<PAGE>
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 quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____ to ____
Commission file number: 2-97254-NY
FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 88-0206732
(State or other jurisdiction of (I.R.S. Employer
incorporation Identification No.) or organization)
601 Brannan Street
San Francisco, California 94107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 284-0444
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 November 13, 1998.
Class A Common stock, $0.00001 par value 11,179,029
Class B Common stock, $0.00001 par value 3,032,000
Class C Common stock, $0.00001 par value 0
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997............................................ 2
Condensed Consolidated Statements of Operations - Three and
Nine months Ended September 30, 1998 and 1997.................... 4
Condensed Consolidated Statements of Stockholders' Equity -
September 30, 1998 and December 31, 1997......................... 5
Condensed Consolidated Statements of Cash Flows - Nine
months Ended September 30, 1998 and 1997......................... 6
Notes to Condensed Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 15
Signatures.................................................................. 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 598 $ 2,924
Contracts in transit 13,221 9,454
Accounts receivable, net of allowance for doubtful accounts of
$416 in 1998 and $320 in 1997 16,443 10,328
Inventories:
New vehicles 51,150 58,344
Used vehicles 19,913 14,027
Parts and accessories 5,412 5,223
-------- --------
Total inventories 76,475 77,594
Prepaid costs-extended warranty service contracts 862 848
Deferred income taxes 676 618
Deposits, prepaid expenses and other assets 3,521 2,779
-------- --------
Total current assets 111,796 104,545
Property and equipment, net of accumulated depreciation of $2,928
in 1998 and $2,133 in 1997 10,531 7,081
Other assets:
Prepaid costs-extended warranty service contracts 1,005 1,287
Loan origination and other costs, net of amortization of
$605 in 1998 and $195 in 1997 3,152 3,407
Other noncurrent assets 3,001 1,342
Goodwill, net of accumulated amortization of $425
in 1998 and $125 in 1997 20,182 6,340
-------- --------
Total assets $149,667 $124,002
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 7,521 $ 6,137
Accrued liabilities 12,486 8,804
Floor plan notes payable 66,105 66,539
Secured lines of credit 16,400 4,000
Other notes payable 6,994 1,218
Deferred revenue-extended warranty service contracts 2,080 2,034
-------- --------
Total current liabilities 111,586 88,732
Long-term liabilities:
Senior notes, net of unamortized discount of $1,910
in 1998 and $2,062 in 1997 22,090 21,938
Deferred income taxes 327 269
Deferred revenue- extended warranty service contracts 2,451 3,061
-------- --------
Total liabilities 136,454 114,000
8% cumulative redeemable preferred stock, $0.00001 par value; 3,500 shares
issued and outstanding in 1998 and 1997 (net of discount of $474 and
$526, liquidation preference of $3,500) 3,026 2,974
Redeemable preferred stock, $0.00001 par value; 500 shares issued and
outstanding in 1998 and 1997 (net of discount of $68 and $75,
liquidation preference of $590 and $540) 522 465
Stockholders' Equity
Common stock, $0.00001 par value:
Class A, 30,000,000 shares authorized, 11,179,029 shares issued
and outstanding in 1998 and 11,201,152 in 1997 - -
Class B, 5,000,000 shares authorized, 3,032,000 shares issued
and outstanding in 1998 and 1997 - -
Class C, 30,000,000 shares authorized, 0 issued and outstanding - -
Additional paid-in capital 6,544 6,544
Retained earnings 3,121 19
-------- --------
Total shareholders' equity 9,665 6,563
-------- --------
Total liabilities and shareholders' equity $149,667 $124,002
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales:
Vehicle $191,820 $ 118,832 $483,586 $ 279,365
Service, parts and other 31,666 20,340 83,568 49,881
-------- ---------- -------- ----------
Total sales 223,486 139,172 567,154 329,246
Cost of sales:
Vehicle 176,287 111,058 444,383 261,451
Service, parts and other 13,460 8,839 35,703 22,471
-------- ---------- -------- ----------
Total cost of sales 189,747 119,897 480,086 283,922
-------- ---------- -------- ----------
Gross profit 33,739 19,275 87,068 45,324
Operating expenses:
Selling, general and administrative 27,486 16,891 71,926 39,767
Depreciation and amortization 701 253 1,666 583
Combination and related expenses - - - 2,268
-------- ---------- -------- ----------
Operating income 5,552 2,131 13,476 2,706
Other expenses:
Interest expense, floor plan (1,483) (873) (4,172) (2,485)
Interest expense, other (1,257) (842) (3,300) (975)
-------- ---------- -------- ----------
Income (loss) before income taxes 2,812 416 6,004 (754)
Income tax (benefit) expense 1,209 365 2,582 (660)
-------- ---------- -------- ----------
Net income (loss) $ 1,603 $ 51 $ 3,422 $ (94)
======== ========== ======== ==========
Basic earnings (loss) per share
of common stock $ 0.11 $ - $ 0.22 $ (0.01)
Weighted average common shares
outstanding 14,210,969 13,593,892 14,215,381 9,744,592
Diluted earnings (loss) per share
of common stock $ 0.10 $ - $ 0.21 $ (0.01)
