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 March 31, 1998
--------------------------
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)
(407) 269-9680
(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 May 12, 1998, 12,743,580 shares of the Registrant's Common Stock were
issued and outstanding.
SMART CHOICE AUTOMOTIVE GROUP, INC.
Form 10-Q
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements. 2
Condensed Consolidated Balance sheets - 3
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations - 5
Three Months Ended March 31, 1998 and March 31, 1997
Condensed Consolidated Statements of Cash Flow - 6
Three Months ended March 31, 1998 and March 31, 1997
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
Part II OTHER INFORMATION 15
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 16
PART I
SMART CHOICE AUTOMOTIVE GROUP, INC.
FINANCIAL STATEMENTS
Item 1. Financial Statements.
SMART CHOICE AUTOMOTIVE GROUP, INC.
Condensed Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------------------------------
As of March 31, 1998 As of December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
Assets
Cash and cash equivalents $ 2,394,391 $ 1,066,949
Accounts receivable 3,164,705 1,773,124
Finance receivables
Principal balances, net 51,146,019 39,109,368
Less: allowance for credit losses (8,493,306) (6,857,265)
- -------------------------------------------------------------------------------------------------------------------------
42,652,713 32,252,103
Inventories, at cost 17,429,409 15,516,084
Land held for resale 1,064,205 1,050,000
Property and equipment, net 9,126,667 9,214,207
Notes receivable 23,140 46,280
Deferred tax asset 1,000 --
Dferred debt costs 949,330 426,823
Goodwill 25,401,022 25,562,162
Prepaid expenses 1,530,471 1,008,229
Deposits 178,237 170,305
Other assets 977,477 43,681
-------------------------------------------------------------------------------------------------------------------------
$ 104,892,766 $ 89,104,991
-----------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
SMART CHOICE AUTOMOTIVE GROUP, INC.
Condensed Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------
As of March 31, 1998 As of December 31, 1997
- ------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 6,793,434 $ 5,259,903
Accrued expenses 4,152,209 4,633,841
Deferred income 92,861 --
Floorplan payable 9,413,944 8,287,092
Capital lease obligations 869,268 940,280
Notes payable 71,720,664 60,427,058
Deferred income taxes 2,042 --
Convertible debt 340,000 --
Other liabilities -- 94,913
- ----------------------------------------------------------------------------------------------------
Total liabilities 93,384,422 79,643,087
- ----------------------------------------------------------------------------------------------------
Redeemable convertible preferred
stock 1,491,834 4,941,834
Stockholders' equity:
Common stock 122,595 97,340
Additional paid in capital 27,913,049 24,108,456
Accumulated deficit (18,019,934) (19,685,726)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 10,016,510 4,520,070
- -----------------------------------------------------------------------------------------------------
$ 104,892,766 $ 89,104,991
- ----------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
SMART CHOICE AUTOMOTIVE GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
- --------------------------------------------------------------------------------------------------------------
Vehicle and Related Revenues:
Sales of new vehicles $8,123,424 --
Sales of used vehicles 21,845,559 4,785,077
Income on finance receivables 4,146,215 522,939
Income from insurance and training 180,222 262,280
Income from parts and accessories 4,364,037 2,498,753
- --------------------------------------------------------------------------------------------------------------
38,659,457 8,069,049
- --------------------------------------------------------------------------------------------------------------
Cost of Vehicle and Vehicle Related Revenues:
Cost of new vehicles sold 7,187,085 --
Cost of used vehicles sold 15,088,274 3,390,292
Provision for credit losses 2,904,128 1,049,680
Cost of insurance and training 30,757 13,565
Cost of parts and accessories sold 2,796,891 1,561,922
- --------------------------------------------------------------------------------------------------------------
28,007,135 6,015,459
- --------------------------------------------------------------------------------------------------------------
Net revenues from vehicle sales and vehicle
related activities 10,652,322 2,053,590
- --------------------------------------------------------------------------------------------------------------
Expenses:
Operating expenses 7,979,811 5,081,660
Compensation expense related to employee stock options -- 3,125,877
- --------------------------------------------------------------------------------------------------------------
7,979,811 8,207,537
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations 2,672,511 (6,153,947)
- ---------------------------------------------------------------------------------------------------------------
Other expense (income):
Interest expense 1,909,671 692,617
Other income (919,413) (9,173)
Miscellaneous expense 15,661 64,944
- --------------------------------------------------------------------------------------------------------------
510,705 748,388
