U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________________
Commission file number 1-14082
--------
SMART CHOICE AUTOMOTIVE GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-1469577
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5200 S. WASHINGTON AVENUE, TITUSVILLE, FLORIDA 32780
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(321) 269-9680
----------------------------------------------------
(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 February 29, 2000, 48,887,872 shares of the Registrant's Common Stock were
issued and outstanding.
SMART CHOICE AUTOMOTIVE GROUP, INC.
Form 10-Q
TABLE OF CONTENTS
HEADING PAGE
------- ----
PART I. FINANCIAL STATEMENTS
Item 1. Consolidated Financial Statements
Balance Sheets - January 31, 2000 and April 30, 1999.....................................3
Statements of Operations - Three and nine months ended January 31, 2000 and 1999.........4
Statements of Stockholders' Equity - Nine months ended January 31, 2000..................5
Statements of Cash Flows - Nine months ended January 31, 2000 and 1999...................6
Notes to Consolidated Financial Statements..............................................7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................10-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................13
Item 2. Changes in Securities...................................................................13
Item 3. Defaults Upon Senior Securities.........................................................14
Item 4. Submission of Matters to a Vote of Securities Holders...................................14
Item 5. Other Information.......................................................................14
Item 6. Exhibits and Reports on Form 8-K........................................................14
SIGNATURES.........................................................................................15
2
PART I
ITEM 1. FINANCIAL STATEMENTS.
Smart Choice Automotive Group, Inc. and Subsidiaries
Consolidated Balance Sheets
JANUARY 31, 2000 APRIL 30, 1999
---------------- --------------
(Unaudited)
Assets
Cash and cash equivalents ............................................... $ 289,412 $ 62,832
Other receivables ....................................................... 1,006,074 727,391
Finance receivables, net ................................................ 125,240,130 47,757,350
Inventories ............................................................. 11,741,187 6,770,755
Property and equipment, net ............................................. 10,839,097 3,825,308
Deferred tax asset, net ................................................. 715,950 715,950
Goodwill, net ........................................................... 15,717,075 --
Prepaid and other assets ................................................ 1,255,167 514,446
------------ ------------
$166,804,092 $ 60,374,032
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses ................................... $ 12,294,846 $ 4,199,718
Revolving credit facility ............................................... 122,467,006 41,823,680
Capital lease obligations ............................................... 605,393 --
Notes payable ........................................................... 11,131,486 4,939,340
Deferred income tax ..................................................... 894,312 --
Deferred sales tax ...................................................... 3,636,081 2,713,914
------------ ------------
Total liabilities ............................................................ 151,029,124 53,676,652
Contingent redemption value of common stock put options ...................... 1,539,148 --
Stockholders' equity:
Preferred stock $.01 par value, authorized 5,000,000 shares; 1,469,551 shares
issued and outstanding at January 31, 2000 ................................. 14,696 --
Common stock, $.01par value, authorized 50,000,000 shares, 48,887,872 and
143,264 shares issued and outstanding at January 31, 2000 and April 30, 1999
respectively ............................................................... 488,879 1,419
Additional paid in capital ................................................... 13,426,880 7,642,036
Retained earnings (accumulated deficit) ...................................... 305,365 (946,075)
------------ ------------
Total stockholders' equity ................................................... 14,235,820 6,697,380
------------ ------------
.............................................................................. $166,804,092 $ 60,374,032
============ ============
See accompanying notes to consolidated financial statements
3
Smart Choice Automotive Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED JANUARY. 31, NINE MONTHS ENDED JANUARY. 31,
------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues:
Sales ...................................... $ 27,287,318 $ 13,402,803 $ 63,609,595 $ 42,975,239
Income on finance receivables .............. 6,831,645 2,229,995 12,530,997 6,149,320
------------- ------------- ------------- -------------
Total revenues ............................. 34,118,963 15,632,798 76,140,592 49,124,559
------------- ------------- ------------- -------------
Cost and expenses:
Costs of sales ............................. 17,649,241 9,295,695 41,066,165 29,051,518
Provision for credit losses ................ 5,444,435 2,898,973 11,098,743 7,205,334
Selling, general and administrative expenses 6,916,103 3,898,861 16,541,731 11,426,252
------------- ------------- ------------- -------------
Total costs and expenses .................. 30,009,779 16,093,529 68,706,639 47,683,104
------------- ------------- ------------- -------------
Income (loss) from operations ................... 4,109,184 (460,731) 7,433,953 1,441,455
