to directly or indirectly incur any
securities or environmental liability; or
(m) Any charge or indictment against Borrower or any Guarantor under a
federal or state law for which forfeiture of any material portion of
the property of Borrower or any Guarantor is a potential penalty.
7. REMEDIES ON DEFAULT. If an Event of Default occurs and is not fully
cured within any applicable cure period, then Holder may exercise any one or
more of the following rights and remedies, and any other rights and remedies
provided in any of the Loan Documents as Holder, in its sole discretion, may
deem necessary or appropriate:
(a) Declare the unpaid principal of, and all interest then
accrued, on the Loan and this Note, to be forthwith due and payable,
whereupon the same shall forthwith become due and payable without
presentment, demand, protest, notice of default, notice of acceleration
or of intention to accelerate or other notice of any kind, all of which
Borrower hereby expressly waives, anything contained herein or in this
Note to the contrary notwithstanding;
(b) Reduce any claim to judgment; and/or;
(c) Without notice of default or demand, pursue and enforce any of
Holder's rights and remedies under any of the Loan Documents, or
otherwise provided under or pursuant to any applicable law or
agreement; provided, however, that if any Event of Default specified
in Subsection (e) above shall occur, the principal of, and all
interest then accrued on, the Note and other liabilities hereunder
shall thereupon become due and payable automatically and concurrently
therewith, without any further action by Holder and without
presentment, demand, protest, notice of default, notice of
acceleration or intention to accelerate or other notice of any kind,
all of which Borrower hereby expressly waives.
8. SET-OFF. Borrower acknowledges and agrees that upon the occurrence
of an Event of Default, Holder may exercise its right of set-off, without demand
or notice to Borrower or any other person or entity, to pay all or any part of
the outstanding principal and accrued interest owed on this Note against any
obligation Holder or any participant in the Note may have, now or hereafter, to
pay money to Borrower, including but not limited to any balances in any account
of Borrower. Where Borrower may obtain payment only with the endorsement or
consent of someone who has not agreed to pay this Note, Holder's right of
set-off will extend to Borrower's interest in the obligation. Holder's right of
set-off will not apply to accounts or obligations in which Borrower's rights are
solely as a fiduciary for another or to accounts exempt by law from the claims
of creditors. Holder's right of set-off may be exercised without regard to the
existence or value of any Collateral securing this Note, and without regard to
the number or creditworthiness of any other persons or entities who have agreed
to pay this Note. Borrower agrees to indemnify and hold Holder harmless from any
person's or entity's claims arising as a result of Holder's exercise of Holder's
right of set-off and the costs and expenses arising from any such claim,
including without limitation, attorney's fees.
9. COLLECTION EXPENSES. Upon a default on this Note, Holder may recover
from Borrower and all Guarantors or any of them, all costs and expenses incurred
by Holder in collecting and enforcing this Note and reasonable costs and
expenses in preserving, selling or disposing of collateral and realizing on any
security. Such costs and expenses shall include, but are not limited to,
reasonable filing fees, costs of publication, deposition fees, stenographer
fees, witness fees, attorneys fees, paralegal fees, and any other court costs,
plus costs of collecting and enforcing the Note. Any such reasonable collection
costs and expenses shall be added to the principal amount of the Note and shall
accrue interest at the same rate as the Note.
10. ATTORNEYS' FEES. Borrower indemnifies Holder and holds Holder
harmless for all reasonable attorney's fees incurred by Holder, without
limitation, for the enforcement and collection of the obligations under this
Note, if it is placed in the hands of an attorney for collection, or for the
protection of any collateral or lien which secures this Note.
11. WAIVER AND CONSENT BY BORROWER AND OTHER SIGNERS. In regard to this
Note, Borrower and each Guarantor:
(a) Waive protest, presentment for payment, notice of dishonor, notice
of intent to accelerate, and notice of acceleration;
(b) Consent to any one or multiple renewals or extensions of time for
payment on this Note;
(c) Consent to Holder's release of any Guarantor, surety, endorser or
co-signer;
(d) Consent to the release or substitution of any collateral or any
failure by Holder to perfect or continue a security interest in any
collateral or any impairment of any collateral;
(e) Consent to any modification of the terms of this Note or any
instrument securing, guaranteeing, or relating to this Note;
(f) Consent to any and all sales, repurchases, and participations of
this Note to any person or entity in any amounts and waive notice of
such sales, repurchases, or participations of this Note; and
(g) Consent to Holder's right of set-off as well as any participating
Holder's right to set-off.
12. APPLICATION OF PAYMENTS. All payments on this Note, including, but not
limited to, regular payments or prepayments, received by Holder shall be applied
first to costs and expenses, then to accrued interest, and the balance, if any,
to principal. No prepayment shall excuse or defer Borrower's subsequent payment
obligations.
13. JOINT AND SEVERAL. Borrower and any other signers shall be jointly and
severally liable under this Note.
14. FINANCIAL STATEMENTS. Until this Note is paid in full, Borrower shall
furnish Holder upon any material change in financial or business condition, upon
Holder's written request, and in the event of no request, at least annually,
current financial statements of the Borrower, which shall be certified by
Borrower and Borrower's accountant to be true and accurate in all material
respects. The requirements of this paragraph shall be in addition to any imposed
by any security agreement or other Loan Documents executed in connection with
the Note.
15. NO OBLIGATION TO RENEW. Borrower must repay the entire principal
balance of the Note and unpaid interest when due. The Holder is under no
obligation to renew or extend the Note or to refinance the Loan at any time.
16. NO DEFENSES. Borrower represents and warrants to Holder that as of the
date of this Note Borrower has no claims or causes of action against the Holder,
nor any defenses, set-offs, or counterclaims to this Note or to the repayment in
full according to the terms hereof, and in consideration of the making hereof or
the renewal or extension hereof, Borrower releases all rights or claims
whatsoever of Borrower against Holder.
17. RELEASE OF INFORMATION. Borrower authorizes Holder to disclose, without
any additional consent, information concerning this Note for any one or more of
the following purposes: to complete the transaction contemplated hereby, to
verify and disclose the existence and condition of the account for credit
reporting purposes, or to collect any money the Holder in good faith believes
Borrower owes, to disclose to Holder's attorneys or collection agents, to
disclose to Holder's accountants or auditors as part of the review of the
Holder's business affairs, to verify the accuracy of any statement made to
Holder, as part of the Holder's report to officials of any governmental
authority or self-regulatory organization that regulates the business of Holder
or its affiliates, for the sale or transfer of the Note or an interest therein,
or for any other legitimate business purpose of Holder.
18. INCORPORATION BY REFERENCE/DEMAND NOTES SUPERCEDED. This Note is
one of a series of notes (aggregating up to $3,000,000.00 principal amount) made
and executed by Borrower pursuant to that certain Subordinated Loan Agreement,
the terms and provisions of which are incorporated herein by reference. This
Note and the other notes executed and delivered in connection herewith supercede
and replace those certain Demand Notes, dated as of February 3 and 5, 1999 in
the respective amounts of $1,650,000.00 and $350,000.00, respectively, executed
by Borrower in favor of High Capital Funding, LLC.
19. SUBORDINATION
(a) The indebtedness evidenced by this Note and the other notes issued in
connection herewith ("Subordinated Debt") is subordinate and junior in
right of payment, to the extent and in the manner hereinafter set forth, to
all Senior Debt (as defined in subsection (b) below) of the Borrower to the
extent provided herein.
(b) For the purpose of these subordination provisions the term "Senior
Debt" shall mean all principal and premium, if any, and interest on the
indebtedness of the Borrower and any other amounts owed or which may be
owed, under those certain debt obligations listed on Schedule "A" to the
Subordinated Loan Agreement referred to in section 18 above.
(c) If Borrower defaults in the payment of any principal of, or premium, if
any, or interest on any Senior Debt (as defined above) when the same
becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise, then, unless and until such
default shall have been cured or waived or shall have ceased to exist, no
direct or indirect payment (in cash, property or securities or by set-off
or otherwise) shall be made on account of the principal of, or premium, if
any, or interest on the Subordinated Debt, or in respect of any redemption,
retirement, purchase or acquisition of the Subordinated Debt until all
Senior Debt shall have been paid in full.
(d) In the event of:
(i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar
proceeding relating to the Borrower or to its creditors, as such,
or to its property;
(ii) any proceedings for the liquidation, dissolution or other
winding-up of the Borrower, voluntary or involuntary, whether or
not involving insolvency or bankruptcy proceedings;
(iii) any assignment by the Borrower for the benefit of its
creditors; or
(iv) any other marshalling of the assets of the Borrower,
all Senior Debt (including any interest thereon accruing at the legal rate after
the commencement of any such proceedings and any additional interest that would
have accrued thereon but for the commencement of such proceedings) shall first
be paid in full before any payment or distribution, whether in cash, securities
or other property, shall be made to the holders of Subordinated Debt on account
of the indebtedness evidenced thereby. Any payment or distribution, whether in
cash, securities or other property, which would otherwise (but for these
subordination provisions) be payable or deliverable in respect of the
Subordinated Debt shall be paid or delivered directly to the holders of Senior
Debt in accordance with the priorities then existing among such holders until
all Senior Debt shall have been paid in full.
(e) If any payment or distribution, whether in cash, securities or other
property, shall be received by any holder of Subordinated Debt in
contravention of any of the terms hereof and before all of the Senior Debt
shall have been paid in full, such payment or distribution shall be
received in trust for the benefit of, and shall be paid over or delivered
and transferred to, the holders of the Senior Debt at the time outstanding
in accordance with the priorities then existing among such holders for
application to the payment of all Senior Debt remaining unpaid, to the
extent necessary to pay all such Senior Debt in full.
(f) No present or future holder of any Senior Debt shall be prejudiced in
the right to enforce subordination of Subordinated Debt by any act or
failure to act on the part of the Borrower. The foregoing provisions as to
subordination are solely for the purpose of defining the relative right of
the holders of the Senior Debt, on the one hand, and the holders of this
Subordinated Debt, on the other hand. Nothing contained herein shall
impair, as between the Borrower and the holder of this Note, the obligation
of the Borrower, which is unconditional and absolute, to pay to the holder
hereof the principal hereof and interest hereon as and when the same shall
become due and payable in accordance with the terms hereof, or prevent the
holder of this Note from exercising all rights, powers and remedies
otherwise permitted by applicable law or hereunder upon a default or Event
of Default hereunder, all subject to the rights of the holders of the
Senior Debt to receive cash, securities or other property otherwise payable
or deliverable to the holder of this Note.
(g) Upon the payment in full of all Senior Debt, the holders of
Subordinated Debt shall be subrogated to all rights of any holders of
Senior Debt to receive any further payments or distributions applicable to
Senior Debt until all Subordinated Debt shall be paid in full, and such
payments or distributions received by the holders of the Subordinated Debt
by reason of such subrogation, of cash, securities or other property which
would otherwise be paid or distributed to the holders of Senior Debt,
shall, as between the Borrower and its creditors other than the holders of
Senior Debt, on the one hand, and the holders of the Subordinated Debt, on
the other hand, be deemed to be a payment by the Borrower on account of
Senior Debt and not on account of Subordinated Debt.
20. GENERAL PROVISIONS.
(a) TIME OF THE ESSENCE. Time is of the essence in Borrower's performance
of all duties and obligations imposed by this Note.
(b) NO WAIVER BY HOLDER. Holder's course of dealing or Holder's forbearance
from, or delay in, the exercise of any of Holder's rights, remedies,
privileges, or right to insist upon Borrower's strict performance of any
provisions contained in this Note or other Loan Documents shall not be
construed as a waiver by Holder, unless any such waiver is in writing and
signed by Holder.
(c) AMENDMENT. The provisions contained in this Note may not be amended
except through a written amendment signed by Borrower and Holder.
(d) GOVERNING LAW. This Note has been negotiated and delivered in the State
of Georgia and shall be governed by the laws of the State of Georgia, to
the extent that such laws are not preempted by federal laws and
regulations.
(e) FORUM AND VENUE. In the event of litigation pertaining to this Note,
the exclusive forum, venue, and place of jurisdiction shall be in the State
of Georgia, unless otherwise designated in writing by Holder.
(f) SUCCESSORS. This Note shall inure to the benefit of and bind the heirs,
personal representatives, successors, and assigns of the parties.
(g) NUMBER AND GENDER. Whenever used, the singular shall include the
plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
(h) PARAGRAPH HEADINGS. The headings at the beginning of each paragraph and
each sub-paragraph in this Note are for convenience only and shall not be
dispositive in the interpreting or construing this Note or any part
thereof.
