<PAGE>
As filed with the Securities and Exchange Commission on April 8, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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 or organization) Identification No.)
601 Brannan Street
San Francisco, California 94107
(415) 284-0444
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------
Thomas A. Price
President and Chief Executive Officer
FirstAmerica Automotive, Inc.
601 Brannan Street
San Francisco, CA 94107
(415) 284-0444
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Gregory M. Gallo, Esq. Valerie Ford Jacob, Esq.
Andrew D. Zeif, Esq. Fried, Frank, Harris, Shriver & Jacobson
Gray Cary Ware & Freidenrich LLP One New York Plaza
400 Hamilton Avenue New York, New York 10004
Palo Alto, California 94301-1825 (212) 859-8000
(650) 328-6561
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered/(a)/ Offering Price(b) Registration Fee/(b)/
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock ($0.00001 par value) $100,000,000 $27,800
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</TABLE>
(a) This Registration Statement covers the sale of shares of common stock, par
value $.00001 per share, by the Registrant and by selling stockholders.
(b) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changes. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities andit is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated April , 1999
P R O S P E C T U S
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Shares
[FIRSTAMERICA AUTOMOTIVE LOGO]
Common Stock
________________
This is FirstAmerica Automotive, Inc.'s initial public offering of common
stock. We are selling of the shares and certain of our
stockholders are selling of the shares.
We expect the public offering price to be between $ and $
per share. Currently, no public market exists for the shares. We intend to
apply to list our common stock on the New York Stock Exchange under the symbol
"FAA."
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 11 of this prospectus.
________________
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Per Share Total
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<S> <C> <C>
Public offering price............................................... $ $
Underwriting discount............................................... $ $
Proceeds, before expenses, to FirstAmerica Automotive............... $ $
Proceeds, before expenses, to the selling stockholders.............. $ $
</TABLE>
The Underwriters may also purchase up to an additional
shares from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the shares of common stock will be ready for delivery in New
York, New York on or about , 1999.
________________
Merrill Lynch & Co.
Donaldson, Lufkin & Jenrette
BancBoston Robertson Stephens
________________
The date of this prospectus is , 1999.
<PAGE>
[FIRSTAMERICA AUTOMOTIVE INC. LOGO APPEARS HERE]
[MAP OF WESTERN UNITED STATES APPEARS HERE HIGHLIGHTING WHERE FIRSTAMERICA
AUTOMOTIVE HAS DEALERSHIPS, ASSUMING THE PENDING ACQUISITIONS ARE COMPLETED.]
<TABLE>
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Dealership Brands Location
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<S> <C> <C>
San Francisco Bay Area:
Serramonte Auto Plaza: Nissan Colma, CA
Isuzu Colma, CA
Dodge Colma, CA
Mitsubishi Colma, CA
Lexus of Serramonte Lexus Colma, CA
Melody Toyota Toyota San Bruno, CA
Marin Nissan Nissan San Rafael, CA
Concord Nissan Nissan Concord, CA
Concord Toyota Toyota Concord, CA
Concord Honda Honda Concord, CA
Serramonte Honda Honda Colma, CA
Dublin Volkswagen/Dodge Volkswagen, Dodge Dublin, CA
Dublin Nissan Nissan Dublin, CA
First Dodge - Marin(a) Dodge San Rafael, CA
San Jose/Silicon Valley:
Stevens Creek Nissan Nissan Santa Clara, CA
Capitol Nissan Nissan San Jose, CA
Los Angeles Area:
Beverly Hills BMW BMW Beverly Hills, CA
Volkswagen of Woodland Hills Volkswagen Woodland Hills, CA
San Diego Area:
Poway Dodge Dodge Poway, CA
Poway Honda Honda Poway, CA
Poway Toyota Toyota Poway, CA
Ritchey Fipp Chevrolet Chevrolet Poway, CA
- -----------------------------------------
</TABLE>
(a) Acquisition is pending.
<PAGE>
TABLE OF CONTENTS
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Page
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Summary............................................................................................. 5
Risk Factors........................................................................................ 11
Dilution............................................................................................ 22
1998, 1999 and Pending Acquisitions................................................................. 23
Use of Proceeds..................................................................................... 25
Dividend Policy..................................................................................... 25
Capitalization...................................................................................... 26
Selected Historical Consolidated Financial Data..................................................... 27
Unaudited Pro Forma Consolidated Financial Data..................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of Operations............... 33
Business............................................................................................ 44
Management.......................................................................................... 66
Certain Transactions................................................................................ 75
Principal and Selling Stockholders.................................................................. 77
Description of Capital Stock........................................................................ 79
Shares Eligible for Future Sale..................................................................... 82
Underwriting........................................................................................ 84
Legal Matters....................................................................................... 87
Experts............................................................................................. 87
Where You Can Find More Information About Us........................................................ 87
Manufacturers' Disclaimer........................................................................... 87
Index to Consolidated Financial Statements.......................................................... F-1
</TABLE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements, which are subject to risks and
uncertainties and assumptions about our business, include, among other things:
. our potential acquisitions of vehicle dealerships;
. our financing plans;
. trends affecting our financial condition or results of operations; and
. our business strategies.
These forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially from
these forward-looking statements. Some of the risks and uncertainties that
could adversely affect our actual results and performance include:
. intense competition in the retail automotive industry;
. our relationships with manufacturers and these manufacturers' success;
. our ability to identify and complete new acquisitions of vehicle
dealerships;
. our success in integrating acquired vehicle dealerships;
. realization of cost savings from economies of scale;
3
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. the cyclical, seasonal and local nature of vehicle sales and the level
of consumer spending on vehicles and vehicle-related products and
services; and
. our debt levels.
These and additional factors that could negatively affect our future
financial condition and operations are discussed under the heading "Risk
Factors" on page 11 and in other parts of this prospectus. You are urged to
consider these factors carefully before investing in our common stock. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
All forward-looking statements made by us in this prospectus are qualified
by the cautionary statement above.
_______________
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities (1) in any
jurisdiction where the offer or sale is not permitted; (2) where the person
making the offer is not qualified to do so; or (3) to any person who can not
legally be offered the securities. You should assume that the information
appearing in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations
and prospects may have changed since that date.
_______________
This prospectus includes statistical data regarding the automotive
retailing industry. Unless otherwise indicated, this data is taken from
information published by the following sources and we have not independently
verified this data:
. a division of Intertec Publishing Corp. in its "Ward's Automotive
Yearbook" and "Ward's Dealer Business;"
. Crain's Communications, Inc. in its "Automotive News" and "1998 Market
Data Book;"
. the U.S. Census Bureau;
. the Industry Analysis Division of the National Automobile Dealers
Association in its "Industry Analysis and Outlook" and "Automotive
Executive Magazine" publications;
. the California Motor Car Dealers Association in its "Economic Impact
Report" for 1998 and 1999;
. the Polk Company in its "Auto Tracker Statistical Report;"
. the Center for Continuing Study of the California Economy in its
"California Economic Growth 1999 Edition;" and
. CNW Marketing/Research, Bandon, Oregon.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully, including the "Risk Factors"
section and our consolidated financial statements. Unless we indicate
otherwise, all information in this prospectus reflects the reclassification of
our Class A, Class B and Class C common stock into a single class of common
stock, our for stock split prior to the completion of this
offering and assumes that the underwriters do not exercise their over-allotment
option.
FIRSTAMERICA AUTOMOTIVE, INC.
We are a leading automotive retailer and consolidator. We currently
operate in four major metropolitan markets in California, and are focusing our
consolidation strategy in the western United States. We generate revenues
primarily through the sale and lease of new and used vehicles, service and parts
sales, financing fees, extended service warranty sales, after-market product
sales and collision repair services. We sell 10 domestic and foreign brands,
consisting of BMW, Chevrolet, Dodge, Honda, Isuzu, Lexus, Mitsubishi, Nissan,
Toyota and Volkswagen through 19 new vehicle dealerships, assuming completion of
our pending acquisitions. For the year ended December 31, 1998 we had pro forma
revenue of $890.8 million and pro forma operating income of $21.7 million.
We believe California's strong demographics provide significant
opportunities for future expansion. California accounted for more than 10
percent of new vehicle registrations in the United States in 1998. In addition,
the metropolitan markets where we do business are projected to have population
growth of more than double the national average and personal income growth over
30% higher than the national average through 2005. Our Chairman and Chief
Executive Officer have each been operating dealerships in California for over 25
years, which we believe provides us with a competitive advantage in these
demographically favorable markets.
Our innovative executive management team has developed and is executing
several new initiatives:
. We created the "Auto Factory" division to implement an efficient used
vehicle inventory control system at our dealerships. Auto Factory
centralizes the wholesale disposal of used vehicles on a company-wide
basis and the procurement, reconditioning and management of used vehicle
inventory on a regional basis.
. We currently market a full range of automobiles and related products and
services through the Internet which may be purchased at our dealerships.
Over 10% of our December 1998 new vehicle sales resulted from leads
generated through the Internet.
. We created a "Dealer Services" division to maximize cost savings by
centralizing and consolidating the purchasing power of our dealerships
for the procurement of finance and insurance products, or F&I, extended
warranty service contracts and aftermarket products.
Company Strengths
Focused Acquisition Strategy. We apply a systematic approach to all of our
acquisitions in which we analyze numerous factors including:
. Opportunity to expand market share and optimize product mix;
. Return on investment and earnings per share;
. Manufacturer relationship and support of acquisitions;
. Quality of location and facilities;
. Operational and cultural fit with our organization; and
. Reputation and experience of existing management.
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We focus on acquiring dealerships in contiguous markets to maximize the
benefits of our corporate infrastructure and existing presence in a particular
region. We seek (1) "platform" acquisitions which are generally established,
profitable, well managed multiple franchise dealerships located in metropolitan
or high-growth suburban markets, and (2) "tuck-in" acquisitions which are
typically single franchise dealerships that will allow us to take advantage of
the buying power of our dealerships in a region and provide greater breadth of
products and services in our markets. We believe that by acquiring and
integrating platforms with experienced existing management, we will be able to
effectively operate the dealerships with a management team that understands the
local market. We believe "tuck-ins" enable us to obtain cost efficiencies on a
regional level in areas including facility and personnel utilization, vendor
consolidation and advertising.
Extensive Experience and Ability to Integrate and Improve Acquisitions. Our
executive officers have substantial experience in successfully integrating and
improving businesses they have acquired, collectively having acquired and
integrated more than 50 dealerships during their careers.
A Leader in the California Market. We currently operate all of our dealerships
in California, which has the following characteristics:
. Approximately 26 million people, or 77.4% of the total California
population, reside in the Los Angeles, San Diego and San Francisco Bay
areas, the regions where we currently operate dealerships. From 1990 to
1998, California's population grew by 12.7% compared to the nation's
overall population growth of 8.6%.
. California had 1.6 million new vehicle registrations, or more than 10%
of the nation's total in 1998.
. From 1994 to 1998, personal income levels in California increased 3.9%
per year compared to the national average of 3.1%.
Used Vehicle Inventory Management. In an effort to increase the profitability
and efficiency of our used vehicle business, we created the Auto Factory
division. Auto Factory complements our acquisition strategy by enabling us to
improve the used vehicle inventory management process of our acquired
dealerships and provides competitive advantages over small dealers in the used
vehicle business. Some of the operations and benefits provided by Auto Factory
include:
. Opportunistic, large purchases of off-lease, rental and fleet vehicles
on a company-wide basis;
. Wholesale auctions on a centralized basis to maximize our profit on used
vehicle sales. Our gross margin for wholesale sales of our own used
vehicles increased to 5.1% in 1998 from 0.4% in 1997;
. Regional reconditioning centers and market-driven redistribution of used
vehicles.
Centralized Corporate Infrastructure with Decentralized Operations. We have
developed a corporate infrastructure that centralizes executive management
functions while maintaining an entrepreneurial environment at the dealership
level. This allows us to provide superior customer service and region-specific
responsiveness to the market.
High Levels of Customer Service. We provide high levels of customer service.
Our sales department focuses on providing customers with an unpressured,
informative shopping experience. Our service departments seek to provide our
customers with a professional and reliable service experience. Our goal is to
build long-term relationships with our customers and to create significant
repeat and referral business, potentially in our higher margin products and
services. Beyond establishing strong consumer loyalty, our focus on customer
satisfaction also engenders good relations with manufacturers. To keep
management focused on customer satisfaction, we include consumer satisfaction
results as a component of our incentive compensation program.
