SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
(Amendment No. )
Check the appropriate box:
[X] Preliminary information statement [ ] Confidential, for use of the
[ ] Definitive information statement Commission only (as permitted
by Rule 14c-5(d)(2))
SMART CHOICE AUTOMOTIVE GROUP, INC.
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(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
N/A
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(2) Aggregate number of securities to which transactions applies:
N/A
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
N/A
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(4) Proposed maximum aggregate value of transaction:
N/A
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(5) Total fee paid:
N/A
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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SMART CHOICE AUTOMOTIVE GROUP, INC.
1555 SEMORAN BOULEVARD
WINTER PARK, FLORIDA 32792
To the Shareholders of Smart Choice Automotive Group, Inc.:
As many of you are aware, certain of the Florida-based subsidiaries of
Smart Choice Automotive Group, Inc. ("Smart Choice" or the "Company") have been
in default since December 2000 under their credit facility with Finova Capital
Corporation, the primary lender to Smart Choice's subsidiaries and the holder
of approximately 12% of the Smart Choice common stock ("Finova"). Smart Choice
is a guarantor of all obligations under the credit facility. On November 8,
2001, Smart Choice and certain of its subsidiaries entered into a Forbearance
Agreement with Finova, pursuant to which Smart Choice has granted Finova an
option to purchase (i) all of Smart Choice's ownership interest in Paaco
Automotive Group, L.P. and Premium Auto Acceptance Corporation (collectively,
"Paaco"), or (ii) all of Smart Choice's remaining authorized but unissued and
unreserved common stock at a price of $0.30 per share. Finova also agreed to
forbear in the commencement of collection proceedings and in the exercise of
any repossession rights, collection rights or other remedies against the
collateral under its credit facilities with Smart Choice's subsidiaries in
exchange for the liquidation of the assets of Smart Choice's Florida-based
subsidiaries following a public foreclosure sale and the right to purchase
Paaco or Smart Choice's remaining authorized but unissued and unreserved common
stock. On November 9, 2001, the collateral under Finova's loan agreement with
the Florida-based subsidiaries, which consisted primarily of receivables and
inventory, was sold at a public foreclosure sale to Finova for a purchase price
of $55 million, resulting in a deficiency owed to Finova of approximately $33.4
million (the "Deficiency"). On December ___, 2001, Finova exercised its option
to purchase Paaco, subject to the completion of its due diligence
investigation. The consideration for the sale of Paaco will be the
relinquishment and satisfaction of the Deficiency. As a result of the exercise
of the option to purchase Paaco, Finova's option to purchase the remaining
authorized but unissued common stock of Smart Choice has been suspended and
will terminate upon the closing of the sale of Paaco. After giving effect to
the sale of the assets of Smart Choice's Florida subsidiaries through the
public foreclosure, the sale of Paaco to Finova will constitute a sale of
substantially all of the Company's assets, which requires shareholder approval
under Florida law. Details of the material terms of the Forbearance Agreement,
including the possible sale of Paaco and other important information, are set
forth in the accompanying Information Statement.
Smart Choice's Board of Directors has fully reviewed, considered and
unanimously approved the Forbearance Agreement, which includes the option for
the sale of Paaco, and has recommended that its shareholders approve the sale
of Paaco. Crown Group, Inc., the holder of approximately 70% of Smart Choice's
common stock, has executed a written consent approving the sale of Paaco as of
December __, 2001. Accordingly, no other vote or shareholder action is
required. Pursuant to Section 607.0704 of the Florida Business Corporation Act,
you are hereby being provided with notice of the approval by less than
unanimous written consent of the shareholders of Smart Choice. Pursuant to the
Securities Exchange Act of 1934, as amended, you are being furnished with an
Information Statement relating to this action along with this letter.
Shareholders of record as of the close of business on November 12, 2001 are
entitled to receive this notice and the attached Information Statement.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
By Order of the Board of Directors,
James Edward Ernst
President and Chief Executive Officer
Winter Park, Florida
December __, 2001
SMART CHOICE AUTOMOTIVE GROUP, INC.
INFORMATION STATEMENT
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CONCERNING CORPORATE ACTION AUTHORIZED BY
WRITTEN CONSENT OF SHAREHOLDERS OWNING
A MAJORITY OF SHARES OF COMMON STOCK
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WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
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This Information Statement is being furnished to the shareholders of
Smart Choice Automotive Group, Inc., a Florida corporation ("Smart Choice" or
the "Company"), to advise them of the corporate action which has been
authorized by the written consent of Crown Group, Inc., the Company's majority
shareholder. Smart Choice is providing you this information in accordance with
the requirements of the Florida Business Corporation Act (the "Florida Act")
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the regulations promulgated thereunder. The Company's Board of Directors
established the close of business on November 12, 2001 as the record date (the
"Record Date") for the determination of shareholders entitled to notice about
the following transaction.
Pursuant to the terms of that certain Forbearance Agreement among
Smart Choice, certain of Smart Choice's subsidiaries and Finova, dated November
8, 2001 (the "Forbearance Agreement"), Finova agreed to forbear in the
commencement of collection proceedings and in the exercise of any repossession
rights, collection rights or other remedies against the collateral under its
credit facility with certain of Smart Choice's subsidiaries in exchange for the
liquidation of the assets of Smart Choice's Florida subsidiaries (the "Florida
Finance Borrowers") following a public foreclosure sale and the grant of an
option to Finova to purchase (i) all of Smart Choice's interest in Paaco
Automotive Group, L.P. and Premium Auto Acceptance Corporation (collectively,
"Paaco" or the "Paaco Borrowers"), or (ii) the remaining authorized but
unissued and unreserved shares of Smart Choice common stock at a price of $0.30
per share. Smart Choice is a guarantor of the obligations of the Florida
Finance Borrowers to Finova. On November 9, 2001, the collateral under the loan
agreement, which consisted primarily of receivables and inventory, was sold at
a public foreclosure sale to Finova for $55 million, resulting in a deficiency
owed by the Florida Finance Borrowers of approximately $33.4 million (the
"Deficiency"). On December ___, 2001, Finova exercised its option to purchase
Paaco, subject to the completion of its due diligence investigation. The
consideration for the sale of Paaco will be the relinquishment and satisfaction
of the Deficiency. As a result of the exercise of the option to purchase Paaco,
Finova's option to purchase the remaining authorized but unissued common stock
of Smart Choice has been suspended and will terminate upon the closing of the
sale of Paaco. After giving effect to the sale of assets through the public
foreclosure which occurred on November 9, 2001, the sale of Paaco to Finova
will constitute a sale of substantially all of the Company's assets.
Upon the closing of the sale of Paaco to Finova, Smart Choice will
have no ongoing operating business, but will continue to own assets consisting
primarily of fixed assets, including improved and unimproved real estate in
Titusville, Florida, equipment, and certain other non-operating assets.
Following the sale of Paaco to Finova, Smart Choice expects to sell its
remaining assets in an effort to realize the maximum value for these assets and
repay its obligations to unsecured creditors to the extent possible.
Smart Choice will not receive any cash payment as a result of the
transactions contemplated by the Forbearance Agreement. After the consummation
of the sale of Paaco, management estimates that the net realizable value of
Smart Choice's remaining assets will be less than Smart Choice's unsecured
liabilities, and therefore a liquidation of those remaining assets would not
result in any distribution to Smart Choice's shareholders.
The Florida Finance Borrowers have been in default under their credit
facility with Finova since December 2000. Smart Choice has been in discussions
with Finova for months regarding possible alternatives for resolving the
defaults. Smart Choice believes that if the transactions contemplated by the
Forbearance Agreement were not consummated and its subsidiaries were not
relieved of approximately $88.4 million in indebtedness (of which Smart Choice
is the guarantor), Smart Choice would be forced to seek immediate protection by
filing for bankruptcy. It is unlikely that a bankruptcy proceeding would result
in any distributions to common shareholders. Further, a bankruptcy proceeding
would most likely result in less distributions to unsecured creditors than the
transactions completed by the Forbearance Agreement. Accordingly, Smart Choice
believes the approval and consummation of the transactions contemplated by the
Forbearance Agreement offers the best chance for maximizing asset value for the
benefit of its unsecured creditors. However, there can be no assurance that
even if the transactions contemplated by the Forbearance Agreement are
consummated, Smart Choice will be able to maximize the value of its remaining
assets and have adequate proceeds and resources to satisfy its creditors. As a
result, Smart Choice may in any event be required to seek bankruptcy protection
in the future.
On November 5, 2001, the Company's Board of Directors approved the
terms of the Forbearance Agreement, including the grant of the option to Finova
to purchase Paaco, and recommended the approval of the sale of Paaco to the
Company's shareholders. Under Section 607.0704 of the Florida Act, any action
required or permitted by the Florida Act to be taken at an annual or special
meeting of shareholders of a Florida corporation may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Notice of the written consent must be
given to those shareholders who have not consented in writing within ten (10)
days of obtaining the authorization. As of the Record Date, the Company had
issued and outstanding 9,762,270 shares of common stock, with each share
entitled to one vote. The consent of the holders of a majority of all of the
Company's outstanding common stock is necessary to authorize the sale of Paaco.
