10-Q 1 g74808e10-q.txt SMART CHOICE AUTOMOTIVE GROUP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: Commission file number: JANUARY 31, 2002 1-14082 SMART CHOICE AUTOMOTIVE GROUP, INC. (Exact name of registrant as specified in its charter) FLORIDA 59-1469577 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) P.O. BOX 5020, WINTER PARK, FLORIDA (Address of principal executive offices) 32793 (Zip Code) (321) 383-4209 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Title of Each Class March 12, 2002 Common stock, par value $.01 per share 8,590,547 PART I ITEM 1. FINANCIAL STATEMENTS SMART CHOICE AUTOMOTIVE GROUP, INC. CONSOLIDATED BALANCE SHEETS

~~Outstanding~~January at31, ~~Title~~2002 of(unaudited) ~~Each~~April ~~Class~~30, ~~December~~2001 17----------- -------------- Assets: Cash and cash equivalents $ 192,364 ~~2001~~$ Prepaid and other assets 128,553 371,055 Florida Finance Group assets held for sale 3,736,639 97,577,626 Paaco assets held for sale 97,103,697 92,225,714 ------------ ------------ $101,161,253 $190,174,395 ============ ============ Liabilities and stockholders' equity: Accounts payable and accrued liabilities $ 447,772 $ 2,295,674 Other borrowings 1,599,563 1,882,344 Florida Finance Group liabilities 2,932,178 93,980,956 Paaco liabilities 74,385,722 76,070,298 ------------ ------------ Total liabilities 79,365,235 174,229,272 ------------ ------------ Contingent redemption value of put options 453,371 453,371 Stockholders' equity: Preferred stock, par value $.01 per share, 2,000,000 shares authorized; none issued or outstanding Common stock, par value $.01 per share, 50,000,000 shares authorized; 9,762,270 issued and outstanding 97,623 97,623 Additional paid-in capital 13,832,832 13,832,832 Retained earnings 7,412,192 1,561,297 ------------ ------------ Total stockholders' equity 21,342,647 15,491,752 ------------ ------------ $101,161,253 $190,174,395 ============ ============

The accompanying notes are an integral part of these consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF OPERATIONS SMART CHOICE AUTOMOTIVE GROUP, INC. (UNAUDITED)

~~October~~Three Months Ended Nine Months Ended January 31, ~~2001~~January ~~(unaudited)~~31, ~~April~~2002 ~~30,~~2001 2002 2001 ---- ---- ----~~-----~~ ----~~-------------~~ ~~Assets~~Costs and expenses: ~~Cash~~Selling, general and ~~cash~~administrative ~~equivalents~~ $ 3176,~~685,690~~082 $ ~~436~~189,~~262~~538 ~~Other~~$ ~~receivables 563~~629,~~775~~046 ~~1,344,238~~$ ~~Finance receivables~~661,915 ~~net~~----------- ~~122,439,871~~---------- ~~149,656,124~~---------- ~~Inventory~~---------- ~~9,898,889~~(Loss) ~~7,980,291~~from ~~Prepaid~~continuing ~~and~~operations ~~other assets 770~~(176,~~283~~082) ~~607~~(189,~~567~~538) ~~Deferred tax assets~~(629,046) ~~net 3~~(661,~~373,921~~915) ~~15,605,094~~Discontinued ~~Property~~operations: ~~and~~Income ~~equipment,~~(loss) net 9of taxes 40,~~489~~867,~~301~~952 12(537,~~186,901~~813) ~~Goodwill~~6,479,941 ~~net~~ 2,~~084~~169,~~017~~237 ----------- ---------- ---------- ---------- $Net ~~150~~income (loss) 40,~~221~~691,~~730~~870 $(727,351) ~~189~~5,~~900~~850,~~494~~895 1,507,322 =========== ========== ========== ========== ~~Liabilities~~Basic ~~and~~earnings ~~stockholders' equity~~ (~~deficit~~loss): ~~Accounts~~per ~~payable~~share: ~~and~~Continuing ~~accrued~~operations ~~liabilities~~ $ ~~7,389,436~~(.02) $ ~~10,425,072~~(.02) ~~Income~~$ ~~taxes~~(.06) ~~payable~~$ ~~1,139,810~~(.07) ~~1,139,810~~Discontinued ~~Revolving~~operations ~~credit~~4.19 ~~facilities~~(.05) ~~147,441,944~~.66 ~~147,441,944~~.22 ~~Other borrowings 8,339,922 9,985,391 Deferred sales tax 4,806,470 4,963,154~~ -----------~~------~~ ----------~~-------~~ ~~Total liabilities 169,117,582 173,955,371~~ ----------~~-------~~ ----------~~-------~~ ~~Contingent~~Total ~~redemption~~$ ~~value~~4.17 of$ ~~put options 453,371 453,371 Commitments and contingencies Stockholders' equity~~ (~~deficit~~.07): ~~Preferred~~$ ~~stock,~~.60 ~~par value~~ $ .0115 ~~per~~=========== ~~share,~~========== ~~2,000,000~~========== ~~shares~~========== ~~authorized;~~Diluted ~~none~~earnings ~~issued~~(loss) ~~or outstanding Common stock, par value $.01~~ per share,: ~~50,000,000~~Continuing ~~shares~~operations ~~authorized;~~$ ~~9,762,270~~(.02) ~~issued~~$ ~~and~~(.02) ~~outstanding~~$ ~~97,623~~(.06) ~~97,623~~$ ~~Additional~~(.07) ~~paid-in~~Discontinued ~~capital~~operations ~~13,832,832~~4.19 ~~13,832,832 Retained earnings~~ (~~accumulated deficit~~.05) ~~(33,279,678)~~.66 ~~1,561,297~~.22 -----------~~------~~ ----------~~-------~~ ~~Total stockholders' equity (deficit) (19,349,223) 15,491,752~~ ----------~~-------~~ ----------~~-------~~ Total $ ~~150,221,730~~4.17 $ ~~189,900,494~~(.07) $ .60 $ .15 =========== ========== ========== ========== Weighted average number of shares outstanding: Basic 9,762,270 9,794,103 9,762,270 9,800,027 Diluted 9,762,270 9,794,103 9,762,270 9,800,027

