U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report March 1, 2000
Commission file number 1-14082
--------
SMART CHOICE AUTOMOTIVE GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-1469577
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5200 S. Washington Avenue, Titusville, Florida 32780
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(407) 269-0834
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
Form 8-K/A
TABLE OF CONTENTS
HEADING PAGE
------- ----
Item 1. Changes in Control of Registrant ..................................3
Item 4. Changes in Registrant's Certifying Accountant .....................4
Item 5. Other Events.......................................................4
Item 7. Exhibits ..........................................................4
SIGNATURES....................................................................5
2
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
On December 1, 1999 the Company completed a merger between a wholly-owned Smart
Choice subsidiary and Paaco Automotive Group, Inc. an 85% owned subsidiary of
Crown Group, Inc. (Nasdaq:CNGR). As a result of the merger and a $3 million cash
investment into the Company, Crown Group, Inc. acquired voting control of the
Company.
The Company and Crown Group, Inc. announced on August 27, 1999, that they had
entered into a letter of intent with respect to Crown's proposed acquisition of
a controlling interest in the Company. The terms of the transaction, as
completed, differ substantially from those outlined in the letter of intent.
Contemporaneously with Crown's equity investment and the merger of its Paaco
subsidiary with the Smart Choice subsidiary, approximately $15.0 million of
Smart Choice's outstanding debt and preferred stock was converted into shares of
Smart Choice common stock. An additional $4.5 million of Smart Choice debt,
acquired by Crown for approximately $2.3 million in cash, was converted into
shares of Series E Convertible Preferred Stock. Following this transaction, the
Company has approximately $2.6 million of subordinated debt outstanding. In
connection with the transaction, the combined company obtained a restructured
and restated $160 million senior finance receivables and inventory credit
facility, which contains more favorable terms than the facilities it replaced.
In exchange for its $3 million cash investment, its contribution of Paaco, and
the conversion of certain debt obligations, Crown received shares of Series E
Convertible Preferred Stock representing 70% of the ownership and voting rights
of the Company on an "as converted" basis. The minority shareholders of Paaco
received shares of Series E Convertible Preferred Stock representing 5% of the
Company's outstanding voting securities. The holders of certain converted Smart
Choice debt and preferred stock received shares of the Company's common stock
equivalent to approximately 20.7% of the outstanding voting securities.
Previously existing Smart Choice shareholders now own approximately 4.3% of the
outstanding Smart Choice voting securities. The holders of the shares of Smart
Choice common stock issued in connection with the transaction and Crown and
other holders of Series E Convertible Preferred Stock have certain registration
rights.
For its most recent fiscal year ended December 31, 1998, the Company reported
revenues from continuing operations of $95.4 million and a loss from continuing
operations of $7.3 million. For the nine months ended September 30, 1999, the
Company reported revenues of $71.4 million and a loss from continuing operations
of $24.2 million.
James E. Ernst has been appointed President and Chief Executive Officer of Smart
Choice. Mr. Ernst has a long association with Crown and has recently been
responsible for the restructuring of Paaco's operations. He is a Certified
Public Accountant and was formerly President and Chief Executive Officer of both
Casino Magic Corp. and Casino America, Inc.
Gary Smith will continue to manage the Florida-based operations of Smart Choice,
as President of First Choice, while Larry Lange remains responsible for the
Company's Texas-based operations, as President of Paaco. Joe Cavalier has joined
Smart Choice as its new Chief Financial Officer, and Ron Anderson will have
principal responsibility for the Company's finance receivable activities.
3
<PAGE>
Smart Choice's board of directors includes Edward R. McMurphy as Chairman, and
T. J. Falgout, III - both senior executives of Crown. Robert Abrahams, James E.
Ernst, Gary Smith and Larry Lange comprise the remainder of the Company's board.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On December 1, 1999 the appointment of BDO Seidman, LLP as independent public
accountants for the Company was terminated. On January 28, 2000 Smart Choice
Automotive Group, Inc. engaged Grant Thornton LLP as the Companies 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.
ITEM 5. OTHER EVENTS.