Experienced Management Team. We are focused on employing highly skilled and
experienced individuals at every level of our organization. We obtain a large
number of skilled and experienced employees from the management of acquired
dealerships. Our Chairman, Chief Executive Officer and Chief Operating Officer
have, on average, 32 years of experience in the automotive retailing industry.
We also have two regional vice presidents and three regional general managers
who have, on average, 18 years of automotive retailing experience. We believe
this
6
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first-hand operating experience will enable us to continue to acquire and
integrate dealerships into our organization effectively.
Business Strategy
Growth Through Acquisitions. We intend to capitalize on the continuing
consolidation of the highly fragmented automotive retailing industry. In 1998,
the approximately 22,600 new vehicle dealerships in the U.S. generated more than
$500 billion in total sales revenue and sold more than 30 million new and used
vehicles. In that year the largest 100 dealership groups generated
approximately $62 billion in total vehicle sales revenue, comprising less than
15% of the industry total. We believe that our management's strong reputation
will assist us in continuing to successfully acquire and integrate dealerships.
Benefits of Scale. We intend to improve the performance of our existing and
acquired dealerships by consolidating our purchasing power to reduce our costs.
We believe we can improve earnings of acquired dealerships by eliminating
duplicative functions and services and implementing best practices, including
used vehicle inventory management. Other benefits include improved terms on bank
and floor plan financing and savings from centralized procurement of products
and services.
Take Advantage of Regional Presence. We believe there are significant
opportunities and benefits from operating clusters of dealerships in contiguous
areas. We encourage the sharing of resources and have implemented technology
initiatives that allow us to effectively cross-sell products and services by
referring customers to our other dealerships. Direct benefits of our regional
focus include:
. Reduced advertising costs. We are able to reduce regional advertising
costs by creating multi-dealership advertisements and increasing our
buying power with advertising agencies and publications.
. Personnel utilization. We are able to utilize the same personnel to
perform various administrative functions for multiple dealerships.
. Regional inventory management. As a result of regionally centralized
procurement, reconditioning, inventory management and wholesale disposal
of used vehicles, we have reduced our inventory holding costs and
increased our wholesale used vehicle gross margins.
Expand High Margin Activities. We will continue to focus on expanding our
higher margin businesses, including sales of used vehicles, finance and
insurance, warranties and service and parts sales. We believe that we will have
significant opportunities to improve these areas in dealerships we acquire.
Capitalize on Market Trends. Part of our strategy is to maintain a competitive
advantage by adapting to new trends. We have implemented several initiatives to
capitalize on current market trends, including:
. Marketing through the Internet. Over 10% of our December 1998 new
vehicle sales resulted from leads generated through the Internet. We
believe that many of these sales are incremental to our traditional
dealership business.
. Proprietary database technology. We have developed a proprietary
database of customer information, which allows us to provide higher
levels of customer service and maximize our cross-selling opportunities.
. Focus on luxury brands. Several luxury manufacturers are now designing
products which are affordable to a broader range of consumers. As these
products provide higher margins and greater retention of service
customers, we are focused on increasing our percentage of sales of
luxury brands.
Train, Develop and Motivate Employees. We have invested substantial resources
in developing training programs at all levels of our organization to insure the
highest quality service for our customers. We believe that it is critical to
motivate management to achieve our overall objectives and we have devised an
incentive system that provides partial compensation in the form of stock options
and a stock purchase plan for employees.
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1998, 1999 and Pending Acquisitions
We have grown, and will continue to grow, primarily through dealership
acquisitions. With our extensive experience in managing and acquiring
dealerships, we believe we are able to increase the profitability of acquired
dealerships by increasing revenues, eliminating certain cost elements and
implementing our best practices. Listed below are our 1998, 1999 and pending
acquisitions which we expect to complete upon consummation of this offering.
<TABLE>
<CAPTION>
1998 Pro Forma Revenue(a)
Dealership Brands Location (in millions)
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<S> <C> <C> <C>
Beverly Hills BMW BMW Beverly Hills, CA $81.1
Serramonte Honda Honda Colma, CA 29.2
Concord Toyota Toyota Concord, CA 67.0
Volkswagen of Woodland Hills Volkswagen Woodland Hills, CA 13.8
Ritchey Fipp Chevrolet Chevrolet Poway, CA 30.8
First Dodge - Marin(b) Dodge San Rafael, CA 17.5
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</TABLE>
(a) Based on monthly dealer statements prepared for manufacturers.
(b) This acquisition is pending and is expected to close upon consummation of
this offering.
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The Offering
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Common stock offered:
<S> <C>
By us................................................ shares(a)
By the selling stockholders.......................... shares
Total shares offered................................. shares(a)
Shares outstanding after this offering..... shares(a)(b)
Use of proceeds........................................ We estimate that the net proceeds to be received by us from this
offering (without exercise of the over-allotment options) will be
approximately $ million. We intend to use these net proceeds,
in addition to funds we will borrow under a new credit facility,
to:
. fund our pending acquisitions;
. repay our existing credit facility;
. repay our outstanding loans to
principal stockholders including accrued
interest;
. redeem our outstanding senior notes
including accrued interest and redemption
premiums; and
. redeem our outstanding redeemable
preferred stock including accrued
dividends and redemption premiums.
We will not receive any proceeds from the
sale of shares of common stock by the selling
stockholders.
See "Use of Proceeds" on page 25 and
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations Liquidity and Capital
Resources" on page 37.
Risk factors.................................................... See "Risk Factors" beginning on page 11
and the other information provided in this prospectus
for a discussion of factors you should carefully
consider before deciding to invest in
shares of our common stock.
Proposed New York Stock Exchange symbol......................... FAA
</TABLE>
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(a) Does not include up to an aggregate of
shares of common stock that may be sold by us upon exercise of the over-
allotment option granted to the underwriters.
(b) Includes shares of common stock issuable upon
exercise of outstanding options and warrants at an average exercise price
of $ . Does not include shares of common
stock issuable upon exercise of options that may be granted under our 1997
stock option plan.
Our principal executive offices are located at 601 Brannan Street, San
Francisco, California 94107 and our telephone number is (415) 284-0444.
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Summary Historical and Pro Forma Consolidated Financial and Operating Data
The following table presents our summary historical and unaudited pro forma
consolidated financial and operating data. The summary historical consolidated
financial data presented below as of December 31, 1996, 1997 and 1998 and for
the years then ended were derived from our audited consolidated financial
statements. The unaudited pro forma financial data presented below are derived
from our historical consolidated financial statements and the unaudited
historical financial statements of the completed and pending acquisitions. This
financial information should be read in conjunction with our consolidated
financial statements and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning on page
33. The unaudited pro forma information as of and for the 12 months ended
December 31, 1998 have been presented as if this offering, debt repayment and
financing, 1998, 1999 and pending acquisitions and disposition had been
consummated on January 1, 1998 as to the statement of operations and operating
data, and on December 31, 1998 as to the balance sheet data. The unaudited pro
forma financial information does not purport to represent what our results of
operations or financial condition would have actually been or what operations
would be if the transactions that give rise to the pro forma adjustments had
occurred on the dates assumed. For information regarding the unaudited pro forma
adjustments made to our historical financial data, which give effect to this
offering, our 1998 acquisitions, our completed and pending 1999 acquisitions and
disposition and a new credit facility, see "Unaudited Pro Forma Consolidated
Financial Data" on page 28. Unless otherwise noted, we refer to this treatment
of financial information as "pro forma" throughout this prospectus.
<TABLE>
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Year Ended December 31,
----------------------------------------------------------------------
Historical Pro Forma
------------------------------------------------- -------------
1996 1997 1998 1998
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(in thousands, except per share and vehicle unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Sales
New vehicle..................................... $200,185 $290,281 $475,847 $540,618
Used vehicle.................................... 81,706 111,616 191,829 216,625
Service and parts............................... 42,416 58,707 91,134 107,123
Other dealership revenues, net.................. 8,215 13,444 24,261 26,446
-------- -------- -------- --------
Total sales................................... 332,522 474,048 783,071 890,812
Cost of sales..................................... 288,918 406,296 663,902 755,899
-------- -------- -------- --------
Gross profit.................................... 43,604 67,752 119,169 134,913
Selling, general and administrative expenses...... 38,330 58,761 99,603 110,392
Depreciation and amortization..................... 611 678 1,952 2,812
Combination and related expenses.................. -- 2,268 -- --
-------- -------- -------- --------
Operating income.................................. 4,663 6,045 17,614 21,709
Interest expense, floor plan...................... (2,922) (3,669) (5,521)
Interest expense, other........................... -- (1,866) (5,432)
-------- -------- -------- --------
Income before income taxes...................... 1,741 510 6,661
Income tax expense................................ 48 446 2,864
-------- -------- -------- --------
Net income...................................... $ 1,693/(a)/ $ 64 $ 3,797 $
======== ======== ======== ========
Pro forma net income (loss) per common share
diluted............................................. ========
Other Consolidated Financial and Operating Data:
New vehicle units sold............................ 9,450 13,835 20,468 23,210
Used vehicle units sold-retail.................... 4,921 6,639 9,901 11,443
New vehicle sales revenue......................... $200,185 $290,281 $475,847 $540,618
Used vehicle sales revenue-retail................. $ 67,944 $ 90,436 $141,946 $162,857
Used vehicle sales revenue-wholesale.............. $ 13,762 $ 21,180 $ 49,883 $ 53,768
Gross margin...................................... 13.1% 14.3% 15.2% 15.1%
New vehicle gross margin.......................... 6.5% 6.5% 7.8% 7.7%
Used vehicle gross margin-retail.................. 8.1% 9.8% 9.6% 9.8%
Used vehicle gross margin-wholesale............... (0.0)% 0.4% 5.1% 4.5%
Service and parts gross margin.................... 40.0% 45.2% 45.8% 44.8%
Consolidated Balance Sheet Data:
Total assets...................................... $ 56,127 $124,002 $178,452
Short-term debt, including floor plan notes....... 39,161 72,619 103,989
Long-term debt.................................... -- 21,938 34,547
Total liabilities................................. 51,247 114,000 163,157
Redeemable preferred stock........................ -- 3,439 3,579
Stockholders' equity.............................. 4,880/(b)/ 6,563 11,716
</TABLE>
(a) We were an S corporation until January 1, 1997. Accordingly, we were not
subject to federal income taxes prior to January 1, 1997. Based on our
estimated effective tax rate during 1996, had we been a C corporation, net
income would have been $1,027.
(b) Stockholders' equity is presented net of advances to stockholders during
1996. Accordingly, the change in stockholders' equity is reflected net of
stockholders' advances.
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RISK FACTORS
You should carefully consider the risks described below before purchasing
our common stock. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties that we do not know about or
that we currently believe are not material may also harm our business. If any
of the following risks actually occur, our business could be materially harmed.
If our business is harmed, the trading price of our common stock could decline,
and you may lose part or all of your investment.
Intense competition in vehicle retailing and related businesses could reduce our
profit margins.
Automobile retailing is a highly competitive business with over 22,600 new
vehicle dealership locations in the United States in 1998. Our competition
includes:
. franchised automobile dealerships selling the same or similar makes of
our new and used vehicles in the same markets as us and sometimes at
lower prices than ours;
. other franchised dealers;
. private market buyers and sellers of used vehicles;
. used vehicle dealers; and
. service center chains and independent service and repair shops.
Gross margins on sales of new vehicles have been generally declining since
1986. We do not have any cost advantage in purchasing new vehicles from
manufacturers. We typically rely on advertising, merchandising, sales
expertise, service reputation and dealership locations to sell new vehicles.
The following factors could have a significant impact on our business:
. Increasing competition in the used car market from non-traditional
outlets such as nationwide networks of used vehicle "superstores"
including AutoNation or CarMax which use sales techniques such as one-
price and "no-haggle" shopping. Some of these used car superstores have
opened in markets where our dealerships compete. No-haggle sales methods
are also being implemented for new car sales by at least one of these
superstores and dealers for Saturn and other makes.
. We, along with our competition, are beginning to use the Internet as
part of the sales process. Consumers are using the Internet to
comparison shop for vehicles, which may further reduce margins for new
and used cars.
. Some of our competitors may be capable of operating on smaller gross
margins than ours and may have greater financial, marketing and
personnel resources than ours.
. Ford, General Motors and Saturn have acquired dealerships in various
cities in the United States. Other manufacturers may also directly enter
the retail market in the future, which could have a material adverse
effect on our business.