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,666,592 $ (6,902,335)
- --------------------------------------------------------------------------------------------------------------
Preferred Stock dividends $ 77,875 --
Net income available to common stock holders $ 1,588,717 $ (6,902,335)
- --------------------------------------------------------------------------------------------------------------
Net income (loss) per share
- --------------------------------------------------------------------------------------------------------------
- Primary $ 0 .15 $ (0.87)
- --------------------------------------------------------------------------------------------------------------
- Fully diluted 0.14
- --------------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares
and Share Equivalents Outstanding:
- Primary 10,380,260 7,853,134
- Fully diluted 11,226,758
See accompanying notes to condensed consolidated financial statements
SMART CHOICE AUTOMOTIVE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income/ (loss) $ 1,666,592 $ (6,902,335)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Provision for credit losses 2,904,128 681,435
Common stock and options issued for consulting fees -- 150,000
Loss on disposal of fixed assets -- 1,151
Stock option compensation -- 3,125,877
Depreciation and amortization 634,995 245,530
Recoupment of expenses (165,967) --
Cash provided by (used for):
Accounts receivable (2,513,545) (70,894)
Inventory (1,913,325) (422,499)
Prepaid expenses (522,242) (18,974)
Other assets -- (1,453)
Accounts payable 1,537,063 964,984
Accrued expenses (481,632) 950,891
Deferred income (1,010) 20,772
Other liabilities -- 1,657,444
Customer deposits -- (116,099)
Floorplan payable 1,126,852 224,876
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,271,909 470,706
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in finance receivables (12,329,624) (1,153,486)
Cash for acquisitions, net of cash acquired -- (2,797,310)
Issuance of notes receivable -- (565,896)
Increase in deposits (7,932) (477,300)
Increase in other assets (41,210) --
Increase in deferred acquisition costs -- (15,400)
Payment of notes receivable 23, 140 --
Purchase of property and equipment (181,034) (56,379)
Decrease in other assets -- 40,435
Purchase of land (14,205) --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,550,935) (5,025,336)
- ---------------------------------------------------------------------------------------------------------------------------
Continued on next page
SMART CHOICE AUTOMOTIVE GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on notes payable $ (874,242) $ (1,835,310)
Proceeds from issuance of Sirrom debt -- 3,500,000
Proceeds from issuance of notes payable 3,000,000 3,996,722
Increase in deferred debt costs -- (256,494)
Increase (decrease) in senior secured debt payable 9,500,000 --
Proceeds from issuance of preferred stock -- 590,000
Proceeds from issuance of convertible debentures -- 300,000
Bank overdraft -- (82,884)
Payments on capital lease obligations (19,289) --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,606,469 6,212,034
- ---------------------------------------------------------------------------------------------------------------------------
Net increase / (decrease) in cash and cash equivalents 1,327,438 1,657,404
Cash and cash equivalents at beginning of period 1,066,949 0
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,394,391 $ 1,657,404
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
SMART CHOICE AUTOMOTIVE GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
===============================================================================
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Smart
Choice Automotive Group, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim information
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present the Company's financial position and results of operations
for the periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full fiscal year. The
Condensed Consolidated Balance Sheet as of December 31, 1997 was derived from
audited consolidated financial statements as of that date but does not include
all the information and notes required by generally accepted accounting
principles. It is suggested that these condensed consolidated financial
statements be read in conjunction with the company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Note 2 - Finance Receivables
The Company's finance receivables ("Finance Receivables" or "Finance
Contracts") are automobile retail installment sale contracts originated by the
Company on sales of used cars at its automobile dealerships. The following shows
the principal balances of the Company's Finance Receivables as of March 31,
1998:
March 31, 1998
--------------
Contractually scheduled payments $50,439,275
Less: allowance for credit losses (8,493,306)
----------
Principal balances, net $41,945,969
===========
Note 3 - Presentation of Dealership Revenues and Cost of Revenues
Revenues from Company dealership operations consist of Sales of New Cars, Sales
of Used Cars, Income on Finance Receiveables, Income from Insurance and
Training, and Income from Parts and Accessories. Cost of Revenues include cost
of New Cars Sold, Cost of Used Cars Sold, the Provision for Credit Losses, Costs
of Insurance and Training Income and Cost of Parts and Accessories Sold.