Other (income) expense:
Interest expense ........................... 2,959,668 1,287,583 5,780,025 3,537,927
Other income ............................... (175,042) (163,353) (389,828) (499,803)
------------- ------------- ------------- -------------
2,784,626 1,124,230 5,390,197 3,038,124
------------- ------------- ------------- -------------
Income (loss) before income taxes ............... 1,324,558 (1,584,961) 2,043,756 (1,596,669)
Provision (benefit) for income taxes ............ 513,148 (586,056) 792,316 (562,316)
------------- ------------- ------------- -------------
Net income (loss) ............................... $ 811,410 $ (998,905) $ 1,251,440 $ (1,034,353)
============= ============= ============= =============
Net income (loss) per common share:
Basic ........................................ $ 0.02 $ (6.97) $ 0.08 $ (7.22)
============= ============= ============= =============
Diluted ...................................... $ 0.01 $ (6.97) $ 0.02 $ (7.22)
============= ============= ============= =============
Weighted average number of common shares
and share equivalents outstanding:
Basic ........................................ 32,639,669 143,264 16,391,467 143,264
============= ============= ============= =============
Diluted ...................................... 131,143,069 143,264 65,643,167 143,264
============= ============= ============= =============
See accompanying notes to consolidated financial statements
4
Smart Choice Automotive Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
PREFERRED STOCK COMMON STOCK
------------------------- ------------------------
RETAINED
NUMBER NUMBER ADDITIONAL EARNINGS
OF OF PAR PAID-IN (ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, May 1, 1999 -- -- 143,264 $ 1,419 $ 7,642,036 $ (946,075) $ 6,697,380
Adjustments for recapitalization
and acquisition (note 1) 1,469,551 $ 14,696 48,744,608 487,460 5,784,844 -- 6,287,000
Net income -- -- -- -- -- 1,251,440 1,251,440
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, January 31, 2000 1,469,551 $ 14,696 48,887,872 $ 488,879 $13,426,880 $ 305,365 $14,235,820
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
5
Smart Choice Automotive Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JANUARY 31,
------------------------------
2000 1999
------------ ------------
Cash flows from operating activities:
Net income (loss) ................................................. $ 1,251,440 $ (1,034,353)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Provision for credit losses .................................... 11,098,743 7,205,334
Depreciation and amortization .................................. 490,751 238,666
Deferred tax expense (benefit) ................................. -- (536,842)
Changes in assets and liabilities net of effects of acquisition:
Accounts receivable .......................................... 408,980 443,655
Inventory .................................................... 595,142 (457,944)
Prepaid expenses ............................................. 219,694 (306,759)
Refundable income taxes ...................................... -- 546,125
Accounts payable ............................................. (3,426,685) 301,392
Deferred sales tax ........................................... 922,168 748,639
Other ........................................................ 848,207 (50,418)
------------ ------------
Net cash provided by operating activities ............................ 12,408,440 7,097,495
------------ ------------
Cash flows from investing activities:
Increase in finance receivables ................................... (19,646,166) (18,826,569)
Net cash acquired in acquisition of Smart Choice .................. 4,513,490 --
Purchase of property and equipment ................................ (1,665,021) (723,103)
------------ ------------
Net cash used in investing activities ................................ (16,797,697) (19,549,672)
------------ ------------
Cash flows from financing activities:
Principal payments on notes payable ............................... (1,765,821) (600,105)
Proceeds from issuance of notes payable ........................... 1,300,000 1,000,000
Proceeds from line of credit borrowings ........................... 5,210,001 11,397,590
Decrease in bank overdraft ........................................ (109,884) --
Proceeds from capital lease obligations ........................... 111,323 --
Payments on capital lease obligations ............................. (129,782) --
------------ ------------
Net cash provided by financing activities ............................ 4,615,837 11,797,485
------------ ------------
Net increase (decrease) in cash and cash equivalents ................. 226,580 (654,692)
Cash and cash equivalents at beginning of period ..................... 62,832 170,618
------------ ------------
Cash and cash equivalents at end of period ........................... $ 289,412 $ (484,074)
============ ============
See accompanying notes to consolidated financial statements
6
Smart Choice Automotive Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Recapitalization and acquisition
Effective December 1, 1999, Smart Choice Automotive Group, Inc. ("Smart
Choice"or the "Company") acquired the stock of Paaco Automotive Group, Inc. and
Premium Auto Acceptance Corporation (collectively, "PAACO") in a reverse
acquisition in which PAACO 's stockholders acquired voting control of Smart
Choice. The acquisition was accomplished through the contribution of all of the
outstanding stock of PAACO by Crown Group, Inc. ("Crown"), an 85% majority
stockholder, along with all the shares of the minority stockholders, in exchange
for 1,203,016 shares of Smart Choice Series E convertible preferred stock.
