SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
(Amendment No. )
Check the appropriate box:
[ ] Preliminary information statement [ ] Confidential, for use of the
[X] Definitive information statement Commission only (as permitted
by Rule 14c-5(d)(2))
SMART CHOICE AUTOMOTIVE GROUP, INC.
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(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
N/A
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(2) Aggregate number of securities to which transactions applies:
N/A
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
N/A
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(4) Proposed maximum aggregate value of transaction:
N/A
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(5) Total fee paid:
N/A
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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SMART CHOICE AUTOMOTIVE GROUP, INC.
1555 SEMORAN BOULEVARD
WINTER PARK, FLORIDA 32792
To the Shareholders of Smart Choice Automotive Group, Inc.:
As many of you are aware, certain of the Florida-based subsidiaries of
Smart Choice Automotive Group, Inc. ("Smart Choice" or the "Company") have been
in default since December 2000 under their credit facility with Finova Capital
Corporation, the primary lender to Smart Choice's subsidiaries and the holder
of approximately 12% of the Smart Choice common stock ("Finova"). Smart Choice
is a guarantor of all obligations under the credit facility. On November 8,
2001, Smart Choice and certain of its subsidiaries entered into a Forbearance
Agreement with Finova, pursuant to which Smart Choice has granted Finova an
option to purchase (i) all of Smart Choice's ownership interest in Paaco
Automotive Group, L.P. and Premium Auto Acceptance Corporation (collectively,
"Paaco"), or (ii) all of Smart Choice's remaining authorized but unissued and
unreserved common stock at a price of $0.30 per share. Finova also agreed to
forbear in the commencement of collection proceedings and in the exercise of
any repossession rights, collection rights or other remedies against the
collateral under its credit facilities with Smart Choice's subsidiaries in
exchange for the liquidation of the assets of Smart Choice's Florida-based
subsidiaries following a public foreclosure sale and the right to purchase
Paaco or Smart Choice's remaining authorized but unissued and unreserved common
stock. On November 9, 2001, the collateral under Finova's loan agreement with
the Florida-based subsidiaries, which consisted primarily of receivables and
inventory, was sold at a public foreclosure sale to Finova for a purchase price
of $55 million, resulting in a deficiency owed to Finova of approximately $33.4
million (the "Deficiency"). On December 12, 2001, Finova exercised its option
to purchase Paaco, subject to the completion of its due diligence
investigation. The consideration for the sale of Paaco will be the
relinquishment and satisfaction of the Deficiency. As a result of the exercise
of the option to purchase Paaco, Finova's option to purchase the remaining
authorized but unissued common stock of Smart Choice has been suspended and
will terminate upon the closing of the sale of Paaco. After giving effect to
the sale of the assets of Smart Choice's Florida subsidiaries through the
public foreclosure, the sale of Paaco to Finova will constitute a sale of
substantially all of the Company's assets, which requires shareholder approval
under Florida law. Details of the material terms of the Forbearance Agreement,
including the possible sale of Paaco and other important information, are set
forth in the accompanying Information Statement.
Smart Choice's Board of Directors has fully reviewed, considered and
unanimously approved the Forbearance Agreement, which includes the option for
the sale of Paaco, and has recommended that its shareholders approve the sale
of Paaco. Crown Group, Inc., the holder of approximately 70% of Smart Choice's
common stock, has executed a written consent approving the sale of Paaco as of
January 4, 2002. Accordingly, no other vote or shareholder action is
required. Pursuant to Section 607.0704 of the Florida Business Corporation Act,
you are hereby being provided with notice of the approval by less than
unanimous written consent of the shareholders of Smart Choice. Pursuant to the
Securities Exchange Act of 1934, as amended, you are being furnished with an
Information Statement relating to this action along with this letter.
Shareholders of record as of the close of business on November 12, 2001 are
entitled to receive this notice and the attached Information Statement.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
By Order of the Board of Directors,
/s/ James Edward Ernst
James Edward Ernst
President and Chief Executive Officer
Winter Park, Florida
January 8, 2002
SMART CHOICE AUTOMOTIVE GROUP, INC.
INFORMATION STATEMENT
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CONCERNING CORPORATE ACTION AUTHORIZED BY
WRITTEN CONSENT OF SHAREHOLDERS OWNING
A MAJORITY OF SHARES OF COMMON STOCK
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WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
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This Information Statement is being furnished to the shareholders of
Smart Choice Automotive Group, Inc., a Florida corporation ("Smart Choice" or
the "Company"), to advise them of the corporate action which has been
authorized by the written consent of Crown Group, Inc., the Company's majority
shareholder. Smart Choice is providing you this information in accordance with
the requirements of the Florida Business Corporation Act (the "Florida Act")
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the regulations promulgated thereunder. The Company's Board of Directors
established the close of business on November 12, 2001 as the record date (the
"Record Date") for the determination of shareholders entitled to notice about
the following transaction.
Pursuant to the terms of that certain Forbearance Agreement among
Smart Choice, certain of Smart Choice's subsidiaries and Finova, dated November
8, 2001 (the "Forbearance Agreement"), Finova agreed to forbear in the
commencement of collection proceedings and in the exercise of any repossession
rights, collection rights or other remedies against the collateral under its
credit facility with certain of Smart Choice's subsidiaries in exchange for the
liquidation of the assets of Smart Choice's Florida subsidiaries (the "Florida
Finance Borrowers") following a public foreclosure sale and the grant of an
option to Finova to purchase (i) all of Smart Choice's interest in Paaco
Automotive Group, L.P. and Premium Auto Acceptance Corporation (collectively,
"Paaco" or the "Paaco Borrowers"), or (ii) the remaining authorized but
unissued and unreserved shares of Smart Choice common stock at a price of $0.30
per share. Smart Choice is a guarantor of the obligations of the Florida
Finance Borrowers to Finova. On November 9, 2001, the collateral under the loan
agreement, which consisted primarily of receivables and inventory, was sold at
a public foreclosure sale to Finova for $55 million, resulting in a deficiency
owed by the Florida Finance Borrowers of approximately $33.4 million (the
"Deficiency"). On December 12, 2001, Finova exercised its option to purchase
Paaco, subject to the completion of its due diligence investigation. The
consideration for the sale of Paaco will be the relinquishment and satisfaction
of the Deficiency. As a result of the exercise of the option to purchase Paaco,
Finova's option to purchase the remaining authorized but unissued common stock
of Smart Choice has been suspended and will terminate upon the closing of the
sale of Paaco. After giving effect to the sale of assets through the public
foreclosure which occurred on November 9, 2001, the sale of Paaco to Finova
will constitute a sale of substantially all of the Company's assets.
Upon the closing of the sale of Paaco to Finova, Smart Choice will
have no ongoing operating business, but will continue to own assets consisting
primarily of fixed assets, including improved and unimproved real estate in
Titusville, Florida, equipment, and certain other non-operating assets.
Following the sale of Paaco to Finova, Smart Choice expects to sell its
remaining assets in an effort to realize the maximum value for these assets and
repay its obligations to unsecured creditors to the extent possible.
Smart Choice will not receive any cash payment as a result of the
transactions contemplated by the Forbearance Agreement. After the consummation
of the sale of Paaco, management estimates that the net realizable value of
Smart Choice's remaining assets will be less than Smart Choice's unsecured
liabilities, and therefore a liquidation of those remaining assets would not
result in any distribution to Smart Choice's shareholders.
The Florida Finance Borrowers have been in default under their credit
facility with Finova since December 2000. Smart Choice has been in discussions
with Finova for months regarding possible alternatives for resolving the
defaults. Smart Choice believes that if the transactions contemplated by the
Forbearance Agreement were not consummated and its subsidiaries were not
relieved of approximately $88.4 million in indebtedness (of which Smart Choice
is the guarantor), Smart Choice would be forced to seek immediate protection by
filing for bankruptcy. It is unlikely that a bankruptcy proceeding would result
in any distributions to common shareholders. Further, a bankruptcy proceeding
would most likely result in less distributions to unsecured creditors than the
transactions completed by the Forbearance Agreement. Accordingly, Smart Choice
believes the approval and consummation of the transactions contemplated by the
Forbearance Agreement offers the best chance for maximizing asset value for the
benefit of its unsecured creditors. However, there can be no assurance that
even if the transactions contemplated by the Forbearance Agreement are
consummated, Smart Choice will be able to maximize the value of its remaining
assets and have adequate proceeds and resources to satisfy its creditors. As a
result, Smart Choice may in any event be required to seek bankruptcy protection
in the future.
On November 5, 2001, the Company's Board of Directors approved the
terms of the Forbearance Agreement, including the grant of the option to Finova
to purchase Paaco, and recommended the approval of the sale of Paaco to the
Company's shareholders. Under Section 607.0704 of the Florida Act, any action
required or permitted by the Florida Act to be taken at an annual or special
meeting of shareholders of a Florida corporation may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Notice of the written consent must be
given to those shareholders who have not consented in writing within ten (10)
days of obtaining the authorization. As of the Record Date, the Company had
issued and outstanding 9,762,270 shares of common stock, with each share
entitled to one vote. The consent of the holders of a majority of all of the
Company's outstanding common stock is necessary to authorize the sale of Paaco.
On January 4, 2002, Crown, who is the owner of record of 6,857,907 shares of
Smart Choice common stock (approximately 70%), executed and delivered to the
Company its written consent approving the sale of Paaco. Accordingly, no vote
or further action of the shareholders of the Company is required.
The Company is required, in accordance with Rule 14c-2 of the Exchange
Act, to mail this Information Statement to shareholders of the Company no later
than twenty (20) days prior to the date the sale of Paaco will become
effective. The Company anticipates that the sale of Paaco will become effective
as soon as practicable upon the exercise of the Paaco option, but no sooner
than twenty (20) days after the mailing of this Information Statement (the
"Effective Date"). This Information Statement is first being mailed to
shareholders on or about January 8, 2002. This Information Statement will
also constitute notice to the shareholders of the approval of the sale by less
than unanimous written consent as required by Section 607.0704 of the Florida
Act.
The executive offices of the Company are located at 1555 Semoran
Boulevard, Winter Park, Florida 32792, and its telephone number is (407)
671-1200. This Information Statement is furnished for informational purposes
only.
2
TABLE OF CONTENTS
PAGE
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Forward-Looking Statements.....................................................................................4
Summary Term Sheet for Proposed Transaction....................................................................5
Parties to the Transaction.....................................................................................6
Security Ownership of Certain Beneficial Owners and Management.................................................8
Business of Smart Choice.......................................................................................9
Background of the Transaction.................................................................................13
Material Terms of the Transaction.............................................................................13
Factors Considered by the Board...............................................................................16
Risks of the Proposed Transaction.............................................................................17
Required Approvals............................................................................................17
Selected Financial Data.......................................................................................18
Pro Forma Financial Information...............................................................................19
Federal Income Tax Considerations.............................................................................23
Dissenter's Rights ..........................................................................................23
Where You Can Find More Information...........................................................................25
APPENDIX A - Sections of the Florida Business Corporation Act Regarding Dissenter's Rights...................A-1
APPENDIX B - Annual Report on Form 10-K for the year ended April 30, 2001....................................B-1
APPENDIX C - Quarterly Report on Form 10-Q for the quarter ended October 31, 2001............................C-1
3
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain information included in
this Information Statement contains, and other materials filed or to be filed
by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made or to
be made by the Company or its management) contain or will contain,
forward-looking statements within the meaning of section 21E of the Securities
Exchange Act of 1934, as amended, and section 27A of the Securities Act of
1933, as amended. The words "believe," "expect," "anticipate," "estimate,"
"project" and similar expressions identify forward-looking statements, which
speak only as of the date the statement was made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements. Such
forward-looking statements are based upon management's current plans or
expectations and are subject to a number of uncertainties and risks that could
significantly affect current plans, anticipated actions and the Company's
future financial condition and results. As a consequence, actual results may
differ materially from those expressed in any forward-looking statements made
by or on behalf of the Company as a result of various factors. Uncertainties
and risks related to such forward-looking statements include, but are not
limited to, those relating to the future operations of the Company's
businesses, if any, and other risks described in this Information Statement.
Any forward-looking statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
4
SUMMARY TERM SHEET FOR PROPOSED TRANSACTION
This summary contains selected information from this Information
Statement and may not contain all of the information that is important to you
regarding the transactions contemplated by the Forbearance Agreement, including
the sale of Paaco. To understand the transaction fully, you should read this
Information Statement completely. The Forbearance Agreement constitutes the
legal document that governs this transaction. For a more complete description
of the terms of the Forbearance Agreement and the details of the transaction
with Finova, please see "Material Terms of the Transaction."
- Under the terms of the credit facility with Finova, material
events of default exist with respect to certain of Smart
Choice's Florida-based subsidiaries. As a result of such
default, Finova would be permitted to exercise its remedies
against the collateral of the Company's Florida-based
subsidiaries as well as the collateral securing Paaco's
credit facility with Finova, which would effectively shut
down the operations of Smart Choice's subsidiaries as they
would have no other source of operating cash. Smart Choice is
a guarantor of its subsidiaries' indebtedness to Finova.
- The fair market value of all of the assets which secure the
obligations of the Florida Finance Borrowers to Finova is
substantially less than the amount owed to Finova by the
Florida Finance Borrowers.
- Pursuant to the Forbearance Agreement, Finova agreed to
forbear in the commencement of any collection proceedings and
in the exercise of any repossession rights for a period of 60
days, except that Finova was permitted to commence the
exercise of its rights to collect receivables owned by the
Florida Finance Borrowers, which include the following
subsidiaries: Florida Finance Group, Inc., Liberty Finance
Company, Smart Choice Receivables Holding Company, and First
Choice Auto Finance, Inc. A public foreclosure sale occurred
on November 9, 2001, and the assets were purchased by Finova
for $55 million.
- Also pursuant to the Forbearance Agreement, the Company
granted an option to Finova to purchase all of the Company's
ownership interest in Paaco at a price equal to the remaining
deficiency on the obligations of the Florida Finance
Borrowers after the public foreclosure sale (the "Paaco
Option"). On December 12, 2001, Finova exercised the Paaco
Option, subject to the completion of its due diligence
investigation.
- The Company also granted an option to Finova to purchase all
of the Company's remaining authorized but unissued and
unreserved common stock (approximately 39,000,000 shares) at
a price of $0.30 per share (the "Smart Choice Option"). As a
result of the exercise of the Paaco Option, the Smart Choice
Option has been suspended and will terminate upon the closing
of the sale of Paaco.
- The sale of Paaco must be approved by the affirmative vote of
a majority of all of the Company's outstanding shares.
Because Crown owns approximately 70% of the Company's
outstanding shares of common stock and has consented to the
sale of Paaco, the transaction has been approved and no
further shareholder approval is required.
- Finova has been the primary lender to certain of Smart
Choice's subsidiaries since 1994. Finova Mezzanine Capital,
Inc., an affiliate of Finova Capital Corporation, has been
the owner of approximately 12% of the Company's common stock
since 1999.
- Smart Choice will obtain an appraisal from a qualified
independent professional firm for the purpose of confirming
that the value of Paaco is not greater than the amount of the
Deficiency.
- Following the sale of Paaco to Finova, Smart Choice intends
to sell its remaining assets in an effort to realize the
maximum value for these assets and repay its obligations to
its unsecured creditors to the extent possible.
5
- Following these transactions, Smart Choice presently expects
to continue to be a reporting company under the Securities
Exchange Act of 1934. Smart Choice can make no assurances
that its stock will remain listed on the OTC Bulletin Board
or that there will continue to be a market for its common
stock.
COMPLETION OF THIS TRANSACTION WILL NOT AFFECT YOUR SMART CHOICE
COMMON STOCK AND YOU WILL CONTINUE TO BE A SHAREHOLDER OF SMART CHOICE AFTER
THIS TRANSACTION. YOU ARE NOT BEING ASKED TO EXCHANGE YOUR SMART CHOICE COMMON
STOCK FOR ANY OTHER SHARES OR FOR CASH OR OTHER PROPERTY.
PARTIES TO THE TRANSACTION
SMART CHOICE AUTOMOTIVE GROUP, INC.
1555 SEMORAN BOULEVARD
WINTER PARK, FLORIDA 32792
ATTENTION: JAMES EDWARD ERNST
PHONE NUMBER: (407) 671-1200
Smart Choice is in the business of selling and financing used
automobiles and trucks principally to consumers with limited or damaged credit
histories. Prior to entering into the Forbearance Agreement, the Company
operated 25 dealerships located in major markets in Texas and Florida. The
Company presently operates 12 lots in Texas under the "Paaco" name and
previously operated 13 lots in Florida under the "First Choice" name. After the
public foreclosure sale on November 9, 2001, the Company is in the process of
winding down its Florida operations. Paaco continues to operate as a subsidiary
of Smart Choice, subject to the transfer of control which will occur upon the
sale of Paaco. For further information regarding the business of Smart Choice,
please see "Business of Smart Choice."
Effective December 1, 1999, Smart Choice acquired all of the ownership
interest of Paaco Automotive Group, L.P. and Premium Auto Acceptance
Corporation (collectively, "Paaco"). As a result of the acquisition, Crown
Group, Inc., the majority shareholder of Paaco ("Crown"), became the
controlling shareholder of Smart Choice.
Paaco began operations in 1992 as an automobile auction concern in
Arlington, Texas. In 1993, Paaco began its "Buy Here-Pay Here" operation,
selling and financing used vehicles to credit-impaired borrowers. Smart Choice
began operations in 1997 through the acquisition and consolidation of five "Buy
Here-Pay Here" businesses.
The Company participates 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, which are typically small, independent used car
dealerships that sell and finance the sale of used cars to sub-prime 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, which is 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.
6
FINOVA CAPITAL CORPORATION
4800 NORTH SCOTTSDALE BOULEVARD
SCOTTSDALE, ARIZONA 85251
ATTENTION: RICHARD LIEBERMAN
PHONE NUMBER: (480) 636-4800
Finova Capital Corporation has been the primary lender to certain of
Smart Choice's subsidiaries since 1994. Finova Mezzanine Capital, Inc., an
affiliate of Finova Capital Corporation, is the owner of 1,171,722 shares of
Smart Choice common stock or approximately 12.0% of the outstanding shares of
Smart Choice common stock. Finova Capital Corporation is engaged in the
business of providing commercial finance and capital to mid-size businesses in
the United States and abroad. Finova Capital Corporation and Finova Mezzanine
Capital, Inc. are collectively referred to as "Finova." On June 22, 1998,
Finova originally acquired 100 shares of Smart Choice's Series D Convertible
Preferred Stock (the "Series D Stock") in connection with a loan transaction
from Finova to Smart Choice. Effective December 1, 1999, Finova and Smart
Choice entered into agreements whereby the Series D Stock was exchanged for
shares of Smart Choice common stock and certain indebtedness owed by Smart
Choice to Finova was exchanged for additional shares of Smart Choice common
stock. The purpose of the December 1999 transaction was to facilitate the
reorganization of Smart Choice and the concurrent investment by Crown in Smart
Choice. There is no affiliation between Crown and Finova. For further
information regarding Finova and its relationship with Smart Choice, see
"Background of the Transaction."
7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 12,
2001, with respect to the ownership of Smart Choice's outstanding common stock
by (i) all persons known to Smart Choice to own beneficially more than five
percent of the issued and outstanding shares of Smart Choice common stock, (ii)
each director and executive officer of Smart Choice, and (iii) all directors
and executive officers as a group. Unless otherwise indicated, each shareholder
possesses sole voting and investment power with respect to the shares owned by
the shareholder.
Shares
Beneficially Percentage of
Beneficial Owner Owned(1) Class(2)
---------------- ------------ -------------
Crown Group, Inc........................................ 6,955,407(3) 70.5%
Finova Mezzanine Capital, Inc. ......................... 1,171,722(4) 12.0%
Edward R. McMurphy...................................... -- --
J. Edward Ernst......................................... 50,000(5) *
Robert J. Abrahams...................................... 25,347(6) *
T. J. Falgout, III...................................... -- --
Larry W. Lange.......................................... 372,794(7) 3.8%
Ronald W. Anderson...................................... 25,634(8) *
All directors and executive
officers as a group (6 persons)..................... 473,775(9) 4.8%
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* Less than 1%
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, a person is deemed to be the beneficial owner of a security if
the person has or shares voting power or dispositive power with
respect to such security or has the right to acquire such ownership
within 60 days. As used herein, "voting power" is the power to vote or
direct the voting of shares, and "dispositive power" is the power to
dispose or direct the disposition of shares, irrespective of any
economic interest therein.
(2) In calculating the percentage ownership for a given shareholder or
group of shareholders, the number of shares of the class of stock
outstanding includes unissued shares subject to options, warrants,
rights or conversion privileges exercisable within 60 days held by
such shareholder or group of shareholders, but such unissued shares
are not deemed outstanding in calculating the percentage ownership for
other shareholders.
(3) Includes 97,500 shares of common stock subject to presently
exercisable warrants. The business address of Crown Group is 4040
North MacArthur Boulevard, Suite 100, Irving, Texas 75038.
(4) Finova's address is 500 Church Street, Suite 200, Nashville, Tennessee
37219. On November 23, 2001, Finova Capital Corporation, an affiliate
of Finova Mezzanine Capital, Inc., filed a Schedule 13D reporting that
it beneficially owned 44,857,909 shares of Smart Choice common stock,
or approximately 93.9% of the outstanding shares. This number was
determined on the basis that Finova Capital Corporation holds an
option to purchase 38,000,000 shares of Smart Choice's common stock
and an option to purchase 6,857,909 shares of Smart Choice common
stock from Crown Group, Inc. As a result of the exercise of the Paaco
Option, the Smart Choice Option has been suspended and will terminate
upon the closing of the sale of Paaco. Finova does not presently
intend to exercise its option with respect to shares owned by Crown
Group, Inc. The information with respect to Finova Capital Corporation
is based on the Schedule 13D filed by Finova Capital Corporation on
November 23, 2001. Smart Choice makes no representation as to the
accuracy or completeness of the information reported.
(5) Represents 50,000 shares subject to presently exercisable options.
(6) Includes 14,320 shares subject to presently exercisable options.
(7) Includes 25,000 shares subject to presently exercisable options.
(8) Includes 25,134 shares subject to presently exercisable options.
(9) Includes 114,454 shares subject to presently exercisable options.
8
BUSINESS OF SMART CHOICE
GENERAL AND HISTORY
Smart Choice operates "Buy Here-Pay Here" car dealerships in the
United States. Prior to entering into the Forbearance Agreement, the Company
operated 25 dealerships located in major markets in Texas and Florida. The
Company focuses exclusively on selling and financing quality used vehicles to
credit-impaired customers. The Company presently operates 12 lots in Texas
under the "Paaco" name and previously operated 13 lots in Florida under the
"First Choice" name.
Effective December 1, 1999, Smart Choice acquired all of the
outstanding stock of Paaco. As a result of the acquisition, Crown Group, Inc.,
the majority shareholder of Paaco, became the controlling shareholder 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.
