1
UNITED STATES
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 fiscal quarter ended: Commission file number:
JULY 31, 2001 1-14082
SMART CHOICE AUTOMOTIVE GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-1469577
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1555 SEMORAN BLVD., WINTER PARK, FLORIDA
(Address of principal executive offices)
32792
(Zip Code)
(407) 671-1200
(Registrant's telephone number, including area code)
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class September 12, 2001
------------------- ------------------
Common stock, par value $.01 per share 9,762,270
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PART I
ITEM 1. FINANCIAL STATEMENTS SMART CHOICE AUTOMOTIVE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
July 31, 2001
(unaudited) April 30, 2001
--------------- ---------------
Assets:
Cash and cash equivalents $ 850,639 $ 436,262
Other receivables 1,538,885 1,344,238
Finance receivables, net 143,652,925 149,656,124
Inventory 9,064,511 7,980,291
Prepaid and other assets 710,059 607,567
Deferred tax assets, net 16,510,211 15,605,094
Property and equipment, net 12,012,342 12,186,901
Goodwill, net 2,084,017 2,084,017
--------------- ---------------
$ 186,423,589 $ 189,900,494
=============== ===============
Liabilities and stockholders' equity:
Accounts payable and accrued liabilities $ 8,977,224 $ 10,425,072
Income taxes payable 1,139,810 1,139,810
Revolving credit facilities 147,441,944 147,441,944
Other borrowings 9,690,208 9,985,391
Deferred sales tax 4,956,653 4,963,154
--------------- ---------------
Total liabilities 172,205,839 173,955,371
--------------- ---------------
Contingent redemption value of put options 453,371 453,371
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 2,000,000 shares
authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares
authorized; 9,762,270 issued and outstanding 97,623 97,623
Additional paid-in capital 13,832,832 13,832,832
Retained earnings (accumulated deficit) (166,076) 1,561,297
--------------- ---------------
Total stockholders' equity 13,764,379 15,491,752
--------------- ---------------
$ 186,423,589 $ 189,900,494
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS SMART CHOICE AUTOMOTIVE GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
2001 2000
--------------- ---------------
Revenues:
Sales $ 36,591,713 $ 43,789,552
Interest income 9,647,648 9,373,066
Other 281,373 231,031
--------------- ---------------
46,520,734 53,393,649
--------------- ---------------
Costs and expenses:
Cost of sales 23,179,400 26,188,340
Selling, general and administrative 10,778,601 9,804,284
Provision for credit losses 11,052,665 10,592,204
Interest expense 3,699,925 4,198,096
Depreciation and amortization 415,133 378,667
--------------- ---------------
49,125,724 51,161,591
--------------- ---------------
Income (loss) before taxes (2,604,990) 2,232,058
Provision (benefit) for income taxes (877,617) 829,284
--------------- ---------------
Net income (loss) $ (1,727,373) $ 1,402,774
=============== ===============
Earnings (loss) per share:
Basic $ (.18) $ .14
Diluted $ (.18) $ .14
Weighted average number of shares outstanding:
Basic 9,762,270 9,792,149
Diluted 9,762,270 9,792,149
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS SMART CHOICE AUTOMOTIVE GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
2001 2000
--------------- ---------------
Operating activities:
Net income (loss) $ (1,727,373) $ 1,402,774
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 415,133 378,667
Accretion of purchase discount (140,924) (282,906)
Deferred income taxes (905,117)
Provision for credit losses 11,052,665 10,592,204
Loss on sale of assets 8,959
Changes in operating assets and liabilities:
Inventory acquired in repossession 5,577,021 6,410,548
Finance receivable originations (34,133,213) (43,789,510)
Finance receivable collections 23,647,650 23,098,200
Other receivables (194,646) 139,839
Inventory (1,084,220) (3,009,668)
Prepaids and other assets (102,492) (398,944)
Accounts payable, accrued liabilities and deferred sales tax (1,454,350) (1,846,021)
--------------- ---------------
Net cash provided by (used in) operating activities 959,093 (7,304,817)
--------------- ---------------
Investing activities:
Purchase of property and equipment (269,533) (854,149)
Sale of assets 20,000
--------------- ---------------
Net cash used in investing activities (249,533) (854,149)
--------------- ---------------
Financing activities:
Proceeds from revolving credit facilities, net 8,173,752
Repayments of other borrowings (295,183) (717,357)
--------------- ---------------
Net cash provided by (used in) financing activities (295,183) 7,456,395
--------------- ---------------
Increase (decrease) in cash and cash equivalents 414,377 (702,571)
Cash and cash equivalents at: Beginning of period 436,262 1,882,716
--------------- ---------------
End of period $ 850,639 $ 1,180,145
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SMART CHOICE AUTOMOTIVE GROUP, INC.