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, some 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 finance receivables
originated at Company dealerships as well as a cost of the sales of the cars
themselves.
Note 4 - Common Stock Equivalents
Net earnings per common share amounts are based on the weighted average number
of common shares and common stock equivalents outstanding as reflected on
Exhibit 11 to this Quarterly Report on Form 10-Q.
Item No. 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion and analysis of the Company's consolidated
financial position and consolidated results of operations should be read in
conjunction with the Company's condensed consolidated financial statements and
related notes thereto included in Item 1.
Forward Looking Statements
This report contains forward looking statements. Additional written or oral
forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of the term in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements may include, but not be 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 the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward looking statements. The Company undertakes no obligation
to publicly update or revise any forward looking statements, whether as a result
of new information, future events, or otherwise. The following disclosures, as
well as other statements in this Report on Form 10-Q, and in the notes to the
Company's condensed consolidated financial statements, describe factors, among
others, that could contribute to or cause such differences, or that could affect
the Company's stock price.
Introduction
The Eckler Merger. In January 1997, the Company, then named Eckler
Industries, Inc., which had completed an initial public offering in 1995 and had
been exclusively in the Corvette parts and accessories business, merged (the
"Eckler Merger") with Smart Choice Holdings, Inc. ("SCHI"), which was acquiring
various automobile sales and finance companies. In the Eckler Merger, SCHI was
the surviving corporation of a merger with an acquisition subsidiary of Eckler
Industries, Inc., and SCHI is presently a wholly owned subsidiary of the
Company. After the Eckler Merger, the Company's name was changed to Smart Choice
Automotive Group, Inc.
In the Eckler Merger shareholders of SCHI were issued Common Stock having a
majority of the voting rights of the Company. Therefore, the Eckler Merger was
accounted for as a purchase of Eckler Industries, Inc. by SCHI (a reverse
acquisition in which SCHI is considered the acquirer for accounting purposes).
Accordingly, the financial statements of the Company for the periods prior to
January 28, 1997 are those of SCHI, which was incorporated on June 21, 1996, and
was a development stage company prior to the Eckler Merger.
Comparability. From the date of the Eckler Merger and thereafter, the
Company acquired various automobile sales and finance companies. The Company
recorded the acquisition of each of these companies as purchases, and their
assets were recorded at their estimated fair values and their results of
operations have been included in the consolidated financial statements of the
Company since their respective dates of acquisition. Thus, the Company's results
of operations for the three months ended March 31, 1997 do not include the
results of operations for the companies acquired on or about the date of the
Eckler Merger for the entire period. In addition, the Company acquired various
other businesses in 1997, the results of operations of which are reflected in
the results of operations for the first quarter of 1998 but not those of the
first quarter of 1997. This factor should be taken into account when comparing
the March 31, 1998 financial statements to the March 31, 1997 financial
statements.
Presentation of Dealership Revenues and Costs and Expenses. Revenues from
new car dealerships include sales of new and used vehicles, as well as revenues
from repairs and finance and insurance commissions. Revenues from used car
dealership operations consist of sales of used cars and income on Finance
Receivables. Costs and expenses of used and new car dealership operations is
comprised of the cost of vehicles and other products sold and the provision for
credit losses on Finance Receivables. The prices at which the Company sells its
used cars at its used car dealerships and the interest rate that it charges to
finance these sales take into consideration that the Company's primary customers
are high-risk borrowers. 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 Finance Contracts originated at the Company's First Choice
dealerships, as well as the cost of the sales of the vehicles themselves.
Accordingly, unlike traditional car dealerships, the Company does not present
gross profits in the Statement of Operations calculated as sales of used cars
less cost of used cars sold.