(i) SEVERABILITY. If any provision of this Note shall be unenforceable or
void, then such provision shall be deemed severable from the remaining
provisions and shall in no way affect the enforceability of the remaining
provisions nor the validity of this Note.
(j) BORROWER DEFINED. The term "Borrower" includes each and every person
and entity signing this Note as a Borrower, and any co-signers.
(k) HOLDER. The term "Holder" shall include any transferee or assignee of
Holder or any other holder of this Note.
(l) ENTIRE AGREEMENT. This Note and the other Loan Documents executed in
connection with this Note by Borrower and any Guarantor, or either of them,
contain all the terms of the agreement among the parties and no earlier
oral statement or agreement has any force or effect. If any of the terms or
provisions relating to the indebtedness or the repayment of the
indebtedness contained in any of the Loan Documents are inconsistent with
the terms of this Note, the terms of this Note shall be controlling.
Borrower agrees that Borrower is not relying on any representation
or agreement except those contained in the Loan Documents.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ Lillian Clover
---------------------------------------
Lillian Clover, Assistant Secretary
(Seal) (Print name and title signed above)
Attest:
By: /s/ Susan K. Odeen
- ----------------------
Susan K. Odeen
(Print name and title signed above)
GUARANTY AGREEMENT
1. DATE AND PARTIES. This Guaranty Agreement ("Agreement") is dated as of
January 31, 1999, and the parties and their mailing addresses and Borrower's
and Guarantor's tax identification numbers are as follows:
Borrower: Smart Choice Automotive Group, Inc.
a Florida corporation
5200 South Washington Avenue
Titusville, FL 32780
Tax I.D. No.: 59-1469577
Holders:
Guarantors: First Choice Auto Finance, Inc.,
a Florida corporation
5200 South Washington Avenue
Titusville, FL 32780
Tax I.D. No.: 59-3231285
and
SC Holdings, Inc.,
a Florida corporation
5200 South Washington Avenue
Titusville, FL 32780
Tax I.D. No.: 59-3395504
2. PROMISE OF GUARANTY. For good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, and to induce the Holders to
make the Loan, as defined in Paragraph 2(a) hereof, Guarantors hereby jointly
and severally absolutely and unconditionally guarantee, without limitation, the
full and prompt performance of the Obligations, as defined herein, to the
Holders. This Guaranty is an absolute, unconditional, and continuing guaranty of
the full and punctual payment and performance of the Obligations, and not of
their collectability only, and is in no way conditioned upon any Holder first
attempting to collect any of the Obligations from Borrower or resorting to any
collateral security or other means of obtaining payment of any of the
Obligations which Holder may now or hereafter acquire or upon any contingency
whatsoever. The terms "Obligations" and "Obligation" are used interchangeably
and include the following:
(a) PROMISSORY NOTES. All obligations, agreements, promises and covenants
of Borrower under that certain Subordinated Loan Agreement, dated as of
January 31, 1999, by and between Borrower and High Capital Funding, LLC
("HCF") (the "Subordinated Loan Agreement") and those certain Smart Choice
Automotive Group, Inc. 1999 Series A Subordinated Notes ("Notes"), executed
by Borrower thereunder, evidencing a loan or loans to Borrower in the
aggregate principal amount of up to $3,000,000.00, and all extensions,
renewals, modifications, or substitutions thereof (the "Loan"). The terms
of the Subordinated Loan Agreement and the Notes are incorporated herein by
reference as if set forth herein word for word;
(b) BORROWER'S PERFORMANCE. All obligations of Borrower or any other person
to perform under the terms of the Note, the Subordinated Loan Agreement and
any other agreement related to the Loan or any other agreement which
secures, guaranties, or otherwise relates to the Notes or Loan, the terms
of which are incorporated herein by reference as if set forth herein word
for word;
(c) ADVANCES AND EXPENSES. All obligations arising from sums advanced and
expenses incurred by Holder(s) for the purpose of insuring, preserving or
otherwise protecting any collateral for either the Loan, its value or any
of the Obligations defined in this Paragraph 2, and any other sums advanced
and expenses incurred by the Holder(s) under this Agreement, the Notes, the
Subordinated Loan Agreement, and any other agreement which secures,
guarantees, or otherwise relates to the Notes, the Loan, or any of the
Obligations defined in this Paragraph 2, including but not limited to
expenses of disposing of any collateral securing the Loan or the other
Obligations, collection expenses and attorneys' fees, plus interest at the
highest lawful rate which may be charged by any Holder on the Obligations.
In addition to any other expenses, Guarantors agree to pay all reasonable
expenses relating to default and collection of those Obligations described
in this Paragraph 2, as follows: Expenses for taking, holding, preparing
for sale, selling or similar expenses, advances made for the above purposes
and advances relating to the collateral for Obligations made on Borrower's
behalf as permitted by any agreements securing such Obligations; and
reasonable attorneys' fees, paralegal fees and other legal expenses to the
extent not prohibited by law, including, but not limited to, any such fees,
costs and expenses incurred in or related to collecting, protecting and
enforcing liabilities, any negotiations or legal proceedings, including,
but not limited to, any bankruptcy proceedings, or any actions in or
relating to any bankruptcy proceedings;
(e) OTHER OBLIGATIONS. All other obligations of Borrower to Holder,
including but not limited to any and all advances made by Holder on
Borrower's behalf and liabilities as guarantor, endorser or surety to
Holder, all whether now existing or hereafter arising, due or to become
due, direct or indirect, absolute or contingent, primary or secondary,
liquidated or unliquidated, or joint, several or joint and several; and
(f) MODIFICATIONS. All obligations arising out of any and all extensions,
renewals, modifications and substitutions of any of the obligations set out
in this Paragraph 2.
3. GUARANTORS' WARRANTIES AND REPRESENTATIONS:
(a) INVESTIGATION. Guarantors have conducted such due diligence as each
Guarantor deems appropriate with respect to Borrower's financial condition
and existing indebtedness, authority to borrow, and the use and intended
use of all Loan proceeds or other funds advanced or to be advanced by the
Holder(s) to Borrower or on Borrower's behalf that create the Obligations;
and Guarantor has not relied on any representations of any Holder or any
information provided by any Holder about Borrower, Borrower's financial
condition and the existing indebtedness, Borrower's authority, or
Borrower's use and intended use of all Loan proceeds or other funds giving
rise to the Obligation whether now or hereafter advanced to Borrower or for
Borrower's benefit;
(b) RELIANCE. Guarantors acknowledge that each Holder is relying on this
Agreement in making the Loan to Borrower and to otherwise extend financial
accommodation to the Borrower or for Borrower's benefit from time to time
and Guarantors acknowledge and agree that the requirement for Guarantors'
signatures is necessary in order for any Holder to make the Loan;
(c) BENEFIT TO GUARANTORS. Guarantors represent and warrant that the Loan
will be of substantial benefit to Guarantors because the proceeds thereof
will be used, directly or indirectly, to enable each Guarantor to acquire
additional inventory;
(d) NO DEFENSES. Guarantors represent that as of the date of this
Agreement, no Guarantor has any claims or causes of action against Holder,
nor any defenses, set-offs, or counterclaims to this Agreement, and in
consideration of the making of the Loan or the renewal or extension
thereof, Guarantor releases all rights or claims whatsoever of Guarantor
against Holder which exist as of the date hereof;
(e) AGREEMENTS. The execution and delivery of this Agreement will not
violate any agreement governing any Guarantor or to which any Guarantor is
a party, except for violations, if any, that have been disclosed in writing
to Holder and that would not result in any material adverse consequences
for the business, operations or financial condition of Guarantor or for the
ability of Guarantor to perform its obligations in connection with the
Loan, including but not limited to its obligations hereunder;
(f) HOLDER'S CONDUCT. If at any time a Guarantor reasonably believes that
any employee of any Holder has engaged in conduct which is unfair or
improper or any Holder exercises any undue control over the business,
management, property or decisions of Borrower or Guarantor, Guarantor will
notify such Holder in writing immediately of the following:
(1) Conduct of the Holder which forms the basis of Guarantor's
concern; (2) Name of the Holder employee(s) involved; (3) Harm which
any Guarantor believes will result if such Holder does not alleviate
the problem;
(g) COMPLIANCE WITH LAW. Guarantors are in compliance with all laws,
regulations, ordinances, and orders of public authorities applicable to
Guarantors, except for violations, if any, that have been disclosed in
writing to Holder and that would not result in any material adverse
consequences for the business, operations or financial condition of
Guarantors or for the ability of Guarantors to perform its obligations in
connection with the Loan, including but not limited to its obligations
hereunder;
(h) ACCURACY OF INFORMATION. All other information, reports, papers, and
data given to any Holder with respect to Guarantor or to others obligated
under the terms of this Agreement are accurate and correct in all material
respects and complete insofar as completeness may be necessary to give any
Holder a true and accurate knowledge of the subject matter of the aforesaid
information; the net worth of each Guarantor as of the date hereof,
determined on the basis of generally accepted accounting principles,
consistently applied, was in excess of $4,000,000 at December 31, 1998; and
each Guarantor has the capacity to pay its creditors and its debts as they
come due, notwithstanding the guaranty made herein;
(i) CORPORATE WARRANTIES AND REPRESENTATIONS. Guarantor makes to Holder the
following warranties, representations, and covenants, which shall be
continuing so long as the obligations of Guarantor under this Agreement,
remain outstanding:
(1) Each Guarantor is a corporation duly organized and validly
existing as a corporation in good standing under the laws of the state
of Florida;
(2) Each Guarantor has the requisite corporate power and authority to
carry on its business as now being conducted;
(3) The execution, delivery, and performance of this Agreement and any
documents securing this Agreement by Guarantors is within the
corporate powers of Guarantors; have been duly authorized by all
requisite corporate action; have received all necessary governmental
approvals; will not violate any provision of law, any order of any
court or other agency of government, or any Guarantor's articles of
incorporation or by-laws; will not violate any provision of any
indenture, agreement or other instrument to which any Guarantor is a
party or to which any Guarantor or any Guarantor's property is
subject, including, but not limited to, securing the obligations of
any Guarantor under this Agreement, any provision prohibiting the
creation or imposition of any lien, charge, or encumbrance of any
nature whatsoever upon any Guarantor's property or assets; and
(4) Upon request by Holder, each Guarantor shall deliver to Holder
copies of its articles of incorporation and bylaws certified by each
Guarantor's secretary as being true and correct copies of same.
4. INVALIDITY AND IMPAIRMENT. The obligations of Guarantor under this Agreement
shall not be released, discharged, or in any way affected or become
unenforceable, nor shall any Guarantor have any rights against any Holder by
reason of any of the following:
(i) that the condition of any collateral securing the Obligations or
any Guarantor's obligations under this Agreement may be in default at
the time of acceptance thereof by any Holder;
(ii) that a valid lien in any collateral securing the Obligations or
Guarantor's obligation under this Agreement may not be conveyed to,
created or perfected in favor of any Holder;
(iii) that the value of, or the lien or security interest of any
Holder in, any collateral securing the Obligations or any Guarantor's
obligations under this Agreement may be or become impaired;
(iv) that any collateral may be subject to equities, defenses or claims
in favor of others or may be invalid or defective in any way; or
(v) any Holder's act, or failure to act, as the case may be, with
respect to any collateral securing the Obligations or Guarantor's
obligations under this Agreement authorized to be taken or excused from
being taken under any security agreement, mortgage, assignment or other
documents creating or perfecting Holder's security interest in such
collateral; or
(vi) the existence or priority of any liens or security interests in
favor of third parties affecting or encumbering all or any portion of
any collateral securing or intended to secure the Loan.