Additionally, Crown purchased 150,000 shares of Smart Choice Series E
convertible preferred stock for $3 million in cash and acquired Smart Choice
debt with a face value of approximately $4.5 million for $2.3 million in cash.
The debt was converted by Crown into 116,535 shares of Smart Choice Series E
convertible preferred stock. Upon completing the transaction, Crown, the former
majority stockholder in PAACO controlled approximately 70% of the voting rights
of the Company.
For financial reporting purposes, PAACO is deemed to be the acquiring entity.
The acquisition has been reflected in the accompanying consolidated financial
statements as (a) a recapitalization of PAACO (whereby the issued and
outstanding stock of PAACO was converted into 1,203,016 shares of Series E
convertible preferred stock and (b) the issuance of the securities discussed in
the following paragraph by PAACO in exchange for all of the outstanding equity
securities of Smart Choice.
Also effective with the merger, Smart Choice and PAACO renegotiated the terms of
their line of credit with Finova Capital Corporation. The new terms provide for
a total revolving line of credit in the amount of $160 million, a reduction in
interest rate to 2.25% over prime and an increase in the advance rate to 85% for
Smart Choice and 72% for PAACO on eligible finance receivables and 70% on
eligible vehicle inventory. As of January 31, 2000, Smart Choice and PAACO had a
net availability under the line of credit of approximately $900,000 and $1.4
million respectively.
The acquisition of Smart Choice was accounted for using the purchase method of
accounting. Accordingly, the consideration of $6,287,000 was allocated to the
Smart Choice assets and liabilities acquired based on estimated fair values
resulting in goodwill of approximately $15.8 million.
The accompanying consolidated financial statements include the results of PAACO
for all periods and the results of Smart Choice from the date of acquisition.
The following pro forma financial information for the nine and three months
ended January 31, 2000 and January 31, 1999 presents revenue and net earnings
given the effect to the acquisition as if it had occurred on May 1, 1999 and May
1, 1998 respectively, after including the impact of adjustments for eliminating
interest expense, preferred stock dividends, amortization of goodwill,
amortization of interest income resulting from purchase accounting entries and
related income tax expense. The unaudited pro forma information is presented
only for informative purposes and is not indicative of the results of operations
that might have occurred if the transaction had taken place on those dates or of
the Company's results of operations for any future period.
NINE MONTHS ENDED JANUARY 31, THREE MONTHS ENDED JANUARY 31,
----------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
Revenue $ 126,366,135 $ 127,165,105 $ 40,918,683 $ 34,819,190
============= ============= ============= ==============
Net earnings (loss) $ (10,053,887) $ 303,667 $ (4,234,177) $ (5,464,853)
============= ============= ============= ==============
Net income (loss) per common share:
Basic $ (.21) $ .01 $ (.09) $ (.12)
============= ============= ============= ==============
Diluted $ (.21) $ .00 $ (.09) $ (.12)
============= ============= ============= ==============
Note 2 - Basis of Presentation
The accompanying unaudited 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.
7
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 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
consolidated balance sheet as of April 30, 1999 was derived from the audited
consolidated financial statements of PAACO as of that date but does not include
all the information and notes required by generally accepted accounting
principles.