Effective December 1, 1999 the Company elected to change its financial reporting
year end from December 31 to April 30. The Company will file a Form 10-K
covering the transition period.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
<PAGE>
ITEM 7(a)
COMBINED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
YEAR ENDED APRIL 30, 1999, FOUR MONTHS ENDED
APRIL 30, 1998, AND THE YEAR ENDED DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Paaco Automotive Group, Inc.
and Premium Auto Acceptance Corporation
We have audited the accompanying combined balance sheets of Paaco Automotive
Group, Inc. and Premium Auto Acceptance Corporation as of April 30, 1999 and
1998, and related combined statements of operations, stockholders' equity and
cash flows for the year ended April 30, 1999, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements 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 combined financial position of Paaco Automotive
Group, Inc. and Premium Auto Acceptance Corporation as of April 30, 1999 and
1998, and the combined results of their operations and their combined cash flows
for the year ended April 30, 1999, the four months ended April 30, 1998 and the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Dallas, Texas
January 21, 2000
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 62,832 $ 170,618
Finance receivables, net 47,757,350 34,191,804
Other receivables 727,391 832,244
Inventories 6,770,755 3,741,679
Property and equipment, net 3,825,308 3,287,267
Prepaids and other assets 412,446 --
Refundable income taxes 102,000 546,125
Deferred tax asset, net 715,950 --
------------ ------------
$ 60,374,032 $ 42,769,737
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility $ 41,823,680 $ 26,049,785
Subordinated notes payable 2,850,000 3,623,217
Mortgages and other notes payable 2,089,340 2,771,857
Accounts payable and accrued liabilities 4,199,718 3,074,856
Deferred sales tax 2,713,914 2,090,303
Deferred tax liability -- 50,418
------------ ------------
Total liabilities 53,676,652 37,660,436
Commitments and contingencies -- --
Stockholders' equity:
Paaco Automotive Group, Inc.
Common stock, $.01 par value; 1,000,000 shares
authorized; 141,845 shares issued and outstanding 1,418 1,418
Additional paid-in capital 7,642,036 4,642,036
Premium Auto Acceptance Corporation
Common stock, no par value; 100,000 shares authorized;
1,419 shares issued and outstanding 1 1
Retained earnings (accumulated deficit) (946,075) 465,846
------------ ------------
Total stockholders' equity 6,697,380 5,109,301
------------ ------------
$ 60,374,032 $ 42,769,737
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR FOUR MONTHS
ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sale of vehicles $ 61,848,161 $ 17,673,694 $ 43,115,477
Interest income 8,879,904 1,982,176 4,686,943
Other income -- -- 257,536
------------ ------------ ------------
70,728,065 19,655,870 48,059,956
------------ ------------ ------------
Costs and expenses:
Cost of vehicle sales 41,858,247 10,539,064 29,324,439
Selling, general and administrative 15,860,074 6,113,625 9,447,420
Provision for credit losses 9,926,127 647,486 7,784,934
Interest expense 4,878,680 1,350,604 2,746,765
Depreciation and amortization 391,880 76,932 --
------------ ------------ ------------
72,915,008 18,727,711 49,303,558
------------ ------------ ------------
Income (loss) before income taxes (2,186,943) 928,159 (1,243,602)
Provision (benefit) for income taxes (775,022) 343,416 (292,998)
------------ ------------ ------------
Net income (loss) $ (1,411,921) $ 584,743 $ (950,604)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 101,000 $ 2,000 $ -- $ 831,707 $ 833,707
Net loss -- -- -- (950,604) (950,604)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 101,000 2,000 -- (118,897) (116,897)
Sale of common stock 42,264 (581) 4,642,036 -- 4,641,455
Net income -- -- -- 584,743 584,743
----------- ----------- ----------- ----------- -----------
Balances at April 30, 1998 143,264 1,419 4,642,036 465,846 5,109,301
Net loss -- -- -- (1,411,921) (1,411,921)
Capital contributions from
stockholders -- -- 3,000,000 -- 3,000,000
----------- ----------- ----------- ----------- -----------
Balances at April 30, 1999 143,264 $ 1,419 $ 7,642,036 $ (946,075) $ 6,697,380
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR FOUR MONTHS
ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (1,411,921) $ 584,743 $ (950,604)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for credit losses 9,926,127 647,486 7,784,934
Deferred income taxes (775,022) 343,416 253,127
Depreciation and amortization 391,880 76,932 163,606
Amortization of debt issuance costs 132,963 -- --
Changes in assets and liabilities:
Inventories 8,776,605 920,815 5,385,895
Other receivables (270,760) (400,304) (151,315)
Prepaids and other assets (69,736) 314,555 920,098