Paaco began operations in 1992 as an automobile auction concern in
Arlington, Texas. In 1993, Paaco began its "Buy Here-Pay Here" operation,
selling and financing used vehicles to credit-impaired borrowers. Smart Choice
began operations in 1997 through the acquisition and consolidation of five "Buy
Here-Pay Here" businesses. As a result of the foreclosure sale on November 9,
2001, Smart Choice sold the collateral securing the obligations of the Florida
Finance Borrowers, which consisted primarily of receivables and inventory, to
Finova for $55 million. Smart Choice is in the process of winding down its
Florida operations. Paaco continues to operate as a subsidiary of Smart Choice,
subject to the transfer of control which may occur if Finova exercises the
Paaco Option.
USED CAR DEALERSHIPS
The Company currently owns and operates 12 dealerships under the Paaco
name in Texas. Paaco dealerships are divided into two regions - the Dallas/Fort
Worth and Houston metropolitan areas. Paaco dealerships presently maintain an
average inventory of approximately 55 vehicles per dealership, featuring a wide
variety of makes and models (with ages generally ranging from two to six years)
and a range of sale prices.
The Company's inventory of used vehicles is primarily acquired through
auto auctions. All vehicles are subjected to a detailed inspection, and
vehicles purchased by Paaco are reconditioned at its reconditioning facility in
Grand Prairie, Texas. If a vehicle is not sold in a timely manner, it is moved
to another dealership or sold at auction.
Paaco provides a 6-month/6,000 mile service contract with the purchase
of a vehicle. Paaco customers can have their vehicles repaired at any of the
Paaco service centers in Texas.
SALES. Paaco continually seeks to develop and retain qualified sales
personnel. The salespersons' sole responsibility is the sale of cars, and,
therefore, they do not participate in the ultimate financing decision. The
Company's dealerships are typically staffed with a manager, up to six sales
personnel and others which may include clerical workers, collectors, mechanics
and a porter. The lots are generally operated six days per week between the
hours of 10:00 a.m. and 8:00 p.m., and each lot typically maintains an
inventory of 35 to 120 vehicles. On a regular basis, Company sales personnel
attend training classes where each phase of the sales process is rehearsed.
Additionally, salespersons are paid principally on a commission basis, and all
salespersons at Paaco speak fluent Spanish.
RECONDITIONING. Paaco reconditions almost every vehicle it purchases
at its 101,000 square foot centralized reconditioning center in Grand Prairie,
Texas. In addition to inspecting, repairing and
9
preparing acquired vehicles for sale, this facility is used to perform service
work on vehicles for customers pursuant to service contracts.
MARKETING AND ADVERTISING. The Company has historically used marketing
programs designed to attract credit-impaired customers, reward those customers
who pay on time, develop customer loyalty and increase referral and repeat
business. The Company has created value-added programs for its customers which
include providing quality cars through a comprehensive inspection and
refurbishment program, a service contract on vehicles sold at its dealerships,
rapid loan application processing and pre-qualification over the telephone by
calling a toll-free number.
FINANCING CUSTOMERS WITH IMPAIRED CREDIT
The Company offers financing to its customers who purchase used cars
at its dealerships. The Company does not have any loans from persons who did
not purchase a vehicle at one of its dealerships and has a policy not to
acquire third party originated finance contracts. The Company's dealerships
provide financing only for its own customers, thereby relying on its own
underwriting standards and not on 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. Payment
terms are somewhat flexible and are generally set such that payment due dates
coincide with the customer's payday. The Company markets 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 usually has an unfavorable employment history and other
credit problems, such as personal bankruptcy. These customers are generally not
able to finance a used car purchase from a traditional finance subsidiary or
bank.
BUY ROOM EVALUATION PROCEDURES. The Company applies consistent
underwriting standards in structuring its used car sales and loans. The most
important criteria used 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.
CONTRACT SERVICING. The Company services its finance contracts through
the use of servicing procedures which have been designed to minimize credit
losses. These include: (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.
ZERO TOLERANCE COLLECTION POLICY. The Company is strict in its
collection policies, believing that by acting promptly and working with
customers, loss exposure is minimized. Collection efforts begin on the day the
car is sold. The Company's policy is to permit the customer to keep the
automobile only so long as payments are made.
REPOSSESSIONS. The process of repossession begins immediately upon
payment delinquency. Once standardized collection procedures have been
implemented and it is determined that a cure of the loan default is unlikely,
the vehicle is repossessed. Repossessions are usually handled by licensed,
bonded and insured repossession firms. The Company re-markets approximately 70%
of its repossessions through its dealerships, rather than through auctions
(where cars are generally sold at lower prices).
10
COMPETITION
The Company competes principally with other independent Buy Here-Pay
Here dealers, and to a lesser degree with:
- the used vehicle retailing operation of franchised automobile
dealerships,
- independent used vehicle dealers, and
- individual consumers who sell used vehicles in private
transactions.
Management believes the principal competitive factors in the sub-prime
market include:
- the availability of financing to credit-impaired borrowers,
- the breadth and quality of vehicle selection,
- the availability of popular vehicles,
- pricing,
- the convenience of a dealership's location,
- customer service, and
- in the case of Paaco, the ability to communicate in Spanish
with its Spanish speaking customers.
REGULATION AND LICENSING
The Company's 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 the Company obtain and maintain certain licenses and
qualifications, limit or prescribe terms of the contracts it originates, make
specified disclosures to customers, limit its 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, the Company charges fixed interest rates in excess of
traditional finance companies on the contracts originated at its dealerships.
The state in which the Company operates impose limits on interest rates it can
charge on its loans, generally based on the age of the vehicle. Management
believes that the Company is in substantial compliance with all applicable
federal, state, and local laws and regulations. However, if the Company does
not remain in compliance with such laws, this failure could have a material
adverse effect on its operations. In addition, the adoption of additional laws,
changes in the interpretation of existing laws, or the Company's entrance into
jurisdictions with more stringent regulatory requirements could have a material
adverse effect on the Company.
BUSINESS OF SMART CHOICE FOLLOWING THE SALE OF PAACO
Smart Choice will not receive any cash payment upon consummation of
the sale of Paaco to Finova. After the sale of Paaco to Finova, Smart Choice
will have no ongoing operating business, but will continue to own assets
consisting primarily of fixed assets, including improved and unimproved real
estate in Titusville, Florida, equipment, and certain other non-operating
assets. Smart Choice intends to sell its remaining assets in an effort to
realize the maximum value for these assets and repay its obligations to
unsecured creditors to the extent possible.
Management estimates that the net realizable value of Smart Choice's
remaining assets will be less than Smart Choice's unsecured liabilities and
therefore a liquidation of those remaining assets would not result in any
distribution to Smart Choice's shareholders. Following the transaction, Smart
Choice
11
expects to continue to be a reporting company under the Securities Exchange Act
of 1934. Smart Choice can make no assurances, however, that its stock will
remain listed on the OTC Bulletin Board or that there will continue to be a
market for its common stock.
COMPLETION OF THIS TRANSACTION WILL NOT AFFECT THE OUTSTANDING SHARES
OF SMART CHOICE COMMON STOCK. SHAREHOLDERS ARE NOT BEING ASKED TO EXCHANGE
THEIR SMART CHOICE SHARES FOR ANY OTHER SHARES OR FOR CASH OR OTHER PROPERTY.
ALL OUTSTANDING STOCK OPTIONS AND WARRANTS OF SMART CHOICE, INCLUDING THOSE
HELD BY DIRECTORS, OFFICERS AND EMPLOYEES, WILL REMAIN OUTSTANDING FOLLOWING
COMPLETION OF THE TRANSACTION.
12
BACKGROUND OF THE TRANSACTION
Prior to November 9, 2001, the Florida Finance Borrowers had a $98
million revolving credit facility with Finova, of which $88.4 million was
outstanding as of October 31, 2001. Since December 2000, the Florida Finance
Borrowers have been over-advanced on the credit facility, which constitutes an
event of default under the facility. As of April 30, 2001, the Florida Finance
Borrowers were over-advanced by $6.2 million. In July 2001, pursuant to the
terms of their credit facility, the advance rate on eligible finance
receivables declined from 85% to 77%, increasing their over-advance to $18.5
million. As of September 30, 2001, the over-advance had increased to
approximately $25 million. The Florida Finance Borrowers were not able to pay
the over-advance and as a result of the event of default, no additional
advances were available under the credit facility. On November 8, 2001, Smart
Choice entered into the Forbearance Agreement with Finova. On November 9, 2001,
Finova purchased all of the collateral securing the obligations of the Florida
Finance Borrowers, which consisted primarily of receivables and inventory,
through a public foreclosure sale for $55 million. Smart Choice is presently in
the process of winding down its Florida operations and transitioning the
control of the collection of its finance receivables to Finova. On December
12, 2001, Finova exercised its option to purchase Paaco subject to the
completion of its due diligence investigation.
Since January 2001 Smart Choice engaged in discussions with Finova
with regard to possible solutions to the over-advanced position. Several
alternatives were considered, including:
- a restructuring of the Smart Choice credit facility which
would bring Smart Choice back into compliance;
- a sale of substantially all of Smart Choice's assets with the
proceeds being used to pay down a portion of its credit
facility, and the unpaid portion being absorbed by Finova
(forgiveness of debt) and Paaco as the parties may negotiate;
- the sale of Paaco with the proceeds being used to pay down
the credit facility and the unpaid portion being absorbed by
Finova (forgiveness of debt);
- an agreement among Smart Choice, Paaco and Finova whereby
substantially all of the assets and liabilities of Smart
Choice are liquidated with the proceeds being used to pay
down a portion of Smart Choice's credit facility, and the
unpaid portion being absorbed by Finova (forgiveness of debt)
and Paaco as the parties may negotiate; or
- Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate
or sell the collateral, which action may have prompted Smart
Choice to file a petition under federal bankruptcy laws.
After evaluating all of its options and extensive negotiations with
Finova, the Board of Directors concluded that the terms of the Forbearance
Agreement were in the best interests of Smart Choice and its constituents,
including its unsecured creditors and shareholders, primarily on the basis that
the transactions contemplated by the Forbearance Agreement would potentially
result in more assets being available for sale to pay unsecured creditors than
if Smart Choice were to file for bankruptcy. For a more detailed discussion of
the terms of the Forbearance Agreement, see "Material Terms of the
Transaction."
MATERIAL TERMS OF THE TRANSACTION
GENERAL
On November 8, 2001 Smart Choice, along with the Florida Finance
Borrowers and the Paaco Borrowers, entered into a Forbearance Agreement with
Finova. Under a loan and security agreement with Finova, the Florida Finance
Borrowers were indebted to Finova in the amount of approximately
13
$88.4 million as of October 31, 2001 (the "Florida Finance Loan Agreement").
Further, pursuant to a separate loan and security agreement, the Paaco
Borrowers were indebted to Finova in the amount of approximately $59 million as
of October 31, 2001 (the "Paaco Loan Agreement"). Pursuant to a guaranty
executed by Smart Choice dated as of November 18, 1999, Smart Choice, which is
the sole shareholder of the Florida Finance Borrowers and owner of all of the
equity interests of the Paaco Borrowers, has guaranteed the payment and
performance of (i) all debts and obligations of the Florida Finance Borrowers
arising under the Florida Finance Loan Agreement, and (ii) all debts and
obligations of the Paaco Borrowers arising under the Paaco Loan Agreement.
Under the Florida Finance Loan Agreement, Finova has a first priority
perfected security interest in the collateral described in the Florida Finance
Loan Agreement to secure its obligations under the loan agreement. Pursuant to
the Paaco Loan Agreement, Finova has a first priority perfected security
interest in the collateral described in the Paaco Loan Agreement to secure its
obligations under that loan agreement. Material events of default exist under
the Florida Finance Loan Agreement and as a result, Finova was entitled to
exercise its remedies against the collateral under both the Florida Finance
Loan Agreement and the Paaco Loan Agreement, including but not limited to, the
recovery of all cash proceeds of pledged chattel paper and other financial
instruments. If Finova had exercised its rights under the loan agreements, it
would have effectively shut down the operations of the Florida Finance
Borrowers and the Paaco Borrowers as they would have no other source of
operating cash. The foreclosure sale conducted on November 9, 2001 has shut
down the operations of the Florida Finance Borrowers, but the Paaco Borrowers
continue to operate. The fair market value of the collateral securing the
obligations of the Florida Finance Borrowers is substantially less than the
amount of the obligations owed under the Florida Finance Loan Agreement. In
addition, the fair market value of the collateral securing the obligations of
the Florida Finance Borrowers and the Paaco Borrowers together is less than the
aggregate amounts owed under both the Florida Finance Loan Agreement and the
Paaco Loan Agreement. Finova has agreed to conditionally forbear in its
exercise of remedies subject to the terms and conditions set forth in the
Forbearance Agreement.
FINOVA'S CONDITIONAL AGREEMENT OF FORBEARANCE
Except for the foreclosure sale which occurred on November 9, 2001,
Finova has agreed to forbear in the commencement of any collection proceedings
under the loan documents and in the exercise of any repossession rights,
collection rights or other remedies against its collateral during the
forbearance period which commenced on the date of the Forbearance Agreement and
will terminate sixty (60) days after such date, unless extended (the
"Forbearance Period"). Upon the expiration of the Forbearance Period or the
termination of the Forbearance Agreement, Finova will be entitled to exercise
all remedies to the fullest extent permitted under the loan agreements and
applicable law, without hindrance or delay and without further notice to Smart
Choice. During the Forbearance Period, the Paaco Borrowers must timely pay the
regular payments to Finova in the amount that would otherwise become due under
the Paaco Loan Agreement if the obligations under that agreement had not been
accelerated.
LIQUIDATION OF FLORIDA FINANCE COLLATERAL
The Florida Finance Borrowers have been losing money on their
operations for all of 2001 and their continued operation has eroded the value
of the collateral under the Florida Finance Loan Agreement. The Company
analyzed the business issues faced by the Florida Finance Borrowers and
determined that the likelihood of being able to rehabilitate or reorganize the
Florida Finance Borrowers into profitable enterprises was minimal.
14
Effective November 9, 2001, Finova commenced the exercise of its
rights to collect and enforce account receivables owned by the Florida Finance
Borrowers and to repossess collateral under the Florida Finance Loan Agreement.
The Florida Finance Borrowers have agreed to assist Finova in making this
transition by providing reports, information, access to personnel and other
reasonable assistance. The Florida Finance Borrowers also immediately began
winding down their operations as a result of the disposition of all collateral
under the Florida Finance Loan Agreement at a public foreclosure sale which was
held on November 9, 2001. Until the completion to Finova's satisfaction of the
transition of control of the collateral under the Florida Finance Loan
Agreement, Smart Choice agreed not to commence or encourage, and to take all
reasonable measures to prevent, the filing of any petition under the Bankruptcy
Code. Thereafter, should it become necessary to an orderly completion of the
liquidation of the assets of the Florida Finance Borrowers, any obligor under
the loan agreements may sponsor or encourage such a filing, provided that in
any such proceeding no obligor shall challenge or encourage the challenge of
the validity or amount of the obligations owed to Finova, Finova's right to
retain any payments on collection or collections received, or the attachment,
perfection or priority of any security interest securing its obligations.
Finova has agreed that during the Forbearance Period, proceeds of
receipts and collections of receivables held by the Florida Finance Borrowers
and the proceeds of inventory sales undertaken in the usual manner by the
Florida Finance Borrowers may be used by the Florida Finance Borrowers in
accordance with a budget agreed upon by the parties for the purposes of:
- paying the usual payroll wages and taxes, including payment
upon termination for any accrued vacation time, with respect
to employees of Smart Choice and the Florida Finance
Borrowers;
- paying lessors and vendors for current accruals of
liabilities to the extent that the continued service of such
lessors and vendors are necessary to the orderly winding up
of the affairs of the Florida Finance Borrowers;
- arranging the due termination of all employee benefit plans
as they affect employees of the Florida Finance Borrowers;
and
- for otherwise paying such reasonable and necessary expenses
of winding down the operations of the Florida Finance
Borrowers as Finova may approve in writing in its sole
discretion.
The actual control of the bank accounts containing proceeds of the
Florida Finance Borrowers collateral has been transferred to Finova and Finova
will release to the Florida Finance Borrowers funds to the extent that they are
needed for the payment of expenses outlined above in accordance with an agreed
upon budget. The management of the Florida Finance Borrowers will continue to
be the responsibility of the Florida Finance Borrowers' directors and officers
and Finova has not undertaken any right to control or interfere with the
operations of the Florida Finance Borrowers.
OPTION FOR PURCHASE OF PAACO
Smart Choice has granted Finova an option to purchase all of its
ownership interest in the Paaco Borrowers at a price equal to the Deficiency. On
December 12, 2001, Finova exercised its option to purchase Paaco, subject to
the successful completion of its due diligence investigation. The sale of Paaco
is expected to close in January 2002. Smart Choice's obligation to perform under
the Paaco Option is subject to obtaining shareholder approval for the sale
(which approval has been obtained) and an independent appraisal from a qualified
firm confirming that the value of the Paaco Borrowers is not greater than the
amount of the Deficiency. The full satisfaction of the Deficiency by the
exercise of the Paaco Option will be effective for the benefit of all of the
obligors, which includes the Company and its subsidiaries, whether liable as
guarantor or co-borrower. The management of the Paaco Borrowers will
15
continue to be the responsibility of their directors and officers and Finova
has not undertaken any right to control or to interfere with the operation of
the Paaco Borrowers.
OPTION FOR PURCHASE OF SMART CHOICE COMMON STOCK
Smart Choice has also granted Finova an option to purchase up to all
of Smart Choice's remaining authorized but unissued and unreserved common stock
at the price of $0.30 per share (approximately 39 million shares), to be paid
through the forgiveness of the obligations under the Florida Finance Loan
Agreement, which forgiveness will be effective for the benefit of Smart Choice
as the guarantor of the obligations under the Florida Finance Loan Agreement
(the "Smart Choice Option"). The Smart Choice Option may be exercised in whole
or in part until the earlier of the closing of the sale of Paaco or March 8,
2002. AS A RESULT OF THE EXERCISE OF THE PAACO OPTION, THE SMART CHOICE OPTION
HAS BEEN SUSPENDED AND WILL TERMINATE UPON THE CLOSING OF THE SALE OF PAACO.
OPERATION OF THE PAACO BORROWERS
Until the termination of the Forbearance Agreement or the purchase by
Finova of Paaco, the Paaco Borrowers must operate in the ordinary course of
business. The Paaco Borrowers have agreed not to pay any additional amounts
with respect to debt owed to Crown Group, Inc. unless such payments are made in
accordance with the subordination agreement approved by Finova.
BANKRUPTCY
In the event that any property or portion thereof or any interest
therein becomes property of any bankruptcy estate or subject to any state or
federal insolvency proceeding, then Finova will become entitled to seek an
order from the Bankruptcy Court to permit Finova to pursue its rights and
remedies against any obligor.
UNCONDITIONAL RELEASE OF ALL CLAIMS AND DEFENSES
Under the terms of the Forbearance Agreement, the Company and its
subsidiaries have released and forever discharged Finova of and from any and
all claims that any of them may have against Finova. The Company and its
subsidiaries have further agreed to refrain and forbear from commencing any
lawsuit, action or other proceeding to collect or enforce any such released
claim and to indemnify, defend and hold harmless Finova against any and all
loss, liability, claim or expense that any of them might incur as a result of
any breach by any borrowing party or the assertion of any claim or defense by
any borrowing party.
FACTORS CONSIDERED BY THE BOARD
In reaching its decision to approve the transactions with Finova and
to recommend that the Smart Choice shareholders approve the sale of Paaco,
Smart Choice's Board of Directors consulted with:
- management of Smart Choice regarding the business, financial
condition and results of operations of Smart Choice's
subsidiaries, and the terms of the Forbearance Agreement;
- its legal counsel regarding the proposed terms of the
Forbearance Agreement and the obligations of the Board of
Directors in its consideration of the proposed transactions;
and
- its independent public accountants regarding the accounting
and tax aspects of the proposed transactions.
Smart Choice's Board of Directors considered various factors,
including the following:
16
- alternatives to the proposed transactions with Finova,
including other sales of assets and a liquidation of Smart
Choice;
- the prospects for effecting such transactions in the current
environment, both outside a bankruptcy proceeding and in a
bankruptcy proceeding; the availability of
debtor-in-possession financing adequate to sustain Smart
Choice's operations in a bankruptcy proceeding; and the
ability of Smart Choice to retain ownership and control of
its principal assets in a bankruptcy proceeding;
- the amount of debt of Smart Choice and the terms and
conditions of the documents evidencing such debt, as well as
the prospects of refinancing or otherwise repaying the debt;
- the impact of a bankruptcy proceeding on the prospects of
Smart Choice's shareholders and creditors to realize value
for their interests in or claims against Smart Choice;
- Smart Choice's prospects for further growth, given its small
size, its limited access to capital markets, and the illiquid
nature of the trading market of its common stock on the OTC
Bulletin Board; and
- whether the proposed transactions would provide some
opportunity for realization of value on the sale of
unencumbered assets.
RISKS OF THE PROPOSED TRANSACTION
Smart Choice's Board of Directors also considered the potential
adverse consequences of the transactions with Finova, which would likely have a
material adverse effect on Smart Choice, such as the following:
- Any potential benefits expected to result from the proposed
transaction may not be realized, especially if Smart Choice
is not able to maximize value from the sale of its remaining
assets.
- Smart Choice does not expect any payment to be made to its
common shareholders upon consummation of the sale of Paaco to
Finova, and Smart Choice believes that any payment in the
future is unlikely, and, in a liquidation, would ultimately
depend upon the proceeds received from the sale of its
remaining assets. These proceeds would be available for
distribution to shareholders only after the repayment of
Smart Choice's obligations to unsecured creditors.
- After consummation of the transactions under the Forbearance
Agreement, Smart Choice will own assets consisting primarily
of fixed non-operating assets. There can be no assurance that
the remaining assets will have any substantial value or that
Smart Choice will be able to achieve any value from the
collection, sale or other disposition of those assets which
will exceed the amount of Smart Choice's remaining
obligations to creditors.
Smart Choice's Board of Directors determined that, on balance, the
positive attributes of the proposed transactions outweighed the potentially
adverse consequences. Smart Choice's Board of Directors ultimately concluded
that the transactions contemplated by the Forbearance Agreement would be in the
best interests of Smart Choice and its constituents.
REQUIRED APPROVALS
The approval of a majority of all of Smart Choice's outstanding common
stock is required to approve the sale of Paaco to Finova. With the exception of
the approvals required by Florida corporate law and compliance with federal
securities laws, neither party must comply with any federal or other state
regulatory requirements or obtain any other material approval in connection
with the proposed transactions.
17
SELECTED FINANCIAL DATA
The financial data set forth below was derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements and related notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual Report on Form 10-K for
the year ended April 30, 2001 and the Company's Quarterly Report on Form 10-Q
for the three and six months ended October 31, 2001, both of which are included
as appendices to this Information Statement. (In thousands, except per share
amounts and other operating data.)
