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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[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
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[ ] 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
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SMART CHOICE AUTOMOTIVE GROUP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-1469577
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5200 S. WASHINGTON AVENUE, TITUSVILLE, FLORIDA 32780
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(407) 269-9680
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(ISSUER'S TELEPHONE NUMBER)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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
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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.
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TABLE OF CONTENTS
PART 1
PAGE
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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 36
Appendix A - Report of Independent Certified Public Accountant F-1
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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.
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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
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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
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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.
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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
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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
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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,
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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.
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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.
9
<PAGE>
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
10
<PAGE>
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
11
<PAGE>
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
12
<PAGE>
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.
<TABLE>
<CAPTION>
PREDECESSORS THE COMPANY
---------------------------------- ---------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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 --
Abandoned offering costs -- -- -- -- 1,063
-------- -------- -------- -------- --------
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
-------- -------- -------- -------- --------
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 loss per common share from -- -- -- $ (3.90) $ (1.18)
continuing operations
Weighted average common shares
outstanding during the period -- -- -- 4,430 6,193
<CAPTION>
PREDECESSORS THE COMPANY
---------------------------------- ---------------------
AS OF DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
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>
13
<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
14
<PAGE>
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.
15
<PAGE>
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>
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
16
<PAGE>
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.
During the year ended December 31, 1998, compensation expense of
$215,875 was recognized on common stock options granted to directors. During the
year ended December 31, 1997, compensation expense of $3,809,826 was recognized
on common stock options granted to employees and directors. These options were
granted by trusts created by two major stockholders to purchase shares of the
Company's common stock owned by the trusts. The trusts will receive the
proceeds, if any from the exercise of these options. Additional compensation
expense was recognized during 1997 as a result of the issuance of 160,000 shares
of common stock by the aforementioned trusts in exchange for stock options for
680,000 shares of common stock relinquished by a former employee. The 160,000
shares were valued at approximately $800,000 based upon the market price at the
date of their issuance. Since the stockholders of these trusts were, in effect,
fulfilling an obligation of the Company, the value of these shares was recorded
as compensation expense.
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.
17
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
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%
</TABLE>
NET CHARGE OFFS. The Company's policy is to charge off finance
receivables when they are deemed uncollectible but in any event at such time as
a finance receivable is delinquent for 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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
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%
</TABLE>
18
<PAGE>
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.
19
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
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
</TABLE>
The Company's improved delinquency experience on its finance
receivables portfolio is primarily attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in finance
receivables, car inventory, parts and accessories inventory, property and
equipment, and working capital for general corporate purposes. Funding sources
potentially available to the Company include operating cash flow, third-party
investors, financial institution borrowings, borrowings against finance
receivables and the securitization of its finance receivables.
Net cash provided by (used for) operating activities was approximately
$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
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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
this 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
this 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
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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.
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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.
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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,
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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."
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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."
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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
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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
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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
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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."
30
<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
33
<PAGE>
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 66 2/3% 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.
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<PAGE>
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.
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<PAGE>
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
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION FILED HEREWITH OR INCORPORATED BY REFERENCE TO:
--- ------------------- -----------------------------------------------
<S> <C> <C>
3.1 Amended and Restated Articles of Exhibit 3.1 to Form SB-2 Registration Statement,
Incorporation of Smart Choice filed on September 1, 1995, File No. 33-96520-A.
Automotive Group, Inc. (the
"Company")
3.1.1 Articles of Amendment to Articles of Exhibit 3.2 to Form 10-Q filed on May 20, 1997.
Incorporation of the Company
3.2 Amended and Restated By-Laws of the Exhibit 3.2 to Form SB-2 Registration Statement,
Company filed on September 1, 1995, File No. 33-96520-A.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
3.2.1 Amendment No. 1 to Amended and Exhibit 3.2.1 to Amendment No. 2 to Form SB-2
Restated Bylaws Registration Statement, filed on November 6, 1995,
File No. 33-96520-A.
3.2.2 Second Articles of Amendment to Exhibit 3.1 to Form 8-K filed on October 9, 1997.
Articles of Incorporation
3.2.3 Third Articles of Amendment to Exhibit 3.1 to Form 10-Q filed on May 15, 1998.
Articles of Incorporation
3.2.4 Fourth Articles of Amendment to 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 Certificate Exhibit 4.1 to Form 8-A Registration Statement,
filed on April 16, 1997.
4.2 Specimen of Warrant Certificate Exhibit 4.2 to Form 8-A Registration Statement,
filed on April 16, 1997.
4.3 Warrant Agreement between the Company Exhibit 4.5 to Amendment No. 2 to Form SB-2
and American Stock Transfer & Trust Registration Statement, filed on November 6, 1995,
Company, as Warrant Agent, dated File No. 33-96520-A.