Accounts payable and accrued liabilities 1,582,639 1,899,505 (1,046,968)
Income tax payable/receivable 452,780 -- --
------------ ------------ ------------
Net cash provided by operating activities 18,735,555 4,387,148 12,358,773
------------ ------------ ------------
Investing activities:
Finance receivable originations (58,335,143) (12,330,182) (36,253,047)
Collections of finance receivables 23,253,652 2,799,595 11,324,885
Purchases of property and equipment (929,921) (1,711,431) (759,970)
------------ ------------ ------------
Net cash used in investing activities (36,011,412) (11,242,018) (25,688,132)
------------ ------------ ------------
Financing activities:
Proceeds from revolving credit facility, net 15,773,805 2,639,910 --
Payments of notes payable to financial institution (500,000) -- 10,958,750
Proceeds from issuance of subordinated notes payable,
mortgages and other notes payable 3,935,183 1,025,000 2,284,091
Payments of subordinated notes payable, mortgages
and other notes payable (4,890,917) (1,475,754) --
Capital contributions from stockholders 3,000,000 -- --
Payment of debt issuance costs (150,000) -- --
Proceeds from sale of stock -- 4,641,455 --
------------ ------------ ------------
Net cash provided by financing activities 17,168,071 6,830,611 13,242,841
------------ ------------ ------------
Net decrease in cash and cash equivalents (107,786) (24,259) (86,518)
Cash and cash equivalents at beginning of period 170,618 194,877 281,395
------------ ------------ ------------
Cash and cash equivalents at end of period $ 62,832 $ 170,618 $ 194,877
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS
These financial statements represent the combined operations of Paaco
Automotive Group, Inc. ("Paaco") and Premium Auto Acceptance Corporation
("Premium"), collectively referred to as the Combined Company. Crown Group,
Inc. ("Crown") acquired an 80% interest in the Combined Company in three
separate transactions in February 1998 (53%), May 1998 (12%) and February
1999 (15%). In July 1999, Crown increased its ownership in the Combined
Company to 85%. Paaco sells, underwrites, and finances used cars and trucks
through its used car dealerships. Premium invests in finance receivables
originated by Paaco.
The Combined Company sells cars and trucks and provides financing primarily
to the Hispanic market in the Dallas/Fort Worth metroplex and in Houston,
Texas. The Combined Company's target market consists of borrowers who have
limited access to consumer financing primarily due to the lack of or limited
credit histories.
Paaco and Premium share common ownership. The combined financial statements
of Paaco and Premium include the accounts of the Combined Company.
Significant intercompany accounts and transactions have been eliminated.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, cash and cash equivalents
includes cash on hand and investments with original maturities of three
months or less.
FINANCE RECEIVABLES
Finance receivables, principally from used vehicle sales to the Hispanic
market in the Dallas/Fort Worth metroplex and Houston, Texas, consist of
installment receivables financed by the Combined Company generally over a
period ranging from 24 to 36 months. Finance receivables are stated at the
amount of remaining payments due less unearned interest and a provision for
credit losses. The unearned interest on finance receivables is recognized as
income over the life of the loan using the interest method. Interest rates
generally range from approximately 15% to 22%.
7
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - 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 estimates are continually reviewed
by management with any changes reflected in current operations.
INVENTORIES
Inventories are valued at the lower of cost or market on a specific
identification basis. Inventories includes vehicles and used parts for
vehicles. Repossessed vehicles are recorded at the lower of cost or market,
which approximates wholesale value. Vehicle reconditioning costs are
capitalized as a component of vehicle cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using an accelerated method over the estimated
useful lives of the respective assets ranging from thirty-nine years for
buildings and five to seven years for equipment. Leasehold improvements are
stated at historical cost AND are amortized over the lease period. Repair
and maintenance expenses are charged to expense as incurred.
REVENUE RECOGNITION
Interest income on finance receivables is recognized using the interest
method. Revenue from the sale of vehicles is recognized upon delivery, when
the sales contract is signed and the down payment has been received.
INCOME TAXES
Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates expected to apply
in the years in which those temporary differences are expected to be
recovered or settled.