Operational Changes. Management undertook a comprehensive restructuring of
the Company beginning in late 1997 with the expectation of better meeting future
operational and liquidity needs. Some of the results of that restructuring are
reflected in the three months ended March 31, 1998. Some components of the
restructuring include the following:
Management determined to emphasize used car operations, which tend to have
higher gross margins than new car sales. Acquisition plans for new car
dealerships were curtailed in early December 1997. Management concentrated
on achieving operational efficiencies at the 22 used car dealerships that
the Company had acquired or opened during 1997.
Management took one-time charges in the fourth quarter of 1997 relating to
acquisition expenses and severance payments.
Staff was reduced by 15% in November and December of 1997.
Overhead expenses were reduced over $2 million during late November and
December, 1997 and January, 1998.
A new Chief Financial Officer was retained in September, a new Vice
President of Finance was employed in November, and a significant portion of
the accounting staff was replaced.
A Company-wide budget was prepared and implemented.
"Flash reports" were developed for the Company's divisions beginning
January 15, 1998. These flash reports are used to monitor business
operations and results on a regular basis.
In late 1997, the Company completed a "static pool" analysis that
established a benchmark for analysis of the quality of the Company's
Finance Receivable portfolio. The static pool indicated that the actual
losses (12 %) on the portfolio were substantially less than loss reserves (
17 %).
The Company's finance subsidiary expanded its loan portfolio to $72.2
million while establishing and maintaining underwriting procedures that
have resulted in 93.7% of the Finance Contracts being current (30 days or
fewer past due).
Eckler Industries, Inc. ("Eckler") was restructured to focus on greater
customer service. Inventory carrying costs were reduced by negotiating with
vendors. "Drop ship" delivery is being utilized. As the mail order business
constitutes over 93% Eckler's revenue, two mail order catalogs are now
used, instead of one per year as in the past.
Management also undertook a restructuring of debt obligations in late 1997
and the first quarter of 1998 in order to better meet its foreseeable
liquidity needs. The debt restructuring included expanded financings for
key areas of the business as well as negotiating conversions of some debt
instruments into equity and refinancing obligations with maturities in
1998. See "Liquidity and Capital Resources."
Results of Operations
Revenues. The Company experienced nearly a four-fold increase in revenues
for the three months ended March 31, 1998 compared to the same period in 1997.
The 1997 revenues reflect less than two months of combined operations for the
companies that merged in later January and February, 1997. In contrast, the 1998
revenues reflect a full quarter of operations which included those of the
companies acquired later in 1997 and the opening of new used car sales
locations.
Costs and Expenses. Cost of revenues also increased nearly four-fold for
the quarter ended March 31, 1998 compared to the 1997 period, reflecting the
increased sales discussed above. Cost of revenues, as a percent of revenues,
decreased from approximately 74.5% for the three months ended March 31, 1997 to
approximately 72.4% of revenues for the same period in 1998. The lower
percentage cost of sales reflects management's increased focus on loan quality
and higher margins for car sales in the 1998 period. In the first quarter of
1997, substantial amounts of management time were allocated to analyzing,
negotiating, and assimilating acquisitions. The improved margins in the 1998
period reflected implementation of policies and procedures for the acquired
companies.
Operating Expenses. Operating expenses consist of selling, marketing, and
general and administrative expenses, and depreciation and amortization.
Operating expenses decreased from $8.2 million for the three months ended March
31, 1996 to $8.0 million for the same period in 1997. The first quarter 1997
operating expenses included approximately $3.1 million in expense recognized by
the Company from issuing stock options to key management personnel by an
affiliated trust. Additionally, in the first quarter of 1997, the Company
recognized expense of approximately $1.7 million to settle various consulting
agreements and employment contracts of predecessor companies. Without those two
items, the Company's operating expenses for the three months ended March 31,
1997 would have totaled $3.4 million, or 42.3% of revenues, compared to $8.0
million, or 20.6% of revenues in the same period in 1998. Management believes
that the decreased percentage of costs to revenues reflects economies of scale
and the better utilization of the Company's infrastructure including centralized
marketing, accounting, and management information functions.