On December __, 2001, Crown, who is the owner of record of 6,857,907 shares of
Smart Choice common stock (approximately 70%), executed and delivered to the
Company its written consent approving the sale of Paaco. Accordingly, no vote
or further action of the shareholders of the Company is required.
The Company is required, in accordance with Rule 14c-2 of the Exchange
Act, to mail this Information Statement to shareholders of the Company no later
than twenty (20) days prior to the date the sale of Paaco will become
effective. The Company anticipates that the sale of Paaco will become effective
as soon as practicable upon the exercise of the Paaco option, but no sooner
than twenty (20) days after the mailing of this Information Statement (the
"Effective Date"). This Information Statement is first being mailed to
shareholders on or about December __, 2001. This Information Statement will
also constitute notice to the shareholders of the approval of the sale by less
than unanimous written consent as required by Section 607.0704 of the Florida
Act.
The executive offices of the Company are located at 1555 Semoran
Boulevard, Winter Park, Florida 32792, and its telephone number is (407)
671-1200. This Information Statement is furnished for informational purposes
only.
2
TABLE OF CONTENTS
PAGE
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Forward-Looking Statements.....................................................................................4
Summary Term Sheet for Proposed Transaction....................................................................5
Parties to the Transaction.....................................................................................6
Security Ownership of Certain Beneficial Owners and Management.................................................8
Business of Smart Choice.......................................................................................9
Background of the Transaction.................................................................................13
Material Terms of the Transaction.............................................................................13
Factors Considered by the Board...............................................................................16
Risks of the Proposed Transaction.............................................................................17
Required Approvals............................................................................................17
Selected Financial Data.......................................................................................18
Pro Forma Financial Information...............................................................................19
Federal Income Tax Considerations.............................................................................23
Dissenter's Rights ..........................................................................................23
Where You Can Find More Information...........................................................................25
APPENDIX A - Sections of the Florida Business Corporation Act Regarding Dissenter's Rights...................A-1
3
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain information included in
this Information Statement 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 future operations of the Company's
businesses, if any, and other risks described in this Information Statement.
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.
4
SUMMARY TERM SHEET FOR PROPOSED TRANSACTION
This summary contains selected information from this Information
Statement and may not contain all of the information that is important to you
regarding the transactions contemplated by the Forbearance Agreement, including
the sale of Paaco. To understand the transaction fully, you should read this
Information Statement completely. The Forbearance Agreement constitutes the
legal document that governs this transaction. For a more complete description
of the terms of the Forbearance Agreement and the details of the transaction
with Finova, please see "Material Terms of the Transaction."
- Under the terms of the credit facility with Finova, material
events of default exist with respect to certain of Smart
Choice's Florida-based subsidiaries. As a result of such
default, Finova would be permitted to exercise its remedies
against the collateral of the Company's Florida-based
subsidiaries as well as the collateral securing Paaco's
credit facility with Finova, which would effectively shut
down the operations of Smart Choice's subsidiaries as they
would have no other source of operating cash. Smart Choice is
a guarantor of its subsidiaries' indebtedness to Finova.
- The fair market value of all of the assets which secure the
obligations of the Florida Finance Borrowers to Finova is
substantially less than the amount owed to Finova by the
Florida Finance Borrowers.
- Pursuant to the Forbearance Agreement, Finova agreed to
forbear in the commencement of any collection proceedings and
in the exercise of any repossession rights for a period of 60
days, except that Finova was permitted to commence the
exercise of its rights to collect receivables owned by the
Florida Finance Borrowers, which include the following
subsidiaries: Florida Finance Group, Inc., Liberty Finance
Company, Smart Choice Receivables Holding Company, and First
Choice Auto Finance, Inc. A public foreclosure sale occurred
on November 9, 2001, and the assets were purchased by Finova
for $55 million.
- Also pursuant to the Forbearance Agreement, the Company
granted an option to Finova to purchase all of the Company's
ownership interest in Paaco at a price equal to the remaining
deficiency on the obligations of the Florida Finance
Borrowers after the public foreclosure sale (the "Paaco
Option"). On December ___, 2001, Finova exercised the Paaco
Option, subject to the completion of its due diligence
investigation.
- The Company also granted an option to Finova to purchase all
of the Company's remaining authorized but unissued and
unreserved common stock (approximately 39,000,000 shares) at
a price of $0.30 per share (the "Smart Choice Option"). As a
result of the exercise of the Paaco Option, the Smart Choice
Option has been suspended and will terminate upon the closing
of the sale of Paaco.
- The sale of Paaco must be approved by the affirmative vote of
a majority of all of the Company's outstanding shares.
Because Crown owns approximately 70% of the Company's
outstanding shares of common stock and has consented to the
sale of Paaco, the transaction has been approved and no
further shareholder approval is required.
- Finova has been the primary lender to certain of Smart
Choice's subsidiaries since 1994. Finova Mezzanine Capital,
Inc., an affiliate of Finova Capital Corporation, has been
the owner of approximately 12% of the Company's common stock
since 1999.
- Smart Choice will obtain an appraisal from a qualified
independent professional firm for the purpose of confirming
that the value of Paaco is not greater than the amount of the
Deficiency.
- Following the sale of Paaco to Finova, Smart Choice intends
to sell its remaining assets in an effort to realize the
maximum value for these assets and repay its obligations to
its unsecured creditors to the extent possible.
5
- Following these transactions, Smart Choice presently expects
to continue to be a reporting company under the Securities
Exchange Act of 1934. Smart Choice can make no assurances
that its stock will remain listed on the OTC Bulletin Board
or that there will continue to be a market for its common
stock.
COMPLETION OF THIS TRANSACTION WILL NOT AFFECT YOUR SMART CHOICE
COMMON STOCK AND YOU WILL CONTINUE TO BE A SHAREHOLDER OF SMART CHOICE AFTER
THIS TRANSACTION. YOU ARE NOT BEING ASKED TO EXCHANGE YOUR SMART CHOICE COMMON
STOCK FOR ANY OTHER SHARES OR FOR CASH OR OTHER PROPERTY.
PARTIES TO THE TRANSACTION
SMART CHOICE AUTOMOTIVE GROUP, INC.
1555 SEMORAN BOULEVARD
WINTER PARK, FLORIDA 32792
ATTENTION: JAMES EDWARD ERNST
PHONE NUMBER: (407) 671-1200
Smart Choice is in the business of selling and financing used
automobiles and trucks principally to consumers with limited or damaged credit
histories. Prior to entering into the Forbearance Agreement, the Company
operated 25 dealerships located in major markets in Texas and Florida. The
Company presently operates 12 lots in Texas under the "Paaco" name and
previously operated 13 lots in Florida under the "First Choice" name. After the
public foreclosure sale on November 9, 2001, the Company is in the process of
winding down its Florida operations. Paaco continues to operate as a subsidiary
of Smart Choice, subject to the transfer of control which will occur upon the
sale of Paaco. For further information regarding the business of Smart Choice,
please see "Business of Smart Choice."
Effective December 1, 1999, Smart Choice acquired all of the ownership
interest of Paaco Automotive Group, L.P. and Premium Auto Acceptance
Corporation (collectively, "Paaco"). As a result of the acquisition, Crown
Group, Inc., the majority shareholder of Paaco ("Crown"), became the
controlling shareholder of Smart Choice.
Paaco began operations in 1992 as an automobile auction concern in
Arlington, Texas. In 1993, Paaco began its "Buy Here-Pay Here" operation,
selling and financing used vehicles to credit-impaired borrowers. Smart Choice
began operations in 1997 through the acquisition and consolidation of five "Buy
Here-Pay Here" businesses.
The Company participates in the sub-prime segment of the independent
used car sales and finance market. This segment is serviced primarily by Buy
Here-Pay Here dealerships, which are typically small, independent used car
dealerships that sell and finance the sale of used cars to sub-prime borrowers.
Buy Here-Pay Here dealers typically offer their customers certain advantages
over more traditional financing sources, such as:
(i) broader and more flexible underwriting guidelines;
(ii) flexible payment terms (including prorating customer payments
due within one month into several smaller payments and
scheduling payments to coincide with a customer's pay days);
and
(iii) the ability to make payments in person, which is an important
feature to many credit-impaired borrowers who may not have
checking accounts or are otherwise unable to make payments by
the due date through the mail.