5. EVENTS OF DEFAULT. Guarantor shall be in default upon the occurrence of any
of the following events, circumstances, or conditions ("Events of Default"):
(a) Failure by any person obligated on the Obligations to make payment to
any Holder when due; or
(b) A default or breach under any of the terms of this Agreement or any
other Loan Document (as herein defined) (other than those defaults
expressly set forth in this paragraph 5 and other than a failure to make
payment to any Holder when due, or to provide daily SMCH INV-DRAFT REPORTS
within 24 hours after written notice from any Holder) which is not fully
cured within ten (10) days after written notice from any Holder;
(c) The making or furnishing of any verbal, or written, representation,
statement, or warranty to Holder which is false or incorrect in any
material respect or the failure to furnish facts necessary to prevent any
statement made from being materially misleading, by, or on behalf of, any
Guarantor or Borrower; or
(d) The dissolution, liquidation, or insolvency of Borrower or any
Guarantor, the appointment of a receiver by or on the behalf of Borrower or
any Guarantor, the assignment for the benefit of creditors by or on the
behalf of Borrower or any Guarantor, the voluntary or involuntary
termination of existence by Borrower or Guarantor, or the commencement of
an action or proceeding under any present or future federal or state
insolvency, bankruptcy, reorganization, composition, or debtor relief law
by or against any Guarantor or Borrower; or
(e) A reasonable belief by Holder at any time that Holder is insecure, that
the prospect of any payment of an Obligation is impaired, or that any
collateral for the Obligations or this Agreement is impaired; or
(f) Failure of Borrower or any Guarantor to pay and provide proof of
payment of any tax, assessment, rent, insurance premium, or escrow on or
before its due date, unless Borrower or any Guarantor provides documentary
evidence to Holder(s) that it is timely contesting same in good faith and
has established adequate reserves to pay same together with any and all
penalties, interest, costs, expenses and attorney's fees related thereto;
or
(g) A transfer of a substantial part of any Guarantor's money or property
to any one or more person(s) other than a wholly-owned subsidiary of such
Guarantor; or
(h) Use of any portion of the Loan proceeds or other funds giving rise to
an Obligation, whether now or hereafter advanced to Borrower or for
Borrower's benefit, in any transaction which is likely to cause any Holder
to directly or indirectly incur any securities or environmental liability;
or
(i) Any charge or indictment against Guarantor or Borrower under a federal
or state law for which forfeiture is a potential penalty.
6. REMEDIES UPON DEFAULT. If an Event of Default occurs and is not fully cured
within any applicable cure period, at the option of any Holder, all or any part
of the Obligations and the obligations of the Guarantors under this Agreement
shall become immediately due and payable without notice or demand. In addition,
if an Event of Default occurs and is continuing, any Holder, at its option, may
immediately invoke any or all other remedies provided for in this Agreement, the
Notes, or any other instrument evidencing the Obligations, and any documents
securing or otherwise relating to this Agreement or the Obligations. All rights
and remedies are cumulative and not exclusive, and each Holder is entitled to
all remedies provided by law or equity, whether or not expressly set forth.
7. EFFECT OF BORROWER'S BANKRUPTCY. Each Guarantor understands and agrees that,
if bankruptcy, reorganization or receivership proceedings should at any time be
filed by or against Borrower, or upon the insolvency (however defined) of
Borrower, this Agreement shall remain in full force and effect, and the maturity
of the Loan and any other Obligations and each Guarantor's liability hereunder
may be accelerated, and all the aforesaid obligations of Borrower and Guarantors
may become immediately payable by either or both Guarantors. No invalidity,
irregularity, or unenforceability by reason of the Federal Bankruptcy Code, 11
U.S.C. 101 et seq., as amended from time to time, or any insolvency or other
similar law, or any law or order of any government or agency thereof purporting
to reduce, amend or otherwise affect, the Obligations, shall impair, affect, be
a defense to or claim against the obligations of Guarantors under this
Agreement. Any determination by final order of a court of competent jurisdiction
that any payment of principal or interest to Holder by any other guarantor,
surety, endorser or co-maker was a voidable preference or a fraudulent
conveyance under the bankruptcy or insolvency laws of the United States or
otherwise shall not extinguish any Guarantor's liability to Holder under this
Agreement, and Guarantor shall be liable to pay to any Holder any amounts which
such Holder may be required to disgorge because of the insolvency or bankruptcy
of Borrower or any other guarantors, surety, endorser, or co-maker of the
Obligations.
8. CONSENTS BY GUARANTOR. Guarantor consents and agrees that:
(a) To enforce the liability of Guarantor hereunder Holder shall NOT be
required to first:
(1) give any Guarantor any notice of Borrower's default;
(2) foreclose upon or resort to any mortgage, pledge or other
collateral held as security for the Loan or any other Obligation;
(3) attempt to enforce the liability of the Borrower or of any other
maker, surety, guarantor, endorser, or other third party who may be
primarily or secondarily liable for the Loan or any other Obligation;
or
(4) exhaust any other remedies it may have.
(b) Holders (or any of them) may, without notice to Guarantors and without
defeating or diminishing the liability of Guarantors hereunder, and on any
terms satisfactory to Holders, from time to time on one or more occasions,
without limitation:
(1) release in whole or in part any mortgage, pledge or other
collateral held as security for the Loan or other Obligations, or
accept substitutions of collateral therefor; or
(2) extend the maturity or modify the terms of the Loan or other
Obligations, or permit the substitution or the renewal or renewals
thereof, without limitation as to the number of renewals, extensions,
modifications or substitutions; or
(3) release, agree not to sue, suspend the right to enforce its rights
as to Borrower or any third party who may at any time be liable as a
co-obligor, endorser, surety, accommodation maker, guarantor or
otherwise for the Loan or other Obligations, including the release of
any co-signer of this Agreement, without the permission of the other
signer(s); or
(4) enter into agreements for sale, repurchase and participations of
the Notes and Loan or other Obligations to any person in any amounts;
or
(5) assign all or any part of the Note or other Obligations or this
Agreement, in which event this Agreement shall inure to the benefit of
any such assignee with the same force and effect as though the
assignee was specifically named herein, provided, however that each
assignee shall be subject to the terms and provisions of the Notes,
other Obligations and this Agreement; or
(6) make any future advances to Borrower without limit as to the
amounts, numbers or terms of payment or interest rates of such
advances; or
(7) agree to any valuation of any collateral securing the Obligations
or this Agreement made in connection with any proceedings under the
U.S. Bankruptcy Code concerning Borrower or any Guarantor, without
regard to the amount of such valuation or any actual monies received
by any Holder from the sale of such collateral; or
(8) take or fail to take any action authorized or permitted to be
taken or that Holder is excused from taking by the Note, or any other
instrument evidencing, guaranteeing, securing or otherwise relating to
the Obligations, this Agreement, or any other obligations of Borrower
or Guarantors to the Holders.
9. WAIVERS. Each Guarantor waives presentment for payment, demand, protest,
notice of dishonor, notice of intent to accelerate, notice of acceleration,
notice of acceptance of this Agreement, notice of the assignment of this
Agreement or the Notes or other Obligations, and notice of action by any Holder
upon default in regard to the Obligations, and any right of set-off any
Guarantor may have against any Holder or any participating Holder. Each
Guarantor further waives the following rights: (i) all rights to
indemnification, reimbursement, contribution, or other rights at law or equity
to recover or seek recovery from Borrower or any insider, as that is defined in
11 U.S.C. ss.101(30) as amended, of the Borrower for any sums paid by any
Guarantor to any Holder(s) in full or partial satisfaction of Borrower's
Obligations or any Guarantor's obligations to any Holder under this Agreement;
(ii) all rights to be subrogated to the rights of any Holder against the
Borrower or any insider, as defined above, for any sums paid by any Guarantor to
any Holder in full or partial satisfaction of Borrower's Obligations or any
Guarantor's obligations to any Holder under this Agreement; (iii) all other
claims, cause of action, liens, rights of payment, rights of equitable remedy
for breach of performance if such breach gives rise to a right of payment
against Borrower or any insider as defined hereinabove, whether or not any of
foregoing is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured or
unsecured.
10. GUARANTY IRREVOCABLE. This Agreement constitutes a continuing guaranty of
the Obligations, cannot be revoked by the Guarantors, and will remain in full
force and effect until the Obligations are paid in full.
11. JOINT AND SEVERAL LIABILITY. Each Guarantor shall be jointly and severally
liable for the payment of the entire amount of the unpaid balance owing under
the Obligations, and no Holder shall, as a condition precedent to enforcing any
Guarantor's liability hereunder, be obligated to enforce payment from any other
guarantor. 12. CHANGES IN ORGANIZATION. No change in the corporate organization
or structure of Borrower shall discharge or otherwise affect any Guarantor's
liabilities hereunder.
13. NO CONDITIONS. The liability of Guarantor hereunder is not conditioned upon
the signing of this Agreement by any other person and is not subject to any
other condition not herein expressly set out.
14. ATTORNEYS' FEES AND COSTS. Each Guarantor agrees to pay the reasonable costs
incurred by each Holder to enforce and collect this Agreement, including, but
not limited to, reasonable paralegal fees, attorneys' fees, court costs and
other legal expenses.
15. LIENS AND RIGHTS OF SET-OFF. In addition to all liens upon, and rights of
set-off against the moneys, securities, and other property of the Guarantors
given to the Holders by law, each Holder shall have a lien upon and a right of
set-off against all moneys, securities, and other property of Guarantor now or
hereafter in the possession of any Holder, whether held in a general or special
account, or for safekeeping or otherwise, except as provided below; and every
such lien or right of set-off may be exercised without demand upon or notice to
any Guarantor, without regard to the existence or value of any collateral
securing the Obligations or this Agreement, and without regard to the number or
creditworthiness of any other persons who have agreed to pay the Obligations. If
any such money is also owned by some other person who has not guaranteed or
agreed to pay the Obligations, each Holder's right of set-off will extend to the
amount which could be withdrawn or paid directly to Guarantor on Guarantor's
request, endorsement or instruction alone. Where any Guarantor may obtain
payment from a Holder only with the endorsement or consent of someone who has
not guaranteed or agreed to pay the Obligations, each Holder's right of set-off
will extend to such Guarantor's interest in the obligation. A Holder's right of
set-off will not apply to an account or other obligation if it clearly appears
that a Guarantor's rights in the obligation are solely as a fiduciary for
another or to an account which, by its nature and applicable law, must be exempt
from the claims of creditors. Each Holder will not be liable for failure to
honor any instruction or request of any Guarantor when there are insufficient
funds in the account or other obligation to pay for such instruction or request
because of any Holder's exercise of its right of set-off. Each Guarantor agrees
to indemnify and hold Holder harmless from any person's claim arising as a
result of any Holder's exercise of such Holder's right of set-off and the cost
and expenses related thereto, including without limitation, reasonable
attorneys' fees and paralegal fees.
16. SUBORDINATION OF INDEBTEDNESS OF GUARANTOR.
(a) Any indebtedness of any Guarantor now or hereafter held by Borrower
is hereby subordinated to the guaranty obligations of the Guarantors to the
Holders under this Guaranty Agreement; and such indebtedness of any Guarantor to
Borrower shall not be paid by any Guarantor until all of the Obligations shall
have been paid and satisfied in full.
(b) The payment obligations of any Guarantor hereunder who is also a
guarantor of "Senior Debt" (as that term is defined in paragraph "19" of the
Notes) is/are hereby subordinated to the payment of such Senior Debt to the
extent and in the same manner as set forth in paragraph "19" of the Notes.
17. FINANCIAL STATEMENTS. Until the Obligations are satisfied in full, each
Guarantor shall furnish Holder upon any material change in financial or business
condition, upon Holder's request, and in the event of no request, at least
annually, a current financial statement of each Guarantor, which is certified by
each Guarantor and each Guarantor's accountant to be true and accurate, and each
Guarantor shall also provide to Holder a copy of its audited financial
statements, certified by its independent auditors, promptly upon the issuance of
such auditor's report.
18. TERMINATION OF GUARANTY. The obligations of the Guarantors under this
Agreement shall continue in full force and effect until 120 days after the
Obligations have been paid or satisfied in full, provided however, that this
Agreement shall continue to be effective or shall be reinstated, as the case may
be, if at any time payment or other satisfaction of any of the Obligations is
rescinded or must otherwise be restored or refunded upon the insolvency or
reorganization of Borrower, or otherwise, as though such payment had not been
made or such other satisfaction had not occurred.
19. GENERAL PROVISIONS.
(a) TIME OF THE ESSENCE. Time is of the essence in each Guarantor's
performance of all duties and obligations imposed by this Agreement.
(b) NO WAIVER BY HOLDER. Holder's course of dealing, forbearance, or
delay in, the exercise of any Holder's rights, remedies, privileges, or right to
insist upon each Guarantor's strict performance of any provisions contained in
this Agreement or Borrower's strict performance of Borrower's obligations, shall
not be construed as a waiver by any Holder, unless any such waiver is in writing
and signed by such Holder (and then only to the extent of such Holder(s) who
actually so signed).