November 9, 1995
4.3.1 Form of Amendment to Warrant Exhibit 4.4 to Form 8-A Registration Statement, filed on
Agreement April 16, 1997.
10.1 Eckler Industries, Inc. Retirement and Exhibit 10.4.1 to Form SB-2 Registration Statement,
Savings Plan and Trust Agreement, as filed on September 1, 1995, File No. 33-96520-A.
Amended and Restated on September 14,
1992
10.1.1 1998 Executive Incentive Compensation Exhibit A to Proxy Statement filed on June 9, 1998.
Plan
10.2 Amendment No. 1 to Eckler Industries, Exhibit 10.4.2 to Form SB-2 Registration Statement
Inc. Retirement and Savings Plan Trust filed on September 1, 1995, File No. 33-96520-A.
Agreement Dated March 28, 1994.
10.3 Eckler Industries, Inc. Non-Qualified Exhibit 10.6 to Form SB-2 Registration Statement,
Stock Option Plan filed on September 1, 1995, File No. 33-96520-A.
10.4 Eckler Industries, Inc. 1995 Combined Exhibit 10.7 to Form SB-2 Registration Statement,
Qualified and Non- Qualified Employee filed on September 1, 1995, File No. 33-96520-A.
Stock Option Plan
10.5 Registration Rights Agreement by and Exhibit 10.15 to Amendment No. 1 to Form SB-2
among the Company and each of the Registration Statement, filed on October 13, 1995,
Purchasers referred to in Schedule 1 File No. 33-96520-A.
thereto, dated September 20, 1995.
10.6 Unit Purchase Option Agreement between Exhibit 1.2 to Amendment No. 2 to Form SB-2
the Company and Argent Securities, Registration Statement, filed on November 6, 1995,
Inc. and Certificate dated November File No. 33-96520-A.
15, 1995
10.7 Loan Agreement between the Company and Exhibit 10.19 to Post-Effective Amendment No. 2 to
Barnett Bank, N.A. dated September 30, Form SB-2 Registration Statement, filed on November
1996 14, 1996, File No. 33-96520-A.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
10.8 Mortgage and Security Agreement Exhibit 10.20 to Post-Effective Amendment No. 2 to
between the Company and Barnett Bank, Form SB-2 Registration Statement, filed on November
N.A. dated September 30, 1996. 14, 1996, File No. 33-96520-A.
10.9 Promissory Note in the amount of Exhibit 10.21 to Post-Effective Amendment No. 2 to
$2,400,000 from the Company in favor Form SB-2 Registration Statement, filed on November
of Barnett Bank, N.A. dated September 14, 1996, File No. 33-96520-A.
30, 1996.
10.10 Assignment of Loan Documents dated Exhibit 10.10 to Form 10-K filed on April 14, 1998.
November 4, 1997 between Barnett Bank,
N.A. and The Huntington National Bank
("Huntington")
10.11 Modification of Mortgage Deed and Exhibit 10.11 to Form 10-K filed on April 14, 1998.
Security Agreement dated November 3,
1997 between the Company and Huntington
10.12 Future Advance Promissory Note dated Exhibit 10.12 to Form 10-K filed on April 14, 1998.
December 30, 1997, principal amount
$260,000, the Company maker,
Huntington, payee
10.13 Modification of Mortgage and Mortgage Exhibit 10.13 to Form 10-K filed on April 14, 1998.
Note and Extension Agreement dated
December 30, 1997 between the Company
and Huntington
10.13.1 Modification of Mortgage Note and Exhibit 10.13.1 to From S-1 filed on August 21,
Extension Agreement dated July 24, 1998, file no. 333-59375.
1998 between the Company and
Huntington.
10.14 Merger Agreement between Smart Choice Exhibit 10.1 to Form 8-K, filed on February 12, 1997
Holdings, Inc. ("SCHI"), the Company,
Thomas E. Conlan and Gerald C. Parker
dated December 30, 1997.
10.15 First Amended and Restated Loan and Exhibit 4.1 to Form 10-Q, filed on May 20, 1997.
Security Agreement between Florida
Finance Group, Inc. ("FFG") and Finova
Capital Corporation ("Finova"), dated
February 4, 1997.
10.16 Warrant to Purchase Common Stock of the Exhibit 4.2 to Form 10-Q, filed on May 20, 1997.
Company between the Company and Finova,
dated January 13, 1997.
10.17 Promissory Note by Eckler Industries, Exhibit 10.1 to Form 8-K filed on March 5, 1998.
Inc. in favor of Stephens Inc.
10.17.1 Amendment to Guaranty Agreement between Exhibit 10.4 to Form 8-K filed on March 5, 1998.
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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
10.17.3 Form of Modification Agreement between Filed herewith.
the Company and Stephens, Inc. dated
April 15, 1999.
