UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2000
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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.
(Exact name of Registrant as specified in its charter)
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FLORIDA 59-1469577
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5200 S. Washington Avenue, Titusville, Florida 32780 (321) 269-0834
(Address of principal executive offices) (Zip Code) (Issuer's
telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
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 as of July 27, 2000 totaled $ 9,552,688.
As of July 27, 2000, 2,444,394 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held in 2000 are incorporated by reference into
Part III of this Report.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PART I
<S> <C>
ITEM 1-BUSINESS 1
ITEM 2-PROPERTIES 7
ITEM 3-LEGAL PROCEEDINGS 8
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
ITEM 5-MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS 9
ITEM 6-SELECTED FINANCIAL DATA 9
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 7A-QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 19
ITEM 11-EXECUTIVE COMPENSATION 19
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 19
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 19
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 19
Appendix A - Report of Independent Certified Public Accountant and Consolidated Financial Statements
</TABLE>
<PAGE>
PART I
ITEM 1-BUSINESS
We operate one of the largest chains of buy here-pay here car
dealerships in the United States. We operate 24 dealerships located in major
markets in Texas and Florida. We have one line of business: to sell and finance
quality used vehicles to credit-impaired customers. In Texas, we operate twelve
lots under the name PAACO, and in Florida we operate twelve lots under the name
First Choice.
Our Texas operations began in 1992 as an automobile auction concern in
Arlington, Texas under the name Public Auto Auction Company (PAACO). In 1993,
PAACO entered the buy here-pay here market. Our Florida operations (First
Choice) began in 1997 with five roll ups of buy here-pay here operations.
Effective December 1, 1999, Smart Choice Automotive Group, Inc. (the
Company or Smart Choice), the parent of First Choice, acquired all of the
outstanding stock of PAACO. As a result of the acquisition, the stockholders of
PAACO, including its majority stockholder, Crown Group, Inc. (Crown), became the
controlling stockholders of Smart Choice. For financial reporting purposes,
PAACO is deemed to be the acquiring entity and the acquisition has been
reflected as a recapitalization of PAACO and an acquisition by PAACO of Smart
Choice.
INDUSTRY
Used car retail sales typically occur through franchised new car
dealerships that sell used cars or independent used car dealerships. The market
for used car sales in the United States is significant and has steadily
increased over the past five years. We believe that the factors that have led to
growth in this industry include:
(i) substantial increases in new car prices, which have made new
cars less affordable to the average consumer,
(ii) the greater reliability and durability of used cars resulting
from the production of higher quality cars, and
(iii) the increasing number of vehicles coming off lease programs in
recent years.
Many industry analysts expect these trends to continue, leading to
further expansion of the used car sales market. First Choice and PAACO
participate in the sub-prime segment of the independent used car sales and
finance market. This segment is serviced primarily by buy here-pay here
dealerships, car dealerships that sell and finance sales of used cars to
credit-impaired borrowers. Buy here-pay here dealers typically offer their
customers certain advantages over more traditional financing sources, such as:
(i) broader and more flexible underwriting guidelines;
(ii) flexible payment terms (including prorating customer payments
due within one month into several smaller payments and
scheduling payments to coincide with a customer's pay days);
and
(iii) the ability to make payments in person, an important feature
to many credit-impaired borrowers who may not have checking
accounts or are otherwise unable to make payments by the due
date through the mail.
<PAGE>
Used Car Sales and Financing
The automobile financing industry is the third-largest consumer finance
market in the country, after mortgage and revolving credit card debt. Growth in
automobile financing has been fueled by increasing prices of both new and used
cars, which has forced more buyers to seek financing when purchasing a car. This
industry is served by such traditional lending sources as banks, savings and
loans, and captive finance subsidiaries of automobile manufacturers, as well as
by independent finance companies and buy here-pay here dealers. In general, the
industry is categorized according to the type of car sold (new versus used) and
the credit characteristics of the borrower. Despite significant opportunities,
many of the traditional lending sources do not consistently provide financing to
the sub-prime consumer finance market. We believe traditional lenders avoid this
market because of its high credit risk and the associated collection efforts.
Many of the approximately 63,000 independent used car dealers are not able to
obtain debt financing from traditional lending sources such as banks, credit
unions, or major finance companies. These dealers typically finance their
operations through the sale of the contract receivables they originate.
OPERATING STRATEGY
Our operating strategy emphasizes the following points:
SELL RELIABLE, QUALITY CARS. We sell reliable, quality used cars. We believe
that product failure is a leading cause of defaults on finance contracts in the
self-financed used car industry. We utilize guidelines in purchasing,
inspecting, reconditioning and servicing, to minimize defaults. At First Choice
we include a 24,000 mile/24-month warranty with the sale of most used cars, and
at PAACO we generally include a 6,000 mile/6-month warranty.
UTILIZE CENTRALIZED CREDIT APPROVAL WITH A BUY ROOM. We integrate the credit
approval function and sales process for used cars with a buy room that ensures
credit worthiness as well as proper deal structure such as overall gross profit,
term and interest rate. The credit underwriting process strictly adheres to
objective underwriting standards that have resulted in improved collection
experience. We regularly review our collection results to assess the
effectiveness of our underwriting standards.
APPLY RIGOROUS COLLECTION PRACTICES. We diligently and pro-actively pursue the
collection of our finance receivables while maintaining a professional,
customer-friendly atmosphere. Our collection policy includes telephoning a
borrower if the borrower's payment is one day late, and repossession procedures
generally begin when the customer is one payment past due. As of April 30, 2000,
96.61% of our finance receivables at PAACO were current and 97.65% of First
Choice's finance receivables were current.
MAXIMIZE RECOVERY ON REPOSSESSIONS. We believe that we generally experience
lower losses on repossessions than other lenders in the self-financed used car
industry due to:
(i) the quality of the cars we sell;
(ii) the timeliness of our repossessions ("zero tolerance" policy
for nonpayment); and
(iii) our ability to re-market repossessions. We recondition and
re-market a majority of our repossessions through our
dealerships, rather than through auctions (where cars are
generally sold at lower prices).
INCREASE OPERATING EFFICIENCY. An ongoing effort has been made to increase
operating efficiency by combining administrative functions in order to reduce
costs. We have consolidated functions such as accounting and treasury, insurance
and employee benefits, and legal support, and in the coming year we believe we
will continue to increase our operating efficiency in such areas as
reconditioning, purchasing and transporting inventory.
<PAGE>
EMPLOY INTEGRATED MANAGEMENT INFORMATION SYSTEMS. All of our used car
dealerships are linked to an integrated computer-based management information
system (the "MIS") that allows the Company to obtain "real time" information on
its operations. We use the MIS to transmit data between our headquarters and our
various stores, to evaluate store performance daily, monitor inventory, sales,
costs, customer payments and facilitates the underwriting and collection of its
finance contracts.
PROMOTE PAACO AND FIRST CHOICE BRANDS. We believe that our PAACO and First
Choice brands are synonymous with quality cars and customer service. By seeking
to maintain continuity in the appearance of our store locations, we expect to
promote our name recognition. Further, we maintain a consistency between
facilities and marketing materials through the use of standardized logos.
AVOID THIRD PARTY FINANCE RECEIVABLES. As part of our operating philosophy, we
only originate and service finance receivables on used cars sold at our used car
stores. We do not intend to purchase third party finance receivables or purchase
other dealerships with existing finance receivables.
CONTROLLED GROWTH IN DEALERSHIP SITES. PAACO's business began in Texas in 1992
as a retail auto auction concern. PAACO entered the buy here-pay here market in
1993, grew modestly in the Dallas/Fort Worth area over the next few years, and
entered the Houston area in 1999. Effective December 1, 1999, our Florida
operations were acquired through the acquisition of PAACO by Smart Choice. In
the coming year we anticipate that, as we focus on maintaining sales at or near
our present monthly sales rate, we will not acquire any additional dealerships,
although PAACO and First Choice may each open a number of new lots.
SELF-FINANCED USED CAR STORES
We currently own and operate 12 self-financed dealerships under the
PAACO name in Texas and 12 dealerships under the First Choice name in central
Florida. PAACO dealerships are divided into two regions (the Dallas/Fort Worth
and, Houston, Texas metropolitan areas). First Choice dealerships are divided
into three regions (the Tampa-St. Petersburg and Orlando, Florida metropolitan
areas and the North I-75 area). We evaluate and upgrade the dealership
facilities we open with fresh exterior and interior paint and new signage and
replace furniture and fixtures as necessary to make the new locations similar to
our existing locations.
The following table summarizes, by market, the number of dealerships we
presently operate.
PAACO
Dallas/Fort Worth 9
Houston 3
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Total PAACO 12
==
First Choice
Orlando 4
Tampa / St. Petersburg 6
I-75 North 2
--
Total First Choice 12
==
Total 24
==
Our stores generally maintain an average inventory of 80 used cars per
store, featuring a wide variety of makes and models (with ages generally ranging
from two to six years) and a range of sale prices, all of which enable us to
meet the preferences and budgets of a wide range of potential customers targeted
for the area. We believe that by selling higher quality used cars and providing
warranties to cover major repairs, improved customer satisfaction and fewer
defaults on finance contracts result.
<PAGE>
We provide, through a third-party underwriter, a 6-month/6,000 mile
warranty for our Texas customers and a 24-month/24,000 mile warranty for our
Florida customers with most used cars sold. The warranty we provide allows the
used cars to be repaired nationally by any one of approximately 375,000 ASE
(Automotive Service Excellence) certified technicians. Additionally, our Texas
customers can have PAACO repair their vehicles at our Service Centers in Texas.
First Choice performs limited repairs under these warranties. Customers are
responsible for payment of up to a $100 deductible for each warranty repair
made.
We acquire our used cars primarily at auto auctions. All cars are
subjected to a detailed inspection, reconditioning and, as necessary, repair at
our reconditioning facilities. If a car is not sold in a timely manner, it is
moved to another dealership or sold at auction.
RECONDITIONING CENTERS. First Choice uses two reconditioning centers in its used
car operations. The centers put the used cars through our inspection program,
perform minor bodywork and detail. The main reconditioning facility is located
in Lakeland, Florida, has 31,286 square feet and is located on 6.7 acres. The
facility has reconditioning capacity of approximately 550 cars per month.