6
FINOVA CAPITAL CORPORATION
4800 NORTH SCOTTSDALE BOULEVARD
SCOTTSDALE, ARIZONA 85251
ATTENTION: RICHARD LIEBERMAN
PHONE NUMBER: (480) 636-4800
Finova Capital Corporation has been the primary lender to certain of
Smart Choice's subsidiaries since 1994. Finova Mezzanine Capital, Inc., an
affiliate of Finova Capital Corporation, is the owner of 1,171,722 shares of
Smart Choice common stock or approximately 12.0% of the outstanding shares of
Smart Choice common stock. Finova Capital Corporation is engaged in the
business of providing commercial finance and capital to mid-size businesses in
the United States and abroad. Finova Capital Corporation and Finova Mezzanine
Capital, Inc. are collectively referred to as "Finova." On June 22, 1998,
Finova originally acquired 100 shares of Smart Choice's Series D Convertible
Preferred Stock (the "Series D Stock") in connection with a loan transaction
from Finova to Smart Choice. Effective December 1, 1999, Finova and Smart
Choice entered into agreements whereby the Series D Stock was exchanged for
shares of Smart Choice common stock and certain indebtedness owed by Smart
Choice to Finova was exchanged for additional shares of Smart Choice common
stock. The purpose of the December 1999 transaction was to facilitate the
reorganization of Smart Choice and the concurrent investment by Crown in Smart
Choice. There is no affiliation between Crown and Finova. For further
information regarding Finova and its relationship with Smart Choice, see
"Background of the Transaction."
7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 12,
2001, with respect to the ownership of Smart Choice's outstanding common stock
by (i) all persons known to Smart Choice to own beneficially more than five
percent of the issued and outstanding shares of Smart Choice common stock, (ii)
each director and executive officer of Smart Choice, and (iii) all directors
and executive officers as a group. Unless otherwise indicated, each shareholder
possesses sole voting and investment power with respect to the shares owned by
the shareholder.
Shares
Beneficially Percentage of
Beneficial Owner Owned(1) Class(2)
---------------- ------------ -------------
Crown Group, Inc........................................ 6,955,407(3) 70.5%
Finova Mezzanine Capital, Inc. ......................... 1,171,722(4) 12.0%
Edward R. McMurphy...................................... -- --
J. Edward Ernst......................................... 50,000(5) *
Robert J. Abrahams...................................... 25,347(6) *
T. J. Falgout, III...................................... -- --
Larry W. Lange.......................................... 372,794(7) 3.8%
Ronald W. Anderson...................................... 25,634(8) *
All directors and executive
officers as a group (6 persons)..................... 473,775(9) 4.8%
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* Less than 1%
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, a person is deemed to be the beneficial owner of a security if
the person has or shares voting power or dispositive power with
respect to such security or has the right to acquire such ownership
within 60 days. As used herein, "voting power" is the power to vote or
direct the voting of shares, and "dispositive power" is the power to
dispose or direct the disposition of shares, irrespective of any
economic interest therein.
(2) In calculating the percentage ownership for a given shareholder or
group of shareholders, the number of shares of the class of stock
outstanding includes unissued shares subject to options, warrants,
rights or conversion privileges exercisable within 60 days held by
such shareholder or group of shareholders, but such unissued shares
are not deemed outstanding in calculating the percentage ownership for
other shareholders.
(3) Includes 97,500 shares of common stock subject to presently
exercisable warrants. The business address of Crown Group is 4040
North MacArthur Boulevard, Suite 100, Irving, Texas 75038.
(4) Finova's address is 500 Church Street, Suite 200, Nashville, Tennessee
37219. On November 23, 2001, Finova Capital Corporation, an affiliate
of Finova Mezzanine Capital, Inc., filed a Schedule 13D reporting that
it beneficially owned 44,857,909 shares of Smart Choice common stock,
or approximately 93.9% of the outstanding shares. This number was
determined on the basis that Finova Capital Corporation holds an
option to purchase 38,000,000 shares of Smart Choice's common stock
and an option to purchase 6,857,909 shares of Smart Choice common
stock from Crown Group, Inc. As a result of the exercise of the Paaco
Option, the Smart Choice Option has been suspended and will terminate
upon the closing of the sale of Paaco. Finova does not presently
intend to exercise its option with respect to shares owned by Crown
Group, Inc. The information with respect to Finova Capital Corporation
is based on the Schedule 13D filed by Finova Capital Corporation on
November 23, 2001. Smart Choice makes no representation as to the
accuracy or completeness of the information reported.
(5) Represents 50,000 shares subject to presently exercisable options.
(6) Includes 14,320 shares subject to presently exercisable options.
(7) Includes 25,000 shares subject to presently exercisable options.
(8) Includes 25,134 shares subject to presently exercisable options.
(9) Includes 114,454 shares subject to presently exercisable options.
8
BUSINESS OF SMART CHOICE
GENERAL AND HISTORY
Smart Choice operates "Buy Here-Pay Here" car dealerships in the
United States. Prior to entering into the Forbearance Agreement, the Company
operated 25 dealerships located in major markets in Texas and Florida. The
Company focuses exclusively on selling and financing quality used vehicles to
credit-impaired customers. The Company presently operates 12 lots in Texas
under the "Paaco" name and previously operated 13 lots in Florida under the
"First Choice" name.
Effective December 1, 1999, Smart Choice acquired all of the
outstanding stock of Paaco. As a result of the acquisition, Crown Group, Inc.,
the majority shareholder of Paaco, became the controlling shareholder of Smart
Choice. For financial reporting purposes, Paaco is deemed to be the acquiring
entity and the acquisition has been reflected as a recapitalization of Paaco.
Paaco began operations in 1992 as an automobile auction concern in
Arlington, Texas. In 1993, Paaco began its "Buy Here-Pay Here" operation,
selling and financing used vehicles to credit-impaired borrowers. Smart Choice
began operations in 1997 through the acquisition and consolidation of five "Buy
Here-Pay Here" businesses. As a result of the foreclosure sale on November 9,
2001, Smart Choice sold the collateral securing the obligations of the Florida
Finance Borrowers, which consisted primarily of receivables and inventory, to
Finova for $55 million. Smart Choice is in the process of winding down its
Florida operations. Paaco continues to operate as a subsidiary of Smart Choice,
subject to the transfer of control which may occur if Finova exercises the
Paaco Option.
USED CAR DEALERSHIPS
The Company currently owns and operates 12 dealerships under the Paaco
name in Texas. Paaco dealerships are divided into two regions - the Dallas/Fort
Worth and Houston metropolitan areas. Paaco dealerships presently maintain an
average inventory of approximately 55 vehicles per dealership, featuring a wide
variety of makes and models (with ages generally ranging from two to six years)
and a range of sale prices.
The Company's inventory of used vehicles is primarily acquired through
auto auctions. All vehicles are subjected to a detailed inspection, and
vehicles purchased by Paaco are reconditioned at its reconditioning facility in
Grand Prairie, Texas. If a vehicle is not sold in a timely manner, it is moved
to another dealership or sold at auction.
Paaco provides a 6-month/6,000 mile service contract with the purchase
of a vehicle. Paaco customers can have their vehicles repaired at any of the
Paaco service centers in Texas.
SALES. Paaco continually seeks to develop and retain qualified sales
personnel. The salespersons' sole responsibility is the sale of cars, and,
therefore, they do not participate in the ultimate financing decision. The
Company's dealerships are typically staffed with a manager, up to six sales
personnel and others which may include clerical workers, collectors, mechanics
and a porter. The lots are generally operated six days per week between the
hours of 10:00 a.m. and 8:00 p.m., and each lot typically maintains an
inventory of 35 to 120 vehicles. On a regular basis, Company sales personnel
attend training classes where each phase of the sales process is rehearsed.
Additionally, salespersons are paid principally on a commission basis, and all
salespersons at Paaco speak fluent Spanish.
RECONDITIONING. Paaco reconditions almost every vehicle it purchases
at its 101,000 square foot centralized reconditioning center in Grand Prairie,
Texas. In addition to inspecting, repairing and
9
preparing acquired vehicles for sale, this facility is used to perform service
work on vehicles for customers pursuant to service contracts.
MARKETING AND ADVERTISING. The Company has historically used marketing
programs designed to attract credit-impaired customers, reward those customers
who pay on time, develop customer loyalty and increase referral and repeat
business. The Company has created value-added programs for its customers which
include providing quality cars through a comprehensive inspection and
refurbishment program, a service contract on vehicles sold at its dealerships,
rapid loan application processing and pre-qualification over the telephone by
calling a toll-free number.
FINANCING CUSTOMERS WITH IMPAIRED CREDIT
The Company offers financing to its customers who purchase used cars
at its dealerships. The Company does not have any loans from persons who did
not purchase a vehicle at one of its dealerships and has a policy not to
acquire third party originated finance contracts. The Company's dealerships
provide financing only for its own customers, thereby relying on its own
underwriting standards and not on those of third parties. Sales and financing
are combined functions performed by a centralized buy room. Experienced
financing and sales personnel make credit and deal structure decisions. Payment
terms are somewhat flexible and are generally set such that payment due dates
coincide with the customer's payday. The Company markets to credit-impaired
customers with "C" or "D" credit profiles. A "C" rated consumer may have an
inconsistent employment record or unresolved problems with credit in the past.