10.17.4 Extension of Engagement Letter between Filed herewith.
Stephens Inc. and Registrant dated
March 1, 1999.
10.17.5 Warrant Agreement Issued to Stephens Filed herewith.
Inc.
10.18 Promissory note dated February 24, Exhibit 10.9 to Form 8-K filed on March 5, 1998.
1998, First Choice Auto Finance, Inc.,
maker, and Manheim Automotive Financial
Services, Inc., payee.
10.18.1 Guaranty dated March 21, 1997 from the Exhibit 10.10 to Form 8-K filed on March 5, 1998.
Company in favor of Manheim Automotive
Financial Services, Inc.
10.19 Second Amended and Restated Loan and Filed herewith.
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 Company Exhibit 4.5 to Form 10-Q, filed on May 20, 1997.
dated January 13, 1997.
10.19.2 Guaranty to Finova from the SC Filed herewith.
Holdings, Inc.
10.19.3 Guaranty to Finova from the Company. Filed herewith.
10.20 Eighth Amended and Restated Promissory Exhibit 10.20 to Form S-1 filed on August 21, 1998,
Note dated March 27, 1998, between FFG, File No. 333-59375
maker, and Finova.
10.20.1 Ninth Amended and Restated Promissory Exhibit 10.1 to Form 10-Q, filed on May 15, 1998.
Note dated March 27, 1998, between FFG,
maker and Finova.
10.20.2 Tenth Amended and Restated Promissory Filed herewith.
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 Schedule to Exhibit 10.21 to Form S-1 filed on August 21, 1998,
Amended and Restated Loan and Security File No. 333-59375.
Agreement, FFG, borrower, Finova,
lender, dated March 27, 1998.
10.21.1 Fifth Amended and Restated Schedule to Exhibit 10.2 to Form 10-Q filed on May 15, 1998.
Amended and Restated Loan and Security
Agreement, FFG, borrower, Finova,
lender.
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
10.21.2 Schedule to Second Amended and Restated Filed herewith.
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 Manheim Filed herewith.
Automotive Financial Services, Inc. and
Finova Capital Corporation.
10.22 Stock Purchase Agreement dated January Exhibit 10.1 to Form 10-Q, filed on May 20, 1997.
28, 1997 between SCHI and Gary Smith.
10.23 Promissory Note dated January 28, 1997, Exhibit 10.2 to Form 10-Q filed on May 20, 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 Exhibit 10.24 to Form S-1 filed on August 21, 1998,
R. Smith and Team Automobile Sales and File No. 333-59375
Finance, Inc.
10.25 Promissory Note Modification Agreement, Exhibit 10.25 to Form S-1 filed on August 21, 1998,
dated December 15, 1997 between FCAF File No. 333-59375
and Gary R. Smith.
10.26 Asset Purchase Agreement dated January Exhibit 10.3 to Form 10-Q, filed on May 20, 1997.
28, 1997 between FCAF and Gary Smith.
10.27 Asset Purchase Agreement among FCAF, Exhibit 10.17 to Form 8-K, filed on February 26,
Palm Beach Finance and Mortgage Company 1997.
("PBF"), Two Two Five North Military
Corp. ("225"), and David Bumgardner,
and Amendment thereto.
10.28 Loan and Security Agreement between 225 Exhibit 10.18 to Form 8-K, filed on February 26,
and FCAF dated February 14, 1997. 1997.
10.29 9% Secured Convertible Note of FCAF to Exhibit 10.20 to Form 8-K, filed on February 26,
225 and PBF. 1997.
10.30 9% Convertible Debenture of SCHI to PBF. Exhibit 10.21 to Form 8-K, filed on February 26,
1997.
10.31 Lease between David Bumgardner as Exhibit 10.22 to Form 8-K, filed on February 26,
Lessor and FCAF, Lessee, dated February 1997.
13, 1997.
10.32 Indemnification Agreement in favor of Exhibit 10.23 to Form 8-K, filed on February 26,
PBF and 225 by FCAF, dated February 14, 1997.
1997.
10.33 Executive Employment Agreement between Exhibit 10.15 to Form 10-Q, filed on May 20, 1997.
the Company and Gary Smith.
10.34 Executive Employment Agreement between Exhibit 10.16 to Form 10-Q, filed May 20, 1997.
the Company and Robert Abrahams.
10.35 Executive Employment Agreement dated Exhibit 10.35 to Form S-1 filed on August 21, 1998,
April 11, 1997 between the Company and File No. 333-59375.
Joseph Alvarez.
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
10.36 Executive Employment Agreement dated Exhibit 10.36 to Form S-1 filed on August 21, 1998,
April 24, 1997 between the Company and File No. 333-59375.