PAACO's main reconditioning facility is located in Grand Prairie, Texas, has
total square footage of 101,000 and is located on a 19.5-acre parcel. We believe
our present reconditioning facilities have sufficient capacity to support our
expected sales in the foreseeable future.
MARKETING AND SALES. A primary focus of our marketing strategy is our ability to
finance automobile purchases for consumers with poor credit histories. We have
initiated marketing programs designed to attract credit-impaired customers,
reward those customers who pay on time, develop customer loyalty and increase
referral and repeat business. We have created value-added programs for our
customers which include providing quality cars through a comprehensive
inspection and refurbishment program, a warranty on most used cars sold at our
dealerships, rapid loan application processing and pre-qualification over the
telephone by calling a toll-free number.
We advertise extensively in the radio and television media, emphasizing
our multiple locations, wide selection of quality used cars, ability to provide
financing to many credit-impaired borrowers and additional value-added programs
such as warranties and loan pre-qualifications. In addition, we believe that our
upgraded facilities provide effective advertising and attract drive-by traffic
to visit the stores because their appearance conveys the image of a used car
store that offers quality cars. We believe that our advertising and marketing
approach creates brand name recognition and promotes our image as a
professional, customer-oriented business. Further, at PAACO we concentrate our
marketing efforts towards the Hispanic community.
We utilize various telemarketing programs to promote our used cars. For
example, potential customers are contacted within several days of their visit to
a dealership to follow up on leads and obtain information regarding their
experience while at our dealership. In addition, used car customers with
satisfactory payment histories are contacted several months before their finance
contract matures and are offered an opportunity to purchase another car.
We employ a dedicated on site sales force. We continually seek to
develop and retain qualified salespersons. The salesperson's sole responsibility
is the sale of cars. Sales personnel do not in any way participate in the
financing aspects of the sale. As of April 30, 2000, we employed 103 full-time
salespersons at our dealerships. The salespersons are compensated primarily
through commissions based on the sales price and units sold in Florida and
amount of down payment and units sold in Texas.
EMPLOYEES
At June 30, 2000, we employed 592 employees, consisting of 332 PAACO
employees and 260 First Choice employees. None of our employees are covered by a
collective bargaining agreement.
<PAGE>
EXECUTIVE OFFICERS
Our executive officers are as follows:
Name Age Position and Office
---- --- -------------------
Edward R. McMurphy 50 Chairman of the Board
James Edward Ernst 49 President, Chief Executive Officer
Larry W. Lange 60 Vice President
Gary R. Smith 46 Vice President
Ronald W. Anderson 53 Vice President, Chief Operating
Officer
Joseph B. Cavalier 46 Vice President, Chief Financial
Officer, Treasurer
Edward R. McMurphy has served as Chairman of the Board of Smart Choice
since December 1999. He has also served as the Chief Executive Officer and
Chairman of Crown since July 1984, and has served as a director of Crown since
its inception in April 1983.
James Edward Ernst, C.P.A., has served as President and Chief Executive
Officer and as a director of Smart Choice since December 1999. Prior to joining
Smart Choice, Mr. Ernst served as a consultant to Crown from November 1998 until
December 1999. From December 1995 until October 1998, he served as President and
Chief Executive Officer of Casino Magic Corporation, and from June 1991 until
September 1995, he served as President and Chief Executive Officer of Casino
America, Inc.
Larry Lange is presently Vice President of Smart Choice as well as the
Chief Executive Officer of PAACO. Prior to founding PAACO in 1992, he owned and
operated several new car franchises.
Gary R. Smith has served as a director and Vice President of Smart
Choice and as President of First Choice since December 1999. He served as
President and Chief Executive Officer of Smart Choice from February 1997 until
December 1999. 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 has served as Smart Choice's Vice President and
Chief Operating Officer since 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 B. Cavalier joined the Company as Vice President, Chief
Financial Officer, and Treasurer in December 1999. In 1999, he assisted Crown
with special projects including serving as Chief Financial Officer of PAACO.
From 1995 to 1998 he served as Chief Financial Officer of HardCote Technologies,
Inc. a manufacturer of aircraft parts. Prior to 1995, he was employed for over
20 years in the retail car and truck dealership industry, serving in various
capacities including General Manager and Chief Financial Officer.
COMPETITION
The used automotive retailing industry is highly competitive and
fragmented. Presently there are an estimated 23,000 franchised automobile
dealers and 63,000 independent used vehicle dealers. In recent years a number of
large companies such as Car Max have entered the used car sales business. We
believe
<PAGE>
these larger companies do not provide significant competition for us as they
tend to sell higher priced vehicles to consumers with stronger credit histories.
First Choice and PAACO compete principally with other independent buy here-pay
here dealers, and to a lesser degree with:
(i) the used vehicle retailing operation of franchised automobile
dealerships,
(ii) independent used vehicle dealers, and
(iii) individual consumers who sell used vehicles in private
transactions.
We believe the principal competitive factors in our market include:
(i) the availability of financing to credit-impaired borrowers,
(ii) the breadth and quality of vehicle selection,
(iii) the availability of popular vehicles,
(iv) pricing,
(v) the convenience of a dealership's location, and
(vi) customer service.
We believe that our dealerships are competitive in each of these areas.
REGULATION AND LICENSING
Our operations are subject to ongoing regulation, supervision, and
licensing under various federal, state, and local statutes, ordinances, and
regulations pertaining to the sale and financing of vehicles. These laws include
the Truth In Lending Act, the Equal Credit Opportunity Act and the Fair Credit
Reporting Act of 1970. Among other things, these laws require that we obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
contracts we originate, make specified disclosures to customers, limit our right
to repossess and sell collateral, and prohibit discrimination against customers
on the basis of certain characteristics including age, race and gender. In many
cases we charge fixed interest rates in excess of traditional finance companies
on the contracts originated at our dealerships. The states in which we operate
impose limits on interest rates we can charge on our loans. These limits are
generally based on the age of the vehicle. We believe we are in substantial
compliance with all applicable federal, state, and local laws and regulations.
However, if we do not remain in compliance with such laws, this failure could
have a material adverse effect on operations. In addition, the adoption of
additional laws, changes in the interpretation of existing laws, or our entrance
into jurisdictions with more stringent regulatory requirements could have a
material adverse effect on us.
FINANCING CUSTOMERS WITH IMPAIRED CREDIT
We offer financing to our customers who purchase used cars at our
dealerships. We do not have any loans from persons who did not purchase a
vehicle at one of our dealerships. We have a policy not to acquire third party
originated finance contracts. We provide financing only for our own customers,
thereby relying on our own underwriting standards and not those of third
parties. Sales and financing are combined functions performed by a centralized
buy room. Experienced financing and sales personnel make credit and deal
structure decisions. At First Choice the deal structure 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
22.5% over a period averaging 36 months with bi-weekly payments. At PAACO the
typical deal structure would include a down payment of 14% to 15%, average
<PAGE>
annual percentage rate of 22% and a term of approximately 28 months with weekly
payments. We finance approximately 98% of our used car sales through finance
contracts that we originate and service.
CUSTOMER CREDIT PROFILE. We market to credit-impaired 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. A "D" rated consumer has an
unfavorable employment history and other credit problems, such as personal
bankruptcy. Our customers are generally not able to finance a used car purchase
from a captive finance subsidiary or a bank, each of which primarily provides
financing to customers with "A" or "B" credit ratings.
BUY ROOM EVALUATION PROCEDURES. We apply consistent underwriting standards in
structuring our used car sales and loans. The most important criteria we use in
evaluating a transaction 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 dealerships submit the customer's credit application
to our buy rooms, where the deal is structured. Senior management is directly
responsible for the deal structure decisions made by our buy room staff. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Credit Losses" for information about our loan loss and delinquency
experience.
CONTRACT SERVICING. We service our finance contracts through the use of
servicing procedures which have been designed to minimize our credit losses:
(i) maintaining a "zero tolerance" policy for all non-payments;
(ii) monitoring loans and related collateral;
(iii) accounting for and posting all payments received;
(iv) responding to borrowers' inquiries;
(v) taking all necessary action to perfect and maintain the
security interest granted in the financed automobile;
(vi) investigating delinquencies and communicating with borrowers
to obtain timely payments;
(vii) pursuing deficiencies on loans; and
(viii) when necessary, repossessing the financed automobile.
COLLECTION POLICY ZERO TOLERANCE. We are strict in our collection policies,
believing that by acting promptly and working with our customers, we are able to
minimize our loss exposure. We begin collection efforts the day we sell the car.
In both Florida and Texas, our policy is to permit the customer to keep the
automobile only so long as payments are made.
REPOSSESSIONS. We begin the process of repossession immediately for non-payment.
Repossessions are handled by independently licensed, bonded and insured
repossession firms. We recondition and re-market approximately 70% of our
repossessions through our dealerships, rather than through auctions (where cars
are generally sold at lower prices).
THIRD PARTY FINANCE RECEIVABLES AND ACCOUNTING. As part of our operating
philosophy, we originate and service finance receivables on used cars sold at
our dealerships. We do not intend to purchase receivables originated by third
parties.
<PAGE>
ITEM 2-PROPERTIES
As of April 30, 2000, we leased substantially all of our facilities,
including dealerships, collection facilities that service dealership portfolios,
and reconditioning centers. PAACO leases nine of its twelve dealership
facilities in the Dallas/Fort Worth and Houston metropolitan areas. PAACO leases
its corporate administrative offices and main reconditioning center in Grand
Prairie, Texas.
First Choice leases all twelve dealership facilities in the Orlando and
Tampa/St. Petersburg metropolitan areas. Smart Choice owns approximately 10.3
acres of real property located in Titusville, Florida, with 12,000 square feet
of office space that houses our corporate administrative offices and collection
center.
ITEM 3-LEGAL PROCEEDINGS
During March 1999, certain of our shareholders filed two putative class
action lawsuits against us and certain of our 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 capacities and on behalf of the class
of persons who purchased or otherwise acquired our publicly traded securities
between April 15, 1998 and February 26, 1999. These lawsuits were filed
following our announcement on February 26, 1999 that 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. 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 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. We intend to contest these
claims vigorously. We 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 or
cash flows.