Weighted average common and common
equivalent shares outstanding 14,696,141 13,593,892 14,683,612 9,744,592
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------
Class A Class B
--------------------------------------- Paid-in Retained Total
Shares Amount Shares Amount Capital Earnings Equity
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 11,201 $ - 3,032 $ - $ 6,544 $ 19 $ 6,563
Preferred dividend, liquidation preference,
and discount amortization (320) (320)
Retirement of shares (22)
Net income 3,422 3,422
------------------------------------------------------------------------------
Balance, September 30, 1998 11,179 $ - 3,032 $ - $ 6,544 $ 3,121 $ 9,665
==============================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,422 $ (94)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,666 583
Non-cash stock compensation - 701
Deferred income taxes - (564)
Deferred warranty revenue amortization, net (296) (355)
Changes in operating assets and liabilities:
Receivables and contracts in transit (9,882) (6,454)
Inventories 5,155 (11,617)
Deposits, prepaids and other assets (3,024) (743)
Floor plan notes payable (2,912) 730
Accounts payable and accrued liabilities 5,066 8,431
---------- ----------
Net cash used in operating activities (805) (9,382)
Cash flows from investing activities:
Capital expenditures (3,921) (296)
Cash paid for acquisitions (15,481) (11,726)
---------- ----------
Net cash used in investing activities (19,402) (12,022)
---------- ----------
Cash flows from financing activities:
Borrowings on secured lines of credit, net 12,400 -
Proceeds from issuance of Senior Notes - 21,851
Borrowings on other notes payable, net 5,776 3,075
Proceeds from issuance of common stock - 2,789
Proceeds from issuance of preferred stock - 3,360
Loan origination costs (155) (3,602)
Distributions to shareholders, pre-Combination (Note 1) - (4,000)
Preferred stock dividend (140) (54)
---------- ----------
Net cash provided by financing activities 17,881 23,419
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,326) 2,015
Cash and cash equivalents:
Beginning of the period $ 2,924 $ 668
---------- ----------
End of period $ 598 $ 2,683
========== ==========
Cash paid during the period for:
Interest $ 6,526 $ 2,828
Income taxes $ 2,432 $ 540
Non-cash activity was as follows:
Common stock issued at the time of acquisition $ - $ 276
Common stock issued as compensation $ - $ 701
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The financial information included herein for the three and nine-month periods
ended September 30, 1998 and 1997 is unaudited and reflects, in the opinion of
management, all material adjustments (which include only normal recurring items)
necessary to fairly state the financial position and the results of operations
for the periods presented. The financial information as of December 31, 1997 is
derived from FirstAmerica Automotive, Inc.'s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on May 14, 1998. These interim
condensed consolidated financial statements should be read in conjunction with
FirstAmerica Automotive, Inc.'s audited consolidated financial statements and
the notes thereto included in FirstAmerica Automotive, Inc.'s Form 10-K. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
(a) Organization and Combination
Effective July 11, 1997, FirstAmerica Automotive, Inc. (the Company) combined
(the "Combination") with a group of automobile dealership entities under common
ownership and control (the "Price Dealerships"). The stockholders of the Price
Dealerships received 5,526,000 shares of FirstAmerica Automotive, Inc.'s common
stock, which represented a majority of the total outstanding shares of capital
stock of FirstAmerica Automotive, Inc. immediately following the Combination.
The Combination was accounted for as the acquisition of FirstAmerica Automotive,
Inc. by the Price Dealerships, and accordingly, the financial statements for
periods before the Combination represent the financial statements of the Price
Dealerships.
(b) Business
The Company's plan is to acquire and operate multiple automobile dealerships in
the highly fragmented automobile retailing industry. The Company operates 16
automobile dealerships in California, including 12 in Northern California and
four in Southern California and a multi-brand service and repair facility in
downtown San Francisco, California. The Company sells new and used cars and
light trucks, sells replacement parts, provides vehicle maintenance, warranty
and repair services, and arranges related financing and insurance products
("F&I") for its customers. The Company sells 12 domestic and foreign brands,
which consist of BMW, Buick, Dodge, GMC, Honda, Isuzu, Lexus, Mitsubishi,
Nissan, Pontiac, Toyota and Volkswagen.
(c) Principles of Consolidation
The condensed consolidated financial statements include the accounts of
FirstAmerica Automotive, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
(2) FLOOR PLAN NOTES PAYABLE AND SECURED LINES OF CREDIT
At the time of the Combination, the Company entered into a three year $175
million Loan and Security Agreement (the "Loan Agreement") with a financial
company, replacing an existing $37 million line of credit to the Company.