Ronald Anderson.
10.36.21 Executive Employment Agreement dated Exhibit 10.36.2 to Form S-1 filed on August 21,
February 9, 1998 between the Company 1998, File No. 333-59375.
and Robert J. Downing.
10.37 Non Qualified Stock Option Agreement Exhibit 10.37 to Form S-1 filed on August 21, 1998,
dated March 5, 1997 among the Smart File No. 333-59375
Choice Holdings Management Trusts (the
"Management Trusts"), Eckler
Industries, Inc., and Robert J.
Abrahams.
10.38 Non Qualified Stock Option Agreement Exhibit 10.38 to Form S-1 filed on August 21, 1998,
dated March 5, 1997 among the File No. 333-59375
Management Trusts, Eckler Industries,
Inc., and Robert J. Abrahams.
10.39 Non Qualified Stock Option Agreement Exhibit 10.39 to Form 10-K, filed on April 14, 1998.
dated April 11, 1997, among the
Management Trusts, the Company
and Joseph Alvarez.
10.40 Stock Option Agreement dated March 24, Exhibit 10.40 to Form S-1 filed on August 21, 1998,
1997 between the Company and Ronald File No. 333-59375
Anderson.
10.41 Non-Qualified Stock Option Agreement Exhibit 10.41 to Form S-1 filed on August 21, 1998,
dated April 17, 1997 between the File No. 333-59375
Company and David Bumgardner.
10.42 Non-Qualified Stock Option Agreement Exhibit 10.42 to Form S-1 filed on August 21, 1998,
dated April 17, 1997 between the File No. 333-59375
Company and Craig Macnab.
10.43 Stock Option Agreement dated March 19, Exhibit 10.43 to Form S-1 filed on August 21, 1998,
1997 between the Company and Gerald File No. 333-59375
Parker.
10.44 Non-Qualified Stock Option Agreement Exhibit 10.44 to Form S-1 filed on August 21, 1998,
dated April 17, 1997 between the File No. 333-59375
Company and Gerald Parker.
10.45 Non-Qualified Stock Option Agreement Exhibit 10.45 to Form S-1 filed on August 21, 1998,
dated April 17, 1997 between the File No. 333-59375
Company and Donald Wojnowski.
10.46.1 Non-Qualified Stock Option Agreement Exhibit 10.46.1 to Form S-1 filed on August 21,
dated July 29, 1997 between the Company 1998, File No. 333-59375
and Joseph Alvarez.
10.46.2 Non-Qualified Stock Option Agreement Exhibit 10.46.2 to Form S-1 filed on August 21,
dated January 29, 1997 between the 1998, File No. 333-59375
Company and Joseph Mohr.
10.46.3 Non-Qualified Stock Option Agreement Exhibit 10.46.3 to Form S-1 filed on August 21,
dated February 9, 1998 between the 1998, File No. 333-59375
Company and Robert Downing.
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
10.46.4 Non-Qualified Stock Option Agreement Exhibit 10.46.4 to Form S-1 filed on August 21,
dated January 29, 1997 between the 1998, File No. 333-59375
Company and Ron Anderson.
10.47 Convertible Senior Promissory Note Exhibit 10.18 to Form 10-Q, filed May 20, 1997.
dated March 13, 1997, the Company,
maker, Sirrom Capital Corporation
("Sirrom"), payee.
10.48 Convertible Senior Promissory Note Exhibit 10.19 to Form 10-Q, filed May 20, 1997.
dated May 13, 1997, the Company, maker,
Sirrom, payee.
10.49 Amended and Restated Registration Exhibit 10.20 to Form 10-Q, filed May 20, 1997.
Rights Agreement between the Company
and Sirrom, dated May 13, 1997.
10.50 Asset Purchase Agreement dated as of Exhibit 10.1 to Form 8-K filed on July 14, 1997.
June 27, 1997 among the Company, Strata
Holding, Inc., Ready Finance, Inc.,
Donald Cook, Marilyn Cook and Madie A.
Stratemeyer.
10.51 Form of Convertible Note issued by the Exhibit 10.1 to Form 8-K filed on October 9, 1997.
Company to High Capital Funding, LLC,
and other purchasers.
10.51.1 Form of Warrant issued by the Company to Exhibit 10.2 to Form 8-K filed on October 9, 1997.
High Capital Funding, LLC, and other
purchasers.
10.52 Subordinated Loan Agreement dated Filed herewith.
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 Holdings, Filed herewith.
Inc., First Choice Auto Finance, Inc.
and High Capital Funding, LLC.
10.53 Promissory Note, principal amount Exhibit 10.3 to Form 8-K filed on October 9, 1997.
$1,500,000 by Eckler Industries, Inc.,
maker, Stephens Inc., payee.