(UNAUDITED)
A - DESCRIPTION OF BUSINESS
Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively
with all of its subsidiaries (the "Company") is in the business of selling and
financing used automobiles and trucks principally to consumers with limited or
damaged credit histories. References to Smart Choice typically include Smart
Choice Automotive Group, Inc. and its Florida based automotive and finance
subsidiaries. Smart Choice also owns 100% of the outstanding common stock Paaco
Automotive Group, Inc. ("Paaco"). As of July 31, 2001 Smart Choice operated 10
used car dealerships in central Florida while Paaco operated 12 used car
dealerships in Texas (principally in the cities of Dallas and Houston).
B - DEFAULT ON FINOVA CREDIT FACILITY AND LIQUIDITY MATTERS
Each of Smart Choice and Paaco have revolving credit facilities with
Finova Capital Corporation ("Finova"). Since December 2000 Smart Choice has been
over-advanced on its revolving credit facility, which constitutes an event of
default under the facility. As of July 31, 2001 Smart Choice was over-advanced
by $20.9 million. Absent funding from an outside source, Smart Choice does not
expect it will be able to come into compliance with the current advance rate
provisions of the Finova revolving credit facility. There is uncertainty as to
whether Smart Choice's event of default is the basis for an event of default
under Paaco's revolving credit facility. In any event, Paaco is a wholly-owned
subsidiary of Smart Choice, and ultimately Paaco could be affected by the
default of Smart Choice under its Finova credit facility. As a result of the
event of default, Smart Choice is currently not entitled to receive additional
advances under its credit facility, and Paaco may not be entitled to receive
additional advances under its credit facility.
Since January 2001 Smart Choice has been in discussions with Finova
with regard to possible solutions to the over-advanced position. There are
several possible outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which
brings Smart Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the
proceeds being used to pay down a portion of its credit
facility, and the unpaid portion being absorbed by Finova
(forgiveness of debt) and Paaco as the parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby
substantially all of the assets and liabilities of Smart
Choice are liquidated with the proceeds being used to pay down
a portion of its credit facility, and the unpaid portion being
absorbed by Finova (forgiveness of debt) and Paaco as the
parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate
or sell the collateral, which action may prompt Smart Choice
to take actions to protect the interests of its shareholders,
including the filing of a plan of reorganization under federal
bankruptcy laws.
Although management is exploring a number of alternatives, including
those listed above, the Company cannot predict how or whether Smart Choice's
default will be resolved.
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. Recoverability
of a significant portion of the assets shown in the accompanying balance sheet
may be materially impacted if the Company ceases to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary should the
Company be unable to continue in existence.
C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended July 31, 2001 are not necessarily indicative of the results that
may be expected for the year ended April 30, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended April 30, 2001.
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Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 will have a
material impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises
the accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be
amortized, but will be tested for impairment annually, and in the event of an
impairment indicator. SFAS 142 is effective for fiscal years beginning after
December 15, 2001, with earlier adoption permitted. The Company has adopted SFAS
142 effective May 1, 2001. Presented below is a reconciliation of reported net
income (loss) and per share amounts to adjusted net income (loss) and per share
amounts for the three months ended July 31, 2001 and 2000 to adjust for the
amortization of intangible assets for periods prior to the adoption of SFAS 142
on May 1, 2001 (in thousands, except per share amounts). The reconciliation
presents the Company's results of operations for periods prior to the adoption
of SFAS 142 on a basis comparable with periods since the adoption of SFAS 142.