The Loan Agreement permits the Company to borrow up to a maximum of: (i) $115
million in floor plan notes payable to finance vehicle inventory; (ii) a $35
million revolver facility ("Revolver Advances"), limited by the used and parts
inventory borrowing base as defined in the loan agreement; and (iii) a $25
million discretionary facility ("Discretionary Advances"), which the financial
company makes at its absolute sole discretion upon request of the Company. As
of September 30, 1998, the Company had floor plan notes payable, Revolver
Advances, and Discretionary Advances outstanding of $66.1 million, $16.4
million, and $0, respectively.
Floor plan notes payables are due when vehicles are sold, leased, or delivered.
Revolver Advances are due whenever the used vehicle and parts borrowing base as
defined in the Loan Agreement is exceeded. The Loan Agreement grants a
collateral interest in substantially all of the Company's assets and contains
various financial covenants such as minimum interest coverage, minimum working
capital ratios, and maximum debt to equity ratios.
The availability of the Company to draw on the floor plan notes payable,
Revolver Advances, and Discretionary
7
<PAGE>
advances, for the purpose of acquiring automobile dealerships, is limited by the
amount of vehicle and parts inventory of the acquired dealership.
As of September 30, 1998, the Company also had $12.0 million available under its
senior notes facility. As discussed in Note 6, on October 1, 1998 the Company
acquired a Toyota automobile dealership and utilized this $12 million to
complete the acquisition.
(3) BUSINESS ACQUISITIONS
(a) Beverly Hills BW, Ltd.
In April 1998, the Company acquired substantially all of the operating assets of
Beverly Hills BW, Ltd., a BMW automobile dealership located in West Los Angeles,
California. The acquisition was accounted for using the purchase method of
accounting and the results of operations of Beverly Hills BW, Ltd. has been
included in the accompanying financial statements for the period beginning April
2, 1998, the effective date of acquisition. The $11.7 million purchase price was
financed using the Company's secured lines of credit. The purchase price was
allocated to the assets and liabilities acquired based on their estimated fair
market value at the acquisition date as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Inventory and other assets, net of floor plan financing $ 1,275
Property and equipment 194
Goodwill 10,250
-------
Total purchase price $11,719
=======
</TABLE>
(b) Burgess British Cars, Inc.
In June 1998, the Company acquired substantially all of the operating assets of
Burgess British Cars, Inc., a Honda automobile dealership located in Daly City,
California. The $3.8 million purchase price was financed by the proceeds of a
$4.0 million loan from the Chairman of the Company's Board of Directors, to the
Company, pursuant to the terms of a Letter Agreement between the Company and the
Chairman. Pursuant to the terms of the Letter Agreement, the Chairman will be
paid a 3% origination fee on the loan, and the Company will be responsible for
interest payments to the commercial bank that made the $4.0 million personal
loan to the Chairman. The principal amount is due at the earlier of June 1,
1999 or upon the refinancing and/or equity offering of either preferred or
common shares in the Company. The Company believes the origination fee to be
paid to the Chairman is equivalent to that which would be paid under an arm's-
length transaction. The loan is included in other notes payable in the
accompanying condensed consolidated financial statements.
The Burgess British Cars, Inc. acquisition was accounted for using the purchase
method of accounting and its results of operations have been included in the
accompanying financial statements for the period beginning June 19, 1998, the
effective date of the acquisition. The purchase price has been allocated to the
assets and liabilities acquired based on their estimated fair market value at
the acquisition date as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Inventory and other assets, net of floor plan financing $ 215
Property and equipment 130
Goodwill 3,417
------
Total purchase price $3,762
======
</TABLE>
The following unaudited pro forma financial data is presented as if the
acquisitions had occurred on January 1, 1997, for the nine months ended
September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Total sales $595,086 $387,433
Net income 3,882 578
Net income per share:
Basic $ 0.25 $ 0.06
========= ==========
Diluted $ 0.24 $ 0.06
========= ==========
</TABLE>
(4) COMPUTATION OF PER SHARE AMOUNTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards
8
<PAGE>
No. 128, "Earnings Per Share" (SFAS No. 128) which is effective for fiscal years
ending after December 15, 1997. The Company has adopted SFAS No. 128 in the
accompanying financial statements.
The following table presents a reconciliation of basic and diluted earnings per
share for the three months and nine months ended September 30, 1998 and 1997 in
accordance with SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income per income statement $ 1,603 $ 51 $ 3,422 $ (94)
Less:
Cumulative redeemable preference dividends (70) (210)
Redeemable preferred stock liquidation
preference accretion (10) (50)
Cumulative and redeemable preferred stock
discount amortization (20) (60)
========== ========== ========== ==========
Net income available to common stockholders $ 1,503 $ 51 $ 3,102 $ (94)
========== ========== ========== ==========
Basic Earnings Per Share:
Weighted average common shares outstanding 14,210,969 13,593,892 14,215,381 9,744,592
Net income per common share, basic $ 0.11 $ -- $ 0.22 $ (0.01)
========== ========== ========== ==========
Diluted Earnings Per Share:
Weighted average common shares outstanding 14,210,969 13,593,892 14,215,381 9,744,592
Net effect of dilutive stock options 268,195 -- 259,244 --
Net effect of warrants 216,977 -- 208,987 --
---------- ---------- ---------- ----------
Total 14,696,141 13,593,892 14,683,612 9,744,592
Net income per common share, diluted $ 0.10 $ -- $ 0.21 $ (0.01)
========== ========== ========== ==========
</TABLE>
(5) NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards of reporting and presentation of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement is effective for fiscal years beginning after December 15, 1997.