We are involved in other legal and administrative proceedings in the
ordinary course of business. We believe that none of these actions will have a
material adverse effect on our financial condition, results of operations or
cash flows.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5-MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock, $.01 par value per share, is traded on the OTC
Bulletin Board under the symbol "SCHA." At June 30, 2000, there were
approximately 1,488 beneficial holders of our common stock. The following table
sets forth the high and low closing sale prices of our common stock, as reported
by the OTC Bulletin Board and the Nasdaq SmallCap Market, as applicable, for the
periods indicated.
High Low
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Fiscal Year 1999:
First Quarter $ 232.50 $ 160.00
Second Quarter $ 177.50 $ 61.25
Third Quarter $ 97.50 $ 67.50
Fourth Quarter $ 90.63 $ 22.50
Fiscal Year 2000:
First Quarter $ 26.25 $ 10.00
Second Quarter $ 20.63 $ 6.25
Third Quarter $ 12.50 $ 4.38
Fourth Quarter $ 8.13 $ 5.00
All prices shown in the table above have been adjusted to reflect the
reverse split of 1 share for 20 shares effective July 26, 2000.
Prior to September 14, 1999, our common stock was traded on the Nasdaq
SmallCap Market. Continued listing of securities on the Nasdaq SmallCap Market
requires the maintenance of certain criteria such as market value, public float,
capital and surplus. On October 26, 1998, we were notified by Nasdaq that we
were not in compliance with certain listing criteria which became applicable to
SmallCap Market listed companies on that date. On September 14, 1999 our common
stock was delisted from the Nasdaq SmallCap Market for non-compliance with the
minimum listing criteria, and began trading on the OTC Bulletin Board.
Dividend Policy
We have not paid dividends on our common stock since our initial public
offering of common stock. We have no present plans to pay cash dividends in the
foreseeable future and intend to retain earnings for future operations,
reduction of debt and limited expansion of our business. Any determination to
declare or pay dividends in the future will be at the discretion of our Board of
Directors and will depend on our results of operations, financial condition, any
contractual restrictions, considerations imposed by applicable law and other
factors deemed relevant by the Board of Directors. Our current covenants with
our lenders restrict our ability to declare or pay dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On July 26, 2000, Smart Choice effected a 1-for-20 reverse split of the
shares of its common stock. Under applicable Florida law, Smart Choice was not
permitted to redeem the fractional shares of common stock that were created by
the reverse split. As of the date of the reverse split, Crown, the majority
shareholder of Smart Choice, subscribed to purchase from Smart Choice that
number of shares which would allow Smart Choice to distribute to each
shareholder that fraction of one share, if any, which would cause such
shareholder to own a whole number of shares of Smart Choice common stock
following the reverse split. Crown has agreed to a purchase price for the shares
equal to the average closing price of Smart Choice common stock on the five
trading days following the reverse split. Smart Choice has estimated that the
number of shares to be purchased by Crown and issued to Smart Choice
shareholders will not exceed 1,000. The shares will be sold by Smart Choice to
Crown pursuant to the exemption from registration contained in Section 4(2) of
the Securities Act of 1933.
ITEM 6-SELECTED FINANCIAL DATA
Selected Consolidated Financial Information.
The selected combined consolidated financial data of the Company as of
and for the periods indicated below were derived from the audited financial
statements of the Company. The selected consolidated financial data are
qualified by reference to, and should be read in conjunction with,
<PAGE>
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and notes thereto included
elsewhere in this report.
<TABLE>
<CAPTION>
($ in thousands except share and per share amounts)
Four months
Ended
Year ended April 30, April 30, Year ended December 31,
2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales of used cars $ 108,583 $ 61,848 $ 17,674 $ 43,115 $ 26,111 $ 18,752
Less:
Cost of used cars sold 67,594 41,858 10,539 29,324 16,576 10,651
Provision for credit
losses 21,369 9,926 648 7,785 3,091 3,511
--------------------------------------------------------------------------------------
19,620 10,064 6,487 6,006 6,444 4,590
--------------------------------------------------------------------------------------
Interest income:
Interest income 21,233 8,880 1,982 4,687 2,469 1,231
Portfolio interest
expense 9,404 4,879 1,350 2,747 1,636 973
--------------------------------------------------------------------------------------
11,829 4,001 632 1,940 833 258
--------------------------------------------------------------------------------------
Income before
operating expense 31,449 14,065 7,119 7,946 7,277 4,848
Operating expense:
Selling, general and
administrative 25,274 15,860 6,114 9,284 6,663 4,723
Depreciation and
amortization 819 392 77 164 77 45
Other expense (income) 207 -- -- (258) (84) 191
--------------------------------------------------------------------------------------
26,300 16,252 6,191 9,190 6,656 4,959
--------------------------------------------------------------------------------------
Income (loss) before income
taxes 5,149 (2,187) 928 (1,244) 621 (111)
Income tax expense (benefit) 2,038 (775) 343 (293) -- --
--------------------------------------------------------------------------------------
Net income (loss) $ 3,111 $ (1,412) $ 585 $ (951) $ 621 $ (111)
======================================================================================
Income (loss) per common share
Basic $ 3.04 $ (197.11) $ 81.63 $ (188.24) $ 62.10 $ (11.10)
Diluted $ 0.37 $ (197.11) $ 0.08 $ (188.24) $ 62.10 $ (11.10)
Weighted average shares:
Basic 1,023,476 7,163 7,163 5,050 10,000 10,000
Diluted 8,398,752 7,355 7,355,000 5,050 10,000 10,000
Balance Sheet Data:
Finance receivables, net $ 132,855 $ 47,757 $ 34,192 $ 27,381 $ 16,443 $ 8,392
Inventories $ 12,190 $ 6,771 $ 3,742 $ 2,591 $ 1,741 $ 960
Total assets $ 178,965 $ 60,374 $ 42,770 $ 33,404 $ 20,723 $ 11,298
Revolving credit facility $ 130,367 $ 41,824 $ 26,050 $ 23,410 $ 12,451 $ 3,985
Other borrowings $ 10,773 $ 4,939 $ 6,395 $ 6,846 $ 4,562 $ 5,272
Total liabilities $ 162,337 $ 53,677 $ 37,660 $ 33,521 $ 19,890 $ 11,084
Total stockholders' equity $ 16,095 $ 6,697 $ 5,109 $ (117) $ 834 $ 213
Loan Portfolio Data:
Interest income $ 21,233 $ 8,880 $ 1,982 $ 4,687 $ 2,469 $ 1,231
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Four months
ended
Year ended April 30, April 30, Year ended December 31,
2000 1999 1998 1997 1996 1995
-------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Other Operating Data:
Total revenues (in thousands) $ 129,816 $ 70,728 $ 19,656 $ 47,802 $ 28,580 $ 19,983
Number of used cars sold 9,479 5,174 1,452 3,461 2,432 *
Open dealerships - end of
period 24 10 9 8 4 3
Sales price - per car sold $ 11,455 $ 11,954 $ 12,172 $ 12,457 $ 10,736 *
Cost of sales - per car sold $ 7,131 $ 8,090 $ 7,258 $ 8,473 $ 6,816 *
Gross margin - per car sold $ 4,324 $ 3,864 $ 4,914 $ 3,984 $ 3,921 *
Provision for credit losses - $ $ $ $
per car sold $ 2,254 $ 1,918 $ 446 $ 2,249 $ 1,271 *
Interest Income - per car sold $ 2,240 $ 1,716 $ 1,365 $ 1,354 $ 1,015 *
Total operating expense - per $ $ $ $
car sold $ 2,775 $ 3,141 $ 4,264 $ 2,655 $ 2,737 *
Cost of used cars as percent
of sales 62.3% 67.7% 59.6% 68.0% 63.5% *
Gross margin as % of sales 37.7% 32.3% 40.4% 32.0% 36.5% *
Provision as % of sales 19.7% 16.0% 3.7% 18.1% 11.8% *
Total operating expense as %
of revenue 20.3% 26.3% 35.0% 21.3% 23.3% *
</TABLE>
*Not available
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains 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", and similar expressions identify forward looking statements. These
statements may include, but are not limited to, projections of revenues, income
or loss, estimates of capital expenditures, plans for future operations,
products or services, and financing needs or plans, as well as assumptions
relating to these matters. Forward-looking statements, speak only as of the date
the statements were made. They are inherently subject to risks and
uncertainties, some of which we cannot predict or quantify. Future events and
actual results could differ materially from the forward-looking statements. You
should keep in mind the risk factors and cautionary statements found throughout
this Form 10-K and specifically those found below. We are not obligated to
publicly update or revise any forward looking statements, whether as a result of
new information, future events, or for any other reason.
The following discussion and analysis of the Company's consolidated
financial position and consolidated results of operations should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto included in Item 8.
Overview
We sell and finance used vehicles in two major markets in the United
States. The First Choice market is based in Florida and the PAACO market is
based in Texas. Effective December 1, 1999, Smart Choice acquired the stock of
PAACO in a reverse acquisition in which PAACO's stockholders acquired voting
control of Smart Choice. For financial reporting and comparative purposes, PAACO
is deemed to be the acquiring entity. Accordingly, the financial statements
include the results of PAACO for all periods presented and the results of First
Choice from the date of acquisition (December 1, 1999) through April 30, 2000.
Although financial information has been included for the periods prior to the
year ended April 30, 1999, the following discussion will concentrate on
comparisons for the year ended April 30, 2000 as compared to the year ended
April 30, 1999, as a discussion of prior periods would not be meaningful.