8
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE C - FINANCE RECEIVABLES
Finance receivables consist of the following:
APRIL 30,
-------------------------------
1999 1998
------------ ------------
Finance receivables $ 67,769,698 $ 48,759,089
Unearned finance charges (12,425,526) (9,839,605)
Allowance for credit losses (7,586,822) (4,727,680)
------------ ------------
Finance receivables, net $ 47,757,350 $ 34,191,804
============ ============
The following table summarizes changes in the allowance for credit losses:
<TABLE>
<CAPTION>
YEAR FOUR MONTHS
ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period $ 4,727,680 $ 6,152,093 $ 2,673,295
Provision for credit losses 9,926,127 647,486 7,784,934
Charge-offs, net of recoveries (7,066,985) (2,071,899) (4,306,136)
----------- ----------- -----------
Balance at end of period $ 7,586,822 $ 4,727,680 $ 6,152,093
=========== =========== ===========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
APRIL 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Land $ 920,114 $ 920,114
Building and leasehold improvements 2,385,574 1,786,296
Furniture and equipment 1,277,469 979,515
Less accumulated depreciation and amortization (757,849) (398,658)
----------- -----------
Property and equipment, net $ 3,825,308 $ 3,287,267
=========== ===========
</TABLE>
9
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE E - ACQUISITION OF SMART CHOICE AUTOMOTIVE GROUP, INC.
On December 1, 1999, Crown acquired a 70% voting interest in Smart Choice
Automotive Group, Inc. ("Smart Choice") for its 85% interest in the Combined
Company, an additional $3 million cash investment in Smart Choice and the
conversion of a Smart Choice $4.5 million promissory note (which Crown had
contemporaneously acquired for $2.3 million) into Smart Choice equity.
As of November 1, 1999, Smart Choice operated 11 used car dealerships in
Florida and reported revenues of $95.4 million and a loss from continuing
operations of $7.3 million for its fiscal year ended December 31, 1998.
As a result of this transaction, the stockholders of the Combined Company
obtained control of Smart Choice and for accounting and reporting purposes
the Combined Company is deemed to be the acquiror and the reporting entity.
NOTE F - NOTES PAYABLE
Notes payable consist of the following:
APRIL 30,
----------------------------
1999 1998
----------- -----------
Revolving credit facility $41,823,680 $26,049,785
Subordinated notes payable 2,850,000 3,623,217
Mortgages and other notes payable 2,089,340 2,771,857
----------- -----------
$46,763,020 $32,444,859
=========== ===========
The revolving credit facility is collateralized by substantially all of the
Combined Company's finance receivables and inventories. At April 30, 1999,
this credit facility accrued interest at a rate of prime (7.75% at April 30,
1999) plus 3.0%. Interest on the credit facility is paid monthly with the
principal due June 30, 2000. This note was amended on March 8, 1999, to
increase the revolving credit facility to $48,000,000 if the date of
determination is prior to June 30, 1999 or $60,000,000 if the date of
determination is on or after July 1, 1999. The loan agreement 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.
At April 30, 1999, the Combined Company was not in compliance with its loan
agreement; however, the Combined Company has received waivers of each
covenant violation and had entered into a forbearance agreement with its
principal lender.
10
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE F - NOTES PAYABLE - CONTINUED
In December 1999, as a result of the transaction with Smart Choice, the
revolving credit facility was restructured to service the Combined Company
and Smart Choice and provides for borrowings of up to $160 million on terms
similar to those above. Crown guarantees the obligation for $5 million, $60
million for the Combined Company and $100 million for Smart Choice. The
revolving facility matures in November 2004 and accrues interest on
borrowings at prime plus 2.25%.
The advance rates on eligible finance receivables declines from 85% for
Smart Choice and 72.5% for the Combining Company to 70% for Smart Choice and
67.5% for the Combined Company over the term of the credit facility.
The subordinated notes payable are subordinate to the revolving credit
facility described above. Subordinated notes payable includes $450,000 which
is payable to the minority shareholders of the Combined Company and
$2,400,000 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 8% and matures in May
2000.