Note 3 - 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:
JANUARY 31, 2000 APRIL 30, 1999
---------------- --------------
Contractually scheduled payments $ 191,465,265 $ 67,769,698
Less: unearned finance charges (36,085,981) (12,425,526)
------------- -------------
Principal balances 155,379,284 55,344,172
Less: allowance for credit losses (30,139,154) (7,586,822)
------------- -------------
Principal balances, net $ 125,240,130 $ 47,757,350
============= =============
A summary of the finance receivables allowance for credit losses is as follows:
NINE MONTHS ENDED JANUARY 31, THREE MONTHS ENDED JANUARY 31,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Beginning balance ................... $ 7,586,822 $ 4,727,680 $ 9,688,619 $ 6,001,422
Acquisition of Smart Choice.......... 21,047,112 -- 21,047,112 --
Provision for credit losses.......... 11,098,743 7,205,334 5,444,435 2,898,973
Net charge offs ..................... (9,593,523) (4,346,192) (6,041,012) (1,310,573)
------------ ------------ ------------ ------------
Balance at January 31 ............... $ 30,139,154 $ 7,586,822 $ 30,139,154 $ 7,586,822
============ ============ ============ ============
Note 4 - Property and Equipment
A summary of property and equipment is as follows:
JANUARY 31, APRIL 30,
2000 1999
------------ ------------
Land, building and building improvements ............... $ 7,183,874 $ 2,163,747
Leasehold improvements ................................. 1,941,001 1,141,941
Furniture and equipment ................................ 2,799,633 1,277,469
Less accumulated depreciation and amortization.......... (1,085,411) (757,849)
------------ ------------
Property and equipment, net ............................ $ 10,839,097 $ 3,825,308
============ ============
Note 5 - Debt
A summary of debt is as follows:
JANUARY 31, APRIL 30,
2000 1999
------------ ------------
Revolving credit facility................. $122,467,006 $ 41,823,680
Subordinated notes payable ............... 6,607,176 2,850,000
Mortgages and other notes payable ....... 4,524,310 2,089,340
Capital lease obligations ................ 605,393 --
------------ ------------
$134,203,885 $ 46,763,020
============ ============
8
Note 6 - Basic and diluted earnings per share
Net income (loss) per common share is based on the weighted average number of
common shares and potential common shares outstanding during each period. The
following represents a reconciliation from basic earnings per share to diluted
earnings per share:
THREE MONTHS ENDED JAN. 31, NINE MONTHS ENDED JAN. 31,
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income (loss) $ 811,410 $ (998,905) $ 1,251,440 $ (1,034,353)
============ ============ ============ ============
Weighted-average common shares 32,639,669 143,264 16,391,467 143,264
Plus: Incremental shares from assumed conversion
Convertible preferred stock 97,970,067 -- 48,985,033 --
Warrants 533,333 -- 266,667 --
------------ ------------ ------------ ------------
Dilutive potential common stock 98,503,400 -- 49,251,700 --
------------ ------------ ------------ ------------
Adjusted weighted-average shares 131,143,069 143,264 65,643,167 143,264
============ ============ ============ ============
Earnings (loss) per common share:
Basic $ 0.02 $ (6.97) $ 0.08 $ (7.22)
============ ============ ============ ============
Diluted $ 0.01 $ (6.97) $ 0.02 $ (7.22)
============ ============ ============ ============
Note 7 - Supplemental Cash Flow Information
Cash paid for interest during the nine months ended January 31, 2000 and 1999
was $6,934,365 and $3,660,042, respectively.
The Company had no non-cash investing and financing activities.
Note 8 - Segment Information
The Company sells and finances used vehicles in two major markets in the United
States. The Smart Choice market is based in Florida and the PAACO market is
based in Texas. The Company's Smart Choice market consists of the Smart Choice
operations that were acquired on December 1, 1999. The following table shows
certain financial information for each geographical reportable segment as of and
for the three and nine months ended January 31, 2000 and 1999:
PAACO SMART CHOICE
THREE MONTHS ENDED JAN. 31, MARKET MARKET COMBINED
--------------------------- ------------- ------------- -------------
2000
----
Revenue $ 20,815,057 $ 13,303,906 $ 34,118,963
Operating income 2,267,848 1,841,336 4,109,184
Identifiable assets 68,398,555 96,133,104 166,804,092
1999
----
Revenue $ 15,632,798 $ -- $ 15,632,798
Operating loss (460,731) -- (460,731)
Identifiable assets 53,995,640 -- 60,374,032
NINE MONTHS ENDED JAN. 31,
--------------------------
2000
----
Revenue $ 62,836,686 $ 13,303,906 $ 76,140,592
Operating income 5,592,617 1,841,336 7,433,953
1999
----
Revenue $ 49,124,559 $ -- $ 49,124,559
Operating income 1,441,455 -- 1,441,455
9
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 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 that 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.