Allowance for Credit Losses. The allowance for credit losses (the
"Allowance") was 16.8% of the principal of Finance Receivables as of March 31,
1998. The following table reflects activity in the Allowance, as well as
information regarding charge off activity, on Finance Receivables for three
months ended March 31, 1998.
Three Months Ended
March 31, 1998
-----------------
Allowance Activity: (In thousands)
- -------------------
Balance, beginning of period.......... $ 6,857
Provision for credit losses........... 2,904
Net charge offs..................... (1,268)
------
Balance, end of period................ $ 8,493
=======
Charge Off Activity:
- --------------------
Principal balances:
Collateral repossessed.............. $(2,536)
Recoveries, net....................... 1,268
-----
Net charge offs..................... $(1,268)
=======
Analysis of the portfolio delinquencies is considered in evaluating the
adequacy of the Allowance. The following table reflects the principal balances
of current and delinquent Finance Receivables as a percentage of the total
outstanding Finance Receivable principal balance as of March 31, 1998 and 1997.
March 31,
---------
Aging Percentages: 1998 1997
---- ----
Principal balances current.................... 93.7% 88.7%
Principal balances 31 to 60 days.............. 2.8% 6.3%
Principal balances over 60 days............... 3.5% 5.0%
Management believes that the decrease in the percentage of loans which are
not delinquent reflects the Company's focus on higher quality borrowers in 1998,
its financing only cars sold at its dealerships rather than purchasing loans
from other dealers, and increased collection efforts.
Interest Expense. Interest expense totaled $1.9 million for the three
months ended March 31, 1998 compared to $0.7 million for the same period in
1997, an increase of 176%. The increase resulted primarily from interest on debt
attributable to acquisitions and interest on financing increased Finance
Receivables and inventory as the Company expanded its operations.
Other Income. Other income totaled approximately $919,000 for the three
months ended March 31, 1998 compared to $9,000 for the same period in 1997. The
1998 amount is comprised primarily of sales tax refunds on repossessed cars
($350,000), late fees on delinquent loans ($167,000), and recoupment of prior
year expenses ($165,000).
Liquidity and Capital Resources
The following table sets forth the major components of the increase in the
cash and cash equivalents, in thousands, for the periods ended March 31, 1998
and 1997:
March 31,
---------
1998 1997
---- ----
Net cash provided (used) by operating activities $ 2,272 $ 470
Net cash used by investing activities (12,551) (5,025)
Net cash provided by financing activities 11,606 6,212
------ -------
Net increase in cash and cash equivalents $ 1,327 $ 1,657
========= ========
The Company requires capital to support increases in Finance Receivables,
vehicle inventory, parts and accessories inventory, property and equipment, and
working capital for general corporate purposes. Funding sources available to the
Company include operating cash flow, third party investors, financial
institution borrowings and borrowings against finance receivables. The Company
intends to explore selling (securitizing) its Finance Receivables in the future.
Net cash flows provided by operating activities were approximately $2.3
million and $0.5 million for the three month periods ended March 31, 1998 and
1997, respectively. Net cash provided from operating activities in the first
quarter of 1998 primarily reflects the net income for the period and an increase
in payables. The increase in the first quarter of 1997 reflected the non-cash
stock option compensation which was included as an expense in that period, plus
increases in accounts payable, accrued expenses, other liabilities and the
provision for credit losses.
Cash used investing activities was approximately $12.6 million and $5.0
million during the three month periods ended March 31, 1998 and 1997,
respectively. The 1998 amount primarily reflects increases in Finance
Receivables carried by the Company. The 1997 amount reflects an increase in
Finance Receivables and debt associated with the acquisition of companies during
the first quarter of 1997.
Cash provided by financing activities was approximately $11.6 million and
$6.2 million during 1998 and 1997, respectively. In the first quarter of 1998,
the Company increased its notes payable on finance receivables by $9.5 million
and borrowed $3 million.
In the first quarter of 1997, the Company raised approximately $0.6 million
through the sale of Preferred Stock, and increased its line of credit and
floorplan borrowings by approximately $5.8 million.