Basic Diluted
Net Income (Loss) Earnings (Loss) Per Share Earnings (Loss) Per Share
------------------------------ ------------------------------ ------------------------------
Three Months Ended Three Months Ended Three Months Ended
July 31, July 31, July 31,
2001 2000 2001 2000 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
As reported $ (1,727) $ 1,403 $ (.18) $ .14 $ (.18) $ .14
Add back goodwill amort. -- 61 -- .01 -- .01
------------ ------------ ------------ ------------ ------------ ------------
As adjusted $ (1,727) $ 1,464 $ (.18) $ .15 $ (.18) $ .15
============ ============ ============ ============ ============ ============
Reclassifications
Certain prior year amounts in the accompanying financial statements
have been reclassified to conform to the fiscal 2002 presentation.
D - FINANCE RECEIVABLES
The components of finance receivables as of July 31, 2001 and April 30, 2001
are as follows:
July 31, April 30,
2001 2001
--------------- ---------------
Finance receivables $ 203,904,198 $ 216,818,123
Unearned finance charges (24,432,856) (29,563,528)
Allowance for credit losses (35,381,216) (36,991,295)
Purchase discounts (437,201) (607,176)
--------------- ---------------
$ 143,652,925 $ 149,656,124
=============== ===============
Changes in the finance receivables allowance for credit losses for the three
months ended July 31, 2001 and 2000 are as follows:
Three Months Ended
July 31,
2001 2000
--------------- ---------------
Balance at beginning of period $ 36,991,295 $ 32,290,918
Provision for credit losses 11,052,665 10,592,204
Net charge-offs (12,662,744) (8,256,396)
--------------- ---------------
Balance at end of period $ 35,381,216 $ 34,626,726
=============== ===============
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E - PROPERTY AND EQUIPMENT
A summary of property and equipment as of July 31, 2001 and April 30, 2001 is
as follows:
July 31, April 30,
2001 2001
--------------- ---------------
Land and buildings $ 6,811,701 $ 6,811,701
Furniture, fixtures and equipment 5,148,464 5,053,556
Leasehold improvements 3,092,930 2,977,018
Less accumulated depreciation and amortization (3,040,753) (2,655,374)
--------------- ---------------
$ 12,012,342 $ 12,186,901
=============== ===============
For the three months ended July 31, 2001 and 2000 depreciation and
amortization of property and equipment amounted to $415,133 and $317,304,
respectively.
F - DEBT
A summary of debt as of July 31, 2001 and April 30, 2001 is as follows:
Revolving Credit Facilities
-------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity July 31, 2001 April 30, 2001
--------------- --------------- ------------- ------------- ------------ ----------------- ----------------
Smart Choice Finova $ 98 million Prime + 2.25% Nov 2004 $ 88,394,134 $ 88,394,134
Paaco Finova $ 62 million Prime + 2.00% Nov 2004 59,047,810 59,047,810
----------------- ----------------
$ 147,441,944 $ 147,441,944
================= ================
Other Borrowings
-------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity July 31, 2001 April 30, 2001
--------------- --------------- ------------- ------------- ------------ ----------------- ----------------
Smart Choice Huntington N/A Prime + .75% Oct 2001 $ 1,903,563 $ 1,932,373
Smart Choice High Capital et al N/A 10.0% Nov 2001 725,000 725,000
Smart Choice Individuals N/A Various Various 533,160 565,948
Smart Choice Leasing companies N/A Various Various 349,075 410,106
Paaco Crown Group N/A 8.50% Mar 2002 2,576,286 2,576,286
Paaco Individual N/A 9.50% May 2002 700,000 700,000
Paaco Washington Mutual N/A 8.50% May 2003 772,512 792,815
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 582,247 586,836
Various Various N/A Various Various 1,548,365 1,696,027
----------------- ----------------
$ 9,690,208 $ 9,985,391
================= ================
At July 31, 2001 Smart Choice was in violation and, as a result of
Smart Choice's violation, Paaco may be in violation, of certain terms of their
revolving credit facilities with Finova (see Note B).