10.54 Promissory Note, principal amount Exhibit 10.1 to Form 8-K filed on March 5, 1998.
$3,000,000, Eckler Industries, Inc.,
maker, Stephens Inc., payee.
10.55 Guaranty Agreement by the Company to Exhibit 10.4 to Form 8-K filed on October 9, 1997.
Stephens Inc.
10.56 Amendment to Guaranty Agreement between Exhibit 10.4 to Form 8-K filed on March 5, 1998.
the Company and Stephens Inc.
10.57 Pledge and Security Agreement between Exhibit 10.5 to Form 8-K filed on October 9, 1997.
the Company and Stephens Inc.
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
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 between Exhibit 10.6 to Form 8-K filed on October 9, 1997.
the Company and certain buyers
represented by Promethean Investment
Group, L.L.C.
10.60 Form of Warrant from the Company to Exhibit 10.7 to Form 8-K filed on October 9, 1997.
certain buyers represented by Promethean
Investment Group, L.L.C.
10.61 Automotive Wholesale Financing and Exhibit 10.61 to Form S-1 filed on August 21, 1998,
Security Agreement dated July 21, 1997 File No. 333-59375
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,
Financing and Security Agreement File No. 333-59375
10.63 Second Addendum to Automotive Wholesale Exhibit 10.63 to Form S-1 filed on August 21, 1998,
Financing and Security Agreement dated File No. 333-59375
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,
Agreement dated October 12, 1995 File No. 333-59375
between B&B Florida Enterprises, Inc.
and NMAC.
10.65 Amendment to Dealer Capital Loan and Exhibit 10.65 to Form S-1 filed on August 21, 1998,
Security Agreement dated September 1, File No. 333-59375
1997 between NMAC and FCS1.
10.66 Dealer Equipment Loan and Security Exhibit 10.66 to Form S-1 filed on August 21, 1998,
Agreement dated October 12, 1995 between File No. 333-59375
NMAC and B&B Florida Enterprises, Inc.
10.67 Amendment to Dealer Equipment Loan and Exhibit 10.67 to Form S-1 filed on August 21, 1998,
Security Agreement dated September 1, File No. 333-59375
1997 between NMAC and FCSI.
10.67.1 Second Amendment to Dealer Equipment Exhibit 10.67 to Form S-1 filed on August 21, 1998,
Loan and Security Agreement. File No. 333-59375.
10.67.2 Second Amendment to Dealer Capital Loan Filed herewith.
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 Service Exhibit 10.68 to Form S-1 filed on August 21, 1998,
Agreement dated August 29, 1997 between File No. 333-59375
Nissan Motor Corporation in U.S.A., the
Company, Smart Cars, Inc. and FCS1.
10.69 Wholesale Financing and Security Exhibit 10.69 to Form S-1 filed on August 21, 1998,
Agreement dated August 11, 1997 between File No. 333-59375
First Choice Stuart 2, Inc. ("FCS2") and
Volvo Finance North America, Inc.
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C>
10.70 Authorized Retailer Agreement between Exhibit 10.70 to Form S-1 filed on August 21, 1998,
Volvo Cars of North America, Inc. and File No. 333-59375
FCS2.
10.71 Convertible Subordinated Debenture dated Exhibit 10.71 to Form S-1 filed on August 21, 1998,
November 3, 1997, principal amount File No. 333-59375
$750,000, the Company, maker, Bankers
Life Insurance Company, payee.
10.72 Registration Rights Agreement dated Exhibit 10.72 to Form S-1 filed on August 21, 1998,
November 3, 1997 between the Company and File No. 333-59375
Bankers Life Insurance Company.
10.73 Settlement Agreement and Release dated Exhibit 10.73 to Form S-1 filed on August 21, 1998,
January 30, 1998 among the Company, File No. 333-59375
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 May 6, Exhibit 10.74 to Form S-1 filed on August 21, 1998,
1997 between FCS1 and Thomas DeRita, Jr. File No. 333-59375
10.75 Promissory Note dated December 19, 1997, Exhibit 1075 to Form S-1 filed on August 21, 1998,
principal amount $2,199,000, First File No. 333-59375
Choice Melbourne 1, Inc., maker and
Raytheon Aircraft Credit Corporation,
payee.
10.76 Guaranty Agreement by the Company to Exhibit 10.76 to Form S-1 filed on August 21, 1998,
Raytheon Aircraft Credit Corporation. File No. 333-59375
10.77 Security Agreement dated December 19, Exhibit 10.77 to Form S-1 filed on August 21, 1998,
1997 between First Choice Melbourne 1, File No. 333-59375
Inc. and Raytheon Aircraft Credit
Corporation.