Four
Six Months Months Years Ended
Ended October 31, Years Ended April 30, Ended December 31,
--------------------- -------------------------------- April 30, -------------------
2001 2000 2001 2000 1999 1998 1997 1996
--------- -------- --------- -------- -------- --------- -------- -------
Statement of Operations Data:
Revenues $ 89,728 $112,739 $ 221,908 $130,564 $ 70,728 $19,666 $ 48,060 $28,857
Net income (loss) (34,841) 2,235 (603) 3,111 (1,412) 585 (951) 621
Earnings (loss) per share-diluted $ ( 3.57) $ .23 $ (.06) $ .37 $(197.11) $ .08 $(188.24) $124.20
Weighted average shares-diluted 9,762 9,794 9,791 8,386 7 7,355 5 5
Balance Sheet Data (at period end):
Finance receivables, net $ 122,440 $146,954 $ 149,656 $132,855 $ 47,757 $34,192 $ 27,381 $16,443
Total assets 150,222 195,449 189,900 178,966 60,374 42,770 33,404 20,723
Revolving credit facilities 147,442 146,281 147,442 130,367 41,824 26,050 23,410 12,451
Other borrowings 8,340 9,973 9,985 10,773 4,939 6,395 6,846 4,562
Stockholders' equity (deficit) (19,349) 18,330 15,492 16,095 6,697 5,109 (117) 834
Other Operating Data:
Number of vehicles sold 6,100 7,755 14,869 9,479 5,174 1,452 3,461 2,432
Dealerships open at period end 24 25 22 24 10 9 8 4
Per vehicle sold:
Sales Price $ 11,557 $ 12,055 $ 12,320 $ 11,455 $ 11,954 $12,172 $ 12,458 $10,736
Gross margin 4,159 4,712 4,610 4,324 3,864 4,914 3,985 3,921
Provision for credit loss 3,449 2,842 2,925 2,254 1,918 446 2,249 1,271
Operating expense 3,579 2,664 3,027 2,766 3,065 4,210 2,730 2,772
Percentages:
Gross margin as of % of sales 36.0% 39.1% 37.4% 37.7% 32.3% 40.4% 32.0% 36.5%
Provision for credit loss as
of a % of sales 29.8% 23.6% 23.7% 19.7% 16.0% 3.7% 18.1% 11.8%
Operating expense as a % of
revenue 24.3% 18.3% 20.3% 20.1% 22.4% 31.1% 19.7% 23.4%
18
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
On November 8, 2001, Smart Choice Automotive Group, Inc. ("Smart
Choice") and certain of its subsidiaries entered into a forbearance agreement
with Finova Capital Corporation ("Finova"), the primary lender to Smart
Choice's subsidiaries, that has resulted in the foreclosure of receivables and
inventory of certain Florida-based subsidiaries of Smart Choice (the "Florida
Finance Group"), and the probable sale of Smart Choice's wholly owned
subsidiaries, Paaco Automotive Group, L.P. and Premium Auto Acceptance
Corporation (collectively, "Paaco"), to Finova.
Prior to November 9, 2001, the Florida Finance Group sold and financed
used cars and trucks in Florida. Paaco sells and finances used cars and trucks
in Texas. The Florida Finance Group had, and Paaco continues to have, a
revolving credit facility with Finova. Prior to November 9, 2001, the Florida
Finance Group was over-advanced on its revolving credit facility, which
constituted an event of default under the facility, and as of September 30,
2001, was over-advanced by approximately $25 million.
Pursuant to the forbearance agreement, on November 9, 2001, the
collateral for the Florida Finance Group's credit facility with Finova, which
consisted principally of receivables and inventory, was sold at a public
foreclosure sale to Finova for $55 million. Prior to the foreclosure sale, the
Florida Finance Group owed Finova $88.4 million. Thus, after applying the
proceeds from the foreclosure sale, the Florida Finance Group owed Finova $33.4
million (the "Deficiency").
Further, as part of the forbearance agreement, Smart Choice has granted
Finova (i) an option to purchase Paaco (the "Paaco Option") for an amount equal
to the Deficiency, subject to shareholder approval and an appraisal indicating
the value of Paaco is not greater than the Deficiency, and (ii) an option to
purchase up to 100% of Smart Choice's remaining shares of authorized but
unissued common stock (approximately 39 million shares) (the "Smart Choice Stock
Option") at a price of $0.30 per share. The Smart Choice Stock Option will
terminate upon the closing of the sale of Paaco. On December 12, 2001, Finova
exercised the Paaco Option, subject to the successful completion of its due
diligence investigation. The Smart Choice Stock Option will expire on March 8,
2002 if not earlier terminated upon the closing of the sale of Paaco.
As a result of the Finova agreement and the lack of other available
capital, on November 9, 2001 the Florida Finance Group began to wind-down its
operations. If the sale of Paaco is closed as expected, Smart Choice's remaining
assets would consist of certain improved and unimproved real estate in
Titusville, Florida, including a 35,000 square-foot office facility, and certain
other current and fixed assets. Assuming the sale of Paaco, management presently
anticipates that Smart Choice's remaining assets will likely be sold by Smart
Choice in an effort to realize the maximum value for these assets and repay its
obligations to unsecured creditors to the extent possible.
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Consolidated Condensed Balance Sheet of Smart
Choice as of October 31, 2001 gives effect to (i) the sale of certain of the
Florida Finance Group's receivables and inventory to Finova at a public
foreclosure sale for $55 million and (ii) the expected sale of Paaco to Finova
for the Deficiency pursuant to Finova's exercise of the Paaco Option.
Pro Forma Consolidated Statements of Operations of Smart Choice for the
year ended April 30, 2001 and the six months ended October 31, 2001 have not
been presented because after (i) the sale of
19
certain of the Florida Finance Group's receivables and inventory to Finova at a
public foreclosure sale, and (ii) the sale of Paaco to Finova pursuant to
Finova's exercise of the Paaco Option, Smart Choice essentially will have no
ongoing operations and is not expected to generate any revenues. Following the
sale of Paaco, management presently anticipates that Smart Choice's remaining
assets will likely be sold by Smart Choice in an effort to realize the maximum
value for these assets and repay its obligations to unsecured creditors to the
extent possible.
The pro forma information is based on the historical financial
statements of Smart Choice giving effect to the transactions and actions
described above and in the accompanying Notes to Pro Forma Consolidated
Condensed Balance Sheet and may not be indicative of the results that would
have occurred had the transactions and actions taken place on the date
indicated.
20
SMART CHOICE AUTOMOTIVE GROUP, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
UNAUDITED
OCTOBER 31, 2001
(IN THOUSANDS)
Foreclosure
of Certain
Florida
Historical Finance Group Sale of Pro Forma
Smart Choice Assets(a) Paaco(b) Smart Choice
------------ ------------- --------- ------------
Assets:
Cash and cash equivalents $ 3,686 $ (1,933) $ 1,753
Other receivables 564 (128) 436
Intercompany receivable (payable) $ (6,782) 6,782
Finance receivables, net 122,440 (44,164) (78,276)
Inventory 9,899 (4,054) (5,845)
Prepaid and other assets 770 (372) 398
Deferred tax assets, net 3,374 (3,374)
Property and equipment, net 9,489 (5,986) 3,503
--------- --------- --------- -------
$ 150,222 $ (55,000) $ (89,132) $ 6,090
========= ========= ========= =======
Liabilities and stockholders' equity (deficit):
Accounts payable and accrued
liabilities $ 7,389 $ (4,125) $ 3,264
Income taxes payable 1,140 (1,140)
Revolving credit facilities 147,442 $ (55,000) (92,442)
Other borrowings 8,340 (4,575) 3,765
Deferred sales tax 4,806 (4,806)
--------- --------- --------- -------
Total liabilities 169,117 (55,000) (107,088) 7,029
--------- --------- --------- -------
Contingent redemption value of put options 454 454
Stockholders' equity (deficit) (19,349) 17,956 (1,393)
--------- --------- --------- -------
$ 150,222 $ (55,000) $ (89,132) $ 6,090
========= ========= ========= =======
The accompanying notes are an integral part of this pro forma
consolidated condensed balance sheet.
21
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
a - Reflects the sale of the Florida Finance Group's finance receivables,
inventory, and an intercompany receivable from Paaco at a public
foreclosure auction where Finova purchased such assets for $55.0
million.
b - Reflects the sale of Paaco to Finova for an amount equal to the
Deficiency ($33.4 million) on the Florida Finance Group's revolving
credit facility with Finova.
22
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material federal income
tax consequences of the sale of Paaco. The discussion is based on the Internal
Revenue Code of 1986, Treasury Department regulations, published positions of
the Internal Revenue Service, and court decisions now in effect, all of which
are subject to change, potentially with retroactive effect. This summary is
provided for general information only and does not address all aspects of the
possible federal income tax consequences of the proposed sale of Paaco and is
not intended as tax advice to any person. In particular, this summary does not
consider the federal income tax consequences to individual shareholders of
Smart Choice in light of their individual investment circumstances or to
shareholders subject to special treatment under the federal income tax laws.
This summary does not address any consequence of the proposed sale of Paaco
under any state, local or foreign tax laws.
The transaction will have no tax consequences to the Smart Choice
shareholders because Smart Choice is a C corporation. Therefore, Smart Choice's
shareholders will not recognize any gain or loss as a result of the proposed
transaction. The only tax consequences will be at the corporate level.
If Smart Choice ultimately makes a non-liquidating distribution or a
liquidating distribution to shareholders, the receipt of these distributions
may have tax consequences to the shareholders.
YOU ARE ENCOURAGED TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC
TAX CONSEQUENCES OF THE PROPOSED TRANSACTION TO YOU, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
DISSENTER'S RIGHTS
Smart Choice is a Florida corporation. The following is a summary of
the Florida statutes that set forth the procedures for dissenting from the
proposed transaction, for demanding payment of the fair value of the shares
held by the dissenter, and for determining the fair value of such shares. Smart
Choice will not send any notice of any action necessary to maintain your
dissenters' rights.
IF YOU DESIRE TO EXERCISE YOUR STATUTORY RIGHTS AS A DISSENTER OR TO
PRESERVE YOUR RIGHT TO DO SO, YOU SHOULD CAREFULLY REVIEW THIS SUMMARY AND THE
DISSENTERS' RIGHTS STATUTES, COPIES OF WHICH ARE ATTACHED AS APPENDIX A TO THIS
INFORMATION STATEMENT. FAILURE TO COMPLY WITH THE PROCEDURES IN THE DISSENTERS'
RIGHTS STATUTES WILL RESULT IN THE LOSS OF YOUR DISSENTERS' RIGHTS.
For Smart Choice, the sale of Paaco will provide Smart Choice with an
opportunity to avoid having to file for bankruptcy protection. Although the
proposed transactions with Finova will not result in any proceeds for Smart
Choice common shareholders, the Smart Choice Board of Directors believes that
the only other alternative for Smart Choice at this point would be to file for
bankruptcy protection. A bankruptcy would not be expected to result in any
assets remaining for sale and/or distribution to common shareholders. In the
judgment of the Smart Choice Board of Directors, the proposed transactions with
Finova will maximize the value of Smart Choice's assets. Smart Choice can make
no assurance that the remaining assets of Smart Choice can be disposed of in a
manner that might allow Smart Choice to satisfy its creditors and result in
some value to Smart Choice's common shareholders in the future. It is very
unlikely that shareholders will receive any distributions in the future.
23
A shareholder that desires to exercise his or her rights as a
dissenter must satisfy all of the following conditions. A shareholder who
wishes to assert dissenters' rights must deliver to Smart Choice, within 20
days after the date on which Smart Choice delivers this written notice, a
notice of such election to dissent, stating his or her name and address, the
number of shares as to which he or she dissents, and a demand for payment of
the fair value of his or her shares. Any shareholder filing an election to
dissent must deposit his or her stock certificates with Smart Choice
simultaneously with filing the election. Any shareholder failing to timely file
this election will be bound by the terms of the proposed transaction. An
election may be withdrawn at any time before an offer is made by Smart Choice
to pay for the dissenting shares. After an offer is made, an election may not
be withdrawn unless Smart Choice consents.
Within 10 days after the expiration of the period in which
shareholders may file their election to dissent but in no case later than 90
days from the shareholders' approval of such proposed transaction, Smart Choice
is required to make a written offer to each dissenting shareholder who has
timely filed an election to pay the fair value of the dissenting shares. This
offer must be accompanied by certain financial information regarding Smart
Choice. Under the Florida dissenters' rights statutes, "fair value" means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable. If
Smart Choice's offer is accepted within 30 days after it is made, Smart Choice
will pay for the dissenting shares within 90 days after the offer is made or
the consummation of the proposed transaction, whichever is later. When this
payment is made, the dissenting shareholder will no longer have any interest in
the shares.
If Smart Choice fails to make a written offer within the required time
period or if Smart Choice makes an offer and the dissenting shareholder does
not accept the offer within 30 days, Smart Choice must file an action in a
court of competent jurisdiction, requesting that the fair value of the
dissenting shares be determined. This action must be filed within 30 days after
receipt of a written demand from any dissenting shareholder that is given
within 60 days from the date of the corporate action. At its election, Smart
Choice may file this action at any time within this 60-day period. If Smart
Choice fails to file this action, any dissenting shareholder may do so in the
name of Smart Choice.
A shareholder may assert dissenters' rights as to fewer than all of
the shares of common stock registered in his or her name.
24
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith, files reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC").
These reports, proxy statements and other information filed by the Company with
the SEC may be inspected without charge at the public reference section of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Copies of
this material also may be obtained from the SEC at prescribed rates. The SEC
also maintains a website that contains reports, proxy and information
statements and other information regarding public companies that file reports
with the SEC. Copies of these materials may be obtained from the SEC's website
at http://www.sec.gov.
SMART CHOICE AUTOMOTIVE GROUP, INC.
Winter Park, Florida
January 8, 2002
25
APPENDIX A
607.1301 DISSENTER'S RIGHTS; DEFINITIONS.--The following definitions
apply to ss. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a
dissenting shareholder before the corporate action or the surviving or
acquiring corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which
the shareholders' vote authorizing the proposed action was taken, the date on
which the corporation received written consents without a meeting from the
requisite number of shareholders in order to authorize the action, or, in the
case of a merger pursuant to s. 607.1104, the day prior to the date on which a
copy of the plan of merger was mailed to each shareholder of record of the
subsidiary corporation.
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT.--(1) Any shareholder of a
corporation has the right to dissent from, and obtain payment of the fair value
of his or her shares in the event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is
a party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its
parent under s. 607.1104, and the shareholders would have been entitled to vote
on action taken, except for the applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation, other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange pursuant to s. 607.1202, including a sale in dissolution but not
including a sale pursuant to court order or a sale for cash pursuant to a plan
by which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within 1 year after the date of sale;
(c) As provided in s. 607.0902(11), the approval of a
control-share acquisition;
(d) Consummation of a plan of share exchange to which the
corporation is a party as the corporation the shares of which will be acquired,
if the shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the
shareholder is entitled to vote on the amendment and if such amendment would
adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any
of his or her shares;
2. Altering or abolishing the voting rights pertaining to any of
his or her shares, except as such rights may be affected by the voting rights
of new shares then being authorized of any existing or new class or series of
shares;
3. Effecting an exchange, cancellation, or reclassification of
any of his or her shares, when such exchange, cancellation, or reclassification
would alter or abolish the shareholder's voting rights or alter his or her
percentage of equity in the corporation, or effecting a reduction or
cancellation of accrued dividends or other arrearages in respect to such
shares;
A-1
4. Reducing the stated redemption price of any of the
shareholder's redeemable shares, altering or abolishing any provision relating
to any sinking fund for the redemption or purchase of any of his or her shares,
or making any of his or her shares subject to redemption when they are not
otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any
of the shareholder's preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of the
shareholder's preferred shares; or
7. Reducing any stated preferential amount payable on any of the
shareholder's preferred shares upon voluntary or involuntary liquidation; or
(f) Any corporate action taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder is entitled to
dissent and obtain payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in
paragraph (1)(e) has the right to dissent only as to those of his or her shares
which are adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares
registered in his or her name. In that event, the shareholder's rights shall be
determined as if the shares as to which he or she has dissented and his or her
other shares were registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this
section does not apply with respect to a plan of merger or share exchange or a
proposed sale or exchange of property, to the holders of shares of any class or
series which, on the record date fixed to determine the shareholders entitled
to vote at the meeting of shareholders at which such action is to be acted upon
or to consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his
or her shares under this section may not challenge the corporate action
creating his or her entitlement unless the action is unlawful or fraudulent
with respect to the shareholder or the corporation.
607.1320 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.--(1)(a) If a
proposed corporate action creating dissenters' rights under s. 607.1302 is
submitted to a vote at a shareholders' meeting, the meeting notice shall state
that shareholders are or may be entitled to assert dissenters' rights and be
accompanied by a copy of ss. 607.1301, 607.1302, and 607.1320. A shareholder
who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for his or her shares if
the proposed action is effectuated, and
2. Not vote his or her shares in favor of the proposed action. A
proxy or vote against the proposed action does not constitute such a notice of
intent to demand payment.
(b) If proposed corporate action creating dissenters' rights
under s. 607.1302 is effectuated by written consent without a meeting, the
corporation shall deliver a copy of ss. 607.1301, 607.1302, and 607.1320 to
each shareholder simultaneously with any request for the shareholder's written
consent or, if such a request is not made, within 10 days after the date the
A-2
corporation received written consents without a meeting from the requisite
number of shareholders necessary to authorize the action.
(2) Within 10 days after the shareholders' authorization date,
the corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his or her shares pursuant to
paragraph (1)(a) or, in the case of action authorized by written consent, to
each shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
(3) Within 20 days after the giving of notice to him or her, any
shareholder who elects to dissent shall file with the corporation a notice of
such election, stating the shareholder's name and address, the number, classes,
and series of shares as to which he or she dissents, and a demand for payment
of the fair value of his or her shares. Any shareholder failing to file such
election to dissent within the period set forth shall be bound by the terms of
the proposed corporate action. Any shareholder filing an election to dissent
shall deposit his or her certificates for certificated shares with the
corporation simultaneously with the filing of the election to dissent. The
corporation may restrict the transfer of uncertificated shares from the date
the shareholder's election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder
shall thereafter be entitled only to payment as provided in this section and
shall not be entitled to vote or to exercise any other rights of a shareholder.
A notice of election may be withdrawn in writing by the shareholder at any time
before an offer is made by the corporation, as provided in subsection (5), to
pay for his or her shares. After such offer, no such notice of election may be
withdrawn unless the corporation consents thereto. However, the right of such
shareholder to be paid the fair value of his or her shares shall cease, and the
shareholder shall be reinstated to have all his or her rights as a shareholder
as of the filing of his or her notice of election, including any intervening
preemptive rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by
the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in
the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or
the shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by
a court has been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such
shareholder is not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which
shareholders may file their notices of election to dissent, or within 10 days
after such corporate action is effected, whichever is later (but in no case
later than 90 days from the shareholders' authorization date), the corporation
shall make a written offer to each dissenting shareholder who has made demand
as provided in this section to pay an amount the corporation estimates to be
the fair value for such shares. If the corporate action has not been
consummated before the expiration of the 90-day period after the shareholders'
authorization date, the offer may be made conditional upon the consummation of
such action. Such notice and offer shall be accompanied by:
A-3
(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available date and not more than
12 months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the
12-month period ended on the date of such balance sheet or, if the corporation
was not in existence throughout such 12-month period, for the portion thereof
during which it was in existence.
(6) If within 30 days after the making of such offer any
shareholder accepts the same, payment for his or her shares shall be made
within 90 days after the making of such offer or the consummation of the
proposed action, whichever is later. Upon payment of the agreed value, the
dissenting shareholder shall cease to have any interest in such shares.
(7) If the corporation fails to make such offer within the period
specified therefor in subsection (5) or if it makes the offer and any
dissenting shareholder or shareholders fail to accept the same within the
period of 30 days thereafter, then the corporation, within 30 days after
receipt of written demand from any dissenting shareholder given within 60 days
after the date on which such corporate action was effected, shall, or at its
election at any time within such period of 60 days may, file an action in any
court of competent jurisdiction in the county in this state where the
registered office of the corporation is located requesting that the fair value
of such shares be determined. The court shall also determine whether each
dissenting shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his or her shares. If
the corporation fails to institute the proceeding as herein provided, any
dissenting shareholder may do so in the name of the corporation. All dissenting
shareholders (whether or not residents of this state), other than shareholders
who have agreed with the corporation as to the value of their shares, shall be
made parties to the proceeding as an action against their shares. The
corporation shall serve a copy of the initial pleading in such proceeding upon
each dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons and compliant and upon each
nonresident dissenting shareholder either by registered or certified mail and
publication or in such other manner as is permitted by law. The jurisdiction of
the court is plenary and exclusive. All shareholders who are proper parties to
the proceeding are entitled to judgment against the corporation for the amount
of the fair value of their shares. The court may, if it so elects, appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers shall have such power and authority
as is specified in the order of their appointment or an amendment thereof. The
corporation shall pay each dissenting shareholder the amount found to be due
him or her within 10 days after final determination of the proceedings. Upon
payment of the judgment, the dissenting shareholder shall cease to have any
interest in such shares.
(8) The judgment may, at the discretion of the court, include a
fair rate of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be
determined by the court and shall be assessed against the corporation, but all
or any part of such costs and expenses may be apportioned and assessed as the
court deems equitable against any or all of the dissenting shareholders who are
parties to the proceeding, to whom the corporation has made an offer to pay for
the shares, if the court finds that the action of such shareholders in failing
to accept such offer was arbitrary, vexatious, or not in good faith. Such
expenses shall include reasonable compensation for, and reasonable expenses of,
the appraisers, but shall exclude the fees and expenses of counsel for, and
experts employed by, any party. If the fair value of the shares, as
A-4
determined, materially exceeds the amount which the corporation offered to pay
therefor or if no offer was made, the court in its discretion may award to any
shareholder who is a party to the proceeding such sum as the court determines
to be reasonable compensation to any attorney or expert employed by the
shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the
agreed value thereof or pursuant to payment of the judgment entered therefor,
as provided in this section, may be held and disposed of by such corporation as
authorized but unissued shares of the corporation, except that, in the case of
a merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
A-5
APPENDIX B
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: Commission file number:
APRIL 30, 2001 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
incorporation or organization) Identification No.)
1555 SEMORAN BLVD., WINTER PARK, FLORIDA
(Address of principal executive offices)
32792
(Zip Code)
(407) 671-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.01 par share
Redeemable Common Stock Purchase Warrants
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 [ ]
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 the 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]
As of August 8, 2001 the aggregate market value of the voting stock held by
non-affiliates (all persons other than executive officers, directors and
holder's of 5% or more of the Registrant's common stock) of the Registrant
(1,373,320 shares) was $549,328.
As of August 8, 2001 there were 9,762,270 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 2001 are incorporated by reference into Part III
of this report, with the exception of information regarding executive officers
required under Item 10 of Part III, which information is included in Part I,
Item 1.