The Company's revolving credit facilities are primarily collateralized
by finance receivables and inventory. Other borrowings are primarily
collateralized by equipment and real estate. Interest is payable monthly or
quarterly on all of the Company's debt. The loan agreements relating to certain
of the above described debt contain various reporting and performance covenants
including (i) maintenance of certain financial ratios and tests, (ii)
limitations on borrowings from other sources, (iii) restrictions on certain
operating activities, and (iv) restrictions on the payment of dividends.
Typically, the amount available to be drawn under each of the Company's
revolving credit facilities is a function of the underlying collateral assets
(finance receivables and inventory) multiplied by a specified advance rate.
However, as a result of Smart Choice's event of default, Smart Choice is
currently not entitled to receive additional advances under its credit facility,
and Paaco may not be entitled to receive additional advances under its credit
facility.
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G - EARNINGS PER SHARE
A summary reconciliation of basic earnings per share to diluted
earnings per share for the three months ended July 31, 2001 and 2000 is as
follows:
Three Months Ended
July 31,
2001 2000
--------------- ---------------
Net income (loss) $ (1,727,373) $ 1,402,774
=============== ===============
Average shares outstanding-basic 9,762,270 9,792,149
Dilutive options -- --
--------------- ---------------
Average shares outstanding-diluted 9,762,270 9,792,149
=============== ===============
Earnings (loss) per share:
Basic $ (.18) $ .14
Diluted $ (.18) $ .14
Antidilutive securities not included:
Options and warrants 426,021 225,052
=============== ===============
H - COMMITMENTS AND CONTINGENCIES
Smart Choice Class Action Lawsuit
In March 1999, prior to Crown's ownership interest in Smart Choice,
certain shareholders of Smart Choice filed two putative class action lawsuits
against Smart Choice and certain of Smart Choice's 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 Smart Choice publicly traded securities
between April 15, 1998 and February 26, 1999. These lawsuits were filed
following Smart Choice's announcement on February 26, 1999 that a preliminary
determination had been reached that the net income it had announced on February
10, 1999 for the fiscal year ended December 31, 1998 was likely overstated in a
material, undetermined amount. 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 the plaintiffs to purchase Smart Choice
securities at artificially inflated prices. In April 2001 Smart Choice and the
plaintiffs' representatives executed an agreement whereby Smart Choice will pay
$2.5 million in full settlement of the above described actions. All of the $2.5
million settlement amount has been funded by Smart Choice's insurance carrier.
The agreement is subject to final approval of the court.
Other Litigation
In the ordinary course of business, the Company has become a defendant
in various other types of legal proceedings. Although the Company cannot
determine at this time the amount of the ultimate exposure from these ordinary
course of business lawsuits, if any, management, based on the advice of counsel,
does not expect the final outcome of any of these actions, individually or in
the aggregate, to have a material adverse effect on the Company's financial
position, results of operations or cash flows.
I - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the three months ended July 31, 2001
and 2000 are as follows:
Three Months Ended
July 31,
2001 2000
--------------- ---------------
Interest paid $ 3,787,779 $ 4,029,732
Income taxes paid 27,500 2,070,000
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J - BUSINESS SEGMENTS
Operating results and other financial data are presented for the two
business segments (Smart Choice and Paaco) of the Company for the three months
ended July 31, 2001 and 2000. These segments are categorized by legal entity and
geographical location, which is how management organizes the segments for making
operating decisions and assessing performance. Each of Smart Choice and Paaco
sell and finance used vehicles. Smart Choice operates in the central region of
Florida and Paaco operates in major metropolitan areas in Texas (principally in
the cities of Dallas and Houston). The Company's business segment data is as
follows (in thousands):
Three Months Ended July 31, 2001 Three Months Ended July 31, 2000
-------------------------------------------- -------------------------------------------
Smart Smart
Paaco Choice Consol Paaco Choice Consol
----------- ----------- ----------- ----------- ----------- -----------
Revenues:
Sales and other $ 25,367 $ 11,506 $ 36,873 $ 25,096 $ 18,924 $ 44,020
Interest income 4,748 4,899 9,647 3,827 5,546 9,373
----------- ----------- ----------- ----------- ----------- -----------
Total 30,115 16,405 46,520 28,923 24,470 53,393
----------- ----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 16,272 6,908 23,180 15,437 10,751 26,188