OVERVIEW
Smart Choice Automotive Group, Inc. sells and finances used vehicles in two
major markets in the United States. The Smart Choice market is based in Florida
and the PAACO market is based in Texas. Effective December 1, 1999, Smart Choice
acquired the stock of Paaco Automotive Group, Inc. ("PAACO") in a reverse
acquisition in which PAACO 's stockholders acquired voting control of Smart
Choice. For financial reporting and comparative purposes, PAACO is deemed to be
the acquiring entity. The interim consolidated financial statements include the
results of PAACO from May 1, 1999 through January 31, 2000 and the results of
Smart Choice from the date of acquisition (December 1, 1999).
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 consolidated financial statements and related notes thereto
included in Item 1.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31,
2000 TO THE THREE MONTHS ENDED JANUARY 31, 1999.
Below is a presentation of the operating results for the two geographical
business segments of the Company for the three months ended January 31, 2000 and
1999. This table reflects operating results of the Company and the acquisition
of Smart Choice, which is included for two months, during the quarter ended
January 31, 2000.
THREE MONTHS ENDED JANUARY 31, 2000 THREE MONTHS ENDED JANUARY 31, 1999
----------------------------------- -----------------------------------
SMART SMART
(Dollars in thousands) PAACO CHOICE CONSOLIDATED PAACO CHOICE CONSOLIDATED
-------- -------- ------------ --------- ------ ------------
Sales $ 17,863 $ 9,424 $ 27,287 $ 13,403 -- $ 13,403
Income on finance receivables 3,038 3,794 6,832 2,230 -- 2,230
-------- -------- -------- -------- ------ --------
Total 20,901 13,218 34,119 15,633 -- 15,633
-------- -------- -------- -------- ------ --------
Costs of sales 11,269 6,380 17,649 9,296 -- 9,296
Provision for credit losses 3,099 2,345 5,444 2,899 -- 2,899
Selling, general and administrative 3,966 2,950 6,916 3,899 -- 3,899
Interest expense and other 1,373 1,412 2,785 1,124 -- 1,124
-------- -------- -------- -------- ------ --------
Total 19,707 13,087 32,794 17,218 -- 17,218
-------- -------- -------- -------- ------ --------
Income (loss) before taxes $ 1,194 $ 131 $ 1,325 $ (1,585) -- $ (1,585)
======== ======== ======== ======== ====== ========
10
REVENUES
Sales increased by $13.9 million or 103.7% for the three months ended January
31, 2000 compared to the same period in 1999. The higher sales reflect the
addition of 11 Smart Choice used vehicle stores and one PAACO used vehicle store
that was added during the third quarter of 2000.
Income on finance receivables increased by $4.6 million or 206.3% for the three
months ended January 31, 2000 compared to the same period in 1999. The increase
reflects the increase in the net finance receivables outstanding to $155.4
million as of January 31, 2000 from $55.3 million for January 31, 1999. This
increase results from the continued growth in the financed vehicle sales and the
addition of Smart Choice's portfolio.
COSTS AND EXPENSES
Cost of sales was $17.6 million for the three months ended January 31, 2000
compared to $9.3 million for the same period during 1999, representing an
increase of $8.3 million, or 89.2%. The increase in cost of sales is primarily
due the acquisition of Smart Choice.
Gross profit margins of 35.3% or $4,074 per car for the three months ended
January 31, 2000, compared to the gross profit margin of 30.6% or $3,903 per car
for the same period in 1999 an increase of 4.7% or $171 per car. The increase of
gross profit margin reflects increased vehicle pricing combined with lower
reconditioning and acquisition costs.
The provision for credit losses in the three months ended January 31, 2000 was
$5.4 million compared to $2.9 million for the same period in 1999. The provision
as a percentage of sales for the three months ended January 31, 2000 was 19.16%
compared to 21.4% for the same period during 1999. The provision is based on
management's expectations of future credit losses on current sales.