<PAGE>
Comparison of Results of Operations
Sales of Used Cars and Cost of Used Cars Sold
<TABLE>
<CAPTION>
($ in thousands, except per car sold amounts)
Four months Annual % change
ended Year ended 2000
Year ended April 30, April 30, December 31, compared to
2000 1999 1998 1997 1999
--------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Number of used car sales 9,479 5,174 1,452 3,461 83.2%
Sales of used cars $ 108,583 $ 61,848 $ 17,674 $ 43,115 75.6%
Cost of used car sales $ 67,594 $ 41,858 $ 10,539 $ 29,324 61.5%
Gross margin $ 40,989 $ 19,990 $ 7,135 $ 13,791 105.0%
Gross margin % 37.7% 32.3% 40.4% 32.0%
Per car sold:
Sales $ 11,455 $ 11,954 $ 12,172 $ 12,457 (4.2)%
Cost of used cars sold $ 7,131 $ 8,090 $ 7,258 $ 8,473 (11.9)%
Gross margin $ 4,324 $ 3,864 $ 4,914 $ 3,984 11.9%
</TABLE>
The number of used cars sold and revenue from the sales of used cars
increased in fiscal 2000. The growth reflects an increase in the number of
dealerships operated as a result of the merger and an increase in the number of
used cars sold per dealership in Texas. Per car sales prices declined as a
result of adding the lower priced Florida units to the sales mix and due to a
concentrated effort in Texas to sell lower priced vehicles with higher gross
margins. Gross margins increased as a result of increased total sales in fiscal
2000 and substantially lower cost of used cars sold. Cost of used cars sold was
reduced by better buying and more cost effective reconditioning.
Provision for Credit Losses
<TABLE>
<CAPTION>
Four
months Annual % change
ended Year ended 2000
Year ended April 30, April 30, December 31, compared to
2000 1999 1998 1997 1999
-------------------------------------- ---------- -------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Provision for credit losses (in $ 21,369 $ 9,926 $ 648 $ 7,785 115.3%
thousands)
Provision per used car sold $ 2,254 $ 1,918 $ 446 $ 2,249 17.5%
Provision as % of sales price per 19.7% 16.0% 3.7% 18.1%
car sold
</TABLE>
The provision for credit losses in total, per used car sold and as a
percentage of sales price per car sold each increased during the year ended
April 30, 2000. The increases were due to increased gross margins and the
increased volume from the addition of the First Choice portfolio. We determine
the provision through analysis of our static pool, repossessions and recovery
rates.
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
(in thousands)
Annual %
Four months change
ended Year ended 2000
Year ended April 30, April 30, December 31, compared to
2000 1999 1998 1997 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 21,233 $ 8,880 $ 1,982 $ 4,687 139.1%
Portfolio interest expense $ 9,404 $ 4,879 $ 1,350 $ 2,747 92.7%
-------------------------------------------------------------
Net interest income $ 11,829 $ 4,001 $ 632 $ 1,940 195.7%
</TABLE>
Interest income consists primarily of interest on finance receivable
principal balances. Principal balances grew from $47.8 million at April 30, 1999
to $132.9 million at April 30, 2000 primarily as a result of the addition of the
First Choice portfolio. Principal balances during the four months ended April
30, 1998 and the year ended December 31, 1997 grew primarily as a result of
adding dealerships at PAACO.
Income before Operating Expenses
<TABLE>
<CAPTION>
Four months
ended Year ended
Year ended April 30, April 30, December 31,
2000 1999 1998 1997
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Income before operating expenses (in thousands) $31,449 $14,065 $7,119 $7,946
</TABLE>
Income before operating expenses grew from $14.1 million at April 30,
1999 to $31.4 million at April 30, 2000 primarily as a result of the addition of
the First Choice dealerships.
Operating Expenses
<TABLE>
<CAPTION>
Four months
ended Year ended
Year ended April 30, April 30, December 31,
2000 1999 1998 1997
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Operating expenses (in thousands) $ 26,300 $ 16,252 $ 6,191 $ 9,190
Per car sold $ 2,775 $ 3,141 $ 4,264 $ 2,655
As % of total revenues 20.3% 23.0% 31.5% 19.2%
</TABLE>
Although operating expenses increased for the year ended April 30, 2000
compared to the previous year, as a percentage of total revenue they declined
from 23.0% to 20.3%. The increase in total expenses was the result of the
merger, while the reduction in operating expenses as a percentage of total
revenue was a result of cost cutting and efficiency programs instituted during
the year.
Income Taxes
Income taxes totaled $2.038 million for the fiscal year ended April 30,
2000, compared to an income tax benefit of $775,000 for fiscal 1999. Our
effective tax rate was 39.6% for the year ended April 30, 2000.
<PAGE>
Balance Sheet Comparisons
The following table sets forth the components of our finance receivables
for the periods indicated:
(in thousands)
April 30,
2000 1999
------------ -------------
Finance receivables gross balance $ 199,629 $ 67,770
Unearned finance charges (34,483) (12,426)
Allowance for credit losses (32,291) (7,587)
------------ -------------
Finance receivables net $ 132,855 $ 47,757
============ =============
Our finance receivables gross balance and unearned finance charges
increased due to increases in sales and the addition of the First Choice
portfolio.
(in thousands)
Year ended
April 30,
2000 1999
------------ -------------
Allowance activity:
Balance, beginning of period $ 7,587 $ 4,728
Acquisition of First Choice 23,559 --
Provision for credit losses 21,369 9,926
Charge-offs, net of recoveries (20,224) (7,067)
------------ -------------
Balance at end of period $ 32,291 $ 7,587
============ =============
Allowance as % of ending
principal balances 19.6% 13.7%
===== =====
Our allowance activity reflects the addition of the First Choice
portfolio. The increase in the allowance as a percentage of the principal
balance from 13.7% at April 30, 1999 to 19.6% at April 30, 2000 was primarily
due to the larger required allowance of First Choice's portfolio, higher gross
profit margins during 2000 and corresponding lower recovery rates along with
longer-term loans.
Financial Position
The following table represents key components of our financial position:
($ in thousands)
<TABLE>
<CAPTION>
April 30, Annual % change,
---------------------------- 2000 compared
2000 1999 to 1999
------------ ----------- -------
<S> <C> <C> <C>
Total assets $ 178,965 $ 60,374 196.4%
Inventory 12,190 6,771 80.0%
Finance receivables, net 132,855 47,757 178.2%
Revolving credit facility 130,367 41,824 211.7%
Other borrowings 10,773 4,939 118.1%
Total debt 141,140 46,763 201.8%
Stockholders' equity. 16,095 6,697 140.3%
</TABLE>
The increase in total assets and total liabilities is primarily due to the
acquisition of First Choice. Stockholders' equity increased through the
re-capitalization resulting from the merger.
Liquidity and Capital Resources
The Company requires capital to support increases in finance
receivables, car 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 used car inventory.
Net cash provided by operating activities was approximately $47.2
million and $18.7 million for the years ended April 30, 2000, and 1999,
respectively. The $28.4 million increase resulted primarily from an increase in
net income of $4.5 million, an increase of provision for credit losses of $11.4
million, and an
<PAGE>
increase in inventories of $8.7 million.
Cash flows used in investing activities was approximately $58.9 million
and $36.0 million for the years ended April 30, 2000 and 1999, respectively. The
$22.8 million increase resulted primarily from an increase in finance receivable
originations net of collections.
Cash provided by financing activities was approximately $13.5 million
and $17.2 million during the year ended April 30, 2000 and 1999, respectively.
These additions consisted primarily of additional borrowings.
The Company has borrowed, and will continue to borrow, substantial
amounts to fund its used vehicle sales and financing operations. The Company
maintains a separate credit agreement for each of PAACO and Smart Choice with
Finova Capital Corporation under the "Finova Loan and Security Agreement".
Under the Finova Loan and Security Agreement, the Company may borrow
the lesser of (i) the Revolving Line of $160 million or (ii) the advance rate of
the available balance of eligible finance contracts and inventory (the "Finova
Revolving Facility"). The Finova Revolving Facility is collateralized by all of
the Company's finance receivables and used car inventory. The Finova Revolving
Facility bears interest at the prime rate plus 2.25% (11.25% as of April 30,
2000). The interest rate declines to prime rate plus 2.00% and prime rate plus
1.75% as the advance rate declines through the life of the note. The Finova
Revolving Facility expires on November 30, 2004, at which time its renewal will
be subject to renegotiation. As of April 30, 2000, the principal amount
outstanding under the Finova Revolving Facility was $130.4 million, up from a
balance of $41.8 million at April 30, 1999. On April 30, 2000, the Company had
availability of approximately $2.3 million under the Finova Revolving Facility.
There can be no assurance that the Company will be able to raise additional
capital as needed or that the Company will be able to generate sufficient cash
flow to pay down the revolving credit facility as the advance rates decline at
First Choice from 85% to 70% and from 72% to 67.5% at PAACO over the term of the
facility.
Seasonality
Historically, the Company's used vehicle business has experienced
higher revenues in the first and fourth quarters of its fiscal year than in the
second and third quarters. Management believes that these results are due to
seasonal buying patterns resulting in part from the fact that many of its
customers receive an income tax refund during our fourth fiscal quarter, which
is one of the primary sources 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 law. To date,
inflation has not had a significant impact on the Company's operations.
RISK FACTORS
Future losses could impair our ability to raise capital or borrow money
and consequently affect our stock price.
Although we recorded net income of $3.1 million for the year ended
April 30, 2000, we cannot assure you that we will be profitable in future
periods. Losses in future periods could impair our ability to raise additional
capital or borrow money as needed, and could decrease our stock price. We may
not be able to obtain the financing we need to fund our operations and, as a
result, our profitability could be reduced.
Our operations require large amounts of capital.
We have borrowed, and will continue to borrow, substantial amounts to
fund our operations. If we
<PAGE>
cannot obtain the financing we need on a timely basis and on favorable terms,
our business and profitability could be materially adversely affected. We
currently obtain our financing through two primary sources: a revolving credit
facility and cash flow from operations.
Revolving Credit Facility. Our revolving credit facility is our primary
source of operating capital. We have pledged substantially all of our assets to
secure the borrowings we make under this facility. Although this facility has a
maximum commitment of $160 million, the amount we can borrow is limited by the
amount of certain types of assets that we own. When we have used all our
capacity under the revolving credit facility, our liquidity can be adversely
affected unless we can find alternative financing sources. The revolving
facility expires in November 2004 and, even if we continue to satisfy the terms
and conditions of the revolving facility, we may not be able to extend its term
beyond the current expiration date. If we cannot extend the term of the
revolving facility or replace that facility with a substitute facility, our
operations would be adversely affected.
Contractual Restrictions. The revolving credit facility contains
various restrictive covenants. Under this credit facility, we must also meet
certain financial tests. Failure to satisfy the covenants in our credit facility
could preclude us from further borrowings under the facility, could cause
defaults in our other borrowings, and could prevent us from securing alternate
sources of funds necessary to operate our business.