. The increased popularity of short-term vehicle leasing has resulted in a
large increase in the number of late-model used vehicles available in
the market, which may reduce profit margins on used vehicle sales.
. As we seek to acquire dealerships in new markets and strive to gain
market share, we may face significant competition, including competition
from other publicly owned dealership groups.
Our finance and insurance business and other related businesses, which
provide higher contributions to our earnings than sales of new and used
vehicles, are subject to strong competition from various financial institutions
and other third parties. This competition may increase if these parties are able
to sell products over the Internet. See "Business--Competition" on page 62.
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Automobile manufacturers exercise significant control over our operations and we
are dependent on them to operate our business.
Manufacturers Control Access to New Vehicles
We operate each of our dealerships under a franchise agreement between the
applicable vehicle manufacturer or related distributor and our subsidiary that
operates the dealership. Without a franchise agreement, we cannot obtain the
manufacturer's new vehicles. Vehicles built by the following manufacturers
accounted for the following approximate percentage of our 1998 new vehicle
revenues on a pro forma basis, as if we owned each of the dealerships we
acquired in 1998 as of January 1, 1998:
<TABLE>
<CAPTION>
Percentage of Our 1998 Pro Forma New
Manufacturer Vehicle Revenues
- ------------------------------- ------------------------------------------------
<S> <C>
Toyota:
Toyota 20.6%
Lexus 9.1%
Nissan 21.6%
DaimlerChrysler 15.9%
Honda 13.2%
</TABLE>
No other manufacturer accounted for more than 10% of our pro forma 1998 new
vehicle revenues. Accordingly, a significant change in our relationship with
Toyota, Nissan, DaimlerChrysler or Honda could have a material adverse effect on
our business.
We depend on the manufacturers to provide us with a desirable mix of new
vehicles, including popular models like sport utility vehicles that generally
produce the highest profit margins. If we are unable to obtain a sufficient
quantity of the most popular vehicles, our business may be materially harmed.
In some instances, to obtain additional allocations of popular vehicles, we must
purchase a larger number of less desirable vehicles than we otherwise would and
this could have a material adverse effect on our business.
We Depend on the Success of Our Manufacturers
The success of our dealerships depends to a great extent on our
manufacturers':
. financial condition;
. quality and quantity of marketing efforts;
. vehicle design and popularity;
. production capabilities;
. management;
. relationship with employees, including events like strikes and other
labor actions by unions; and
. timely delivery of vehicles, particularly in connection with the
introduction of new models.
Nissan, one of our largest new vehicle suppliers in 1998, has had
significant financial difficulty in the U.S. market in the past year with unit
sales declining from 663,000 in 1997 to 558,000 in 1998. Adverse conditions
affecting manufacturers, particularly Toyota, Nissan, DaimlerChrysler or Honda,
each of whom accounted for more than 10% of our pro forma 1998 new vehicle
revenues, could have a material adverse effect on our business.
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Manufacturers Have Significant Control Over Our Dealership Operations
A manufacturer can terminate or not renew its franchise agreement for a
variety of reasons, including any unapproved change of ownership or management
of our company or our dealerships, or other material contract breaches. Some of
the manufacturers, including Nissan, have a right of first refusal if we seek to
sell one of that manufacturer's dealerships. We cannot guarantee that we will
be able to renew all of our existing franchise agreements when they expire or
that any manufacturer's terms and conditions for renewal will be acceptable to
us. A manufacturer's termination or decision not to renew one or more of our
franchise agreements could have a material adverse effect on our business. A
manufacturer could use its superior bargaining position in renewal or other
franchise agreement negotiations to obtain concessions from us that could have a
material adverse effect on our business.
We Depend on Manufacturers' Sales Incentive and Other Dealership Support
Programs
Our dealerships depend on manufacturers for sales incentives and other
programs that are intended to promote dealership sales or support dealership
profitability. For example, the manufacturers sometimes provide the following
programs:
. customer rebates on new vehicles;
. dealer incentives on new vehicles;
. special financing or lease terms;
. warranties on new and used vehicles; and
. sponsorship of used vehicle sales by authorized new vehicle dealers.
Manufacturers frequently change their incentive programs. A reduction or
discontinuation of a manufacturer's incentive programs may have a material
adverse effect on our business.
Manufacturers Could Harm Our Business by Granting Additional Franchises in
Our Markets
Our franchise agreements do not grant us the exclusive right to sell a
manufacturer's vehicles within a given geographic area. Our business could be
harmed if any of our manufacturers award additional franchises to our
competitors.
We may not be able to complete desired acquisitions.
The U.S. automotive retailing industry is a mature industry and we expect
minimal growth in unit sales of new vehicles. Consequently, our principal
strategy for increasing our revenues and earnings is to acquire additional
dealerships. Our revenues and profits will significantly depend on our ability
to make acquisitions. We may encounter the following difficulties in acquiring
dealerships:
Manufacturers May Not Consent to Our Acquisitions
We cannot acquire a dealership without the consent of the applicable
manufacturer. Each of our dealerships operates under a franchise agreement with
one of our manufacturers and these franchise agreements give manufacturers the
power to block dealership transfers. A manufacturer's delay in or refusal to
grant approval of our dealership acquisitions could have a material adverse
effect on our growth strategy and business.
In deciding whether to approve an acquisition, manufacturers are likely to
consider:
. our management's moral character;
. the business experience of the post-acquisition dealership principals;
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. our financial condition;
. the condition of the dealership facility to be acquired; and
. our ownership structure.
The key factor a manufacturer will consider in connection with a proposed
dealership transfer is the dealership's compliance with manufacturers' minimum
customer satisfaction levels, as determined through systems generally known as
consumer satisfaction indices, or CSIs. Manufacturers have modified components
of CSIs in the past, and they may replace them with different systems.
Generally, each manufacturer requires that all of our dealerships that hold a
franchise meet minimum CSI standards. If we seek to acquire a dealership from a
manufacturer for which we do not currently hold a franchise, the manufacturer
will examine our CSI scores from our other dealerships. A number of our
agreements with manufacturers include the requirement that we meet specific CSI
performance standards to acquire additional dealerships. For example:
. We have entered into an agreement with DaimlerChrysler under which we
are required to have 12 months of CSI scores at each of our Chrysler
dealerships which are equal to or greater than the average rating for
the "zone group" levels in which each dealership is included in its
sales zone.
. Toyota and Lexus require that each Toyota or Lexus dealership owned by
us must meet all applicable Toyota and Lexus market representation
policies and standards and meet applicable performance criteria for the
most recent 12 month period.
. We have agreed that prior to obtaining an additional BMW dealership,
each BMW dealership owned by us must show that it has maintained or
improved key operational benchmarks including CSI scores and sales
penetration.
We may not be able to meet CSI scores or other standards required of us by
the manufacturers in the future.
Manufacturers May Impose Limits on the Number and Location of Dealerships We
Own
A manufacturer may limit the total number of its dealerships we may own or
the number we may own in a particular geographic area. See "-- Relationships
with Manufacturers" on page 58. The following is a summary of the restrictions
imposed by our most significant manufacturers:
Toyota/Lexus. Under our agreement with Toyota, the number of Toyota
dealerships we may acquire is restricted to:
. the greater of one dealership or twenty percent of the Toyota dealer
count in a "metro" market (metro markets are multiple Toyota dealership
markets within some geographic areas as defined by Toyota);
. the lesser of five dealerships or 5% of the Toyota dealerships within
regional geographic areas designated by Toyota; and
. seven Toyota dealerships nationally.
Our agreement with Toyota also limits the number of Lexus dealerships we
may acquire to not more than:
. two Lexus dealerships in any Area regional geographic area designated by
Toyota; and
. three Lexus dealerships nationally.
Toyota restricts the number of its dealerships we may own in a specific
region and the time frame over which any dealership may be acquired. We can
acquire no more than two Toyota dealerships in each semi-annual period from
January to June and July to December until we acquire a total of seven
Toyota dealerships. After we acquire seven Toyota dealerships we can
acquire, if we are then qualified, additional dealerships over a minimum of
seven semi-annual periods up to a maximum
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number of dealerships that represent 5% of Toyota's aggregate U.S. annual retail
sales volume. In addition, Toyota restricts the number of Toyota dealerships we
may acquire in any contiguous market. We may acquire only three Lexus
dealerships in the U.S.
Nissan. Nissan restricts us from owning Nissan dealerships which account for
either:
. more than 5% of Nissan's total national competitive segment
registrations based on the sum of the retail competitive segment
registrations in our primary marketing areas, or
. 20% of any Nissan region's total competitive segment registrations
contained in all of our primary marketing areas in that region.
In addition to a customary agreement with Nissan, we have entered into a
contiguous market ownership agreement, or CMO, with Nissan for us to own and
operate multiple and contiguous Nissan dealerships in two contiguous markets in
the San Francisco Bay area. These CMO agreements provide that if we want to sell
one Nissan dealership within the CMO area, Nissan has the right to require that
we sell all of our Nissan dealerships within the CMO area. Further, if we want
to sell or transfer one of our two San Francisco Bay Area contiguous market
areas without Nissan's consent, Nissan may require us to sell or transfer one or
all, or any combination of these areas or dealerships to a proposed buyer
acceptable to Nissan. Termination of one Nissan dealer services agreement within
a CMO constitutes termination of all dealer agreements within that CMO.
Honda/Acura. Under our current agreement, Honda limits the number of dealerships
that we may own to not more than:
. seven Honda and three Acura franchises nationally;
. one Honda dealership in a Honda-defined "Metro" market having two to ten
Honda dealerships;
. two Honda dealerships in a Metro market having 11 to 20 Honda
dealerships;
. three Honda dealerships in a Metro market having 21 or more Honda
dealerships;
. 4% of the Honda dealerships in any one of the ten Honda-defined
geographic zones;
. one Acura dealership in a Metro market having two or more Acura
dealerships; and
. two Acura dealerships in any one of the six Acura geographic zones, as
defined by Honda.
DaimlerChrysler. Currently, we have no agreement with DaimlerChrysler
restricting our ability to acquire DaimlerChrysler dealerships. DaimlerChrysler
has advised us that in determining whether to approve an acquisition of a
DaimlerChrysler dealership, DaimlerChrysler considers the number of
DaimlerChrysler dealerships the acquiring company already owns. DaimlerChrysler
currently considers on a case-by-case basis any acquisition that would cause the
acquiring company to own more than ten DaimlerChrysler dealerships nationally,
six in the same DaimlerChrysler-defined zone or two in the same market.
General Motors. General Motors currently limits the number of GM dealerships
that we may acquire over the next two years to between five and ten additional
GM dealership locations. Any one GM dealership may include a number of different
GM franchises. In addition, GM limits the maximum number of GM dealerships that
we may acquire at any time to 50% of the GM dealerships, by franchise line, in a
GM-defined geographic market area.
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BMW. BMW prohibits publicly held companies from owning BMW dealerships
representing more than 5% of all BMW sales in the U.S. or more than 50%
of BMW dealerships in a given metropolitan market.
We currently own three Toyota, one Lexus, six Nissan, three Honda, three
DaimlerChrysler, one GM, one BMW, one Mitsubishi, two Volkswagen and one Isuzu
dealership franchises. Under current restrictions in our existing regions, we
may acquire the maximum number of Toyota dealerships described above based on
aggregate national retail sales volume of Toyota, two additional Lexus
dealerships, four additional Honda dealerships and three Acura dealerships.
Most other car manufacturers have similar restrictions on acquisitions. In
addition to potentially limiting our ability to complete acquisitions, these
restrictions may delay or prevent a change of control of our company.
Increased Competition Could Result in Lost Dealership Acquisition
Opportunities and Increased Acquisition Costs
We anticipate increased competition for acquisitions from other public and
privately held dealer groups as well as from manufacturers who are beginning to
acquire dealerships. This could result in fewer acquisition opportunities for
us and higher acquisition prices.
We May Not Be Able to Obtain the Equity or Debt Financing We Need to Finance
Acquisitions
We intend to finance acquisitions with cash on hand and cash raised through
equity and debt security issuances and additional borrowings. We may not be
able to obtain enough additional debt or equity financing to finance our
acquisitions. If the timing of acquisitions should accelerate or the number or
cost of acquisitions increase, we may not be able to finance these acquisitions
on favorable terms, if at all. We are currently negotiating for a new credit
facility, but we may not be able to secure a new credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources" on page 37.