10.78 Registration Rights Agreement between Exhibit 10.8 to Form 8-K filed on October 9, 1997.
the Company and certain buyers
represented by Promethean Investment
Group, L.L.C.
10.79 Promissory Note dated February 24, 1998, Exhibit 10.9 to Form 8-K filed on March 5, 1998.
FCAF, maker, Manheim Automotive
Financial Services, Inc., payee.
10.80 Guaranty dated March 21, 1997 from the Exhibit 10.10 to Form 8-K filed on March 5, 1998.
Company in favor of Manheim Automotive
Financial Services, Inc.
10.81 Intentionally Omitted.
10.82 Manheim Automotive Financial Services, Exhibit 10.82 to Form S-1 filed on August 21, 1998,
Inc. Security Agreement dated March 21, File No. 333-59375
1997 between FCAF and Manheim Automotive
Financial Services, Inc.
10.83 Promissory Note dated June 17, 1997, Exhibit 10.83 to Form S-1 filed on August 21, 1998,
principal amount $825,000, FCAF, maker, File No. 333-59375
Carl Schmidt Enterprises, Inc., payee.
10.84 Real Estate Mortgage dated June 17, Exhibit 10.84 to Form S-1 filed on August 21, 1998,
1997, FCAF, mortgagor, Carl Schmidt File No. 333-59375
Enterprises, Inc., mortgagee.
</TABLE>
44
<PAGE>
<TABLE>
<S> <C> <C>
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,
Reproduction and Service Part Tooling File No. 333-59375
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 Tooling File No. 333-59375
License Agreement.
10.89 Thirty-Fourth Amendment to GM Exhibit 10.89 to Form S-1 filed on August 21, 1998,
Reproduction Service Part Tooling File No. 333-593759375
License Agreement.
10.90 Lease between Florida Auto Auction of Exhibit 10.90 to Form S-1 filed on August 21, 1998,
Orlando, Inc. and First Choice Auto File No. 333-59375
Finance, Inc. dated May 12, 1997, for
Reconditioning Facility.
10.91 Aircraft Lease between General Electric Filed herewith.
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.
45
<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 May 17, 2000.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ JAMES E. ERNST
-------------------------------------
James E. Ernst
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/S/EDWARD MCMURPHY Director May 17, 2000
- ------------------
Edward McMurphy
/S/ ROBERT J. ABRAHAMS Director May 17, 2000
---------------------
Robert J. Abrahams
/S/ GARY R. SMITH Director May 17, 2000
- -----------------
Gary R. Smith
/S/ T.J. FALGOUT III Director May 17, 2000
- --------------------
T.J. Falgout
/S/LARRY LANGE Director May 17, 2000
- ------------------
Larry Lange
/S/ JOE CAVALIER Chief Financial Officer May 17, 2000
- ------------------ (Principal Financial and Accounting Officer)
Joe Cavalier
</TABLE>
46
<PAGE>
SMART CHOICE AUTOMOTIVE
GROUP, INC.
AND SUBSIDIARIES
========================================
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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
Summary of significant accounting policies F-8 - F-12
Notes to consolidated financial statements F-13 - F-45
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.
BDO Seidman, LLP
Orlando, Florida
April 12, 1999
F-2
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 (a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 --
Abandoned public offering costs 1,062,962 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 94,710,177 55,033,433 670,616
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 674,650 (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) --
- -----------------------------------------------------------------------------------------------------------------------------
(7,974,087) (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-5
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
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
================================================================================================================================
<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 (2,840,000) -- -- (2,840,000)
Preferred stock dividend 333,333 -- (333,333) --
Net loss -- -- (18,648,605) (18,648,605)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 21,317,126 -- (19,685,726) 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) $(27,034,112) $ 8,863,351
================================================================================================================================
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996(a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
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 SUMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(a) PERIOD FROM INCEPTION (JUNE 21, 1996) THROUGH DECEMBER 31, 1996.
F-7
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
PRINCIPLES OF The consolidated financial statements include the accounts of
CONSOLIDATION Smart Choice Automotive Group, Inc. and its wholly-owned
subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated in
consolidation.
CONCENTRATION The Company provides sales finance services in connection
OF CREDIT RISK 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 Income on finance receivables is recognized using the
RECOGNITION 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 The Company originates installment sales contracts from its
RECEIVABLES 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
F-8
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
the unamortized balance of costs incurred in the origination
of contracts at the Company's dealerships.
ALLOWANCE FOR The allowance for uncollectible finance receivables is
CREDIT LOSSES 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 The prices at which the Company sells its used cars and the
REVENUES AND interest rate that it charges to finance these sales take
COST OF REVENUES 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.
F-9
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
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 Property and equipment are stated at cost. Depreciation is
EQUIPMENT 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.