The accompanying notes are an integral part of these consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS SMART CHOICE AUTOMOTIVE GROUP, INC. (UNAUDITED)

~~Three~~Nine Months Ended ~~Six~~January ~~Months Ended October~~ 31, ~~October~~2002 ~~31,~~ 2001 ~~2000 2001 2000~~ ----~~---------~~ ----~~---------~~ ~~-------------~~Operating ~~------------- Revenues~~activities: ~~Sales~~Net $income ~~33,907,405~~ $ 495,~~696~~850,~~443~~895 $ 701,~~499~~507,~~118~~322 $Add: ~~93,485,995~~Income ~~Interest~~from ~~income~~discontinued ~~8,801,037~~operations 9(6,~~525~~479,~~288~~941) 18(2,~~448~~169,~~685~~237) ~~18,898,355 Other 499,056 124,054 780,429 355,085~~ ------------- ------------- ~~-------------~~Loss ~~-------------~~from ~~43,207,498~~continuing ~~59,345,785~~operations 89(629,~~728,232~~046) ~~112~~(661,~~739,435~~915) ~~-------------~~Adjustments ~~-------------~~to ~~-------------~~reconcile ~~-------------~~(loss) ~~Costs~~from ~~and~~continuing ~~expenses:~~operations ~~Cost~~to ofnet ~~sales~~cash ~~21,947,473~~Provided ~~30,754,372~~by ~~45,126,873~~(used ~~56,942,713~~in) ~~Selling,~~operating ~~general~~activities: ~~and~~Changes ~~administrative~~in ~~11,054,178~~operating ~~10,854,945~~assets ~~21,832,779~~and ~~20,659,229~~liabilities: ~~Provision~~Prepaids ~~for~~and ~~credit~~other ~~losses~~assets 9242,~~987,918~~502 11166,~~446,207~~501 ~~21,040,583~~Accounts ~~22,038,412~~payable ~~Interest~~and ~~expense~~accrued ~~3,430,371~~liabilities 4(1,~~539~~847,~~025~~902) 7(527,~~130,296~~233) ~~8,737,121~~----------- ~~Depreciation~~----------- ~~and~~Net ~~amortization~~cash ~~430,352~~used ~~394,943~~in ~~845,485~~operating ~~773,610~~activities ~~Write-down of assets 16~~(2,~~232~~234,~~861~~446) 16(1,~~232~~022,~~861~~647) ------------- ------------- Financing activities: Repayments of other borrowings (282,781) (281,538) ------------- ------------- ~~63,083,153~~Net ~~57,989,492~~cash ~~112~~used in financing activities (282,~~208,877~~781) ~~109~~(281,~~151,085~~538) ------------- ------------- Cash used in continuing operations (2,517,227) (1,304,185) Cash provided by (used in) discontinued operations 6,557,831 (142,268) ------------- ------------- ~~Income~~Increase (~~loss~~decrease) ~~before~~in ~~taxes~~cash ~~(19,875,655)~~and 1cash equivalents 4,~~356~~040,~~293~~604 (221,~~480~~446,~~645~~453) ~~3,588,350~~Cash ~~Provision~~and ~~for~~cash ~~income~~equivalents ~~taxes~~at: ~~13,237,947~~Beginning ~~524,396~~of 12period 436,~~360,330~~262 1,~~353~~882,~~679~~716 ------------- ------------- End of period 4,476,866 436,263 Less: Cash and cash equivalents of discontinued operations (4,284,502) (436,263) ------------- ------------- ~~Net~~Cash ~~income~~and ~~(loss)~~cash $equivalents ~~(33,113,602)~~of $continuing ~~831,897~~operations $ ~~(34~~192,~~840,975)~~364 $ ~~2,234,671~~ ============= ============= ============= ============= Earnings (loss) per share: Basic $ (3.39) $ .08 $ (3.57) $ .23 Diluted $ (3.39) $ .08 $ (3.57) $ .23 Weighted average number of shares outstanding: Basic 9,762,270 9,814,000 9,762,270 9,794,103 Diluted 9,762,270 9,814,000 9,762,270 9,794,103