B-1
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. Certain information included in this
Annual Report on Form 10-K contains, and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company or its management) contain or will contain, forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words "believe," "expect," "anticipate," "estimate," "project" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. The Company undertakes no obligation to publicly update
or revise any forward-looking statements. Such forward-looking statements are
based upon management's current plans or expectations and are subject to a
number of uncertainties and risks that could significantly affect current plans,
anticipated actions and the Company's future financial condition and results. As
a consequence, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company as a result of
various factors. Uncertainties and risks related to such forward-looking
statements include, but are not limited to, those relating to the development of
the Company's businesses, continued availability of lines of credit for the
Company's businesses, changes in interest rates, competition, dependence on
existing management, economic conditions (particularly in the states of Texas
and Florida), changes in tax laws or the administration of such laws and changes
in lending laws or regulations. Any forward-looking statements are made pursuant
to the Private Securities Litigation Reform Act of 1995 and, as such, speak only
as of the date made.
GENERAL AND HISTORY
Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively with all
of its subsidiaries (the "Company") is one of the largest chains of "Buy
Here-Pay Here" car dealerships in the United States. The Company operates 22
dealerships located in major markets in Texas and Florida. The Company focuses
exclusively on selling and financing quality used vehicles to credit-impaired
customers. The Company operates twelve lots in Texas under the "Paaco" name and
ten lots in Florida under the "First Choice" name.
Effective December 1, 1999, Smart Choice acquired all of the outstanding stock
of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "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. References to Smart Choice generally
refer to Smart Choice Automotive Group, Inc. and its Florida based subsidiaries,
including First Choice Auto Finance.
Paaco began operations in 1992 as an automobile auction concern in Arlington,
Texas. In 1993, Paaco began its Buy Here-Pay Here operation, selling and
financing used vehicles to credit-impaired borrowers. Smart Choice began
operations in 1997 through the acquisition and consolidation of five Buy
Here-Pay Here businesses.
INDUSTRY
USED CAR SALES
Used car retail sales typically occur through either independent used car
dealerships or franchised new car dealerships that sell used cars. The market
for used car sales in the United States is substantial and has steadily
increased over the past five years. Management believes the factors that have
led to growth in this industry include:
B-2
(i) significant 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. According to an October 2000 Bear
Stearns research report, automotive retailing was the largest U.S. retail
sector, generating approximately $710 billion in annual sales. Of these
revenues, 51%, or roughly $360 billion, were estimated to come from used vehicle
sales.
Both Paaco and Smart Choice 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, which are typically small,
independent used car dealerships that sell and finance the sale of used cars to
sub-prime 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, which is 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.
USED CAR FINANCING
The automobile financing industry is the third-largest consumer finance market
in the country, behind 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 such 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. The
Company believes that traditional lenders avoid this market because of its high
credit risk and the associated collection efforts. Many of the estimated 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 at a discount.
OPERATING STRATEGY
The Company's operating strategy emphasizes the following points:
SELL RELIABLE, QUALITY CARS. Both Paaco and Smart Choice sell reliable, quality
used cars. Management believes that product failure is a leading cause of
defaults on finance contracts in the self-financed used car industry. Each
company utilizes guidelines in purchasing, inspecting, reconditioning (Paaco
only) and servicing in order to minimize defaults. At Paaco and Smart Choice,
the vast majority of customers are provided with a service contract/limited
warranty (6 month/6,000 mile for Paaco and 12 month/12,000 mile for Smart
Choice) at the time they purchase their vehicle.
B-3
UTILIZE CENTRALIZED CREDIT APPROVAL WITH A BUY ROOM. Both Paaco and Smart Choice
coordinate the credit approval function and sales process for used cars through
the use of a centralized loan approval team (hereinafter referred to as the "buy
room"). The buy room helps to determine credit worthiness and proper deal
structure, including factors such as gross profit, loan term and interest rate.
The credit underwriting process strictly adheres to objective underwriting
standards and focuses on the customer's weekly, bi-weekly or monthly cash flow.
The Company regularly reviews collection results to assess the effectiveness of
its underwriting standards.
APPLY RIGOROUS COLLECTION PRACTICES. Providing financing to sub-prime borrowers
requires not only that the Company have an effective underwriting process, but
that its collection policies and procedures be sound and diligently executed.
The majority of the Company's customers make their payments in person at one of
the dealerships, although some customers mail their payments into the corporate
offices of the Company. Both Paaco and Smart Choice closely monitor their
customer accounts using collections software that stratifies past due accounts
by dealership and the number of days past due. Customers are contacted by phone
within a few days if their payment is not received on the scheduled due date.
The results of each phone contact (such as promises to pay or the establishment
of alternative payment arrangements) are documented by Company personnel.
If standardized collection procedures have been unsuccessful, and it is
determined that a cure of the loan default is unlikely, then the repossession
process begins. Of the vehicles repossessed, many are returned by the customer
on a voluntary basis. Other repossessions are usually handled by licensed,
bonded and insured repossession firms. The Company re-markets approximately 70%
of its repossessions through its dealerships (rather than through auctions where
cars are generally sold at lower prices), with the remainder sold for cash to
wholesalers or other third parties at an auction.
The Company monitors the results of its collection efforts based upon a number
of quantitative criteria including (i) installment contract agings, (ii) the
percentage of accounts past due versus current, and (iii) static pool analysis.
MAXIMIZE RECOVERY ON REPOSSESSIONS. Management believes that the Company should
experience lower losses on repossessions than other lenders in the self-financed
used car industry due to:
(i) the quality of the cars sold;
(ii) the timeliness of repossessions ("zero tolerance" policy for
nonpayment); and
(iii) its ability to re-market repossessions. Paaco and Smart Choice
both re-market the majority of their repossessions through
their dealerships, rather than through auctions (where cars
are generally sold at lower prices).
INCREASE OPERATING EFFICIENCY. An ongoing effort has been made to increase the
operating efficiency throughout the Company by combining administrative
functions in order to reduce costs. Smart Choice, in particular, has
consolidated functions such as accounting and treasury, insurance and employee
benefits, and legal support, and in the coming year expects to further increase
operating efficiencies in such areas as purchasing and transporting inventory.
EMPLOY INTEGRATED MANAGEMENT INFORMATION SYSTEMS. All of the Company's 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. The Company uses the MIS to transmit data between corporate
headquarters and the various dealerships and payment centers to evaluate daily
lot performance. The MIS allows management to monitor inventory, sales, costs
and customer payments, as well as facilitate the underwriting and collection of
its finance contracts.
PROMOTE PAACO AND FIRST CHOICE BRANDS. Management believes that the Paaco and
First Choice brands are synonymous with quality cars and customer service. By
seeking to maintain continuity in the appearance of its store locations, the
Company expects to promote its name recognition. Additionally, each of Paaco and
First Choice maintains a consistency between facilities and marketing materials
through the use of standardized logos.
B-4
USED CAR DEALERSHIPS
The Company currently owns and operates 12 dealerships under the Paaco name in
Texas and 10 dealerships under the First Choice name in central Florida. Paaco
dealerships are divided into two regions - the Dallas/Fort Worth and Houston
metropolitan areas. First Choice dealerships are divided into three Florida
regions - the Tampa/St. Petersburg area, the Orlando metropolitan area and the
Gainesville/Ocala area.
The following table summarizes, by market, the number of dealerships presently
operated by the Company.
Paaco
Dallas/Fort Worth 9
Houston 3
--
Total Paaco 12
==
First Choice
Orlando 4
Tampa / St. Petersburg 4
Gainesville/Ocala 2
--
Total First Choice 10
==
Total 22
==
Currently, Paaco and Smart Choice dealerships maintain an inventory of 35 to 70
vehicles per dealership, 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 the dealership to meet the preferences and budgets of a wide range
of potential customers targeted for the area. Management believes that selling
higher quality used cars and providing service contract/limited warranty to
cover many of the vehicle's major mechanical components results in improved
customer satisfaction and fewer defaults on finance contracts.
Paaco and Smart Choice provide a service contract/limited warranty (6
month/6,000 mile for Paaco and 12 month/12,000 mile for Smart Choice) with the
purchase of most vehicles. The service contract/limited warranty enables the
customer to have his or her vehicle repaired by any one of approximately 375,000
ASE (Automotive Service Excellence) certified technicians nationally.
Additionally, Paaco customers can have their vehicles repaired at any of the
Paaco service centers in Texas. Smart Choice performs limited repairs under its
service contract/limited warranty. Customers are typically responsible for the
payment of a $50 deductible for each service repair made.
The Company's inventory of used vehicles is primarily acquired through auto
auctions. All vehicles are subjected to a detailed inspection, and vehicles
purchased by Paaco are reconditioned at its reconditioning facilities in Grand
Prairie, Texas. If a vehicle is not sold in a timely manner, it is moved to
another dealership or sold at auction.
RECONDITIONING. Paaco reconditions almost every vehicle it purchases at its
101,000 square foot centralized reconditioning center in Grand Prairie, Texas
where a variety of parts, assemblies, and systems are inspected and, if
necessary, repaired or replaced. In addition to inspecting, repairing and
preparing acquired vehicles for sale, this facility is used to perform service
work on vehicles for customers pursuant to service contract/limited warranty.
In general, Smart Choice performs little or no reconditioning on the vehicles it
purchases. Buyers are instructed to thoroughly inspect and evaluate each vehicle
in order to identify and purchase vehicles that require little or no
reconditioning. As described above, Smart Choice provides a service
contract/limited warranty to its customers which covers certain vehicle
components and assemblies for a specified duration.
MARKETING AND ADVERTISING. A primary focus of the Company's marketing strategy
is its ability to finance automobile purchases for consumers with poor credit
histories. The Company has 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.
B-5
The Company advertises extensively in the radio and television media,
emphasizing its multiple locations, wide selection of quality used cars, ability
to provide financing to many credit-impaired borrowers and additional
value-added programs such as service contract/limited warranty and loan
pre-qualifications. In addition, management believes that the Company's
facilities provide effective advertising and attract drive-by traffic to visit
its dealerships because their appearance conveys the image of a used car
dealership that offers quality cars. Management further believes that its
advertising and marketing approach creates brand name recognition and promotes
the Company's image as a professional, customer-oriented business.
In addition to television and radio advertising, the Company conducts a variety
of promotional activities, including a sales referral program, occasional live
entertainment at its dealerships and the distribution of promotional items.
Various telemarketing programs are also utilized to promote the Company's used
cars. For example, potential customers are contacted within days after their
visit to a dealership to follow up on leads and obtain information regarding
their experience while at the dealership. In addition, customers with
satisfactory payment histories are contacted several months before their finance
contract matures and are offered an opportunity to purchase another car.
SALES. The Company employs a dedicated on-site sales force. The Company
continually seeks to develop and retain qualified sales personnel. The
salesperson's sole responsibility is the sale of cars, and, therefore, they do
not participate in the ultimate financing decision. The Company's dealerships
are typically staffed with a manager, up to six sales personnel and others which
may include clerical workers, collectors, mechanics and a porter. The lots are
generally operated six days per week between the hours of 9:00 am and 8:00 pm,
and each lot typically maintains an inventory of 35 to 70 vehicles. On a regular
basis, Company sales personnel attend training classes where each phase of the
sales process is rehearsed. Additionally, salespersons at both companies are
paid principally on a commission basis, and all salespersons at Paaco speak
fluent Spanish. As of April 30, 2001, the Company employed 121 full-time
salespersons at its dealerships.
FINANCING CUSTOMERS WITH IMPAIRED CREDIT
The Company offers financing to its customers who purchase used cars at its
dealerships. The Company does not have any loans to persons who did not purchase
a vehicle at one of its dealerships and has a policy not to acquire third party
originated finance contracts. Each of the Company's dealerships provides
financing only for its own customers, thereby relying on its own underwriting
standards and not on 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 Smart Choice, the deal
structure typically provides for down payments of approximately 10% to 15% of
the purchase price with the balance of the purchase price financed at an average
annual percentage rate of approximately 18.5% over a period between 24 and 30
months with bi-weekly payments. At Paaco, the typical deal structure would
include a down payment of 12% to 15%, an average annual percentage rate of 22%,
and a term of approximately 28 months with weekly payments. Payment terms are
somewhat flexible and are generally set such that payment due dates coincide
with the customer's payday. The Company finances approximately 98% of its used
car sales through finance contracts that it originates and services.
CUSTOMER CREDIT PROFILE. The Company markets 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 usually has an unfavorable employment history and other credit
problems, such as personal bankruptcy. These customers are generally not able to
finance a used car purchase from a traditional finance subsidiary or bank, each
of which primarily provides financing only to customers with "A" or "B" credit
ratings.
BUY ROOM EVALUATION PROCEDURES. The Company applies consistent underwriting
standards in structuring its used car sales and loans. The most important
criteria used 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 the buy rooms, wherein the deal is structured and
underwritten. Senior management is directly responsible for the deal structure
and underwriting decisions made by the buy room staff.
B-6
CONTRACT SERVICING. The Company services its finance contracts through the use
of servicing procedures which have been designed to minimize credit losses.
These include:
(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.
ZERO TOLERANCE COLLECTION POLICY. The Company is strict in its collection
policies, believing that by acting promptly and working with customers, loss
exposure is minimized. Collection efforts begin on the day the car is sold. In
both Texas and Florida, the Company's policy is to permit the customer to keep
the automobile only so long as payments are made.
REPOSSESSIONS. The process of repossession begins after standardized collection
procedures have been unsuccessful, and it is determined that a cure of the loan
default is unlikely. Of the vehicles repossessed, many are returned by the
customer on a voluntary basis. Other repossessions are usually handled by
licensed, bonded and insured repossession firms. The Company re-markets
approximately 70% of its repossessions through its dealerships (rather than
through auctions where cars are generally sold at lower prices), with the
remainder sold for cash to wholesalers or other third parties at an auction.
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 have entered the used car sales business. Management believes these
larger companies do not provide significant competition for the Company as they
tend to sell higher priced vehicles to consumers with stronger credit histories.
Paaco and Smart Choice 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.
Management believes the principal competitive factors in the sub-prime 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,
B-7
(iv) pricing,
(v) the convenience of a dealership's location,
(vi) customer service, and
(vii) in the case of Paaco, the ability to communicate in Spanish
with Spanish speaking customers.
Management believes that its dealerships are competitive in each of these areas.
REGULATION AND LICENSING
The Company's 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 the Company
obtain and maintain certain licenses and qualifications, limit or prescribe
terms of the contracts it originates, make specified disclosures to customers,
limit its 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, the Company charges fixed interest rates in excess of traditional
finance companies on the contracts originated at its dealerships. The states in
which the Company operates impose limits on interest rates it can charge on its
loans, generally based on the age of the vehicle. Management believes that the
Company is in substantial compliance with all applicable federal, state, and
local laws and regulations. However, if the Company does not remain in
compliance with such laws, this failure could have a material adverse effect on
its operations. In addition, the adoption of additional laws, changes in the
interpretation of existing laws, or the Company's entrance into jurisdictions
with more stringent regulatory requirements could have a material adverse effect
on the Company.
EMPLOYEES
At April 30, 2001, the Company employed 641 employees, consisting of 396 Paaco
employees and 245 Smart Choice employees. None of the Company's employees are
covered by a collective bargaining agreement.
EXECUTIVE OFFICERS
The Company's executive officers are as follows:
NAME AGE POSITION AND OFFICE
---- --- -------------------
Edward R. McMurphy 50 Chairman of the Board
James Edward Ernst 50 President, Chief Executive Officer
Larry W. Lange 61 Vice President, Chief Executive Officer of Paaco
Ronald W. Anderson 54 Vice President, Chief Operating Officer
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.
B-8
Larry W. Lange has served as Vice President and as a director of Smart Choice
since December 1999, as well as the Chief Executive Officer of Paaco since 1992.
Prior to founding Paaco in 1992, Mr. Lange owned and operated several new car
franchises.
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.
ITEM 2. PROPERTIES
As of April 30, 2001, the Company leased substantially all of its 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. The facility which houses Paaco's corporate
offices and main reconditioning center in Grand Prairie, Texas, is also leased.
Paaco owns real property upon which three dealerships within the Dallas/Fort
Worth metroplex are located.
Smart Choice leases all ten of its dealership facilities in central Florida.
Smart Choice owns approximately 10.3 acres of real property located in
Titusville, Florida, including an office building containing approximately
33,000 square feet of office space.
ITEM 3. LEGAL PROCEEDINGS
In March 1999, prior to the acquisition of Smart Choice, certain shareholders of
Smart Choice filed two putative class action lawsuits against Smart Choice and
certain of Smart Choice's 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 Smart Choice publicly traded securities between April 15,
1998 and February 26, 1999. These lawsuits were filed following Smart Choice's
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 the
plaintiffs to purchase Smart Choice securities at artificially inflated prices.
In April 2001, Smart Choice and the plaintiffs' representatives executed an
agreement whereby Smart Choice will pay $2.5 million in full settlement of the
above described actions. All of the $2.5 million settlement amount has been
funded by Smart Choice's insurance carrier. The agreement is subject to final
approval of the court.
In the ordinary course of business, the Company has become a defendant in
various other 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 its legal counsel,
does not expect any of these actions, individually or in the aggregate, to have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter ended April 30, 2001.
B-9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board under the symbol
"SCHA." At April 30, 2001, there were approximately 176 shareholders of record.
This number excludes individual stockholders holding stock under nominee
security position listings. The following table sets forth, by fiscal quarter,
the high and low closing sale prices reported by the OTC Bulletin Board and the
Nasdaq SmallCap Market, as applicable, for the periods indicated.
Fiscal 2001 Fiscal 2000
High Low High Low
------------ ------------ ------------ ------------
First Quarter $ 8.12 $ 1.50 $ 26.25 $ 10.00
Second Quarter $ 4.00 $ 1.25 $ 20.63 $ 6.25
Third Quarter $ 1.38 $ .69 $ 12.50 $ 4.38
Fourth Quarter $ 1.03 $ .39 $ 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 the Company's 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, the Company was notified by Nasdaq
that it was not in compliance with certain listing criteria which became
applicable to SmallCap Market listed companies on that date. On September 14,
1999 the Company's 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
The Company has not paid dividends on its common stock since inception. The
Company has no present plans to pay cash dividends in the foreseeable future and
intends to retain earnings for future operations, reduction of debt and limited
expansion. Any determination to declare or pay dividends in the future will be
at the discretion of the Board of Directors and will depend on the Company's
results of operations, financial condition, any contractual restrictions,
considerations imposed by applicable law and other factors deemed relevant by
the Board of Directors. The Company's current covenants with its lenders
prohibit the declaration and payment of dividends.
B-10
ITEM 6. SELECTED FINANCIAL DATA
The financial data set forth below was derived from the audited consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements and related notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained elsewhere herein. (In thousands, except per share amounts and other
operating data.)
Four Months
Years Ended April 30, Ended Years Ended December 31,
--------------------------------------- April 30, ---------------------------
2001 2000 1999 1998 1997 1996
---------- ---------- ---------- ------------ ------------- ----------
Statement of Operations Data:
Revenues $ 221,908 $ 130,564 $ 70,728 $ 19,666 $ 48,060 $ 28,857
Net income (loss) (603) 3,111 (1,412) 585 (951) 621
Earnings (loss) per share-diluted $ (.06) $ .37 $ (197.11) $ .08 $ (188.24) $ 124.20
Weighted average shares-diluted 9,791 8,386 7 7,355 5 5
Balance Sheet Data (at period end):
Finance receivables, net $ 149,656 $ 132,855 $ 47,757 $ 34,192 $ 27,381 $ 16,443
Total assets 189,900 178,966 60,374 42,770 33,404 20,723
Revolving credit facilities 147,442 130,367 41,824 26,050 23,410 12,451
Other borrowings 9,985 10,773 4,939 6,395 6,846 4,562
Stockholders' equity (deficit) 15,492 16,095 6,697 5,109 (117) 834
Other Operating Data:
Number of vehicles sold 14,869 9,479 5,174 1,452 3,461 2,432
Dealerships open at period end 22 24 10 9 8 4
Per vehicle sold:
Sales price $ 12,320 $ 11,455 $ 11,954 $ 12,172 $ 12,458 $ 10,736
Gross margin 4,610 4,324 3,864 4,914 3,985 3,921
Provision for credit loss 2,925 2,254 1,918 446 2,249 1,271
Selling, gen and admin expense 3,027 2,766 3,065 4,210 2,730 2,772
Percentages:
Gross margin as a % of sales 37.4% 37.7% 32.3% 40.4% 32.0% 36.5%
Prov for credit loss as a % of sales 23.7% 19.7% 16.0% 3.7% 18.1% 11.8%
SG&A exp as a % of revenue 20.3% 20.1% 22.4% 31.1% 19.7% 23.4%
B-11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto included in Item 8.
OVERVIEW
Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively with all
of its subsidiaries (the "Company") is in the business of selling and financing
used automobiles and trucks principally to consumers with limited or damaged
credit histories. On December 1, 1999, Smart Choice acquired all the outstanding
stock of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "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 Smart Choice and its subsidiaries from the date of acquisition
(December 1, 1999). References to Smart Choice generally refer to Smart Choice
Automotive Group, Inc. and its Florida based subsidiaries. As of April 30, 2001
Smart Choice operated 10 used car dealerships in central Florida while Paaco
operated 12 used car dealerships in Texas (principally in the cities of Dallas
and Houston).
CONSOLIDATED REVIEW
The Company's two business segments (Paaco and Smart Choice) are categorized by
legal entity and geographical location, which is how management organizes the
segments for making operating decisions and assessing performance. Each of Paaco
and Smart Choice sell and finance used vehicles. Paaco operates in major markets
in the State of Texas and Smart Choice operates in the central region of the
State of Florida. Below is a summary of revenue and pretax income (loss) by
business segment, and a more detailed operating statement by segment, for the
years ended April 30, 2001, 2000 and 1999 (in thousands):
Revenues Pretax Income (Loss)
--------------------------------------------- ----------------------------------------------
Years Ended April 30, Years Ended April 30,
2001 2000 1999 2001 2000 1999
------------- ------------- ------------- ------------- ------------- -------------
Paaco $ 122,985 $ 94,708 $ 70,728 $ 7,093 $ 4,318 $ (2,187)
Smart Choice 98,923 35,856 (7,591) 831
------------- ------------- ------------- ------------- ------------- -------------
Consolidated $ 221,908 $ 130,564 $ 70,728 $ (498) $ 5,149 $ (2,187)
============= ============= ============= ============= ============= =============
2001 VS. 2000
Revenues increased $91.3 million, or 70.0%, in fiscal 2001 compared with fiscal
2000 principally as a result of (i) including Smart Choice in the Company's
operating results for twelve months in fiscal 2001 versus five months in fiscal
2000 ($61.0 million), and (ii) higher revenues at Paaco ($28.3 million),
primarily as a result of an increase in the average number of dealerships in
operation. The Company reported a pretax loss of $.5 million in fiscal 2001
compared with pretax income of $5.1 million in fiscal 2000, a decrease of $5.6
million. The decrease was attributable to a higher provision for credit loss and
reduced gross margins at Smart Choice, partially offset by improved results at
Paaco stemming from higher sales (while costs and expenses as a percentage of
revenue declined slightly) and a lower provision for credit loss.
