U.S. 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 quarterly period ended January 31, 2001
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________________
Commission file number 1-14082
--------
SMART CHOICE AUTOMOTIVE GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-1469577
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5200 S. WASHINGTON AVENUE, TITUSVILLE, FLORIDA 32780
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(321) 269-0834
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate number or shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
As of March 19, 2001, 9,794,103 shares of the Registrant's Common Stock were
issued and outstanding.
PART I. FINANCIAL STATEMENTS
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
Smart Choice Automotive Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
JANUARY 31, 2001 APRIL 30, 2000
---------------- --------------
(unaudited)
Assets
Cash and cash equivalents $ 452 $ 1,883
Other receivables 1,444 1,029
Finance receivables, net 148,372 132,855
Inventories 11,577 12,190
Property and equipment, net 13,200 11,487
Goodwill, net 5,850 6,034
Prepaid and other assets 793 577
Due from parent -- 528
Deferred tax asset, net 12,382 12,382
-------- --------
$194,070 $178,965
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 11,533 $ 13,857
Revolving credit facility 147,442 130,367
Other borrowings 10,200 10,773
Income taxes payable 1,731 3,133
Sales taxes payable 5,029 4,207
-------- --------
Total liabilities 175,935 162,337
-------- --------
Contingent redemption value of common stock put options 533 533
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 -- 15
Common stock, $.01 par value; 50,000,000 shares authorized;
9,794,103 shares issued and outstanding (2,446,353 shares
issued and outstanding at April 30, 2000) 98 24
Additional paid-in capital 13,832 13,891
Retained earnings 3,672 2,165
-------- --------
Total stockholders' equity 17,602 16,095
-------- --------
$194,070 $178,965
======== ========
The accompanying notes are an integral part of these financial statements.
2
Smart Choice Automotive Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Sales of used cars $ 40,400 $ 27,287 $ 134,704 $ 63,609
Less: Cost of used cars sold 25,684 17,649 83,398 41,066
Provision for credit losses 9,469 5,445 31,507 11,099
--------- --------- --------- ---------
5,247 4,193 19,799 11,444
Interest income
Interest income 9,395 6,832 28,293 12,531
Portfolio interest expense 4,651 2,960 13,388 5,780
--------- --------- --------- ---------
4,744 3,872 14,905 6,751
--------- --------- --------- ---------
Income before operating expenses 9,991 8,065 34,704 18,195
--------- --------- --------- ---------
Operating expenses
Selling, general and administrative 10,642 6,615 31,249 16,075
Depreciation and amortization 484 302 1,258 467
Other (income) expense 22 (176) (234) (390)
--------- --------- --------- ---------
11,148 6,741 32,273 16,152
--------- --------- --------- ---------
Income (loss) before income taxes (1,157) 1,324 2,431 2,043
Income tax expense (benefit) (429) 513 924 792
--------- --------- --------- ---------
Net income (loss) $ (728) $ 811 $ 1,507 $ 1,251
========= ========= ========= =========
Net income (loss) per common share
Basic $ (0.17) $ 113.22 $ 0.49 $ 174.65
Diluted $ (0.17) $ 0.11 $ 0.15 $ 0.17
Weighted average shares
Basic 4,283 7 3,059 7
Diluted 4,283 7,355 9,800 7,355
The accompanying notes are an integral part of these financial statements.
3
Smart Choice Automotive Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
NINE MONTHS ENDED JANUARY 31,
-----------------------------
2001 2000
--------- ---------
Operating activities
Net income $ 1,507 $ 1,251
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 31,507 11,099
Depreciation and amortization 1,258 467
Accretion of purchase discount (725) (253)
Deferred warranty contracts earned (413) (42)
Changes in assets and liabilities
Inventories (net of reposessions) 20,331 3,659
Other receivables (416) 409
Prepaids and other assets (215) 232
Accounts payable and accrued liabilities (1,088) (2,505)
Income tax payable/receivable (874) 848
--------- ---------
Net cash provided by operating activities 50,872 15,165
--------- ---------
Investing activities
Finance receivable originations (129,125) (43,635)
Collections of finance receivables 63,108 21,178
Net cash acquired in acquisition of Smart Choice -- 4,513
Purchases of property and equipment (2,787) (1,653)
--------- ---------
Net cash used in investing activities (68,804) (19,597)
--------- ---------
Financing activities
Increase in checks outstanding in excess of bank balance -- (110)
Proceeds from revolving credit facility, net 17,075 5,210
Net payments/advances on other borrowings (574) (442)
--------- ---------
Net cash provided by financing activities 16,501 4,658
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,431) 226
Cash and cash equivalents at beginning of period 1,883 63
--------- ---------
Cash and cash equivalents at end of period $ 452 $ 289
========= =========
The accompanying notes are an integral part of these financial statements.
4
Smart Choice Automotive Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - ACCOUNTING POLICIES
Effective December 1, 1999, Smart Choice Automotive Group, Inc. ("Smart Choice"
or the "Company") acquired the 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. The
acquisition was accomplished through the contribution of all of the outstanding
stock of PAACO by Crown Group, Inc. ("Crown"), an 85% majority stockholder,
along with all the shares of the minority stockholders, in exchange for
1,203,016 shares of Smart Choice Series E convertible preferred stock.
Additionally, Crown purchased 150,000 shares of Smart Choice Series E
convertible preferred stock for $3 million in cash and acquired Smart Choice
debt with a face value of approximately $4.5 million for $2.3 million in cash.