The Company has determined that net income and comprehensive income are the same
for the periods presented and therefore no separate disclosure for comprehensive
income is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company believes
that its automobile operations constitute its only operating segment and
therefore no separate disclosure under this statement is required.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting the Cost of Start-Up Activities", which provides guidance on
financial reporting for enterprise start-up costs. The SOP, which is effective
for fiscal years beginning after December 15, 1998, requires the costs of start-
up activities and related organization costs to be expensed as incurred. The
Company is currently evaluating this SOP and its impact on its financial
reporting and disclosure.
(6) SUBSEQUENT EVENTS
On October 1, 1998 FirstAmerica Automotive, Inc. (the "Company") completed the
acquisition of a Toyota automobile dealership known as Concord Toyota located
in Concord, California. Pursuant to a Stock Purchase Agreement dated July 17,
1998 (the "Purchase Agreement") by and between the Company, the Graybehl
Family Trust (the "Seller") and Vacation Motors, Inc., the operating entity
("Vacation Motors"), the Company acquired all of the outstanding capital stock
of Vacation Motors (the "Shares") from the Seller. The $12.6 million purchase
price ("Purchase Price") of the Shares was paid in cash.
The Company funded $12.0 million of the Purchase Price from borrowings under an
existing lending agreement with Trust Company of the West, a financial company,
and the balance of the Purchase Price ($0.6 million) was funded by the Company's
working capital.
The Seller's trustee is the father of Steven S. Hallock, an officer of the
Company. The Company believes it purchased the Corporation under terms no less
favorable to the Company than those arranged with other parties. Mr. Hallock was
also issued options to purchase 100,000 shares of the Company's Class A Common
Stock at fair market value under terms of his employment agreement, which
provided for such issuance upon the close of the Concord Toyota transaction.
The Company has entered into a definitive agreement to acquire an automobile
dealership in Southern California for a purchase price of $0.7 million plus new
vehicle inventory.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Quarterly Report and Management's Discussion and Analysis of Results of
Operations and Financial Condition include certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this document, including statements regarding
potential acquisitions, expected cost savings, planned capital expenditures, the
Company's future financial position, business strategy and other plans and
objectives for future operations are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, such statements are based upon assumptions and
anticipated results that are subject to numerous uncertainties. Actual results
may vary significantly from those anticipated due to many factors, including
industry conditions, future demand for new and used vehicles, the ability to
obtain manufacturer consents to acquisitions, the availability of capital
resources, the willingness of acquisition candidates to accept the Company's
capital stock as currency, the cyclical nature of automobile sales and the
intense competition in the automobile retail industry.
OVERVIEW
FirstAmerica Automotive, Inc. (the "Company") is one of the largest automobile
retailers in Northern California. As of September 30, 1998, the Company
operated 12 automobile dealerships and one multi-brand vehicle repair and
service center in Northern California, 3 dealerships in San Diego County and one
in Beverly Hills, California. The Company sells new and used cars and light
trucks, sells replacement parts, provides vehicle maintenance, warranty and
repair services and arranges related financing and insurance products ("F&I")
for its customers. At its sixteen dealership locations, certain of which
represent multiple new vehicle franchises, the Company sells 12 domestic and
foreign brands, which consist of BMW, Buick, Dodge, GMC, Honda, Isuzu, Lexus,
Mitsubishi, Nissan, Pontiac, Toyota and Volkswagen.
In addition to its traditional dealership operations, the Company has (i)
developed a Used Car Auto Factory program to centralize procurement,
reconditioning and wholesale disposal of used cars and (ii) developed a "Dealer
Services" program to centralize the procurement of extended warranty service
contracts and custom accessories such as alarms, stereos and chemical
treatments. The centralization of these programs is intended to create
economies of scale and enhanced margins.
The following table sets forth selected condensed financial data for the Company
expressed as a percentage of total sales for the periods indicated below.
10
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles 63.4% 62.9% 60.2% 61.4%
Used vehicles 22.4% 22.5% 25.1% 23.4%
Service, parts and other 14.2% 14.6% 14.7% 15.2%
----- ----- ----- -----
Total sales 100.0% 100.0% 100.0% 100.0 %
Gross profit 15.1% 13.8% 15.4% 13.8 %
Selling, general and
administrative 12.3% 12.1% 12.7% 12.1 %
Depreciation and
amortization 0.3% 0.2% 0.3% 0.2 %
Combination and
related expenses 0.0% 0.0% 0.0% 0.7 %
----- ----- ----- -----
Operating income 2.5% 1.5% 2.4% 0.8 %
Income (loss) before taxes 1.3% 0.3% 1.1% (0.2)%
----- ----- ----- -----
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
SALES. Sales increased by $84.3 million, or 60.6%, to $223.5 million for the
three months ended September 30, 1998 from $139.2 million for the comparable
period of 1997, primarily due to sales contributed by dealerships that the
Company has acquired since the Combination. The Company expects sales growth to
continue as the Company executes its acquisition strategy.