2000 VS. 1999
Revenues increased $59.8 million, or 84.6%, in fiscal 2000 compared with fiscal
1999 principally as a result of (i) including Smart Choice in the Company's
operating results for five months during fiscal 2000 ($35.9 million), and (ii)
higher revenues at Paaco ($24.0 million) primarily as a result of an increase in
the average number of dealerships
B-12
in operation. The Company reported pretax income of $5.1 million in fiscal 2000
compared with a pretax loss of $2.2 million in fiscal 1999, an increase of $7.3
million. The increase was attributable to (i) increased sales, higher gross
margins and lower operating expenses as a percentage of sales and other, and
(ii) including Smart Choice in the Company's consolidated results of operations
($.8 million).
PAACO
(Dollars in Thousands)
% Change
Year Year Year ----------------------
Ended Ended Ended 2001 2000 As a % of Sales and Other
April 30, April 30, April 30, vs vs -----------------------------------
2001 2000 1999 2000 1999 2001 2000 1999
---------- ---------- --------- --------- --------- --------- --------- ---------
Revenues:
Sales and other $ 106,654 $ 82,674 $ 61,848 29.0% 33.7% 100.0% 100.0% 100.0%
Interest income 16,331 12,034 8,880 35.7 35.5 15.3 14.6 14.4
---------- ---------- --------- --------- --------- ---------
Total 122,985 94,708 70,728 29.9 33.9 115.3 114.6 114.4
---------- ---------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 68,700 52,259 41,858 31.5 24.8 64.4 63.2 67.7
Selling, gen and admin 24,887 18,962 15,860 31.2 19.6 23.3 23.0 25.6
Prov for credit loss 14,342 13,113 9,926 9.4 32.1 13.4 15.9 16.1
Interest expense 7,246 5,725 4,879 26.6 17.3 6.8 6.9 7.9
Depreciation and amort 717 331 392 116.6 (15.6) .7 .4 .6
---------- ---------- --------- --------- --------- ---------
Total 115,892 90,390 72,915 28.2 24.0 108.6 109.4 117.9
---------- ---------- --------- --------- --------- ---------
Pretax income (loss) $ 7,093 $ 4,318 $ (2,187) 64.3 NM 6.7 5.2 (3.5)
========== ========== ========= ========= ========= =========
2001 VS. 2000
Revenues increased $28.3 million, or 29.9%, in fiscal 2001 versus fiscal 2000
principally as a result of (i) increasing the average number of stores in
operation to 12.7 in fiscal 2001 from 10.6 in fiscal 2000, and (ii) increasing
the average sales price per retail vehicle by approximately 7%. Pretax income
increased $2.8 million, or 64.3%, in fiscal 2001 versus fiscal 2000 principally
as a result of (i) increased revenues (29.9%), and (ii) a lower provision for
credit loss as a percentage of sales and other (13.4% in fiscal 2001 versus
15.9% in fiscal 2000), which is believed to be attributable to (a) selling a
higher quality vehicle, and (b) providing a greater level of service.
2000 VS. 1999
Revenues increased $24.0 million, or 33.9%, in fiscal 2000 versus fiscal 1999
principally as a result of (i) increasing the average number of stores in
operation to 10.6 in fiscal 2000 from 8.3 in fiscal 1999, and (ii) higher
interest income in fiscal 2000 as a result of higher finance receivable balances
during fiscal 2000 as compared to fiscal 1999. Pretax income increased to $4.3
million in fiscal 2000 from a pretax loss of $2.2 million in fiscal 1999
principally as a result of (i) lower cost of sales as a percentage of sales and
other (63.2% in fiscal 2000 versus 67.7% in fiscal 1999), and (ii) lower
selling, general and administrative expenses as a percentage of sales and other
(23.0% in fiscal 2000 versus 25.6% in fiscal 1999).
B-13
SMART CHOICE
(Dollars in Thousands)
% Change
Year 5 Months Year ---------------------
Ended Ended Ended 2001 2000
April 30, April 30, April 30, vs vs As a % of Sales and Other
2001 2000 1999 2000 1999 2001 2000 1999
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues:
Sales and other $ 77,206 $ 26,657 -- NM -- 100.0% 100.0% --
Interest income 21,717 9,199 -- NM -- 28.1 34.5 --
--------- --------- --------- --------- --------- ---------
Total 98,923 35,856 -- NM -- 128.1 134.5 --
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 45,940 15,335 -- NM -- 59.5 57.5 --
Selling, gen and admin 20,119 7,255 -- NM -- 26.0 27.2 --
Prov for credit loss 29,153 8,257 -- NM -- 37.8 31.0 --
Interest expense 10,253 3,743 -- NM -- 13.3 14.1 --
Depreciation and amort 1,049 435 -- NM -- 1.3 1.6 --
--------- --------- --------- --------- --------- ---------
Total 106,514 35,025 -- NM -- 137.9 131.4 --
--------- --------- --------- --------- --------- ---------
Pretax income (loss) $ (7,591) $ 831 -- NM -- (9.8) 3.1 --
========= ========= ========= ========= ========= =========
NM = Not meaningful
2001 VS 2000
Revenues increased $63.1 million in fiscal 2001 versus fiscal 2000
principally as a result of (i) fiscal 2001 including twelve months of operating
results versus five months in fiscal 2000 ($61.0 million), and (ii) a higher
average retail selling price per vehicle in fiscal 2001 compared to fiscal 2000.
Smart Choice reported a pretax loss of $7.6 million in fiscal 2001 versus $.8
million pretax income in fiscal 2000. The $8.4 million decrease is principally
the result of (i) the provision for credit loss increasing to 37.8% of sales and
other in fiscal 2001 from 31.0% in fiscal 2000 ($5.3 million), (ii) cost of
sales increasing to 59.5% of sales and other in fiscal 2001 from 57.5% in fiscal
2000 ($1.5 million), and (iii) a decrease in the average interest rate charged
on Smart Choice finance receivables.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 2001, net cash provided by operating activities amounted to $68.9
million. The principal source of cash resulted from certain non-cash expenses
(provision for credit losses and depreciation and amortization). Net cash
provided by operating activities for fiscal 2001 increased $21.8 million, or
46.1%, compared with fiscal 2000. The increase is primarily attributable to
including Smart Choice in the Company's consolidated results of operations for
twelve months during fiscal 2001 versus five months in fiscal 2000. Net cash
used in investing activities of $85.3 million included (i) an $83.5 million use
of cash in finance receivables originations in excess of finance receivables
collections, and (ii) a $1.8 million use of cash in the purchase of property and
equipment. Net cash used in investing activities for fiscal 2001 increased $26.4
million, or 44.9%, compared with fiscal 2000. The increase is primarily
attributable to including Smart Choice in the Company's consolidated results of
operations for twelve months during fiscal 2001 versus five months in fiscal
2000. Net cash provided by financing activities of $14.9 million principally
relates to net borrowings from the Company's revolving credit facilities ($17.1
million), partially offset by repayments of other debt ($2.1 million).
B-14
PAACO
Paaco's sources of liquidity include cash from operations and its $62.0 million
revolving credit facility with Finova Capital Corporation ("Finova"), of which
$59.0 was outstanding at April 30, 2001. As of April 30, 2001, Smart Choice's
revolving credit facility with Finova was in default, and there is uncertainty
as to whether such default constitutes an event of default under Paaco's
revolving credit facility with Finova (see Smart Choice discussion below). Thus,
there is an uncertainty as to whether Paaco is eligible to draw any additional
monies under its revolving credit facility with Finova. Paaco's revolving credit
facility matures in November 2004.
It is unlikely that Finova will increase the size of Paaco's credit facility, or
that Paaco could refinance such facility with a new lender since Paaco's advance
rate of 70% of eligible receivables is believed to be above market. Accordingly,
for the foreseeable future, Paaco's ability to expand its operations may be
limited as a result of a shortage of additional capital. Consequently, Paaco
anticipates operating its business at a level consistent with its recent past,
and not substantially expanding its operations.
SMART CHOICE
For the fiscal year ended April 30, 2001 Smart Choice reported a net loss of
$5.1 million. Smart Choice has a $98 million revolving credit facility with
Finova, of which $88.4 million was outstanding as of April 30, 2001. Since
December 2000 Smart Choice has been over-advanced on its revolving credit
facility, which constitutes an event of default under the facility. As of April
30, 2001 Smart Choice was over-advanced by $6.2 million. In July 2001, pursuant
to the terms of its credit facility, the advance rate on eligible finance
receivables declined from 85% to 77%, increasing Smart Choice's over-advance to
$18.5 million. Absent funding from an outside source, Smart Choice does not
expect it will be able to come into compliance with the current advance rate
provisions of its credit facility. As a result of the event of default, Smart
Choice is currently not entitled to receive additional advances under its credit
facility. Smart Choice is presently operating its business from the cash
generated from the collection of its finance receivables and down payments
received in connection with the sale of vehicles.
Since January 2001 Smart Choice has been in discussions with Finova with regard
to possible solutions to the over-advanced position. There are several possible
outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which
brings Smart Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the
proceeds being used to pay down a portion of its credit
facility, and the unpaid portion being absorbed by Finova
(forgiveness of debt) and Paaco as the parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby
substantially all of the assets and liabilities of Smart
Choice are liquidated with the proceeds being used to pay down
a portion of Smart Choice's credit facility, and the unpaid
portion being absorbed by Finova (forgiveness of debt) and
Paaco as the parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate
or sell the collateral, which action may prompt Smart Choice
to take actions to protect the interests of its shareholders,
including the filing of a plan of reorganization under federal
bankruptcy laws.
Although management is exploring a number of alternatives, including those
listed above, the Company cannot predict how or whether Smart Choice's default
will be resolved.
The opinion of the Company's independent certified public accountants covering
the 2001 year expressed substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability of recorded asset amounts
that might be necessary should the Company be unable to continue in existence.
B-15
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting
for intangible assets and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for business combinations completed after June
30, 2001. The Company does not expect SFAS 141 will have a material impact on
the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting
for purchased goodwill and intangible assets. Under SFAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized, but will be
tested for impairment annually, and in the event of an impairment indicator.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company expects the adoption of SFAS 142 will
increase annual pretax income by approximately $.2 million. The Company has
adopted SFAS 142 effective May 1, 2001.
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.
SEASONALITY
The Company's automobile sales and finance business is seasonal in nature. In
such business, the Company's third fiscal quarter (November through January) is
historically the slowest period for car and truck sales. Many of the Company's
operating expenses such as administrative personnel, rent and insurance are
fixed and cannot be reduced during periods of decreased sales. Conversely, the
Company's fourth fiscal quarter (February through April) is historically the
busiest time for car and truck sales as many of the Company's customers use
income tax refunds as a down payment on the purchase of a vehicle.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk on its financial instruments from changes
in interest rates. The Company does not use financial instruments for trading
purposes or to manage interest rate risk. 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 liabilities.
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 12% to 26%. These finance
receivables have scheduled remaining maturities from one to 48 months. At April
30, 2001 the majority of the Company's interest bearing liabilities contained
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.
B-16
The table below illustrates the impact which hypothetical changes in market
interest rates could have on the Company's pretax earnings. The calculations
assume (i) the increase or decrease in market interest rates remain in effect
for twelve months, (ii) the amount of variable rate notes payable outstanding
during the period decreases in direct proportion to decreases in finance
receivables as a result of scheduled payments and anticipated charge-offs, and
(iii) there is no change in prepayment rates as a result of the interest rate
changes.
Change in Change in
Interest Rates Pretax Earnings
-------------- ---------------
(in thousands)
+2% $ (2,074)
+1% (1,037)
-1% 1,037
-2% 2,074
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and accountant's report are included in Item
8 of this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of April 30, 2001 and 2000
Consolidated Statements of Operations for the fiscal years ended April
30, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the fiscal years
ended April 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the fiscal years ended April
30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
B-17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 2001, and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended April 30, 2001. 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, 2001 and 2000, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended April 30, 2001, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, Smart Choice Automotive Group, Inc. ("Smart Choice"), has
been over-advanced on its revolving credit facility since December 2000, which
constitutes an event of default. As of April 30, 2001, Smart Choice's revolving
credit facility was in default, and such default may constitute an event of
default under Paaco Automotive Group, Inc.'s ("Paaco") revolving credit
facility. Accordingly, advances made to Smart Choice ($88,394,134) are callable
at the discretion of the lender and advances made to Paaco ($59,047,810) may be
callable at the discretion of the lender. The advances are collateralized by
finance receivables and inventories which comprise $157,636,415 of the Company's
total assets of $189,900,494. Since January 2001 the Company has been in
discussions with the lender with regard to these matters, and possible outcomes
are described in Note B. The Company's ability to achieve a satisfactory
resolution is uncertain, which raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Grant Thornton LLP
Dallas, Texas
July 16, 2001
B-18
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
April 30,
---------------------------------
2001 2000
--------------- ---------------
ASSETS
Cash and cash equivalents $ 436,262 $ 1,882,716
Other receivables 1,344,238 1,028,652
Finance receivables, net 149,656,124 132,854,563
Inventory 7,980,291 12,190,289
Prepaids and other assets 607,567 578,154
Due from parent 528,296
Deferred tax assets, net 15,605,094 12,382,267
Property and equipment, net 12,186,901 11,486,698
Goodwill, net 2,084,017 6,034,104
--------------- ---------------
$ 189,900,494 $ 178,965,739
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 10,425,072 $ 13,857,291
Income taxes payable 1,139,810 3,133,281
Revolving credit facilities 147,441,944 130,367,005
Other borrowings 9,985,391 10,773,313
Deferred sales tax 4,963,154 4,207,117
--------------- ---------------
Total liabilities 173,955,371 162,338,007
--------------- ---------------
Contingent redemption value of put options 453,371 532,552
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
at April 30, 2000 14,696
Common stock, $.01 par value; 50,000,000 shares authorized;
9,762,270 shares issued and outstanding (2,444,394 shares
issued and outstanding in 2000) 97,623 24,444
Additional paid-in capital 13,832,832 13,891,315
Retained earnings 1,561,297 2,164,725
--------------- ---------------
Total stockholders' equity 15,491,752 16,095,180
--------------- ---------------
$ 189,900,494 $ 178,965,739
=============== ===============
The accompanying notes are an integral part of these financial statements.
B-19
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended April 30,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Revenues:
Sales of vehicles $ 183,183,398 $ 108,583,828 $ 61,848,161
Interest income 38,048,097 21,233,097 8,879,904
Other 676,459 747,250
--------------- --------------- ---------------
221,907,954 130,564,175 70,728,065
--------------- --------------- ---------------
Costs and expenses:
Cost of vehicle sales 114,640,183 67,594,118 41,858,247
Selling, general and administrative 45,005,698 26,216,951 15,860,074
Provision for credit losses 43,494,930 21,369,553 9,926,127
Interest expense 17,499,358 9,467,588 4,878,680
Depreciation and amortization 1,766,251 766,496 391,880
--------------- --------------- ---------------
222,406,420 125,414,706 72,915,008
--------------- --------------- ---------------
Income (loss) before income taxes (498,466) 5,149,469 (2,186,943)
Income tax expense (benefit) 104,962 2,038,669 (775,022)
--------------- --------------- ---------------
Net income (loss) $ (603,428) $ 3,110,800 $ (1,411,921)
=============== =============== ===============
Earnings (loss) per common share:
Basic $ (.06) $ 3.04 $ (197.11)
Diluted $ (.06) $ 0.37 $ (197.11)
Weighted average shares:
Basic 9,791,394 1,023,476 7,163
Diluted 9,791,394 8,385,752 7,163
The accompanying notes are an integral part of these financial statements.
B-20
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained
Preferred Stock Common Stock Additional Earnings Total
------------------------ ------------------------- Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
----------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at May 1, 1998 143,264 $ 1,433 $ 4,642,022 $ 465,846 $ 5,109,301
Net loss (1,411,921) (1,411,921)
Contributions from stockholders 3,000,000 3,000,000
----------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at April 30, 1999 143,264 1,433 7,642,022 (946,075) 6,697,380
Recapitalization and acquisition
of Old Smart Choice 1,469,551 $ 14,696 48,744,608 487,446 5,784,858 6,287,000
Net income 3,110,800 3,110,800
One for twenty reverse stock
split (46,443,478) (464,435) 464,435 --
----------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at April 30, 2000 1,469,551 14,696 2,444,394 24,444 13,891,315 2,164,725 16,095,180
Purchase of common stock (29,882) (299) 299 --
Conversion of preferred stock
to common stock (1,469,551) (14,696) 7,347,758 73,478 (58,782) --
Net loss (603,428) (603,428)
----------- ----------- ----------- ------------ ------------ ------------ ------------
Balance at April 30, 2001 -- $ -- 9,762,270 $ 97,623 $ 13,832,832 $ 1,561,297 $ 15,491,752
=========== =========== =========== ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
B-21
SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 30,
---------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Operating activities:
Net income (loss) $ (603,428) $ 3,110,800 $ (1,411,921)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Provision for credit losses 43,494,930 21,369,553 9,926,127
Deferred income taxes 1,231,805 1,255,909 (775,022)
Depreciation and amortization 1,766,251 766,496 391,880
Accretion of purchase discount (883,772) (585,067)
Loss on sale of assets 36,269
Other 120,018 132,963
Changes in assets and liabilities, net of
Smart Choice acquisition
Other receivables (315,583) 386,422 (270,760)
Inventory 28,290,959 17,456,019 8,776,605
Prepaids and other assets 498,882 795,849 (69,736)
Accounts payable and accrued liabilities (2,603,138) 2,385,048 1,582,639
Income taxes payable (1,993,471) 102,000 452,780
--------------- --------------- ---------------
Net cash provided by operating activities 68,919,704 47,163,047 18,735,555
--------------- --------------- ---------------
Investing activities:
Finance receivable originations (172,884,116) (105,139,052) (58,335,143)
Finance receivable collections 89,390,436 48,371,056 23,253,652
Purchases of property and equipment (1,832,733) (2,621,498) (929,921)
Cash acquired in acquisition 531,353
Proceeds from sale of assets 34,265
--------------- --------------- ---------------
Net cash used in investing activities (85,292,148) (58,858,141) (36,011,412)
--------------- --------------- ---------------
Financing activities:
Proceeds from revolving credit facilities, net 17,074,939 14,110,000 15,773,805
Repayments of other borrowings (2,148,949) (2,334,812) (5,390,917)
Proceeds from other borrowings 1,739,790 3,935,183
Capital contributions from stockholders 3,000,000
Payment of debt issuance costs (150,000)
--------------- --------------- ---------------
Net cash provided by financing activities 14,925,990 13,514,978 17,168,071
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,446,454) 1,819,884 (107,786)
Cash and cash equivalents at: Beginning of year 1,882,716 62,832 170,618
--------------- --------------- ---------------
End of year $ 436,262 $ 1,882,716 $ 62,832
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
B-22
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND ACQUISITION
Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively with all
of its subsidiaries (the "Company") is in the business of selling and financing
used automobiles and trucks principally to consumers with limited or damaged
credit histories.
On December 1, 1999 Smart Choice acquired all the outstanding stock of Paaco
Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively,
"Paaco") by issuing 1,469,551 shares of Smart Choice's Series E Convertible
Preferred Stock. As a result of such issuance, the shareholders 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. Accordingly, the accompanying financial
statements include the activities of Paaco for all periods presented, and the
activities of Smart Choice and its subsidiaries from the date of acquisition
(December 1, 1999). The acquisition of Smart Choice was accounted for using the
purchase method of accounting. The consideration, valued at $6,287,000 was
allocated to Smart Choice's assets and liabilities based on their estimated fair
values, resulting in goodwill of $6,254,231.
References to Smart Choice typically include Smart Choice Automotive Group, Inc.
and its Florida based subsidiaries. As of April 30, 2001 Smart Choice operated
10 used car dealerships in central Florida while Paaco operated 12 used car
dealerships in Texas (principally in the cities of Dallas and Houston).
The following unaudited pro forma condensed consolidated results of operations
of the Company for the year ended April 30 2000, gives effect to the acquisition
of Smart Choice as if it had occurred on May 1, 1999 (in thousands, except per
share amount). The adjustments to the historical financial statements
principally consist of (i) eliminating interest expense and preferred stock
dividends pertaining to certain Smart Choice debt and preferred stock that was
converted into Smart Choice common stock, (ii) amortizing goodwill created in
the Smart Choice acquisition, (iii) adjusting interest income resulting from
purchase accounting entries, (iv) eliminating Smart Choice's discontinued
operations and write-off of historical goodwill, and (v) adjusting income tax
expense to reflect the above described adjustments. 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 date
indicated. Loss per share is calculated after giving effect to the reverse stock
split (See Note H).
Year Ended
April 30, 2000
--------------
Revenues $ 176,754
Net loss (8,124)
Loss per share - diluted $ (.97)
NOTE B - DEFAULT ON FINOVA CREDIT FACILITY AND LIQUIDITY MATTERS
Each of Paaco and Smart Choice have revolving credit facilities with Finova
Capital Corporation ("Finova"). Since December 2000 Smart Choice has been
over-advanced on its revolving credit facility, which constitutes an event of
default under the facility. As of April 30, 2001 Smart Choice was over-advanced
by $6.2 million. In July 2001, pursuant to the credit facility, the advance rate
on eligible finance receivables declined from 85% to 77%, increasing Smart
Choice's over-advance to $18.5 million. Absent funding from an outside source,
Smart Choice does not expect it will be able to come into compliance with the
current advance rate provisions of the Finova revolving credit facility. There
is uncertainty as to whether Smart Choice's event of default is the basis for an
event of default under Paaco's revolving credit facility with Finova. In any
event, Paaco is a wholly-owned subsidiary of Smart Choice, and ultimately Paaco
could be affected by the default of Smart Choice under its Finova credit
facility.
B-23
Since January 2001 Smart Choice has been in discussions with Finova with regard
to possible solutions to the over-advanced position. There are several possible
outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which
brings Smart Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the
proceeds being used to pay down a portion of its credit
facility, and the unpaid portion being absorbed by Finova
(forgiveness of debt) and Paaco as the parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby
substantially all of the assets and liabilities of Smart
Choice are liquidated with the proceeds being used to pay down
a portion of Smart Choice's credit facility, and the unpaid
portion being absorbed by Finova (forgiveness of debt) and
Paaco as the parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate
or sell the collateral, which action may prompt Smart Choice
to take actions to protect the interests of its shareholders,
including the filing of a plan of reorganization under federal
bankruptcy laws.
Although management is exploring a number of alternatives, including those
listed above, the Company cannot predict how or whether Smart Choice's default
will be resolved.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. Recoverability of a
significant portion of the assets shown in the accompanying balance sheet may be
materially impacted if the Company ceases to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary should the
Company be unable to continue in existence.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Smart Choice and
all of 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.
B-24
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 17% 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 the stated interest rate. Smart 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.
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.