(c) AMENDMENT. The terms and provisions of this Agreement may not be
waived, altered, modified or amended, except by a writing duly signed by an
authorized agent of each Holder and by each Guarantor.
(d) GOVERNING LAW. This Agreement shall be governed by the internal laws of
the State of Georgia, to the extent that such laws are not preempted by federal
laws and regulations.
(e) FORUM AND VENUE. In the event of litigation pertaining to this
Agreement, the exclusive forum, venue, and place of jurisdiction shall be in the
State of Georgia.
(f) SUCCESSORS. This Agreement shall inure to the benefit of and bind the
heirs, personal representatives, successors, and assigns of the parties. The
term "Holder" shall specifically include any transferee or assignee of any
Holder or any other holder of the Obligations. The term "Guarantor" shall
specifically include any successors of any Guarantor.
(g) NUMBER AND GENDER. Whenever used, the singular shall include the
plural, the plural the singular, and the use of any gender shall be applicable
to all genders.
(h) PARAGRAPH HEADINGS. The headings at the beginning of each paragraph and
each subparagraph in this Agreement are for convenience only and shall not be
dispositive in interpreting or construing this Agreement or any part thereof.
(i) SEVERABILITY. If any provision of this Agreement shall be ruled
unenforceable or void by a court of law having jurisdiction over the parties and
subject matter, then such provision shall be deemed severable from the remaining
provisions and shall in no way affect the enforceability of the remaining
provisions nor the validity of this Agreement.
(j) ENTIRE AGREEMENT. This Agreement and the Loan Documents as defined in
the Notes contain all the terms of the agreement between the Holders and the
Guarantors, and no earlier statement has any force or effect.
20. RECEIPT OF COPY. By signing this Agreement, each Guarantor acknowledges
that such Guarantor has read the Agreement prior to execution and that a copy
(copies) of this Agreement was delivered and received by each Guarantor.
(Seal) FIRST CHOICE AUTO FINANCE, INC., Guarantor
Attest: By:_______________________________________
Lillian Clover, Assistant Secretary
- ---------------------------
(Title)
(Seal) SC HOLDINGS, INC., Guarantor
Attest: By:_______________________________________
Lillian Clover, Assistant Secretary
- ---------------------------
(Title)
SECOND AMENDMENT TO DEALER CAPITAL
LOAN AND SECURITY AGREEMENT
This Second Amendment to Dealer Capital Loan and Security Agreement
("Amendment"), effective as of the day of July, 1998 (the "Effective Date"), by
and between NISSAN MOTOR ACCEPTANCE CORPORATION ("NMAC") and FIRST CHOICE STUART
1, INC., a Florida corporation d/b/a Stuart Nissan ("Dealer").
W I T N E S S E T H:
WHEREAS, NMAC and B & B Florida Enterprises, Inc., a Florida corporation
("B & B") entered into that certain Nissan Motor Acceptance Corporation Dealer
Capital Loan and Security Agreement, dated October 12, 1995 (the " Original Loan
Agreement"), whereby NMAC agreed to advance to B & B the maximum sum of ONE
MILLION TWO HUNDRED THOUSAND AND NO/100 ($1,200,000.00) DOLLARS, upon
fulfillment of the terms and conditions thereof by B & B; and
WHEREAS, the Original Loan Agreement was subsequently amended September 1,
1997 and again on June 8, 1998 pursuant to that certain Extension Agreement (the
Original Loan Agreement, as subsequently amended, the "Loan Agreement") and
Dealer and NMAC wish to further amend the Loan Agreement as provided herein.
NOW THEREFORE, in consideration of the premises, Ten and No/100 ($10.00)
Dollars and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
1. The recitations set forth above are true and correct.
2. The principal outstanding balance (exclusive of interest) owed to NMAC
under the Loan Agreement is, as of the Effective Date of this Amendment,
Six Hundred Seventy-Six Thousand Ninety Dollars and Eighty Cents
($676,090.80).
3. The second sentence of Article I of the Loan Agreement is hereby deleted in
its entirety and the following is substituted therefore:
"From the Effective Date of this Dealer Capital Loan and Security
Agreement through June 30, 1998 (the "Interest Only Period") accrued
interest together with all other fees, costs and charges shall be paid
monthly under this Agreement. Commencing with the first month
following the expiration of the Interest Only Period and continuing
each month thereafter, successive monthly principal installments of
Eleven Thousand Two Hundred Sixty-Eight Dollars and Eighteen Cents
($11,268.18) each together with all accrued and unpaid interest and
all other fees, costs and charges shall be paid under this Agreement
commencing with the payment due August 15, 1998, followed by one final
installment on July 15, 2003 equal to the then unpaid Principal, all
accrued and unpaid interest and all other fees, costs and charges due
and owing under this Loan. Interest shall be calculated on a daily
basis, computed on the actual number of days elapsed over a year of
365 or 366 days, commencing on the date the Principal is funded.
4. NMAC's waiver of any term, provision, condition, covenant or agreement of
the Loan Agreement prior to the Effective Date hereof shall not be
construed, in any manner, to be NMAC's consent to such waiver on or after
the Effective Date of this Amendment. No waiver of any term, provision,
condition, covenant or agreement herein contained or contained in the Loan
Agreement shall be effective unless set forth in writing signed by NMAC and
any such waiver shall be effective only to the extent set forth in such
writing.
5. Dealer agrees to pay any and all documentary stamps and all penalties, if
any, which are assessed by the State of Florida on account of the execution
and/or delivery of the Loan Agreement and/or this Amendment. Dealer shall
pay such sums immediately upon receipt of notice of such amounts from NMAC.
If the Dealer fails to pay such sums to NMAC, NMAC may (and without waiving
such Event of Default), at its option, pay such taxes and penalties) and
any such payment made by NMAC shall be added to the indebtedness hereof and
shall bear interest from the date advanced at the rate of the lesser of
eighteen (18%) percent per annum or the maximum rate permissible under
Florida law.
6. The Dealer hereby represents, ratifies and affirms to NMAC that NMAC has
acted in good faith and has fulfilled and fully performed its obligations
under the Loan Agreement and all of its obligations with respect to the
administration and disbursement of the loan proceeds.
7. Except as specifically provided in this Amendment, no part of the Loan
Agreement or any other instrument securing the Loan Agreement is in any way
altered, amended or changed.
8. The parties hereto intend that this Amendment will not disturb the existing
lien priority of NMAC and that this Amendment will retain the same lien and
priority as the Loan Agreement which this Amendment modifies.
9. This Amendment shall be governed by and construed and the rights and
obligations of the parties under this Amendment shall be determined in
accordance with the laws of the State of Florida.
10. This Amendment and the Loan Agreement shall be binding upon and shall enure
to the benefit of the parties hereto and their respective personnel,
representatives, heirs, successors and assigns.
11. Each party to this Amendment acknowledges that it has reviewed this
Amendment and hereby declares that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Amendment. In the event
that any terms or provisions of this Amendment are held invalid or
unenforceable, the remaining terms and conditions of this Amendment shall
continue to be fully enforceable without change, and this Amendment shall
be interpreted as if the unenforceable provision had not been a part
hereof.
12. NMAC and Dealer each hereby knowingly, voluntarily and intentionally waive
any and all right either may have to a trial by jury in respect of any
litigation (including, but not limited to, any claims, cross-claims or a
third-party claims) arising out of, under or in connection with this
Amendment, the Loan Agreement or any other agreement contemplated to be
executed in conjunction herewith or therewith, or any course of conduct,
course of dealing, statements (whether written or verbal) or actions of any
party hereto. This provision is a material inducement for NMAC to enter
into this Amendment. The Dealer hereby certifies that no representative or
agent of NMAC nor NMAC's counsel has represented, expressly or otherwise,
that NMAC would not, in the event of such litigation, seek to enforce this
waiver of right to jury trial provision.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
Signed, sealed and delivered in NISSAN MOTOR ACCEPTANCE CORPORATION
the presence of:
/s/ Christine Baba By: /s/ Mark Doi
- ------------------ ---------------
Witness Print Name: Mark Doi
Print Name: Christine Baba Title: Commercial Credit Manager
/s/ Pat Yamada
- --------------
Witness
Print Name: Pat Yamada
FIRST CHOICE STUART 1, INC.,
a Florida corporation d/b/a Stuart Nissan
/s/ Robert J. Downing By: /s/ Donna L. Siebel
- ---------------------------- -----------------------------------------
Witness Print Name: Donna L .Siebel
Print Name: Robert J. Downing Title: Vice President/Asst. Secretary
/s/ Lori J. Arp
- ----------------------------
Witness
Print Name: Lori J. Arp
By execution hereof, the following Guarantors, in their capacity as
guarantors of the obligations of Dealer to NMAC under their respective
Continuing Guaranty Agreement (Corporation) previously delivered to NMAC, hereby
approve and consent to the execution and delivery of this Amendment and
acknowledge and agree that, notwithstanding the execution and delivery of this
Amendment, each Guarantor shall have continuing liability under their respective
Continuing Guaranty Agreement (Corporation) for the obligations of Dealer as
modified by this Amendment.
SMART CHOICE AUTOMOTIVE GROUP,
INC., a Florida corporation
By: /s/ Joseph E. Mohr
----------------------
Print Name: Joseph E. Mohr
Title: Executive Vice President and
Chief Financial Officer
SMART CARS, INC., a Florida corporation
By: /s/ Donna L. Siebel
-----------------------
Print Name: Donna L .Siebel
Title: Vice President/Asst. Secretary
AIRCRAFT LEASE AGREEMENT
dated as of ___________________ ("Agreement")
This Agreement (together with all supplements, annexes. exhibits and schedules
hereto hereinafter referred to as the "Lease") is between General Electric
Capital Corporation, with an office at 1000 Windward Concourse, Suite 403 P.O.
Box 3300, Alpharetta, GA 30023-3300 (hereinafter called, together with its
successors and assigns, if any, "Lessor") and Smart Choice Automotive Group,
Inc., a corporation organized and existing under the laws of the State of
Florida with its mailing address and chief place of business at 5200 S.
Washington Avenue, Titusville, FL 32780 (hereinafter called "Lessee").
1. LEASING:
(a) Subject to the terms and conditions set forth below, Lessor agrees
to lease to Lessee, and Lessee agrees to lease from Lessor, the aircraft,
including the airframe, engines and all appurtenant equipment (together
hereinafter the "Aircraft") described in Annex A.
(b) Lessor shall purchase the Aircraft from the manufacturer or
supplier thereof ("Supplier") and lease it to Lessee if on or before the Last
Delivery Date (specified in Annex B) Lessor receives each of the following
documents in form and substance satisfactory to Lessor: (i) a copy of this Lease
executed by Lessee, (ii) unless Lessor shall have delivered its purchase order
for the Aircraft or received a bill of sale for the Aircraft in the name of
Lessor (and in form and substance satisfactory to Lessor), the Purchase
Document(s) Assignment and Consent in the form of Annex C, with copies of the
purchase order or other purchase documents attached thereto; (iii) copies of
insurance policies or, at Lessor's option, such other evidence of insurance
which complies with the requirements of Section 10, (iv) evidence of an N number
for the Aircraft together with an assignment of the rights thereto to Lessor;
(v) evidence that the Aircraft has been duly certified as to type and
airworthiness by the Federal Aviation Administration ("FAA"); (vi) evidence that
Lessor's designated FAA escrow agent (which may be FAA counsel) has received in
escrow the executed bill of sale and AC Form 8050-1 Aircraft Registration Form
(except for the pink copy which shall be available to be placed on the Aircraft
upon acceptance thereof), and an executed duplicate of this Lease all In proper
form for filing with the FAA; (vii) resolution of Lessee authorizing this Lease
in the form of Annex D; (viii) a completed inspection and/or survey with respect
to the Aircraft in accordance with the requirements set forth in the Certificate
of Acceptance; and (ix) such other documents as Lessor may reasonably request.
Lessor's obligation to lease the Aircraft hereunder is further conditioned upon
(1) the cost to Lessor of the acquisition of the Aircraft not exceeding the
Capitalized Lessor's Cost stated on Annex A; (2) upon delivery of the Aircraft
Lessee's execution and delivery to Lessor of a Certificate of Acceptance in the
form of Annex E; and (3) filing of all necessary documents with, and the
acceptance thereof by, the FAA.
(c) Lessor hereby appoints Lessee its agent for inspection and
acceptance of the Aircraft from the Supplier. Once the Certificate of Acceptance
has been signed, Lessee may not cancel this Lease.
