LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS:
Combined balance sheets 2
Combined statements of operations 3
Combined statements of stockholders' equity 4
Combined statements of cash flows 5
Notes to combined financial statements 7
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Liberty Finance Company, Inc. and Affiliates
Orlando, Florida
We have audited the accompanying combined balance sheets of
Liberty Finance Company, Inc. and affiliates as of December 31,
1996 and 1995, and the related combined statements of operations,
stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
combined 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 combined financial statements referred to
above present fairly, in all material respects, the financial
position of Liberty Finance Company, Inc. and affiliates as of
December 31, 1996 and 1995, and the results of their operations and
their cash flows for the years then ended in conformity with
generally accepted accounting principles.
OSBURN, HENNING AND COMPANY
Orlando, Florida
March 26, 1997, except for
Note 6, as to which the
date is April 12, 1997
LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
ASSETS
Cash $ 163,184 $ 8,368
Finance receivables, less allowance
for uncollectible accounts 11,383,431 9,804,684
Inventories 2,861,848 2,264,315
Land held for sale 1,050,000 1,050,000
Property and equipment, less accumulated
depreciation 272,543 241,210
Loan costs, less accumulated amortization
of $3,476 - 1996 and $20,197 - 1995 4,154 13,290
Other assets 83,754 68,159
$15,818,914 $13,450,026
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Cash overdraft $ - $ 11,269
Floor plan notes payable 1,378,601 785,163
Accounts payable 473,088 505,510
Sales taxes payable 23,535 49,471
Accrued interest 45,280 14,094
Accrued real estate taxes 47,262 58,900
Advances from related parties 197,237 182,096
Notes payable 13,059,981 10,640,827
Other liabilities 113,781 110,221
Total liabilities 15,338,765 12,357,551
STOCKHOLDERS' EQUITY
Common stock 700 1,500
Stock subscriptions (600) (1,400)
Additional paid-in capital 703,044 703,044
Retained earnings (deficit) (222,995) 389,331
Total stockholders' equity 480,149 1,092,475
$15,818,914 $13,450,026
The Notes to Combined Financial Statements are an integral part of
these statements.
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
1996 1995
AUTOMOBILE RETAILING
Sales $18,639,749 $11,786,657
Cost of sales 16,122,778 9,235,343
Gross profit 2,516,971 2,551,314
AUTOMOBILE FINANCING
Interest income 3,047,669 2,334,256
Interest expense (1,324,437) (1,105,558)
Interest income before provision
for credit losses 1,723,232 1,228,698
Provision for credit losses (1,324,787) (417,659)
Net interest income 398,445 811,039
INCOME FROM OPERATIONS 2,915,416 3,362,353
GENERAL AND ADMINISTRATIVE EXPENSE 3,527,742 2,772,391
NET INCOME (LOSS) $ (612,326) $ 589,962
The Notes to Combined Financial Statements are an integral part of
these statements.
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
Additional Retained
Common Stock Paid-In Earnings
StockSubscriptions Capital (Deficit) Total
Balance,
January 1, 1995 $ 500 $ (400) $250,400 $ 186,857 $ 437,357
Issuance of
common stock 1,000 (1,000) - - -
Contribution of
capital (1) - - 452,644 - 452,644
Net income - - - 589,962 589,962
Distributions - - - (387,488) (387,488)
Balance,
December 31, 1995 1,500 (1,400) 703,044 389,331 1,092,475
Merger of
affiliates (2) (800) 800 - - -
Net loss - - - (612,326) (612,326)
Balance,
December 31, 1996$ 700 $ (600) $703,044 $(222,995) $ 480,149
(1) The contribution of capital resulted from the assumption of a
note payable by a stockholder of the Company under a
refinancing agreement with the creditor.
(2) Merger of RRL Investments, Inc., RRL Central Enterprises, Inc.,
RRL Trading, Inc. and Team Automobile Sales & Finance East,
Inc. into Team Automobile Sales & Finance, Inc.
The Notes to Combined Financial Statements are an integral part of
these statements.