New Vehicles. The Company sells twelve domestic and imported brands
ranging from economy to luxury vehicles, as well as sport utility vehicles,
minivans and light trucks. The Company sold 6,141 and 4,156 new vehicles
in the three months ended September 30, 1998 and 1997, respectively,
generating revenues of $141.9 million and $87.5 million, which constituted
63.4% and 62.9% of the Company's total sales, respectively. New vehicle
sales increased by $54.4 million, or 62.2%, due to an increase in unit
sales attributable to dealerships acquired by the Company, a $14.5 million
increase in sales at stores owned during both three month periods, as well
as price increases which were consistent with manufacturers' price
increases.
Used Vehicles. The Company sells a variety of makes and models of used
vehicles and light trucks of varying model years and prices. The Company
sold 4,734 and 2,855 retail and wholesale used vehicles in the three months
ended September 30, 1998 and 1997, respectively, generating revenues of
$49.9 million and $31.3 million, which constituted 22.4% and 22.5% of the
Company's total sales, respectively. The $18.6 million or 59.4% increase
in used vehicle revenues is primarily due to a corresponding increase in
used vehicle unit sales from dealerships acquired during 1997, as well as
an increase in used vehicle revenues in existing stores due to the
implementation of the Company's Used Car Auto Factory.
Service, parts and other revenues. Service, parts and other revenues
includes revenue from the sale of parts, accessories, maintenance and
repair services, and from fees earned on the sale of vehicle financing
notes and warranty service contracts. Finance fees are received for notes
sold to finance companies for customer vehicle financing. Warranty service
contract fees are earned on extended warranty service contracts that are
sold on behalf of vehicle manufacturers or insurance companies. Service,
parts and other revenue increased 56.2% or $11.4 million, from $20.3
million for the three months ended September 30, 1997 to $31.7 million for
the comparable period in 1998, primarily due to dealerships acquired
subsequent to June 1997.
11
<PAGE>
GROSS PROFIT. Gross profit increased by $14.5 million, or 75.0%, to $33.7
million for the three months ended September 30, 1998 versus the comparable
period in 1997, primarily due to dealerships acquired subsequent to the
Combination. Gross profit margins on new vehicles increased from 6.3% to 7.8%,
primarily due to a higher percentage of luxury vehicle sales. Gross profit
margins on used vehicle retail sales increased from 9.1% to 10.1% for the three
months ended September 30, 1997 and 1998, respectively, primarily due to a
higher percentage of luxury vehicle sales and the Company's emphasis on
purchasing for resale high demand used vehicles through its Used Car Auto
Factory. Service, parts and other gross profit increased from 56.5% to 57.5%
for the three months ended September 30, 1997 and 1998, respectively, primarily
due to higher margins at dealerships acquired since the Combination.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 62.7%, or $10.6 million, from $16.9 million to
$27.5 million for the three months ended September 30, 1997 and 1998,
respectively. As a percentage of sales, selling, general and administrative
expense increased from 12.1% to 12.3% for the three months ended September 30,
1997 and 1998, respectively. The increase was due primarily to expenses
incurred for the establishment of a management structure for executing the
Company's acquisition strategy.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $0.4
million, from $.3 million to $.7 million for the three months ended September
30, 1997 and 1998, respectively, primarily due to additional depreciation and
goodwill amortization related to dealerships acquired since June 1997.
INTEREST EXPENSE. Floor plan interest expense increased $0.6 million to $1.5
million for the three months ended September 30, 1998 versus the comparable
period in 1997. The increase was due to increased floor plan debt in 1998 from
the inventory associated with the acquired dealerships. Interest expense other
than floor plan increased $.5 million from $.8 million to $1.3 million for the
three months ended September 30, 1997 and 1998, respectively, primarily due to
debt incurred for the acquisition of additional dealerships.
INCOME TAX EXPENSE. Income tax expense increased to $1.2 million from $0.4
million for the three months ended September 30, 1998 versus the comparable
period in the previous year. The Company's effective tax rate for the third
quarter of 1998 was 43.0% compared to 87.5% for 1997; the higher effective rate
in the prior year is primarily due to certain non-deductible stock compensation
expenses incurred in 1997.
NET INCOME. Net income increased from $0.1 million to $1.6 million for the
three months ended September 30, 1997 and 1998, respectively, primarily as a
result of the overall increase in gross profit and other items discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
SALES. Sales increased by $237.9 million, or 72.2%, to $567.2 million for the
nine months ended September 30, 1998 from $329.3 million for the comparable
period of 1997, primarily due to sales contributed by dealerships that the
Company has acquired since June 1997. The Company expects sales growth to
continue as the Company executes its acquisition strategy.