A "D" rated consumer usually has an unfavorable employment history and other
credit problems, such as personal bankruptcy. These customers are generally not
able to finance a used car purchase from a traditional finance subsidiary or
bank.
BUY ROOM EVALUATION PROCEDURES. The Company applies consistent
underwriting standards in structuring its used car sales and loans. The most
important criteria used in evaluating a transaction are the applicant's
creditworthiness, the collateral value of the car, employment and residence
histories, income information, personal references, income and expense
information and credit bureau reports.
CONTRACT SERVICING. The Company services its finance contracts through
the use of servicing procedures which have been designed to minimize credit
losses. These include: (i) maintaining a "zero tolerance" policy for all
non-payments; (ii) monitoring loans and related collateral; (iii) accounting
for and posting all payments received; (iv) responding to borrowers' inquiries;
(v) taking all necessary action to perfect and maintain the security interest
granted in the financed automobile; (vi) investigating delinquencies and
communicating with borrowers to obtain timely payments; (vii) pursuing
deficiencies on loans; and (viii) when necessary, repossessing the financed
automobile.
ZERO TOLERANCE COLLECTION POLICY. The Company is strict in its
collection policies, believing that by acting promptly and working with
customers, loss exposure is minimized. Collection efforts begin on the day the
car is sold. The Company's policy is to permit the customer to keep the
automobile only so long as payments are made.
REPOSSESSIONS. The process of repossession begins immediately upon
payment delinquency. Once standardized collection procedures have been
implemented and it is determined that a cure of the loan default is unlikely,
the vehicle is repossessed. Repossessions are usually handled by licensed,
bonded and insured repossession firms. The Company re-markets approximately 70%
of its repossessions through its dealerships, rather than through auctions
(where cars are generally sold at lower prices).
10
COMPETITION
The Company competes principally with other independent Buy Here-Pay
Here dealers, and to a lesser degree with:
- the used vehicle retailing operation of franchised automobile
dealerships,
- independent used vehicle dealers, and
- individual consumers who sell used vehicles in private
transactions.
Management believes the principal competitive factors in the sub-prime
market include:
- the availability of financing to credit-impaired borrowers,
- the breadth and quality of vehicle selection,
- the availability of popular vehicles,
- pricing,
- the convenience of a dealership's location,
- customer service, and
- in the case of Paaco, the ability to communicate in Spanish
with its Spanish speaking customers.
REGULATION AND LICENSING
The Company's operations are subject to ongoing regulation,
supervision, and licensing under various federal, state, and local statutes,
ordinances, and regulations pertaining to the sale and financing of vehicles.
These laws include the Truth In Lending Act, the Equal Credit Opportunity Act
and the Fair Credit Reporting Act of 1970. Among other things, these laws
require that the Company obtain and maintain certain licenses and
qualifications, limit or prescribe terms of the contracts it originates, make
specified disclosures to customers, limit its right to repossess and sell
collateral, and prohibit discrimination against customers on the basis of
certain characteristics including age, race and gender.
In many cases, the Company charges fixed interest rates in excess of
traditional finance companies on the contracts originated at its dealerships.
The state in which the Company operates impose limits on interest rates it can
charge on its loans, generally based on the age of the vehicle. Management
believes that the Company is in substantial compliance with all applicable
federal, state, and local laws and regulations. However, if the Company does
not remain in compliance with such laws, this failure could have a material
adverse effect on its operations. In addition, the adoption of additional laws,
changes in the interpretation of existing laws, or the Company's entrance into
jurisdictions with more stringent regulatory requirements could have a material
adverse effect on the Company.
BUSINESS OF SMART CHOICE FOLLOWING THE SALE OF PAACO
Smart Choice will not receive any cash payment upon consummation of
the sale of Paaco to Finova. After the sale of Paaco to Finova, Smart Choice
will have no ongoing operating business, but will continue to own assets
consisting primarily of fixed assets, including improved and unimproved real
estate in Titusville, Florida, equipment, and certain other non-operating
assets. Smart Choice intends to sell its remaining assets in an effort to
realize the maximum value for these assets and repay its obligations to
unsecured creditors to the extent possible.
Management estimates that the net realizable value of Smart Choice's
remaining assets will be less than Smart Choice's unsecured liabilities and
therefore a liquidation of those remaining assets would not result in any
distribution to Smart Choice's shareholders. Following the transaction, Smart
Choice
11
expects to continue to be a reporting company under the Securities Exchange Act
of 1934. Smart Choice can make no assurances, however, that its stock will
remain listed on the OTC Bulletin Board or that there will continue to be a
market for its common stock.
COMPLETION OF THIS TRANSACTION WILL NOT AFFECT THE OUTSTANDING SHARES
OF SMART CHOICE COMMON STOCK. SHAREHOLDERS ARE NOT BEING ASKED TO EXCHANGE
THEIR SMART CHOICE SHARES FOR ANY OTHER SHARES OR FOR CASH OR OTHER PROPERTY.
ALL OUTSTANDING STOCK OPTIONS AND WARRANTS OF SMART CHOICE, INCLUDING THOSE
HELD BY DIRECTORS, OFFICERS AND EMPLOYEES, WILL REMAIN OUTSTANDING FOLLOWING
COMPLETION OF THE TRANSACTION.
12
BACKGROUND OF THE TRANSACTION
Prior to November 9, 2001, the Florida Finance Borrowers had a $98
million revolving credit facility with Finova, of which $88.4 million was
outstanding as of October 31, 2001. Since December 2000, the Florida Finance
Borrowers have been over-advanced on the credit facility, which constitutes an
event of default under the facility. As of April 30, 2001, the Florida Finance
Borrowers were over-advanced by $6.2 million. In July 2001, pursuant to the
terms of their credit facility, the advance rate on eligible finance
receivables declined from 85% to 77%, increasing their over-advance to $18.5
million. As of September 30, 2001, the over-advance had increased to
approximately $25 million. The Florida Finance Borrowers were not able to pay
the over-advance and as a result of the event of default, no additional
advances were available under the credit facility. On November 8, 2001, Smart
Choice entered into the Forbearance Agreement with Finova. On November 9, 2001,
Finova purchased all of the collateral securing the obligations of the Florida
Finance Borrowers, which consisted primarily of receivables and inventory,
through a public foreclosure sale for $55 million. Smart Choice is presently in
the process of winding down its Florida operations and transitioning the
control of the collection of its finance receivables to Finova. On December
___, 2001, Finova exercised its option to purchase Paaco subject to the
completion of its due diligence investigation.
Since January 2001 Smart Choice engaged in discussions with Finova
with regard to possible solutions to the over-advanced position. Several
alternatives were considered, including:
- a restructuring of the Smart Choice credit facility which
would bring Smart Choice back into compliance;
- 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;
- the sale of Paaco with the proceeds being used to pay down
the credit facility and the unpaid portion being absorbed by
Finova (forgiveness of debt);
- 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 Smart Choice's credit facility, and the
unpaid portion being absorbed by Finova (forgiveness of debt)
and Paaco as the parties may negotiate; or
- 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 have prompted Smart
Choice to file a petition under federal bankruptcy laws.
After evaluating all of its options and extensive negotiations with
Finova, the Board of Directors concluded that the terms of the Forbearance
Agreement were in the best interests of Smart Choice and its constituents,
including its unsecured creditors and shareholders, primarily on the basis that
the transactions contemplated by the Forbearance Agreement would potentially
result in more assets being available for sale to pay unsecured creditors than
if Smart Choice were to file for bankruptcy. For a more detailed discussion of
the terms of the Forbearance Agreement, see "Material Terms of the
Transaction."
MATERIAL TERMS OF THE TRANSACTION
GENERAL
On November 8, 2001 Smart Choice, along with the Florida Finance
Borrowers and the Paaco Borrowers, entered into a Forbearance Agreement with
Finova. Under a loan and security agreement with Finova, the Florida Finance
Borrowers were indebted to Finova in the amount of approximately
13
$88.4 million as of October 31, 2001 (the "Florida Finance Loan Agreement").
Further, pursuant to a separate loan and security agreement, the Paaco
Borrowers were indebted to Finova in the amount of approximately $59 million as
of October 31, 2001 (the "Paaco Loan Agreement"). Pursuant to a guaranty
executed by Smart Choice dated as of November 18, 1999, Smart Choice, which is
the sole shareholder of the Florida Finance Borrowers and owner of all of the
equity interests of the Paaco Borrowers, has guaranteed the payment and
performance of (i) all debts and obligations of the Florida Finance Borrowers
arising under the Florida Finance Loan Agreement, and (ii) all debts and
obligations of the Paaco Borrowers arising under the Paaco Loan Agreement.