2. TERM, RENT AND PAYMENT:
(a) The rent ("Rent") payable for the Aircraft and Lessee's right to
use the Aircraft begins on the date Lessee signs the Certificate of Acceptance
("Commencement Date"). The term ("Term") of this Lease shall commence on the
Commencement Date and shall continue, unless earlier terminated pursuant to the
provisions of this Lease, until and including the Expiration Date stated in
Annex B. If any Term is extended or renewed, the word "Term" shall be deemed to
refer to all extended or renewal Terms, and all provisions of this Lease shall
apply during any such extension or renewal Terms, except as may be otherwise
specifically provided in writing.
(b) Lessee shall pay rent to Lessor at its address stated above, except
as otherwise directed by Lessor. Rent payments shall be in the amount, payable
at such intervals and due in accordance with the provisions of Annex B. (Each
payment of Rent is hereinafter referred to as a "Rent Payment"). If one or more
Advance Rent is payable, such Advance Rent shall be (i) set forth on Annex B and
due in accordance with the provisions of Annex B, and (ii) when received by
Lessor, applied to the first Basic Term for Rent Payment as set forth on Annex B
and the balance, if any, to the final Rent Payment(s), in inverse order of
maturity, In no event shall any Advance Rent or any other Rent Payment be
refunded to Lessee. If Rent is not paid within ten (10) days of its due date,
Lessee agrees to pay a late charge of five cents ($.05) per dollar on, and in
addition to, the amount of such Rent but not exceeding the lawful maximum if
any.
3. RENT ADJUSTMENT:
(a) If, solely as a result of Congressional enactment of any law
(including, without limitation, any modification of, or amendment or addition
to, the Internal Revenue Code of 1986, as amended, ("Code")), the maximum
effective corporate income tax rate (exclusive of any minimum tax rate) for
calendar-year taxpayers ("Effective Rate") is higher than thirty-five percent
(35%) for any year during the Term of this Lease, then Lessor shall have the
right to increase such rent payments by requiring payment of a single additional
sum. The additional sum shall be equal to the product of (i) the Effective Rate
(expressed as a decimal) for such year less .35 (or, in the event that any
adjustment has been made hereunder for any previous year, the Effective Rate
(expressed as a decimal) used in calculating the next previous adjustment) times
(ii) the adjusted Termination Value (defined below) divided by (iii) the
difference between the new Effective Rate (expressed as a decimal) and one (1).
The adjusted Termination Value shall be the Termination Value (calculated as of
the first rental due in the year for which such adjustment is being made) minus
the Tax Benefits that would be allowable under Section 168 of the Code (as of
the first day of the year for which such adjustment is being made and all future
years of the lease term). The Termination Values are defined on Annex F and the
Tax Benefits are defined on Annex B. Lessee shall pay to Lessor the full amount
of the additional rent payment on the later of (i) receipt of notice or (ii) the
first day of the year for which such adjustment is being made.
(b) Lessee's obligations under this Section 3 shall survive any
expiration or termination of this Agreement.
4. TAXES AND FEES: If permitted by law, Lessee shall report and pay promptly all
taxes, fees and assessments due, imposed, assessed or levied against the
Aircraft (or purchase, ownership, delivery, leasing, possession, use or
operation thereof), this Agreement (or any rents or receipts hereunder), any
Schedule, Lessor or Lessee, by any domestic or foreign governmental entity or
taxing authority during or related to the term of this Agreement, including,
without limitation, all license and registration fees, and all sales, use,
personal property, excise, gross receipts, franchise, stamp, value added, custom
duties, landing fees, airport charges, navigation service charges, route
navigation charges or other taxes, imposts, duties and charges, together with
any penalties, fines or interest thereon (collectively "Taxes"). Lessee shall
have no liability for Taxes imposed by the United States of America or any state
or political subdivision thereof which are on or measured by the net income of
Lessor except as provided in Sections 3 and 14(c). Lessee shall promptly
reimburse (on an after tax basis) Lessor for any Taxes charged to or assessed
against Lessor. Lessee shall show Lessor as the owner of the Aircraft on all tax
reports or returns, and send Lessor a copy of each report or return and evidence
of Lessees payment of Taxes upon request.
5. REPORTS: Lessee will provide Lessor with the following in writing within the
time periods specified: (a) notice of any tax or other lien which attaches to
the Aircraft and the full particulars of the tax or lien, within ten (10) days
after Lessee becomes aware of the tax or lien, (b) Lessee's complete financial
statements, certified by a recognized firm of certified public accountants,
within ninety (90) days of the close of each fiscal year of Lessee, and any
further financial information or report, upon request; (c) notice to Lessor of
the Aircraft's location, and the location of all information, logs, documents
and records relating to the Aircraft and its use, maintenance and/or condition,
immediately upon request; (d) notice to Lessor of the relocation of the
Aircraft's primary hangar location, ten (10) days prior to any relocation; (e)
notice of loss or damage to the Aircraft which would cost more than the lesser
of (i) ten percent (10%) of the original Capitalized Lessor's Cost or (ii) two
hundred fifty thousand Dollars ($250,000,00) to repair or replace, within ten
(10) days of such loss or damage; (f) notice of any accident involving the
Aircraft causing personal injury or property damage, within ten (10) days of
such accident; (g) copies of the insurance policies or other evidence of
insurance required by the terms hereof, promptly upon request by Lessor; (h)
copies of all information, logs, documents and records relating to the Aircraft
and its use, maintenance and/or condition, within ten (10) days of such request;
(i) on each annual anniversary of the Commencement Date of this Lease, a
certificate of the authorized officer of Lessee stating that he has reviewed the
activities of Lessee and that, to the best of his knowledge, there exists no
Event of Default or event which with notice or lapse of time (or both) would
become an Event of Default; (j) such information as may be required to enable
Lessor to file any reports required by any governmental authority as a result of
Lessor's ownership of the Aircraft promptly upon request of Lessor; (k) copies
of any manufacturer's maintenance service program contract for the airframe or
engines, promptly upon request by Lessor; (1) evidence of Lessee's compliance
with FAA airworthiness directives and advisory circulars and of compliance with
other maintenance provisions of Section 7 hereof and the return provisions of
Section 11, promptly upon request of Lessor; and (m) such other reports as
Lessor may reasonably request.
6. DELIVERY, REGISTRATION, USE AND OPERATION:
(a) The Aircraft shall be delivered directly from the Supplier to
Lessee unless the Aircraft is being leased pursuant to a sale leaseback
transaction in which case Lessee acknowledges that it is in possession of the
Aircraft as of the Lease Commencement Date.
(b) Lessee, at its own cost and expense, shall cause the Aircraft to be
duly registered in the name of Lessor under the Title 49, Subtitle VII of the
United States Code, as amended (the "FAA Act"), and shall not register the
Aircraft under the laws of any other country.
(c) The possession, use and operation of the Aircraft shall be at the
sole risk and expense of Lessee. Lessee acknowledges that I (accepts full
operational control of the Aircraft. Lessee agrees that the Aircraft will be
used and operated in compliance with any and all statutes, laws. ordinances,
regulations and standards or directives issued by any governmental agency
applicable to the use or operation thereof, in compliance with any airworthiness
certificate, license or registration relating to the Aircraft issued by any
agency and in a manner that does not modify or impair any existing warranties on
the Aircraft or any part thereof. Lessee will operate the Aircraft predominantly
in the conduct of its business and will not use or operate, or permit the
Aircraft to be used or operated, (i) in violation of any United States export
control law, (ii) in a manner wherein the predominant use during any twelve
month period is for a purpose other than transportation for Lessee, or in a
manner, for any time period, such that Lessor or a third party shall be deemed
to have "operational control" of the Aircraft, or (iii) for the carriage of
persons or property for hire or the transport of mail or contraband. The
Aircraft will, at all times be operated by duly qualified pilots holding at
least a valid airline transport pilot certificate and instrument rating and any
other certificate, rating, type rating or endorsement appropriate to the
Aircraft purpose of flight, condition of flight or as otherwise required by the
Federal Aviation Regulations ("FAR"). The Aircrafts pilots shall be employed
and/or paid and contracted for by Lessee, shall meet all recency of flight
requirements and shall meet the requirements established and specified by the
insurance policies required under this Lease and the FAA. The primary hangar
location of the Aircraft shall be as stated in Annex B. Lessee shall not
relocate the primary hangar location to a hangar location outside the United
States. Lessor may examine and inspect the Aircraft, wherever located, on land
and in flight, after giving Lessee reasonable prior notice.
(d) AT ALL TIMES DURING THE TERM OF THE LEASE, THE AIRCRAFT WILL BE
LOCATED AND USED SOLELY WITHIN THE CONTINENT OF NORTH AMERICA AND THE CARIBBEAN.
(i) AT ALL TIMES DURING THE TERM OF THE LEASE, LESSEE AGREES
NOT TO OPERATE OR LOCATE THE AIRCRAFT, OR ALLOW THE AIRCRAFT TO BE OPERATED OR
LOCATED, IN OR OVER ANY AREA OF HOSTILITIES, ANY GEOGRAPHIC AREA WHICH IS NOT
COVERED BY THE INSURANCE POLICIES REQUIRED BY THIS LEASE, OR ANY COUNTRY OR
JURISDICTION FOR WHICH EXPORTS OR TRANSACTIONS ARE SUBJECT TO SPECIFIC
RESTRICTIONS UNDER ANY UNITED STATES EXPORT OR OTHER LAW OR UNITED NATIONS
SECURITY COUNCIL DIRECTIVE, INCLUDING WITHOUT LIMITATION, THE TRADING WITH THE
ENEMY ACT, 50 U.S.C. APP. SECTIONS 1 ET SEQ., THE INTERNATIONAL EMERGENCY
ECONOMIC POWERS ACT, 50 U.S.C. APP. SECTIONS 1701 ET SEQ., AND THE EXPORT
ADMINISTRATION ACT, 50 U.S.C. APP. SECTIONS 2401 ET SEQ. OR TO OTHERWISE
VIOLATE, OR PERMIT THE VIOLATION OF, SUCH LAWS OR DIRECTIVES. LESSEE ALSO AGREES
TO PROHIBIT ANY NATIONAL OF SUCH RESTRICTED NATIONS FROM OPERATING THE AIRCRAFT.
(ii) Lessee represents and warrants that it does not on this
date hold a contract or other obligation to operate the Aircraft in any of the
following countries: Cuba, Iraq, Libya, Myanmar, North Korea, and the Federal
Republic of Yugoslavia (Serbia and Montenegro).
(iii) The engines set forth on Annex A shall be used only on
the airframe described in Annex A and shall only be removed for maintenance in
accordance with the provisions of this Lease.
(e) Lessor shall not disturb Lessees quiet enjoyment of the Aircraft
during the Term of this Lease unless an Event of Default has occurred and is
continuing under this Lease.
7. MAINTENANCE:
(a) Lessee agrees that the Aircraft will be maintained in compliance
with any and all statutes, laws, ordinances, regulations and standards or
directives issued by any governmental agency applicable to the maintenance
thereof, in compliance with any airworthiness certificate, license or
registration relating to the Aircraft issued by any agency and in a manner that
does not modify or impair any existing warranties on the Aircraft or any part
thereof.
(b) Lessee shall maintain, inspect, service, repair, overhaul and test
the Aircraft (including each engine) in accordance with (i) all maintenance
manuals initially furnished with the Aircraft, including any subsequent
amendments or supplements to such manuals issued by the manufacturer from time
to time, (ii) all mandatory or otherwise required "Service Bulletins" issued,
supplied, or available by or through the manufacturer and/or the manufacturer of
any engine or part with respect to the Aircraft, (iii) all airworthiness
directives applicable to the Aircraft issued by the FAA or similar regulatory
agency having jurisdictional authority, and causing compliance to such
directives to be completed through corrective modification in lieu of operating
manual restrictions, and (iv) all maintenance requirements set forth in Annex G
hereto. Lessee shall maintain all records, logs and other materials required by
the manufacturer for enforcement of any warranties or by the FAA. All
maintenance procedures required hereby shall be undertaken and completed in
accordance with the manufacturer's recommended procedures, and by properly
trained, licensed, and certificated maintenance sources and maintenance
personnel, so as to keep the Aircraft and each engine in as good operating
condition as when delivered to Lessee hereunder, ordinary wear and tear
excepted, and so as to keep the Aircraft in such operating condition as may be
necessary to enable the airworthiness certification of such Aircraft to be
maintained in good standing at all times under the FAA.