Selling, gen. and admin. 6,728 4,050 10,778 5,275 4,529 9,804
Prov. for credit losses 3,820 7,232 11,052 4,748 5,844 10,592
Interest expense 1,502 2,198 3,700 1,735 2,463 4,198
Depreciation and amort. 202 213 415 126 253 379
----------- ----------- ----------- ----------- ----------- -----------
Total 28,524 20,601 49,125 27,321 23,840 51,161
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before taxes $ 1,591 $ (4,196) $ (2,605) $ 1,602 $ 630 $ 2,232
=========== =========== =========== =========== =========== ===========
Capital expenditures $ 109 $ 161 $ 270 $ 525 $ 329 $ 854
=========== =========== =========== =========== =========== ===========
Total assets $ 91,081 $ 95,343 $ 186,424 $ 84,622 $ 101,357 $ 185,979
=========== =========== =========== =========== =========== ===========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing
elsewhere in this report.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain information included in
this Quarterly Report on Form 10-Q contains, and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made or to
be made by the Company or its management) contain or will contain,
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. 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. The Company undertakes no obligation to
publicly update or revise any forward-looking statements. Such forward-looking
statements are based upon management's current plans or expectations and are
subject to a number of uncertainties and risks that could significantly affect
current plans, anticipated actions and the Company's future financial condition
and results. As a consequence, actual results may differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company
as a result of various factors. Uncertainties and risks related to such
forward-looking statements include, but are not limited to, those relating to
the development of the Company's business, continued availability of lines of
credit for the Company's business, changes in interest rates, competition,
dependence on existing management, economic conditions (particularly in the
states of Florida and Texas), changes in tax laws or the administration of such
laws and changes in lending laws or regulations. Any forward-looking statements
are made pursuant to the Private Securities Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
RESULTS OF OPERATIONS
Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively
with all of its subsidiaries (the "Company") is in the business of selling and
financing used automobiles and trucks principally to consumers with limited or
damaged credit histories. References to Smart Choice typically include Smart
Choice Automotive Group, Inc. and its Florida based automotive and finance
subsidiaries. Smart Choice also owns 100% of the outstanding common stock Paaco
Automotive Group, Inc. ("Paaco"). As of July 31, 2001 Smart Choice operated 10
used car dealerships in central Florida while Paaco operated 12 used car
dealerships in Texas (principally in the cities of Dallas and Houston).
Operating results and other financial data are presented for the two business
segments of the Company (Smart Choice and Paaco) for the three months ended July
31, 2001 and 2000. These segments are categorized by legal entity and
geographical location, which is how management organizes the segments for making
operating decisions and assessing performance. The Company's business segment
data is as follows:
CONSOLIDATED
(In Thousands)
Revenues Pretax Income (Loss)
----------------------------- ------------------------------
Three Months Ended July 31, Three Months Ended July 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Smart Choice $ 16,405 $ 24,470 $ (4,196) $ 630
Paaco 30,115 28,923 1,591 1,602
------------ ------------ ------------ ------------
Consolidated $ 46,520 $ 53,393 $ (2,605) $ 2,232
============ ============ ============ ============
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THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues decreased $6.9 million, or 12.9%, for the three months ended
July 31, 2001 compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) a decrease in revenues at Smart Choice ($8.1
million) resulting from a 25% decrease in the number of vehicles sold and a 20%
decrease in the average retail sales price per unit, partially offset by (ii)
higher revenues at Paaco ($1.2 million) resulting from higher interest income.
The Company reported a pretax loss of $2.6 million for the three months ended
July 31, 2001 as compared to $2.2 million pretax income for the same period in
the prior fiscal year. The $4.8 million decrease is the result of (i) Smart
Choice's provision for credit losses increasing to $7.2 million in the current
fiscal period from $5.8 million in the same period in the prior fiscal year
($1.4 million), (ii) cost of sales increasing to 60.0% of sales and other in the
current fiscal period from 56.8% in the same period in the prior fiscal year
($.4 million), and (iii) a 33% decrease in revenues without a corresponding
decrease in costs and expenses.