Under the Florida Finance Loan Agreement, Finova has a first priority
perfected security interest in the collateral described in the Florida Finance
Loan Agreement to secure its obligations under the loan agreement. Pursuant to
the Paaco Loan Agreement, Finova has a first priority perfected security
interest in the collateral described in the Paaco Loan Agreement to secure its
obligations under that loan agreement. Material events of default exist under
the Florida Finance Loan Agreement and as a result, Finova was entitled to
exercise its remedies against the collateral under both the Florida Finance
Loan Agreement and the Paaco Loan Agreement, including but not limited to, the
recovery of all cash proceeds of pledged chattel paper and other financial
instruments. If Finova had exercised its rights under the loan agreements, it
would have effectively shut down the operations of the Florida Finance
Borrowers and the Paaco Borrowers as they would have no other source of
operating cash. The foreclosure sale conducted on November 9, 2001 has shut
down the operations of the Florida Finance Borrowers, but the Paaco Borrowers
continue to operate. The fair market value of the collateral securing the
obligations of the Florida Finance Borrowers is substantially less than the
amount of the obligations owed under the Florida Finance Loan Agreement. In
addition, the fair market value of the collateral securing the obligations of
the Florida Finance Borrowers and the Paaco Borrowers together is less than the
aggregate amounts owed under both the Florida Finance Loan Agreement and the
Paaco Loan Agreement. Finova has agreed to conditionally forbear in its
exercise of remedies subject to the terms and conditions set forth in the
Forbearance Agreement.
FINOVA'S CONDITIONAL AGREEMENT OF FORBEARANCE
Except for the foreclosure sale which occurred on November 9, 2001,
Finova has agreed to forbear in the commencement of any collection proceedings
under the loan documents and in the exercise of any repossession rights,
collection rights or other remedies against its collateral during the
forbearance period which commenced on the date of the Forbearance Agreement and
will terminate sixty (60) days after such date, on or about January 7, 2002,
unless extended (the "Forbearance Period"). Upon the expiration of the
Forbearance Period or the termination of the Forbearance Agreement, Finova will
be entitled to exercise all remedies to the fullest extent permitted under the
loan agreements and applicable law, without hindrance or delay and without
further notice to Smart Choice. During the Forbearance Period, the Paaco
Borrowers must timely pay the regular payments to Finova in the amount that
would otherwise become due under the Paaco Loan Agreement if the obligations
under that agreement had not been accelerated.
LIQUIDATION OF FLORIDA FINANCE COLLATERAL
The Florida Finance Borrowers have been losing money on their
operations for all of 2001 and their continued operation has eroded the value
of the collateral under the Florida Finance Loan Agreement. The Company
analyzed the business issues faced by the Florida Finance Borrowers and
determined that the likelihood of being able to rehabilitate or reorganize the
Florida Finance Borrowers into profitable enterprises was minimal.
14
Effective November 9, 2001, Finova commenced the exercise of its
rights to collect and enforce account receivables owned by the Florida Finance
Borrowers and to repossess collateral under the Florida Finance Loan Agreement.
The Florida Finance Borrowers have agreed to assist Finova in making this
transition by providing reports, information, access to personnel and other
reasonable assistance. The Florida Finance Borrowers also immediately began
winding down their operations as a result of the disposition of all collateral
under the Florida Finance Loan Agreement at a public foreclosure sale which was
held on November 9, 2001. Until the completion to Finova's satisfaction of the
transition of control of the collateral under the Florida Finance Loan
Agreement, Smart Choice agreed not to commence or encourage, and to take all
reasonable measures to prevent, the filing of any petition under the Bankruptcy
Code. Thereafter, should it become necessary to an orderly completion of the
liquidation of the assets of the Florida Finance Borrowers, any obligor under
the loan agreements may sponsor or encourage such a filing, provided that in
any such proceeding no obligor shall challenge or encourage the challenge of
the validity or amount of the obligations owed to Finova, Finova's right to
retain any payments on collection or collections received, or the attachment,
perfection or priority of any security interest securing its obligations.
Finova has agreed that during the Forbearance Period, proceeds of
receipts and collections of receivables held by the Florida Finance Borrowers
and the proceeds of inventory sales undertaken in the usual manner by the
Florida Finance Borrowers may be used by the Florida Finance Borrowers in
accordance with a budget agreed upon by the parties for the purposes of:
- paying the usual payroll wages and taxes, including payment
upon termination for any accrued vacation time, with respect
to employees of Smart Choice and the Florida Finance
Borrowers;
- paying lessors and vendors for current accruals of
liabilities to the extent that the continued service of such
lessors and vendors are necessary to the orderly winding up
of the affairs of the Florida Finance Borrowers;
- arranging the due termination of all employee benefit plans
as they affect employees of the Florida Finance Borrowers;
and
- for otherwise paying such reasonable and necessary expenses
of winding down the operations of the Florida Finance
Borrowers as Finova may approve in writing in its sole
discretion.
The actual control of the bank accounts containing proceeds of the
Florida Finance Borrowers collateral has been transferred to Finova and Finova
will release to the Florida Finance Borrowers funds to the extent that they are
needed for the payment of expenses outlined above in accordance with an agreed
upon budget. The management of the Florida Finance Borrowers will continue to
be the responsibility of the Florida Finance Borrowers' directors and officers
and Finova has not undertaken any right to control or interfere with the
operations of the Florida Finance Borrowers.
OPTION FOR PURCHASE OF PAACO
Smart Choice has granted Finova an option to purchase all of its
ownership interest in the Paaco Borrowers at a price equal to the Deficiency. On
December ___, 2001, Finova exercised its option to purchase Paaco, subject to
the successful completion of its due diligence investigation. The sale of Paaco
is expected to close in January 2002. Smart Choice's obligation to perform under
the Paaco Option is subject to obtaining shareholder approval for the sale
(which approval has been obtained) and an independent appraisal from a qualified
firm confirming that the value of the Paaco Borrowers is not greater than the
amount of the Deficiency. The full satisfaction of the Deficiency by the
exercise of the Paaco Option will be effective for the benefit of all of the
obligors, which includes the Company and its subsidiaries, whether liable as
guarantor or co-borrower. The management of the Paaco Borrowers will
15
continue to be the responsibility of their directors and officers and Finova
has not undertaken any right to control or to interfere with the operation of
the Paaco Borrowers.
OPTION FOR PURCHASE OF SMART CHOICE COMMON STOCK
Smart Choice has also granted Finova an option to purchase up to all
of Smart Choice's remaining authorized but unissued and unreserved common stock
at the price of $0.30 per share (approximately 39 million shares), to be paid
through the forgiveness of the obligations under the Florida Finance Loan
Agreement, which forgiveness will be effective for the benefit of Smart Choice
as the guarantor of the obligations under the Florida Finance Loan Agreement
(the "Smart Choice Option"). The Smart Choice Option may be exercised in whole
or in part until the earlier of the closing of the sale of Paaco or March 8,
2002. AS A RESULT OF THE EXERCISE OF THE PAACO OPTION, THE SMART CHOICE OPTION
HAS BEEN SUSPENDED AND WILL TERMINATE UPON THE CLOSING OF THE SALE OF PAACO.
OPERATION OF THE PAACO BORROWERS
Until the termination of the Forbearance Agreement or the purchase by
Finova of Paaco, the Paaco Borrowers must operate in the ordinary course of
business. The Paaco Borrowers have agreed not to pay any additional amounts
with respect to debt owed to Crown Group, Inc. unless such payments are made in
accordance with the subordination agreement approved by Finova.
BANKRUPTCY
In the event that any property or portion thereof or any interest
therein becomes property of any bankruptcy estate or subject to any state or
federal insolvency proceeding, then Finova will become entitled to seek an
order from the Bankruptcy Court to permit Finova to pursue its rights and
remedies against any obligor.
UNCONDITIONAL RELEASE OF ALL CLAIMS AND DEFENSES
Under the terms of the Forbearance Agreement, the Company and its
subsidiaries have released and forever discharged Finova of and from any and
all claims that any of them may have against Finova. The Company and its
subsidiaries have further agreed to refrain and forbear from commencing any
lawsuit, action or other proceeding to collect or enforce any such released
claim and to indemnify, defend and hold harmless Finova against any and all
loss, liability, claim or expense that any of them might incur as a result of
any breach by any borrowing party or the assertion of any claim or defense by
any borrowing party.
FACTORS CONSIDERED BY THE BOARD
In reaching its decision to approve the transactions with Finova and
to recommend that the Smart Choice shareholders approve the sale of Paaco,
Smart Choice's Board of Directors consulted with:
- management of Smart Choice regarding the business, financial
condition and results of operations of Smart Choice's
subsidiaries, and the terms of the Forbearance Agreement;
- its legal counsel regarding the proposed terms of the
Forbearance Agreement and the obligations of the Board of
Directors in its consideration of the proposed transactions;
and
- its independent public accountants regarding the accounting
and tax aspects of the proposed transactions.