The debt was converted by Crown into 116,535 shares of Smart Choice Series E
convertible preferred stock. Upon completing the transaction, Crown, the former
majority stockholder in PAACO, controlled approximately 70% of the voting rights
of the Company.
For financial reporting purposes, PAACO is deemed to be the acquiring entity.
The acquisition has been reflected in the accompanying consolidated financial
statements as (a) a recapitalization of PAACO whereby the issued and outstanding
stock of PAACO was converted into 1,203,016 shares of Series E convertible
preferred stock and (b) the issuance of the securities discussed in the
preceding paragraph by PAACO in exchange for all of the outstanding equity
securities of Smart Choice.
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 7,347,750 shares of common stock. This
conversion represented all outstanding shares or Smart Choice Series E
convertible preferred stock.
The following unaudited pro forma condensed results of operations of Smart
Choice for the nine months and three months ended January 31, 2001 and 2000,
give effect to the acquisition of Smart Choice as if it had occurred on May 1,
1999. The unaudited pro forma results of operations are not necessarily
indicative of future results or the results that would have occurred had the
acquisition taken place on the dates indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
2000 2000
--------- ---------
Revenue $ 40,919 $ 126,366
Net (loss) (4,234) (10,054)
(Loss) per share
Basic and diluted $ (1.73) $ (4.11)
The accompanying consolidated financial statements include the results of PAACO
for all periods and the results of Smart Choice from the date of acquisition.
NOTE 2 - BASIS OF PRESENTATION
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 generally accepted accounting principles 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 nine month period ended January 31, 2001 are not
necessarily indicative of the results that may be expected for the year ended
April 30, 2001. For further
5
information, refer to consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended April
30, 2000.
NOTE 3 - FINANCE RECEIVABLES
A summary of finance receivables, net, is as follows (in thousands):
JANUARY 31, APRIL 30,
2001 2000
--------- ---------
Contractual payments $ 214,865 $ 199,629
Unearned finance charges (30,547) (33,021)
--------- ---------
Principal balances 184,318 166,608
Allowance for credit losses (35,150) (32,291)
Finance receivable discount (796) (1,462)
--------- ---------
Finance receivables, net $ 148,372 $ 132,855
========= =========
Contractual payment balances increased from April 30, 2000 due to higher sales
levels during the nine-month period, partially offset by runoff of older loans.
Unearned finance charges decreased during the same period due to our change in
policy made during the fourth quarter of the year ended April 30, 2000 to reduce
the average term of new loans.
NOTE 4 - DEBT
A summary of our indebtedness at January 31, 2001 and April 30, 2000 is as
follows (in thousands):
JANUARY 31, APRIL 30,
2001 2000
-------- --------
Revolving credit facility $147,442 $130,367
Subordinated notes payable 2,576 3,000
Mortgages and other notes payable 6,302 6,843
Other borrowings 1,322 930
-------- --------
10,200 10,773
-------- --------
Total $157,642 $141,140
======== ========
In December 1999, as a result of the acquisition of Smart Choice, our revolving
credit facility was amended to provide for borrowings of up to $160 million, up
to $60 million for PAACO and up to $100 million for Smart Choice. During the
second quarter the revolving credit facility was further amended to provide up
to $62 million for PAACO and decrease Smart Choice borrowing capacity to $98
million. Crown guarantees the obligation for up to $5 million. The revolving
facility matures in November 2004 and accrues interest on borrowings at prime
plus 2.25% (11.75% at January 31, 2001).
The advance rates on eligible finance receivables declines from 85% to 70% for
First Choice and 72.5% to 67.5% for PAACO over the term of the credit facility.
Concurrent with the decrease in the advance rate, the interest rate will
decrease to prime plus 1.75%.
Based upon the eligible collateral on hand at January 31, 2001, Paaco and Smart
Choice were collectively over advanced on their senior credit facilities with
Finova Capital Corporation ("Finova") by approximately $4.9 million. Paaco and
Smart Choice presently expect to come back into compliance with the terms of
their credit facilities in April 2001. However, in July 2001 the Smart Choice
credit facility requires a step-down in the finance receivable advance rate from
85.0% to 77.0%. Absent funding from an outside source, Smart Choice does not
expect it will be able to meet this step-down. In February 2001, Smart Choice
and
6
Paaco provided Finova with their most recent financial projections and requested
that the scheduled finance receivable advance rate step-downs over the next
three years be modified to conform to those projections.
Presently, it is the Company's expectation that Finova will either modify the
scheduled finance receivable advance rate step-downs to conform to the financial
projections of Smart Choice and Paaco, or provide Smart Choice and Paaco with a
forbearance letter covering some period of time. However, the Company cannot
predict with certainty the actions of Finova; and, under the terms of the credit
facilities, Finova has the right to accelerate the maturity of the loans
demanding immediate repayment, and call on Crown's guarantee of $5 million.
Subordinated notes payable at January 31, 2001 represents $2.5 million payable
to Crown. The subordinated notes payable bear interest at 8.5% per annum, and
mature on March 26, 2002.
The mortgages payable consists of four notes, all collateralized by land and
certain buildings, to two financial institutions and an individual. The two
notes with one financial institution accrue interest at prime plus 2.25% and
mature in December 2015. The other mortgage note payable to a financial
institution accrues interest at 8.25% and matures in May 2003. The mortgage note
payable to an individual accrues interest at 9.5% and matures in May 2001.