We have a high risk of credit losses because of the poor
creditworthiness of our borrowers.
Substantially all of our finance receivables are with credit-impaired
borrowers. Credit-impaired borrowers generally cannot borrow money from
traditional lending institutions, such as banks, savings and loans, credit
unions, and captive finance companies owned by automobile manufactures because
of their poor credit histories and/or low incomes. Loans to credit-impaired
borrowers are often difficult to collect and are subject to a high risk of loss.
We have established an allowance for credit losses to cover our anticipated
credit losses. A significant variation in the timing of, or increase in credit
losses in our portfolio would have a material adverse effect on our net
earnings.
Interest rates affect our profitability.
Much of our financing income results from the difference between the
rate of interest that we pay on the funds we borrow and the rate of interest
that we earn on the loans in our portfolio. While we earn interest on our
finance receivables at a fixed rate, we pay interest on our borrowings at a
floating rate. When interest rates increase, our interest expense increases and
our net interest margin decreases. Increases in our interest expense that we
cannot offset by increases in interest income will lower our profitability.
Laws that limit the interest rates that we can charge adversely affect
our profitability.
We operate in states that impose limits on the interest rate that a
lender may charge. When a state limits the amount of interest that we can charge
on our installment sales loans, we may not be able to offset any increased
interest expense caused by rising interest rates under our revolving credit
facility. Therefore, these interest rate limitations can adversely affect our
profitability.
Government regulation may limit our ability to recover and enforce
receivables or to repossess and sell collateral.
We are subject to ongoing regulation, supervision, and licensing under
various federal, state, and local statutes, ordinances, and regulations. If we
do not comply with these laws, we could be fined or certain of our operations
could be interrupted or shut down. Failure to comply could have a material
adverse effect on our operations. Among other things, these laws:
o Require that we obtain and maintain certain licenses and
qualifications;
<PAGE>
o Limit or prescribe terms of the loans that we can originate;
o Require specified disclosures to customers;
o Limit our right to repossess and sell collateral; and
o Prohibit us from discriminating against certain customers.
We believe that we are currently in substantial compliance with all
applicable material federal, state, and local laws and regulations. We may not,
however, be able to remain in compliance with such laws. In addition, the
adoption of new statutes and regulations changes in the interpretation of
existing statutes and regulations, or our entry into jurisdictions with more
stringent regulatory requirements could also have a material adverse effect on
our operations.
From time to time, we may be subject to pending actions and
investigations relating to our compliance with various laws and regulations.
While we do not believe the ultimate resolution of such matters will result in
a material adverse effect on our business or financial condition (such as fines,
injunctions, or damages), there can be no assurance in this regard.
Events happening to other companies in our industry can adversely
effect our operations and the value of our securities.
In recent years, several major used car finance companies have
announced major downward adjustments to their financial statements, violations
of loan covenants, related litigation, and other events. Companies in the used
vehicle sales and financing market have also been named as defendants in an
increasing number of class action lawsuits brought by customers claiming
violations of various federal and state consumer credit and similar laws and
regulations. In addition, some of these companies have filed for bankruptcy
protection. These events:
o Have lowered the value of securities of sub-prime automobile finance
companies;
o Have made it more difficult for sub-prime automobile finance
companies to borrow money; and
o Could cause more restrictive regulation of this industry.
If our current contingency plan is inadequate, we could have a system
failure, which could adversely affect our ability to collect on loans and comply
with statutory requirements.
We depend on our loan servicing software, collection facilities and on
telecommunications lines to transmit and process information among our various
facilities. We use a standard program to prepare and store our off-site back-up
tapes of our main systems applications and data files on a routine basis. We
regularly revise our contingency plan, however, the plan as revised may not
prevent a systems failure or allow us to timely resolve any systems failures.
Also, a natural disaster, calamity, or other significant event that causes
long-term damage to any of these facilities or that interrupts our
telecommunications networks could have a material adverse effect on our
operations.
Increased competition could adversely affect our operations and
profitability.
Our primary competitors are the numerous buy here-pay here used car
dealers that operate in the sub-prime segment of the used car sales industry. We
attempt to distinguish ourselves from our competitors through name recognition
and other factors. However, the advertising and infrastructure required by these
efforts increase our operating expenses. There is no assurance that we can
successfully distinguish ourselves and compete in the industry. In addition, in
recent years a number of larger companies with significant financial and other
resources have entered or announced plans to enter the used car sales industry.
Although these companies do not currently compete with us in the sub-prime
segment of the market, they do compete with us in the purchase of inventory,
which results in increased costs for used cars and lower margins. They could
also enter the sub-prime segment of the market at any time.
Increased competition may cause downward pressure on the margins or
interest rates that we charge on loans
<PAGE>
originated by our dealerships which could have a material effect on the value
of our securities.
The success of our operations depends on certain key personnel.
We believe that our ability to successfully implement our business
strategy and to operate profitably depends on the continued employment of our
senior management team. The unexpected loss of the services of any of our key
management personnel or inability to attract new management when necessary could
have a material adverse effect on our operations. We do not currently maintain
key person life insurance on any member of our senior management team.
We may issue stock in the future that will dilute the value of our
existing stock.
We have the ability to issue common stock or securities exercisable
for, or convertible into common stock that may dilute the value of the
securities held by our existing stockholders.
The voting power of our principal stockholder, Crown, may limit your
voting rights.
At April 30, 2000 Crown owned shares of the Company's preferred stock
which is convertible into common stock at Crown's election. If converted, Crown
would then own approximately 70% of the Company's outstanding common stock. As a
result, Crown has a significant influence upon our activities as well as on all
matters requiring approval of our stockholders. These matters include electing
or removing members of our board of directors, engaging in transactions with
affiliated entities, causing or restricting our sale or merger, and changing our
dividend policy. The interests of Crown may conflict with the interests of other
stockholders.
ITEM 7A-QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks on its financial instruments
from changes in interest rates. The Company does not use financial instruments
for trading purposes or to manage interest rate risks. The Company's earnings
are impacted by its net interest income, which is the difference between the
income earned on interest-bearing assets and the interest paid on interest
bearing notes payable. Increases in market interest rates could have an adverse
effect on profitability. Financial instruments consist of fixed rate finance
receivables and fixed and variable rate notes payable. The Company's finance
receivables generally bear interest at fixed rates ranging from 17% to 26%.
These finance receivables have scheduled maturities from one to 42 months. The
majority of the Company's notes payable contain variable interest rates that
fluctuate with market rates. Therefore, an increase in market interest rates
would decrease the Company's net interest income and profitability. A one
percent increase in our borrowing costs would decrease our pretax income by
approximately $1.0 million over a period of twelve months.
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
On December 1, 1999 the appointment of BDO Siedman, LLP as independent
public accountants for the Company was terminated. On January 28, 2000 the
Company engaged Grant Thornton LLP as its new independent accountants.
During the two most recent fiscal years and subsequent interim period
preceding the engagement of Grant Thornton LLP, the Company did not consult with
Grant Thornton LLP on (i) the application of accounting principles to a
specified transaction, (ii) the type of audit opinion that might be rendered on
the Company's financial statements, or (iii) any matter that was either the
subject of a disagreement or a reportable event.
<PAGE>
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contemplated by this Item is incorporated by reference
from the Registrant's definitive proxy statement for its 2000 annual meeting of
shareholders.
ITEM 11-EXECUTIVE COMPENSATION
The information contemplated by this Item is incorporated by reference
from the Registrant's definitive proxy statement for its 2000 annual meeting of
shareholders.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contemplated by this Item is incorporated by reference
from the Registrant's definitive proxy statement for its 2000 annual meeting of
shareholders.
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contemplated by this Item is incorporated by reference
from the Registrant's definitive proxy statement for its 2000 annual meeting of
shareholders.
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
Financial statements
--------------------
Report of Independent Certified Public Accountants
Consolidated Balance Sheets of Smart Choice
Automotive Group, Inc. as of April 30, 2000 and 1999
Consolidated Statements of Operations of Smart Choice
Automotive Group, Inc. for the years ended April 30,
2000 and 1999, the four month period ended April 30,
1998 and the year ended December 31, 1997
Consolidated Statements of Stockholders' Equity for
the years ended April 30, 2000 and 1999, the four
month period ended April 30, 1998 and the year ended
December 31, 1997
Consolidated Statements of Cash Flows for the years
ended April 30, 2000 and 1999, the four month period
ended April 30, 1998 and for the year ended December
31, 1997.
Notes to Consolidated Financial Statements
Financial statement schedules
-----------------------------
Omitted because not applicable or because data is
reflected in the Notes to Consolidated Financial
Statements
<PAGE>
Exhibits
--------
The following exhibits are filed with or incorporated by reference into
this Form 10-K:
<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.
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
3.2.6 Sixth Articles of Amendment to Filed herewith.
Articles of Incorporation
3.2.7 Certificate of Amendment of Articles Filed herewith.
of Incorporation effecting 1-for-20
reverse split of common stock
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.
10.1 1998 Executive Incentive Compensation Exhibit A to Proxy Statement filed on June 9, 1998.
Plan
10.2 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>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description Filed Herewith or Incorporated by Reference to:
--- ------------------- -----------------------------------------------
<S> <C> <C>
10.3 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.
10.4 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.
10.5 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")
10.6 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
10.7 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
10.8 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
10.9 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description Filed Herewith or Incorporated by Reference to:
--- ------------------- -----------------------------------------------
<S> <C> <C>
10.10 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.
10.11 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.
10.12 Second Amended and Restated Loan and Exhibit 10.19 to Form 10-K filed on April 15, 1999
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.
10.13 Guaranty to Finova from the Company Exhibit 4.5 to Form 10-Q, filed on May 20, 1997.
dated January 13, 1997.
10.14 Guaranty to Finova from the SC Exhibit 10.19.2 to Form 10-K filed on April 15, 1999
Holdings, Inc.
10.15 Guaranty to Finova from the Company. Exhibit 10.19.3 to Form 10-K filed on April 15, 1999
10.16 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.
10.17 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.