New Vehicles. The Company sold 14,918 and 9,746 new vehicles in the nine
months ended September 30, 1998 and 1997, respectively, generating revenues
of $341.5 million and $202.1 million. New vehicle sales increased by $139.4
million, or 69.0%, primarily due to an increase in unit sales attributable
to dealerships acquired by the Company as well as increases in average unit
prices which were consistent with manufacturers' price increases.
Used Vehicles. The Company sold 12,819 and 6,689 retail and wholesale used
vehicles in the nine months ended September 30, 1998 and 1997,
respectively, generating revenues of $142.1 million and $77.2 million,
which constituted 25.1% and 23.4% of the Company's total sales,
respectively. The $64.9 million or 84.1% increase in used vehicle revenues
is primarily due to a corresponding increase in used vehicle unit sales
from dealerships acquired subsequent to June 1997.
Service, parts and other. Service, parts and other revenue increased 67.5%
or $33.7 million, from $49.9
12
<PAGE>
million for the first nine months of 1997 to $83.6 million for the
comparable period in 1998, primarily due to dealerships acquired since June
1997.
GROSS PROFIT. Gross profit increased by $41.8 million, or 92.3%, to $87.1
million for the nine months ended September 30, 1998 compared to the same period
in 1997, primarily due to dealerships acquired subsequent to the Combination.
Gross profit margins on new vehicles increased from 6.8% to 7.8%, primarily due
to a higher percentage of luxury vehicle sales. Gross profit margins on used
vehicle retail sales increased from 8.0% to 10.0% for the nine months ended
September 30, 1998 compared to the same period in 1997, primarily due to higher
percentages of luxury vehicle sales as well as the Company's emphasis on
acquiring for resale high demand used vehicles through its Used Car Auto
Factory. Service, parts and other gross profit increased from 55.0% to 57.3% for
the first nine months of 1997 and 1998, respectively, primarily due to higher
margins at dealerships acquired since the Combination.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. During the nine months ended June
30, 1998, selling, general and administrative expense increased $32.1 million,
or 80.7%, to $71.9 million, from $39.8 million in the same period in 1997.
Selling, general and administrative expense as a percent of sales increased to
12.7% from 12.1% in the nine months ended September 30, 1998 compared to the
same period in the prior year. The increase was due primarily to expenses
incurred for the establishment of a management structure for executing the
Company's acquisition strategy.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $1.1
million, from $.6 million to $1.7 million for the nine months ended September
30, 1997 and 1998, respectively, primarily due to additional depreciation and
goodwill amortization related to dealerships acquired.
COMBINATION AND RELATED EXPENSES. During the nine months ended September 30,
1997, the Company incurred $2.3 million in certain legal, accounting, consulting
and compensation expenses associated with the combination with the Price
Dealerships and the development of the Company's organization and business plan.
The expenses relating to the Combination were incurred during the nine months
ended September 30, 1997. There were no comparable expenses incurred in the
nine months ended September 30, 1998.
INTEREST EXPENSE. Floor plan interest expense increased $1.7 million or 68.0%
to $4.2 million for the nine months ended September 30, 1998 versus the
comparable period in 1997. The increase was due to increased floor plan debt in
1998 from the inventory associated with the acquired dealerships. Interest
expense other than floor plan increased $2.3 million due to debt incurred for
the acquisition of dealerships.
INCOME TAX EXPENSE. The income tax benefit of $.7 million for the first nine
months of 1997 versus the $2.6 million expense for the comparable period in 1998
represents a $3.3 million increase. The income tax benefit in the nine months
ended September 30, 1997 was due to the loss before income taxes of $0.8
million, which was incurred due to combination and related expenses of $2.3
million incurred during the period. The Company's effective tax rate for the
first nine months of 1998 was 43.0% compared to 87.5% for 1997; the higher
effective rate in 1997 was primarily due to certain non-deductible stock
compensation expenses incurred in 1997.
NET INCOME. Net income increased from a $0.1 million loss to a $3.4 million
profit for the nine months ended September 30, 1997 and 1998, respectively,
primarily as a result of the overall increase in gross profit and other items
discussed above, and the non-recurrence in 1998 of $2.3 million in combination-
related expenses, partially offset by increased income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
The cash and liquidity requirements of the Company are primarily to finance
acquisitions of new automobile dealerships, service debt and fund working
capital. Historically the Company has relied primarily upon cash flows from
operations, floor plan financing, and other borrowings under its various credit
facilities to finance its operations and the proceeds from its private debt
placement with an institutional investor to finance its acquisition strategy.
The ability of the Company to draw on the floor plan notes payable, Revolver
advances, and Discretionary advances for the purpose of acquiring automobile
dealerships, is limited by the amount of vehicle and parts inventory of the
acquired dealership. In order to continue to execute the Company's acquisition
strategy, the Company needs to obtain additional financing or capital. The
Company is currently evaluating financing alternatives with its existing
investors and note holders as well as reviewing other alternatives with
investment banking groups to assist the Company in raising this required
capital.