NOTE 5 - COMMON STOCK EQUIVALENTS
Net income (loss) per common share is based on the weighted average number of
common shares and common stock equivalents outstanding for the three and
nine-month periods ended January 31, 2001 and 2000 as follows (in thousands,
except share and per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------ --------------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
Net income (loss) $ (728) $ 811 $ 1,507 $ 1,251
========= ========= ========== ==========
Basic earnings per share $ (0.17) $ 113.22 $ 0.49 $ 174.65
========= ========= ========== ==========
Diluted earnings per share $ (0.17) $ 0.11 $ 0.15 $ 0.17
========= ========= ========== ==========
Basic weighted average shares outstanding 4,283,291 7,163 3,058,666 7,163
Effect of dilutive securities:
Preferred stock -- 7,347,750 6,741,361 7,347,750
--------- --------- ---------- ----------
Dilutive weighted average shares outstanding 4,283,291 7,354,913 9,800,027 7,354,913
========= ========= ========== ==========
Warrants not included in dilutive shares since antidilutive 82,084 -- 82,084 --
========= ========= ========== ==========
Common stock options not included in dilutive shares
since antidilutive 556,219 -- 400,422 --
========= ========= ========== ==========
7
NOTE 6 - BUSINESS SEGMENTS
We sell and finance used vehicles in two major markets in the United States. The
First Choice market is based in Florida and the PAACO market is based in Texas.
Effective December 1, 1999, Smart Choice acquired the stock of PAACO in a
reverse acquisition in which PAACO's stockholders acquired voting control of
Smart Choice. For financial reporting and comparative purposes, PAACO is deemed
to be the acquiring entity. Accordingly, the financial statements include the
results of PAACO for all periods presented and the results of First Choice for
December 1999 and January 2000 and the three and nine month period ending
January 31, 2001. Our business segment data for the three months ended January
31, 2001 and 2000 is as follows (in thousands):
THREE MONTHS ENDED JANUARY 31, PAACO FIRST CHOICE COMBINED
-------------------------------------- --------- ------------ ---------
2001
--------------------------------------
Sales of used cars $ 23,726 $ 16,674 $ 40,400
Less: cost of cars sold 15,287 10,397 25,684
Provision for credit losses 2,255 7,214 9,469
--------- --------- ---------
6,184 (937) 5,247
Net interest income 2,244 2,500 4,744
--------- --------- ---------
Income before operating expenses 8,428 1,563 9,991
Operating expenses:
Selling, general and administrative 5,796 4,846 10,642
Depreciation and amortization 210 274 484
Other expense (income) (16) 38 22
--------- --------- ---------
5,990 5,158 11,148
--------- --------- ---------
Operating income (loss) $ 2,438 $ (3,595) $ (1,157)
========= ========= =========
Capital expenditures $ 1,455 $ 478 $ 1,933
========= ========= =========
Total assets $ 86,914 $ 107,156 $ 194,070
========= ========= =========
2000
--------------------------------------
Sales of used cars $ 17,864 $ 9,423 $ 27,287
Less: cost of cars sold 11,269 6,380 17,649
Provision for credit losses 3,100 2,345 5,445
--------- --------- ---------
3,495 698 4,193
Net interest income 1,575 2,297 3,872
--------- --------- ---------
Income before operating expenses 5,070 2,995 8,065
Operating expenses:
Selling, general and administrative 3,877 2,738 6,615
Depreciation and amortization 90 212 302
Other income (90) (86) (176)
--------- --------- ---------
3,877 2,864 6,741
--------- --------- ---------
Operating income $ 1,193 $ 131 $ 1,324
========= ========= =========
Capital expenditures $ 276 $ 184 $ 460
========= ========= =========
Total assets $ 68,399 $ 96,133 $ 164,532
========= ========= =========
8
Our business segment data for the nine months ended January 31, 2001 and 2000 is
as follows (in thousands):
NINE MONTHS ENDED JANUARY 31, PAACO FIRST CHOICE COMBINED
-------------------------------------- --------- ------------ ---------
2001
--------------------------------------
Sales of used cars $ 75,641 $ 59,063 $ 134,704
Less: cost of cars sold 48,594 34,804 83,398
Provision for credit losses 10,697 20,810 31,507
--------- --------- ---------
16,350 3,449 19,799
Net interest income 6,372 8,533 14,905
--------- --------- ---------
Income before operating expenses 22,722 11,982 34,704
Operating expenses:
Selling, general and administrative 16,796 14,453 31,249
Depreciation and amortization 470 788 1,258
Other income (166) (68) (234)
--------- --------- ---------
17,100 15,173 32,273
--------- --------- ---------
Operating income (loss) $ 5,622 $ (3,191) $ 2,431
========= ========= =========
Capital expenditures $ 1,980 $ 807 $ 2,787
========= ========= =========
2000
--------------------------------------
Sales of used cars $ 54,186 $ 9,423 $ 63,609
Less: cost of cars sold 34,686 6,380 41,066
Provision for credit losses 8,754 2,345 11,099
--------- --------- ---------
10,746 698 11,444
Net interest income 4,454 2,297 6,751
--------- --------- ---------
Income before operating expenses 15,200 2,995 18,195
Operating expenses:
Selling, general and administrative 13,337 2,738 16,075
Depreciation and amortization 255 212 467
Other income (304) (86) (390)
--------- --------- ---------
13,288 2,864 16,152
--------- --------- ---------
Operating income $ 1,912 $ 131 $ 2,043
========= ========= =========
Capital expenditures $ 1,469 $ 184 $ 1,653
========= ========= =========
9
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We operate one of the largest chains of buy here-pay here car dealerships in the
United States. At January 31, 2001 we operated 25 dealerships located in major
markets in Texas and Florida. We have one line of business: to sell and finance
quality used vehicles to credit-impaired customers. In Texas, we operate
thirteen lots under the name PAACO, and in Florida we operate twelve lots under
the name First Choice.
