Strata Holding, Inc.
and Ready Finance, Inc.
Combined Financial Statements
and Supplemental Material
Year ended December 31, 1996
Strata Holding, Inc.
and Ready Finance, Inc.
Contents
Independent auditors' report 3
Financial statements
Combined balance sheet 4
Combined statement of operations 5
Combined statement of stockholders' equity 6
Combined statement of cash flows 7
Notes to combined financial statements 8 - 14
Supplemental material
Independent auditors' report on supplemental material 16
Combining balance sheet 17
Combining statement of operations 18
BDO Seidman, LLP
Accountants and Consultants
201 S. Orange Avenue, Suite 950
Orlando, FL 32801-3241
Telephone: (407) 841-6930
Fax: (407) 841-6347
Independent Auditors' Report
Strata Holding, Inc. and Ready Finance, Inc.
West Palm Beach, Florida
We have audited the accompanying combined balance sheets of Strata Holding Inc.
and Ready Finance, Inc. (collectively "the Company") as of December 31, 1996 and
the related combined statements of operations, stockholders' equity, and cash
flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Strata
Holding, Inc. and Ready Finance, Inc. as of December 31, 1996, and the results
of their combined operations and their combined cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Orlando, Florida Certified Public Accountants
September 7, 1997
Strata Holding, Inc.
and Ready Finance, Inc.
Combined Balance Sheet
December 31 1996
- ----------- ----
Assets (Note 5)
Cash $ 86,000
Accounts receivable 171,592
Finance receivables, principal balances (Note 2) 5,627,381
Less allowance for credit losses (Note 2) (1,158,712)
-----------
Finance receivables, net 4,468,669
Inventories (Note 3) 1,530,253
Property and equipment, net (Note 4) 69,180
Other 91,135
-----------
$ 6,416,829
-----------
Liabilities and stockholders' equity
Liabilities
Accounts payable $ 271,882
Sales taxes payable 23,370
Note payable - bank (Note 5) 1,640,000
Notes payable - related parties (Note 5) 2,514,625
-----------
Total liabilities 4,449,877
-----------
Commitments (Note 7) --
Stockholders' equity (Note 6)
Common stock 2,000
Retained earnings 1,964,952
-----------
Total stockholders' equity 1,966,952
-----------
$ 6,416,829
-----------
See accompanying notes to combined financial statements.
Strata Holding, Inc.
and Ready Finance, Inc.
Combined Statements of Operations
Year ended December 31, 1996
- ----------------------- ----
Revenues:
Sales of used vehicles $ 9,515,375
Income on finance receivables 1,526,208
-----------
11,041,583
-----------
Cost of Revenues:
Cost of used vehicles sold 6,973,535
Provision for credit losses (Note 2) 1,285,539
-----------
8,259,074
-----------
Net revenues 2,782,509
Operating expenses 2,187,377
-----------
Income from operations 595,132
Interest expense 218,694
-----------
Net income $ 376,438
-----------
See accompanying notes to combined financial statements.
Strata Holding, Inc.
and Ready Finance, Inc.
Combined Statement of Stockholders' Equity
Common Retained
Stock Earnings Total
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 2,000 $ 2,098,514 $ 2,100,514
Net income -- 376,438 376,438
Distributions -- (510,000) (510,000)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 2,000 $1,964,952 $ 1,966,952
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to combined financial statements.
Strata Holding, Inc.
and Ready Finance, Inc.
Combined Statement of Cash Flows
Year ended December 31, 1996
- ----------------------- ----
Cash flows from operating activities
Net income $ 376,438
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 18,741
Provision for credit losses 1,285,539
Decrease (increase):
Accounts receivable (82,953)
Inventories (215,678)
Other assets (36,995)
Increase (decrease):
Accounts payable 120,551
Sales taxes payable (8,668)
-----------
Net cash provided by operating activities 1,456,975
-----------
Cash flows from investing activities
Purchase of property and equipment (36,345)
Net increase in finance receivables (1,804,834)
-----------
Net cash used in investing activities (1,841,179)
-----------
Cash flows from financing activities
Net borrowings under line of credit 1,639,900
Net payments on notes payable to related parties (996,730)
Distributions to stockholders (510,000)
-----------
Net cash provided by financing activities 133,170
-----------
Net decrease in cash (251,034)
Cash, beginning of year 337,034
-----------
Cash, end of year $ 86,000
-----------
See accompanying notes to combined financial statements.