13
<PAGE>
For the nine months ended September 30, 1998, operating activities resulted in
net cash used in operations of $0.8 million, primarily due to net income of $3.4
million, a decrease in inventories of $5.2 million and an increase in accounts
payable and accrued liabilities of $5.1 million, offset by a increase in
accounts receivable and contracts in transit of $9.9 million and deposits,
prepaids and other assets of $3.0 million and a decrease in floor plan notes
payable of $2.9 million. For the nine months ended September 30, 1997, cash
used in operations totaled $9.4 million, primarily due to increases in
inventories of $11.6 million and increases in accounts receivable and contracts
in transit of $6.5 million, partially offset by increases in accounts payable
and accrued liabilities of $8.4 million.
Net cash used in investing activities totaled $19.4 million and $12.0 million
for the nine months ended September 30, 1998 and 1997, respectively. Investing
activities for the nine months ended September 30, 1998 primarily consisted of
the acquisition of the Burgess British Cars, Inc. and Beverly Hills BMW
automobile dealerships for a purchase price totaling $15.5 million, and $2.4
million in capital expenditures primarily for the build out and renovation of
the Company's multi-brand service and repair center in San Francisco and $1.5
for equipment and improvements in existing facilities. For the nine months ended
September 30, 1997, net cash used in investing activities was $12.0 million, of
which $6.1 million was used for the acquisition of three automobile dealerships
in San Diego County, $5.6 million for the acquisition of three automobile
dealerships in Northern California and $0.3 million for improvement of
equipment.
Net cash provided by financing activities in the nine months ended September 30,
1998 totaled $17.9 million, which primarily consisted of borrowings on secured
lines of credit and notes payable which were used to finance acquisitions. Net
cash provided by financing activities in the nine months ended September 30,
1997 totaled $23.4 million, which consisted primarily of $21.9 million resulting
from the issuance of senior notes, $6.1 million from the issuance of common and
preferred stock and $3.1 million in borrowings on other notes payable. This was
offset by the distribution of $4.0 million to the stockholders of the Price
Dealerships as part of the Combination and $3.6 million in origination costs
paid in association with the private placement of senior notes and preferred
stock.
The Company currently has a $175 million loan and security agreement with a
financial company. The agreement permits the Company to borrow up to $115
million in floor plan notes payable, restricted by new and certain used vehicle
inventory, and provides a revolving line of credit up to $35 million, restricted
by used vehicle and parts inventory. The agreement also provides a discretionary
line of credit up to $25 million, under which the financial company will make
advances at its discretion. The loan agreement matures in July 2000.
As of September 30, 1998, the Company had flooring notes payable, Revolver
advances, and Discretionary advances outstanding of $66.1 million, $16.4
million, and $0.0 million, respectively. The floor plan notes payable bear
interest at prime rate minus 45 to 75 basis points, and the Revolver advances
bear interest at prime rate minus 35 basis points. The floor plan liability
becomes due as vehicles are sold. Similarly, the Revolver liability becomes due
as vehicles and parts are sold. The Company also has a $4.0 million note payable
to Donald V. Strough, the Chairman of the Company's Board of Directors. The note
is due June 1, 1999 and bears interest at the Bank of America Reference Rate
plus 0.625%. The interest rate was 9.12% at September 30, 1998.
The Company has a securities purchase agreement with a financial company to
provide an aggregate funding commitment of up to $40 million, consisting of up
to $36 million of 12.375% senior notes, $3.5 million 8% cumulative redeemable
preferred stock, $0.5 million redeemable preferred stock, and up to 5 million
shares of the Company's Class B common stock, par value $0.00001 per share.
At September 30, 1998, the Company had issued senior notes with a principal
amount of $24 million at a discount of $1.9 million, 3.5 million shares of
cumulative redeemable preferred stock at a discount of $0.5 million, 0.5 million
shares of redeemable preferred stock at a discount of $0.1 million and 3 million
shares of Class B common stock at $0.92 per share. The notes and the preferred
stock are due June 30, 2005.
As of September 30, 1998, the Company also had $12.0 million available under its
senior notes facility. On October 1, 1998 the Company acquired a Toyota
automobile dealership and utilized this $12 million to complete the acquisition.
YEAR 2000 PROJECT
The Company is assessing the impact on its operations of computer programs which
are unable to distinguish between the year 1900 and the year 2000 ("Year 2000
program").
Readiness Preparation
The Company's Year 2000 program is comprised of several individual projects
which address the following broad areas: data processing systems, embedded
technology in equipment and facilities, vendor and supplier risk and contingency
planning. The Company has created a Year 2000 Task Force that has assigned a
priority to all projects and broadly classified projects into critical and non-
critical categories indicating the importance of the function to the Company's
continuing operations.