Smart Choice's Board of Directors considered various factors,
including the following:
16
- alternatives to the proposed transactions with Finova,
including other sales of assets and a liquidation of Smart
Choice;
- the prospects for effecting such transactions in the current
environment, both outside a bankruptcy proceeding and in a
bankruptcy proceeding; the availability of
debtor-in-possession financing adequate to sustain Smart
Choice's operations in a bankruptcy proceeding; and the
ability of Smart Choice to retain ownership and control of
its principal assets in a bankruptcy proceeding;
- the amount of debt of Smart Choice and the terms and
conditions of the documents evidencing such debt, as well as
the prospects of refinancing or otherwise repaying the debt;
- the impact of a bankruptcy proceeding on the prospects of
Smart Choice's shareholders and creditors to realize value
for their interests in or claims against Smart Choice;
- Smart Choice's prospects for further growth, given its small
size, its limited access to capital markets, and the illiquid
nature of the trading market of its common stock on the OTC
Bulletin Board; and
- whether the proposed transactions would provide some
opportunity for realization of value on the sale of
unencumbered assets.
RISKS OF THE PROPOSED TRANSACTION
Smart Choice's Board of Directors also considered the potential
adverse consequences of the transactions with Finova, which would likely have a
material adverse effect on Smart Choice, such as the following:
- Any potential benefits expected to result from the proposed
transaction may not be realized, especially if Smart Choice
is not able to maximize value from the sale of its remaining
assets.
- Smart Choice does not expect any payment to be made to its
common shareholders upon consummation of the sale of Paaco to
Finova, and Smart Choice believes that any payment in the
future is unlikely, and, in a liquidation, would ultimately
depend upon the proceeds received from the sale of its
remaining assets. These proceeds would be available for
distribution to shareholders only after the repayment of
Smart Choice's obligations to unsecured creditors.
- After consummation of the transactions under the Forbearance
Agreement, Smart Choice will own assets consisting primarily
of fixed non-operating assets. There can be no assurance that
the remaining assets will have any substantial value or that
Smart Choice will be able to achieve any value from the
collection, sale or other disposition of those assets which
will exceed the amount of Smart Choice's remaining
obligations to creditors.
Smart Choice's Board of Directors determined that, on balance, the
positive attributes of the proposed transactions outweighed the potentially
adverse consequences. Smart Choice's Board of Directors ultimately concluded
that the transactions contemplated by the Forbearance Agreement would be in the
best interests of Smart Choice and its constituents.
REQUIRED APPROVALS
The approval of a majority of all of Smart Choice's outstanding common
stock is required to approve the sale of Paaco to Finova. With the exception of
the approvals required by Florida corporate law and compliance with federal
securities laws, neither party must comply with any federal or other state
regulatory requirements or obtain any other material approval in connection
with the proposed transactions.
17
SELECTED FINANCIAL DATA
The financial data set forth below was derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements and related notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual Report on Form 10-K for
the year ended April 30, 2001. See "Where You Can find More Information." (In
thousands, except per share amounts and other operating data.)
Four
Three Months Months Years Ended
Ended July 31, Years Ended April 30, Ended December 31,
--------------------- -------------------------------- April 30, -------------------
2001 2000 2001 2000 1999 1998 1997 1996
--------- -------- --------- -------- -------- --------- -------- -------
Statement of Operations Data:
Revenues $ 46,521 $ 53,394 $ 221,908 $130,564 $ 70,728 $19,666 $ 48,060 $28,857
Net income (loss) (1,727) 1,403 (603) 3,111 (1,412) 585 (951) 621
Earnings (loss) per share-diluted $ (.18) $ .14 $ (.06) $ .37 $(197.11) $ .08 $(188.24) $124.20
Weighted average shares-diluted 9,762 9,792 9,791 8,386 7 7,355 5 5
Balance Sheet Data (at period end):
Finance receivables, net $ 143,653 $138,982 $ 149,656 $132,855 $ 47,757 $34,192 $ 27,381 $16,443
Total assets 186,424 185,979 189,900 178,966 60,374 42,770 33,404 20,723
Revolving credit facilities 147,442 138,541 147,442 130,367 41,824 26,050 23,410 12,451
Other borrowings 9,690 10,056 9,985 10,773 4,939 6,395 6,846 4,562
Stockholders' equity (deficit) 13,764 17,497 15,492 16,095 6,697 5,109 (117) 834
Other Operating Data:
Number of vehicles sold 3,072 3,655 14,869 9,479 5,174 1,452 3,461 2,432
Dealerships open at period end 22 25 22 24 10 9 8 4
Per vehicle sold:
Sales Price $ 11,911 $ 11,981 $ 12,320 $ 11,455 $ 11,954 $12,172 $ 12,458 $10,736
Gross margin 4,366 4,816 4,610 4,324 3,864 4,914 3,985 3,921
Provision for credit loss 3,598 2,898 2,925 2,254 1,918 446 2,249 1,271
Operating expense 3,509 2,682 3,027 2,766 3,065 4,210 2,730 2,772
Percentages:
Gross margin as of % of sales 36.7% 40.2% 37.4% 37.7% 32.3% 40.4% 32.0% 36.5%
Provision for credit loss as
of a % of sales 30.2% 24.2% 23.7% 19.7% 16.0% 3.7% 18.1% 11.8%
Operating expense as a % of
revenue 23.2% 18.4% 20.3% 20.1% 22.4% 31.1% 19.7% 23.4%
18
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
On November 8, 2001, Smart Choice Automotive Group, Inc. ("Smart
Choice") and certain of its subsidiaries entered into a forbearance agreement
with Finova Capital Corporation ("Finova"), the primary lender to Smart
Choice's subsidiaries, that has resulted in the foreclosure of receivables and
inventory of certain Florida-based subsidiaries of Smart Choice (the "Florida
Finance Group"), and the probable sale of Smart Choice's wholly owned
subsidiaries, Paaco Automotive Group, L.P. and Premium Auto Acceptance
Corporation (collectively, "Paaco"), to Finova.
Prior to November 9, 2001, the Florida Finance Group sold and financed
used cars and trucks in Florida. Paaco sells and finances used cars and trucks
in Texas. The Florida Finance Group had, and Paaco continues to have, a
revolving credit facility with Finova. Prior to November 9, 2001, the Florida
Finance Group was over-advanced on its revolving credit facility, which
constituted an event of default under the facility, and as of September 30,
2001, was over-advanced by approximately $25 million.
Pursuant to the forbearance agreement, on November 9, 2001, the
collateral for the Florida Finance Group's credit facility with Finova, which
consisted principally of receivables and inventory, was sold at a public
foreclosure sale to Finova for $55 million. Prior to the foreclosure sale, the
Florida Finance Group owed Finova $88.4 million. Thus, after applying the
proceeds from the foreclosure sale, the Florida Finance Group owes Finova $33.4
million (the "Deficiency").
Further, as part of the forbearance agreement, Smart Choice has
granted Finova (i) an option to purchase Paaco (the "Paaco Option") for an
amount equal to the Deficiency, subject to shareholder approval and an
appraisal indicating the value of Paaco is not greater than the Deficiency, and
(ii) an option to purchase up to 100% of Smart Choice's remaining shares of
authorized but unissued common stock (approximately 38 million shares) (the
"Smart Choice Stock Option") at a price of $0.30 per share. The Smart Choice
Stock Option will terminate upon the closing of the exercise of the Paaco
Option. On December ___, 2001, Finova exercised the Paaco Option, subject to
the successful completion of its due diligence investigation. The Smart Choice
Stock Option will expire on March 8, 2002 if not earlier terminated upon the
closing of the sale of Paaco.
As a result of the Finova agreement and the lack of other available
capital, on November 9, 2001 Smart Choice began to wind-down its Florida-based
operations. If Paaco is sold to Finova pursuant to the exercise of the Paaco
Option, Smart Choice's remaining assets would consist of certain improved and
unimproved real estate in Titusville, Florida, including a 35,000 square-foot
office facility, and certain other current and fixed assets. Further assuming
the sale of Paaco, management presently anticipates that Smart Choice's
remaining assets will likely be sold by Smart Choice in an effort to realize
the maximum value for these assets and repay its obligations to unsecured
creditors to the extent possible.
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Consolidated Condensed Balance Sheet of Smart
Choice as of July 31, 2001 gives effect to (i) the sale of certain of the
Florida Finance Group's receivables and inventory to Finova at a public
foreclosure sale for $55 million, (ii) the expected sale of Paaco to Finova for
the Deficiency pursuant to Finova's exercise of the Paaco Option, and (iii) the
adjustment of certain Smart Choice assets to net realizable value, as if such
transactions and actions had occurred on that date.