PAACO
(Dollars in Thousands)
% Change As a % of Sales and Other
------------ ------------------------------
Three Months Ended 2001 Three Months Ended
July 31, vs July 31,
2001 2000 2000 2001 2000
------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 25,367 $ 25,096 1.1% 100.0% 100.0%
Interest income 4,748 3,827 24.1 18.7 15.2
------------ ------------ ------------ ------------ ------------
Total 30,115 28,923 4.1 118.7 115.2
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 16,272 15,437 5.4 64.1 61.5
Selling, gen and admin 6,728 5,275 27.5 26.5 21.0
Prov for credit losses 3,820 4,748 (19.5) 15.1 18.9
Interest expense 1,502 1,735 (13.4) 5.9 6.9
Depreciation and amort 202 126 60.3 .8 .5
------------ ------------ ------------ ------------ ------------
Total 28,524 27,321 4.4 112.4 108.8
------------ ------------ ------------ ------------ ------------
Pretax income $ 1,591 $ 1,602 (.7) 6.3 6.4
============ ============ ============ ============ ============
THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues increased $1.2 million, or 4.1%, for the three months ended July 31,
2001 as compared to the same period in the prior fiscal year. The increase was
principally the result of higher interest income resulting from (i) a 14.4%
increase in the average finance receivables balances outstanding, and (ii) a
slight increase in the average interest rate charged on Paaco's installment
loans. Pretax income was virtually unchanged during the two periods as costs and
expenses increased substantially the same amount ($1.2 million) as the increase
in revenues.
SMART CHOICE
(Dollars in Thousands)
% Change As a % of Sales and Other
------------ -------------------------------
Three Months Ended 2001 Three Months Ended
July 31, vs July 31,
2001 2000 2000 2001 2000
------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 11,506 $ 18,924 (39.2)% 100.0% 100.0%
Interest income 4,899 5,546 (11.7) 42.6 29.3
------------ ------------ ------------ ------------ ------------
Total 16,405 24,470 (33.0) 142.6 129.3
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 6,908 10,751 (35.7) 60.0 56.8
Selling, gen and admin 4,050 4,529 (10.6) 35.2 23.9
Prov for credit losses 7,232 5,844 (23.8) 62.9 30.9
Interest expense 2,198 2,463 (10.8) 19.1 13.0
Depreciation and amort 213 253 (15.8) 1.9 1.3
------------ ------------ ------------ ------------ ------------
Total 20,601 23,840 (13.6) 179.1 125.9
------------ ------------ ------------ ------------ ------------
Pretax income $ (4,196) $ 630 NM (36.5) 3.4
============ ============ ============ ============ ============
NM - Not meaningful
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THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues decreased $8.1 million, or 33.0%, for the three months ended
July 31, 2001 as compared to the same period in the prior fiscal year. The
decrease was principally the result of (i) a 25% decrease in the number of
vehicles sold, and (ii) a 20% decrease in the average sales price per retail
vehicle sold. Beginning in March 2001 Smart Choice changed its underwriting
practices in an effort to reduce credit losses. The changes in its underwriting
practices resulted in fewer individuals being approved for credit, which
resulted in a lower number of vehicles sold. In addition, Smart Choice also
reduced the average retail sales price per unit by 20% during the current fiscal
period. Smart Choice believes that by selling a lower priced vehicle and
financing it over a shorter term, its credit losses will decline.