First Choice and PAACO participate in the sub-prime segment of the independent
used car sales and finance market. This segment is serviced primarily by buy
here-pay here dealerships. These dealerships sell and finance sales of used cars
to credit-impaired borrowers. Buy here-pay here dealers typically offer their
customers certain advantages over more traditional financing sources, such as:
(i) broader and more flexible underwriting guidelines;
(ii) flexible payment terms (including prorating customer payments
due within one month into several smaller payments and
scheduling payments to coincide with a customer's pay days);
and
(iii) the ability to make payments in person, an important feature
to many credit-impaired borrowers who may not have checking
accounts or are otherwise unable to make payments by the due
date through the mail.
Our operating strategy emphasizes the following points:
SELL RELIABLE, QUALITY CARS. We sell reliable, quality used cars. We believe
that product failure is a leading cause of defaults on finance contracts in the
self-financed used car industry. We utilize guidelines in purchasing,
inspecting, reconditioning and servicing, to minimize defaults. At First Choice
we include a 24,000 mile/24-month warranty with the sale of most used cars, and
at PAACO we generally include a 6,000 mile/6-month warranty.
UTILIZE CENTRALIZED CREDIT APPROVAL WITH A BUY ROOM. We integrate the credit
approval function and sales process for used cars with a buy room that ensures
credit worthiness as well as proper deal structure such as overall gross profit,
term and interest rate. The credit underwriting process strictly adheres to
objective underwriting standards that have resulted in improved collection
experience. We regularly review our collection results to assess the
effectiveness of our underwriting standards.
APPLY RIGOROUS COLLECTION PRACTICES. We diligently and pro actively pursue the
collection of our finance receivables while maintaining a professional,
customer-friendly atmosphere. Our collection policy includes telephoning a
borrower if the borrower's payment is one day late, and repossession procedures
generally begin when the customer is one payment past due. As of January 31,
2001, 93.2% of our finance receivables at PAACO were not more than one payment
past due and 95.0% of First Choice's finance receivables were not more than one
payment past due.
MAXIMIZE RECOVERY ON REPOSSESSIONS. We believe that we generally experience
lower losses on repossessions than other lenders in the self-financed used car
industry due to:
(i) the quality of the cars we sell;
(ii) the timeliness of our repossessions ("zero tolerance" policy
for nonpayment); and
(iii) our ability to re-market repossessions. We recondition and
re-market a majority of our repossessions through our
dealerships, rather than through auctions (where cars are
generally sold at lower prices).
INCREASE OPERATING EFFICIENCY. An ongoing effort has been made to increase
operating efficiency by combining administrative functions in order to reduce
costs. We have consolidated functions such as accounting and treasury, insurance
and employee benefits, and legal support. We believe we will continue to
increase our operating efficiency in such areas as reconditioning, purchasing
and transporting inventory.
10
EMPLOY INTEGRATED MANAGEMENT INFORMATION SYSTEMS. All of our used car
dealerships are linked to an integrated computer-based management information
system (the "MIS") that allows us to obtain "real time" information on our
operations. We use the MIS to transmit data between our headquarters and our
various stores, to evaluate store performance daily, monitor inventory, sales,
costs, customer payments and facilitates the underwriting and collection of our
finance contracts.
PROMOTE PAACO AND FIRST CHOICE BRANDS. We believe that our PAACO and First
Choice brands are synonymous with quality cars and customer service. By seeking
to maintain continuity in the appearance of our store locations, we expect to
promote our name recognition. Further, we maintain a consistency between
facilities and marketing materials through the use of standardized logos.
AVOID THIRD PARTY FINANCE RECEIVABLES. As part of our operating philosophy, we
only originate and service finance receivables on used cars sold at our used car
stores. We do not intend to purchase third party finance receivables or purchase
other dealerships with existing finance receivables.
CONTROLLED GROWTH IN DEALERSHIP SITES. PAACO's business began in Texas in 1992
as a retail auto auction concern. PAACO entered the buy here-pay here market in
1993, grew modestly in the Dallas/Fort Worth area over the next few years, and
entered the Houston area in 1999. Effective December 1, 1999, our Florida
operations were acquired through the acquisition of PAACO by Smart Choice. In
the coming year we anticipate that, as we focus on maintaining sales at or near
our present monthly sales rate, we will not acquire any additional dealerships
in the next twelve months, although PAACO and First Choice may each open a
number of new lots.