Our ability to acquire dealerships also will depend on our ability to
finance the new dealerships' inventory purchases, which in the automotive retail
industry involves significant borrowings commonly referred to as floor plan
financing. As of December 31, 1998, we had approximately $138.5 million of
indebtedness, which included $81.5 million of floor plan financing.
Substantially all of our assets are pledged to secure this indebtedness, which
may impede our ability to borrow from other sources. Upon acquiring additional
dealerships, we will require new floor plan financing or will need to obtain
consents to assume the acquired dealership's existing floor plan financing.
Manufacturer Stock Ownership and Issuance Restrictions May Limit Our Ability
to Issue Additional Equity to Meet Our Financing Needs
A standard automobile franchise agreement prohibits, and any new debt
financing may prohibit, transfers of any ownership interest of a dealership and
its parent, and therefore, do not permit public trading of the capital stock of
a dealership or its parent. Our manufacturers have agreed to permit public
trading of our common stock, but a number of these manufacturers impose
restrictions upon the transferability of our common stock held by our principal
stockholders which may impede our ability to raise needed capital or to issue
stock as consideration for future acquisitions.
. Toyota, Lexus, Isuzu and Nissan may force the sale of their franchises
or in some cases, terminate the franchise, if 20% of more of our common
stock is acquired by an individual or entity unqualified, as defined by
the manufacturer, to own one of its dealerships.
. Honda requires that our original ownership group retain more than 50% of
our capital stock and that these shares may not be publicly traded.
Honda may force us to sell our Honda dealerships if any
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person or entity, excluding our current 5% stockholders, acquires 5% of
our common stock, and Honda considers that person or entity to be
incompatible with the manufacturer. The original ownership group will
own approximately % of our common stock upon completion of this
offering, assuming the underwriters' over-allotment is exercised. Honda
has proposed a new agreement to replace our current agreement that would
eliminate this restriction but the proposal has not yet been executed.
In addition, our current agreement with Honda requires Honda's consent
for any equity offering by us. Honda's proposed new agreement with us
does not contain that requirement. We have not executed the proposed new
agreement, nor have we obtained Honda's consent for any equity offering.
If Honda were to claim that we breached its existing agreement with us
by consummating an equity offering and sought to enforce its remedies,
we could be materially harmed. If we materially breach our agreement
with Honda, Honda could purchase our Honda dealerships at their fair
market value and terminate our dealer agreements. For the year ended
December 31, 1998, our Honda dealerships represented approximately 13.2%
of our pro forma revenues. We are continuing to negotiate with Honda on
the terms of the proposed new agreement.
. Volkswagen may force us to sell our Volkswagen franchises if 10% or more
of our common stock is acquired by an individual or entity unqualified,
as defined by Volkswagen, to own that dealership.
. GM may force us to sell our GM franchises if 20% or more of our common
stock is acquired by an individual or entity unqualified, as defined by
GM, to own a GM dealership.
. Mitsubishi must provide prior written consent to any change in control
of our company, which includes the transfer of a majority interest to
new investors.
. DaimlerChrysler must provide prior written consent to any change in
control of our company, which includes the transfer of a majority
interest to new investors.
Manufacturers of acquired dealerships may also place similar restrictions
on our ability to issue additional equity.
Our Ability to Acquire Dealerships May Be Impeded or Blocked by Antitrust Law
In some cases, federal antitrust laws may require us to file applications
and obtain clearances under applicable federal antitrust laws before completing
an acquisition. These requirements may restrict or delay acquisitions, and may
increase the cost of completing these transactions.
Risks associated with acquisitions may hinder our ability to increase revenues
and earnings.
In pursuing a strategy of acquiring other dealerships, we face risks
commonly encountered with growth through acquisitions. These risks include:
. incurring significantly higher capital expenditures and operating
expenses;
. failing to assimilate the operations and personnel of acquired
dealerships;
. entering new markets with which we are unfamiliar;
. disrupting our ongoing business;
. diverting our limited management resources;
. failing to maintain uniform standards, controls and policies;
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. impairing relationships with employees, manufacturers and customers as a
result of changes in management;
. causing increased expenses for accounting and computer systems; and
. potential undiscovered liabilities of our acquisition targets.
Although we believe that we conduct a prudent level of investigation
regarding the operating condition of the dealerships we acquire, unavoidable
levels of risk remain regarding the actual operating condition of the target
dealerships. Until we actually assume operating control of a dealership, we may
not be able to ascertain its actual value and determine whether the price paid
for a dealership was reasonable.
To manage our expansion, we intend to continually evaluate the adequacy of
our existing systems and procedures, including our financial and reporting
control systems, data processing systems and management structure. We may not
adequately anticipate all of the demands that our growth will impose on these
systems, procedures and structures. If we cannot adequately anticipate and
respond to these demands, our business could be materially harmed.
Failing to retain qualified management personnel at any acquired dealership
may increase the risk associated with integrating that dealership. We believe
that it takes approximately three to six months to fully integrate an acquired
dealership into our operations and realize the full benefit of our strategies
and systems. We may not be successful in overcoming the risks listed above or
any other problems encountered with acquisitions in a timely manner or at all.
Acquisitions may also result in significant goodwill and other intangible assets
that are amortized in future years and reduce future stated earnings.
The cyclical, seasonal and local nature of vehicle sales may adversely affect
our business.
The automotive retailing industry is cyclical and has experienced periodic
downturns due to oversupply and weak demand. Many factors affect the industry,
including general economic conditions, consumer confidence, the level of
consumers' discretionary personal income, interest rates and credit
availability. For the year ended December 31, 1998, industry retail unit sales
increased 2.9% as a result of retail truck sales gains of 7.9% offset by retail
car sales declines of 1.2% from the same period in 1997. Future recessions may
have a material adverse effect on our business. In addition, changes in
interest rates may significantly impact our car sales since a significant
portion of car buyers finance their purchases.
Vehicle sales tend to be seasonal, with higher revenues in the second and
third calendar quarters of the year. If we fail to adequately forecast seasonal
variation in sales, our financial results could be materially harmed.
Local economic, competitive and other conditions also affect the
performance of dealerships. Our dealerships currently are located in the San
Francisco Bay, San Jose/Silicon Valley, San Diego and Los Angeles markets.
While we intend to pursue acquisitions outside of these markets, we expect that
the substantial majority of our operations will continue to be concentrated in
these areas for the foreseeable future. As a result, the success of our
business depends substantially on general economic conditions and consumer
spending habits in California, as well as various other factors, including tax
rates, interest rates, state and local regulations and weather conditions. We
may not be able to expand geographically, and any expansion may not adequately
insulate us from the adverse effects of local or regional economic conditions in
California.
We have a substantial amount of debt.
As of December 31, 1998, our total consolidated long-term indebtedness was
$34.5 million and our total consolidated short-term indebtedness, including
floor plan notes payable, was $104.0 million. We may incur significant
additional debt in connection with our future acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources" on page 37 and "Capitalization" on page 26.
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The amount of our outstanding debt could impact our business and have
important consequences to holders of our common stock, including:
. our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
. a substantial portion of our cash flow from operations must be dedicated
to the payment of principal and interest on borrowings under our credit
facility, our standardized floor plan credit facility for each of our
dealership subsidiaries and other indebtedness, reducing the funds
available to us for our operations and other purposes;
. substantially all of our borrowings are and may continue to be at
variable rates of interest, which exposes us to the risk of increased
interest rates;
. the indebtedness outstanding under a new credit facility will likely be
secured by a pledge of substantially all the assets of our dealerships;
and
. we may have substantially more debt than some of our competitors, which
may place us at a competitive disadvantage and make us more vulnerable
to changing market conditions and regulations.
In addition, our debt agreements contain numerous covenants that limit the
discretion of our and our subsidiaries' management with respect to business
matters, including restrictions on dividend payments, capital expenditures and
acquisitions and dispositions of assets.
The loss of key personnel and our limited management and personnel resources
could adversely affect our operations and growth.
Our success significantly depends on the continued contributions of our
management team and service and sales personnel. In particular, we depend on
our executive management, regional vice presidents, regional general managers
and general managers to supervise the day-to-day operations of our dealerships.
In addition, as we expand, we may need to hire additional managers and we will
likely be dependent on the senior management of acquired dealerships.
Manufacturer franchise agreements require the manufacturer's prior approval of
any change in franchise general managers. The market for qualified employees in
the automotive retailing industry and in the regions in which we operate,
particularly for general managers and sales and service personnel, is highly
competitive and we may incur increased labor costs in periods of low
unemployment. The loss of the services of key employees or the inability to
attract additional qualified managers could have a material adverse effect on
our business. In addition, the lack of qualified management or employees
employed by our potential acquisition targets may limit our ability to
consummate future acquisitions.
Imported product restrictions and foreign trade risks may impair our ability to
sell foreign vehicles profitably.
Some of the vehicles and parts that we sell are manufactured outside the
U.S. Accordingly, we are subject to the customary risks of importing
merchandise, including fluctuations in the value of currencies, import duties,
exchange controls, trade restrictions, work stoppages and general political and
economic conditions in foreign countries. The U.S. or the countries from which
our products originate may from time to time adjust existing, or impose new,
quotas, tariffs, duties or other restrictions which could adversely affect our
operations and our ability to purchase imported vehicles and parts.
Governmental regulation and environmental regulation compliance costs may have a
material adverse affect on our profits.
We are subject to a wide range of federal, state and local laws and
regulations, including local licensing requirements and consumer protection
laws. Our violation of these laws and regulations could result in civil and
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criminal penalties being levied against us or in a cease and desist order
against our non-complying operations. We believe that we comply in all material
respects with all laws and regulations applicable to our business, but future
regulations may be more stringent and require us to incur significant additional
costs.
Our facilities and operations are also subject to federal, state and local
laws and regulations relating to environmental protection and human health and
safety, including those governing wastewater discharges, air emissions, the
operation and removal of underground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and wastes and the
remediation of contamination associated with any disposal or release. These
laws and regulations may impose joint and several liability on statutory classes
of persons for the costs of investigating and/or remediating contaminated
properties, regardless of fault or the legality of the original disposal. These
persons include the present or former owner or operator of a contaminated
property and companies that generated, disposed of or arranged for the disposal
of hazardous substances found at the property.
Our past and present business operations subject to these laws and
regulations include the use, storage handling and contracting for recycling or
disposal of hazardous or toxic substances or wastes. These toxic substances
include environmentally sensitive materials including motor oil, waste motor oil
and filters, transmission fluid, antifreeze, freon, waste paint and lacquer
thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel
fuels. We are subject to other laws and regulations as a result of the past or
present existence of underground storage tanks at many of our properties. Like
many of our competitors, we have incurred, and will continue to incur, capital
and operating expenditures and other costs in complying with these laws and
regulations. In addition, in connection with future acquisitions, we could
become subject to new or unforeseen environmental costs or liabilities, some of
which could be material.
Laws and regulations will require us to comply with new or more stringent
environmental compliance standards as of future dates. We cannot predict future
environmental legislation and regulations, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist in the future. Compliance with new or more stringent laws
or regulations, stricter interpretation of existing laws or the future discovery
of environmental conditions may require us to make additional expenditures, some
of which may be material.
Lack of independent directors could result in conflicts with stockholders.
A majority of the members of our board of directors are employees and/or
principal stockholders of us or one of our affiliates. Although we intend to
appoint at least two additional independent directors in the future, they will
not constitute a majority of the board, and the board might not have a majority
of independent directors in the future. Without a majority of independent
directors, our executive officers, who also are principal stockholders and
directors, could establish policies and enter into transactions without
independent review and approval, subject to restrictions required by Delaware
law. In addition, although we intend to have audit and compensation committees
comprised entirely of independent directors, until we appoint additional
independent directors, audit and compensation policies could be approved without
fully independent review. These and other transactions present the potential
for a conflict of interest between us and our stockholders generally and our
controlling officers, stockholders or directors. See "Certain Transactions" on
page 75.
Provisions in our certificate of incorporation and bylaws may delay or prevent a
change of control or changes in our management.
The following provisions in our certificate of incorporation and our bylaws
may delay or prevent a change of control or changes in our management:
. the division of our board of directors into three separate classes;
. the right of our board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors; and
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. the ability of our board of directors to alter our bylaws without
stockholder approval.