The accompanying notes are an integral part of these consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SMART CHOICE AUTOMOTIVE GROUP, INC. A - DESCRIPTION OF BUSINESS Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively with all of its subsidiaries (the "Company") was in the business of selling and financing used automobiles and trucks principally to consumers with limited or damaged credit histories. Smart Choice's Florida-based subsidiaries are referred to as the "Florida Finance Group" or "FFG". Smart Choice's Texas-based subsidiaries, which include Paaco Automotive Group, L.P. and Premium Auto Acceptance Corporation, are referred to as "Paaco". As of January 31, Paaco operated 13 used car dealerships in Texas (principally in the cities of Dallas and Houston). As discussed in Note B, the Company has disposed of all of its operations. B - SETTLEMENT AGREEMENT WITH FINOVA On November 8, 2001, Smart Choice, the Florida Finance Group and Paaco, entered into a forbearance agreement with Finova that resulted in the foreclosure of the Florida Finance Group's receivables and inventory, and the probable sale of Paaco to Finova. Pursuant to the forbearance agreement, on November 9, 2001, the collateral for the Florida Finance Group's credit facility 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 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 39 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 12, 2001 Finova exercised its option to purchase Paaco subject to certain conditions. Finova subsequently assigned its option to purchase Paaco to Motive Group, L.P., a Texas limited partnership. On March 8, 2002 Motive Group, L.P. exercised its option and purchased Paaco. Under the purchase agreement, Motive Group, L.P. will assume all debt of Paaco. Smart Choice will no longer have any operations of substance and its remaining assets will be sold in an effort to repay its obligations to unsecured creditors to the extent possible. Smart Choice's remaining assets 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. C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended January 31, 2002 are not necessarily indicative of the results that may be expected for the year ended April 30, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended April 30, 2001. Discontinued operations As a result of the Finova agreement and the lack of other available capital, on November 9, 2001 the Florida Finance Group began to wind-down its operations. The Florida Finance Group has been accounted for as a discontinued operation. Prior year amounts have been restated to conform to the fiscal 2002 presentation for comparative purposes. As a result of the exercise of the Paaco option on March 8, 2002, Paaco has also been accounted for a discontinued operation. Prior year amounts have been restated to conform to the fiscal 2002 presentation for comparative purposes. Paaco and Florida Finance Group comprise all the operations of Smart Choice and therefore no continuing operations are reported for the period included herein. It is not anticipated that Smart Choice will have any future operations. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2002 presentation. 5 D - FINANCE RECEIVABLES As discussed in Note B, 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. In addition, Paaco was sold March 8, 2002 pursuant to assignment by Finova of its Paaco option. All financed receivables for Florida Finance Group and Paaco are included in assets held for sale on the accompanying balance sheet. E - DEBT A summary of debt as of January 31, 2002 and April 30, 2001 is as follows:

~~Six~~Other ~~Months~~Borrowings ~~Ended October 31, 2001 2000~~ ------------ ------------ Operating activities: Net income (loss) $(34,840,975) $ 2,234,671 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 845,485 773,610 Accretion of purchase discount (256,644) (522,595) Deferred income taxes 12,231,173 Provision for credit losses 21,040,583 22,038,412 Write-down of assets 16,232,861 Loss on sale of assets 45,242 Changes in operating assets and liabilities: Other receivables 780,463 (233,917) Finance receivable originations (65,980,838) (90,217,855) Finance receivable collections 47,686,109 40,479,015 Inventory acquired in repossession 12,804,322 13,457,195 Inventory (1,918,598) (1,679,985) Prepaids and other assets (315,160) (445,708) Accounts payable, accrued liabilities and deferred sales tax (3,192,321) (864,068) ------------ ------------ ~~Net cash provided by (used in) operating activities 5,161,702 (14,981,225)~~ ------------ ------------ ~~Investing activities: Purchase of property and equipment (436,805) (1,427,058) Sale of assets 170,000~~ ------------ ------------ ~~Net cash used in investing activities (266,805) (1,427,058)~~ ------------ ---------------- ~~Financing~~Facility ~~activities:~~Interest ~~Proceeds~~Balance ~~from~~at ~~revolving~~Borrower ~~credit~~Lender ~~facilities,~~Amount ~~net~~Rate ~~15,913,880~~Maturity ~~Repayments~~January of31, ~~other~~2002 ~~borrowings~~April (130,~~645,469)~~ ~~(800,000)~~2001 -------- ------ ------ ---- -------- ~~Net cash provided by (used in) financing activities (1,645,469) 15,113,880~~ ---------------- -------------- ~~Increase~~Smart ~~(decrease)~~Choice inHigh ~~cash~~Capital ~~and~~et ~~cash~~al ~~equivalents~~N/A 310.0% Nov 2001 725,~~249,428~~000 (1725,~~294,403)~~000 ~~Cash~~Florida ~~and~~Fin. ~~cash~~Grp ~~equivalents~~Individuals ~~at:~~N/A ~~Beginning~~Various ofVarious ~~period~~401,007 ~~436~~565,~~262~~948 1Various Various N/A Various Various 473,~~882~~556 591,~~716~~396 ------------ ------------ ~~End of period~~ $ 31,~~685~~599,~~690~~563 $ ~~588~~1,~~313~~882,344 ============ ============