The Company's Dealer Development Services, Inc. and Dealer
Insurance Services, Inc. subsidiaries were acquired on
January 28, 1997 (see Note 1). However, certain events and
changes in circumstances occurred during 1998 which indicated
the goodwill of Dealer Development Services, Inc. and Dealer
Insurance Services, Inc. may not be recoverable. The
operations of Dealer Development Services, Inc. were not
growing as expected, and therefore, the Company abandoned the
Dealer Development Services, Inc. operations during the
fourth quarter of 1998. The remaining goodwill specifically
related to the Dealer Development Services, Inc. acquisition
of $794,852 was recorded as an impairment charge and is
included in selling, general and administrative expenses in
the accompanying statement of operations. In September 1998,
the net assets of Dealer Insurance Services, Inc. were sold
back to the original seller for $425,000 in the form of a
note receivable from the buyer. The Company
F-10
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
retained the Dealer Insurance Services, Inc. name and certain
Dealer Insurance Services, Inc. contracts and began focusing
the Dealer Insurance Services, Inc. operations on providing
credit life, warranty protection and auto insurance to the
Company's used car customers. As a result of the sale of a
portion of the Dealer Insurance Services, Inc. operations, a
portion of the goodwill specifically related to the Dealer
Insurance Services, Inc. acquisition was recorded as an
impairment charge ($250,995) and a net gain of $201,814 was
recorded. The impairment charge was determined based upon
projected operating income which was the lowest level of cash
flow projected to the remaining Dealer Insurance Services,
Inc. operations.
DEFERRED Deferred financing costs include costs related to obtaining
FINANCING COSTS 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 Assets are evaluated for impairment when events change or
LONG-LIVED ASSETS 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 The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
F-11
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
LOSS PER Loss per common share is based upon the weighted average
COMMON SHARE 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 In June 1998, the Financial Accounting Standards Board issued
PRONOUNCEMENTS 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.
F-12
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION Smart Choice Automotive Group, Inc. (the "Company"), formerly
AND named "Eckler Industries, Inc.," operates new car dealerships
ACQUISITIONS 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"). 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
F-13
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
$40,643. The purchase price of DDS and DIS was $781,000 notes
due to the sellers and acquisition costs of $24,561. 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.
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.
F-14
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
F-15
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 discontinued operations (see Note 19) and is not
necessarily indicative of the results of operations as they
would have been had the transactions been effected on the
assumed dates.
<TABLE>
<CAPTION>
UNAUDITED
------------------------------
YEAR ENDED DECEMBER 31, 1997 1996
------------------------------------------------------------------------------
<S> <C> <C>
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)
==============================================================================
</TABLE>
The results of operations of the insignificant acquisitions
were not material to the Company's consolidated results of
operations.
F-16
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. FINANCE The following is a summary of principal balances, net as of
RECEIVABLES December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
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
================================================================================
</TABLE>
Finance receivables consist of sales of used cars under
installment sale contracts with maturities that generally do
not exceed 48 months. The receivables bear interest at rates
ranging from 25.0% to 29.9% and are collateralized by the
vehicles sold. The Company holds title to the vehicles until
full contract payment is made. Finance receivables are
pledged as collateral under a line of credit agreement (see
Note 5).
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 6,857,265 $ --
Balance at dates of acquisitions -- 5,627,937
Loans charged off, net of recoveries (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
================================================================================
</TABLE>
F-17
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED
DECEMBER 31, USEFUL LIFE 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
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
================================================================================
</TABLE>
Property and equipment is pledged as collateral under a line
of credit agreement and various notes payable (see Notes 5
and 6).
4. ACCRUED Accrued expenses consist of the following:
EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
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
================================================================================
</TABLE>
F-18
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. LINE OF CREDIT 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.
The following summarizes certain information about the
borrowings under the line of credit:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
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%
================================================================================
</TABLE>
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.
F-19
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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
</TABLE>
F-20
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
F-21
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
F-22
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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%.
F-23
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. FLOOR PLANS Floor plans payable consist of the following:
PAYABLE
<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>
F-24
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES The components of deferred income tax assets consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
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 $ -- $ --
================================================================================
</TABLE>
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
F-25
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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. COMMITMENTS LEASES
AND
CONTINGENCIES 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 initial or remaining
noncancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=============
</TABLE>
F-26
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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
F-27
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 During December 1996 and January 1997, the Company sold
CONVERTIBLE 395,000 shares of Series A redeemable convertible preferred
PREFERRED stock. Proceeds from these offerings, net of offering costs,
STOCK 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
F-28
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
$.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.
F-29
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 In May 1998, the Company sold to a private investment group
STOCK 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
F-30
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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
preferred stock by the Company.