A summary of debt maturities as of April 30, 1999 is as follows:
FOR THE YEARS
ENDING APRIL 30,
----------------
2000 $ 457,104
2001 42,069,044
2002 2,967,422
2003 111,918
2004 625,725
Thereafter 531,807
-----------
$46,763,020
===========
11
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES
Paaco files a consolidated federal income tax return with Crown for the
period from February 1, 1999 through April 30, 1999. Premium files a
separate tax return. For periods prior to February 1, 1999, Paaco and
Premium filed separate tax returns. For the period from January 31, 1999
through April 30, 1999 income taxes are determined as if Paaco and Premium
had filed on a separate return basis. The provision (benefit) for income
taxes is as follows:
YEAR FOUR MONTHS
ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31,
1999 1998 1997
--------- --------- ---------
Current $ -- $ -- $(546,122)
Deferred (775,022) 343,416 253,124
--------- --------- ---------
$(775,022) $ 343,416 $(292,998)
========= ========= =========
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 Combined Company's deferred tax assets and liabilities are
as follows:
APRIL 30, APRIL 30,
1999 1998
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 2,096,303 $ --
Net operating loss carryforward 2,625,622 1,454,064
Other 133,507 192,692
----------- -----------
Total deferred tax assets 4,855,432 1,646,756
----------- -----------
Deferred tax liabilities:
Allowance for loan losses -- 1,634,165
Discount on loans sold to Premium 4,099,193 --
Other 40,289 63,009
----------- -----------
Total deferred tax liabilities 4,139,482 1,697,174
----------- -----------
Net deferred tax asset (liability) $ 715,950 $ (50,418)
=========== ===========
12
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE H - FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF Financial Instruments (SFAS No. 107), requires disclosure of fair
value information about financial instruments, whether or not recognized on
the balance sheet. Fair values are based on estimates using present value or
other valuation techniques in cases where quoted market prices are not
available. These techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
The estimated fair values of the Combined Company's financial instruments
are as follows:
APRIL 30, 1999
----------------------------
CARRYING FAIR
VALUE VALUE
----------- -----------
Financial assets:
Cash and cash equivalents $ 62,832 $ 62,832
Finance receivables, net 47,757,350 45,369,483
Financial liabilities:
Revolving credit facility 41,823,680 41,823,680
Subordinated notes payable 2,850,000 2,850,000
Mortgages and other notes payable 2,089,340 2,089,340
APRIL 30, 1998
----------------------------
CARRYING FAIR
VALUE VALUE
----------- -----------
Financial assets:
Cash and cash equivalents $ 170,618 $ 170,618
Finance receivables, net 34,191,804 32,482,214
Financial liabilities:
Revolving credit facility 26,049,785 26,049,785
Subordinated notes payable 3,623,217 3,623,217
Mortgages and other notes payable 2,771,857 2,771,857
13
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE H - 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 financial receivable portfolios within the
sub-prime auto industry.
REVOLVING CREDIT FACILITY, SUBORDINATED NOTES PAYABLE, AND MORTGAGES AND
OTHER NOTES PAYABLE: The carrying amounts of the Combined Company's
revolving credit facility, subordinated notes payable, and mortgages and
other notes payable approximate fair value as the interest rates on such
debt approximate market.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Combined Company leases premises and equipment under operating leases
with various expiration dates. Future minimum lease obligations as of April
30, 1999 are as follows:
FOR THE YEARS
ENDING APRIL 30,
----------------
2000 $ 896,287
2001 679,256
2002 290,934
2003 102,924
2004 28,208
-----------
$ 1,997,609
===========
Rent expense for the year ended April 30,1999, the four months ended April
30, 1998 and the year ended December 31, 1997 was $1,382,707, $379,535 and
$682,387, respectively.
14
<PAGE>
PAACO AUTOMOTIVE GROUP, INC. AND
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE J - RELATED PARTIES
The Combined Company 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.
Certain family members of the minority shareholders of Paaco loaned money to
Paaco during the year ended April 30, 1999 at interest rates ranging from
15% to 18%. At April 30, 1999 all of such loans had been repaid.
Premium has notes payable outstanding at April 30, 1999 with a former
officer and his relatives of $212,226.
Interest expense related to affiliated parties was approximately $425,000,
$62,000 and $215,000, for the year ended April 30,1999, the four months
ended April 30, 1998 and the year ended December 31, 1997, respectively.
During June and July 1999, Crown loaned the Combined Company $2,000,000 at
8.5% interest for working capital. Interest is payable monthly.
NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures are as follows:
<TABLE>
<CAPTION>
YEAR FOUR MONTHS
ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Inventory acquired upon repossession $12,026,450 $ 2,071,899 $ 6,163,881
Interest paid 4,692,474 1,385,353 2,746,765
Income taxes paid 102,000 -- 500,843
</TABLE>
15
<PAGE>
ITEM 7(b)
SMART CHOICE AUTOMOTIVE GROUP, INC.