In the following discussion and analysis, we explain the results of operations
and general financial condition of Smart Choice and its subsidiaries. In
particular we analyze and explain the changes in the results of operations for
the three and nine-month periods ended January 31, 2001 and January 31, 2000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31,
2001 TO THE THREE MONTHS ENDED JANUARY 31, 2000:
SALES OF USED CARS AND COST OF USED CARS SOLD
THREE MONTHS ENDED
JANUARY 31,
--------------------- PERCENTAGE
2001 2000 CHANGE
------- ------- ----------
(dollar amounts in thousands, except per car amounts)
Number of used cars sold 3,409 2,457 38.7%
======= =======
Sales of used cars $40,400 $27,287 48.1%
Cost of used cars sold 25,684 17,649 45.5%
------- -------
Gross margin $14,716 $ 9,638 52.7%
======= =======
Gross margin % 36.4% 35.3%
Per car sold:
Sales $11,851 $11,106 6.7%
Cost of used cars sold 7,534 7,183 4.9%
------- -------
Gross margin $ 4,317 $ 3,923 10.0%
======= =======
Sales increased by $13.1 million, or 48.1%, for the three months ended January
31, 2001 compared to the same period in 2000. The increase in sales reflects the
addition of 12 First Choice used car dealerships and increased sales per
dealership at existing PAACO used car dealerships along with the addition of one
lot at
11
PAACO. In addition, sales per car sold increased by $745 for the three months
ended January 31, 2001 compared to the same period in 2000 due to an increase in
sales of higher cost trucks and SUV's and our efforts to increase gross margins.
Cost of used cars sold increased by $8.0 million or 45.5%. The increase in cost
of used cars sold is primarily due to the addition of First Choice used car
dealerships acquired through merger in December 1999. Cost of used cars sold, as
a percent of sales, was 63.6% for the three months ended January 31, 2001
compared to 64.7% for the same period in 2000. Cost per car sold was $7,534 for
three months ended January 31, 2001 compared to $7,183 for three months ended
January 31, 2000. This increase reflects higher average acquisition costs for
trucks and SUV's that comprised a greater percentage of sales for the three
months ended January 31, 2001 compared to the same period in 2000.
Gross margin was $14.7 million for the three months ended January 31, 2001
compared to $9.6 million for the same period in 2000, an increase of $5.1
million, or 52.7%. Gross margin was 36.4%, or $4,317 per car for the three
months ended January 31, 2001 as compared to 35.3%, or $3,923 per car, for the
same period in 2000. The increase in gross margin percentage for the three
months ended January 31, 2001 as compared to the same period in 2000 reflects
the sale of a greater proportion of higher cost, higher margin trucks and SUV's
and our efforts to increase gross margins.
PROVISION FOR CREDIT LOSSES
The following is a summary of the provision for credit losses:
THREE MONTHS ENDED
JANUARY 31,
--------------------- PERCENTAGE
2001 2000 CHANGE
------- ------- ----------
Provision for credit losses (in thousands) $ 9,469 $ 5,445 73.9%
======= =======
Provision per loan originated $ 2,778 $ 2,216 25.3%
======= =======
Provision as a percentage of principal
balances originated 23.4% 20.0%
======= =======
The provision for credit losses was $9.5 million for the three months ended
January 31, 2001 compared to $5.4 million for the same period in 2000. The
provision as a percent of principal balances originated was 23.4% for the three
months ended January 31, 2001 and 20.0% for the same period in 2000. The
increase in provision reflects the addition of 12 First Choice used car
dealerships and management's expectations of future credit losses on current
sales. Management believes along with increases in gross profit on each unit
sold comes a corresponding increase in credit loss. This expectation is based on
stable to declining repossession rates with lower net recovery rates for each
vehicle repossessed. In addition, we recorded an additional provision for future
potential credit losses as of January 31, 2001 in the amount of $1.4 million. As
a result of our efforts to reduce the term on new loans during the first six
months of the 2001 fiscal year we began to experience higher losses due to
higher monthly payments. We have reviewed this policy and adopted new credit
terms that we believe will result in lower credit losses in future periods. The
additional provision recorded at January 31, 2001 reflects the expected
increased losses on our loan portfolio as of that date.
12
NET INTEREST INCOME
THREE MONTHS ENDED
JANUARY 31,
--------------------- PERCENTAGE
2001 2000 CHANGE
------- ------- ----------
($ in thousands)
Interest income $ 9,395 $ 6,832 37.5%
Portfolio interest expense $ 4,651 $ 2,960 57.1%
------- -------
Net interest income $ 4,744 $ 3,872 22.5%
======= =======
Average effective yield 20.2% 22.1% -8.6%
Average borrowing cost 11.7% 11.3% 3.5%
Interest earned on financed receivables was $9.4 million for the three months
ended January 31, 2001 compared to $6.8 million for the three months ended
January 31, 2000 which reflects an increase of $2.6 million, or 37.5%. The
increase is due primarily to the acquisition of First Choice's portfolio which
had a higher yield than PAACO's, and to continued growth in financed used car
sales.
Portfolio interest expense increased by $1.7 million, or 57.1%, to $4.7 million
for the three months ended January 31, 2001 from $3.0 million for the same
period in 2000. The increase is due to the acquisition of First Choice and an
increase in the prime interest rate during the periods reported, which was
partially offset by a lower overall cost of capital obtained in the revised
credit facility.
INCOME BEFORE OPERATING EXPENSES
Our income before operating expenses was $10.0 million at January 31, 2001
compared to $8.1 million for the same period in 2000. The increase in income
before operating expenses reflects the increase in sales of used cars and
interest income and the addition of Smart Choice's operations December 1, 1999.