12. CONTINGENT In connection with the acquisitions in January and February
REDEMPTION 1997 ("Predecessor Acquisition"), two founding stockholders
VALUE OF of SCHI each received 588,695 shares of common stock of the
PUT OPTIONS 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 1) the
satisfaction of the purposes of the trusts and the exercise
or expiration of all options granted with respect to the
shares of the Company's common stock or 2) February 15, 2007,
cause shares of common stock held by the trust to be
purchased by the Company (the "Put Option"). The purchase
price per share for the Finance Trust is $4.00 and for the
F-31
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 INCREASE IN PAR VALUE AND STOCK SPLIT
STOCK
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
F-32
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
================================================================================
</TABLE>
F-33
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table summarizes information about employee
plan and non-plan stock option activity for the periods ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
SHARES EXERCISE PRICE OPTIONS GRANTED
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 -- $ -- $ --
Acquired in merger 87,500 5.32 --
Granted, at market value 419,000 9.78 5.56
Granted, above market value 15,000 13.00 7.10
Granted, below market value 25,000 8.14 5.06
Exercised (6,250) 5.00 --
Forfeited (1,500) 9.76 --
--------------------------------------------------------------------------------
Outstanding, December 31, 1997 538,750 9.12 --
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 $ --
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE FAIR VALUE OF
SHARES EXERCISE PRICE OPTIONS GRANTED
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding - inception -- $ -- $ --
Granted, above market value 145,000 9.50 --
--------------------------------------------------------------------------------
Outstanding, December 31, 1996 145,000 9.50 --
Acquired in merger 522,000 7.62 --
Granted, at market value 116,250 10.12 5.16
Granted, above market value 150,000 16.34 4.56
Forfeited (340,000) 7.58 --
Expired (20,000) 10.00 --
--------------------------------------------------------------------------------
Outstanding, December 31, 1997 573,250 10.82 --
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 $ --
================================================================================
</TABLE>
F-34
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER EXERCISE REMAINING NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EMPLOYEE PLAN AND
NON-PLAN OPTIONS
$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
================================================================================
</TABLE>
COMMON STOCK OPTIONS ISSUED - COMPENSATION
During the year ended December 31, 1998, compensation expense
of $215,875 was recognized on common stock options granted to
directors. During the year ended December 31, 1997,
compensation expense of $3,809,826 was recognized on common
stock options granted to employees and directors. These
options were granted by trusts created by two major
stockholders to
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<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
purchase shares of the Company's common stock owned by the
trusts. The trusts will receive the proceeds, if any, from
the exercise of these options. Since these options were not
granted by the Company and their exercise will not result in
the issuance of any additional common stock, they have been
excluded from the tables above. Additional compensation
expense was recognized during 1997 as a result of the
issuance of 160,000 shares of common stock by the
aforementioned trusts in exchange for stock options for
680,000 shares of common stock relinquished by a former
employee. The 160,000 shares were valued at approximately
$800,000 based upon the market price at the date of their
issuance. Since the stockholders of these trusts were, in
effect, fulfilling an obligation of the Company, the value of
these shares was recorded as compensation expense.
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
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<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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
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<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
"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.
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<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
14. RESTRUCTURING During the fourth quarter of 1997, after all acquisitions
CHARGE 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 $1,101,266 related to disputed employment
termination claims was included in accrued expenses.
15. RETIREMENT The Company sponsors a defined contribution pension plan for
BENEFIT PLAN 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.
F-39
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. SUPPLEMENTAL The Company considers all highly liquid investments with a
CASH FLOW maturity of three months or less to be cash equivalents.
INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
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 --
================================================================================
</TABLE>
F-40
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
17. DISCLOSURES Statement of Financial Accounting Standards No. 107,
ABOUT FAIR "Disclosures about Fair Value of Financial Instruments,"
VALUE OF requires that the Company disclose estimated fair values for
FINANCIAL its financial instruments. The following summary presents a
INSTRUMENTS 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.
F-41
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
18. SEGMENT During 1998, the Company adopted Statement of Financial
INFORMATION 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:
F-42
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
FINANCING CORPORATE DISCONTINUED
USED CAR 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>
19. DISCONTINUED In January 1999, management of the Company made a decision to
OPERATIONS 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
F-43
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
The net assets of the discontinued operations included in the
December 31, 1998 and 1997 consolidated balance sheets
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
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
===============================================================================
</TABLE>
20. FOURTH During the fourth quarter of 1998 and 1997, the Company
QUARTER recorded the following adjustments:
ADJUSTMENTS
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
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 --
================================================================================
</TABLE>
F-44
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The effect of the above 1998 fourth quarter adjustments on
previous quarters is as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, SEPTEMBER 30,
1998 1998
----------------------------------------------------------------------------------
<S> <C> <C>
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)
=================================================================================
</TABLE>
F-45