The Company's selling, general and administrative expenses (including
depreciation and amortization) were $6.9 million for the three months ended
January 31, 2000, compared $3.9 million for the three months ended January 31,
1999. Selling, general and administrative expenses as a percentage of total
revenues for 2000 was 20.3% for the three months ended January 31, 1999 compared
to 24.8% for the three months ended January 31,1999. The reductions in expenses
as a percentage of total revenues were due to cost cutting measures.
INTEREST EXPENSE AND OTHER INCOME
The Company's interest expense totaled $2.9 million for the three months ended
January 31, 2000, compared to $1.3 million for the three months ended January
31, 1999, an increase of approximately $1.6 million. The increase is the result
of the acquisition of Smart Choice.
NET INCOME
The Company's pre-tax income for the three months ended January 31, 2000 of $1.3
million compared to a net loss of approximately ($1.6) million for the same
period of 1999, resulting in an increase of approximately $2.9 million or
181.3%. The combined effects of the addition of Smart Choice resulted in
significant increases in used vehicle sales, reduced costs of vehicle sales, and
declining operating and interest expense as a percentage of sales as discussed
above.
COMPARISON OF THE RESULTS FOR THE NINE MONTHS ENDED JANUARY 31, 2000 TO THE NINE
MONTHS ENDED JANUARY 31, 1999.
Below is a presentation of the operating results for the two geographical
business segments of the Company for the nine months ended January 31, 2000 and
1999. This table points out the operating results of the acquisition of Smart
Choice, which is included for two months, during the nine months ended January
31, 2000.
NINE MONTHS ENDED JANUARY 31, 2000 NINE MONTHS ENDED JANUARY 31, 1999
---------------------------------- ----------------------------------
SMART SMART
(Dollars in thousands) PAACO CHOICE CONSOLIDATED PAACO CHOICE CONSOLIDATED
-------- -------- ------------ -------- ------ ------------
Sales $ 54,186 $ 9,424 $ 63,610 $ 42,975 -- $ 42,975
Income on finance receivables 8,737 3,794 12,531 6,149 -- 6,149
-------- -------- -------- -------- ------ --------
Total 62,923 13,218 76,141 49,124 -- 49,124
-------- -------- -------- -------- ------ --------
Costs of sales 34,686 6,380 41,066 29,052 -- 29,052
Provision for credit losses 8,754 2,345 11,099 7,205 -- 7,205
Selling, general and administrative 13,592 2,950 16,542 11,426 -- 11,426
Interest expense and other 3,978 1,412 5,390 3,038 -- 3,038
-------- -------- -------- -------- ------ --------
Total 61,010 13,087 74,097 50,721 -- 50,721
-------- -------- -------- -------- ------ --------
Income (loss) before taxes $ 1,913 $ 131 $ 2,044 $ (1,597) -- $ (1,597)
======== ======== ======== ======== ====== ========
11
REVENUES
Sales increased by $20.6 million or 48.0% for the nine months ended January 31,
2000 compared to the same period in 1999. The higher sales reflect the addition
of 11 Smart Choice used vehicle stores and one PAACO used vehicle store that was
added during the third quarter of 2000.
Income on finance receivables increased by $6.4 million or 103.8% for the nine
months ended January 31, 2000 compared to the same period in 1999. The increase
reflects the increase in the net finance receivables outstanding to $155.4
million as of January 31, 2000 from $55.3 million for January 31, 1999. This
increase results from the continued growth in the financed vehicle sales and the
addition of Smart Choice's portfolio.
COSTS AND EXPENSES
Cost of sales was $41.1 million for the nine months ended January 31, 2000
compared to $29.0 million for the same period during 1999, representing an
increase of $12.1 million, or 41.7%. The increase in cost of sales is primarily
due to the acquisition of Smart Choice.
Gross profit margins of 35.4% or $4,285 per car for the nine months ended
January 31, 2000, compared to the gross profit margin of 32.4% or $3,954 per car
for the same period in 1999, resulting in an increase of 3.0% or $331 per car.
The increase of gross profit margin reflects increased vehicle pricing combined
with lower reconditioning and acquisition costs.
The provision for credit losses in the nine months ended January 31, 2000 was
$11.1 million compared to $7.2 million for the same period in 1999. The
provision as a percentage of sales for the nine months ended January 31, 2000
was 17.4% compared to 16.8% for the same period during 1999. The increase is the
result of the acquisition of Smart Choice and the increase in vehicle sales.