Revolving Credit Facilities. The Company's revolving credit facility with
Finova Capital Corporation (the "Finova Revolving Facility") had a maximum
commitment of $35 million at December 31, 1997. The credit line was increased to
a maximum commitment of $42.5 million on March 27, 1998 and $75 million,
effective May 11, 1998. Under the Finova Revolving Facility, the Company may
borrow up to 55% of the gross balance of eligible Finance Contracts. The Finova
Revolving Facility expires in December 2001, at which time its renewal will be
subject to renegotiation. The Finova Revolving Facility is secured by
substantially all of the Company's Finance Receivables. As of December 31, 1997
and March 31, 1998, the principal amount outstanding under the Finova Revolving
Facility was $31.4 million and $40.9 million, respectively. The Finova Revolving
Facility bears interest at the prime rate (currently the Citibank N.A. prime
rate) plus 2.5%.
In 1997 and the first quarter of 1998 the Company financed its used car
inventory through a line of credit with Manheim Automotive Financial Services,
Inc. (the "Manheim Facility") which had an outstanding balance at December 31,
1997 of $2.7 million and $3.5 million at March 31, 1998. The maximum commitment
on the Manheim Facility is $3.75 million. The Manheim Facility is secured by the
Company's buy here-pay here used car inventory and bears interest at 1.5% over
the prime rate. The Company is negotiating with other lenders for an increased
credit line.
The Company finances its new car inventory through manufacturer floorplan
facilities. The Company's floorplan facility with Volvo Finance North America,
Inc. has a maximum commitment of $3.3 million, bears interest at 1% above the
prime rate, and at December 31, 1997 and March 31, 1998 had outstanding balances
of $1.98 million and $2.8 million, respectively. The Company's floorplan
facility with Nissan Motor Acceptance Corporation has a $3 million maximum
commitment, bears interest at 1% above prime, and at December 31, 1997 and March
31, 1998 had outstanding balances of $2.3 million and $2.5 million,
respectively.
Loans. In March and May 1997, Sirrom Capital Corporation ("Sirrom") loaned
the Company a total of $7.5 million. The Company issued Sirrom a $3.5 million
convertible note, convertible until March 12, 1999 at $3.67 per share and a $4.0
million convertible note, convertible at $7.50 per share until May 12, 2002,
subject to adjustment.
In September 1997, the Company completed the private placement of
convertible notes in the aggregate amount of $1,050,000. The notes mature on
April 15, 1998, bear interest at the rate of 8% per annum, and, since December
14, 1997, have been convertible into Common Stock of the Company at a conversion
price of 66 2/3% of the average closing bid price for the five trading days
immediately preceding the effective date of conversion. Nearly $475,000 of the
debt had been converted into common stock by March 31, 1998. In conjunction with
the borrowing, the Company also issued common stock warrants for 52,500 shares
of the Company's Common Stock exercisable at $7.00 per share at any time prior
to August 29, 2002.
In 1997 and 1998, Eckler borrowed a total of $8.5 million from Stephens
Inc. ("Stephens"), the investment banking firm that is the managing underwriter
of the Offering to which this Prospectus relates. The loans bear interest at the
rate of 10% per annum and are secured by all of the assets and common stock of
Eckler. The Company guaranteed the debt. The maturities of the Stephens loans
are as follows: $1.5 million on October 15, 1998, $1.0 million on June 30, 1998,
$2.0 million on June 30, 1999, and $4.0 million on September 30, 1999.
In 1997 the Company completed an offering to institutional investors of 400
units of Series A Redeemable Convertible Preferred Stock and warrants at $10,000
per unit. Proceeds from the offering, net of offering costs, were approximately
$3,965,000. Each unit consisted of one share of Series A Redeemable Convertible
Preferred Stock and a five year warrant to acquire 300 shares of Common Stock
for each preferred share purchased. The exercise price of the warrants are $8.10
for 90,000 shares and $5.23 for 30,000 shares. At March 31, 1998 all but one
share of the Series A Redeemable Convertible Preferred Stock had been converted
into Common Stock.
In May of 1998, the Company sold to a private investment group 220 shares
of the Company's Series B Convertible Preferred Stock for $10,000 per share for
an aggregate of $2,200,000. The Series B Convertible Preferred Stock has an 11%
dividend per year and is convertible into Common Stock at a conversion rate of
$5.00 per share. After November 5, 1999, the Company may, at its option, redeem
the Series B Convertible Preferred Stock for $10,000 per share. In connection
with the issuance of the Series B Convertible Preferred Stock, the Company
agreed to certain limitations on the issuance of additional shares of preferred
stock by the Company.