F - DISCONTINUED OPERATIONS Since January 2001 Florida Finance Group has been over-advanced on their revolving credit facility with Finova. On November 8, 2001, Florida Finance Group and Paaco entered into an agreement with Finova that resulted in the foreclosure of Florida Finance Group's receivables and inventory. The Florida Finance Group ceased operations in November 2001 and Paaco was sold March 11, 2002. Smart Choice's remaining assets consist principally of a 35,000 square foot office building and certain other current and fixed assets. The building and other fixed assets will be sold or conveyed by Smart Choice in an effort to realized the maximum value for these assets and repay its obligations to unsecured creditors to the extent possible. As a result of the foreclosure of Florida Finance Group's receivables and inventory and the agreement with Finova that the deficiency of approximately $33 million be satisfied by the sale of Paaco, Smart Choice recorded income from forgiveness of indebtedness from write off of the outstanding balance of the Finova loan of $88,394,135. This was partially offset by the effect of the foreclosure and other items resulting in a gain of $40,691,870 for the quarter ending January 31, 2002. G - EARNINGS (LOSS) PER SHARE A summary reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share for the Nine Months Ended January 31, 2002 and 2001 is as follows:

~~Net Income (Loss) Diluted Earnings (Loss) Per Share ------------------------------------------------- -------------------------------------------------~~ Three Months Ended ~~Six~~Nine Months Ended ~~Three~~January ~~Months Ended Six Months Ended October~~ 31, ~~October~~January 31, ~~October~~2002 ~~31, October 31,~~ 2001 ~~2000~~2002 2001 ~~2000 2001 2000 2001 2000~~ ----~~----~~ ----~~----~~ ----~~----~~ ----~~----~~ ~~--------~~Net ~~--------~~income ~~-------- -------- As reported $~~(~~33,114~~loss) $40,691,870 ~~832~~ $ (34727,~~841~~351) $ 25,~~235~~850,895 $1,507,322 ~~(3.39)~~=========== $========== ~~.08~~========== $========== ~~(3.57)~~Average $shares ~~.23~~outstanding-basic ~~Add~~9,762,270 ~~back~~9,794,103 ~~goodwill~~9,762,270 ~~amort.~~9,800,027 61Dilutive ~~123~~options ~~.01 .01~~ -------- ---~~-----~~ -------- --~~------~~ -------- --~~------~~ -------- --~~------~~ AsAverage ~~adjusted~~shares ~~$(33~~outstanding-diluted 9,~~114)~~762,270 $9,794,103 ~~893 $(34~~9,~~841)~~762,270 ~~$ 2~~9,~~358~~800,027 ~~$ (3.39) $ .09 $ (3.57) $ .24~~ =========== ========== ========== ========== Earnings (loss) per share: Basic $ 4.17 $ (.07) $ .60 $ .15 Diluted $ 4.17 $ (.07) $ .60 $ .15 Antidilutive securities not included: Options and warrants 426,021 404,686 426,021 404,686 =========== ========== ========== ==========