Furthermore, we are subject to the provisions of section 203 of the
Delaware General Corporation Law. These provisions prohibit certain large
stockholders, in particular those owning 15% or more of our outstanding voting
stock, from consummating a merger or combination with a corporation within three
years of the stockholder's acquisition of that interest unless the stockholder
receives board approval for the transaction or 66 2/3% of the shares of voting
stock not owned by the stockholder approve the merger or combination. See
"Description of Capital Stock -- Delaware Law, Charter, By-law and Franchise
Agreement Provisions" on page 80.
There has not been an active public market for our common stock, an active
trading market may not develop and the common stock offered to you may not trade
at its issuance price.
No active public market existed for our common stock prior to this
offering. We intend to apply for listing of the common stock on the New York
Stock Exchange. An active trading market may not develop after this offering
or, if one develops, it may not be sustained. The initial public offering price
will be the product of our negotiations with the underwriters and may bear no
relationship to the price at which the common stock trades after this offering.
The common stock's price after this offering may be influenced by a number of
factors, including the liquidity of the market for the stock, investors'
perceptions of our business and the automotive retailing industry and general
economic and other conditions. See "Underwriting" on page 84.
Purchasers of our common stock in this offering will be immediately and
substantially diluted.
Purchasers of our common stock in this offering will be immediately and
substantially diluted in the amount of $ per share in net tangible book
value per share from the initial offering price. See "Dilution" on page 22.
Substantial future sales of our common stock in the public market could cause
our stock price to fall.
The market price of our common stock could drop as a result of sales of a
large number of shares in the market after this offering or in response to the
perception that these sales could occur. All of the shares sold
in this offering will be freely transferable. Of the other 15,046,044 shares
outstanding, 14,879,934 shares will be "restricted securities" as defined in
Rule 144 under the Securities Act, and will be transferable in the near future,
and 166,110 shares are freely transferable. 1,447,847 shares issuable upon
exercise of outstanding options will be freely tradable upon exercise and after
180 days following the effective date of this prospectus. In addition, holders
of 14,648,119 shares have registration rights. See "Shares Eligible for Future
Sale" on page 82.
Year 2000 computer problems could adversely affect our profitability.
We are in the process of addressing the impact on our operations of
computer programs that are unable to distinguish between the year 1900 and the
year 2000. We rely heavily on the systems of lenders and suppliers,
particularly manufacturers of vehicles and parts. Our business could be
materially harmed if our lenders' or suppliers' systems are not year 2000 ready.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Project" on page 41.
A major earthquake or other natural disaster could harm our business.
We conduct the vast majority of our operations in major metropolitan
markets in California, each of which has been subject to unpredictable
earthquake activity. A major earthquake or other natural disaster affecting one
or more of our markets could at least temporarily reduce sales by diverting
consumers' discretionary income to other purposes, and could harm our business.
Moreover, the continued operation and success of our business are dependent in
part upon our ability to protect our facilities against physical damage from
power outages, telecommunications failures, physical break-ins and other similar
events. We may not be able to prevent catastrophic damage to our facilities in
the event of a major earthquake or other natural disaster, which could harm our
business.
21
<PAGE>
DILUTION
Our pro forma consolidated net tangible book value as of December 31, 1998
was $ , or $ per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities and divided by the total number
of our shares of common stock outstanding. Total tangible assets excludes
goodwill and other intangible assets. Without taking into account any other
change in this pro forma consolidated net tangible book value after December 31,
1998, other than to give effect to our sale of the shares of common
stock in this offering at an assumed initial public offering price of
$ per share, and after deducting estimated underwriting discounts
and offering expenses and receipt of the estimated net proceeds, our pro forma
consolidated net tangible book value as of December 31, 1998 would have been
approximately $ , or $ per share. This represents an immediate increase in
our net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to the purchasers of common stock in this
offering. If the initial public offering price is higher or lower than $ per
share, the dilution to purchasers of common stock in this offering will be
greater or less. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Assumed initial public offering price per share............................... $
Pro forma net tangible book value per share as of December 31, 1998.... $
Increase in net tangible book value attributable to new public
investors..............................................................
Pro forma net tangible book value per share after this offering...............
Dilution per share to new public investors.................................... $
--------
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1998, the differences between the number of shares of common stock purchased
from us, the total consideration paid to us and the average price per share paid
by the existing stockholders and by the new public investors purchasing shares
in this offering, at an assumed initial public offering price of $ per
share and before deducting estimated underwriting discounts and offering
expenses:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price Per
---------------------- --------------------
Number Percent Amount Percent Share
------ -------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Existing stockholders........... % % $
New public investors............ $
------ -------- ------- -------
Total 100.0% $ 100.0%
====== ======== ======= =======
</TABLE>
The tables above assume that (1) the underwriters' over-allotment option
will not be exercised and (2) no options have been or are exercised after
December 31, 1998. As of December 31, 1998, there were outstanding options to
purchase an aggregate of 1,447,847 shares of common stock under our 1997
stock option plan, with a weighted average exercise price of $2.78 per
share. To the extent these options are exercised, there will be further
dilution to the new public investors. See "Description of Capital Stock - Stock
Options" on page 80, "Shares Eligible for Future Sale" on page 82 and note 10
of the notes to our consolidated financial statements on page F-16.
22
<PAGE>
1998, 1999 AND PENDING ACQUISITIONS
We have grown, and will continue to grow, primarily through dealership
acquisitions. Due to our extensive experience in managing and acquiring
dealerships, we believe we are able to increase the profitability of acquired
dealerships by increasing revenues, reducing costs and implementing our best
practices operating strategy. Many of the dealerships that we acquire are well-
managed, profitable dealerships, yet by focusing on higher margin products and
services, in addition to cost reductions, we are able to further increase
profitability. Listed below are our 1998 and 1999 dealership acquisitions, as
well as our pending acquisitions which we expect to complete upon consummation
of this offering.
1998 Acquisitions
The following presents for informational purposes the unaudited total
revenues and vehicle unit sales for the period in 1998 that we owned the
dealership, combined with the period in 1998 that the previous owner owned the
dealership. The combined 1998 results are compared to the results of the
previous owner for the year ended 1997.
Beverly Hills BMW
Beverly Hills BMW is located on Wilshire Boulevard in the heart of Beverly
Hills in West Los Angeles, California. On April 1, 1998, we acquired
substantially all of the operating assets of Beverly Hills BM, Ltd., for $11.7
million. Beverly Hills BMW had retail sales in 1997 of 769 new and 183 used
vehicles, and had aggregate revenues of approximately $53.7 million. In 1998,
this dealership had retail sales of 1,113 new and 535 used vehicles, and had
aggregate revenues of $81.1 million, a 51.0% increase over 1997. This
acquisition further implements our strategy to increase our percentage mix of
luxury vehicles. Additionally, Beverly Hills BMW represents the addition of a
high profile, well-managed luxury vehicle dealership having a significant
presence in a new market.
Serramonte Honda
On June 19, 1998, we acquired substantially all of the operating assets of
Burgess British Cars, Inc., a Honda automobile dealership located in Daly City,
California for approximately $3.8 million. We assessed this purchase as a
strategic opportunity to acquire an available Honda franchise currently
operating below optimal performance levels due to demographic changes in its
existing location and absentee management. We relocated the operations to a
newly refurbished facility at our existing Serramonte Boulevard location in
Colma, California--one of the most desirable automotive retail locations in
Northern California. At its former location, Burgess Honda had retail sales in
1997 of 1,023 new and 211 used vehicles, and had aggregate revenues of
approximately $25.3 million. In 1998, this dealership had retail sales of 1,248
new and 140 used vehicles, and had aggregate revenues of $29.2 million, a 15.4%
increase over 1997.
Concord Toyota
On October 1, 1998, we acquired a Toyota dealership known as Concord Toyota
located in Concord, California for approximately $12.6 million. Concord Toyota
had retail sales in 1997 of 1,819 new and 1,125 used vehicles, and had aggregate
revenues of approximately $69.8 million. In 1998, the dealership had retail
sales of 1,865 new and 1,080 used vehicles, and had aggregate revenues of
approximately $67.0 million. This acquisition is an example of our "tuck-in"
strategy, providing us with opportunities to utilize shared personnel,
advertising and other resources within that market. This dealership was formerly
operated by Steven S. Hallock, our Regional Vice President for the East San
Francisco Bay Region, and is located within two blocks of our existing Concord
Honda and Concord Nissan locations.
Volkswagen of Woodland Hills
On November 19, 1998, we acquired substantially all of the operating assets
of Volkswagen of Woodland Hills for $0.6 million. This dealership is located on
Ventura Boulevard in Woodland Hills, a northern suburb of Los Angeles,
California. This dealership was established in August of 1997 and had retail
sales in 1997 of 123 new and 56 used vehicles, and had aggregate revenues of
approximately $3.3 million. In 1998, this dealership had retail sales of 497
new and 123 used vehicles, and had aggregate revenues of approximately $13.8
million. We believe
23
<PAGE>
this dealership has strong upside potential as it was operated with absentee
management and provides us with an entry dealership in a market we are
strategically targeting for expansion and development of a dealership platform.
1999 Acquisition
Ritchey Fipp Chevrolet
On March 2, 1999, we acquired the operating assets of Ritchey Fipp
Chevrolet for $3.7 million. The dealership is located on Poway Road, in Poway,
north San Diego County, California. In 1998, Ritchey Fipp had retail sales of
667 new and 942 used vehicles, and had revenues of $30.8 million. This
acquisition is an example of our "tuck-in" strategy, which seeks to increase
market penetration and benefit from economies of scale. We currently operate a
dealership platform in Poway, which includes Dodge, Honda and Toyota franchises.
Dwight Ritchey, who has over 38 years in the automotive retailing industry, will
continue as the Service and Parts Director for the dealerships in our Poway
platform.
Pending Acquisition
First Dodge-Marin
On January 5, 1999, we signed an agreement to acquire the operating assets
of a Dodge franchise known as Marin Dodge located in San Rafael, California for
approximately $2.4 million. In 1998, Marin Dodge had retail sales of 409 new
and 256 used vehicles, and had revenues of approximately $17.5 million. We
intend to relocate this franchise to a newly constructed facility in San Rafael
with more convenient freeway access. Marin Dodge and our existing Marin Nissan
will form a dealership platform in Marin County. With the establishment of this
platform, we will initiate our first branded naming of our dealerships to
reflect the FirstAmerica Automotive identity and image as First Nissan-Marin and
First Dodge-Marin. We intend to complete this acquisition on or prior to
consummation of this offering.
24
<PAGE>
USE OF PROCEEDS
Our net proceeds from our sale of shares of common stock in this
offering will be approximately $ million, assuming an initial public
offering price of $ per share, and after deducting the underwriting discount
and our estimated expenses. If the underwriters exercise their over-allotment
option in full, our net proceeds will be approximately $ million. We intend
to use the net proceeds, along with funds from a new credit facility, to:
. fund our pending acquisition in the amount of $3.3 million, including
initial capitalization;
. repay our existing senior credit facility in the amount of $ plus
accrued interest;
. repay our outstanding loan to Mr. Price in the amount of $1 million plus
accrued interest at a rate equal to that of our existing senior credit
facility, and repay our outstanding loan to Mr. Strough in the amount of
$4 million plus accrued interest at a rate of prime plus 62.5 basis
points;
. redeem our outstanding 12.375% senior notes due 2005 in the amount of
$36 million plus accrued interest and a redemption premium of
approximately $1.3 million; and
. redeem our outstanding redeemable preferred stock in the amount of $4
million at a redemption price of 108.75% plus accrued dividends.
Our senior credit facility consists of floor plan financing and revolving
line of credit advances and matures in July 2000. The aggregate average interest
rate for 1998 was 7.67%. The revolver advances were borrowed to fund
acquisitions. We will not receive any proceeds from the sale of common stock by
the selling stockholders.
DIVIDEND POLICY
We have not paid dividends on any class of our common stock for our two
most recent fiscal years or any subsequent interim period, excluding S
corporation distributions for the former Tom Price dealerships. We currently
intend to retain future earnings, if any, to finance the development and
expansion of our business and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. Under the terms of our new credit
facility and some dealership agreements, we will also be subject to restrictions
on paying dividends on our common stock.