The Company is in the process of updating its data processing systems. The
Company has converted or will complete conversion of its noncompliant software
and computer systems to compliant systems by the end of 1999. Critical systems
are in the process of being upgraded or replaced as a result of an unrelated
project to integrate computing systems across the Company. Specifically, dealer
management systems are being replaced or upgraded with Year 2000 compliant
software and hardware platforms. Although the Company is converting to Year
2000 compliant systems, management recognizes that it could potentially acquire
a dealership that doesn't have Year 2000 compliant systems. As part of the
Company's dealership acquisition due diligence process, acquired dealership
systems are evaluated for Year 2000 compliance and scheduled for upgrade or
replacement as acquired dealerships are assimilated into the Company.
The Company is currently assessing the readiness preparations of its major
vendors and suppliers. Manufacturers of vehicles and parts have been identified
as critical suppliers and inquiries are underway regarding their Year 2000
readiness plans and status. In addition, financial institutions have been
identified as critical suppliers of funding and insurance, and are in the
process of being evaluated for Year 2000 compliance. Contingency plans will be
developed based on assessments of major suppliers' states of readiness. However,
there can be no guarantee that the systems of the Company's vendors or suppliers
will be in compliance or corrected on a timely basis.
The Company also recognizes that there may be embedded technology in equipment
and facilities that could be impacted by the Year 2000 issue. The Company has a
project plan in place to address this issue and is in the process of evaluating
service equipment, other equipment, telephone systems and facilities for Year
2000 compliance.
Risks
The principal risks associated with the Year 2000 program are the risk of
disrupting Company operations due to operational failure of third-party
suppliers, primarily vehicle manufacturers and lenders. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Although the Company's inquiries are underway, the
Company does not yet have the information to estimate the possibility or
likelihood of significant disruptions among its suppliers. The Company believes
that, with the completion of the Year 2000 project as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
Costs
The conversion of the Company's data processing systems and its related costs
have been incorporated into the Company's planned replacement or upgrade of its
software and other computer systems and therefore the Company has not
experienced any significant incremental costs that are specifically related to
Year 2000 compliance issues. Neither does the Company expect to incur
significant incremental costs to ensure Year 2000 compliance in the future.
However, project costs could change in the future as analysis continues.
Contingency Planning & Business Resumption
The Company is in the process of assessing the consequences if its Year 2000
initiative is not completed on schedule or its remediation efforts are not
successful. Upon completion of this assessment, the Company will begin
contingency planning.
Forward-looking Statements
This discussion of the implications of the Year 2000 for the Company contains
numerous forward-looking statements based on inherently uncertain information.
Statements about the cost of the project and the date on which the Company plans
to complete the internal Year 2000 modifications are based on management's best
estimates, which were derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, there can be no guarantee that
these estimates will be achieved or that there will not be a delay in, or
increased costs associated with, the implementation of the Year 2000 program.
In addition, the Company places a high degree of reliance on computer systems of
third parties, such as vendors, suppliers, and financial institutions.
Although the Company is assessing the readiness of these third parties and will
prepare contingency plans, there can be no guarantee that the failure of these
third parties to modify their systems in advance of December 31, 1999 will not
have a material adverse affect on the Company.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales have been lower in the first and fourth
quarters of each calendar year largely due to consumer purchasing patterns
during the holiday season, inclement weather during the winter months, and the
reduced number of business days during the holiday season. As a result, the
Company's revenues are generally lower during the first and fourth quarters
than during the other quarters of each calendar year. Management believes that
interest rates, variations in automobile manufacturers incentive plans, levels
of consumer debt, consumer buying patterns and confidence, as well as general
economic conditions also contribute to fluctuations in sales and operating
results. The timing of acquisitions may also cause substantial quarterly
fluctuations.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required by Registrant.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as a part of this report are listed below.
Exhibit No.
- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 16, 1998 FIRSTAMERICA AUTOMOTIVE, INC.
By /s/ THOMAS A. PRICE
-------------------------
Thomas A. Price
President, Chief Executive
Officer and Director
(Principal Executive Officer)
By /s/ DEBRA SMITHART
-------------------------
Debra Smithart
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
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<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 598 2,924
<SECURITIES> 0 0
<RECEIVABLES> 30,080 20,102
<ALLOWANCES> (416) (320)
<INVENTORY> 76,475 77,594
<CURRENT-ASSETS> 111,796 104,545
<PP&E> 13,459 9,214
<DEPRECIATION> (2,928) (2,133)
<TOTAL-ASSETS> 149,667 124,002
<CURRENT-LIABILITIES> 114,018 88,732
<BONDS> 0 0
3,548 3,439
0 0
<COMMON> 0 0
<OTHER-SE> 9,665 6,563
<TOTAL-LIABILITY-AND-EQUITY> 149,667 124,002
<SALES> 567,154 474,048
<TOTAL-REVENUES> 567,154 474,048
<CGS> 480,086 407,074
<TOTAL-COSTS> 480,086 407,074
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<INTEREST-EXPENSE> 7,472 5,340
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<INCOME-TAX> (2,582) (446)
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