The Company's selling, general and administrative expenses (including
depreciation and amortization) were $16.5 million for the nine months ended
January 31, 2000, compared to $11.4 million for the nine months ended January
31, 1999. Selling, general and administrative expenses as a percentage of total
revenues for 2000 was 21.7% for the nine months ended January 31, 2000 compared
to 23.3% for the nine months ended January 31,1999. The reductions in expenses
as a percentage of total revenues were due to cost cutting measures.
INTEREST EXPENSE AND OTHER INCOME
The Company's interest expense totaled $5.8 million for the nine months ended
January 31, 2000, compared to $3.5 million for the nine months ended January 31,
1999, an increase of approximately $2.3 million or 63.4%.
NET INCOME
The Company's pre-tax income for the nine months ended January 31, 2000 of $2.0
million compared to a net loss of approximately ($1.6) million for the same
period of 1999, resulting in an increase of approximately $3.6 million or
228.0%. The combined effects of the addition of Smart Choice market resulted in
significant increases in used vehicle sales, reduced costs of vehicle sales, and
declining operating and interest expense as a percentage of sales as discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in finance receivables, car
inventory, parts and accessories inventory, property and equipment, and working
capital for general corporate purposes. Funding sources potentially available to
the Company include operating cash flow, third-party investors, financial
institution borrowings, borrowings against finance receivables and used car
inventory.
NET CASH PROVIDED BY OPERATING ACTIVITIES was approximately $12.4 million and
$7.1 million for the nine months ended January 31, 2000, and 1999, respectively.
CASH FLOWS USED IN INVESTING ACTIVITIES was approximately $16.8 million and
$19.5 million for the nine months ended January 31, 2000 and 1999, respectively.
CASH PROVIDED BY FINANCING ACTIVITIES was approximately $4.6 million and $11.8
million during the nine months ended January 31, 2000 and 1999, respectively.
During the nine months ended January 31, 2000 and 1999, the Company increased
its line of credit borrowing by $5.2 million and $11.4 million, respectively.
The Company repaid notes payable net of the issuance of notes of approximately
$.5 million during the nine months ended January 31, 2000 and issued notes
payable net of repayment of notes of approximately $.4 million during the nine
months ended January 31, 1999, respectively.
12
The Company has borrowed, and will continue to borrow, substantial amounts to
fund its used vehicle sales and financing operations. The Company maintains two
separate credit agreements for PAACO and Smart Choice with Finova Capital
Corporation under the "Finova Loan and Security Agreement".
Under the Finova Revolving Facility, the Company may borrow the lesser of
Revolving Line of $160 million or up to the Advance Rate of the available
balance of eligible finance contracts and inventory. The Finova Revolving
Facility is secured by all of the Company's finance receivables and used car
inventory. The Finova Revolving Facility the bears interest at the prime rate
plus 2.25% (11.00% as of January 31, 2000). The interest rate declines to prime
rate plus 2.00% after December 1, 2000 and prime rate plus 1.75% after December
1, 2001 through the life of the note. The Finova Revolving Facility expires on
November 30, 2004, at which time its renewal will be subject to renegotiation.
As of January 31, 2000, the principal amount outstanding under the Finova
Revolving Facility and the Inventory Facility was $122.5 million up from a
balance of $41.8 million at April 30, 1999. The excess availability of the
Company on January 31, 2000 was approximately $2.3 million and as of February
29, 2000 was approximately $6.6 million.
SEASONALITY
Historically, the Company's used vehicle 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.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would increase the interest expense
related to the Company's existing debt. The Company cannot seek to limit this
risk by increasing interest rates earned on its finance contracts since the
interest charged is at or near the maximum permitted under law. To date,
inflation has not had a significant impact on the Company's operations.
ITEM 3. QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk on its financial instruments from changes
in interest rates. The Company does not use financial instruments for trading
purposes or to manage interest rate risk. The Company's earnings are impacted by
its net interest income, which is the difference between the income earned on
interest-bearing assets and the interest paid on interest bearing notes payable.