10.18 Tenth Amended and Restated Promissory Exhibit 10.20.2 to Form 10-K filed on April 15, 1999
Note dated November 9, 1998, between
FFG, Liberty Finance Company, Smart
Choice Receivable Holdings Company and
First Choice Auto Finance, Inc.
10.19 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.
10.20 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.
10.21 Schedule to Second Amended and Restated Exhibit 10.21.2 to Form 10-K filed on April 15, 1999
Loan and Security Agreement, dated
November 9, 1998, FFG, Liberty Finance
Company and First Choice Auto Finance,
Inc., borrower.
10.22 Inter-creditor Agreement between Exhibit 10.21.3 to Form 10-K filed on April 15, 1999
Manheim Automotive Financial Services,
Inc. and Finova Capital Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description Filed Herewith or Incorporated by Reference to:
--- ------------------- -----------------------------------------------
<S> <C> <C>
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 Promissory Note dated February 24, Exhibit 10.9 to Form 8-K filed on March 5, 1998.
1998, FCAF, maker, Manheim Automotive
Financial Services, Inc., payee.
10.30 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.
10.31 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description Filed Herewith or Incorporated by Reference to:
--- ------------------- -----------------------------------------------
<S> <C> <C>
10.32 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.
10.33 Lease between the Company, Lessor and Exhibit 10.92 to Form 8 filed a September 8, 1999
Ecklers Industries LLC, Lessee, dated
August 26, 1999
10.34 Agreement for the sale of the business Exhibit 10.93 to Form 10-Q filed on November 22, 1999
and net assets of First Choice Stuart
1, Inc. and First Choice Stuart 2, Inc.
to L& J Automotive Investments, Inc.
and Oceanside Motorcars, Inc.
10.35 Stock Purchase Agreement dated December Exhibit 10.94 to Form 8-K filed on December 8, 1999
1, 1999 by and between Crown Group,
Inc. and Smart Choice Automotive Group,
Inc.
11.1 Statement re Computation of Earnings *
Per Share.
16.1 Letter from BDO Seidman LLP dated Exhibit 16.1 to form 8-K filed on December 8, 1999
December 1, 1999
27.1 Financial Data Schedule (for SEC use Filed herewith.
only)
</TABLE>
* Information regarding the computation of earnings per share is set forth
in the Notes to Consolidated Financial Statements.
REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K/A on March 1, 2000 relating to
the recapitalization of PAACO and the acquisition of PAACO by the Company.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on August 11, 2000.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ James Edward Ernst
-----------------------------
James Edward Ernst
President and Chief Executive Officer
By: /s/ Joseph B. Cavalier
------------------------------
Joseph B. Cavalier
Vice President and Chief Financial Officer
(principal financial and accounting 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 R. McMurphy Chairman of the Board August 11, 2000
----------------------
Edward R. McMurphy
/s/ James Edward Ernst President, Chief Executive August 11, 2000
---------------------- Officer and Director
James Edward Ernst
/s/ Tilman J. Falgout, III Assistant Secretary and Director August 11, 2000
--------------------------
Tilman J. Falgout
/s/ Larry Lange Vice President and Director August 11, 2000
---------------
Larry Lange
/s/ Gary R. Smith Vice President and Director August 11, 2000
-----------------
Gary R. Smith
/s/ Robert J. Abrahams Director August 11, 2000
----------------------
Robert J. Abrahams
</TABLE>
<PAGE>
APPENDIX A
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Smart Choice Automotive Group, Inc.
We have audited the accompanying consolidated balance sheets of Smart Choice
Automotive Group, Inc. as of April 30, 2000 and 1999, and related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended, the four months ended April 30, 1998 and the year ended December 31,
1997. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Smart Choice
Automotive Group, Inc. as of April 30, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, the four months ended April 30, 1998 and the year ended December 31, 1997
in conformity with accounting principles generally accepted in the United States
of America.
GRANT THORNTON LLP
Dallas, Texas
June 30, 2000, except for the last paragraph of
Note G, as to which date is July 11, 2000
A-1
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
APRIL 30,
----------------------
ASSETS 2000 1999
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 1,883 $ 63
Finance receivables, net 132,855 47,757
Other receivables 1,029 727
Inventories 12,190 6,771
Property and equipment, net 11,487 3,825
Goodwill, net 6,034 --
Prepaids and other assets 577 413
Refundable income taxes -- 102
Due from parent 528 --
Deferred income taxes, net 12,382 716
-------- --------
$178,965 $ 60,374
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 13,857 $ 4,200
Revolving credit facility 130,367 41,824
Other borrowings 10,773 4,939
Income taxes payable 3,133 --
Sales taxes payable 4,207 2,714
-------- --------
Total liabilities 162,337 53,677
Contingent redemption value of put options 533 --
Commitments and contingencies -- --
Stockholders' equity:
Series E convertible preferred stock $.01 par value; 2,000,000 shares
authorized; 1,469,551 shares issued and outstanding; liquidation
value of $1,469,551 15 --
Common stock, $.01 par value; 2,500,000 shares
authorized; 2,444,394 and 143,264 shares issued and outstanding 24 1
Additional paid-in capital 13,891 7,642
Retained earnings (accumulated deficit) 2,165 (946)
-------- --------
Total stockholders' equity 16,095 6,697
-------- --------
$178,965 $ 60,374
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-2
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED APRIL 30, ENDED YEAR ENDED
---------------------- APRIL 30, DECEMBER 31,
2000 1999 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales of used cars $108,583 $ 61,848 $ 17,674 $ 43,115
Less: Cost of used cars sold 67,594 41,858 10,539 29,324
Provision for credit losses 21,369 9,926 648 7,785
-------- -------- -------- --------
19,620 10,064 6,487 6,006
Interest income
Interest income 21,233 8,880 1,982 4,687
Portfolio interest expense 9,404 4,879 1,350 2,747
-------- -------- -------- --------
11,829 4,001 632 1,940
-------- -------- -------- --------
Income before operating
expenses 31,449 14,065 7,119 7,946
Operating expenses
Selling, general and administrative 25,274 15,860 6,114 9,284
Depreciation and amortization 819 392 77 164
Other expense (income) 207 -- -- (258)
-------- -------- -------- --------
26,300 16,252 6,191 9,190
-------- -------- -------- --------
Income (loss) before
income taxes 5,149 (2,187) 928 (1,244)
Income tax expense (benefit) 2,038 (775) 343 (293)
-------- -------- -------- --------
Net income (loss) $ 3,111 $ (1,412) $ 585 $ (951)
======== ======== ======== ========
Net income (loss) per common share
Basic $ 3.04 $(197.11) $ 81.63 $(188.24)
Diluted $ 0.37 $(197.11) $ 0.08 $(188.24)
Weighted average shares
Basic 1,023 7 7 5
Diluted 8,386 7 7,355 5
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-3
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except number of shares)
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS TOTAL
------------------------- -------------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY (DEFICIT)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997 -- $ -- 101,000 $ 2 $ -- $ 832 $ 834
Net loss -- -- -- -- -- (951) (951)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at January 1, 1998 -- -- 101,000 2 -- (119) (117)
Sale of common stock -- -- 42,264 (1) 4,642 -- 4,641
Net income -- -- -- -- -- 585 585
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at April 30, 1998 -- 143,264 1 4,642 466 5,109
Net loss -- -- -- -- -- (1,412) (1,412)
Capital contributions from
stockholders -- -- -- -- 3,000 -- 3,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at April 30, 1999 -- -- 143,264 1 7,642 (946) 6,697
Recapitalization and acquisition
of Old Smart Choice 1,469,551 15 48,744,608 487 5,785 -- 6,287
Net income -- -- -- -- -- 3,111 3,111
One for twenty reverse stock
split (Note G) -- -- (46,443,478) (464) 464 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at April 30, 2000 1,469,551 $ 15 2,444,394 $ 24 $ 13,891 $ 2,165 $ 16,095
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-4
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED APRIL 30, ENDED YEAR ENDED
------------------------- APRIL 30, DECEMBER 31,
2000 1999 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 3,111 $ (1,412) $ 585 $ (951)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Provision for credit losses 21,369 9,926 648 7,785
Deferred income taxes 1,256 (775) 343 253
Depreciation and amortization 819 392 77 164
Accretion of purchase discount (585) -- -- --
Other 120 133 -- --
Changes in assets and liabilities, net of
the effects of acquisitions
Inventories 17,457 8,777 920 5,386
Other receivables 386 (271) (400) (151)
Prepaids and other assets 743 (70) 315 920
Accounts payable and accrued
liabilities 2,385 1,583 1,899 (1,047)
Income tax payable/receivable 102 453 -- --
--------- --------- --------- ---------
Net cash provided by operating
activities 47,163 18,736 4,387 12,359
Investing activities
Finance receivable originations (105,139) (58,335) (12,330) (36,253)
Collections of finance receivables 48,371 23,253 2,800 11,325
Purchases of property and equipment (2,621) (930) (1,712) (760)
Cash acquired in acquisition 531 -- -- --
--------- --------- --------- ---------
Net cash used in investing
activities (58,858) (36,012) (11,242) (25,688)
Financing activities
Proceeds from revolving credit facility, net 14,110 15,774 2,640 10,959
Payments on other borrowings (2,335) (5,391) (1,475)
Proceeds from other borrowings 1,740 3,935 1,025 2,284
Capital contributions from stockholders -- 3,000 -- --
Payment of debt issuance costs -- (150) -- --
Proceeds from sale of stock -- -- 4,641 --
--------- --------- --------- ---------
Net cash provided by financing
activities 13,515 17,168 6,831 13,243
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 1,820 (108) (24) (86)
Cash and cash equivalents at beginning of period 63 171 195 281
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 1,883 $ 63 $ 171 $ 195
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-5
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND ACQUISITION
Smart Choice Automotive Group, Inc. and subsidiaries (collectively, the
Company) sell and finance used vehicles through their used car dealerships
located in the Dallas and Houston metropolitan areas and central Florida.
The Company's target market consists of borrowers who have limited access to
consumer financing due to the lack of or limited credit histories.
Effective December 1, 1999, the Company acquired all of the outstanding
stock of Paaco Automotive Group, Inc. and Premium Auto Acceptance
Corporation (collectively PAACO) in exchange for 1,469,551 shares of the
Company's Series E preferred stock. As a result of the acquisition, the
stockholders of Paaco, including its majority stockholder, Crown Group, Inc.