OPERATING EXPENSES
THREE MONTHS ENDED
JANUARY 31,
--------------------- PERCENTAGE
2001 2000 CHANGE
------- ------- ----------
Operating expenses (in thousands) $11,148 $ 6,741 65.4%
======= =======
Per car sold $ 3,270 $ 2,744 19.2%
======= =======
As % of total revenue 22.4% 19.8%
------- -------
Operating expenses were $11.1 million for the three months ended January 31,
2001 compared to $6.7 million for the same period in 2000, reflecting an
increase of $4.4 million or 65.4%. The increase is primarily due to the addition
of First Choice's operations. Operating expenses were $3,270 per car sold for
the three months ended January 31, 2001 compared to $2,744 per car sold in the
same period in 2000. The increase reflects higher overhead costs as a result of
the merger with Smart Choice on December 1, 1999. We are continuing to focus on
reducing overhead expenses. During the fourth quarter we will begin a
restructuring of certain operations that we believe will result in significant
reductions in overhead and improved operating efficiencies.
13
INTEREST EXPENSE
Our interest expense totaled $4.7 million for the three months ended January 31,
2001 versus $3.0 million for the three months ended January 31, 2000. The
increase is a result of the merger with Smart Choice and an increase in
borrowing under the Finova revolving credit facility.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31,
2001 TO THE NINE MONTHS ENDED JANUARY 31, 2000:
SALES OF USED CARS AND COST OF USED CARS SOLD
NINE MONTHS ENDED
JANUARY 31,
----------------------- PERCENTAGE
2001 2000 CHANGE
-------- -------- ----------
(dollar amounts in thousands, except per car amounts)
Number of used cars sold 11,326 5,453 107.7%
======== ========
Sales of used cars $134,704 $ 63,609 111.8%
Cost of used cars sold 83,398 41,066 103.1%
-------- --------
Gross margin $ 51,306 $ 22,543 127.6%
======== ========
Gross margin % 38.1% 35.4%
Per car sold:
Sales $ 11,893 $ 11,665 2.0%
Cost of used cars sold 7,363 7,531 -2.2%
-------- --------
Gross margin $ 4,530 $ 4,134 9.6%
======== ========
We increased sales by $71.1 million or 111.8% for the nine months ended January
31, 2001 compared to the same period in 2000. The increase in sales reflects the
addition of 12 First Choice used car dealerships and increased sales per
dealership at existing PAACO used car dealerships. Sales per vehicle sold
increased $228 reflecting the average higher sales price per vehicle as a result
of our efforts to offset higher acquisition costs and improve gross margins.
Cost of used cars sold increased by $42.3 million or 103.1%. The increase in
cost of used cars sold is primarily due to the addition of 12 First Choice used
car dealerships and increased sales per dealership at existing PAACO used car
dealerships. Cost of used cars sold, as a percent of sales, was 61.9% for the
nine months ended January 31, 2001 compared to 64.6% for the same period in
2000. Cost per car sold was $7,363 for nine months ended January 31, 2001
compared to $7,531 for nine months ended January 31, 2000. The decrease reflects
the lower average cost per car purchased by First Choice as compared to PAACO
and management's efforts in lowering reconditioning and acquisition costs at
PAACO. The decrease does not fully reflect the impact of increased purchasing of
higher cost trucks and SUV's as discussed under the Comparison of results of
operations for the three months ended January 31, 2001 to the three months ended
January 31, 2000.
Gross margin was $51.3 million for the nine months ended January 31, 2001
compared to $22.5 million for the same period in 2000, an increase of $28.8
million, or 127.6%. Gross margin was 38.1%, or $4,530 per car, for the nine
months ended January 31, 2001, as compared to 35.4%, or $4,134 per car, for the
same period in 2000. The increase in gross margin percentage reflects lower
reconditioning and acquisition costs at PAACO along with a higher sales price
per car at First Choice.
14
PROVISION FOR CREDIT LOSSES
The following is a summary of the provision for credit losses:
NINE MONTHS ENDED
JANUARY 31,
----------------------- PERCENTAGE
2001 2000 CHANGE
-------- -------- ----------
Provision for credit losses (in thousands) $ 31,507 $ 11,099 183.9%
======== ========
Provision per loan originated $ 2,782 $ 2,035 36.7%
======== ========
Provision as a percentage of principal
balances originated 23.4% 17.4%
======== ========
The provision for credit losses was $31.5 million for the nine months ended
January 31, 2001 compared to $11.1 million for the same period in 2000. The
provision as a percent of principal balances originated was 23.4% for the nine
months ended January 31, 2001 and 17.4% for the same period in 2000. The
increase in provision reflects the addition of 12 First Choice used car
dealerships and management's expectations of future credit losses on current
sales. This expectation is based on stable to declining repossession rates with
lower net recovery rates for each vehicle repossessed. In addition, we recorded
an additional provision for future potential credit losses as of January 31,
2001 in the amount of $1.4 million. As a result of our efforts to reduce the
term on new loans during the first six months of the 2001 fiscal year we began
to experience higher losses due to higher monthly payments. We have reviewed
this policy and adopted new credit terms that we believe will result in lower
credit losses in future periods. The additional provision recorded at January
31, 2001 reflects the expected increased future losses on our loan portfolio as
of that date.