Increases in market interest rates could have an adverse effect on
profitability. Financial instruments consist of fixed rate finance receivables
and fixed and variable rate notes payable. The Company's finance receivables
generally bear interest at fixed rates ranging from 10% to 26%. These finance
receivables have scheduled maturities from one to 46 months. The majority of the
Company's notes payable contain variable interest rates that fluctuate with
market rates. Therefore, an increase in market interest rates would decrease the
Company's net interest income and profitability.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During March 1999, certain shareholders of the Company filed two putative class
action lawsuits against the Company and certain of the Company's current and
former officers and directors in the United States District Court for the Middle
District of Florida (collectively, the "Securities Actions"). The Securities
Actions purport to be brought by plaintiffs in their individual capacity and on
behalf of the class of persons who purchased or otherwise acquired Company
publicly traded securities between April 15, 1998 and February 26, 1999. These
lawsuits were filed following the Company's announcement on February 26, 1999 a
preliminary determination had been reached that the net income announced on
February 10, 1999 for the fiscal year ended December 31, 1998 was likely
overstated in a material, undetermined amount at that time. Each of the
complaints assert claims for violations of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission as
well as a claim for the violation of Section 20(a) of the Exchange Act. The
plaintiffs allege that the defendants prepared and issued deceptive and
materially false and misleading statements to the public, which caused
plaintiffs to purchase Company securities at artificially inflated prices. The
plaintiffs seek unspecified damages. The Company intends to contest these claims
vigorously. The Company cannot predict the ultimate resolution of these actions.
The two class action lawsuits have subsequently been consolidated.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Described below are the sales of securities by the Company during the first nine
months of 2000 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
13
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 May 14, 1999, the Company issued 88,000 shares of common stock to Mr. Albert
S. Klopf in consideration for the conversion of his note in the principal amount
of $110,000 with the Company.
On July 20, 1999, the Company issued 32,400 shares of common stock to Mr. John
Thatch in consideration for the conversion of his note in the principal amount
of $20,000 plus accrued interest with the Company.
On July 20, 1999, the Company issued 283,500 shares of common stock to Mr. Edgar
Rosenberry in consideration for the conversion of his note in the principal
amount of $280,000 plus accrued interest with the Company.
On August 26, 1999 the Company issued 488,000 shares of common stock to
Stephens, Inc. in consideration for fees incurred by the Company.
On September 20, 1999 the Company issued 34,015 shares of common stock to
DeFalco Advertising in consideration for liabilities incurred by the Company.
On December 1, 1999 the Company issued 1,203,016 shares of Series E preferred
stock to the stockholders of Paaco Automotive Group, Inc. in a merger with the
Company.
On December 1, 1999 the Company issued 21,141,949 shares of common stock to
Finova Mezzanine Capital in consideration for the conversion of notes in the
principal amount of $7,500,000 plus accrued interest with the Company.
On December 1, 1999 the Company issued 116,535 shares of Series E convertible
preferred stock in consideration for the conversion of notes in the principal
amount of $4,310,745 plus accrued interest with the Company.
On December 1, 1999 the Company issued 150,000 shares of Series E convertible
preferred stock to Crown Group, Inc. in consideration for an investment of
$3,000,000.
On December 1, 1999 the Company issued 4,898,505 shares of common stock to
Bankers Insurance Company in consideration for an investment of $1,000,000.
On December 1, 1999 the Company issued 13,030,025 shares of common stock in
consideration for the conversion of all outstanding preferred stock of the
Company as of November 30, 1999 plus accrued dividends.
On December 1, 1999 the Company issued 1,273,611 shares of common stock to
Suncoast Auto Brokers, Inc. in consideration for the conversion of notes in the
principal amount of $600,000 plus accrued interest with the Company.
On December 1, 1999 the Company issued 215, 534 shares of common stock in
consideration for the conversion of accrued interest in the amount of $103,333
with the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule (1)
14
(b) Report on Form 8-K
During the fiscal quarter ended January 31, 2000 the Company filed
a report on Form 8-K dated December 8, 1999 (event dated December
1, 1999) respecting the acquisition of Paaco Automotive Group,
Inc. as a reverse merger.
A change in the Company's independent public accountants and the
election to change the fiscal reporting year end of the Company
from December 31 to April 30.
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 December 8, 1999.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ JAMES E. ERNST
-------------------
James E. Ernst
President and Chief Executive 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/ JOE CAVALIER Chief Financial Officer March 16, 2000
- ---------------- (Principal Financial and Accounting Officer)
Joe Cavalier
15