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $15,736,215 $ 7,999,776
Interest received 3,047,669 2,334,256
Cash paid to suppliers and employees (19,673,517) (11,764,018)
Interest paid (1,293,251) (1,091,464)
Net cash (used in) operating activities (2,182,884) (2,521,450)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (54,965) (159,373)
Net cash (used in) investing activities (54,965) (159,373)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties 15,141 182,096
Proceeds from issuance of notes payable 10,015,455 7,861,144
Principal payments on notes payable (7,630,301) (5,004,717)
Loan costs paid (7,630) -
Distributions to stockholder - (387,488)
Net cash provided by financing
activities 2,392,665 2,651,035
NET INCREASE (DECREASE) IN CASH 154,816 (29,788)
CASH, BEGINNING OF YEAR 8,368 38,156
CASH, END OF YEAR $ 163,184 $ 8,368
CONTINUED ON NEXT PAGE
The Notes to Combined Financial Statements are an integral part of
these statements.
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1996 and 1995
1996 1995
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (612,326) $ 589,962
Adjustments to reconcile net income (loss) to
net cash (used in) operating activities:
Depreciation 57,632 31,135
Amortization of loan costs 16,766 27,335
Provision for uncollectible
finance receivables 1,324,787 417,659
Decrease (Increase) In:
Finance receivables (2,903,534) (3,786,881)
Inventories (597,533) (1,017,419)
Other assets (15,595) 16,062
Increase (Decrease) In:
Accounts payable (32,422) 385,683
Floor plan note payable 593,438 739,363
Cash overdraft (11,269) 11,269
Sales taxes payable (25,936) 32,541
Accrued interest 31,186 14,094
Accrued real estate taxes (11,638) (240)
Other liabilities 3,560 17,987
Net cash (used in) operating activities$(2,182,884) $(2,521,450)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996, the Company acquired a
vehicle through the assumption of long-term debt amounting to
$34,000.
During the year ended December 31, 1995, the Company had a
$452,644 non-cash decrease in notes payable, and related
contribution to capital due to the assumption of the note by a
stockholder under a refinancing agreement with the creditor.
The Notes to Combined Financial Statements are an integral part of
these statements.
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. Nature of Business and Summary of Significant Accounting
Policies
Nature of Business:
The principal business activity of Liberty Finance Company,
Inc. and Affiliates (the Company) is retail and wholesale
sales, and the related financing, of used automobiles in
the Central Florida market.
Summary of Significant Accounting Policies:
Use of estimates:
In preparing the financial statements, management is
required to make estimates and assumptions that
affect certain reported amounts and disclosures.
Actual results could differ from those estimates.
Principles of combination:
The combined financial statements include Liberty
Finance Company, Inc. and the following related
entities under the common control of R.C. Hill, Jr.:
Wholesale Acquisitions, Inc., RRL Investments, Inc.,
RRL Central Enterprises, Inc., RRL Trading, Inc.,
Team Automobile Sales and Finance, Inc., and Team
Automobile Sales and Finance East, Inc. All
material intercompany transactions and balances have
been eliminated in combination.
Income recognition:
Vehicle sales are recognized when delivery is made.
Interest income from finance receivables is
recognized using the interest method.
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1.Nature of Business and Summary of Significant Accounting
Policies - (Continued)
Summary of Significant Accounting Policies: (Continued)
Credit losses:
The allowance for uncollectible finance receivables
is maintained at a level which, in management's
judgment, is adequate to absorb potential losses
inherent in the loan portfolio. The amount of the
allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations,
trends in historical loss experience, specific
impaired loans, collateral values, and economic
conditions. Because of uncertainties associated
with regional economic conditions, collateral
values, and future cash flows on impaired loans, it
is reasonably possible that management's estimate of
credit losses inherent in the loan portfolio and the
related allowance may change materially in the near
term. However, the amount of change that is
reasonably possible cannot be estimated. The
allowance is increased by a provision for loan
losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or
credited to the provision for loan losses.
Inventories:
Inventories are stated at the lower of cost or
market. Cost is generally determined on a specific
unit basis.
Land held for sale:
The land, which is being held for sale, is recorded
at estimated fair value at date of contribution by
the Company's stockholder.
Property and equipment:
Property and equipment are stated at cost less
accumulated depreciation. Depreciation on furniture
and fixtures, and signs is computed using an
accelerated method, and on leasehold improvements
using the straight-line method, over the estimated
useful lives of the assets.