25
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
(1) on a historical basis, and (2) on a pro forma basis, to reflect this
offering, our 1999 completed and pending acquisitions and disposition and a new
credit facility. The following table should be read in conjunction with "Use of
Proceeds" on page 25, "Unaudited Pro Forma Consolidated Financial Data" on page
28, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 33 and our consolidated financial statements and
notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Historical(a) Pro Forma(a)
----------------- ----------------
(in thousands except share data)
<S> <C> <C>
Long-term debt:
Senior notes, net of discount of $2,839........................ $33,161 $
Other debt..................................................... 1,386
-----------------
Total long-term debt.......................................... 34,547
Redeemable preferred stock:
8% cumulative redeemable preferred stock;
3,500 shares issued and outstanding net of discount of $456,
liquidation preference of $3,500............................ 3,044 --
Redeemable preferred stock; 500 shares issued and outstanding
net of discount of $65, liquidation preference of $600........ 535 --
Stockholders' equity:
Common Stock, shares
authorized; shares issued and outstanding............ --
Class A common stock, 30,000,000 shares
authorized; 11,514,044 shares issued and outstanding........... -- --
Class B common stock, 5,000,000 shares
authorized; 3,532,000 shares issued and outstanding............ -- --
Class C common stock, 30,000,000 shares
authorized; no shares issued and outstanding................... -- --
Additional paid-in capital...................................... 8,320
Retained earnings............................................... 3,396
-----------------
Total stockholders' equity..................................... 11,716
----------------- ----------------
Total capitalization $49,842 $
================= ================
___________________________
</TABLE>
(a) Short-term debt as of December 31, 1998 was $104.0 million including floor
plan notes payable of $81.5 million.
26
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial information. The statement of operations data for each of the years
in the four year period ended December 31, 1998 and the balance sheet data as of
December 31, 1995, 1996, 1997 and 1998 have been derived from our consolidated
financial statements audited by KPMG, LLP, independent auditors. The statement
of operations for the year ended December 31, 1994 and the balance sheet data as
of December 31, 1994 are unaudited. The following selected historical
consolidated financial statements and notes thereto should be read in
conjunction with our consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 33 and other financial information included elsewhere in
this prospectus. The following selected financial data represents the
historical financial information of the former Tom Price dealerships prior to
our combination on July 11, 1997, and the financial information of all
dealerships acquired by us from the date of acquisition.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
(in thousands, except per share and vehicle unit data)
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales
New vehicle.............................. $134,980 $147,088 $200,185 $290,281 $475,847
Used vehicle............................. 53,280 60,967 81,706 111,616 191,829
Service and parts........................ 30,441 33,428 42,416 58,707 91,134
Other dealership revenues, net........... 3,680 6,702 8,215 13,444 24,261
--------- --------- --------- --------- ---------
Total sales.......................... 222,381 248,185 332,522 474,048 783,071
Cost of sales................................ 189,757 213,463 288,918 406,296 663,902
--------- --------- --------- --------- ---------
Gross profit......................... 32,624 34,722 43,604 67,752 119,169
Selling, general and
administrative expenses..................... 28,424 30,060 38,330 58,761 99,603
Depreciation and amortization................ 284 381 611 678 1,952
Combination and related expenses............. -- -- -- 2,268 --
--------- --------- --------- --------- ---------
Operating income..................... 3,916 4,281 4,663 6,045 17,614
Interest expense, floor plan................. (2,160) (2,864) (2,922) (3,669) (5,521)
Interest expense, other...................... -- -- -- (1,866) (5,432)
--------- --------- --------- --------- ---------
Income before income taxes........... 1,756 1,417 1,741 510 6,661
Income tax expense........................... 47 26 48 446 2,864
--------- --------- --------- --------- ---------
Net income........................... $ 1,709/(a)/ $ 1,391/(a)/ $ 1,693/(a)/ $ 64 $ 3,797
========= ========= ========= ========= =========
Net income (loss) per common share-diluted... $ $ $ $ $
========= ========= ========= ========= =========
Weighted average common shares
outstanding-diluted.................. ========= ========= ========= ========= =========
Other Consolidated Financial and Operating Data:
New vehicle units sold...................... 6,861 7,116 9,450 13,835 20,468
Used vehicle units sold-retail.............. 3,428 3,720 4,921 6,639 9,901
New vehicle sales revenue................... $134,980 $147,088 $200,185 $290,281 $475,847
Used vehicle sales revenue-retail........... $ 44,253 $ 51,586 $ 67,944 $ 90,436 $141,946
Used vehicle sales revenue-wholesale........ $ 9,027 $ 9,381 $ 13,762 $ 21,180 $ 49,883
Gross margin................................ 14.7% 14.0% 13.1% 14.3% 15.2%
New vehicle gross margin.................... 5.5% 5.8% 6.5% 6.5% 7.8%
Used vehicle gross margin-retail............ 7.6% 8.2% 8.1% 9.8% 9.6%
Used vehicle gross margin-wholesale......... (0.0)% (2.9)% (0.0)% 0.4% 5.1%
Service and parts gross margin.............. 44.3% 43.5% 40.0% 45.2% 45.8%
Consolidated Balance Sheet Data:
Total assets................................. $ 46,403 $ 54,423 $ 56,127 $124,002 $178,452
Short-term debt, including floor plan........ 30,574 37,537 39,161 72,619 103,989
Long-term debt............................... 686 112 -- 21,938 34,547
Total liabilities............................ 39,830 47,779 51,247 114,000 163,157
Redeemable preferred stock................... -- -- -- 3,439 3,579
Stockholders' equity......................... 6,573/(b)/ 6,644/(b)/ 4,880/(b)/ 6,563 11,716
</TABLE>
- -------------------------------------------
(a) We were an S corporation until January 1, 1997. Accordingly, we were not
subject to federal income taxes prior to January 1, 1997. Based on our
estimated effective tax rates during these periods, had we been a C
corporation, net income would have been $1,027 during 1996, $836 in 1995,
and $1,025 in 1994.
(b) Stockholders' equity is presented net of advances to stockholders during
the years 1994 through 1996. Accordingly, the change in stockholders'
equity is reflected net of stockholders' advances.
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1998 is derived from our historical consolidated
statement of operations for that period, adjusted to give effect to the
following events, as if those events had occurred on January 1, 1998:
. the acquisitions we completed during 1998 and 1999;
. the acquisition that we expect to complete prior to the consummation of
this offering;
. the disposition of Serramonte GMC/Pontiac/Buick and Auto Town; and
. this offering, a new credit facility and the related use of proceeds.
The following unaudited pro forma consolidated balance sheet as of December
31, 1998 is derived from our historical consolidated balance sheet as of that
date as adjusted to give effect to the following events, as if those events had
occurred on December 31, 1998:
. the acquisition we completed in 1999;
. the acquisition that we expect to complete prior to the consummation of
this offering;
. the disposition of Serramonte GMC/Pontiac/Buick;
. the reclassification of the Auto Town assets and liabilities as "Assets
held for sale"; and
. this offering, a new credit facility and the related use of proceeds.
The unaudited pro forma consolidated financial data and accompanying notes
should be read in conjunction with our consolidated financial statements and
related notes beginning on page F-2. The unaudited pro forma consolidated data
and accompanying notes do not give effect to our acquisitions of Volkswagen of
Woodland Hills and Starfire Body Shop, a collision repair center, or the
financing of these acquisitions, because these transactions are not material and
are therefore not required to be presented in this prospectus on a pro forma
basis under SEC rules. We believe that these consolidated statements provide a
reasonable basis on which to present the pro forma consolidated financial data.
The unaudited pro forma consolidated financial data should not be construed to
be indicative of our financial condition, results of operations or covenant
compliance had the transactions and events described above been consummated on
the dates assumed, and are not intended to project our financial condition on
any future date or our results of operation for any future period.
28
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Dealership
Dealership Acquisition Disposition
Historical/(a)/ Acquisitions/(b)/ Adjustments Adjustments/(c)/ Sub-total
--------------- ----------------- ----------- ---------------- ---------
(in thousands, except per share data)
Sales:
<S> <C> <C> <C> <C> <C>
New vehicle......................... $475,847 $ 74,734 $ (9,963) $540,618
Used vehicle........................ 191,829 30,204 (5,408) 216,625
Service and parts................... 91,134 19,550 (3,561) 107,123
Other dealership revenues, net...... 24,261 2,655 (470) 26,446
------------- --------------- ------------ -------------- ---------
Total sales....................... $783,071 127,143 (19,402) 890,812
Cost of sales........................ 663,902 108,104 (28)/(d)/ (16,079) 755,899
------------- --------------- ------------ -------------- ---------
Gross profit........................ $119,169 19,039 28 (3,323) 134,913
Selling, general and administrative
expenses............................ 99,603 15,084 (1,020)/(e)/ (3,275) 110,392
Depreciation and amortization........ 1,952 335 544/(f)/ (19) 2,812
------------- --------------- ------------ -------------- ---------
Operating income.................... 17,614 3,620 504 (29) 21,709
Interest expense, floor plan......... 5,521 975 (199)/(g)/ (176) 6,121
Interest expense, other.............. 5,432 106 2,270/(h)/ - 7,808
------------- --------------- ------------ -------------- ---------
Income before taxes................. 6,661 2,539 (1,567) 147 7,780
Income tax expense................... 2,864 10 471/(i)/ - 3,345
------------- --------------- ------------ -------------- ---------
Net income........................ $ 3,797 $ 2,529 $(2,038) $ 147 $ 4,435
============= =============== ============ ============== =========
Net income (loss) per common
share-basic.........................
Weighted average common shares -
basic...............................
Net income (loss) per common share -
diluted.............................
Weighted average common shares -
diluted.............................
<CAPTION>
Financing
Adjustments Pro Forma
----------- ---------
Sales:
<S> <C> <C>
New vehicle......................... $540,618
Used vehicle........................ 216,625
Service and parts................... 107,123
Other dealership revenues, net...... 26,446
----------- ---------
Total sales....................... 890,812
Cost of sales........................ 755,899
----------- ---------
Gross profit........................ 134,913
Selling, general and administrative
expenses............................ 110,392
Depreciation and amortization........ 2,812
----------- ---------
Operating income.................... 21,709
Interest expense, floor plan.........
Interest expense, other..............
----------- ---------
Income before taxes..................
Income tax expense...................
----------- ---------
Net income.......................... $
=========== =========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations).
29
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statement of Operations
(a) The actual consolidated statement of operations data for the Company for
the year ended December 31, 1998 includes the results of operations of the
following acquisitions completed during the year ended December 31, 1998
from their respective date of acquisition:
<TABLE>
<CAPTION>
Acquisition Date
----------- ----
<S> <C>
Beverly Hills BMW...................... April 1998
Starfire (collision repair)............ June 1998
Serramonte Honda....................... June 1998
Concord Toyota......................... October 1998
Volkswagen of Woodland Hills........... November 1998
</TABLE>
(b) Reflects the historical results of operations of the 1998 Acquisitions for
the period from January 1, 1998 to their respective dates of acquisition.
Pro forma adjustments have not been presented to include the results of
Volkswagen of Woodland Hills and Starfire for the period from January 1,
1998 to the date of acquisition, because management believes such results
are not material and therefore not required. In addition to the pre-
acquisition results of Volkswagen of Woodland Hills and Starfire, the pro
forma adjustments have not been presented to include the results of Auto
Town for the period from January 1, 1998 to the date of acquisition,
December 31, 1998, as the Company intends to sell the business in the
second quarter of 1999. Pro forma adjustments have been presented to
include the results of operations as if the acquisition occurred on January
1, 1998 for the 1999 completed and pending acquisitions which include the
following dealerships:
<TABLE>
<CAPTION>
1999 Completed and Pending Acquisitions Date
--------------------------------------- ----
<S> <C>
Ritchey Fipp Chevrolet................. March 1999
First Dodge - Marin.................... Pending
</TABLE>
The following summarizes the pre-acquisition results of operations for the
dealerships acquired and pending:
<TABLE>
<CAPTION>
1998 1999 Completed Pending
Acquisitions Acquisition Acquisition Total
------------ ----------- ----------- -----
<S> <C> <C> <C> <C>
Sales............. $78,854 $30,782 $17,507 $127,143
Gross Profit...... $10,644 $ 5,208 $ 3,187 $ 19,039
Net Income........ $ 1,524 $ 741 $ 264 $ 2,529
</TABLE>
(c) Reflects the elimination of the operating results for the year ended
December 31, 1998 of Serramonte GMC/Pontiac/Buick which was disposed of
during the first quarter of 1999.
(d) Reflects the change in accounting for inventories from the last-in, first-
out method to our specific identification method for accounting for
inventories.