(c) Lessee agrees, at its own cost and expense, to (i) cause the
Aircraft and each engine thereon to be kept numbered with the identification in
serial number therefor as specified in Annex A; (ii) prominently display on the
Aircraft that N number, and only that N number, specified in Annex A, and (iii)
notify Lessor in writing thirty (30) days prior to making any change in the
configuration (other than changes in configuration mandated by the FAA),
appearance and coloring of the Aircraft from that in effect at the time the
Aircraft is accepted by Lessee hereunder, and in the event of such change or
modification of configuration, coloring or appearance, to restore, upon request
of Lessor, the Aircraft to the configuration, coloring or appearance in effect
on the Commencement Date or, at Lessor's option to pay to Lessor an amount equal
to the reasonable cost of such restoration. Lessee will not place the Aircraft
in operation or exercise any control or dominion over the same until such
Aircraft marking has been placed thereon. Lessee will replace promptly any such
Aircraft marking which may be removed, defaced or destroyed.
(d) Lessee shall be entitled from time to time during the Term of this
Lease to acquire and install on the Aircraft at Lessee's expense, any additional
accessory, device or equipment as Lessee may desire (each such accessory, device
or equipment an "Addition"), but only so long as such Addition (i) is ancillary
to the Aircraft; (ii) is not required to render the Aircraft complete for its
intended use by Lessee; (iii) does not alter or impair the originally intended
function or use of the Aircraft; and (iv) can be readily removed without causing
material damage. Title to each Addition which is not removed by Lessee prior to
the return of the Aircraft to Lessor shall vest in Lessor upon such return.
Lessee shall repair all damage to the Aircraft resulting from the installation
or removal of any Addition so as to restore the Aircraft to its condition prior
to installation, ordinary wear and tear excepted.
(e) Any alteration or modification (each an "Alteration") with respect
to the Aircraft that may at any time during the Term of this Lease be required
to comply with any applicable law or any governmental rule or regulation shall
be made at the expense of Lessee. Any repair made by Lessee of or upon the
Aircraft or replacement parts, including any replacement engine, installed
thereon in the course of repairing or maintaining the Aircraft, or any
Alteration required by law or any governmental rule or regulation, shall be
deemed an accession, and tide thereto shall be immediately vested in Lessor
without cost or expense to Lessor.
(f) Except as permitted under this Section 7, Lessee will not modify
the Aircraft or affix or remove any accessory to the Aircraft leased hereunder.
(g) If the Aircraft is to be operated at any time under Part 135 with
the prior written consent of Lessor, then the Aircraft shall be maintained and
operated in accordance with the applicable Part 135 standards.
8. LIENS, SUBLEASE AND ASSIGNMENT:
(a) LESSEE SHALL NOT SELL, TRANSFER, ASSIGN OR ENCUMBER THE AIRCRAFT,
ANY ENGINE OR ANY PART THEREOF, LESSOR'S TITLE OR ITS RIGHTS UNDER THIS LEASE.
LESSEE SHALL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, SUBLET, CHARTER
OR PART WITH POSSESSION OF THE AIRCRAFT OR ANY ENGINE OR PART THEREOF OR ENTER
INTO ANY INTERCHANGE AGREEMENT. Lessee shall not permit any engine to be used on
any other Aircraft. Lessee shall keep the Aircraft each engine and any part
thereof free and clear of all liens and encumbrances other than those which
result from (i) the respective rights of Lessor and Lessee as herein provided,
(ii) liens arising from the acts of Lessor; (iii) liens for taxes not yet due;
and (iv) inchoate materialmen's. mechanics', workmen's, repairmens', employees'
or other like liens arising in the ordinary course of business of Lessee for
sums not yet delinquent or being contested in good faith (and for the payment of
which adequate assurances in Lessor's judgment have been provided Lessor).
(b) Lessor and any assignee of Lessor may assign this Lease, or any
part hereof and/or the Aircraft, Lessee hereby waives and agrees not to assert
against any such assignee, or assignee's assigns, any defense, set-off
recoupment claim or counterclaim which Lessee has or may at any time have
against Lessor for any reason whatsoever.
9. LOSS, DAMAGE AND STIPULATED LOSS VALUE: Lessee hereby assumes and shall bear
the entire risk of any loss, theft, confiscation, expropriation, requisition,
damage to, or destruction of, the Aircraft any engine or part thereof from any
cause whatsoever. If for any reason the Aircraft, or any engine thereto becomes
worn out, lost, stolen, confiscated, expropriated, requisitioned, destroyed,
irreparably damaged, or unusable ("Casualty Occurrences") Lessee shall promptly
and fully notify Lessor in writing. If, in the opinion of Lessor, a Casualty
Occurrence has occurred which affects only the engine(s) of the Aircraft, then
Lessee, at its own cost and expense, shall replace such engine(s) with an
engine(s) acceptable to Lessor and shall cause title to such engine(s) to be
transferred to Lessor for lease to Lessee under this Lease. Upon transfer of
title to Lessor of such engine(s), such engine(s) shall be subject to the terms
and conditions of this Lease, and Lessee shall execute whatever documents or
filings Lessor deems necessary and appropriate in connection with the
substitution of such replacement engine(s) for the original engine(s). If, in
the opinion of Lessor, a Casualty Occurrence has occurred with respect to the
Aircraft in its entirety, on the next Rent Payment Date after a Casualty
Occurrence (the "Payment Date"), Lessee shall pay Lessor the sum of (i) the
Stipulated Loss Value as set forth in Annex F calculated as of the Rent Payment
Date prior to such Casualty Occurrence; and (ii) all Rent and other amounts
which are due under this Lease as of the Payment Date. Upon payment of all sums
due hereunder, the Term of this Lease as to the Aircraft shall terminate.
10. INSURANCE: Lessee shall secure and maintain in effect at its own expense
throughout the Term of the Lease insurance against such hazards and for such
risks as Lessor may require. All such insurance shall be with companies
satisfactory to Lessor. Without limiting the generality of the foregoing, Lessee
shall maintain (i) liability insurance covering public liability and property,
cargo and environmental damage, in amounts not less than fifty (50) million U.S.
dollars for any single occurrence, (ii) all-risk aircraft hull and engine
insurance (including, without limitation, foreign object damage insurance) in an
amount which is not less than the then Stipulated Loss Value, and (iii)
confiscation, expropriation and war risk insurance. All insurance shall: (1)
name Lessor as owner of the Aircraft and as loss payee and additional insured
(without responsibility for premiums), (2) provide that any cancellation or
substantial change in coverage shall not be effective as to the Lessor for
thirty (30) days after receipt by Lessor of written notice from the insurer of
such cancellation or change, (3) insure Lessor's interest regardless of any
breach of warranty or other act or omission of Lessee, (4) include a
severability of interest clause providing that such policy shall operate in the
same manner as if them were a separate policy covering each insured, (5) waive
any right of set-off against Lessee or Lessor, and any rights of subrogation
against Lessor, and (6) be primary and not be subject to any offset by any other
insurance carried by Lessor or Lessee. Lessee hereby appoints Lessor as Lessee's
attorney-in-fact to make proof of loss and claim for and to receive payment of
and to execute or endorse all documents, checks or drafts in connection with all
policies of insurance in respect of the Aircraft. Lessor shall not act as
Lessee's attorney-in-fact unless Lessee is in default. Lessee shall pay any
reasonable expenses of Lessor in adjusting or collecting insurance proceeds.
Lessor may, at its option, apply proceeds of insurance, in whole or in part, to
(A) repair the Aircraft, or repair or replace any part thereof, or (B) satisfy
any obligation of Lessee to Lessor under this Lease.
11. RETURN OF AIRCRAFT:
(a) At expiration or termination of this Lease (the "Return Date"),
Lessee shall return the Aircraft to Lessor, at a location within the continental
United States as Lessor shall direct. Lessee shall also return all logs, loose
equipment, manuals and data associated with the Aircraft, including without
limitation, inspection, modification and overhaul records required to be
maintained with respect to the Aircraft under this Lease or under the applicable
rules and regulations of the FAA or the manufacturer's recommended maintenance
program, along with a currently effective FAA airworthiness certificate. Lessee
shall, upon request, assign to Lessor its rights under any manufacturer's
maintenance service contract or extended warranty for the Aircraft any engine or
part thereof. The Aircraft shall be returned in the condition in which the
Aircraft is required to be maintained pursuant to Section 7, but with all logos
or other identifying marks of Lessee removed. Additionally, Lessee shall ensure
that the Aircraft complies with all requirements and conditions set forth on
Annex G hereto.
Lessee shall pay for all costs to comply with this Section 11(a).
(b) Lessor shall arrange for the inspection of the Aircraft on the
Return Date to determine if the Aircraft has been maintained and returned in
accordance with the Provisions of this Lease. Lessee shall be responsible for
the cost of such inspection and shall pay Lessor such amount as additional Rent
within ten (10) days of demand. If the results of such inspection indicate that
the Aircraft, any engine thereto or part thereof, has not been maintained or
returned in accordance with the provisions of this Lease, Lessee shall pay to
Lessor within ten (10) days of demand, as liquidated damages, the estimated cost
("Estimated Cost") of servicing or repairing the Aircraft, engine or part. The
Estimated Cost shall be determined by Lessor by obtaining two quotes for such
service or repair work and taking their average. Lessee shall bear the cost, if
any, incurred by Lessor in obtaining such quotes.
(c) If Lessee fails to return the Aircraft on the Return Date, Lessor
shall be entitled to damages equal to the higher of (i) the Rent for the
Aircraft, pro-rated on a per diem basis, for each day the Aircraft is retained
beyond the Return Date; or (ii) the daily fair market rental for the Aircraft at
the Return Date. Such damages for retention of the Aircraft after the Return
Date shall not be interpreted as an extension or reinstatement of the Term.
(d) All of Lessor's rights contained in this Section shall survive the
expiration or other termination of this Lease.
12. EVENT'S OF DEFAULT AND REMEDIES:
(a) The term "Event of Default", wherever used herein, shall mean any
of the following events under this Lease: (i) Lessee breaches its obligation to
pay Rent or any other sum when due and fails to cure the breach within ten (10)
days; or (ii) Lessee breaches any of its insurance obligations under Section 10;
or (iii) Lessee breaches any of its other obligations and fails to cure that
breach within thirty (30) days after written notice from Lessor to Lessee; or
(iv) any representation or warranty made by Lessee in connection with this Lease
shall be false or misleading in any material respect; or (v) Lessee or any
guarantor or other obligor for any of the obligations hereunder (collectively
"Guarantor") becomes insolvent or ceases to do business as a going concern; or
(vi) a petition is filed by or against Lessee or any Guarantor under any
bankruptcy, insolvency or similar laws and in the event of an involuntary
petition, the petition is not dismissed within forty-five (45) days of the
filing date; or (vii) if Lessee or any Guarantor is a natural person, any death
or incompetency of Lessee or such Guarantor; or (viii) Lessee breaches or is in
default under any other agreement by and between Lessor and Lessee.
(b) Upon the occurrence of any Event of Default and so long as the same
shall be continuing, Lessor may, at its option, at any time thereafter, exercise
one or more of the following remedies, as Lessor in its sole discretion shall
lawfully elect: (i) demand that Lessee immediately pay as liquidated damages,
for loss of a bargain and not as a penalty, an amount equal to the Stipulated
Loss Value of the Aircraft, computed as of the Basic Term Rent Date prior to
such demand together with all Rent and other amounts due and payable for all
periods up to and including the Basic Term Rent Date following such demand; (ii)
demand that Lessee pay all amounts due for failure to maintain or return the
Aircraft as provided herein and cause Lessee to assign to Lessor Lessee's rights
under any manufacturer's service program contract or any extended warranty
contract in force for the Aircraft; (iii) proceed by appropriate court action,
either at law or in equity, to enforce the performance by Lessee of the
applicable covenants of this Lease or to recover damages for breach hereof, (iv)
by notice in writing terminate this Lease, whereupon all rights of Lessee to use
of the Aircraft or any part thereof shall absolutely cease and terminate, and
Lessee shall immediately return the Aircraft in accordance with Section I 1, but
Lessee shall remain liable as provided in Section 11; (v) request Lessee to
return the Aircraft to a designated location in accordance with Section 11; (vi)
peacefully enter the premises where the Aircraft may be and take possession of
the Aircraft; (vii) sell or otherwise dispose of the Aircraft at private or
public sale, in bulk or in parcels, with or without notice, and without having
the Aircraft present at the place of sale; (viii) lease or keep idle all or part
of the Aircraft; (ix) use Lessee's premises for storage pending lease or sale or
for holding a sale without liability for rent or costs; (x) collect from Lessee
all costs, charges and expenses, including reasonable legal fees and
disbursements, incurred by Lessor by reason of the occurrence of any Event of
Default or the exercise of Lessor's remedies with respect thereto; and/or (xi)
declare any Event of Default under the terms of this Lease to be a default under
any other agreement between Lessor and Lessee.