Smart Choice reported a pretax loss of $4.2 million for the three
months ended July 31, 2001 as compared to $.6 million pretax income for the same
period in the prior fiscal year. The $4.8 million decrease is principally the
result of (i) the provision for credit losses increasing to $7.2 million in the
current fiscal period from $5.8 million in the same period in the prior fiscal
year ($1.4 million), (ii) cost of sales increasing to 60.0% of sales and other
in the current fiscal period from 56.8% in the same period in the prior fiscal
year ($.4 million), and (iii) a 33% decrease in revenues without a corresponding
decrease in costs and expenses. Smart Choice believes that changes in the
structure of its installment sales contracts and inventory mix beginning in May
2000 and continuing into February 2001 may have contributed to the increase in
credit losses during the three months ended July 31, 2001. In particular, during
this period Smart Choice sold a higher priced vehicle and shortened the term of
its installment sales contracts. These actions increased the average monthly
payment on its contracts to a level which may have made it difficult for certain
customers to remain current in their payments. Many of the accounts charged-off
and vehicles repossessed during the three months ended July 31, 2001 pertain to
loans originated between May 2000 and February 2001. In March 2001 Smart Choice
began selling lower priced vehicles and reduced the average interest rate
charged on its loans which has decreased the average monthly payment required on
its contracts. Smart Choice believes that by making its monthly payments more
affordable, its credit losses will decline.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.0 million for the
three months ended July 31, 2001 as compared to a $7.3 million use of cash for
the same period in the prior fiscal year. The $8.3 million increase was
principally the result of (i) the net finance receivables portfolio increasing
by $6.1 million in the prior fiscal period as compared to a decrease of $6.0
million in the current fiscal period, partially offset by (ii) a $3.1 million
decrease in net income. Net cash used in investing activities was $.3 million
for the three months ended July 31, 2001 as compared to $.9 million in the same
period in the prior fiscal year. The $.6 million decrease was principally the
result of a decrease in the purchase of property and equipment. Net cash used by
financing activities was $.3 million for the three months ended July 31, 2001 as
compared to a $7.5 million source of cash for the same period in the prior
fiscal year. The $7.8 million decrease was principally the result of the prior
period including an increase in borrowings from revolving credit facilities of
$8.2 million.
PAACO
Paaco's sources of liquidity principally include cash on hand ($.7
million at July 31, 2001) and cash generated from operations. In addition, Paaco
has a $62 million revolving credit facility with Finova, of which $59.0 million
was outstanding at July 31, 2001. However, as of July 31, 2001, Smart Choice's
revolving credit facility with Finova was in default, and there is a question as
to whether such default is a basis for an event of default under Paaco's
revolving credit facility (see Smart Choice discussion below). Accordingly,
there is uncertainty as to whether Paaco is eligible to draw any additional
monies under its revolving credit facility. Paaco's revolving credit facility
matures in November 2004.
It is unlikely that Finova will increase the size of Paaco's credit
facility, or that Paaco could refinance such facility with a new lender since
Paaco's advance rate (ie. 70% of eligible receivables and inventory) is believed
to be above market. Accordingly, for the foreseeable future, Paaco's ability to
expand its operations may be limited as a result of a shortage of additional
capital. Consequently, Paaco anticipates operating its business at sales and
asset levels consistent with its recent past, and not substantially expanding
its operations.
SMART CHOICE
For the three months ended July 31, 2001 Smart Choice (excluding Paaco)
reported a net loss of $2.7 million. Smart Choice has a $98 million revolving
credit facility with Finova, of which $88.4 million was outstanding as of July
31, 2001. Since December 2000 Smart Choice has been over-advanced on its
revolving credit facility, which constitutes an event of default under the
facility. As of July 31, 2001 Smart Choice was over-advanced by $20.9 million.
Absent funding from an outside source, Smart Choice does not expect it will be
able to come into compliance with the current advance rate provisions of its
credit facility. As a result of the event of default, Smart Choice is currently
not entitled to receive additional advances under its credit facility. Smart
Choice is presently operating its business from the cash generated from the
collection of its finance receivables and down payments received in connection
with the sale of vehicles.
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Since January 2001 Smart Choice has been in discussions with Finova
with regard to possible solutions to the over-advanced position. There are
several possible outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which
brings Smart Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the
proceeds being used to pay down a portion of its credit
facility, and the unpaid portion being absorbed by Finova
(forgiveness of debt) and Paaco as the parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby
substantially all of the assets and liabilities of Smart
Choice are liquidated with the proceeds being used to pay down
a portion of its credit facility, and the unpaid portion being
absorbed by Finova (forgiveness of debt) and Paaco as the
parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate
or sell the collateral, which action may prompt Smart Choice
to take actions to protect the interests of its shareholders,
including the filing of a plan of reorganization under federal
bankruptcy laws.