(e) Reflects the net decrease in selling, general and administrative expenses
related to the net reduction in salaries, fringe benefits, and related
expenses of owners of the acquired dealerships whose salaries have been
contractually reduced, or whose position has been or will be eliminated as
part of the acquisition and will not be replaced.
(f) Reflects the incremental depreciation and amortization of tangible and
intangible assets, consisting primarily of goodwill, resulting from the
1998 and 1999 completed and pending acquisitions as if the acquisitions
occurred as of January 1, 1998. The assumed estimated useful life of
goodwill is 40 years and other intangible assets lives range from one to
seven years.
(g) Reflects the incremental decrease in floor plan interest expense resulting
from the refinancing of the floor plan arrangements of the dealerships
acquired as if the refinancing occurred at the beginning of the period
presented. The interest rate under our master agreement ranges from
prime rate less 45 to 75 basis points.
(h) Reflects the incremental interest expense resulting from borrowings used to
fund the cash portion of the purchase price paid for acquisitions.
(i) Reflects the net increase in provision for income taxes resulting from the
acquisitions and pro forma adjustments above, computed using a combined
statutory income tax rate of 43%.
30
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
As of December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
1999 Completed/
Pending Dealership
Dealership Acquisition Disposition
Historical/(a)/ Acquisitions/(b)/ Adjustments Adjustments/(e)/ Sub-total
--------------- ----------------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 2,191 $ 425 $ (856)/(d)(f)/ $ 1,800 $ 3,560
Contracts in transit................ 13,567 446 (446)(d) (388) 13,179
Accounts receivable................. 18,440 1,124 (1,124)(d) (572) 17,868
Inventories......................... 90,947 5,873 1,051(c) (2,969) 94,902
Assets held for sale................ 1,873 - - - 1,873
Deferred income taxes............... 853 - - - 853
Deposits, prepaids and other........ 2,992 136 (222)/(c)(d)/ (99) 2,807
--------- ------- -------- -------- ---------
Total current assets............. $ 130,863 $ 8,004 $ (1,597) $ (2,228) $ 135,042
Property and equipment................ 9,872 352 149/(c)/ (105) 10,268
Other assets:
Loan origination and other costs.... 3,107 - - - 3,107
Other noncurrent assets............. 2,446 1,153 (1,153)/(d)/ - 2,446
Goodwill and other intangibles...... 29,682 - 4,167/(c)/ - 33,849
--------- ------- -------- -------- ---------
Total assets..................... $ 175,970 $ 9,509 1,566 $ (2,333) $ 184,712
========= ======= ======== ======== =========
Current liabilities:
Floor plan notes payable............ 81,452 5,178 (243)/(c)/ (2,606) 83,781
Secured lines of credit............. 17,025 - 2,825/(f)/ - 19,850
Notes payable and other............. 4,970 498 2,502/(d)(f)/ - 7,970
Accounts payable.................... 5,699 365 (365)/(c)/ (1,293) 4,406
Accrued liabilities................. 12,929 394 (79)/(c)(d)/ (231) 13,013
Income taxes payable................ - - - 773 773
Deferred revenue.................... 1,758 - - - 1,758
--------- ------- -------- -------- ---------
Total current liabilities........ $ 123,833 $ 6,435 $ 4,640 $ (3,357) $ 131,551
Long-term liabilities:
Senior notes........................ 33,161 - - - 33,161
Capital lease obligations........... 1,361 - - - 1,361
Deferred income taxes............... (155) - - - (155)
Deferred revenue.................... 2,475 - - - 2,475
--------- ------- -------- -------- ---------
Total liabilities................ $ 160,675 $ 6,435 $ 4,640 $ (3,357) $ 168,393
--------- ------- -------- -------- ---------
Redeemable preferred stock:
Cumulative redeemable preferred
stock.............................. 3,044 - - - 3,044
Redeemable preferred stock.......... 535 - - - 535
Stockholders equity:
Common stock........................ 100 (100)/(d)/ - -
Additional paid-in capital.......... 8,320 719 (719)/(d)/ - 8,320
Retained earnings................... 3,396 2,255 (2,255)/(d)/ 1,024 4,420
--------- ------- -------- -------- ---------
Total stockholders equity........ 11,716 3,074 (3,074) 1,024 12,740
--------- ------- -------- -------- ---------
$ 175,970 $ 9,509 $ 1,566 $ (2,333) $ 184,712
========= ======= ======== ======== =========
Financing
Adjustments/(c)/ Pro Forma
-------------- ---------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents...........
Contracts in transit................
Accounts receivable.................
Inventories.........................
Assets held for sale................
Deferred income taxes...............
Deposits, prepaids and other........
Total current assets.............
Property and equipment................
Other assets:
Loan origination and other costs....
Other noncurrent assets.............
Goodwill and other intangibles......
Total assets.....................
Current liabilities:
Floor plan notes payable............
Secured lines of credit.............
Notes payable and other.............
Accounts payable....................
Accrued liabilities.................
Income taxes payable................
Deferred revenue....................
Total current liabilities........
Long-term liabilities:
Senior notes........................
Capital lease obligations...........
Deferred income taxes...............
Deferred revenue....................
Total liabilities................
Redeemable preferred stock:
Cumulative redeemable preferred
stock..............................
Redeemable preferred stock..........
Stockholders equity:
Common stock........................
Additional paid-in capital..........
Retained earnings...................
Total stockholders equity........
</TABLE>
- ----------------------------------------
(See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet).
31
<PAGE>
Notes to Unaudited Pro Forma Consolidated Balance Sheet
/(a)/ The historical consolidated balance sheet for the Company has been
adjusted to reflect the reclassification of the net balance of assets and
liabilities of Auto Town as of December 31, 1998 as Assets Held For Sale
totaling $1,873 because of our intention to sell Auto Town in the second
quarter of 1999.
/(b)/ Reflects the historical combined balance sheets of the 1999 completed and
pending acquisitions.
/(c)/ Represents the adjustments to reflect the preliminary allocation of the
aggregate purchase price of the 1999 acquisitions based upon the
estimated fair value of the net assets acquired. Because the carrying
amount of the assets acquired, which primarily consist of inventory,
equipment, and floor plan indebtedness, approximates their fair value,
management believes the application of purchase accounting will not
result in a significant adjustment to the carrying amount of those net
assets. The amount of goodwill and the corresponding amortization
actually recorded may ultimately be different from the amounts estimated
here, depending on the actual fair value of the tangible net assets
acquired at the closing of the 1999 acquisitions and the final purchase
price. The total estimated purchase price allocation consists of the
following (in thousands):
<TABLE>
<S> <C>
Estimated consideration..................................................... $ 6,056
Less: Estimated fair value of tangible net assets acquired................. (1,889)
-------
Excess of purchase price over fair value of net tangible assets acquired.... $ 4,167
=======
</TABLE>
/(d)/ Reflects the elimination of certain assets, liabilities and stockholders'
equity of the 1999 acquisitions that will not be acquired.
/(e)/ Reflects the estimated proceeds of $1.8 million and the elimination of
assets, liabilities and retained earnings related to the disposition of
Serramonte GMC/Pontiac/Buick.
/(f)/ We financed the closed 1999 acquisition with seller's notes of $2,000, a
loan from our Chief Executive Officer of $1,000 and $1,000 funded out of
working capital. It is estimated that the pending acquisition will be
funded by a $2,825 advance on our existing revolving line of credit with
our institutional lender.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read in conjunction with our consolidated financial
statements and the related notes thereto beginning on page F-2.
Overview
We are a leading automotive retailer and consolidator in the highly
fragmented automotive retailing industry. We currently operate in four major
metropolitan markets in California, and are focusing our consolidation strategy
in the western United States. We generate revenues through the sale and lease
of new and used vehicles, service and parts sales, financing fees, vehicle
insurance commissions, extended service warranty sales, after-market product
sales and collision repair service revenues. As of December 31, 1998, we sold
12 domestic and foreign brands, consisting of BMW, Buick, Dodge, Honda, Isuzu,
GMC, Lexus, Mitsubishi, Nissan, Pontiac, Toyota and Volkswagen through 18 new
vehicle dealerships.
In July 1997, we combined with a group of six automobile dealerships then
owned by Thomas A. Price, our President and Chief Executive Officer. The
combination was accounted for as the acquisition of us by the former Tom Price
dealerships, and accordingly, the financial information for periods before the
combination represent financial information of the former Tom Price dealerships.
New vehicle revenues include the sale and lease of new cars and light
trucks. Used vehicle revenues include retail and wholesale sales of used cars
and light trucks. Service and parts revenues include vehicle servicing
revenues, warranty repairs, collision repairs and sales of parts to retail and
wholesale customers. Other dealership revenues include financing fees, document
processing fees, vehicle insurance commissions, extended service warranty
contract sales and after-market product sales.
Our gross margin varies based on the mix between new vehicle sales, used
vehicle sales, service and parts sales and other dealership revenues. Gross
margins on new vehicle sales can be affected by the availability of popular
model types as well as manufacturer promotions. Factors such as seasonality,
weather and cyclicality may also impact our product mix and influence our gross
margins. Used vehicle gross margins are primarily impacted by supply and the
price of new vehicles. Service and parts gross margins are primarily impacted
by the productivity and wage rate of service personnel.
Sales commissions, salaries, advertising and rent constitute the largest
components of selling, general and administrative expenses. Interest expense
primarily consists of interest charges on debt incurred for floor plan financing
and interest on debt incurred for dealership acquisitions.
Vehicle sales are cyclical and can be impacted by consumer confidence,
levels of consumers' disposable income, inflation, interest rates, credit
availability and other economic conditions. A significant portion of the costs
associated with vehicle sales are variable costs and can be adjusted during
periods of depressed sales. Sales of parts and service can offset reductions in
vehicle sales to the extent customers repair and service vehicles rather than
replace them.
We have accounted for all of our acquisitions using the purchase method of
accounting and, as a result, we do not include in our financial statements the
results of operations of acquisitions prior to the date they were acquired by
us.
33
<PAGE>
Results of Operations
The following tables summarize, for the periods presented, the information
relating to specific items reflected in our statement of operations.
Percentages of total revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1997 1998
------------- --------------- --------------
<S> <C> <C> <C>
Sales:
New vehicles................................ 60.2% 61.2% 60.8%
Used vehicles............................... 24.6% 23.6% 24.5%
Service and parts........................... 12.8% 12.4% 11.6%
Other dealership revenues, net.............. 2.4% 2.8% 3.1%
------------- --------------- --------------
Total sales................................. 100.0% 100.0% 100.0%
Cost of sales.................................. 86.9% 85.7% 84.8%
------------- --------------- --------------
Gross profit................................ 13.1% 14.3% 15.2%
Selling, general and administrative expenses... 11.5% 12.4% 12.7%
Depreciation and amortization.................. 0.2% 0.1% 0.2%
Combination and related expenses............... - 0.5% -
------------- --------------- --------------
Operating Income............................ 1.4% 1.3% 2.3%
</TABLE>
New vehicle sales statistics:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Units............................................... 9,450 13,835 20,468
Sales (in thousands)................................ $200,185 $290,281 $475,847
Gross profit (in thousands)......................... $ 12,907 $ 18,869 $ 37,121
Gross margin........................................ 6.5% 6.5% 7.8%
Gross profit per unit............................... $ 1,366 $ 1,364 $ 1,814
</TABLE>
Used vehicle retail sales statistics, excluding wholesale sales and units:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Units............................................... 4,921 6,639 9,901
Sales (in thousands)................................ $67,944 $90,436 $141,946
Gross profit (in thousands)......................... $ 5,522 $ 8,841 $ 13,560
Gross margin........................................ 8.1% 9.8% 9.6%
Gross profit per unit............................... $ 1,122 $ 1,332 $ 1,370
</TABLE>
Service and parts statistics:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Sales (in thousands)................................ $42,416 $58,707 $91,134
Gross profit (in thousands)......................... $16,966 $26,512 $41,711
Gross margin........................................ 40.0% 45.2% 45.8%
</TABLE>
34
<PAGE>
1998 Compared to 1997
Sales. Our sales increased $309.1 million, or 65.2%, to $783.1 million for
the year ended December 31, 1998 from $474.0 million in 1997. We acquired four
dealerships in 1998 and eight dealerships in 1997, which for the periods
following their acquisition accounted for $288.5 million or 93.4% of the
increase in 1998 sales.