Loan costs:
Loan costs are amortized over the life of the loan
using the straight-line method.
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1.Nature of Business and Summary of Significant Accounting
Policies - (Continued)
Summary of Significant Accounting Policies: (Continued)
Income taxes:
The Company, with the consent of its stockholders,
has elected under the Internal Revenue Code to be "S
corporations". In lieu of corporation income taxes,
the stockholders of an S corporation are taxed on
the Company's taxable income. Therefore, no
provision or liability for federal income taxes has
been included in these financial statements.
Modifications of 1995 financial statements:
The 1995 combined statement of operations as
previously reported has been modified to correct a
misclassification of losses on the sales of
repossessed automobiles in the amount of $406,154.
This modification increased provision for credit
losses, and decreased cost of sales, but had no
effect on net income. The 1995 combined financial
statements contain certain other reclassifications
in order to conform to the 1996 format.
Note 2. Finance Receivables
Finance receivables at December 31, 1996 and 1995 consist
of the following:
1996 1995
Finance receivables - gross $12,283,431 $10,304,684
Less allowance for uncollectible accounts 900,000
500,000
Finance receivables - net $11,383,431 $ 9,804,684
An analysis of the allowance for uncollectible finance
receivables for the years ended December 31, 1996 and 1995
is as follows:
1996 1995
Balance, beginning of year $ 500,000 $ 750,000
Provision for uncollectible finance
receivables 1,324,787 417,659
Loans charged off,
net of recoveries (924,787) (667,659)
Balance, end of year $ 900,000 $ 500,000
Finance receivables consist of installment sale contracts
with maturities that generally do not exceed 36 months.
The receivables are collateral- ized by the vehicles sold,
and the Company holds title to the vehicles until full
contract payment is made.
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 3. Inventories
Inventories at December 31, 1996 and 1995 consist of the
following:
1996 1995
Used cars $ 2,610,934$ 2,081,673
Used motorcycles 203,094 132,323
Accessories 47,820 50,319
$ 2,861,848$ 2,264,315
Note 4. Property and Equipment
Property and equipment at December 31, 1996 and 1995
consists of the following:
1996 1995
Furniture and fixtures $ 190,280$ 123,671
Leasehold improvements 130,895 115,880
Signs 55,768 48,427
376,943 287,978
Less accumulated depreciation 104,400 46,768
$ 272,543$ 241,210
Depreciation expense for the years ended December 31, 1996
and 1995 amounted to $57,632 and $31,135, respectively.
Note 5. Floor Plan Notes Payable
Floor plan notes payable at December 31, 1996 and 1995
consist of the following:
1996 1995
Floor plan note payable to financial
institution, collateralized by used car
inventory, maximum total advances of
$2,000,000 are available, note bears
interest at prime plus 2%, principal
and interest on individual advances due
90 days after advance or 48 hours from
time car is sold, agreement expires
June 30, 1997. $ 1,010,663$ 739,363
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 5. Floor Plan Notes Payable - (Continued)
1996 1995
Floor plan note payable to stockholder,
collateralized by specific used cars
in inventory, bears interest at 15%,
principal and interest on individual
advances due 120 days after advance or
date car is sold. Balance paid off in
February 1997. $ 331,938$ 45,800
Floor plan note payable to relative of
stockholder, collateralized by
specific cars in inventory, bears
interest at 15%, principal and
interest on individual advances due
120 days after advance or date car is
sold. Balance paid off in
February 1997. 36,000 -
$ 1,378,601$ 785,163
Note 6. Notes Payable
Notes payable at December 31, 1996 and 1995 consist of the
following:
1996 1995
Unrelated Parties:
Uncollateralized notes payable to
individuals, payable in monthly
installments of interest only at
15%, due on demand. $ 20,000$ 20,000
Uncollateralized notes payable,
payable in monthly installments of
interest at 16%, matures in 1997. 180,000 180,000
Note payable to bank, collateralized
by land held for sale, payable in
monthly principal and interest
payments of $8,683, bears
interest of 7.75% until December
1998, after that date, payments
will be modified to reflect an
interest rate at 2.75% over the
then five year constant U. S.