(c) Lessor shall have the right to any proceeds of sale, lease or other
disposition of the Aircraft, if any, and shall have the right to apply same in
the following order of priorities: (1) to pay all of Lessor's costs, charges and
expenses incurred in enforcing its rights under this Lease or in taking,
removing, holding, repairing, selling, leasing or otherwise disposing of the
Aircraft; then, (ii) to the extent not previously paid by Lessee, to pay Lessor
all sums due from Lessee under this Lease; then (iii) to reimburse to Lessee any
sums previously paid by Lessee as liquidated damages; and (iv) any surplus shall
be retained by Lessor. Lessee shall pay any deficiency in (i) and (ii)
immediately.
(d) The foregoing remedies are cumulative, and any or all thereof may
be exercised instead of or in addition to each other or any remedies at law, in
equity, or under statute Waiver of any Event of Default shall not be a waiver of
any other or subsequent Event of Default.
13. NET LEASE:
Lessee is unconditionally obligated to pay all rent and other amounts
due for the entire Term of this Lease no matter what happens, even if the
Aircraft is damaged or destroyed, if it is defective or if Lessee no longer can
use it. Lessee is not entitled to reduce or set-off against rent or other
amounts due to Lessor or to anyone to whom Lessor assigns this Lease whether
Lessee's claim arises out of this Lease, any statement by Lessor, Lessor's
liability or any manufacturers liability, strict liability, negligence or
otherwise.
14. INDEMNIFICATION:
(a) Lessee hereby agrees to indemnify Lessor, its agents, employees,
successors and assigns (on an after tax basis) from and against any and all
losses, damages, penalties, injuries, claims, actions and suits, including legal
expenses, of whatsoever kind and nature arising out of or relating to the
Aircraft or this Lease, except to the extent the losses, damages, penalties,
injuries, claims, actions, suits or expenses result from Lessor's gross
negligence or willful misconduct ("Claims"). This indemnity shall include, but
is not limited to, Lessor's strict liability in tort and Claims arising out of
(i) the selection, manufacture, purchase, acceptance or rejection of Aircraft,
the ownership of the Aircraft during the term of this Lease, and the delivery,
lease, possession, maintenance, uses, condition, return or operation of the
Aircraft (including, without limitation, latent and other defects, whether or
not discoverable by Lessor or Lessee and any claim for patent, trademark or
copyright infringement or environmental damage) or (ii) the condition of the
Aircraft sold or disposed of after use by Lessee, any sublessee or employees of
Lessee. Lessee shall, upon request, defend any actions based on, or arising out
of, any of the foregoing.
(b) Lessee hereby represents, warrants and covenants that (i) on the
Commencement Date, the Aircraft will qualify for all of the items of deduction
and credit specified in Annex B ("Tax Benefits") in the hands of Lessor, and
(ii) at no time during the Term of this Lease will Lessee take or omit to take,
nor will it permit any sublessee or assignee to take or omit to take, any action
(whether or not such act or omission is otherwise permitted by Lessor or by this
Lease), which will result in the disqualification of the Aircraft for, or
recapture of, all or any portion of such Tax Benefits.
(c) If as a result of a breach of any representation, warranty or
covenant of the Lessee contained in this Lease (i) tax counsel of Lessor shall
determine that Lessor is not entitled to claim on its Federal income tax return
all or any portion of the Tax Benefits with respect to the Aircraft, or (ii) any
Tax Benefit claimed on the Federal income tax return of Lessor is disallowed or
adjusted by the Internal Revenue Service, or (iii) any Tax Benefit is
recalculated or recaptured (any determination, disallowance, adjustment,
recalculation or recapture being a "Loss"), then Lessee shall pay to Lessor, as
an indemnity and as additional rent an amount that shall, in the reasonable
opinion of Lessor, cause Lessor's after-tax economic yields and cash flows to
equal the Net Economic Return that would have been realized by Lessor if such
Loss had not occurred. Such amount shall be payable upon demand accompanied by a
statement describing in reasonable detail such Loss and the computation of such
amount. The economic yields and cash flows shall be computed on the same
assumptions, including tax rates as were used by Lessor in originally evaluating
the transaction ("Net Economic Return"). If an adjustment has been made under
Section 3 then the Effective Rate used in the next preceding adjustment shall be
substituted.
(d) All references to Lessor in this Section 14 include Lessor and the
consolidated taxpayer group of which Lessor is a member. All of Lessor's rights,
privileges and indemnities contained in this Section 14 shall survive the
expiration or other termination of this Lease. The rights, privileges and
indemnities contained herein are expressly made for the benefit of, and shall be
enforceable by Lessor, its successors and assigns.
15. DISCLAIMER:
LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE AIRCRAFT WITHOUT ANY
ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES AND THAT LESSOR IS LEASING THE
AIRCRAFT IN AN "AS IS" CONDITION. LESSOR DOES NOT MAKE, HAS NOT MADE, NOR SHALL
BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS
OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE AIRCRAFT LEASED UNDER THIS
LEASE OR ANY COMPONENT THEREOF, OR ANY ENGINE INSTALLED THEREON, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTY AS TO CONDITION, AIRWORTHINESS, DESIGN,
COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP,
MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, SAFETY, PATENT,
TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All such risks, as between Lessor
and Lessee, are to be borne by Lessee. Without limiting the foregoing, Lessor
shall have no responsibility or liability to Lessee or any other person with
respect to any of the following: (i) any liability, loss or damage caused or
alleged to be caused directly or indirectly by the Aircraft, any inadequacy
thereof, any deficiency or defect (latent or otherwise) of the Aircraft, or any
other circumstance in connection with the Aircraft; (ii) the use, operation or
performance of the Aircraft or any risks relating to it; (iii) any interruption
of service, loss of business or anticipated profits or consequential damages; or
(iv) the delivery, operation, servicing, maintenance, repair, improvement or
replacement of the Aircraft. If, and so long as, no default exists under this
Lease, Lessee shall be, and hereby is, authorized during the Term of this Lease
to assert and enforce, at Lessee's sole cost and expense, in the name of and for
the account of lessor and/or Lessee, as their interests may appear, whatever
claims and rights Lessor may have against any Supplier of the Aircraft.
16. REPRESENTATIONS AND WARRANTIES OF LESSEE:
Lessee hereby represents and warrants to Lessor that on the date of
this Lease and at all times during the Term of this Lease:
(a) Lessee has adequate power and capacity to enter into, and perform
under, this Lease and all related documents (together, the "Documents") and is
duly qualified to do business wherever necessary to carry on its present
business and operations, including the jurisdiction(s) where the Aircraft is or
is to have its primary hangar location.
(b) The Documents have been duly authorized, executed and delivered by
Lessee and constitute valid, legal and binding agreements, enforceable in
accordance with their terms, except to the extent that the enforcement of
remedies may be limited under applicable bankruptcy and insolvency laws.
(c) No approval, consent or withholding of objections is required from
any governmental authority or entity with aspect to the entry into or
performance by Lessee of the Documents except such as have already been
obtained.
(d) The entry into and Performance by Lessee of the Documents will not:
(i) violate any judgment, order, law or regulation applicable to Lessee or any
provision of Lessee's Certificate of Incorporation or By-Laws; or (ii) result in
any breach of, constitute a default under or result in the creation of any lien,
charge, security interest or other encumbrance upon any Aircraft pursuant to any
indenture, mortgage, deed of trust, bank loan or credit agreement or other
instrument (other than this Lease) to which Lessee is a party.
(e) There are no suits or proceedings pending or threatened in court or
before any commission, board or other administrative agency against or affecting
Lessee, which will have a material adverse effect on the ability of Lessee to
fulfill its obligations under this Lease.
(f) Each financial statement delivered to Lessor has been prepared in
accordance with generally accepted accounting principles consistently applied,
and since the date of the most recent financial statement, there has been no
material adverse change.
(g) Lessee is and will be at all times validly existing and in good
standing under the laws of the State of its incorporation (specified in the
first sentence of this Lease) and Lessee is and will continue to be a "Citizen
of the United States" within the meaning of Section 40102(15) of the FAA. Lessee
shall not consolidate, reorganize or merge with any other corporation or entity
or sell, convey, transfer or lease all or substantially all of its property
during the Term of this Lease.
(h) The chief executive office or chief place of business (as either of
such terms is used in Article 9 of the Uniform Commercial Code) of Lessee is
located at the address set forth above, and Lessee agrees to give Lessor prior
written notice of any relocation of said chief executive office or chief place
of business from its present location.
(i) A copy of this Lease, and a current and valid AC Form 8050-1 will
be kept on the Aircraft at all times during the Term of this Lease.
(j) Lessee has selected the Aircraft manufacturer and vendor thereof,
and all maintenance facilities required hereby.
(k) Lessee shall maintain all logs, books and records (including any
computerized maintenance records) pertaining to the Aircraft and engines and
their maintenance during the Term in accordance with FAA rules and regulations.
(l) Lessee shall not operate the Aircraft under Part 135 of the Federal
Aviation Regulations without the prior written approval of Lessor.
(m) Lessee shall notify the local Flight Standards District Office of
the FAA forty-eight (48) hours prior to the first flight of the Aircraft under
this Lease.
(n) Throughout the Term of this Lease, Lessee will not use or operate
and will not permit the Aircraft to be used or operated "predominately" outside
the United States as that phrase is used in Section 168(g)(1)(A) of the Code.
17. EARLY TERMINATION:
(a) On or after the First Termination Date (specified in Annex B),
Lessee may, so long as no default exists under this Lease, terminate this Lease
as of a Rent Payment Date ("Termination Date"). Lessee must give Lessor at least
ninety (90) days prior written notice of the termination.
(b) Lessee shall, and Lessor may, solicit cash bids for the Aircraft on
an AS IS, WHERE IS basis without recourse to or warranty from Lessor, express or
implied ("AS IS BASIS"). Prior to the Termination Date, Lessee shall, (i)
certify to Lessor any bids received by Lessee; and (ii) pay to Lessor, (a) the
Termination Value (calculated as of the Termination Date) for the Aircraft; and
(b) all Rent and other sums due and unpaid as of the Termination Date. Neither
Lessee nor its agents shall be permitted to bid.
(c) If all amounts due hereunder have been paid on the Termination
Date, Lessor shall (i) sell the Aircraft on an AS IS BASIS for cash to the
highest bidder; and (ii) refund the proceeds of such sale (net of any related
expenses) to Lessee up to the amount of the Termination Value paid by Lessee. If
such sale is not consummated, no termination shall occur and Lessor shall refund
the Termination Value (less any expenses incurred by Lessor) to Lessee.
(d) Notwithstanding the foregoing, Lessor may elect by written notice,
at any time prior to the Termination Date, not to sell the Aircraft. In that
event, on the Termination Date Lessee shall: (i) return the Aircraft (in
accordance with Section 11); and (ii) pay to Lessor all amounts required under
Section 17(b) less the amount of the highest bid certified by Lessee to Lessor.
18. EARLY PURCHASE OPTION:
(a) On the Early Purchase Option Date (specified in Annex B), Lessee
may, so long as no default exists hereunder and this Lease has not been earlier
terminated, purchase the Aircraft on an AS IS BASIS for cash equal to the Early
Purchase Option Price (specified on Annex B), plus all applicable sales taxes.
Lessee must give Lessor at least thirty (30) days, but not more then ninety (90)
days, prior written notice of the purchase. Lessor and Lessee agree that the
Option Price is a reasonable prediction of the price that a willing buyer (who
is neither a lessee in possession or a used aircraft dealer) would pay for the
Aircraft on the Early Purchase Option Date in an arm's-length transaction to a
willing seller under no compulsion to sell.
(b) If Lessee has elected to purchase the Aircraft, then on the Early
Purchase Option Date Lessee shall pay to Lessor the Early Purchase Option Price
(plus all applicable sales taxes) together with any rent and other sums due and
unpaid on the Early Purchase Option Date.