Inventory
Inventory is 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
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 these
temporary differences are expected to be recovered or settled.
Goodwill
Goodwill represents the excess of Paaco's cost in acquiring Smart Choice over
the fair value of the net assets acquired. Goodwill is amortized on a
straight-line basis over twenty-five years. At April 30, 2001 and 2000,
accumulated amortization of goodwill was $465,582 and $220,127, respectively.
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.
B-25
Revenue Recognition
Interest income on finance receivables is recognized using the interest method.
Revenue from the sale of used vehicles is recognized when the sales contract is
signed and the customer has taken possession of the vehicle.
Advertising
The Company expenses the costs of advertising as incurred. Advertising expense
was $3,816,968, $2,029,620, and $1,389,568 for the fiscal years ended April 30,
2001, 2000, and 1999, respectively.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income by the
average number of common shares outstanding during the period. Diluted earnings
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 earnings of the Company.
All references to share and per share information have been adjusted to give
effect to the shares of common stock received by the Paaco stockholders in
connection with the acquisition of Smart Choice on December 1, 1999. All
earnings (loss) per share amounts have been restated to give effect to the one
for twenty reverse stock split (See Note H).
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting
for intangible assets and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for business combinations completed after June
30, 2001. The Company does not expect SFAS 141 will have a material impact on
the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting
for purchased goodwill and intangible assets. Under SFAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized, but will be
tested for impairment annually, and in the event of an impairment indicator.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company expects the adoption of SFAS 142 will
increase annual pretax income by approximately $.2 million. The Company has
adopted SFAS 142 effective May 1, 2001.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 2001 presentation.
B-26
NOTE D - FINANCE RECEIVABLES
Finance receivables consist of the following:
April 30,
2001 2000
--------------- ---------------
Finance receivables $ 216,818,123 $ 199,628,984
Unearned finance charges (29,563,528) (33,021,606)
Purchase discounts (607,176) (1,461,897)
Allowance for credit losses (36,991,295) (32,290,918)
--------------- ---------------
Finance receivables, net $ 149,656,124 $ 132,854,563
=============== ===============
The following table summarizes changes in the allowance for credit losses:
Years Ended April 30,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Balance at beginning of year $ 32,290,918 $ 7,586,822 $ 4,727,679
Acquisition of Smart Choice (Note A) 23,558,787
Provision for credit losses 43,494,930 21,369,553 9,926,127
Charge-offs, net of recoveries (38,794,553) (20,224,244) (7,066,984)
--------------- --------------- ---------------
Balance at end of year $ 36,991,295 $ 32,290,918 $ 7,586,822
=============== =============== ===============
NOTE E - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
April 30,
2001 2000
--------------- ---------------
Furniture, fixtures and equipment $ 5,053,556 $ 3,381,703
Buildings and leasehold improvements 7,200,842 6,856,986
Land 2,587,877 2,512,879
Less accumulated depreciation and amortization (2,655,374) (1,264,870)
--------------- ---------------
$ 12,186,901 $ 11,486,698
=============== ===============
Depreciation and amortization of property and equipment amounted to $1,520,796,
$546,369 and $391,880 for the fiscal years ended April 30, 2001, 2000 and 1999,
respectively.
B-27
NOTE F - DEBT
Debt consists of the following:
April 30,
---------------------------------
2001 2000
--------------- ---------------
Revolving credit facilities with Finova:
Paaco $ 59,047,810 $ 52,833,680
Smart Choice 88,394,134 77,533,325
--------------- ---------------
147,441,944 130,367,005
--------------- ---------------
Other borrowings:
Mortgages 4,012,024 4,262,871
Capital leases 1,448,669 657,396
Note payable to Crown 2,576,286 3,000,000
Other notes payable 1,948,412 2,853,046
--------------- ---------------
9,985,391 10,773,313
--------------- ---------------
$ 157,427,335 $ 141,140,318
=============== ===============
Each of Paaco's and Smart Choice's revolving credit facilities require monthly
payments of interest at the annual rates of prime plus 2.00% for Paaco and prime
plus 2.25% for Smart Choice, and are collateralized by the Company's finance
receivables and inventory. The amount available to be drawn under Paaco's and
Smart Choice's revolving credit facilities is a function of eligible finance
receivables and inventory, not to exceed the facility amount ($62 million for
Paaco and $98 million for Smart Choice). At April 30, 2001 Smart Choice had
drawn $6.2 million in excess of the amount of borrowings permitted based upon
eligible collateral. This over-advance constitutes an event of default under the
facility (see Note B). The facilities mature in November 2004 and contain
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. Crown guarantees the repayment of these
facilities up to a maximum combined amount of $5 million.
The mortgages payable consist of five notes, all collateralized by land and
certain buildings, to three financial institutions and an individual. The two
notes with one financial institution accrue interest at prime plus 2.25% per
annum and mature in December 2015. The other two mortgage notes payable to
financial institutions accrue interest at 8.34% and 8.50% per annum and mature
in July 2001 and May 2003, respectively. The mortgage note payable to an
individual accrues interest at 9.5% per annum and matures in May 2002. The note
payable to Crown bears interest at 8.5% per annum, and matures in March 2002.
A summary of future minimum principal payments required under the above
described debt as of April 30, 2001, assuming no acceleration of the maturity
date of Smart Choice's and/or Paaco's credit facilities with Finova, is as
follows:
Years Ending
April 30,
2002 $ 7,507,071
2003 688,299
2004 974,328
2005 147,682,377
2006 85,580
Thereafter 489,680
---------------
$ 157,427,335
===============
B-28
NOTE G - INCOME TAXES
Prior to December 1, 1999, Paaco was included in the consolidated federal income
tax return of Crown. 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 income tax purposes. The provision (benefit) for income
taxes is as follows:
Year ended April 30,
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
Provision (benefit) for income taxes:
Current $ (1,126,843) $ 782,760
Deferred 1,231,805 1,255,909 $ (775,022)
------------- ------------- -------------
$ 104,962 $ 2,038,669 $ (775,022)
============= ============= =============
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,
----------------------------------
2001 2000
--------------- ---------------
Deferred tax assets:
Allowance for credit losses $ 12,836,646 $ 11,504,803
Net operating loss carryforwards 4,432,061 4,767,896
Other 1,088,527 1,905,973
--------------- ---------------
Total deferred tax assets 18,357,234 18,178,672
--------------- ---------------
Deferred tax liabilities:
Finance receivables 1,934,739 1,519,215
Other 817,401 460,858
--------------- ---------------
Total deferred tax liabilities 2,752,140 1,980,073
--------------- ---------------
15,605,094 16,198,599
Less valuation allowance (3,816,332)
--------------- ---------------
$ 15,605,094 $ 12,382,267
=============== ===============
In fiscal 2001, 2000 and 1999 the Company utilized approximately $4.2 million,
$3.1 million and $2.1 million, respectively, of net operating loss carryforwards
in determining its federal income tax provision. At April 30, 2001 Smart Choice
had a net operating loss carryforward of approximately $12.8 million available
to offset future Smart Choice taxable income. The net operating loss
carryforward expires in 2014 and its utilization is subject to certain
limitations. In fiscal 2001 the Company determined that it was more likely than
not that all of Smart Choice's net operating loss carryforwards were realizable.
As a result, during fiscal 2001 the valuation allowance was reversed and
goodwill was reduced by approximately $3.8 million.
B-29
A reconciliation of income tax expense (benefit) using the statutory federal
income tax rate of 34% to actual income tax expense is as follows:
Years Ended April 30,
----------------------------------------------------
2001 2000 1999
------------- -------------- -------------
Tax provision (benefit) at statutory rate $ (169,478) $ 1,750,826 $ (743,559)
State income taxes, net of federal benefit 362,068 154,484 (65,608)
Other (87,628) 133,359 34,145
------------- -------------- -------------
Income tax expense (benefit) $ 104,962 $ 2,038,669 $ (775,022)
============= ============== =============
NOTE H - 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.
Effective January 9, 2001 Crown and minority holders of Smart Choice Series E
Convertible Preferred Stock converted their shares of Smart Choice Series E
Convertible Preferred Stock into 7,347,758 shares of common stock. This
conversion represented all outstanding shares of Smart Choice Series E
Convertible Preferred Stock.
Contingent Redemption Value of Put Options
In the acquisition of Smart Choice, the Company assumed an obligation pertaining
to put options of approximately 19,000 shares of its common stock. The put
options, which expire in 2007, require the Company to purchase 5,562 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 Purchase Price of the
options 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.
B-30
NOTE I - EARNINGS PER SHARE
Basic and diluted earnings (loss) per share were computed as follows:
Years Ended April 30,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Net income (loss) $ (603,428) $ 3,110,800 $ (1,411,921)
=============== =============== ===============
Weighted average shares outstanding - basic 9,791,394 1,023,476 7,163
Dilutive options and warrants 14,526
Convertible preferred stock 7,347,750
--------------- --------------- ---------------
Weighted average shares outstanding - diluted 9,791,394 8,385,752 7,163
=============== =============== ===============
Income (loss) per share
Basic $ (.06) $ 3.04 $ (197.11)
Diluted $ (.06) $ 0.37 $ (197.11)
Antidilutive options and warrants
not included 426,021 139,000
NOTE J - STOCK WARRANTS AND OPTIONS
Stock Warrants
At April 30, 2001, the Company had outstanding warrants to purchase 35,571
shares of its common stock. These warrants expire in July 2001 through June 2003
and had a weighted average exercise price of $202 per share. At April 30, 2001
all of the warrants were exercisable.
Stock Options
The following table summarizes information about stock option activity under the
Company's qualified stock option plans, and has been restated to give effect to
the reverse stock split (see Note H). Prior to December 1, 1999, the Company had
no stock options outstanding.
Weighted
Number Exercise Proceeds Average
of Price on Exercise Price
Shares per Share Exercise per Share
-------------- -------------- -------------- --------------
Outstanding at May 1, 1999 -- -- -- --
Acquired from acquisition 94,768 $13.12 to $350.00 $ 16,982,426 $ 179.20
-------------- --------------
Outstanding at April 30, 2000 94,768 16,982,426
Granted 500,000 $ 2.00 1,000,000 $ 2.00
Canceled (204,318) $ 54.59 (11,153,800) $ 54.59
-------------- --------------
Outstanding at April 30, 2001 390,450 $2.00 to $350.00 $ 6,828,626 $ 17.49
============== ==============
B-31
A summary of stock options outstanding as of April 30, 2001 is as follows:
Weighted Average
Range of Remaining Weighted
Exercise Number Contractual Life Average
Prices of Shares (in years) Exercise Price
------------------- -------------- ----------------- ----------------
$ 2.00 to $ 13.12 366,300 8.64 $ 2.46
$ 67.60 to $ 350.00 24,150 6.80 $ 245.43
--------------
390,450 6.87 $ 17.49
==============
All of the above options were exercisable at April 30, 2001 with the exception
of options to purchase 262,500 shares at $2.00 per share. Such shares become
exercisable in 2001 through 2003.
NOTE K - 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 to a maximum of 15% of
each employee's salary. For the year ended April 30, 2001, the Company
contributed $118,568 to the plan. No Company contributions were made in prior
periods.
NOTE L - FINANCIAL INSTRUMENTS
The table below summarizes information about the fair value of the Company's
financial instruments:
April 30, 2001 April 30, 2000
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- --------------- --------------- ---------------
Financial assets:
Cash and cash equivalents $ 436,262 $ 436,262 $ 1,882,716 $ 1,882,716
Finance receivables, net 149,656,124 134,690,512 132,854,563 126,211,835
Financial liabilities:
Revolving credit facilities $ 147,441,944 $ 147,441,944 $ 130,367,005 $ 130,367,005
Other borrowings 9,985,391 9,985,391 10,773,313 10,773,313
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.
B-32
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:
Financial Instrument Valuation Methodology
-------------------- ---------------------
Cash and cash equivalents The carrying amount is considered to be a
reasonable estimate of fair value.
Finance receivables, net 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 facilities The fair value approximates carrying
value due to the variable interest rates
charged on the borrowings.
Other borrowings The carrying amounts of the Company's
other borrowings approximate fair value as
the interest rates on such debt approximates market.
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company leases premises and equipment under operating leases with various
expiration dates. Future minimum lease obligations as of April 30, 2001 are as
follows:
For the Years
Ending April 30,
-----------------------
2002 $ 4,088,328
2003 3,024,743
2004 2,272,907
2005 1,952,791
2006 758,947
Thereafter 257,801
---------------
$ 12,355,517
===============
Rent expense for all operating leases was $4,631,138, $2,435,050 and $1,382,707
for the years ended April 30, 2001, 2000 and 1999, respectively.
Litigation
In March 1999, prior to the acquisition of Smart Choice, certain shareholders of
Smart Choice filed two putative class action lawsuits against Smart Choice and
certain of Smart Choice's 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 Smart Choice publicly traded securities between April 15,
1998 and February 26, 1999. These lawsuits were filed following Smart Choice'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 the plaintiffs to purchase Smart Choice securities at artificially
inflated prices. In April 2001
B-33
Smart Choice and the plaintiffs' representatives executed an agreement whereby
Smart Choice will pay $2.5 million in full settlement of the above described
actions. All of the $2.5 million settlement amount has been funded by Smart
Choice's insurance carrier. The agreement is subject to final approval of the
court.
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 N - RELATED PARTY TRANSACTIONS
Paaco sends the majority of its vehicle trade-ins to an auction company, which
is 50% owned by an officer of Paaco and certain family members, under terms
management believes are equal to or more favorable than could be obtained from
an unrelated party.
Interest paid to Crown was approximately $237,000, $317,000 and $120,000, for
the years ended April 30, 2001, 2000 and 1999, respectively.
NOTE O - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures are as follows:
Years Ended April 30,
2001 2000 1999
--------------- --------------- ---------------
Inventories acquired upon repossession $ 24,080,961 $ 17,309,979 $ 12,026,450
Interest paid 17,474,783 8,175,829 4,693,598
Income taxes paid 1,253,338 102,000
Debt issued to acquire equipment 1,361,026
In connection with the Company's acquisition of Smart Choice in fiscal 2000,
liabilities assumed were approximately:
Fair value of assets acquired $ 97,230,000
Common stock issued (6,287,000)
---------------
Liabilities assumed $ 90,943,000
===============
B-34
NOTE P - BUSINESS SEGMENTS
Operating results and other financial data are presented for the two business
segments (Paaco and Smart Choice) of the Company for the years ended April 30,
2001 and 2000. These segments are categorized by legal entity and geographical
location, which is how management organizes the segments for making operating
decisions and assessing performance. Each of Paaco and Smart Choice sell and
finance used vehicles. Paaco operates in major metropolitan areas in the State
of Texas and Smart Choice operates in the central region of Florida. Prior to
the acquisition of Smart Choice during fiscal 2000, the Company operated in one
business segment. The Company's business segment data is as follows (in
thousands):
Year Ended April 30, 2001 Year Ended April 30, 2000
------------------------------------------- ------------------------------------------
Smart Smart
Paaco Choice Consol Paaco Choice Consol
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 106,654 $ 77,206 $ 183,860 $ 82,674 $ 26,657 $ 109,331
Interest income 16,331 21,717 38,048 12,034 9,199 21,233
------------ ------------ ------------ ------------ ------------ ------------
Total 122,985 98,923 221,908 94,708 35,856 130,564
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of vehicle sales 68,700 45,940 114,640 52,259 15,335 67,594
Selling, gen. and admin 24,887 20,119 45,006 18,962 7,255 26,217
Prov. for credit losses 14,342 29,153 43,495 13,113 8,257 21,370
Interest expense 7,246 10,253 17,499 5,725 3,743 9,468
Depreciation and amort 717 1,049 1,766 331 435 766
------------ ------------ ------------ ------------ ------------ ------------
Total 115,892 106,514 222,406 90,390 35,025 125,415
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before taxes $ 7,093 $ (7,591) $ (498) $ 4,318 $ 831 $ 5,149
============ ============ ============ ============ ============ ============
Capital expenditures $ 2,219 $ 975 $ 3,194 $ 1,651 $ 970 $ 2,621
============ ============ ============ ============ ============ ============
Total assets $ 89,841 $ 100,059 $ 189,900 $ 78,719 $ 100,246 $ 178,965
============ ============ ============ ============ ============ ============
B-35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 1, 1999 the appointment of BDO Siedman, LLP ("BDO") as independent
public accountants for the Company was terminated. On January 28, 2000 the
Company engaged Grant Thornton LLP as its new independent accountants.
BDO's report on the financial statements of the Company for 1998 and 1997 did
not contain an adverse opinion or a disclaimer of opinion, and was not qualified
or modified as to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years and the subsequent interim period
preceding the dismissal of BDO, there were no disagreements with BDO on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of BDO, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
No event listed in Paragraphs (A) through (D) of Item 304 a(1)(v) of Regulation
S-K occurred within the Company's two most recent fiscal years and the
subsequent interim period preceding the dismissal of BDO.
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.
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 2001 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 2001 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 2001 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 2001 annual meeting of
shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
B-36
The following financial statements and accountant's report are included in Item
8 of this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of April 30, 2001 and 2000
Consolidated Statements of Operations for the fiscal years ended April
30, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the fiscal years
ended April 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the fiscal years ended April
30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(a)(2). FINANCIAL STATEMENT SCHEDULES
The financial statement schedules are omitted since the required information is
not present, or is not present in amounts sufficient to require submission of
the schedules, or because the information required is included in the
consolidated financial statements and notes thereto.
(a)(3). EXHIBITS
EXHIBIT
NO. EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO:
------- ------------------- -----------------------------
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
3.1.2 Second Articles of Amendment to Exhibit 3.1 to Form 8-K filed on October 9, 1997.
Articles of Incorporation
3.1.3 Third Articles of Amendment to Exhibit 3.1 to Form 10-Q filed on May 15, 1998.
Articles of Incorporation
3.1.4 Fourth Articles of Amendment to Exhibit 3.2.4 to Form S-1 filed on July 17, 1998.
Articles of Incorporation
3.1.5 Fifth Articles of Amendment to Exhibit 3.2.5 to Form S-1 filed on July 17, 1998.
Articles of Incorporation
3.1.6 Sixth Articles of Amendment to Exhibit 3.2.6 to Form 10-K filed on August 11, 2000.
Articles of Incorporation
3.1.7 Certificate of Amendment of Articles Exhibit 3.2.7 to Form 10-K filed on August 11, 2000.
of Incorporation effecting 1-for-20
reverse split of common stock
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.
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.
B-37
10.1 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.
10.2 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.
10.3 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.
10.4 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")
10.5 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
10.6 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
10.7 Modification of Mortgage Note and Exhibit 10.13.1 to From S-1 filed on August 21,
Extension Agreement dated July 24, 1998, file no. 333-59375.
1998 between the Company and
Huntington.
10.8 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.
10.9 Guaranty to Finova from the Company Exhibit 4.5 to Form 10-Q, filed on May 20, 1997.
dated January 13, 1997.
10.10 Guaranty to Finova from the SC Exhibit 10.19.2 to Form 10-K filed on April 15, 1999
Holdings, Inc.
10.11 Guaranty to Finova from the Company. Exhibit 10.19.3 to Form 10-K filed on April 15, 1999
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
B-38
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 Manheim Automotive Financial Services, Exhibit 10.82 to Form S-1 filed on August 21, 1998,
Inc. Security Agreement dated March 21, File No. 333-59375
1997 between FCAF and Manheim
Automotive Financial Services, Inc.
10.24 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
10.25 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.
10.26 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.
16.19 Letter from BDO Seidman LLP dated Exhibit 16.1 to form 8-K filed on December 8, 1999
December 1, 1999
* Information regarding the computation of earnings per share is set forth in
the Notes to Consolidated Financial Statements.
(b) REPORTS ON FORM 8-K
During the fiscal quarter ended April 30, 2001 the Company did not file any
reports on Form 8-K.
B-39
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 13, 2001.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ James Edward Ernst
--------------------------------------
James Edward Ernst
President and Chief Executive Officer
By: /s/ Larry Kiem
--------------------------------------
Larry Kiem
(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.
Signatures Title Date
---------- ----- ----
/s/ Edward R. McMurphy Chairman of the Board August 13, 2001
----------------------------
Edward R. McMurphy
/s/ James Edward Ernst President, Chief Executive August 13, 2001
---------------------------- Officer and Director
James Edward Ernst
/s/ Tilman J. Falgout, III Assistant Secretary and Director August 13, 2001
----------------------------
Tilman J. Falgout
/s/ Larry Lange Vice President and Director August 13, 2001
----------------------------
Larry Lange
/s/ Robert J. Abrahams Director August 13, 2001
----------------------------
Robert J. Abrahams
B-40
APPENDIX C
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarter ended: Commission file number:
OCTOBER 31, 2001 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)
1555 SEMORAN BLVD., WINTER PARK, FLORIDA
(Address of principal executive offices)
32792
(Zip Code)
(407) 671-1200
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class December 17, 2001
------------------- -----------------
Common stock, par value $.01 per share 9,762,270
C-1
PART I
ITEM 1. FINANCIAL STATEMENTS SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 2001
(unaudited) April 30, 2001
----------------- -----------------
Assets:
Cash and cash equivalents $ 3,685,690 $ 436,262
Other receivables 563,775 1,344,238
Finance receivables, net 122,439,871 149,656,124
Inventory 9,898,889 7,980,291
Prepaid and other assets 770,283 607,567
Deferred tax assets, net 3,373,921 15,605,094
Property and equipment, net 9,489,301 12,186,901
Goodwill, net 2,084,017
----------------- -----------------
$ 150,221,730 $ 189,900,494
================= =================
Liabilities and stockholders' equity (deficit):
Accounts payable and accrued liabilities $ 7,389,436 $ 10,425,072
Income taxes payable 1,139,810 1,139,810
Revolving credit facilities 147,441,944 147,441,944
Other borrowings 8,339,922 9,985,391
Deferred sales tax 4,806,470 4,963,154
----------------- -----------------
Total liabilities 169,117,582 173,955,371
----------------- -----------------
Contingent redemption value of put options 453,371 453,371
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $.01 per share, 2,000,000 shares
authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares
authorized; 9,762,270 issued and outstanding 97,623 97,623
Additional paid-in capital 13,832,832 13,832,832
Retained earnings (accumulated deficit) (33,279,678) 1,561,297
----------------- -----------------
Total stockholders' equity (deficit) (19,349,223) 15,491,752
----------------- -----------------
$ 150,221,730 $ 189,900,494
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
C-2
CONSOLIDATED STATEMENTS OF OPERATIONS SMART CHOICE AUTOMOTIVE GROUP, INC.