Treasury Index, matures
December 2003. 561,683 619,750
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6. Notes Payable - (Continued)
1996 1995
Unrelated Parties: (continued)
Note payable to bank, collateralized
by Ford Wrecker, payable in
monthly principal and interest
payments of $781, bears interest
of 9.5%, matures in December, 1998.$ 16,728$ 24
,073
Note payable under financing agreement,
collateralized by substantially all
Company assets except real estate,
maximum note is the lower of
$15,000,000 or 80% of outstanding
balance of finance receivables,
payable based on the repayment
history of finance receivables,
bears interest at 5% plus the LIBOR
rate, expires in June, 1997. 10,391,312 8,188,231
Note payable to bank, collateralized
by land held for sale, principal
and interest at 1% over Barnett
Bank, Inc.'s prime rate payable
April 30, 1997. 600,000 -
Note payable to bank, collateralized
by Chevy Suburban, payable in
monthly principal and interest
payments of $1,092, bears interest
of 8.99%, matures
in October 1999. 32,549 -
11,802,272 9,032,054
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6. Notes Payable - (Continued)
1996 1995
Related Parties:
Uncollateralized notes payable to
relatives of stockholder, payable
in monthly installments of interest
only ranging from 10% to 15%,
balloon maturities range from due
on demand to December, 2001. $ 395,575 $ 440,975
Notes payable to relative of
stockholder, collateralized by
real estate owned by stockholder,
payable in monthly installments
of interest only at 10%, matures
December, 2001. 200,000 200,000
Uncollateralized note payable to
stockholder, payable in monthly
principal and interest payments of
$8,520, bears interest of 7.75%
until December 1998, after that
date, payments will be modified to
reflect an interest rate at 2.75%
over the then five year constant
U. S. Treasury Index, matures
December 2003. 389,279 835,798
Uncollateralized notes payable to
stockholder, payable in monthly
installments of interest only
of 15%, balloon maturities range
from due on demand to
November, 2000. 272,855 132,000
1,257,709 1,608,773
$13,059,981 $10,640,827
At December 31, 1996, the Company was not in compliance
with certain terms and covenants related to the note
payable under financing agreement, including overdrawing
the limit on drawings of 80% of the outstanding balance of
finance receivables. On January 21, 1997, the Company
entered into a forbearance agreement with this lender to
work out the non-compliance issues, and this agreement
amended some of the terms of the original agreement. In
particular, 1% was added to the basic interest rate to
reflect default interest, and interest on the overdrawings
accrues at 13%. At December 31, 1996, the overdrawing
amounted to $498,599.
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6. Notes Payable - (Continued)
On February 19, 1997, the Company was notified by the
lender referred to in the preceding paragraph that the note
payable under financing agreement would not be renewed
after its maturity date on June 30, 1997.
On April 12, 1997, the Company entered into an agreement
with the lender referred to in the preceding paragraph
which commits the lender to modify the forbearance
agreement referred to in the second prior paragraph in
order to extend the forbearance period until January 1998.
In addition, the agreement commits the lender to modify
certain terms and covenants to cure acts of default as of
December 31, 1996, and allows the lender to reduce the
limit on drawings under the agreement from 80% of the
outstanding balance of finance receivables to 75% upon the
occurrence of certain events.
On February 12, 1997, in connection with the ownership
change described in Note 10, certain notes payable were
amended to accelerate their maturity dates to June 30,
1997. The balances of these notes payable at December
31,1996 were as follows:
Uncollateralized notes payable to individuals$ 20,000
Uncollateralized notes payable 180,000
Note payable to relative of stockholder 200,000
Uncollateralized notes payable to relatives of
stockholder 395,575
$795,575
On February 12, 1997, in connection with the ownership
change described in Note 10, certain notes payable to
stockholder were converted to stockholders' equity. At
December 31, 1996, these notes payable amounted to
$662,134.
Principal maturities of notes payable (as modified for the
circumstances described above) are as follows at December
31, 1996:
Year ending December 31,
1997 $ 9,477,265
1998 2,479,351
1999 83,747
2000 79,281
2001 85,648
Later years 192,555
12,397,847
Stockholder notes to be converted to
stockholders' equity 662,134
$13,059,981
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6. Notes Payable - (Continued)
The Company is the cosigner on a stockholder's note payable
which has a balance of $432,488 at December 31, 1996.