INTRODUCTION TO PRO-FORMA FINANCIAL INFORMATION
On December 1, 1999, Smart Choice Automotive Group, Inc. ("the Company")
completed a merger with Paaco Automotive Group, Inc. ("Pacco"), an 85% owned
subsidiary of Crown Group, Inc. ("Crown"). Crown contributed its 85% interest in
Paaco, $3 million cash and acquired $4.5 million of the Company's debt for
approximately $2.3 million in exchange for 1,371,581 shares of its Series E
Convertible Preferred Stock. On an "if converted" basis , those shares represent
approximately 70% of the ownership and voting rights of the Company.
Additionally, the minority shareholders of Paaco contributed their interests in
Pacco to the Company in exchange for shares of the Company's Series E
Convertible Preferred Stock representing approximately 5% of the Company's
outstanding securities on an "if-converted" basis.
Contemporaneously with the aforementioned transaction, approximately $15 million
of the Company's outstanding debt and preferred stock was converted into
35,661,116 shares of the Company's common stock
As a result of the merger, the shareholders of Paaco obtained voting control of
the Company and, for accounting and reporting purposes Paaco is deemed to be the
acquirer and new reporting entity.
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of October 31,
1999 gives effect to the transactions described above as if they had occurred on
that date.
The following unaudited pro forma consolidated statements of operations for the
six months ended October 31, 1999 and the year ended April 30, 1999 give effect
to the transactions described above, as if they had occurred at the beginning of
each period (May 1, 1999 and May 1, 1998, respectively)
The unaudited pro forma information is based on the historical financial
statements of the Company and Paaco, giving effect to the transactions described
above and the adjustments described in the accompanying Notes to Pro Forma
Consolidated Financial Statements, and is not necessarily indicative of the
financial position and results of operations that might have occurred if the
transactions had taken place on such dates or of the Company's results of
operations for any future period.
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) - to record acquisition of 1,371,581 shares of the Company's Series E
Convertible Preferred Stock by Crown
(2) - to record the purchase accounting adjustments as a result of Crown's
acquisition of the Company
(3) - to record conversion of other debt into Series E Convertible Preferred
Stock.
(4) - to record conversion of other debt and preferred stock into common stock
(5) - to record amortization of discount on the finance receivable portfolio.
(6) - to eliminate interest expense related to debt which was converted into
preferred stock.
(7) - to record additional amortization of goodwill which arose as a result of
Crown's acquisition.
(8) - to eliminate preferred stock dividends as a result of the conversion of
preferred stock into common stock.
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
PRO FORMA BALANCE SHEET
OCTOBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SMART
PAACO CHOICE
HISTORICAL HISTORICAL SUB-TOTAL ADJUSTMENTS CONSOLIDATED
--------------- ----------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ (45) $ 885 $ 840 $ 3,000 (1) $ 3,840
Finance receivables, net 54,513 77,783 132,296 (3,314) (2) 128,982
Other receivables 49 1,233 1,282 -- 1,282
Inventory 4,954 10,496 15,450 -- 15,450
Property and equipment, net 5,056 6,919 11,975 1,062 (2) 13,037
Prepaids and other assets 299 1,093 1,392 (100) (2) 1,292
Goodwill -- 5,263 5,263 6,878 (2) 12,141
Deferred tax asset 437 -- 437 -- 437
--------------- ---------------------------------------------- ---------------
$ 65,263 $ 103,672 $ 168,935 $ 7,526 $ 176,461
=============== ============================================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility $ 43,834 $ 80,026 $ 123,860 $ -- $ 123,860
Mortgages and other notes payable 7,709 20,459 28,168 (11,507) (1)(3) 16,661
Accounts payable and accrued liabilities 3,101 17,384 20,485 -- 20,485
Deferred sales tax 3,481 -- 3,481 -- 3,481
--------------- ---------------------------------------------- ---------------
Total liabilities 58,125 117,869 175,994 (11,507) 164,487
Contingent redemption of put option -- 1,549 1,549 -- 1,549
Stockholders' equity
Common stock 79 -- 79 357 (4) 436
Preferred stock -- -- - 14 (1)(3)(4) 14
Additional paid-in capital 7,565 (15,746) (8,181) 18,662 10,481
Accumulated deficit (506) -- (506) -- (506)
--------------- ---------------------------------------------- ---------------