6 H - COMMITMENTS AND CONTINGENCIES Other Litigation In the ordinary course of business, the Company has become a defendant in various other types of legal proceedings. The Company cannot determine at this time the amount of the ultimate exposure, if any, these ordinary course of business lawsuits may have on the Company. I - SUPPLEMENTAL CASH FLOW INFORMATION Cash flows from continuing operations represent cash used for expenses to wind down the operations of Florida Finance Group's operations and for repayment of certain other borrowings. Cash balances as of January 31, 2002 in the amount of $192,364 will be used to pay off accounts payable and accrued expenses to the extent possible. As of the filing date, March 15, 2002 two employees remain in Florida Finance Group to provide final reporting and negotiate creditor settlements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this report. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, for--ward-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 sale of Paaco to Finova pursuant to the Paaco Option, the ability of Smart Choice to sell its remaining assets and repay unsecured creditors to the extent possible, continuation of Paaco's borrowings from Finova, changes in interest rates, competition, dependence on existing management, economic conditions (particularly in the State of Texas), changes in tax laws or the administration of such laws and changes in lending laws or regulations. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. RESULTS OF OPERATIONS Smart Choice Automotive Group, Inc. ("Smart Choice") and collectively with all of its subsidiaries (the "Company") was in the business of selling and financing used automobiles and trucks principally to consumers with limited or damaged credit histories. Smart Choice's Florida-based subsidiaries are referred to as the "Florida Finance Group" or "FFG". Smart Choice's Texas-based subsidiaries, which include Paaco Automotive Group, L.P. and Premium Auto Acceptance Corporation, are referred to as "Paaco". As of January 31, Paaco operated 12 used car dealerships in Texas (principally in the cities of Dallas and Houston). As discussed in Note B, on November 9, 2001 the Company has closed Florida Finance Group and sold Paaco. As a result of the foreclosure of Florida Finance Group's receivables and inventory and the agreement with Finova that the deficiency of approximately $33 million be satisfied by the sale of Paaco, Smart Choice recorded income from forgiveness of indebtedness from write off of the outstanding balance of the Finova loan of $88,394,135. This was partially offset by the effect of the foreclosure and other items resulting in a gain of $40,691,870 for the quarter ending January 31, 2002. 7 LIQUIDITY AND CAPITAL RESOURCES As discussed in Note B, on November 9, 2001 the Company began to wind-down its Florida-based operations. Further, Smart Choice granted Finova Capital Corporation ("Finova"), the primary lender to its subsidiaries, an option to purchase Paaco. On December 12, 2001 Finova exercised its option to purchase Paaco. Finova subsequently assigned its option to purchase Paaco to Motive Group, L.P., a Texas limited partnership. On March 8, 2002 Motive Group, L.P. exercised its option and purchased Paaco. Under the purchase agreement, Motive Group, L.P. will assume all debt of Paaco. Florida Finance Group has no further sources of income or cash flow. All future operations and wind down activities will be funded from current cash balances. It is anticipated that current cash balances will be sufficient to fund a limited operation and settle outstanding non-secured creditor obligations to the extent possible. SMART CHOICE / FLORIDA FINANCE GROUP On November 8, 2001, Smart Choice, the Florida Finance Group and Paaco, entered into a forbearance agreement with Finova, the primary lender to Smart Choice's subsidiaries, that resulted in the foreclosure of the Florida Finance Group's receivables and inventory, and the probable sale of 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 ($25 million over-advanced at September 30, 2001), which constituted an event of default under the facility. 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 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 39 million shares) (the "Smart Choice Stock Option") at a price of $0.30 per share. As a result of the Finova agreement and the lack of other available capital, on November 9, 2001 the Florida Finance Group began to wind-down its operations. On December 12, 2001 Finova exercised its option to purchase Paaco subject to certain conditions. Finova subsequently assigned its option to purchase Paaco to Motive Group, L.P., a Texas limited partnership. On March 8, 2002 Motive Group, L.P. exercised its option and purchased Paaco. Under the purchase agreement, Motive Group, L.P. will assume all debt of Paaco. As of January 31, 2002 Florida Finance Group had five employees remaining to perform final accounting and wind down activities. It is anticipated that two employees will remain with the company indefinitely to finalize creditor negotiations and other activities necessary to close the Company. It is expected that current cash balances will be sufficient to support a minimal operation and settle outstanding non-secured creditor obligations to the extent possible. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company adopted SFAS 141 effective May 1, 2001. Such adoption did not have any impact on the Company's financial position or results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually, and in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company adopted SFAS 142 effective May 1, 2001. Such adoption did not have a material impact on the Company's financial position or results of operations. 8 In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets", which requires a single accounting model to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a "component of an entity" (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity that is classified as held for sale or has been disposed of is presented as a discontinued operation if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component. The Company adopted SFAS 144 effective August 1, 2001. Such adoption did not have any impact on the Company's financial position or results of operations. PART II ITEM 3. DEFAULTS UPON SENIOR SECURITIES On November 8, 2001, Smart Choice, the Florida Finance Group and Paaco, entered into a forbearance agreement with Finova, the primary lender to Smart Choice's subsidiaries, that resulted in the foreclosure of the Florida Finance Group's receivables and inventory, and the probable sale of 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 ($25 million over-advance at September 30, 2001), which constituted an event of default under the facility. 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 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 39 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. Presently, Smart Choice has approximately 9.8 million shares of common stock outstanding. Both the Paaco Option and the Smart Choice Stock Option expire March 8, 2002. As a result of the Finova agreement and the lack of other available capital, on November 9, 2001 the Florida Finance Group began to wind-down its operations. On December 12, 2001 Finova exercised its option to purchase Paaco subject to certain conditions. As of January 31, 2002, Paaco was also in violation of certain provisions of its loan agreement with Finova. As a result of Paaco's loan covenant violations, on November 8, 2001 Finova accelerated the maturity of Paaco's revolving credit facility such that the entire balance is currently due and payable. Finova subsequently assigned its option to purchase Paaco to Motive Group, L.P., a Texas limited partnership. On March 8, 2002 Motive Group, L.P. exercised its option and purchased Paaco. Under the purchase agreement, Motive Group, L.P. will assume all debt of Paaco. ITEM 5. OTHER INFORMATION CHANGE IN CONTROL Effective March 11, 2002, Crown Group, Inc. ("Crown") sold to Ed Ernst, the Chief Executive Officer of Smart Choice, all of the 6,857,907 shares of common stock of Smart Choice held by Crown for an aggregate purchase price of $100.00. Prior to this transaction, Mr. Ernst did not own any securities of Smart Choice. As a result of the transaction, Mr. Ernst now owns 79.8% of the issued and outstanding shares of common stock of Smart Choice, based on the 8,890,547 shares issued and outstanding on March 12, 2002. DISPOSITION OF ASSETS The disposition by Smart Choice of its Texas-based subsidiaries is described in Item 2 of this Report, which is incorporated by reference in response to this Item. 9 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits are filed herein. Exhibit 10.1 Sale and Purchase Agreement between Paaco Automotive Group, L.P., Premium Auto Acceptance Corporation, Paaco Holdings, L.L.C., Alouette Trucking, Inc., Smart Choice Automotive Group, Inc. and Motive Group, L.P. Exhibit 10.2 Acknowledgement of Assignment of Option between Smart Choice Automotive Group, Inc., Finova Capital Corporation and Motive Group, L.P. (b) Reports on Form 8-K: During the fiscal quarter ended January 31, 2002, the Company filed a report on Form 8-K dated November 21, 2001 (event date November 9, 2001) respecting Florida Finance Group's sale of receivables and inventory at a public foreclosure sale. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SMART CHOICE AUTOMOTIVE GROUP, INC. By: \s\ James Edward Ernst ----------------------------------------------- James Edward Ernst President and Chief Executive Officer (Principal Executive Officer) By: \s\ Larry Kiem ----------------------------------------------- Larry Kiem Controller (Principal Financial and Accounting Officer) Dated: March 15, 2002 10