19. END OF LEASE PURCHASE OPTION:
(a) On the Expiration Date (specified in Annex B), Lessee may, so long
as no default exists hereunder and this Lease has not been earlier terminated,
purchase the Aircraft on an AS IS BASIS for cash equal to its then Fair Market
Value (plus all applicable sales taxes). Lessee must give Lessor at least ninety
(90) days, but not more than one hundred eighty (180) days, prior written notice
of its intent to purchase.
(b) "Fair Market Value" shall mean the price which a willing buyer (who
is neither a lessee in possession nor a used equipment dealer) would pay for the
Aircraft in an arm's-length transaction to a willing seller under no compulsion
to sell. In determining the Fair Market Value; (i) the Aircraft shall be assumed
to be in the condition in which it is required to be maintained and returned
under this Lease, (ii) any installed additions to the Aircraft shall be valued
on an installed basis; and (iii) costs of removal of the Aircraft from the
current location shall not be a deduction from the value of the Aircraft. If
Lessor and Lessee are unable to agree on the Fair Market Value at least sixty
(60) days before Lease expiration, Lessor shall appoint an independent appraiser
(reasonably acceptable to Lessee) to determine Fair Market Value. The
independent appraisers determination shall be final, binding and conclusive.
Lessee shall bear all costs associated with any such appraisal.
(c) Lessee shall be deemed to have waived this purchase option unless
it provides Lessor with written notice of its irrevocable election to exercise
the option within fifteen (15) days after the Fair Market Value is told to
Lessee.
20. MISCELLANEOUS:
(a) LESSEE AND LESSOR HEREBY UNCONDITIONALLY WAIVE THEIR RIGHTS TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
LEASE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS,
AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR. THE
SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES
THAT MAY BE FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT
BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE, ANY
RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS
TRANSACTION OR ANY RELATED TRANSACTION. THIS LEASE MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
(b) The Aircraft shall remain Lessor's property unless Lessee purchases
the Aircraft from Lessor, and until such time Lessee shall only have the right
to use the Aircraft as a lessee. Any cancellation or termination by Lessor of
this Lease, pursuant to the provisions of this Lease, shall not release Lessee
from any then outstanding obligations to Lessor hereunder.
(c) Time is of the essence of this Lease. Lessee agrees, upon Lessor's
request, to execute any instrument necessary or expedient for filing, recording
or perfecting the interest of Lessor. All notices required to be given hereunder
shall be deemed adequately given if delivered in hand or sent by registered or
certified mail to the addressee at its address stated herein, or at such other
place as such addressee may have designated in writing. This Lease and any
Annexes hereto constitute the entire agreement of the parties with respect to
the subject matter hereof, and all Annexes referenced herein are incorporated
herein by reference. NO VARIATION OR MODIFICATION OF THIS LEASE OR ANY WAIVER OF
ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED
BY AN AUTHORIZED REPRESENTATIVE OF EACH PARTY TO THIS LEASE.
(d) If Lessee does not comply with any provision of this Agreement,
Lessor shall have the right, but shall not be obligated, to effect such
compliance, in whole or in part. All reasonable amounts spent and obligations
incurred or assumed by Lessor in effecting such compliance shall constitute
additional Rent due to Lessor. Lessee shall pay the additional Rent within five
days after the date Lessor sends notice to Lessee requesting payment. Lessors
effecting such compliance shall not be a waiver of any Event of Default.
(e) Any Rent or other amount not paid to Lessor when due shall bear
interest from the due date until paid, at the lesser of eighteen percent (18%)
per annum or the maximum rate allowed by law. Any provisions in this Lease which
are in conflict with any statute, law or applicable rule shall be deemed
omitted, modified or altered to conform thereto.
(f) THIS LEASE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF CONNECTICUT (WITHOUT REGARD TO THE CONFLICT OF
LAWS PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE AIRCRAFT.
21. TRUTH-IN-LEASING:
(a) LESSEE HAS REVIEWED THE AIRCRAFT'S MAINTENANCE AND OPERATING LOGS
SINCE ITS DATE OF MANUFACTURE AND HAS FOUND THAT THE AIRCRAFT HAS BEEN
MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS.
LESSEE CERTIFIES THAT THE AIRCRAFT PRESENTLY COMPLIES WITH THE APPLICABLE
MAINTENANCE AND INSPECTION REQUIREMENTS OF PART 91 OF THE FEDERAL AVIATION
REGULATIONS.
(b) LESSEE CERTIFIES THAT LESSEE, AND NOT LESSOR, IS RESPONSIBLE FOR
OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS LEASE DURING THE TERM HEREOF.
LESSEE FURTHER CERTIFIES THAT LESSEE UNDERSTANDS ITS RESPONSIBILITY FOR
COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.
(c) LESSEE CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED
UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS FOR OPERATIONS TO BE CONDUCTED
UNDER THIS LEASE. LESSEE UNDERSTANDS THAT AN EXPLANATION OF FACTORS BEARING ON
OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED
FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE, GENERAL AVIATION DISTRICT
OFFICE, OR AIR CARRIER DISTRICT OFFICE.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Lease to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL CORPORATION SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ Allen Brown By: /s/ Joseph E. Mohr
- ------------------------------------ ------------------------------
Allen Brown Joseph E. Mohr
Regional Risk Manager Executive Vice President/Chief
Financial Officer
<PAGE>
ANNEX A
DESCRIPTION OF AIRCRAFT, LESSOR'S COST, AND AIRCRAFT MARKINGS
I. Description Cost: $2,160,000.00
RAYTHEON AIRCRAFT CO., Model C90A Aircraft which consists of the
following components:
(a) Airframe bearing FAA Registration Mark N1107W and Manufacturer's
Serial No. LJ1477;
(b) two, (2) Pratt & Whitney PT6A-42 engines bearing Manufacturer's Serial Nos.
Left-PCE-PE-0067 and Right-PCE-PE-0071 respectively (each of which has 750 or
more rated takeoff horsepower or the equivalent of such horsepower);
(c) two, (2) McCauley, 4HFR34C768-C propellers bearing, respectively bearing,
Manufacturer's Serial Nos. Left-970225 and Right-970575, each being rated as
follows: __________________________
(d) Standard accessories and optional equipment and such other items fitted or
installed on the Aircraft and set forth hereinafter:
MORE FULLY DESCRIBED ON EXHIBIT A ATTACHED HERETO AND MADE A PART HEREOF.
(e) Those items of Lessee Furnished Equipment described in a bill of sale or
bills of sale thereof (copies of which arc appended hereto), delivered by Lessee
to Lessor which constitute appliances and equipment which will be installed on
the Aircraft;
(f) Sales Tax .00
(g) Other .00
Aircraft more fully described on Exhibit A to Aircraft Least attached hereto and
made a part hereof
Capitalized Lessor's Cost $2,160,000.00
II. Aircraft Markings (referenced in the MAINTENANCE Section of Lease)
a) Four-by-six inch plaque to be maintained in cockpit and affixed in
conspicuous position stating: General Electric Capital Corporation Owner and
Lessor. Smart Choice Automotive Group, Inc. Lessee under a certain Lease dated
as of _______________ has operational control of this Aircraft.
b) Similar markings shall be permanently affixed to each engine.
Initials:
Lessee:__________________________ Lessor:__________________________
<PAGE>
ANNEX B
DATED THIS ____________________
TO AIRCRAFT LEASE AGREEMENT
DATED AS OF ___________________
Lessor & Mailing Address: Leesee & Mailing Address:
General Electric Capital Corporation Smart Choice Automotive Group, Inc.
1000 Windward Concourse, Suite 403 5200 S. Washington Avenue
P.O. Box 3300 Titusville, FL 32780
Alpharetta, GA 30023-3300
Capitalized terms not defined herein shall have the meanings assigned to them in
the Aircraft Lease Agreement identified above.
A. AIRCRAFT.
Pursuant to the terms of the Lease, Lessor agrees to acquire and lease
to Lessee the Aircraft described on Annex A to the Lease.
B. FINANCIAL TERMS.
1. Advance Rent (if any): (a) Amount: $ Not Applicable.
(b) Due Date: Not Applicable.
2. Capitalized Lessor's Cost: $2,160,000.00.
3. Basic Term Commencement Date: December 1, 1998.
4. Basic Term: 120 months.
5. First Basic Term Rent Date: December 1, 1998.
6. Basic Term Rent Dates: December 1, 1998.
7. First Termination Date: (36) months after the
Basic Term Commencement Date.
8. Last Basic Term Rent Dates November 30, 2008.
9. Last Delivery Date: November 30, 1998.
10. Primary Hangar Location: Discovery Aviation,
7300 Challenger Ave.,
Titusville, FL 32780.
11. Supplier: Raytheon Aircraft Company.
12. Lessee Federal Tax ID No.: 59-1469577.
13. Early Purchase Option: Option Date: N /A.
Option Price: $ N/A.
14. Expiration Date: November 30, 2008.
15. Daily Lease Rate Factor: .000324.
16. Basic Term Lease Rate Factor:
Factor Rental No.
0.972222 36
0.679569 94
C. TAX BENEFITS.
Depreciation Deductions:
a. Depreciation Method: 200% declining balance method, switching to
straight line method for the 1st taxable year for which using the
straight line method with respect to the adjusted basis as of the
beginning of such year will yield a larger allowance.
b. Recovery Period: Five (5).
c. Basis: 100% of Capitalized Lessor's Cost.
D. TERM AND RENT.
1. Interim Rent. For the period from and including the Commencement
Date to the Basic Term Commencement Date ("Interim Period"), Lessee shall pay as
Rent ("Interim Rent") for each unit of Aircraft, the product of the Daily Lease
Rate Factor times the Capitalized Lessees Cost of such unit times the number of
days in the Interim Period. Interim Rent shall be due on November 30, 1998.
2. Basic Term Rent. Commencing on December 1, 1998 and on the same day
of each month thereafter (each, a "Rent Payment Date") during the Basic Term,
Lessee shall pay as Rent ("Basic Term Rent") the product of the Basic Term Lease
Rate Factor times the Capitalized Lessor's Cost of the Aircraft on this Annex B.
E. INSURANCE.
1. Public Liability: $50,000,000.00 total liability per occurrence.
2. Casualty and Property Damage: An amount equal to the higher of the
Stipulated Loss Value or the full replacement cost of the Aircraft.
List of Subsidiaries
of
SMART CHOICE AUTOMOTIVE GROUP, INC.
Subsidiary State of Incorporation
Dealer Development Services, Inc. Florida
Dealers Insurance Services, Inc. Florida
Easy Pay Insurance, Inc. Florida
Eckler Corvette Sales, Inc. Florida
Eckler Industries, Inc. Florida
Eckler's Racing Bodies, Inc. Florida
First Choice Auto Finance, Inc. Florida
First Choice Melbourne 1, Inc. Florida
First Choice Stuart 1, Inc. Florida
First Choice Stuart 2, Inc. Florida
Florida Finance Group, Inc. Florida
Liberty Finance Company Florida
Premium Bonding & Ins. Services, Inc. Florida
Smart Cars, Inc. Florida
Smart Choice Holdings, Inc. Delaware
Smart Choice Receivables Holding, Inc. Delaware
Team Automobile Sales & Finance, Inc. Florida
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Smart Choice Automotive Group, Inc.
Titusville, Florida
We have audited the accompanying consolidated balance sheets of Smart Choice
Automotive Group, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smart Choice
Automotive Group, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ BDO Siedman, LLP
--------------------
BDO Seidman, LLP
Orlando, Florida
April 12, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Form 10-K for the Year Ending December 31, 1998
</LEGEND>
<CIK> 0000949091
<NAME> Smart Choice Automotive Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,268
<SECURITIES> 0
<RECEIVABLES> 80,549
<ALLOWANCES> 12,157
<INVENTORY> 20,004
<CURRENT-ASSETS> 1,688
<PP&E> 7,655
<DEPRECIATION> 725
<TOTAL-ASSETS> 123,592
<CURRENT-LIABILITIES> 11,524
<BONDS> 0
0
5,891
<COMMON> 66
<OTHER-SE> 4,674
<TOTAL-LIABILITY-AND-EQUITY> 123,592
<SALES> 95,385
<TOTAL-REVENUES> 95,385
<CGS> 57,233
<TOTAL-COSTS> 93,647
<OTHER-EXPENSES> 9,813
<LOSS-PROVISION> 13,371
<INTEREST-EXPENSE> 8,752
<INCOME-PRETAX> (7,299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,871)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> 0
</TABLE>