Total stockholders' equity 7,138 (15,746) (8,608) 19,033 10,425
--------------- ---------------------------------------------- ---------------
$ 65,263 $ 103,672 $ 168,935 $ 7,526 $ 176,461
=============== ============================================== ===============
</TABLE>
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED OCTOBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SMART
PAACO CHOICE
HISTORICAL HISTORICAL SUB-TOTAL ADJUSTMENTS CONSOLIDATED
--------------- ------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sale of vehicles $ 40,557 $ 29,635 $ 70,192 $ -- $ 70,192
Interest income 5,699 10,865 16,564 358 (5) 16,922
Other income -- 349 349 -- 349
-------------- ------------------------------------------ -------------
46,256 40,849 87,105 358 87,463
COSTS AND EXPENSES
Cost of vehicle sales 27,437 $ 22,564 50,001 -- 50,001
Selling, general and administrative 9,469 8,339 17,808 -- 17,808
Provision for credit losses 5,654 9,490 15,144 -- 15,144
Restructuring charge -- 3,414 3,414 -- 3,414
Write-off of goodwill -- 12,329 12,329 -- 12,329
Interest expense 2,784 4,725 7,509 (701) (6) 6,808
Depreciation and amortization 193 757 950 175 (7) 1,125
-------------- ------------------------------------------ -------------
45,537 61,618 107,155 (526) 106,629
-------------- ------------------------------------------- -------------
Operating profit(loss) 719 (20,769) (20,050) 884 (19,166)
Provision (benefit) for income taxes 279 -- 279 -- 279
-------------- ------------------------------------------ -------------
Net income(loss) 440 (20,769) (20,329) 884 (8) (19,445)
Preferred dividend requirement -- 316 316 (316) --
-------------- ------------------------------------------ -------------
Net income(loss) allocable
to common stockholders $ 440 $ (20,453) $ (20,013) $ 568 $ (19,445)
============== ========================================== =============
Loss per share - basic and diluted $ (2.70) $ (0.45)
============= =============
Weighted average number of shares outstanding -
basic and diluted 7,575 35,661 43,236
============= ==============================
</TABLE>
<PAGE>
SMART CHOICE AUTOMOTIVE GROUP, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SMART
PAACO CHOICE
HISTORICAL HISTORICAL SUB-TOTAL ADJUSTMENTS CONSOLIDATED
-------------- -------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sale of vehicles $ 61,848 $ 79,851 $ 141,699 $ -- $ 141,699
Interest income 8,880 16,645 25,525 678 (5) 26,203
Other income -- 1,859 1,859 -- 1,859
------------- -------------------------------------------- ---------------
70,728 98,355 169,083 678 169,761
COSTS AND EXPENSES
Cost of vehicle sales 41,858 59,789 101,647 -- 101,647
Selling, general and administrative 15,860 23,713 39,573 -- 39,573
Provision for credit losses 9,926 14,711 24,637 -- 24,637
Interest expense 4,879 9,856 14,735 (1,402) (6) 13,333
Depreciation and amortization 392 2,046 2,438 353 (7) 2,791
------------- -------------------------------------------- ---------------
72,915 110,115 183,030 (1,049) 181,981
------------- -------------------------------------------- ---------------
Operating profit(loss) (2,187) (11,760) (13,947) 1,727 (12,220)
Provision (benefit) for income taxes (775) -- (775) -- (775)
------------- -------------------------------------------- ---------------
Net income(loss) (1,412) (11,760) (13,172) 1,727 (11,445)
Preferred dividend requirement -- 615 615 (615) (8) --
------------- -------------------------------------------- ---------------
Net income(loss) allocable
to common stockholders $ (1,412) $ (11,145) $ (12,557) $ 1,112 $ (11,445)
============= ============================================ ===============
Loss per share - basic and diluted $ (1.80) $ (0.27)
============== ===============
Weighted average number of shares outstanding -
basic and diluted 6,193 35,661 41,854
============== =================================
</TABLE>
<PAGE>
ITEM 7 (c) Exhibits filed herewith or incorporated by reference to:
EXHIBITS FILED HEREWITH
EXHIBIT OR INCORPORATED BY
NO. EXHIBIT DESCRIPTION REFERENCE TO:
--- ------------------- ------------------------
(2) Stock Purchase Agreement dated December Exhibit 2 to Form 8-K
1, 1999 by and between Crown Group, filed on December 8,
and Smart Choice Automotive Group, Inc. 1999
(16) Letter from BDO Seidman, LLP dated Exhibit 16 to Form 8-K
December 1, 1999 filed on December 8,
1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on December 8, 1999.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ JOSEPH B. CAVALIER
--------------------------------
Joseph B. Cavalier
Chief Accounting Officer
5