Mortgage Loan. The Company has a long-term mortgage payable to a bank with
a current principal balance of approximately $2.5 million at a variable rate of
1.5% above prime. The mortgage loan is collateralized by the Company's
headquarters real property and machinery, equipment and fixtures. The loan terms
require monthly principal payments of $13,333, plus interest, and the loan
matures on July 1, 1998, at which time the Company intends to negotiate a later
maturity.
In connection with an acquisition in 1997, the Company acquired
approximately 7.92 acres of undeveloped land in Lake Mary, Florida. The land,
held for resale by the Company, is recorded at $1,050,000 on the Company's
books. The property is subject to a first mortgage in favor of AmSouth Bank and
a second mortgage in favor of Barnett Bank. The AmSouth debt had a principal
balance of $482,202 as of March 31, 1998, an interest rate of 7.75%, and monthly
payments of $8,683 until December 2003. The Barnett Bank note has a principal
balance of $600,000, bears interest at 1% over Barnett's prime interest rate,
and requires quarterly interest payments. The note matured on April 1, 1998. The
Lake Mary property is presently under contract to be sold to an unrelated party
in May 1998 for $1.3 million. Both mortgages will be satisfied when the property
is sold.
Seasonality. Historically, the Company's used car business has experienced
higher revenues in the first two quarters of the calendar year than in the
latter half of the year. Management believes that these results are due to
seasonal buying patterns resulting in part from the fact that many of its
customers receive income tax refunds during the first half of the year, which
are a primary source of down payments on used car purchases.
The Eckler business is also subject to seasonal fluctuations. Historically,
Eckler has realized a higher portion of its revenues in the second and third
quarters of the calendar year and the lowest portion of its revenues in the
fourth quarter. The business of Eckler is particularly dependent on sales to
Corvette enthusiasts during the spring and summer months. This is the time of
year that Corvette enthusiasts are preparing for upcoming car shows that are
held in the late summer and early fall.
Inflation. Increases in inflation generally result in higher interest
rates. Higher interest rates on the Company's borrowings would increase the
interest expense related to the Company's existing debt. The Company cannot seek
to limit this risk by increasing interest rates earned on its Finance Contracts
since the interest charged is at or near the maximum permitted under Florida
law. Instead, the Company will seek to limit this risk, to the extent market
conditions permit, by increasing the profit margin on the cars sold. To date,
inflation has not had a significant impact on the Company's operations.
Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective for periods
beginning after December 15, 1997. Adoption of these standards is not expected
to have a material adverse effect on the Company's financial statements.
PART II
SMART CHOICE AUTOMOTIVE GROUP, INC.
OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds.
Described below are the sales of securities by the Company during the first
quarter of 1998 that were not registered under the Securities Act of 1933, as
amended (the "1933 Act"). On the issuance of these securities the Company relied
on the exemption from registration under the 1933 Act set forth in Section 4(2)
thereof, based on established criteria for effecting a private offering.,
including the number of offerees for each transaction, access to information
regarding the Company, disclosure of information by the Company, restrictions on
resale of the securities offered, investment representations by the purchasers,
and the qualification of the offerees as "accredited investors."
On various dates during the three months ended March 31, 1998, the Company
issued Common Stock to holders of the Company's Series A Redeemable Convertible
Preferred Stock (the "Series A Preferred Stock"), on conversion of Series A
Preferred Stock. The Company had issued the Series A Preferred Stock in 1997 to
institutional investors. The Series A Preferred Stock was converted into Common
Stock at a conversion price that was based on the market price of the Common
Stock at the time of conversion. A total of 1,265,825 shares of Common Stock
were issued in the first quarter of 1998 on conversion of the Series A Preferred
Stock.
On various dates during the three months ended March 31, 1998, the Company
issued Common Stock to holders of preferred stock of a subsidiary of the Company
(the "Subsidiary Preferred Stock") in exchange for the Subsidiary Preferred
Stock. The holders of the Subsidiary Preferred Stock were accredited investors
who had purchased the Subsidiary Preferred Stock in a private placement in 1996.