Total interest expense amounted to $1,324,437 and
$1,105,558, respectively, for the years ended December 31,
1996 and 1995.
Note 7. Common Stock
At December 31, 1996 and 1995, the Company's common stock
consisted of the following:
1996 1995
Liberty Finance Company, Inc.,
par value $1 per share, 7,500 shares
authorized, 100 shares issued and
outstanding $ 100 $ 100
Wholesale Acquisitions, Inc.,
par value $.10 per share, 75,000
shares authorized, 1,000 shares
issued and outstanding 100 100
RRL Investments, Inc., par value
$.10 per share, 75,000 shares
authorized, 1,000 shares issued
and outstanding - 100
RRL Central Enterprises, Inc., par
value $.10 per share, 75,000
shares authorized, 1,000 shares
issued and outstanding - 100
RRL Trading, Inc., par value
$.10 per share, 75,000 shares
authorized, 1,000 shares issued
and outstanding - 100
Team Automobile Sales & Finance,
Inc., par value $.10 per share,
75,000 shares authorized, 5,000
shares issued and outstanding 500 500
Team Automobile Sales & Finance
East, Inc., par value $.10 per
share, 75,000 shares authorized,
5,000 shares issued
and outstanding - 500
$ 700 $ 1,500
CONTINUED ON NEXT PAGE
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 7. Common Stock - (Continued)
Effective January 1, 1996, RRL Investments, Inc., RRL
Central Enterprises, Inc., RRL Trading, Inc., and Team
Automobile Sales & Finance East, Inc. were merged into Team
Automobile Sales & Finance, Inc.
Note 8. Related Party Transactions
Two of the eight locations used by the Company (see also
Note 9) are owned by a stockholder. These locations are
rented under operating leases. The stockholder and the
Company entered into an agreement to cancel these leases in
1997.
Total rent expense related to these two locations amounted
to $151,335 for each of the years ended December 31, 1996
and 1995.
Floor plan notes payable include $367,938 and $45,800
payable to the stockholder or relatives of the stockholder
at December 31, 1996 and 1995, respectively.
Notes payable to related parties totaled $1,257,709 and
$1,608,773 as of December 31, 1996 and 1995, respectively,
(see Note 6).
Interest expense related to these notes was $208,164 and
$165,657, respectively, for the years ended December 31,
1996 and 1995.
Advances from related parties are uncollateralized, non-
interest bearing, and contain no repayment terms.
Note 9. Lease Commitments (See Also Note 8)
The Company leases three of its locations and a portion of
another location from unrelated parties under cancelable
leases. The Company leases three of its locations, office
equipment, and garage equipment from unrelated parties
under noncancelable operating leases. The future minimum
rentals under noncancellable operating leases with
unrelated parties are as follows:
Year ending December 31,
1997 $139,866
1998 85,506
1999 45,762
2000 25,919
2001 24,000
Thereafter 90,000
$411,053
Total rent expense for the years ended December 31, 1996
and 1995 amounted to $512,008 and $388,687, respectively,
which includes the related party rents and other short-term
rentals.
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LIBERTY FINANCE COMPANY, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 10. Ownership Change
On February 12, 1997, the stockholder of Wholesale
Acquisitions, Inc. (Wholesale), and Team Automobile Sales
and Finance, Inc. (Team) entered into an agreement to sell
Wholesale and Team to First Choice Auto Finance, Inc.
(First Choice), a wholly owned subsidiary of Eckler
Industries, Inc. (Eckler). Eckler is a publicly traded
company.
Also, on February 12, 1997, Liberty Finance Co. (Liberty)
and its stockholder entered into a merger agreement with R.
C. Acquisition, Inc. (Acquisition), a wholly-owned
subsidiary of Eckler. Subsequently, Acquisition was merged
into Liberty so that Liberty became a wholly-owned
subsidiary of Eckler.
The transactions described above resulted in the
termination of the election under the Internal Revenue Code
to be "S corporations." The effect of the terminations has
not been determined.
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