(UNAUDITED)
Three Months Ended Six Months Ended
October 31, October 31,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Sales $ 33,907,405 $ 49,696,443 $ 70,499,118 $ 93,485,995
Interest income 8,801,037 9,525,288 18,448,685 18,898,355
Other 499,056 124,054 780,429 355,085
------------- ------------- ------------- -------------
43,207,498 59,345,785 89,728,232 112,739,435
------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 21,947,473 30,754,372 45,126,873 56,942,713
Selling, general and administrative 11,054,178 10,854,945 21,832,779 20,659,229
Provision for credit losses 9,987,918 11,446,207 21,040,583 22,038,412
Interest expense 3,430,371 4,539,025 7,130,296 8,737,121
Depreciation and amortization 430,352 394,943 845,485 773,610
Write-down of assets 16,232,861 16,232,861
------------- ------------- ------------- -------------
63,083,153 57,989,492 112,208,877 109,151,085
------------- ------------- ------------- -------------
Income (loss) before taxes (19,875,655) 1,356,293 (22,480,645) 3,588,350
Provision for income taxes 13,237,947 524,396 12,360,330 1,353,679
------------- ------------- ------------- -------------
Net income (loss) $ (33,113,602) $ 831,897 $ (34,840,975) $ 2,234,671
============= ============= ============= =============
Earnings (loss) per share:
Basic $ (3.39) $ .08 $ (3.57) $ .23
Diluted $ (3.39) $ .08 $ (3.57) $ .23
Weighted average number of shares outstanding:
Basic 9,762,270 9,814,000 9,762,270 9,794,103
Diluted 9,762,270 9,814,000 9,762,270 9,794,103
The accompanying notes are an integral part of these consolidated financial
statements.
C-3
CONSOLIDATED STATEMENTS OF CASH FLOWS SMART CHOICE AUTOMOTIVE GROUP, INC.
(UNAUDITED)
Six Months Ended
October 31,
2001 2000
------------ ------------
Operating activities:
Net income (loss) $(34,840,975) $ 2,234,671
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 845,485 773,610
Accretion of purchase discount (256,644) (522,595)
Deferred income taxes 12,231,173
Provision for credit losses 21,040,583 22,038,412
Write-down of assets 16,232,861
Loss on sale of assets 45,242
Changes in operating assets and liabilities:
Other receivables 780,463 (233,917)
Finance receivable originations (65,980,838) (90,217,855)
Finance receivable collections 47,686,109 40,479,015
Inventory acquired in repossession 12,804,322 13,457,195
Inventory (1,918,598) (1,679,985)
Prepaids and other assets (315,160) (445,708)
Accounts payable, accrued liabilities and deferred sales tax (3,192,321) (864,068)
------------ ------------
Net cash provided by (used in) operating activities 5,161,702 (14,981,225)
------------ ------------
Investing activities:
Purchase of property and equipment (436,805) (1,427,058)
Sale of assets 170,000
------------ ------------
Net cash used in investing activities (266,805) (1,427,058)
------------ ------------
Financing activities:
Proceeds from revolving credit facilities, net 15,913,880
Repayments of other borrowings (1,645,469) (800,000)
------------ ------------
Net cash provided by (used in) financing activities (1,645,469) 15,113,880
------------ ------------
Increase (decrease) in cash and cash equivalents 3,249,428 (1,294,403)
Cash and cash equivalents at: Beginning of period 436,262 1,882,716
------------ ------------
End of period $ 3,685,690 $ 588,313
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
C-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SMART CHOICE AUTOMOTIVE GROUP, INC.
(UNAUDITED)
A - DESCRIPTION OF BUSINESS
Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively with
all of its subsidiaries (the "Company") is in the business of selling and
financing used automobiles and trucks principally to consumers with limited or
damaged credit histories. Smart Choice's Florida-based subsidiaries are referred
to as the "Florida Finance Group" or "FFG". Smart Choice's Texas-based
subsidiaries, which include Paaco Automotive Group, L.P. and Premium Auto
Acceptance Corporation, are referred to as "Paaco". As of October 31, 2001 the
Florida Finance Group operated 13 used car dealerships in central Florida while
Paaco operated 12 used car dealerships in Texas (principally in the cities of
Dallas and Houston).
As discussed in Note B, on November 9, 2001 the Company began to wind-down
its Florida-based operations. Further, Smart Choice granted Finova Capital
Corporation ("Finova"), the primary lender to its subsidiaries, an option to
purchase Paaco. On December 12, 2001 Finova exercised its option to purchase
Paaco, the closing of which is subject to certain conditions. If the sale of
Paaco closes as expected, Smart Choice will no longer have any operations of
substance, and it is anticipated that its remaining assets will be sold in an
effort to repay its obligations to unsecured creditors to the extent possible.
B - SETTLEMENT AGREEMENT WITH FINOVA
On November 8, 2001, Smart Choice, the Florida Finance Group and Paaco,
entered into a forbearance agreement with Finova, the primary lender to Smart
Choice's subsidiaries, that resulted in the foreclosure of the Florida Finance
Group's receivables and inventory, and the probable sale of Paaco to Finova.
Prior to November 9, 2001, the Florida Finance Group sold and financed used
cars and trucks in Florida. Paaco sells and finances used cars and trucks in
Texas. The Florida Finance Group had, and Paaco continues to have, a revolving
credit facility with Finova. Prior to November 9, 2001, the Florida Finance
Group was over-advanced on its revolving credit facility ($25 million
over-advanced at September 30, 2001), which constituted an event of default
under the facility.
Pursuant to the forbearance agreement, on November 9, 2001, the collateral
for the Florida Finance Group's credit facility with Finova, which consisted
principally of receivables and inventory, was sold at a public foreclosure sale
to Finova for $55 million. Prior to the foreclosure sale, the Florida Finance
Group owed Finova $88.4 million. Thus, after applying the proceeds from the
foreclosure sale, the Florida Finance Group owed Finova $33.4 million (the
"Deficiency").
Further, as part of the forbearance agreement, Smart Choice granted Finova
(i) an option to purchase Paaco (the "Paaco Option") for an amount equal to the
Deficiency, subject to shareholder approval and an appraisal indicating the
value of Paaco is not greater than the Deficiency, and (ii) an option to
purchase up to 100% of Smart Choice's remaining shares of authorized but
unissued common stock (approximately 39 million shares) (the "Smart Choice Stock
Option") at a price of $0.30 per share. The Smart Choice Stock Option will
terminate upon the closing of the sale of Paaco. Presently, Smart Choice has
approximately 9.8 million shares of common stock outstanding. Both the Paaco
Option and the Smart Choice Stock Option expire March 8, 2002.
As a result of the Finova agreement and the lack of other available capital,
on November 9, 2001 the Florida Finance Group began to wind-down its operations.
Stemming from these events, the Company determined that certain of its assets
were impaired, and as of October 31, 2001 wrote-down the value of Smart Choice
and Florida Finance Group finance receivables, property and equipment and
goodwill by an aggregate $16.2 million, and deferred tax assets by $13.7
million. On December 12, 2001 Finova exercised its option to purchase Paaco
subject to certain conditions. If the sale of Paaco is closed as expected, Smart
Choice's remaining assets would consist of certain improved and unimproved real
estate in Titusville, Florida, including a 35,000 square-foot office facility,
and certain other current and fixed assets. Assuming the sale of Paaco,
management presently anticipates that Smart Choice's remaining assets will
likely be sold by Smart Choice in an effort to realize the maximum value for
these assets and repay its obligations to unsecured creditors to the extent
possible.
C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period
ended October 31, 2001 are not indicative of the results that will be reported
for the year ended April 30, 2002 as the Company is in the process of
winding-down its Florida Finance Group operation and is expected to sell Paaco
to Finova. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended April 30, 2001.
C-5
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company adopted SFAS 141 effective May 1,
2001. Such adoption did not have any impact on the Company's financial position
or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting
for purchased goodwill and intangible assets. Under SFAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized, but will be
tested for impairment annually, and in the event of an impairment indicator.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company adopted SFAS 142 effective May 1, 2001.
Presented below is a reconciliation of reported net income (loss) and per share
amounts to adjusted net income (loss) and per share amounts for the three and
six months ended October 31, 2001 and 2000 to adjust for the amortization of
intangible assets for periods prior to the adoption of SFAS 142 on May 1, 2001
(in thousands, except per share amounts). The reconciliation presents the
Company's results of operations for periods prior to the adoption of SFAS 142 on
a basis comparable with periods since the adoption of SFAS 142 as discussed in
Note B, goodwill was written-off as of October 31, 2001.
Net Income (Loss) Diluted Earnings (Loss) Per Share
------------------------------------------------- -------------------------------------------------
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
October 31, October 31, October 31, October 31,
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- -------- -------- --------
As reported $(33,114) $ 832 $(34,841) $ 2,235 $ (3.39) $ .08 $ (3.57) $ .23
Add back goodwill amort. 61 123 .01 .01
-------- -------- -------- -------- -------- -------- -------- --------
As adjusted $(33,114) $ 893 $(34,841) $ 2,358 $ (3.39) $ .09 $ (3.57) $ .24
======== ======== ======== ======== ======== ======== ======== ========
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets",
which requires a single accounting model to be used for long-lived assets to be
sold and broadens the presentation of discontinued operations to include a
"component of an entity" (rather than a segment of a business). A component of
an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
A component of an entity that is classified as held for sale or has been
disposed of is presented as a discontinued operation if the operations and cash
flows of the component will be (or have been) eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the component. The Company adopted SFAS 144
effective August 1, 2001. Such adoption did not have any impact on the financial
position or results of operations of the Company.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 2002 presentation.
D - FINANCE RECEIVABLES
The components of finance receivables as of October 31, 2001 and April 30,
2001 are as follows:
October 31, April 30,
2001 2001
---------------- -----------------
Finance receivables $ 187,461,456 $ 216,818,123
Unearned finance charges (19,327,228) (29,563,528)
Allowance for credit losses (33,450,154) (36,991,295)
Valuation allowance - Florida Finance Group (11,922,721)
Purchase discounts (321,482) (607,176)
--------------- ---------------
$ 122,439,871 $ 149,656,124
=============== ===============
As discussed in Note B, on November 9, 2001, the collateral for the Florida
Finance Group's credit facility with Finova, which consisted principally of
receivables and inventory, was sold at a public foreclosure sale to Finova for
$55 million. As a result, a finance receivable valuation allowance of
$11,922,721 was established as of October 31, 2001 to adjust such receivables to
their net realizable value.
C-6
Changes in the finance receivables allowance for credit losses for the six
months ended October 31, 2001 and 2000 are as follows:
Six Months Ended
October 31,
2001 2000
------------ ------------
Balance at beginning of period $ 36,991,295 $ 32,290,918
Provision for credit losses 21,040,583 22,038,412
Net charge-offs (24,581,724) (19,887,537)
------------ ------------
Balance at end of period $ 33,450,154 $ 34,441,793
============ ============
E - PROPERTY AND EQUIPMENT
A summary of property and equipment as of October 31, 2001 and April 30, 2001
is as follows:
October 31, April 30,
2001 2001
------------ ------------
Land and buildings $ 6,798,635 $ 6,811,701
Furniture, fixtures and equipment 3,532,479 5,053,556
Leasehold improvements 1,649,493 2,977,018
Less accumulated depreciation and amortization (2,491,306) (2,655,374)
------------ ------------
$ 9,489,301 $ 12,186,901
============ ============
For the six months ended October 31, 2001 and 2000 depreciation and
amortization of property and equipment amounted to $845,485 and $650,883,
respectively.
C-7
F - DEBT
A summary of debt as of October 31, 2001 and April 30, 2001 is as follows:
Revolving Credit Facilities
---------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity October 31, 2001 April 30, 2001
--------------- --------------- -------------- ------------- ------------ ------------------ -----------------
Florida Fin. Grp Finova $ 98 million Prime + 2.25% Nov 2001 $ 88,394,134 $ 88,394,134
Paaco Finova $ 62 million Prime + 2.00% Nov 2001 59,047,810 59,047,810
----------------- ----------------
$ 147,441,944 $ 147,441,944
================= ================
Other Borrowings
-------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity October 31, 2001 April 30, 2001
----------------- ------------------ ----------- ------------- ------------ ------------------ ----------------
Smart Choice Huntington N/A Prime + .75% Oct 2001 $ 1,860,348 $ 1,932,373
Smart Choice High Capital et al N/A 10.0% Nov 2001 725,000 725,000
Florida Fin. Grp Individuals N/A Various Various 401,007 565,948
Florida Fin. Grp Leasing companies N/A Various Various 286,319 410,106
Paaco Crown Group N/A 8.50% Mar 2002 1,576,286 2,576,286
Paaco Individual N/A 9.50% May 2002 700,000 700,000
Paaco Washington Mutual N/A 8.50% May 2003 754,262 792,815
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 577,468 586,836
Various Various N/A Various Various 1,459,232 1,696,027
----------------- ----------------
$ 8,339,922 $ 9,985,391
================= ================
As discussed in Note B, as of October 31, 2001 the Florida Finance Group and
Paaco were in violation of certain provisions of their loan agreements with
Finova. As a result, and taking into consideration certain other conditions, on
November 8, 2001 Smart Choice, Paaco and the Florida Finance Group entered into
a forbearance agreement with Finova. Pursuant to the forbearance agreement, on
November 9, 2001, the collateral for the Florida Finance Group's credit facility
with Finova, which consisted principally of receivables and inventory, was sold
at a public foreclosure sale to Finova for $55 million. Prior to the foreclosure
sale, the Florida Finance Group owed Finova $88.4 million. Thus, after applying
the proceeds from the foreclosure sale, the Florida Finance Group owed Finova
$33.4 million.
As a result of Paaco's loan covenant violations, on November 8, 2001 Finova
accelerated the maturity of Paaco's revolving credit facility such that the
entire balance is currently due and payable. However, the Company does not
presently expect that Finova will seek to foreclose upon its collateral
(principally receivables and inventory), but rather will allow Paaco to operate
at or near its present borrowing level.
In addition, at October 31, 2001, Smart Choice and the Florida Finance Group
were in violation of the terms of certain agreements with respect to their other
borrowings.
C-8
G - EARNINGS (LOSS) PER SHARE
A summary reconciliation of basic earnings (loss) per share to diluted
earnings (loss) per share for the six months ended October 31, 2001 and 2000 is
as follows:
Three Months Ended Six Months Ended
October 31, October 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income (loss) $(33,113,602) $ 831,897 $(34,840,975) $ 2,234,671
============ ============ ============ ============
Average shares outstanding-basic 9,762,270 9,814,000 9,762,270 9,794,103
Dilutive options -- -- -- --
------------ ------------ ------------ ------------
Average shares outstanding-diluted 9,762,270 9,814,000 9,762,270 9,794,103
============ ============ ============ ============
Earnings (loss) per share:
Basic $ (3.39) $ .08 $ (3.57) $ .23
Diluted $ (3.39) $ .08 $ (3.57) $ .23
Antidilutive securities not included:
Options and warrants 426,021 404,686 426,021 404,686
============ ============ ============ ============
H - COMMITMENTS AND CONTINGENCIES
Smart Choice Class Action Lawsuit
In March 1999 certain shareholders of Smart Choice filed two putative class
action lawsuits against Smart Choice and certain of Smart Choice's 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 Smart Choice publicly traded
securities between April 15, 1998 and February 26, 1999. These lawsuits were
filed following Smart Choice'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 the plaintiffs to purchase Smart Choice
securities at artificially inflated prices. In April 2001 Smart Choice and the
plaintiffs' representatives executed an agreement requiring Smart Choice to pay
$2.5 million in full settlement of the above described actions. All of the $2.5
million settlement amount was funded by Smart Choice's insurance carrier. In
September 2001, the settlement agreement was approved by the Court, the funds
were disbursed and the lawsuits were dismissed with prejudice.
Other Litigation
In the ordinary course of business, the Company has become a defendant in
various other types of legal proceedings. The Company cannot determine at this
time the amount of the ultimate exposure, if any, these ordinary course of
business lawsuits may have on the Company.
I - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the six months ended October 31, 2001
and 2000 are as follows:
Six Months Ended
October 31,
2001 2000
----------- -----------
Interest paid $ 6,727,530 $ 8,534,840
Income taxes paid (refunded) (362,143) 2,070,000
C-9
J - BUSINESS SEGMENTS
Operating results and other financial data are presented for the two business
segments of the Company (the Florida Finance Group and Paaco) for the three and
six months ended October 31, 2001 and 2000. These segments are categorized by
legal entity and geographical location, which is how management organizes the
segments for making operating decisions and assessing performance. Smart
Choice's corporate operations, which are based in Florida, are included in the
Florida Finance Group's operations. Each of the Florida Finance Group and Paaco
sell and finance used vehicles. The Florida Finance Group operates in central
Florida and Paaco operates in Texas (principally in the cities of Dallas and
Houston). As discussed in Note B, on November 9, 2001 the Florida Finance Group
began to wind-down its operations. The Company's business segment data is as
follows (in thousands):
Three Months Ended October 31, 2001 Three Months Ended October 31, 2000
-------------------------------------- --------------------------------------
Florida Florida
Paaco Fin. Grp. Consol Paaco Fin. Grp. Consol
--------- --------- --------- --------- --------- ---------
Revenues:
Sales and other $ 24,217 $ 10,190 $ 34,407 $ 26,152 $ 23,669 $ 49,821
Interest income 4,611 4,190 8,801 3,977 5,548 9,525
--------- --------- --------- --------- --------- ---------
Total 28,828 14,380 43,208 30,129 29,217 59,346
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 15,550 6,397 21,947 17,053 13,702 30,755
Selling, gen. and admin 7,091 3,964 11,055 5,725 5,130 10,855
Prov. for credit losses 3,511 6,477 9,988 3,694 7,752 11,446
Interest expense 1,385 2,045 3,430 1,941 2,598 4,539
Depreciation and amort. 215 215 430 134 261 395
Write-down of assets 16,233 16,233
--------- --------- --------- --------- --------- ---------
Total 27,752 35,331 63,083 28,547 29,443 57,990
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes $ 1,076 $ (20,951) $ (19,875) $ 1,582 $ (226) $ 1,356
========= ========= ========= ========= ========= =========
Capital expenditures $ 47 $ 120 $ 167 $ 354 $ 219 $ 573
========= ========= ========= ========= ========= =========
Total assets $ 89,132 $ 61,090 $ 150,222 $ 90,219 $ 104,607 $ 194,826
========= ========= ========= ========= ========= =========
Six Months Ended October 31, 2001 Six Months Ended October 31, 2000
-------------------------------------- --------------------------------------
Florida Florida
Paaco Fin. Grp. Consol Paaco Fin. Grp. Consol
--------- --------- --------- --------- --------- ---------
Revenues:
Sales and other $ 49,584 $ 21,696 $ 71,280 $ 51,248 $ 42,593 $ 93,841
Interest income 9,359 9,089 18,448 7,804 11,094 18,898
--------- --------- --------- --------- --------- ---------
Total 58,943 30,785 89,728 59,052 53,687 112,739
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 31,822 13,305 45,127 32,490 24,453 56,943
Selling, gen. and admin 13,819 8,014 21,833 11,000 9,659 20,659
Prov. for credit losses 7,331 13,709 21,040 8,442 13,596 22,038
Interest expense 2,887 4,243 7,130 3,676 5,061 8,737
Depreciation and amort. 417 428 845 260 514 774
Write-down of assets 16,233 16,233
--------- --------- --------- --------- --------- ---------
Total 56,276 55,932 112,208 55,868 53,283 109,151
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes $ 2,667 $ (25,147) $ (22,480) $ 3,184 $ 404 $ 3,588
========= ========= ========= ========= ========= =========
Capital expenditures $ 156 $ 281 $ 437 $ 879 $ 548 $ 1,427
========= ========= ========= ========= ========= =========
Total assets $ 89,132 $ 61,090 $ 150,222 $ 90,219 $ 104,607 $ 194,826
========= ========= ========= ========= ========= =========
C-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
report.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. Certain information included in this
Quarterly Report on Form 10-Q contains, and other materials filed or to be filed
by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made or to
be made by the Company or its management) contain or will contain,
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. The words "believe," "expect," "anticipate," "estimate," "project"
and similar expressions identify forward-looking statements, which speak only as
of the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements. Such forward-looking
statements are based upon management's current plans or expectations and are
subject to a number of uncertainties and risks that could significantly affect
current plans, anticipated actions and the Company's future financial condition
and results. As a consequence, actual results may differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company
as a result of various factors. Uncertainties and risks related to such
forward-looking statements include, but are not limited to, those relating to
the sale of Paaco to Finova pursuant to the Paaco Option, the ability of Smart
Choice to sell its remaining assets and repay unsecured creditors to the extent
possible, continuation of Paaco's borrowings from Finova, changes in interest
rates, competition, dependence on existing management, economic conditions
(particularly in the State of Texas), changes in tax laws or the administration
of such laws and changes in lending laws or regulations. Any forward-looking
statements are made pursuant to the Private Securities Litigation Reform Act of
1995 and, as such, speak only as of the date made.
RESULTS OF OPERATIONS
Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively with
all of its subsidiaries (the "Company") is in the business of selling and
financing used automobiles and trucks principally to consumers with limited or
damaged credit histories. Smart Choice's Florida-based subsidiaries are referred
to as the "Florida Finance Group" or "FFG". Smart Choice's Texas-based
subsidiaries, which include Paaco Automotive Group, L.P. and Premium Auto
Acceptance Corporation, are referred to as "Paaco". As of October 31, 2001 the
Florida Finance Group operated 13 used car dealerships in central Florida while
Paaco operated 12 used car dealerships in Texas (principally in the cities of
Dallas and Houston).
As discussed in Note B to the accompanying consolidated financial statements,
on November 9, 2001 the Company began to wind-down its Florida-based operations.
Further, Smart Choice granted Finova Capital Corporation ("Finova"), the primary
lender to its subsidiaries, an option to purchase Paaco. On December 12, 2001
Finova exercised its option to purchase Paaco, the closing of which is subject
to certain conditions. If the sale of Paaco closes as expected, Smart Choice
will no longer have any operations of substance, and it is anticipated that its
remaining assets will be sold in an effort to repay its obligations to unsecured
creditors to the extent possible.
C-11
Operating results and other financial data are presented for the two business
segments of the Company (the Florida Finance Group and Paaco) for the three and
six months ended October 31, 2001 and 2000. These segments are categorized by
legal entity and geographical location, which is how management organizes the
segments for making operating decisions and assessing performance. Smart
Choice's corporate operations, which are based in Florida, are included in the
Florida Finance Group's operations. Each of the Florida Finance Group and Paaco
sell and finance used vehicles. The Florida Finance Group operates in central
Florida and Paaco operates in Texas (principally in the cities of Dallas and
Houston). The Company's business segment data is as follows (in thousands):
CONSOLIDATED
(In Thousands)
Revenues Pretax Income (Loss)
----------------------------------------------- --------------------------------------------------
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
October 31, October 31, October 31, October 31,
--------------------- --------------------- ---------------------- ----------------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- -------- -------- --------
Paaco $ 28,828 $ 30,129 $ 58,943 $ 59,052 $ 1,076 $ 1,582 $ 2,667 $ 3,184
FFG 14,380 29,217 30,785 53,687 (20,951) (226) (25,147) 404
-------- -------- -------- -------- -------- -------- -------- --------
Consolidated $ 43,208 $ 59,346 $ 89,728 $112,739 $(19,875) $ 1,356 $(22,480) $ 3,588
======== ======== ======== ======== ======== ======== ======== ========
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $16.1 million, or 27.2%, for the three months ended
October 31, 2001 as compared to the same period in the prior fiscal year. The
decrease was principally the result of (i) a 39.0% decrease in the number of
vehicles sold, and (ii) a 32.6% decrease in the average sales price per retail
vehicle sold at the Florida Finance Group. Beginning in March 2001 the Florida
Finance Group changed its underwriting practices in an effort to reduce credit
losses. The changes in its underwriting practices resulted in fewer individuals
being approved for credit, which resulted in a lower number of vehicles sold.