NET INTEREST INCOME
NINE MONTHS ENDED
JANUARY 31,
----------------------- PERCENTAGE
2001 2000 CHANGE
-------- -------- ----------
($ in thousands)
Interest income $ 28,293 $ 12,531 125.8%
Portfolio interest expense $ 13,388 $ 5,780 131.6%
-------- --------
Net interest income $ 14,905 $ 6,751 120.8%
======== ========
Average effective yield 20.3% 22.1% -8.3%
Average borrowing cost 11.2% 11.3% -0.3%
Interest earned on financed receivables was $28.3 million for the nine months
ended January 31, 2001 compared to $12.5 million for the nine months ended
January 31, 2000 which reflects an increase of $15.8 million, or 125.8%. The
increase is due primarily to the acquisition of First Choice's portfolio which
had a higher yield than PAACO's and continued growth in financed used car sales.
Portfolio interest expense increased by $7.6 million or 131.6% to $13.4 million
for the nine months ended January 31, 2001 from $5.8 million for the same period
in 2000. The increase is due to the acquisition of First Choice and an increase
in the prime interest rate during the periods reported, which was partially
offset by a lower overall cost of capital obtained in the revised credit
facility.
INCOME BEFORE OPERATING EXPENSES
Our income before operating expenses was $34.7 million at January 31, 2001
compared to $18.2 million for the same period in 2000. The increase in income
before operating expenses reflects the increase in sales of used cars, interest
income and the addition of Smart Choice's operations December 1, 1999.
15
OPERATING EXPENSES
NINE MONTHS ENDED
JANUARY 31,
----------------------- PERCENTAGE
2001 2000 CHANGE
-------- -------- ----------
Operating expenses (in thousands) $ 32,273 $ 16,152 99.8%
======== ========
Per car sold $ 2,849 $ 2,962 -3.8%
======== ========
As % of total revenue 19.8% 21.2%
======== ========
Operating expenses were $32.3 million for the nine months ended January 31, 2001
compared to $16.2 million for the same period in 2000, reflecting an increase of
$16.1 million or 99.8%. The increase is primarily due to the addition of Smart
Choice's operations. Operating expenses were $2,849 per car sold for the nine
months ended January 31, 2001 compared to $2,962 per car sold in the same period
in 2000. The decrease reflects our commitment to controlling operating expenses
and the success of certain cost-cutting measures initiated in the third quarter
of fiscal 2000 as well as high unit sales during the period. We continue to
focus on reducing operating expenses and will be restructuring several operating
areas during the fourth quarter to further reduce overhead and improve operating
efficiencies.
FINANCIAL POSITION
JANUARY 31, APRIL 30,
2001 2000
--------- ---------
Finance receivables, net $ 148,372 $ 132,855
Inventory 11,577 12,190
Total assets 194,070 178,965
Total debt 157,642 141,140
Revolving credit facility 147,442 130,367
Other borrowings 10,200 10,773
Total liabilities 175,935 162,337
Total stockholders' equity $ 17,602 $ 16,095
The increase in finance receivables, net was primarily due to increased used car
sales and financing, partially offset by the principal balance runoff of loans
originated in prior periods and higher allowance for credit losses. Used car
sales totaled 11,326 for the nine months ended January 31, 2001 versus sales of
5,453 used cars during the same nine month period of the prior year.
16
The following table reflects activity in the allowance for credit losses for the
three and nine-month periods ended January 31, 2001 and 2000 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------ -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Allowance activity:
Balance, beginning of period $ 34,442 $ 9,689 $ 32,291 $ 7,587
Provision for credit losses 9,469 5,445 31,507 11,099
Acquisition of Smart Choice -- 21,047 -- 21,047
Net charge offs (8,761) (6,042) (28,648) (9,594)
-------- -------- -------- --------
Balance, end of period $ 35,150 $ 30,139 $ 35,150 $ 30,139
======== ======== ======== ========
Allowance as a percent of period end balances 19.2% 19.4%
======== ========
The allowance for credit losses is maintained at a level that in management's
judgement is adequate to provide for estimated probable credit losses inherent
in our retail portfolio. As discussed under Item 2, Provision for Credit Losses,
we recorded an additional provision for future potential credit losses as of
January 31, 2001 in the amount of $1.4 million. As a result of our efforts to
reduce the term on new loans during the first six months of the 2001 fiscal year
we began to experience higher losses due to higher monthly payments. We have
reviewed this policy and adopted new credit terms that we believe will result in
lower credit losses in future periods. The additional provision recorded at
January 31, 2001 reflects the expected increased future losses on our loan
portfolio as of that date.
The following table sets forth the principal balances delinquent as a percentage
of total outstanding contract principal balances from dealership operations.
JANUARY 31, APRIL 30,
2001 2000
-------- --------
Days delinquent:
Current 66.7% 71.4%
1-30 days 27.6% 25.2%
31-60 days 4.0% 2.0%
61-90 days 1.7% 1.4%
-------- --------
Total portfolio 100.0% 100.0%
Delinquencies have increased as of January 31, 2001 versus April 30, 2000. We
have experienced higher calculated delinquency rates due to new credit terms
adopted in the first quarter which now require bi-weekly payment schedules
versus the old terms which required monthly payment schedules. We believe this
to be within an acceptable range.