October 31, April 30, 2001 2001 ---------------- ----------------- Finance receivables $ 187,461,456 $ 216,818,123 Unearned finance charges (19,327,228) (29,563,528) Allowance for credit losses (33,450,154) (36,991,295) Valuation allowance - Florida Finance Group (11,922,721) Purchase discounts (321,482) (607,176) --------------- --------------- $ 122,439,871 $ 149,656,124 =============== ===============

Six Months Ended October 31, 2001 2000 ------------ ------------ Balance at beginning of period $ 36,991,295 $ 32,290,918 Provision for credit losses 21,040,583 22,038,412 Net charge-offs (24,581,724) (19,887,537) ------------ ------------ Balance at end of period $ 33,450,154 $ 34,441,793 ============ ============

October 31, April 30, 2001 2001 ------------ ------------ Land and buildings $ 6,798,635 $ 6,811,701 Furniture, fixtures and equipment 3,532,479 5,053,556 Leasehold improvements 1,649,493 2,977,018 Less accumulated depreciation and amortization (2,491,306) (2,655,374) ------------ ------------ $ 9,489,301 $ 12,186,901 ============ ============

Revolving Credit Facilities --------------------------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Borrower Lender Amount Rate Maturity October 31, 2001 April 30, 2001 --------------- --------------- -------------- ------------- ------------ ------------------ ----------------- Florida Fin. Grp Finova $ 98 million Prime + 2.25% Nov 2001 $ 88,394,134 $ 88,394,134 Paaco Finova $ 62 million Prime + 2.00% Nov 2001 59,047,810 59,047,810 ----------------- ---------------- $ 147,441,944 $ 147,441,944 ================= ================

Other Borrowings ------------------------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Borrower Lender Amount Rate Maturity October 31, 2001 April 30, 2001 ----------------- ------------------ ----------- ------------- ------------ ------------------ ---------------- Smart Choice Huntington N/A Prime + .75% Oct 2001 $ 1,860,348 $ 1,932,373 Smart Choice High Capital et al N/A 10.0% Nov 2001 725,000 725,000 Florida Fin. Grp Individuals N/A Various Various 401,007 565,948 Florida Fin. Grp Leasing companies N/A Various Various 286,319 410,106 Paaco Crown Group N/A 8.50% Mar 2002 1,576,286 2,576,286 Paaco Individual N/A 9.50% May 2002 700,000 700,000 Paaco Washington Mutual N/A 8.50% May 2003 754,262 792,815 Paaco Heller Financial N/A Prime + 2.25% Dec 2015 577,468 586,836 Various Various N/A Various Various 1,459,232 1,696,027 ----------------- ---------------- $ 8,339,922 $ 9,985,391 ================= ================