Smart Choice reported a pretax loss of $19.9 million for the three months
ended October 31, 2001 as compared to $1.4 million pretax income for the same
period in the prior fiscal year. The $21.2 million decrease is principally the
result of a $16.2 million write-down of assets and higher costs and expenses as
a percentage of sales at the Florida Finance Group. The $16.2 million write-down
pertains to certain Smart Choice and Florida Finance Group assets (finance
receivables, property and equipment and goodwill) that were deemed to be
impaired in connection with the foreclosure by Finova of certain Florida Finance
Group assets and the winding-down of the Florida Finance Group's operations (see
Note B to the accompanying consolidated financial statements). In addition, the
Florida Finance Group's provision for credit loss and selling, general and
administrative expenses have not decreased proportionately with its 50.8%
decrease in revenues.
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $23.0 million, or 20.4%, for the six months ended October
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) a 32.9% decrease in the number of vehicles
sold, and (ii) a 26.3% decrease in the average sales price per retail vehicle
sold at the Florida Finance Group. Beginning in March 2001 the Florida Finance
Group changed its underwriting practices in an effort to reduce credit losses.
The changes in its underwriting practices resulted in fewer individuals being
approved for credit, which resulted in a lower number of vehicles sold.
Smart Choice reported a pretax loss of $22.5 million for the six months ended
October 31, 2001 as compared to $3.6 million pretax income for the same period
in the prior fiscal year. The $26.1 million decrease is principally the result
of a $16.2 million write-down of assets and higher costs and expenses as a
percentage of sales at the Florida Finance Group. The $16.2 million write-down
pertains to certain Smart Choice and Florida Finance Group assets (finance
receivables, property and equipment and goodwill) that were deemed to be
impaired in connection with the foreclosure by Finova of certain Florida Finance
Group assets and the winding-down of the Florida Finance Group's operations (see
Note B to the accompanying consolidated financial statements). In addition, the
Florida Finance Group's provision for credit loss and selling, general and
administrative expenses have not decreased proportionately with its 42.7%
decrease in revenues.
C-12
PAACO
(Dollars in Thousands)
% Change As a % of Sales and Other
---------- --------------------------
Three Months Ended 2001 Three Months Ended
October 31, vs October 31,
2001 2000 2000 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues:
Sales and other $ 24,217 $ 26,152 (7.4)% 100.0% 100.0%
Interest income 4,611 3,977 15.9 19.0 15.2
---------- ---------- ---------- ---------- ----------
Total 28,828 30,129 (4.3) 119.0 115.2
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 15,550 17,053 (8.8) 64.2 65.2
Selling, gen and admin 7,091 5,725 23.9 29.3 21.9
Prov. for credit losses 3,511 3,694 (5.0) 14.5 14.1
Interest expense 1,385 1,941 (28.6) 5.7 7.5
Depreciation and amort. 215 134 60.4 .9 .5
---------- ---------- ---------- ---------- ----------
Total 27,752 28,547 (2.8) 114.6 109.2
---------- ---------- ---------- ---------- ----------
Pretax income $ 1,076 $ 1,582 (32.0) 4.4 6.0
========== ========== ========== ========== ==========
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $1.3 million, or 4.3%, for the three months ended October
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) a lower level of vehicle sales, partially
offset by (ii) higher interest income. Unit sales decreased by 12.4% while the
average price per vehicle sold increased by 5.0%. The decrease in unit sales was
partially the result of decreasing the average number of stores in operation to
12 in the current fiscal period from 13 in the prior fiscal period. Interest
income increased by 15.9% as a result of (i) a 7.8% increase in the average
finance receivables balances outstanding, and (ii) a 7.5% increase in the
average interest rate charged on Paaco's installment loans. Pretax income
decreased $.5 million, or 32.0%, for the three months ended October 31, 2001 as
compared to the same period in the prior fiscal year. The decrease was
principally the result of (i) higher selling, general and administrative
expenses ($1.3 million), partially offset by (ii) lower interest expense ($.6
million) as a result of a reduction in interest rates. Selling, general and
administrative expenses increased as a result of higher payroll, employee
benefit and service contract costs.
% Change As a % of Sales and Other
---------- --------------------------
Six Months Ended 2001 Six Months Ended
October 31, vs October 31,
2001 2000 2000 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues:
Sales and other $ 49,584 $ 51,248 (3.2)% 100.0% 100.0%
Interest income 9,359 7,804 19.9 18.9 15.2
---------- ---------- ---------- ---------- ----------
Total 58,943 59,052 (.2) 118.9 115.2
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 31,822 32,490 (2.1) 64.2 63.4
Selling, gen and admin 13,819 11,000 25.6 27.9 21.4
Prov. for credit losses 7,331 8,442 (13.2) 14.8 16.5
Interest expense 2,887 3,676 (21.5) 5.8 7.2
Depreciation and amort. 417 260 60.4 .8 .5
---------- ---------- ---------- ---------- ----------
Total 56,276 55,868 .7 113.5 109.0
---------- ---------- ---------- ---------- ----------
Pretax income $ 2,667 $ 3,184 (16.2) 5.4 6.2
========== ========== ========== ========== ==========
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Revenues were virtually unchanged for the six months ended October 31, 2001
as compared to the same period in the prior fiscal year. A $1.7 million decrease
in vehicle sales was offset by a $1.6 million increase in interest income. Unit
sales decreased by 10.2% while the average price per vehicle sold increased by
7.4%. The decrease in unit sales was partially the result of decreasing the
average number of stores in operation to 12 in the current fiscal period from
12.5 in the prior fiscal period. Interest income increased by 19.9% as a result
of (i) a 11.1% increase in the average finance receivables balances outstanding,
and (ii) an 8.0% increase in the average interest rate charged on Paaco's
installment loans.
C-13
Pretax income decreased $.5 million, or 16.2%, for the six months ended October
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) higher selling, general and administrative
expenses ($2.8 million), partially offset by (ii) a lower provision for credit
losses ($1.1 million), and (iii) lower interest expense ($.8 million) as a
result of a reduction in interest rates. Selling, general and administrative
expenses increased as a result of higher payroll, employee benefit, insurance
and service contract costs.
FLORIDA FINANCE GROUP
(Dollars in Thousands)
% Change As a % of Sales and Other
---------- -------------------------
Three Months Ended 2001 Three Months Ended
October 31, vs October 31,
2001 2000 2000 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues:
Sales and other $ 10,190 $ 23,669 (56.9)% 100.0% 100.0%
Interest income 4,190 5,548 (24.5) 41.1 23.4
---------- ---------- ---------- ---------- ----------
Total 14,380 29,217 (50.8) 141.1 123.4
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 6,397 13,702 (53.3) 62.8 57.9
Selling, gen and admin 3,964 5,130 (22.7) 38.9 21.7
Prov. for credit losses 6,477 7,752 (16.4) 63.6 32.7
Interest expense 2,045 2,598 (21.3) 20.1 11.0
Depreciation and amort. 215 261 (17.6) 2.1 1.1
Write-down of assets 16,233 NM NM
---------- ---------- ---------- ---------- ----------
Total 35,331 29,443 NM NM 124.4
---------- ---------- ---------- ---------- ----------
Pretax loss $ (20,951) $ .(226) NM NM (1.0)
========== ========== ========== ========== ==========
NM - Not meaningful
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $14.8 million, or 50.8%, for the three months ended
October 31, 2001 as compared to the same period in the prior fiscal year. The
decrease was principally the result of (i) a 39.0% decrease in the number of
vehicles sold, and (ii) a 32.6% decrease in the average sales price per retail
vehicle sold. Beginning in March 2001 the Florida Finance Group changed its
underwriting practices in an effort to reduce credit losses. The changes in its
underwriting practices resulted in fewer individuals being approved for credit,
which resulted in a lower number of vehicles sold.
Pretax loss increased to $21.0 million for the three months ended October 31,
2001 from $.2 million for the same period in the prior fiscal year, an increase
of $20.7 million. The increase was principally the result of (i) writing-down
certain assets in the current fiscal period ($16.2 million), and (ii) higher
cost of sales, provision for credit losses, and selling, general and
administrative expenses as a percentage of sales and other in the current fiscal
period as compared to the prior fiscal period ($5.4 million). The $16.2
write-down pertains to certain assets (finance receivables, property and
equipment and goodwill) that were deemed to be impaired in connection with the
foreclosure by Finova of certain Florida Finance Group assets and the
winding-down of the Florida Finance Group's operations (see Note B to the
accompanying consolidated financial statements).
The Florida Finance Group believes that changes in the structure of its
installment sales contracts and inventory mix beginning in May 2000 and
continuing into February 2001 may have contributed to the increase in credit
losses during the three months ended October 31, 2001. In particular, during the
May 2000 to February 2001 period the Florida Finance Group sold a higher priced
vehicle and shortened the term of its installment sales contracts. These actions
increased the average monthly payment on its contracts to a level which may have
made it difficult for certain customers to remain current in their payments.
Many of the accounts charged-off and vehicles repossessed during the three
months ended October 31, 2001 pertain to loans originated between May 2000 and
February 2001. In an effort to reduce credit losses, in March 2001 the Florida
Finance Group began selling lower priced vehicles and reduced the average
interest rate charged on its loans, which has decreased the average monthly
payment required on its contracts.
C-14
% Change As a % of Sales and Other
---------- --------------------------
Six Months Ended 2001 Six Months Ended
October 31, vs October 31,
2001 2000 2000 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues:
Sales and other $ 21,696 $ 42,593 (49.1)% 100.0% 100.0%
Interest income 9,089 11,094 (18.1) 41.9 26.0
---------- ---------- ---------- ---------- ----------
Total 30,785 53,687 (42.7) 141.9 126.0
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 13,305 24,453 (45.6) 61.3 57.4
Selling, gen and admin 8,014 9,659 (17.0) 36.9 22.7
Prov. for credit losses 13,709 13,596 .8 63.2 31.9
Interest expense 4,243 5,061 (16.2) 19.6 11.9
Depreciation and amort. 428 514 (16.7) 2.0 1.2
Write-down of assets 16,233 NM NM
---------- ---------- ---------- ---------- ----------
Total 55,932 53,283 NM NM 125.1
---------- ---------- ---------- ---------- ----------
Pretax income (loss) $ (25,147) $ 404 NM NM .9
========== ========== ========== ========== ==========
NM - Not meaningful
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $22.9 million, or 42.7%, for the six months ended October
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) a 32.9% decrease in the number of vehicles
sold, and (ii) a 26.3% decrease in the average sales price per retail vehicle
sold. Beginning in March 2001 the Florida Finance Group changed its underwriting
practices in an effort to reduce credit losses. The changes in its underwriting
practices resulted in fewer individuals being approved for credit, which
resulted in a lower number of vehicles sold.
The Florida Finance Group reported a pretax loss of $25.1 million for the six
months ended October 31, 2001 as compared to $.4 million pretax income for the
same period in the prior fiscal year. The $25.6 million decrease is principally
the result of (i) writing-down certain assets in the current fiscal period
($16.2 million), and (ii) higher cost of sales, provision for credit losses, and
selling, general and administrative expenses as a percentage of sales and other
in the current fiscal period as compared to the prior fiscal period ($10.7
million). The $16.2 write-down pertains to certain assets (finance receivables,
property and equipment and goodwill) that were deemed to be impaired in
connection with the foreclosure by Finova of certain Florida Finance Group
assets and the winding-down of the Florida Finance Group's operations (see Note
B to the accompanying consolidated financial statements).
The Florida Finance Group believes that changes in the structure of its
installment sales contracts and inventory mix beginning in May 2000 and
continuing into February 2001 may have contributed to the increase in credit
losses during the six months ended October 31, 2001. In particular, during the
May 2000 to February 2001 period the Florida Finance Group sold a higher priced
vehicle and shortened the term of its installment sales contracts. These actions
increased the average monthly payment on its contracts to a level which may have
made it difficult for certain customers to remain current in their payments.
Many of the accounts charged-off and vehicles repossessed during the six months
ended October 31, 2001 pertain to loans originated between May 2000 and February
2001. In an effort to reduce credit losses, in March 2001 the Florida Finance
Group began selling lower priced vehicles and reduced the average interest rate
charged on its loans, which has decreased the average monthly payment required
on its contracts.
C-15
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.2 million for the six months
ended October 31, 2001 as compared to a $15.0 million use of cash for the same
period in the prior fiscal year. The $20.2 million increase was principally the
result of (i) the net finance receivables portfolio increasing by $14.1 million
in the prior fiscal period as compared to a decrease of $15.3 million in the
current fiscal period, (ii) a $16.2 million write-down of assets and (iii) a
$12.2 million decrease in deferred tax assets, partially offset by (iv) a $37.1
million decrease in net income. Net cash used in investing activities was $.3
million for the six months ended October 31, 2001 as compared to $1.4 million in
the same period in the prior fiscal year. The $1.1 million decrease was
principally the result of a decrease in the purchase of property and equipment.
Net cash used by financing activities was $1.6 million for the six months ended
October 31, 2001 as compared to a $15.1 million source of cash for the same
period in the prior fiscal year. The $16.7 million decrease was principally the
result of the prior period including an increase in borrowings from revolving
credit facilities of $15.9 million.
PAACO
Paaco's sources of liquidity principally include cash on hand ($1.9 million
at October 31, 2001) and cash generated from operations. Paaco has a $62.0
million revolving credit facility with Finova, of which $59.1 million was
outstanding at October 31, 2001. However, as of October 31, 2001, Paaco's
revolving credit facility with Finova was in default, and, as a result, on
November 8, 2001 Finova accelerated the maturity of the credit facility such
that the entire balance is currently due and payable. However, the Company does
not presently expect that Finova will seek to foreclose upon its collateral
(principally receivables and inventory), but rather will allow Paaco to operate
at or near its present borrowing level.
It is unlikely that Paaco could refinance such facility with a new lender
since Paaco's advance rate (ie. 70% of eligible receivables and inventory) is
believed to be above market. Accordingly, for the foreseeable future, Paaco's
ability to expand its operations may be limited as a result of a shortage of
additional capital. Consequently, Paaco anticipates operating its business at
sales and asset levels consistent with its recent past, and not substantially
expanding its operations.
SMART CHOICE / FLORIDA FINANCE GROUP
On November 8, 2001, Smart Choice, the Florida Finance Group and Paaco,
entered into a forbearance agreement with Finova, the primary lender to Smart
Choice's subsidiaries, that resulted in the foreclosure of the Florida Finance
Group's receivables and inventory, and the probable sale of Paaco to Finova.
Prior to November 9, 2001, the Florida Finance Group sold and financed used
cars and trucks in Florida. Paaco sells and finances used cars and trucks in
Texas. The Florida Finance Group had, and Paaco continues to have, a revolving
credit facility with Finova. Prior to November 9, 2001, the Florida Finance
Group was over-advanced on its revolving credit facility ($25 million
over-advanced at September 30, 2001), which constituted an event of default
under the facility.
Pursuant to the forbearance agreement, on November 9, 2001, the collateral
for the Florida Finance Group's credit facility with Finova, which consisted
principally of receivables and inventory, was sold at a public foreclosure sale
to Finova for $55 million. Prior to the foreclosure sale, the Florida Finance
Group owed Finova $88.4 million. Thus, after applying the proceeds from the
foreclosure sale, the Florida Finance Group owed Finova $33.4 million (the
"Deficiency").
Further, as part of the forbearance agreement, Smart Choice granted Finova
(i) an option to purchase Paaco (the "Paaco Option") for an amount equal to the
Deficiency, subject to shareholder approval and an appraisal indicating the
value of Paaco is not greater than the Deficiency, and (ii) an option to
purchase up to 100% of Smart Choice's remaining shares of authorized but
unissued common stock (approximately 39 million shares) (the "Smart Choice Stock
Option") at a price of $0.30 per share. The Smart Choice Stock Option will
terminate upon the closing of the sale of Paaco. Presently, Smart Choice has
approximately 9.8 million shares of common stock outstanding. Both the Paaco
Option and the Smart Choice Stock Option expire March 8, 2002.
As a result of the Finova agreement and the lack of other available capital,
on November 9, 2001 the Florida Finance Group began to wind-down its operations.
Stemming from these events, the Company determined that certain of its assets
were impaired, and as of October 31, 2001 wrote-down the value of Smart Choice
and Florida Finance Group finance receivables, property and equipment and
goodwill by an aggregate $16.2 million, and deferred tax assets by $13.7
million. On December 12, 2001 Finova exercised its option to purchase Paaco
subject to certain conditions. If the sale of Paaco is closed as expected, Smart
Choice's remaining assets would consist of certain improved and unimproved real
estate in Titusville, Florida, including a 35,000 square-foot office facility,
and certain other current and fixed assets. Assuming the sale of Paaco,
management presently anticipates that Smart Choice's remaining assets will
likely be sold by Smart Choice in an effort to realize the maximum value for
these assets and repay its obligations to unsecured creditors to the extent
possible.
C-16
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company adopted SFAS 141 effective May 1,
2001. Such adoption did not have any impact on the Company's financial position
or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting
for purchased goodwill and intangible assets. Under SFAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized, but will be
tested for impairment annually, and in the event of an impairment indicator.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company adopted SFAS 142 effective May 1, 2001.
Such adoption did not have a material impact on the Company's financial position
or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets",
which requires a single accounting model to be used for long-lived assets to be
sold and broadens the presentation of discontinued operations to include a
"component of an entity" (rather than a segment of a business). A component of
an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
A component of an entity that is classified as held for sale or has been
disposed of is presented as a discontinued operation if the operations and cash
flows of the component will be (or have been) eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the component. The Company adopted SFAS 144
effective August 1, 2001. Such adoption did not have any impact on the Company's
financial position or results of operations.
SEASONALITY
The Company's automobile sales and finance business is seasonal in nature. In
such business, the Company's third fiscal quarter (November through January) is
historically the slowest period for car and truck sales. Many of the Company's
operating expenses such as administrative personnel, rent and insurance are
fixed and cannot be reduced during periods of decreased sales. Conversely, the
Company's fourth fiscal quarter (February through April) is historically the
busiest time for car and truck sales as many of the Company's customers use
income tax refunds as a down payment on the purchase of a vehicle.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk on its financial instruments from
changes in interest rates. The Company does not use financial instruments for
trading purposes or to manage interest rate risk. 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 12% to 26%.
These finance receivables have remaining maturities from one to 36 months. At
October 31, 2001 the majority of the Company's notes payable contained 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.
The table below illustrates the impact which hypothetical changes in market
interest rates could have on the Company's pretax earnings. The calculations
assume (i) the increase or decrease in market interest rates remains in effect
for twelve months, (ii) the amount of variable rate notes payable outstanding
during the period decreases in direct proportion to decreases in finance
receivables as a result of scheduled payments and anticipated charge-offs, and
(iii) there is no change in prepayment rates as a result of the interest rate
changes.
Change in Change in
Interest Rates Pretax Earnings
-------------- ----------------
(in thousands)
+2% $ (768)
+1% (384)
-1% 384
-2% 768
C-17
PART II
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On November 8, 2001, Smart Choice, the Florida Finance Group and Paaco,
entered into a forbearance agreement with Finova, the primary lender to Smart
Choice's subsidiaries, that resulted in the foreclosure of the Florida Finance
Group's receivables and inventory, and the probable sale of Paaco to Finova.
Prior to November 9, 2001, the Florida Finance Group sold and financed used
cars and trucks in Florida. Paaco sells and finances used cars and trucks in
Texas. The Florida Finance Group had, and Paaco continues to have, a revolving
credit facility with Finova. Prior to November 9, 2001, the Florida Finance
Group was over-advanced on its revolving credit facility ($25 million
over-advance at September 30, 2001), which constituted an event of default under
the facility.
Pursuant to the forbearance agreement, on November 9, 2001, the collateral
for the Florida Finance Group's credit facility with Finova, which consisted
principally of receivables and inventory, was sold at a public foreclosure sale
to Finova for $55 million. Prior to the foreclosure sale, the Florida Finance
Group owed Finova $88.4 million. Thus, after applying the proceeds from the
foreclosure sale, the Florida Finance Group owed Finova $33.4 million (the
"Deficiency").
Further, as part of the forbearance agreement, Smart Choice granted Finova
(i) an option to purchase Paaco (the "Paaco Option") for an amount equal to the
Deficiency, subject to shareholder approval and an appraisal indicating the
value of Paaco is not greater than the Deficiency, and (ii) an option to
purchase up to 100% of Smart Choice's remaining shares of authorized but
unissued common stock (approximately 39 million shares) (the "Smart Choice Stock
Option") at a price of $0.30 per share. The Smart Choice Stock Option will
terminate upon the closing of the sale of Paaco. Presently, Smart Choice has
approximately 9.8 million shares of common stock outstanding. Both the Paaco
Option and the Smart Choice Stock Option expire March 8, 2002.
As a result of the Finova agreement and the lack of other available capital,
on November 9, 2001 the Florida Finance Group began to wind-down its operations.
Stemming from these events, the Company determined that certain of its assets
were impaired, and as of October 31, 2001 wrote-down the value of Smart Choice
and Florida Finance Group finance receivables, property and equipment and
goodwill by an aggregate $16.2 million, and deferred tax assets by $13.7
million. On December 12, 2001 Finova exercised its option to purchase Paaco
subject to certain conditions. If the sale of Paaco is closed as expected, Smart
Choice's remaining assets would consist of certain improved and unimproved real
estate in Titusville, Florida, including a 35,000 square-foot office facility,
and certain other current and fixed assets. Assuming the sale of Paaco,
management presently anticipates that Smart Choice's remaining assets will
likely be sold by Smart Choice in an effort to realize the maximum value for
these assets and repay its obligations to unsecured creditors to the extent
possible.
As of October 31, 2001, Paaco was also in violation of certain provisions of
its loan agreement with Finova. As a result of Paaco's loan covenant violations,
on November 8, 2001 Finova accelerated the maturity of Paaco's revolving credit
facility such that the entire balance is currently due and payable. However, the
Company does not presently expect that Finova will seek to foreclose upon its
collateral (principally receivables and inventory), but rather will allow Paaco
to operate at or near its present borrowing level.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the fiscal quarter ended October 31, 2001 no reports on
Form 8-K were filed.
C-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: \s\ James Edward Ernst
--------------------------------------
James Edward Ernst
President and Chief Executive Officer
(Principal Executive Officer)
By: \s\ Larry Kiem
--------------------------------------
Larry Kiem
Controller
(Principal Financial and Accounting
Officer)
Dated: December 20, 2001
C-19