(Crown) became the controlling stockholders of the Company.
For financial reporting purposes, PAACO is deemed to be the acquiring entity
and the acquisition has been reflected as a recapitalization of PAACO and
the acquisition by PAACO of Smart Choice Automotive Group, Inc. and
subsidiaries (First Choice). Accordingly, the accompanying financial
statements include the accounts of PAACO as of and for all periods and the
accounts of First Choice from the date of acquisition.
The acquisition of First Choice was accounted for using the purchase method
of accounting. The consideration, valued at $6,287,000 was allocated to the
First Choice assets and liabilities acquired based on their estimated fair
values, resulting in goodwill of approximately $6,254,000.
The following unaudited pro forma condensed results of operations of the
Company for the years ended April 30, 2000 and 1999, give effect to the
acquisition of First Choice as if it had occurred on May 1, 1999 and 1998,
respectively. The unaudited pro forma results of operations are not
necessarily indicative of future results or the results that would have
occurred had the acquisition taken place on the dates indicated. Loss per
share is calculated after giving effect to the reverse stock split (See Note
G).
YEARS ENDED APRIL 30,
--------------------------
2000 1999
-------- --------
(In thousands,
except per share data)
Revenue $177,348 $169,761
Net loss (8,321) (11,445)
Loss per share
Basic and diluted $ (3.40) $ (4.68)
A-6
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual amounts could
differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company provides financing in connection with the sale of substantially
all of its used vehicles. These sales are made primarily to customers
residing in Texas and Florida.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The Company originates installment contracts from the sale of used vehicles
at its dealerships. Finance receivables consist of contractually scheduled
payments from installment contracts, net of unearned finance charges and an
allowance for credit losses. The installment sale contracts typically
include interest at rates ranging from 19% to 26% per annum and provide for
payments over periods ranging from 24 to 42 months. PAACO originates its
loans using the simple interest method, where no unearned finance charge is
established at loan origination but interest income is recognized daily
based on the outstanding principal balance and stated interest rate. First
Choice originates its loans using the add-on interest method which records
the interest to be recognized over the life of the loans as unearned finance
charges and amortizes it to income using the interest method, which
approximates simple interest. The recognition of interest is suspended if
collection becomes doubtful, generally 60 days past due, and is resumed when
the loan becomes current.
A-7
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES - Continued
The Company maintains an allowance for credit losses at a level it considers
sufficient to cover anticipated losses in the collection of its finance
receivables. The allowance for credit losses is based upon a periodic
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay and collateral values. Since
the estimate of losses is based upon a number of factors, most of which are
subject to change over time, it is reasonably possible that a change in such
factors may cause the allowance for credit losses to increase or decrease by
a material amount in the near term. The allowance for credit losses is
periodically reviewed by management with any changes reflected in current
operations.
INVENTORIES
Used vehicle inventories are valued at the lower of cost or market on a
specific identification basis. Repossessed vehicles are recorded at the
lower of cost or market, which approximates wholesale value. Vehicle
reconditioning costs are capitalized as a component of inventory.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets of thirty-nine years for buildings and five to seven years for
equipment. Leasehold improvements are stated at historical cost and are
amortized over five to seven years, which approximates the lease period.
Costs of repair and maintenance are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled.
ADVERTISING
The Company expenses the costs of advertising as incurred. Advertising
expense was $2,029,620, $1,389,568, $338,209 and $840,771 for the years
ended April 30, 2000 and 1999, the four months ended April 30, 1998 and the
year ended December 31, 1997, respectively.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
period to be benefited of twenty-five years. At April 30, 2000, accumulated
amortization of goodwill was $220,127.
A-8
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
INCOME (LOSS) PER SHARE
Basic income per share is computed by dividing net income by the average
number of common shares outstanding during the period. Diluted income per
share takes into consideration the potentially dilutive effect of common
stock equivalents, such as outstanding stock options, convertible preferred
stock, and warrants, that if exercised or converted into common stock would
then share in the income of the Company.
All references to share and per share information have been adjusted to give
effect to the shares of preferred stock received by the PAACO stockholders
in connection with the acquisition of First Choice on December 1, 1999.
All income per share amounts have been restated to give effect to the one
for twenty reverse stock split. (See Note G)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options to
employees is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of grant over the amount the employee
must pay to acquire the stock.
A-9
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - FINANCE RECEIVABLES
Finance receivables consist of the following:
APRIL 30,
--------------------------
2000 1999
-------- --------
(In thousands)
Finance receivables $199,629 $ 67,770
Unearned finance charges (34,483) (12,426)
Allowance for credit losses (32,291) (7,587)
-------- --------
Finance receivables, net $132,855 $ 47,757
======== ========
The following table summarizes changes in the allowance for credit
losses:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED APRIL 30, ENDED YEAR ENDED
----------------------- APRIL 30, DECEMBER 31,
2000 1999 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 7,587 $ 4,728 $ 6,152 $ 2,673
Acquisition of business (Note A) 23,559 -- -- --
Provision for credit losses 21,369 9,926 648 7,785
Charge-offs, net of recoveries (20,224) (7,067) (2,072) (4,306)
-------- -------- -------- --------
Balance at end of period $ 32,291 $ 7,587 $ 4,728 $ 6,152
======== ======== ======== ========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
APRIL 30,
---------------------
2000 1999
------- ------
(In thousands)
Building and leasehold improvements $ 6,409 $2,386
Furniture and equipment 3,830 1,277
------- ------
10,239 3,663
Less accumulated depreciation and amortization (1,265) (758)
------- ------
8,974 2,905
Land 2,513 920
------- ------
$11,487 $3,825
======= ======
A-10
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NOTES PAYABLE
Notes payable consist of the following:
APRIL 30,
--------------------------
2000 1999
-------- -------
(In thousands)
Revolving credit facility $130,367 $41,824
Subordinated notes payable 3,000 2,850
Mortgages and other notes payable 6,843 2,089
Other 930 --
-------- -------
10,773 4,939
-------- -------
$141,140 $46,763
======== =======
The revolving credit facility is collateralized by substantially all of the
Company's finance receivables and inventories and contains various reporting
and performance covenants including (i) maintenance of certain financial
ratios and tests, (ii) limitations on borrowings from other sources, (iii)
restrictions on certain operating activities, and (iv) restrictions on
distributions to shareholders.
In December 1999, as a result of the acquisition of First Choice, the
revolving credit facility was amended to service the Company and provides
for borrowings of up to $160 million. $60 million for PAACO and $100 million
for First Choice. Crown guarantees the obligation for up to $5 million. The
revolving facility matures in November 2004 and accrues interest on
borrowings at prime plus 2.25% (11.25% at April 30, 2000). The Company had
available capacity under the facility at April 30, 2000 of $4.3 million,
$1.1 million for First Choice and $3.2 million for PAACO.
The advance rates on eligible finance receivables declines from 85% to 70%
for First Choice and 72.5% to 67.5% for PAACO over the term of the credit
facility. Concurrent with the decrease in the advance rate, the interest
rate will decrease to prime plus 1.75%.
Subordinated notes payable at April 30, 2000 represents $3 million payable
to Crown. The subordinated notes payable bear interest at 8.5% per annum,
and mature on March 26, 2002.
The mortgages payable consist of four notes, all collateralized by land and
certain buildings, to two financial institutions and an individual. The two
notes with one financial institution accrue interest at prime plus 2.25% and
mature in December 2015. The other mortgage note payable to a financial
institution accrues interest at 8.25% and matures in May 2003. The mortgage
note payable to an individual accrues interest at 9.5% and matures in May
2001.
A-11
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NOTES PAYABLE - CONTINUED
A summary of debt maturities as of April 30, 2000 is as follows:
FOR THE YEARS
ENDING APRIL 30,
----------------
(In thousands)
2001 $ 2,342
2002 6,899
2003 345
2004 664
2005 130,391
Thereafter 499
--------
$141,140
========
NOTE F - INCOME TAXES
Prior to December 1, 1999, PAACO was included in the federal tax return of
Crown, its parent. Federal income taxes were allocated to PAACO as if it
filed its own return. Effective December 1, 1999, the Company became a
separate taxpayer for Federal tax purposes. The provision (benefit) for
income taxes is as follows:
FOUR MONTHS
YEAR ENDED APRIL 30, ENDED YEAR ENDED
--------------------- APRIL 30, DECEMBER 31,
2000 1999 1998 1997
------- ------- ------- -------
(In thousands)
Current $ 782 $ -- $ -- $ (546)
Deferred 1,256 (775) 343 253
------- ------- ------- -------
$ 2,038 $ (775) $ 343 $ (293)
======= ======= ======= =======
A-12
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as
follows:
APRIL 30,
-------------------------
2000 1999
------- ------
(In thousands)
Deferred tax assets
Allowance for loan losses $11,539 $2,096
Net operating loss carryforwards 4,684 2,626
Other 1,806 133
------- ------
Total deferred tax assets 18,029 4,855
Deferred tax liabilities
Discount on loans sold 1,456 4,099
Other 442 40
------- ------
Total deferred tax liabilities 1,898 4,139
------- ------
16,131 716
Less valuation allowance (3,749) --
------- ------
$12,382 $ 716
======= =======
The deferred tax valuation allowance at April 30, 2000 is the result of an
analysis performed on the net operating loss carryforwards acquired in the
acquisition of First Choice and the Company's ability to utilize those net
operating loss carryforwards. Reduction of the valuation allowance in the
future will reduce goodwill.
A reconciliation of income tax expense (benefit) using the statutory federal
income tax rate of 34% to actual income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS
APRIL 30, ENDED YEAR ENDED
------------------ APRIL 30, DECEMBER 31,
2000 1999 1998 1997
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Income tax expense (benefit) at statutory rate $1,751 $ (744) $ 316 $ (423)
State income taxes, net of federal benefit 154 (66) 28 (37)
Other 133 35 (1) 167
------ ------ ------ ------
Income tax expense (benefit) $2,038 $ (775) $ 343 $ (293)
====== ====== ====== ======
</TABLE>
A-13
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - STOCKHOLDERS' EQUITY
SERIES E CONVERTIBLE PREFERRED STOCK
On November 22, 1999, the Company authorized 2,000,000 shares of Series E
Convertible Preferred Stock having a par value of $.01 per share. Each share
of Series E Convertible Preferred Stock may be converted into five shares of
the Company's common stock, is entitled to five votes per share on all
matters upon which the common shareholders are entitled to vote and is
entitled to dividends equal to five times the amount of dividends paid on
the Company's common stock. The Series E Convertible Preferred Stock has a
liquidation preference of $1 per share.