Three Months Ended Six Months Ended October 31, October 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net income (loss) $(33,113,602) $ 831,897 $(34,840,975) $ 2,234,671 ============ ============ ============ ============ Average shares outstanding-basic 9,762,270 9,814,000 9,762,270 9,794,103 Dilutive options -- -- -- -- ------------ ------------ ------------ ------------ Average shares outstanding-diluted 9,762,270 9,814,000 9,762,270 9,794,103 ============ ============ ============ ============ Earnings (loss) per share: Basic $ (3.39) $ .08 $ (3.57) $ .23 Diluted $ (3.39) $ .08 $ (3.57) $ .23 Antidilutive securities not included: Options and warrants 426,021 404,686 426,021 404,686 ============ ============ ============ ============

Six Months Ended October 31, 2001 2000 ----------- ----------- Interest paid $ 6,727,530 $ 8,534,840 Income taxes paid (refunded) (362,143) 2,070,000

Three Months Ended October 31, 2001 Three Months Ended October 31, 2000 -------------------------------------- -------------------------------------- Florida Florida Paaco Fin. Grp. Consol Paaco Fin. Grp. Consol --------- --------- --------- --------- --------- --------- Revenues: Sales and other $ 24,217 $ 10,190 $ 34,407 $ 26,152 $ 23,669 $ 49,821 Interest income 4,611 4,190 8,801 3,977 5,548 9,525 --------- --------- --------- --------- --------- --------- Total 28,828 14,380 43,208 30,129 29,217 59,346 --------- --------- --------- --------- --------- --------- Costs and expenses: Cost of sales 15,550 6,397 21,947 17,053 13,702 30,755 Selling, gen. and admin 7,091 3,964 11,055 5,725 5,130 10,855 Prov. for credit losses 3,511 6,477 9,988 3,694 7,752 11,446 Interest expense 1,385 2,045 3,430 1,941 2,598 4,539 Depreciation and amort. 215 215 430 134 261 395 Write-down of assets 16,233 16,233 --------- --------- --------- --------- --------- --------- Total 27,752 35,331 63,083 28,547 29,443 57,990 --------- --------- --------- --------- --------- --------- Income (loss) before taxes $ 1,076 $ (20,951) $ (19,875) $ 1,582 $ (226) $ 1,356 ========= ========= ========= ========= ========= ========= Capital expenditures $ 47 $ 120 $ 167 $ 354 $ 219 $ 573 ========= ========= ========= ========= ========= ========= Total assets $ 89,132 $ 61,090 $ 150,222 $ 90,219 $ 104,607 $ 194,826 ========= ========= ========= ========= ========= =========

Six Months Ended October 31, 2001 Six Months Ended October 31, 2000 -------------------------------------- -------------------------------------- Florida Florida Paaco Fin. Grp. Consol Paaco Fin. Grp. Consol --------- --------- --------- --------- --------- --------- Revenues: Sales and other $ 49,584 $ 21,696 $ 71,280 $ 51,248 $ 42,593 $ 93,841 Interest income 9,359 9,089 18,448 7,804 11,094 18,898 --------- --------- --------- --------- --------- --------- Total 58,943 30,785 89,728 59,052 53,687 112,739 --------- --------- --------- --------- --------- --------- Costs and expenses: Cost of sales 31,822 13,305 45,127 32,490 24,453 56,943 Selling, gen. and admin 13,819 8,014 21,833 11,000 9,659 20,659 Prov. for credit losses 7,331 13,709 21,040 8,442 13,596 22,038 Interest expense 2,887 4,243 7,130 3,676 5,061 8,737 Depreciation and amort. 417 428 845 260 514 774 Write-down of assets 16,233 16,233 --------- --------- --------- --------- --------- --------- Total 56,276 55,932 112,208 55,868 53,283 109,151 --------- --------- --------- --------- --------- --------- Income (loss) before taxes $ 2,667 $ (25,147) $ (22,480) $ 3,184 $ 404 $ 3,588 ========= ========= ========= ========= ========= ========= Capital expenditures $ 156 $ 281 $ 437 $ 879 $ 548 $ 1,427 ========= ========= ========= ========= ========= ========= Total assets $ 89,132 $ 61,090 $ 150,222 $ 90,219 $ 104,607 $ 194,826 ========= ========= ========= ========= ========= =========

Revenues Pretax Income (Loss) ----------------------------------------------- -------------------------------------------------- Three Months Ended Six Months Ended Three Months Ended Six Months Ended October 31, October 31, October 31, October 31, --------------------- --------------------- ---------------------- ---------------------- 2001 2000 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- -------- -------- Paaco $ 28,828 $ 30,129 $ 58,943 $ 59,052 $ 1,076 $ 1,582 $ 2,667 $ 3,184 FFG 14,380 29,217 30,785 53,687 (20,951) (226) (25,147) 404 -------- -------- -------- -------- -------- -------- -------- -------- Consolidated $ 43,208 $ 59,346 $ 89,728 $112,739 $(19,875) $ 1,356 $(22,480) $ 3,588 ======== ======== ======== ======== ======== ======== ======== ========