Pro Forma Consolidated Statements of Operations of Smart Choice for
the year ended April 30, 2001 and the three months ended July 31, 2001 have not
been presented because after (i) the sale of
19
certain of the Florida Finance Group's receivables and inventory to Finova at a
public foreclosure sale, and (ii) the sale of Paaco to Finova pursuant to
Finova's exercise of the Paaco Option, Smart Choice essentially will have no
ongoing operations and is not expected to generate any revenues. Following the
sale of Paaco, management presently anticipates that Smart Choice's remaining
assets will likely be sold by Smart Choice in an effort to realize the maximum
value for these assets and repay its obligations to unsecured creditors to the
extent possible.
The pro forma information is based on the historical financial
statements of Smart Choice giving effect to the transactions and actions
described above and in the accompanying Notes to Pro Forma Consolidated
Condensed Balance Sheet and may not be indicative of the results that would
have occurred had the transactions and actions taken place on the date
indicated.
20
SMART CHOICE AUTOMOTIVE GROUP, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
UNAUDITED
JULY 31, 2001
(IN THOUSANDS)
Foreclosure Adjust
of Certain Smart Choice
Florida Assets to
Historical Finance Group Sale of Net Realizable Pro Forma
Smart Choice Assets(a) Paaco(b) Value(c) Smart Choice
------------ ------------- --------- -------------- ------------
Assets:
Cash and cash equivalents $ 851 $ (707) $ 144
Other receivables 1,539 (1,044) 495
Intercompany receivable (payable) $ (6,123) 6,123
Finance receivables, net 143,653 (63,845) (79,808)
Inventory 9,065 (4,384) (4,681)
Prepaid and other assets 710 (375) $ (150) 185
Deferred tax assets, net 16,510 (3,681) (12,829)
Property and equipment, net 12,012 (6,345) (2,417) 3,250
Goodwill, net 2,084 (2,084)
--------- --------- --------- -------- -------
$ 186,424 $ (74,352) $ (90,518) $(17,480) $ 4,074
========= ========= ========= ======== =======
Liabilities and stockholders' equity (deficit):
Accounts payable and accrued
liabilities $ 8,977 $ (4,942) $ 4,035
Income taxes payable 1,140 (1,140)
Revolving credit facilities 147,442 $ (55,000) (92,442)
Other borrowings 9,690 (5,660) 4,030
Deferred sales tax 4,957 (4,957)
--------- --------- --------- -------- -------
Total liabilities 172,206 (55,000) (109,141) 8,065
--------- --------- --------- -------- -------
Redemption value of put options 454 454
Stockholders' equity (deficit) 13,764 (19,352) 18,623 $(17,480) (4,445)
--------- --------- --------- -------- -------
$ 186,424 $ (74,352) $ (90,518) $(17,480) $ 4,074
========= ========= ========= ======== =======
The accompanying notes are an integral part of this pro forma
consolidated condensed balance sheet.
21
SMART CHOICE AUTOMOTIVE GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
a - Reflects the sale of the Florida Finance Group's finance receivables,
inventory, and an intercompany receivable from Paaco at a public
foreclosure auction where Finova purchased such assets for $55.0
million.
b - Reflects the sale of Paaco to Finova for an amount equal to the
Deficiency ($33.4 million) on the Florida Finance Group's revolving
credit facility with Finova.
c - To reduce Smart Choice's and the Florida Finance Group's remaining
assets to net realizable value.
22
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material federal income
tax consequences of the sale of Paaco. The discussion is based on the Internal
Revenue Code of 1986, Treasury Department regulations, published positions of
the Internal Revenue Service, and court decisions now in effect, all of which
are subject to change, potentially with retroactive effect. This summary is
provided for general information only and does not address all aspects of the
possible federal income tax consequences of the proposed sale of Paaco and is
not intended as tax advice to any person. In particular, this summary does not
consider the federal income tax consequences to individual shareholders of
Smart Choice in light of their individual investment circumstances or to
shareholders subject to special treatment under the federal income tax laws.
This summary does not address any consequence of the proposed sale of Paaco
under any state, local or foreign tax laws.
The transaction will have no tax consequences to the Smart Choice
shareholders because Smart Choice is a C corporation. Therefore, Smart Choice's
shareholders will not recognize any gain or loss as a result of the proposed
transaction. The only tax consequences will be at the corporate level.
If Smart Choice ultimately makes a non-liquidating distribution or a
liquidating distribution to shareholders, the receipt of these distributions
may have tax consequences to the shareholders.
YOU ARE ENCOURAGED TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC
TAX CONSEQUENCES OF THE PROPOSED TRANSACTION TO YOU, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
DISSENTER'S RIGHTS
Smart Choice is a Florida corporation. The following is a summary of
the Florida statutes that set forth the procedures for dissenting from the
proposed transaction, for demanding payment of the fair value of the shares
held by the dissenter, and for determining the fair value of such shares. Smart
Choice will not send any notice of any action necessary to maintain your
dissenters' rights.
IF YOU DESIRE TO EXERCISE YOUR STATUTORY RIGHTS AS A DISSENTER OR TO
PRESERVE YOUR RIGHT TO DO SO, YOU SHOULD CAREFULLY REVIEW THIS SUMMARY AND THE
DISSENTERS' RIGHTS STATUTES, COPIES OF WHICH ARE ATTACHED AS APPENDIX A TO THIS
INFORMATION STATEMENT. FAILURE TO COMPLY WITH THE PROCEDURES IN THE DISSENTERS'
RIGHTS STATUTES WILL RESULT IN THE LOSS OF YOUR DISSENTERS' RIGHTS.
For Smart Choice, the sale of Paaco will provide Smart Choice with an
opportunity to avoid having to file for bankruptcy protection. Although the
proposed transactions with Finova will not result in any proceeds for Smart
Choice common shareholders, the Smart Choice Board of Directors believes that
the only other alternative for Smart Choice at this point would be to file for
bankruptcy protection. A bankruptcy would not be expected to result in any
assets remaining for sale and/or distribution to common shareholders. In the
judgment of the Smart Choice Board of Directors, the proposed transactions with
Finova will maximize the value of Smart Choice's assets. Smart Choice can make
no assurance that the remaining assets of Smart Choice can be disposed of in a
manner that might allow Smart Choice to satisfy its creditors and result in
some value to Smart Choice's common shareholders in the future. It is very
unlikely that shareholders will receive any distributions in the future.
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A shareholder that desires to exercise his or her rights as a
dissenter must satisfy all of the following conditions. A shareholder who
wishes to assert dissenters' rights must deliver to Smart Choice, within 20
days after the date on which Smart Choice delivers this written notice, a
notice of such election to dissent, stating his or her name and address, the
number of shares as to which he or she dissents, and a demand for payment of
the fair value of his or her shares. Any shareholder filing an election to
dissent must deposit his or her stock certificates with Smart Choice
simultaneously with filing the election. Any shareholder failing to timely file
this election will be bound by the terms of the proposed transaction. An
election may be withdrawn at any time before an offer is made by Smart Choice
to pay for the dissenting shares. After an offer is made, an election may not
be withdrawn unless Smart Choice consents.
Within 10 days after the expiration of the period in which
shareholders may file their election to dissent but in no case later than 90
days from the shareholders' approval of such proposed transaction, Smart Choice
is required to make a written offer to each dissenting shareholder who has
timely filed an election to pay the fair value of the dissenting shares. This
offer must be accompanied by certain financial information regarding Smart
Choice. Under the Florida dissenters' rights statutes, "fair value" means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable. If
Smart Choice's offer is accepted within 30 days after it is made, Smart Choice
will pay for the dissenting shares within 90 days after the offer is made or
the consummation of the proposed transaction, whichever is later. When this
payment is made, the dissenting shareholder will no longer have any interest in
the shares.
If Smart Choice fails to make a written offer within the required time
period or if Smart Choice makes an offer and the dissenting shareholder does
not accept the offer within 30 days, Smart Choice must file an action in a
court of competent jurisdiction, requesting that the fair value of the
dissenting shares be determined. This action must be filed within 30 days after
receipt of a written demand from any dissenting shareholder that is given
within 60 days from the date of the corporate action. At its election, Smart
Choice may file this action at any time within this 60-day period. If Smart
Choice fails to file this action, any dissenting shareholder may do so in the
name of Smart Choice.
A shareholder may assert dissenters' rights as to fewer than all of
the shares of common stock registered in his or her name.
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WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith, files reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC").
These reports, proxy statements and other information filed by the Company with
the SEC may be inspected without charge at the public reference section of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Copies of
this material also may be obtained from the SEC at prescribed rates. The SEC
also maintains a website that contains reports, proxy and information
statements and other information regarding public companies that file reports
with the SEC. Copies of these materials may be obtained from the SEC's website
at http://www.sec.gov.