Although management is exploring a number of alternatives, including
those listed above, the Company cannot predict how or whether Smart Choice's
default will be resolved. The opinion of the Company's independent certified
public accountants covering the fiscal year ended April 30, 2001 expressed
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements for the three months ended July 31, 2001
do not include any adjustments relating to the recoverability of recorded asset
amounts that might be necessary should the Company be unable to continue in
existence.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 will have a
material impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises
the accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be
amortized, but will be tested for impairment annually, and in the event of an
impairment indicator. SFAS 142 is effective for fiscal years beginning after
December 15, 2001, with earlier adoption permitted. The Company has adopted SFAS
142 effective May 1, 2001.
SEASONALITY
The Company's automobile sales and finance business is seasonal in
nature. In such business, the Company's third fiscal quarter (November through
January) is historically the slowest period for car and truck sales. Many of the
Company's operating expenses such as administrative personnel, rent and
insurance are fixed and cannot be reduced during periods of decreased sales.
Conversely, the Company's fourth fiscal quarter (February through April) is
historically the busiest time for car and truck sales as many of the Company's
customers use income tax refunds as a down payment on the purchase of a vehicle.
None of the Company's other businesses experience significant seasonal
fluctuations.
ITEM 3. QUANTITATIVE AND 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 12% to 26%.
These finance receivables have remaining maturities from one to 42 months. At
July 31, 2001 the majority of the Company's notes payable contained 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.
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The table below illustrates the impact which hypothetical changes in market
interest rates could have on the Company's pretax earnings. The calculations
assume (i) the increase or decrease in market interest rates remain in effect
for twelve months, (ii) the amount of variable rate notes payable outstanding
during the period decreases in direct proportion to decreases in finance
receivables as a result of scheduled payments and anticipated charge-offs, and
(iii) there is no change in prepayment rates as a result of the interest rate
changes.
Change in Change in
Interest Rates Pretax Earnings
-------------------- ------------------
(in thousands)
+2% $ (2,074)
+1% (1,037)
-1% 1,037
-2% 2,074
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PART II
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Each of Paaco and Smart Choice have revolving credit facilities with
Finova. Since December 2000 Smart Choice has been over-advanced on its revolving
credit facility, which constitutes an event of default under the facility. As of
July 31, 2001 Smart Choice was over-advanced by $20.9 million. Absent funding
from an outside source, Smart Choice does not expect it will be able to come
into compliance with the current advance rate provisions of its credit facility.
There is uncertainty as to whether Smart Choice's event of default is the basis
for an event of default under Paaco's revolving credit facility. In any event,
Paaco is a wholly-owned subsidiary of Smart Choice, and ultimately Paaco could
be affected by the default of Smart Choice under its Finova credit facility. As
a result of the event of default, Smart Choice is currently not entitled to
receive additional advances under its credit facility, and Paaco may not be
entitled to receive additional advances under its credit facility.
Since January 2001 Smart Choice has been in discussions with Finova
with regard to possible solutions to the over-advanced position. There are
several possible outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which
brings Smart Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the
proceeds being used to pay down a portion of its credit
facility, and the unpaid portion being absorbed by Finova
(forgiveness of debt) and Paaco as the parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby
substantially all of the assets and liabilities of Smart
Choice are liquidated with the proceeds being used to pay down
a portion of its credit facility, and the unpaid portion being
absorbed by Finova (forgiveness of debt) and Paaco as the
parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate
or sell the collateral, which action may prompt Smart Choice
to take actions to protect the interests of its shareholders,
including the filing of a plan of reorganization under federal
bankruptcy laws.
Although management is exploring a number of alternatives, including
those listed above, the Company cannot predict how or whether Smart Choice's
default will be resolved. The opinion of the Company's independent certified
public accountants covering the fiscal year ended April 30, 2001 expressed
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements for the three months ended July 31, 2001
do not include any adjustments relating to the recoverability of recorded asset
amounts that might be necessary should the Company be unable to continue in
existence.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the fiscal quarter ended July 31, 2001 no reports on
Form 8-K were filed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMART CHOICE AUTOMOTIVE GROUP, INC.
By: /s/ James Edward Ernst
---------------------------------------------
James Edward Ernst
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Larry Kiem
---------------------------------------------
Larry Kiem
Controller
(Principal Financial and Accounting Officer)
Dated: September 13, 2001
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