Strata Holding, Inc.
and Ready Finance, Inc.
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business
- ------------------
The principal business activities of Strata Holding, Inc. (dba Don Cook
Motors) and Ready Finance, Inc. (collectively the "Company") are retail and
wholesale sales, and the related financing, of used vehicles in the South
Florida market.
Use of Estimates
- ----------------
In preparing the financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements as well as
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Combination
- -------------------------
The combined financial statements include Strata Holding, Inc. and Ready
Finance, Inc. Ownership of each Company is vested primarily in the same
stockholders, and the Companies are under common management. Because of these
relationships, the financial statements of the Companies have been presented as
if they were a single entity. All material intercompany transactions and
balances have been eliminated in combination.
Revenue Recognition
- -------------------
Vehicle sales are recognized upon delivery.
Interest income from finance receivables is recognized using the straight-line
method which approximates the interest method.
Presentation of Revenues and Cost of Revenues
- ---------------------------------------------
The prices at which the Company sells its cars and the interest rate that it
charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default. The
provision for credit losses reflects these factors and is treated by the Company
as a cost of both the future finance income derived on the contract receivables
originated by the Company as well as a cost of the sale of the cars themselves.
Accordingly, unlike traditional car dealerships, the Company does not present
gross profit margin in its statement of operations calculated as sales of used
vehicles less cost of used vehicles sold.
Strata Holding, Inc.
and Ready Finance, Inc.
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies (Concluded)
Allowance for 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 for
uncollectible finance receivables is increased by a provision for loan losses,
which is charged to expense. Repossessed vehicles are recorded as inventory at
their estimated fair value. The difference between the balance of the
installment contract and the estimated fair value of the repossessed vehicle is
charged to the allowance for credit losses.
Inventories
- -----------
Inventories are stated at the lower of cost or market, on a specific unit basis.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation on equipment is computed
using an accelerated method, and amortization on leasehold improvements is
computed using the straight-line method, over the estimated useful lives of the
assets.
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.
Strata Holding, Inc.
and Ready Finance, Inc.
Notes to Combined Financial Statements
2. Finance Receivables
Finance receivables consist of the following:
December 31, 1996
- -------------------------------------------------------------------------------
Contractually scheduled payments $ 7,137,220
Less unearned finance charges 1,509,839
- -------------------------------------------------------------------------------
Principal balances, net $ 5,627,381
- -------------------------------------------------------------------------------
Finance receivables consist of sales of vehicles under installment sale
contracts with maturities that generally do not exceed 48 months. The
receivables bear interest at rates ranging from 17% to 30% and are
collateralized by the vehicles sold. The Company holds title to the vehicles
until full contract payment is made. Finance receivables are pledged as
collateral under the note payable (see Note 5).
Changes in the allowance for credit losses are as follows:
Year ended December 31, 1996
- ------------------------------------------------------------------------------
Balance at beginning of year $ 875,222
Loans charges off, net of recoveries (1,002,049)
Provision for credit losses 1,285,539
- -------------------------------------------------------------------------------
Balance at end of year $ 1,158,712
- -------------------------------------------------------------------------------
3. Inventories
Inventories consist of the following:
December 31, 1996
- -------------------------------------------------------------------------------
Used vehicles $ 1,512,753
Parts and accessories 17,500
- -------------------------------------------------------------------------------
$ 1,530,253
- -------------------------------------------------------------------------------
Strata Holding, Inc.
and Ready Finance, Inc.