SMART CHOICE AUTOMOTIVE GROUP, INC.
Winter Park, Florida
December __, 2001
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APPENDIX A
607.1301 DISSENTER'S RIGHTS; DEFINITIONS.--The following definitions
apply to ss. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a
dissenting shareholder before the corporate action or the surviving or
acquiring corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which
the shareholders' vote authorizing the proposed action was taken, the date on
which the corporation received written consents without a meeting from the
requisite number of shareholders in order to authorize the action, or, in the
case of a merger pursuant to s. 607.1104, the day prior to the date on which a
copy of the plan of merger was mailed to each shareholder of record of the
subsidiary corporation.
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT.--(1) Any shareholder of a
corporation has the right to dissent from, and obtain payment of the fair value
of his or her shares in the event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is
a party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its
parent under s. 607.1104, and the shareholders would have been entitled to vote
on action taken, except for the applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation, other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange pursuant to s. 607.1202, including a sale in dissolution but not
including a sale pursuant to court order or a sale for cash pursuant to a plan
by which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within 1 year after the date of sale;
(c) As provided in s. 607.0902(11), the approval of a
control-share acquisition;
(d) Consummation of a plan of share exchange to which the
corporation is a party as the corporation the shares of which will be acquired,
if the shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the
shareholder is entitled to vote on the amendment and if such amendment would
adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any
of his or her shares;
2. Altering or abolishing the voting rights pertaining to any of
his or her shares, except as such rights may be affected by the voting rights
of new shares then being authorized of any existing or new class or series of
shares;
3. Effecting an exchange, cancellation, or reclassification of
any of his or her shares, when such exchange, cancellation, or reclassification
would alter or abolish the shareholder's voting rights or alter his or her
percentage of equity in the corporation, or effecting a reduction or
cancellation of accrued dividends or other arrearages in respect to such
shares;
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4. Reducing the stated redemption price of any of the
shareholder's redeemable shares, altering or abolishing any provision relating
to any sinking fund for the redemption or purchase of any of his or her shares,
or making any of his or her shares subject to redemption when they are not
otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any
of the shareholder's preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of the
shareholder's preferred shares; or
7. Reducing any stated preferential amount payable on any of the
shareholder's preferred shares upon voluntary or involuntary liquidation; or
(f) Any corporate action taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder is entitled to
dissent and obtain payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in
paragraph (1)(e) has the right to dissent only as to those of his or her shares
which are adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares
registered in his or her name. In that event, the shareholder's rights shall be
determined as if the shares as to which he or she has dissented and his or her
other shares were registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this
section does not apply with respect to a plan of merger or share exchange or a
proposed sale or exchange of property, to the holders of shares of any class or
series which, on the record date fixed to determine the shareholders entitled
to vote at the meeting of shareholders at which such action is to be acted upon
or to consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his
or her shares under this section may not challenge the corporate action
creating his or her entitlement unless the action is unlawful or fraudulent
with respect to the shareholder or the corporation.
607.1320 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.--(1)(a) If a
proposed corporate action creating dissenters' rights under s. 607.1302 is
submitted to a vote at a shareholders' meeting, the meeting notice shall state
that shareholders are or may be entitled to assert dissenters' rights and be
accompanied by a copy of ss. 607.1301, 607.1302, and 607.1320. A shareholder
who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for his or her shares if
the proposed action is effectuated, and
2. Not vote his or her shares in favor of the proposed action. A
proxy or vote against the proposed action does not constitute such a notice of
intent to demand payment.
(b) If proposed corporate action creating dissenters' rights
under s. 607.1302 is effectuated by written consent without a meeting, the
corporation shall deliver a copy of ss. 607.1301, 607.1302, and 607.1320 to
each shareholder simultaneously with any request for the shareholder's written
consent or, if such a request is not made, within 10 days after the date the
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corporation received written consents without a meeting from the requisite
number of shareholders necessary to authorize the action.
(2) Within 10 days after the shareholders' authorization date,
the corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his or her shares pursuant to
paragraph (1)(a) or, in the case of action authorized by written consent, to
each shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
(3) Within 20 days after the giving of notice to him or her, any
shareholder who elects to dissent shall file with the corporation a notice of
such election, stating the shareholder's name and address, the number, classes,
and series of shares as to which he or she dissents, and a demand for payment
of the fair value of his or her shares. Any shareholder failing to file such
election to dissent within the period set forth shall be bound by the terms of
the proposed corporate action. Any shareholder filing an election to dissent
shall deposit his or her certificates for certificated shares with the
corporation simultaneously with the filing of the election to dissent. The
corporation may restrict the transfer of uncertificated shares from the date
the shareholder's election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder
shall thereafter be entitled only to payment as provided in this section and
shall not be entitled to vote or to exercise any other rights of a shareholder.
A notice of election may be withdrawn in writing by the shareholder at any time
before an offer is made by the corporation, as provided in subsection (5), to
pay for his or her shares. After such offer, no such notice of election may be
withdrawn unless the corporation consents thereto. However, the right of such
shareholder to be paid the fair value of his or her shares shall cease, and the
shareholder shall be reinstated to have all his or her rights as a shareholder
as of the filing of his or her notice of election, including any intervening
preemptive rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by
the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in
the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or
the shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by
a court has been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such
shareholder is not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which
shareholders may file their notices of election to dissent, or within 10 days
after such corporate action is effected, whichever is later (but in no case
later than 90 days from the shareholders' authorization date), the corporation
shall make a written offer to each dissenting shareholder who has made demand
as provided in this section to pay an amount the corporation estimates to be
the fair value for such shares. If the corporate action has not been
consummated before the expiration of the 90-day period after the shareholders'
authorization date, the offer may be made conditional upon the consummation of
such action. Such notice and offer shall be accompanied by:
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(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available date and not more than
12 months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the
12-month period ended on the date of such balance sheet or, if the corporation
was not in existence throughout such 12-month period, for the portion thereof
during which it was in existence.
(6) If within 30 days after the making of such offer any
shareholder accepts the same, payment for his or her shares shall be made
within 90 days after the making of such offer or the consummation of the
proposed action, whichever is later. Upon payment of the agreed value, the
dissenting shareholder shall cease to have any interest in such shares.
(7) If the corporation fails to make such offer within the period
specified therefor in subsection (5) or if it makes the offer and any
dissenting shareholder or shareholders fail to accept the same within the
period of 30 days thereafter, then the corporation, within 30 days after
receipt of written demand from any dissenting shareholder given within 60 days
after the date on which such corporate action was effected, shall, or at its
election at any time within such period of 60 days may, file an action in any
court of competent jurisdiction in the county in this state where the
registered office of the corporation is located requesting that the fair value
of such shares be determined. The court shall also determine whether each
dissenting shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his or her shares. If
the corporation fails to institute the proceeding as herein provided, any
dissenting shareholder may do so in the name of the corporation. All dissenting
shareholders (whether or not residents of this state), other than shareholders
who have agreed with the corporation as to the value of their shares, shall be
made parties to the proceeding as an action against their shares. The
corporation shall serve a copy of the initial pleading in such proceeding upon
each dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons and compliant and upon each
nonresident dissenting shareholder either by registered or certified mail and
publication or in such other manner as is permitted by law. The jurisdiction of
the court is plenary and exclusive. All shareholders who are proper parties to
the proceeding are entitled to judgment against the corporation for the amount
of the fair value of their shares. The court may, if it so elects, appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers shall have such power and authority
as is specified in the order of their appointment or an amendment thereof. The
corporation shall pay each dissenting shareholder the amount found to be due
him or her within 10 days after final determination of the proceedings. Upon
payment of the judgment, the dissenting shareholder shall cease to have any
interest in such shares.
(8) The judgment may, at the discretion of the court, include a
fair rate of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be
determined by the court and shall be assessed against the corporation, but all
or any part of such costs and expenses may be apportioned and assessed as the
court deems equitable against any or all of the dissenting shareholders who are
parties to the proceeding, to whom the corporation has made an offer to pay for
the shares, if the court finds that the action of such shareholders in failing
to accept such offer was arbitrary, vexatious, or not in good faith. Such
expenses shall include reasonable compensation for, and reasonable expenses of,
the appraisers, but shall exclude the fees and expenses of counsel for, and
experts employed by, any party. If the fair value of the shares, as
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determined, materially exceeds the amount which the corporation offered to pay
therefor or if no offer was made, the court in its discretion may award to any
shareholder who is a party to the proceeding such sum as the court determines
to be reasonable compensation to any attorney or expert employed by the
shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the
agreed value thereof or pursuant to payment of the judgment entered therefor,
as provided in this section, may be held and disposed of by such corporation as
authorized but unissued shares of the corporation, except that, in the case of
a merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
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