LIQUIDITY AND CAPITAL RESOURCES
In recent periods, our needs for additional capital resources have increased in
connection with the growth of our business. We require capital for:
* increases in our loan portfolio * purchase of inventories
* working capital and general * the purchase of property and
corporate purposes equipment
We fund our capital requirements primarily through:
* operating cash flow * our revolving facility with
* supplemental borrowings Finova Capital Corp.
While to date we have met our liquidity requirements as needed, there can be no
assurance that we will be able to continue to do so in the future.
17
CASH FLOW FROM OPERATIONS, INVESTMENTS AND FINANCING
Net cash provided by operating activities increased by $35.7 million in the nine
months ended January 31, 2001 to $50.9 million compared to cash generated of
$15.2 million for the nine months ended January 31, 2000. The increase is due to
the addition of First Choice lots and increased sales at PAACO lots.
Net cash used by investing activities increased by $49.2 million for the nine
months ended January 31, 2001 to $68.8 million versus cash used of $19.6 million
for the same period of the previous year. Net cash used by finance receivable
originations increased by $85.5 million for the nine months ended January 31,
2001 compared to the same period in 2000. The increase is due to the addition of
First Choice lots and increased sales at PAACO lots. Collections of financed
receivables increased $41.9 million also due to the addition of First Choice
lots and higher portfolio principal balances as a result of increased sales.
Financing activities generated an increase of $11.9 million for the nine months
ended January 31, 2001 to $16.5 million as compared to $4.6 million generated in
the same period of fiscal 2000. Proceeds from the Finova revolving credit
facility generated $17.1 million that was used primarily to fund purchases of
vehicles for resale.
FINANCING RESOURCES
Under the Finova Loan and Security Agreement (the "Finova Revolving Facility"),
we may borrow the lesser of (i) the Revolving line of $160 million or (ii) the
advance rate of the available balance of eligible finance contracts and
inventory. The Finova Revolving Facility is collateralized by all of our finance
receivables and used car inventory. The Finova Revolving Facility bears interest
at the prime rate plus 2.25% (11.75% as of January 31, 2001). The interest rate
declines to prime rate plus 2.00% and prime rate plus 1.75% as the advance rate
declines through the life of the note. The Finova Revolving Facility matures on
November 30, 2004, at which time its renewal will be subject to renegotiations.
As of January 31, 2001, the principal amount outstanding under the Finova
Revolving Facility was $147.4 million, up from a balance of $130.4 million as of
April 30, 2000.
Based upon the eligible collateral on hand at January 31, 2001, Paaco and Smart
Choice were collectively over advanced on their senior credit facilities with
Finova Capital Corporation ("Finova") by approximately $4.9 million. Paaco and
Smart Choice presently expect to come back into compliance with the terms of
their credit facilities in April 2001. However, in July 2001 the Smart Choice
credit facility requires a step-down in the finance receivable advance rate from
85.0% to 77.0%. Absent funding from an outside source, Smart Choice does not
expect it will be able to meet this step-down. In February 2001, Smart Choice
and Paaco provided Finova with their most recent financial projections and
requested that the scheduled finance receivable advance rate step-downs over the
next three years be modified to conform to those projections.
Presently, it is the Company's expectation that Finova will either modify the
scheduled finance receivable advance rate step-downs to conform to the financial
projections of Smart Choice and Paaco, or provide Smart Choice and Paaco with a
forbearance letter covering some period of time. However, the Company cannot
predict with certainty the actions of Finova; and, under the terms of the credit
facilities, Finova has the right to accelerate the maturity of the loans
demanding immediate repayment, and call on Crown's guarantee of $5 million.
WE MAKE FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The words "believe", "expect", "anticipate", "estimate", "project", and
similar expressions identify forward-looking statements. These statements may
include, but are not limited to, projections of revenues, income or loss,
estimates of capital expenditures, plans for future operations, products or
services, and financing needs or plans, as well as assumptions relating to these
matters. Forward-looking statements speak only as of the date the statements
were made. They are inherently subject to risks and uncertainties, some of which
we cannot predict or quantify. Future events and actual results could differ
materially from the forward-looking statements. You should keep in mind the risk
factors and cautionary statements found throughout this Form 10-Q and contained
in our other filings with the SEC. We are not obligated to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, or for any other reason.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risks associated with our financial instruments from
changes in interest rates. We do not use financial instruments for trading
purposes or to manage interest rate risks. Our earnings are impacted by our 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 and senior credit facilities. Our
finance receivables generally bear interest at fixed rates ranging from 17% to
26%. These finance receivables have scheduled maturities from one to 42 months.
The majority of our notes payable contain variable interest rates that fluctuate
with market rates. Therefore, an increase in market interest rates would
decrease our net interest income and profitability. At January 31, 2001, a one-
percent increase in our borrowing costs on variable rate debt would decrease our
pretax income by approximately $1.1 million over a period of nine months.
We believe that our market risk has not changed materially from April 30, 2000.
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES.
(a) The information set forth in Item 2 of this report under the
caption "Financing resources" is incorporated by reference in
response to this Item 3.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended January 31, 2001.
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.
SMART CHOICE AUTOMOTIVE GROUP, INC.
Date: March 19, 2001 By: /s/ JAMES E. ERNST
--------------------------------------------
James E. Ernst
President and Chief Executive Officer
Date: March 19, 2001 By: /s/ JOE CAVALIER
--------------------------------------------
Joe Cavalier
Chief Financial Officer
(principal financial and accounting officer)
19