Notes to Combined Financial Statements
4. Property and Equipment
Property and equipment consists of the following:
Useful
December 31, Lives 1996
- -------------------------------------------------------------------------------
Equipment 5 - 7 $ 146,154
Leasehold improvements 31.5 69,234
- -------------------------------------------------------------------------------
215,388
Less accumulated depreciation and amortization 146,208
- -------------------------------------------------------------------------------
$ 69,180
- -------------------------------------------------------------------------------
5. Notes Payable
Notes payable consist of the following:
Note payable to bank:
December 31, 1996
- -------------------------------------------------------------------------------
$2,000,000 revolving line of credit due
to bank, bearing interest at prime plus
1% (9.75% at December 31, 1996),
collateralized by first lien on business
assets and second mortgage on real estate
(owned by a stockholder), due on demand $1,640,000
- -------------------------------------------------------------------------------
Strata Holding, Inc.
and Ready Finance, Inc.
Notes to Combined Financial Statements
5. Notes Payable (Concluded)
Notes payable to related parties:
December 31, 1996
- -------------------------------------------------------------------------------
Unsecured notes payable to stockholders
with interest ranging from 6% to 12%,
due December 31, 1996 $1,139,000
Unsecured notes payable to relatives of
stockholders, with interest ranging from
6% to 12% and due from December 31,
1996 to December 31, 1997 507,625
Unsecured notes payable to companies under
common control, interest at 6%, due
December 31, 1996 868,000
- -------------------------------------------------------------------------------
$2,514,625
- -------------------------------------------------------------------------------
The line of credit and notes payable to related parties were paid off in July
1997 in connection with the sale of the Company's assets (see Note 10).
6. Stockholders' Equity
At December 31, 1996 the Company's stockholders' equity consisted of the
following:
Retained
Common Earnings
Stock (Deficit)
- -------------------------------------------------------------------------------
Strata Holding, Inc. par value
$1 per share, 7,500 shares
authorized, 1,000 shares issued
and outstanding $ 1,000 $ (105,770)
Ready Finance, Inc. par value
$1 per share, 7,500 shares
authorized, 1,000 shares issued
and outstanding 1,000 2,070,722
- -------------------------------------------------------------------------------
$ 2,000 $1,964,952
- -------------------------------------------------------------------------------
Strata Holding, Inc.
and Ready Finance, Inc.
Notes to Combined Financial Statements
7. Lease Commitments
The Company leases an office building and a warehouse from a stockholder. The
future minimum rentals under noncancellable operating leases with this related
party are as follows:
Year ending December 31,
- -------------------------------------------------------------------------------
1997 $105,000
1998 87,000
1999 51,000
2000 22,000
- -------------------------------------------------------------------------------
$265,000
- -------------------------------------------------------------------------------
8. Related Party Transactions
The facilities under operating leases (Note 7) are owned by a stockholder. Total
rent paid to that stockholder for those facilities amounted to $107,890 during
1996.
The building occupied by Ready Finance, Inc. which is owned by a
stockholder is being held for collateral against the line of credit (see
Note 5).
Interest expense on related party notes payable (see Note 5) was $136,689
during 1996.
9. Supplemental Cash Flow Information
Cash paid for interest approximated $444,188 during 1996.
Strata Holding, Inc.
and Ready Finance, Inc.
Notes to Combined Financial Statements
10. Subsequent Event
On June 27, 1997, the stockholders of Strata Holding, Inc. ("Strata") and Ready
Finance, Inc. ("Ready" entered into an agreement to sell substantially all of
the assets owned or used by Strata and Ready to Smart Choice Automotive Group,
Inc. ("Smart Choice"). In addition, Smart Choice assumed certain liabilities of
Strata and Ready and paid off the related party notes payable (see Note 5).
As consideration for the assets acquired, Smart Choice paid the stockholders
cash of $3.2 million, paid off the Company's line of credit of approximately
$1.8 million (see Note 5), and issued to Ready a subordinated note in the amount
of $3,680,089 and a secured note in the amount of $1,200,000. The notes bear
interest at 9% and are payable in equal monthly installments which total $27,112
until June 1999 when the entire unpaid balances plus accrued interest are due in
full. The secured note is collateralized by certain equipment and inventory.