The exchange ratio for the exchange of Common Stock for the Subsidiary Preferred
Stock was 2.7 shares of Common Stock for each share of Subsidiary Common Stock,
which was determined based on the market price of the Common Stock for the
period January 21, 1998 through January 30, 1998. A total of 648,00 shares of
Common Stock were issued in the first quarter of 1998 on conversion of the
Subsidiary Preferred Stock.
On various dates during the three months ended March 31, 1998, the Company
issued Common Stock to holders of the Company's 12% convertible notes due April
15, 1998 (the "Notes") on conversion of the Notes. The Company had issued the
Notes in 1997 to institutional and individual accredited investors. The Notes
were converted into Common Stock at a conversion price that was based on the
market price of the Common Stock at the time of conversion. A total of 560,472
shares of Common Stock were issued in the first quarter of 1998 on conversion of
the Notes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not invest or trade in foreign currency or commodity
transactions which would ordinarily be subject to market risk. The interest rate
on the Company's revolving credit facility with Finova Capital Corporation is
based on the prime rate plus 2.5% percent. Accordingly, a significant increase
or decrease in the prime rate could affect the Company's earnings in the future.
The Company believes, however, that its financial instruments are disclosed at
their fair values. Fair value estimates are made at a specific point in time and
are based on relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties and matters
of judgment and, therefore, cannot be determined with precision. These estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect these estimates.
Since fair value estimates are as of a particular date, the amounts that
will actually be realized or paid in settlement of the instruments could be
significantly different.
The carrying amount of cash and cash equivalents is assumed to be the fair
value because of the liquidity of these instruments. The carrying amount is
assumed to be the fair value because of the relative short maturity and
repayment terms of the portfolio as compared to similar instruments. The
carrying amount of accounts payable and accrued expenses approximates fair value
because of the short maturity of these instruments. The terms of the Company's
notes payable approximates the terms in the market place at which they could be
replaced. Therefore, the fair value approximates the carrying value of these
financial instruments.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
List Exhibit Description Filed herewith or Incorporated by reference to:
---- ------------------- -----------------------------------------------
3.1 Third Articles of Amendment to Articles of Filed herewith.
Incorporation.
10.1 Ninth Amended and Restated Promissory Note Filed herewith.
dated May 11, 1998 between Florida Finance
Group, Inc. ("FFG"), maker, and Finova
Capital Corporation ("Finova") payee.
10.2 Fifth Amended and Restated Schedule to Filed herewith.
Amended and Restated Loan and Security
Agreement, FFG, borrower, Finova, lender.
10.3 Promissory Note by Eckler Industries, Inc. Exhibit 10.1 to Form 8-K filed March 5, 1998.
in favor of Stephens Inc.
10.4 Amendment to Guaranty Agreement between Exhibit 10.4 to Form 8-K filed March 5, 1998.
Registrant and Stephens Inc.
10.5 Amendment to Pledge and Security Agreement Exhibit 10.5 to Form 8-K filed March 5, 1998
between Registrant and Stephens Inc.
10.6 Promissory Note, dated February 24, 1998, Exhibit 10.9 to Form 8-K filed March 5, 1998
First Choice Auto Finance, Inc., maker, and
Manheim Automotive Financial Services, Inc.,
payee.
10.7 Guaranty, dated March 21, 1997 from the Exhibit 10.10 to Form 8-K filed March 5, 1998
Registrant in favor of Manheim Automotive
Financial Services, Inc.
11.0 Statement re computation of per share Filed herewith.
earnings.
27.0 Financial Data Schedule. Filed herewith.
(b) Report on Form 8-K
In the three months ended March 31, 1998, the Company filed a report on
Form 8-K dated December 10, 1997 reporting information pursuant to Item 5.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on May 15, 1998.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ Joseph E. Mohr
-------------------------
Joseph E. Mohr
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Joseph E. Mohr Chief Financial Officer, May 15, 1998
- ----------------------- (Principal Financial and
Joseph E. Mohr Accounting Officer)