% Change As a % of Sales and Other ---------- -------------------------- Three Months Ended 2001 Three Months Ended October 31, vs October 31, 2001 2000 2000 2001 2000 ---------- ---------- ---------- ---------- ---------- Revenues: Sales and other $ 24,217 $ 26,152 (7.4)% 100.0% 100.0% Interest income 4,611 3,977 15.9 19.0 15.2 ---------- ---------- ---------- ---------- ---------- Total 28,828 30,129 (4.3) 119.0 115.2 ---------- ---------- ---------- ---------- ---------- Costs and expenses: Cost of sales 15,550 17,053 (8.8) 64.2 65.2 Selling, gen and admin 7,091 5,725 23.9 29.3 21.9 Prov. for credit losses 3,511 3,694 (5.0) 14.5 14.1 Interest expense 1,385 1,941 (28.6) 5.7 7.5 Depreciation and amort. 215 134 60.4 .9 .5 ---------- ---------- ---------- ---------- ---------- Total 27,752 28,547 (2.8) 114.6 109.2 ---------- ---------- ---------- ---------- ---------- Pretax income $ 1,076 $ 1,582 (32.0) 4.4 6.0 ========== ========== ========== ========== ==========

% Change As a % of Sales and Other ---------- -------------------------- Six Months Ended 2001 Six Months Ended October 31, vs October 31, 2001 2000 2000 2001 2000 ---------- ---------- ---------- ---------- ---------- Revenues: Sales and other $ 49,584 $ 51,248 (3.2)% 100.0% 100.0% Interest income 9,359 7,804 19.9 18.9 15.2 ---------- ---------- ---------- ---------- ---------- Total 58,943 59,052 (.2) 118.9 115.2 ---------- ---------- ---------- ---------- ---------- Costs and expenses: Cost of sales 31,822 32,490 (2.1) 64.2 63.4 Selling, gen and admin 13,819 11,000 25.6 27.9 21.4 Prov. for credit losses 7,331 8,442 (13.2) 14.8 16.5 Interest expense 2,887 3,676 (21.5) 5.8 7.2 Depreciation and amort. 417 260 60.4 .8 .5 ---------- ---------- ---------- ---------- ---------- Total 56,276 55,868 .7 113.5 109.0 ---------- ---------- ---------- ---------- ---------- Pretax income $ 2,667 $ 3,184 (16.2) 5.4 6.2 ========== ========== ========== ========== ==========

% Change As a % of Sales and Other ---------- ------------------------- Three Months Ended 2001 Three Months Ended October 31, vs October 31, 2001 2000 2000 2001 2000 ---------- ---------- ---------- ---------- ---------- Revenues: Sales and other $ 10,190 $ 23,669 (56.9)% 100.0% 100.0% Interest income 4,190 5,548 (24.5) 41.1 23.4 ---------- ---------- ---------- ---------- ---------- Total 14,380 29,217 (50.8) 141.1 123.4 ---------- ---------- ---------- ---------- ---------- Costs and expenses: Cost of sales 6,397 13,702 (53.3) 62.8 57.9 Selling, gen and admin 3,964 5,130 (22.7) 38.9 21.7 Prov. for credit losses 6,477 7,752 (16.4) 63.6 32.7 Interest expense 2,045 2,598 (21.3) 20.1 11.0 Depreciation and amort. 215 261 (17.6) 2.1 1.1 Write-down of assets 16,233 NM NM ---------- ---------- ---------- ---------- ---------- Total 35,331 29,443 NM NM 124.4 ---------- ---------- ---------- ---------- ---------- Pretax loss $ (20,951) $ .(226) NM NM (1.0) ========== ========== ========== ========== ==========

% Change As a % of Sales and Other ---------- -------------------------- Six Months Ended 2001 Six Months Ended October 31, vs October 31, 2001 2000 2000 2001 2000 ---------- ---------- ---------- ---------- ---------- Revenues: Sales and other $ 21,696 $ 42,593 (49.1)% 100.0% 100.0% Interest income 9,089 11,094 (18.1) 41.9 26.0 ---------- ---------- ---------- ---------- ---------- Total 30,785 53,687 (42.7) 141.9 126.0 ---------- ---------- ---------- ---------- ---------- Costs and expenses: Cost of sales 13,305 24,453 (45.6) 61.3 57.4 Selling, gen and admin 8,014 9,659 (17.0) 36.9 22.7 Prov. for credit losses 13,709 13,596 .8 63.2 31.9 Interest expense 4,243 5,061 (16.2) 19.6 11.9 Depreciation and amort. 428 514 (16.7) 2.0 1.2 Write-down of assets 16,233 NM NM ---------- ---------- ---------- ---------- ---------- Total 55,932 53,283 NM NM 125.1 ---------- ---------- ---------- ---------- ---------- Pretax income (loss) $ (25,147) $ 404 NM NM .9 ========== ========== ========== ========== ==========

Change in Change in Interest Rates Pretax Earnings -------------- ---------------- (in thousands) +2% $ (768) +1% (384) -1% 384 -2% 768

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