The transaction described above resulted in the termination of the Company's
election under the Internal Revenue Code to be "S Corporations".
Supplemental Material
------------------------
Independent Auditors' Report
on Supplemental Material
Our audits of the combined financial statements included in the preceding
section of this report were made for the purpose of forming an opinion on those
statements taken as a whole. The supplemental material presented in the
following section of this report is presented for purposes of additional
analysis and is not a required part of the combined financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the combined financial statements and, in our opinion, is fairly stated in
all material respects in relation to the combined financial statements taken as
a whole.
/s/ BDO Seidman, LLP
Orlando, Florida Certified Public Accountants
September 7, 1997
Strata Holding, Inc.
and Ready Finance, Inc.
Combining Balance Sheet
Strata Ready Combining Combined
December 31, 1996 Holding, Inc. Finance, Inc. Entries Totals
- -----------------------------------------------------------------------------------------------
Assets
Cash $ 20,840 $ 65,160 $ -- $ 86,000
Accounts receivable 171,592 -- -- 171,592
Finance receivables, net -- 4,468,669 -- 4,468,669
Inventory 1,530,253 -- -- 1,530,253
Property and equipment, net 69,180 -- -- 69,180
Intercompany receivable 1,573,000 -- (1,573,000) --
Other assets 50,617 40,518 -- 91,135
- -----------------------------------------------------------------------------------------------
$ 3,415,482 $ 4,574,347 $(1,573,000) $ 6,416,829
- -----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Accounts payable $ 271,882 $ -- $ -- $ 271,882
Sales tax payable 23,370 -- -- 23,370
Note payable - bank 1,640,000 -- -- 1,640,000
Notes payable - related
parties 1,585,000 929,625 -- 2,514,625
Intercompany payable -- 1,573,000 (1,573,000) --
- -----------------------------------------------------------------------------------------------
Total liabilities 3,520,252 2,502,625 (1,573,000) 4,449,877
- -----------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 1,000 1,000 -- 2,000
Retained earnings (deficit) (105,770) 2,070,722 -- 1,964,952
- -----------------------------------------------------------------------------------------------
Total stockholders' equity
(deficit) (104,770) 2,071,722 -- 1,966,952
- -----------------------------------------------------------------------------------------------
$ 3,415,482 $ 4,574,347 $(1,573,000) $ 6,416,829
- -----------------------------------------------------------------------------------------------
Strata Holding, Inc.
and Ready Finance, Inc.
Combining Statement of Operations
Year ended Strata Ready Combining Combined
December 31, 1996 Holding, Inc. Finance, Inc. Entries Totals
- -------------------------------------------------------------------------------------------
Revenues:
Sales of used vehicles $ 9,515,375 $ -- $ -- $ 9,515,375
Income on finance
receivables -- 1,614,588 (88,380) 1,526,208
- ------------------------------------------------------------------------------------------
9,515,375 1,614,588 (88,380) 11,041,583
- ------------------------------------------------------------------------------------------
Cost of Revenues:
Cost of used vehicles sold 6,973,535 -- -- 6,973,535
Provision for credit losses 525,137 509,725 250,677 1,285,539
- ------------------------------------------------------------------------------------------
7,498,672 509,725 250,677 8,259,074
- ------------------------------------------------------------------------------------------
Net revenues 2,016,703 1,104,863 (339,057) 2,782,509
Operating expenses 1,728,265 459,112 -- 2,187,377
- ------------------------------------------------------------------------------------------
Income from operations 288,438 645,751 (339,057) 595,132
Interest expense 390,507 167,244 (339,057) 218,694
- ------------------------------------------------------------------------------------------
Net income (loss) $ (102,069) $ 478,507 $ -- $ 376,438
- ------------------------------------------------------------------------------------------