CONTINGENT REDEMPTION VALUE OF PUT OPTIONS
In the acquisition of First Choice, the Company assumed an obligation
covering put options of approximately 19,000 shares of its common stock. The
put options require the Company to purchase 5,563 of the aforementioned
shares at $80.00 per share and 13,438 shares at the average closing price of
the stock for the preceding 20 days (the Purchase Price). The redemption
value of the options, which represents the options purchase price multiplied
by the number of shares under option, is presented in the accompanying
consolidated balance sheet as "Contingent Redemption Value of Put Options."
REVERSE STOCK SPLIT
On July 11, 2000, the Company's Board of Directors authorized a 1 for 20
reverse split of its common stock for all stockholders of record at the
close of business on July 26, 2000. The reverse stock split has been
retroactively reflected in the Company's balance sheet as of April 30, 2000
and the statement of stockholders' equity for the year ended April 30, 2000.
All share and per share amounts have been restated to give effect to the
reverse stock split.
A-14
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - EARNINGS PER SHARE
Basic and diluted income (loss) per share were computed as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED APRIL 30, ENDED YEAR ENDED
-------------------- APRIL 30, DECEMBER 31,
2000 1999 1998 1997
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss) $ 3,111 $ (1,412) $ 585 $ (951)
======= ======== ======= =======
Weighted average shares outstanding - basic 1,023 7 7 5
Dilutive options and warrants 15 -- -- --
Convertible preferred stock 7,348 -- 7,348 --
------- -------- ------- -------
Weighted average shares outstanding - diluted 8,386 7 7,355 5
======= ======== ======= =======
Income (loss) per share
Basic $ 3.04 $(197.11) $ 81.63 $188.24
Diluted $ 0.37 $(197.11) $ 0.08 $188.24
Antidilutive options and warrants
not included 139 -- -- --
</TABLE>
NOTE I - STOCK OPTIONS AND WARRANTS
STOCK WARRANTS
At April 30, 2000, the Company had outstanding warrants to purchase 44,203
shares of its common stock. These warrants expire beginning in November 2000
through June 2003 and had a weighted average exercise price of $247 per
share. At April 30, 2000 all of the warrants were exercisable.
A-15
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCK OPTIONS AND WARRANTS - CONTINUED
STOCK OPTIONS PLANS
The following table summarizes information about stock option activity under
qualified stock option plans for the year ended April 30, 2000 and has been
restated to give effect to the reverse stock split (see Note G). Prior to
December 1, 1999, the Company had no stock options outstanding.
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -------
Outstanding at May 1, 1999 -- $ --
Resulting from acquisition 94,768 179.20
------ -------
Outstanding at April 30, 2000 94,768 $179.20
====== =======
The following table summarizes information about stock options outstanding
and exercisable at April 30, 2000 and has been restated to give effect to
the reverse stock split (see Note G):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF SHARES EXERCISE REMAINING SHARES EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
---------------- ----------- -------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
EMPLOYEE OPTIONS
$67.60 to $100.00 12,712 $ 82.00 2.6 years 12,712 82.00
$120.00 to $170.00 4,849 151.80 2.4 years 4,849 151.80
$180.00 to $260.00 49,357 193.60 2.7 years 49,357 193.60
------ ------- ------ ------
66,918 $169.40 66,918 169.40
====== ======= ====== ======
NON-EMPLOYEE
NON-PLAN OPTIONS
$70.40 to $120.00 6,375 $104.80 1.7 years 6,375 $104.80
$175.00 to $260.00 18,975 216.40 1.9 years 18,975 216.40
$350.00 2,500 350.00 1.7 years 2,500 350.00
------ ------- ------ -------
27,850 $202.80 27,850 $202.80
====== ======= ====== =======
</TABLE>
NOTE J - BENEFIT PLAN
The Company has a 401(k) benefit plan for all of its employees meeting
certain eligibility requirements. The plan provides for voluntary employee
contributions and the Company matches 25% of employee contributions. For the
year ended April 30, 2000, the Company contributed $19,000 to the plan. No
company contributions were made in prior periods.
A-16
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - FINANCIAL INSTRUMENTS
The table below summarizes information about the fair value of the Company's
financial instruments:
APRIL 30, 2000
-------------------------
CARRYING FAIR
VALUE VALUE
------- -------
(In thousands)
Financial assets:
Cash and cash equivalents $ 1,883 $ 1,883
Finance receivables, net 132,855 126,212
Financial liabilities:
Revolving credit facility 130,367 130,367
Other borrowings 10,773 10,773
APRIL 30, 1999
-------------------------
CARRYING FAIR
VALUE VALUE
------- -------
(In thousands)
Financial assets:
Cash and cash equivalents $ 63 $ 63
Finance receivables, net 47,757 45,369
Financial liabilities:
Revolving credit facility 41,824 41,824
Other borrowings 4,939 4,939
Because no market exists for certain of the Company's financial instruments,
fair value estimates are based on judgments and estimates regarding yield
expectations of investors, credit risk, normal cost of administration of
finance receivables and other risk characteristics, including interest rate
and prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect these
estimates.
A-17
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - FINANCIAL INSTRUMENTS - CONTINUED
The following methods and assumptions were used to estimate the fair value
for each class of financial instrument for which it is practical to estimate
fair value:
CASH AND CASH EQUIVALENTS: The carrying amount is considered to be a
reasonable estimate of fair value.
FINANCE RECEIVABLES: The fair value was estimated based on management's
knowledge of the sale of other finance receivable portfolios within the
sub-prime auto industry.
REVOLVING CREDIT FACILITY AND OTHER BORROWINGS: The carrying amounts of the
Company's revolving credit facility and other borrowings approximate fair
value as the interest rates on such debt approximates market.
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company leases premises and equipment under operating leases with
various expiration dates. Future minimum lease obligations as of April 30,
2000 are as follows:
FOR THE YEARS
ENDING APRIL 30, (In thousands)
----------------
2001 $3,189
2002 2,500
2003 1,847
2004 1,267
2005 1,072
------
$9,875
======
Rent expense for the years ended April 30, 2000 and 1999, the four months
ended April 30, 1998 and the year ended December 31, 1997 was $1,840,000,
$1,380,000, $380,000 and $680,000, respectively.
A-18
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMITMENTS AND CONTINGENCIES - CONTINUED
LITIGATION
In March 1999, certain shareholders of the Company filed two putative class
action lawsuits against the Company and certain of its 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 the
Company's publicly traded securities between April 15, 1998 and February 26,
1999. These lawsuits were filed following the Company's announcement on
February 26, 1999 that a preliminary determination had been reached that the
net income it had announced on February 10, 1999 for the fiscal year ended
December 31, 1998 was likely overstated in a material, undetermined amount.
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 the Company's securities at
artificially inflated prices. The plaintiffs seek unspecified damages. The
Company intends to contest these claims vigorously; however, the Company
cannot predict the ultimate resolution of these actions.
In the ordinary course of business, the Company has become a defendant in
various types of legal proceedings. Although the Company cannot determine at
this time the amount of the ultimate exposure from these ordinary course of
business lawsuits, if any, management, based on the advice of counsel, does
not expect the final outcome of any of these actions, individually or in the
aggregate, to have a material adverse effect on the Company's financial
position, results of operations or cash flows.
NOTE M - RELATED PARTIES
PAACO sends the majority of its vehicle trade-ins to an auction company,
which is 50% owned by its minority shareholders, under terms management
believes are equal to or more favorable than could be obtained from an
unrelated party.
Interest expense related to affiliated parties was approximately $598,000,
$425,000, $62,000 and $215,000, for the years ended April 30, 2000 and
1999, the four months ended April 30, 1998 and the year ended December 31,
1997, respectively.
A-19
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED APRIL 30, ENDED YEAR ENDED
-------------------- APRIL 30, DECEMBER 31,
2000 1999 1998 1997
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Inventories acquired upon repossession $17,310 $12,026 $ 2,072 $ 6,164
Interest paid 10,072 4,692 1,385 2,747
Income taxes paid -- 102 -- 501
</TABLE>
In connection with the Company's acquisition of First Choice, liabilities
assumed were as follows (in thousands):
Fair value of assets acquired $97,230
Common stock issued (6,287)
-------
Liabilities assumed $90,943
=======
A-20
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - BUSINESS SEGMENTS
The Company sells and finances used vehicles in two major markets in the
United States. The First Choice market is based in Florida and the PAACO
market is based in Texas. Prior to the acquisition of Smart Choice on
December 1, 1999, the Company operated in one geographic business segment.
The Company's geographic business segment data for the year ended April 30,
2000 is as follows:
<TABLE>
<CAPTION>
SMART
CHOICE PAACO CONSOLIDATED
--------- --------- ------------
<S> <C> <C> <C>
Sales of used cars $ 26,405 $ 82,178 $ 108,583
Less: Cost of used cars sold 15,335 52,259 67,594
Provision for credit losses 8,257 13,112 21,369
--------- --------- ---------
2,813 16,807 19,620
Interest income
Interest income 9,199 12,034 21,233
Portfolio interest expense 3,743 5,661 9,404
--------- --------- ---------
5,456 6,373 11,829
--------- --------- ---------
Income before operating expenses 8,269 23,180 31,449
Operating expenses
Selling, general and administrative 7,208 18,066 25,274
Depreciation and amortization 424 395 819
Other expense (income) (194) 401 207
--------- --------- ---------
7,438 18,862 26,300
--------- --------- ---------
Income before income taxes $ 831 $ 4,318 $ 5,149
========= ========= =========
Capital expenditures $ 970 $ 1,651 $ 2,621
========= ========= =========
Total assets $ 100,246 $ 78,719 $ 178,965
========= ========= =========
</TABLE>
A-21