New vehicles. We sold 12 domestic and imported vehicle brands ranging
from economy to luxury vehicles, as well as sport utility vehicles,
minivans and light trucks. In 1998 we sold 20,468 new vehicles, generating
revenues of $475.8 million, which constituted 60.8% of our total sales. In
1997 we sold 13,835 new vehicles, generating revenues of $290.3 million,
which constituted 61.2% of our total sales. The increase in revenues and
units was due primarily to the dealerships acquired in 1998 and 1997.
Average unit prices increased 10.8% to $23,248 from $20,982 per vehicle due
to the higher mix of luxury vehicles we sold in 1998.
Used vehicles. We sold a variety of makes and models of used vehicles
and light trucks of varying model years and prices. In 1998, we sold 9,901
retail used vehicles and 7,137 wholesale used vehicles. In 1997, we sold
6,639 retail used vehicles and 4,182 wholesale used vehicles. Total
revenues from used vehicle sales increased 71.9%, to $191.8 million in 1998
from $111.6 million in 1997, primarily due to the dealerships we acquired
in 1998 and 1997. Retail and wholesale used vehicle sales comprised 24.5%
of our total sales in 1998 compared to 23.6% of our total sales in 1997.
Our average price per used vehicle unit increased 9.2% to $11,259 from
$10,315 per vehicle.
Service and parts. Service and parts includes revenue from the sale
of parts, accessories, maintenance and repair services. Service and parts
revenue increased 55.2% to $91.1 million in 1998 from $58.7 million in
1997, primarily due to dealerships acquired in 1998 and 1997. To a limited
extent, revenues from the sale of parts, maintenance and repair offset
reductions in vehicle sales to the extent owners repair existing vehicles
rather than replace them.
Other dealership revenues, net. Other dealership revenues primarily
include 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 insurance companies. Other dealership revenues increased 80.5% to $24.3
million in 1998 from $13.4 million in 1997 due to dealerships acquired in
1998 and 1997 as well as a $2.1 million increase from our dealer services
subsidiary which we started in late 1997.
Gross profit. Gross profit increased 75.8% to $119.2 million in 1998 from
$67.8 million in 1997. Our overall gross margins increased to 15.2% in 1998,
from 14.3% in 1997, primarily due to an increase in new vehicle margins and an
increase in other dealership revenues as a percentage of total sales. The gross
margin on new vehicle sales increased to 7.8% in 1998, from 6.5% in 1997. The
gross margin on used vehicle sales increased to 8.4% in 1998 from 8.0% in 1997.
This increase was due to increased margins on wholesale used vehicle sales
resulting from our centralized wholesale vehicle auctions, which we started in
December 1997. Gross margins on service and parts increased to 45.8% of
revenues in 1998 from 45.2% of revenues in 1997, primarily due to increased
emphasis on service operations and profitability.
Selling, general and administrative expense. Our selling, general and
administrative expense increased $40.8 million, or 69.5%, to $99.6 million in
1998 from $58.8 million in 1997. Selling, general and administrative expense as
a percentage of sales increased to 12.7% in 1998 from 12.4% in 1997. The
increase was due primarily to an increase in compensation for additional
personnel and management required as a result of dealership acquisitions and
building a management structure for executing our acquisition strategies.
Depreciation and amortization. Depreciation and amortization expense
increased $1.3 million, or 188%, to $2.0 million in 1998 from $0.7 million in
1997. The increase was due to additional depreciation and goodwill amortization
from acquired dealerships.
35
<PAGE>
Combination and related expenses. In 1997, we incurred $2.3 million of
legal, accounting, consulting and compensation expenses associated with our
combination with the former Tom Price dealerships and the development of our
organization and business plan. No similar expenses were incurred in 1998.
Interest expense. Floor plan interest expense increased $1.9 million, or
50.5%, to $5.5 million in 1998 from $3.7 million in 1997 primarily as a result
of increased floor plan debt in 1998 from the acquired dealerships. Interest
expense other than floor plan increased $3.6 million, or 191%, to $5.4 million
in 1998 from $1.8 million in 1997. The increase was due to debt incurred from
dealerships we acquired.
Income tax expense. Income tax expense increased to $2.9 million in 1998
from $0.4 million in 1997 due to higher pretax income in 1998. Our effective
income tax rate was 43% for 1998 compared to 88% for 1997 due primarily to non-
deductible expenses in 1997. Our effective tax rate in the future may be
affected by non-deductible expenses incurred as a result of additional
acquisitions.
Net income. As a result of the items discussed above, net income increased
to $3.8 million in 1998 from $64,000 in 1997.
1997 Compared to 1996
Sales. Our sales increased $141.5 million, or 42.6%, to $474.0 million for
the year ended December 31, 1997 from $332.5 million in 1996. We acquired eight
dealerships in 1997, which for the periods following their acquisition accounted
for $133.2 million, or 94.1%, of the increase in 1997 sales. Sales increased at
our dealerships owned throughout 1997 and 1996 by 1.7%, due primarily to
increases in new vehicle revenues.
New vehicles. In 1997, we sold 13,835 new vehicles, generating
revenues of $290.3 million, which constituted 61.2% of our total sales. In
1996, we sold 9,450 new vehicles, generating revenues of $200.2 million,
which constituted 60.2% of our total sales. The increase in revenues and
units was due primarily to the dealerships acquired in 1997. Average unit
prices decreased 1.0% to $20,982 per vehicle in 1997 from $21,184 in 1996
due to the lower prices in the product mix of dealerships acquired in 1997.
Used vehicles. In 1997, we sold 6,639 retail used vehicles and 4,182
wholesale used vehicles. In 1996, we sold 4,921 retail used vehicles and
3,073 wholesale used vehicles. Total used vehicle sales increased 36.6%,
to $111.6 million in 1997 from $81.7 million in 1996, primarily due to the
dealerships we acquired. Average unit prices increased 0.9% to $10,315 in
1997 from $10,221 in 1996.
Service and parts. Service and parts revenue increased 38.4%, to
$58.7 million in 1997 from $42.4 million in 1996, due to a 38.4% increase
in service department maintenance and repairs, largely attributable to the
dealerships acquired.
Other dealership revenues, net. Other dealership revenues increased
63.7% to $13.4 million in 1997 from $8.2 million in 1996 primarily due to
the dealerships acquired.
Gross profit. Gross profit increased 55.4%, to $67.8 million in 1997 from
$43.6 million in 1996, primarily due to increases in margins on sales, parts and
other, and to a lesser extent, increases in used vehicle profit margins.
The gross margin on new vehicle sales was relatively consistent at 6.5% in 1997
and 1996. The gross margin on used vehicle sales increased to 8.0% in 1997 from
6.8% in 1996. This increase is primarily due to our emphasis on improving the
used vehicle reconditioning process and implementation of best practices. Gross
margins on service and parts increased to 45.2% of revenues in 1997 from 40.0%
in 1996, primarily due to higher profitability in service, parts and maintenance
activities due to increased emphasis on our service operations.
Selling, general and administrative expense. Our selling, general and
administrative expense increased $20.4 million, or 53.3%, to $58.8 million in
1997 from $38.3 million in 1996. Selling, general and administrative expense as
a percentage of sales increased to 12.4% in 1997 from 11.5% in 1996. The
increase was due primarily to
36
<PAGE>
an increase in compensation for additional personnel and management required as
a result of dealership acquisitions and the activities associated with building
a management structure for executing our acquisition strategy.
Depreciation and amortization. Depreciation and amortization expense
increased $0.1 million, or 11.0%, to $0.7 million in 1997, from $0.6 million in
1996.
Combination and related expenses. In 1997, we incurred $2.3 million of
legal, accounting, consulting and compensation expenses associated with our
combination with the former Tom Price dealerships and the development of our
organization and business plan. No similar expenses were incurred in 1996.
Interest expense. Floor plan interest expense increased $0.7 million, or
25.6%, to $3.7 million in 1997 from $2.9 million in 1996 primarily as a result
of increased floor plan debt in 1997 from the acquired dealerships. Interest
expense other than floor plan increased due to debt incurred for the combination
and acquisition of additional dealerships during 1997.
Income tax expense. Income tax expense increased to $0.4 million in 1997
from $48,000 in 1996 due to our change in status from an S corporation to a C
corporation on January 1, 1997. Our effective tax rate was 88% for 1997
compared to 3% for 1996 due to non-deductible stock compensation expenses
incurred in 1997 and our change in tax status from 1996. On January 1, 1997, our
change in tax status resulted in the recognition of $1.6 million in net deferred
tax assets, which was offset by a $1.4 million tax liability resulting from a
last-in, first-out inventory change recapture. Our effective tax rate in the
future may be affected by certain non-deductible expenses incurred as a result
of the acquisition of additional dealerships.
Net income. Net income decreased to $64,000 in 1997 from $1.7 million in
1996, primarily due to one-time expenses related to our combination with the
former Tom Price dealerships discussed above.
Liquidity and Capital Resources
Our cash and liquidity requirements are primarily for acquiring new
dealerships, working capital, information systems and expanding existing
facilities. Historically, we have relied primarily upon cash flows from
operations, floor plan financing, and other borrowings under our credit facility
to finance our operations, and the proceeds from our private placements to
finance our acquisitions. At December 31, 1998, we had working capital of $3.9
million including $2.2 million in cash.
In 1998, operating activities resulted in net cash provided by operations
of $4.3 million compared to $7.6 million used in operations in 1997. The
increase was attributable principally to a reduction in purchased inventory, and
an increase in net income, offset by a decrease in accounts payable and accrued
liabilities compared to the prior year.
In 1998, the net cash used in investing activities totaled $33.6 million,
which consisted of $29.0 million used for acquisitions and $4.6 million of
capital expenditures for information systems and improvements to existing
facilities. This compared to $12.8 million in 1997, which consisted of $11.7
million used for acquisitions and $1.1 million of capital expenditures for
expansion and improvements to existing facilities. We estimate capital
expenditures of approximately $2 million for 1999, without giving effect to any
acquisitions.
In 1998, net cash provided by financing activities totaled $28.5 million,
which consisted of $15.0 million from the issuance of senior notes, $13.0
million borrowed on secured lines of credit and $1.0 million from the issuance
of Class B common stock. Proceeds from the issuance of the notes and Class B
common stock were used to help finance the acquisitions of dealerships.
Proceeds from borrowings on secured lines of credit were used to finance
acquisitions and purchase inventories. In 1997, net cash provided from
financing activities totaled $22.7 million which consisted of $16.6 million from
the issuance of notes net of repayments and origination costs,
37
<PAGE>
$4.0 million of borrowings on secured lines of credit and $6.2 million from the
issuance of common and preferred stock, less $4.1 million of dividends and
distributions paid.
Flooring Notes Payable and Secured Lines of Credit
In 1997, we entered into a three year $175 million loan and security
agreement with a financial company, replacing our existing $37 million line of
credit. The loan agreement matures in July 2000.
Our loan and security agreement permits us to borrow up to $115 million in
floor plan notes payable, limited by our new and a portion of our used vehicle
inventory and provides for revolver advances up to $35 million, secured by used
vehicle and parts inventories. The loan agreement also provides a discretionary
line up to $25 million that the financial company makes available at its
absolute discretion.
As of December 31, 1998, we had floor plan notes payable of $81.5 million
and revolving advances outstanding of $17.0 million, and at December 31, 1997 we
had floor plan notes payable of $67.4 million and revolving advances outstanding
of $4.0 million. There were no discretionary advances outstanding as of
December 31, 1998 or 1997.
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. Revolver advances
are classified as secured lines of credit in the accompanying financial
statements. The loan agreement grants a collateral interest in substantially
all of our assets.
Our ability 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.
Consequently, we have little discretionary borrowing capacity.
Interest rates on the floor plan notes and the revolver advances are
variable and change based on movements in the prime rate. The interest rates on
the floor plan notes equal prime minus 75 basis points and the interest rate on
the revolver advances equals prime minus 35 basis points. During 1998, the
average monthly borrowing on the floor plan notes was $73.4 million, and during
1997 the average monthly borrowing on these notes was $44.0 million. During
1998, the average monthly borrowing on the revolver advances was $13.5 million,
and during 1997 the average monthly borrowing on the revolver advances was $0.3
million. The aggregate average interest rate for 1998 was 7.67% and for 1997
was 7.75%.
Our loan agreement contains various financial covenants such as minimum
interest coverage, working capital, and maximum debt to equity ratios.
We are currently negotiating a new credit facility, which will include a
new floor plan line and an acquisition financing line. We expect to close this
new facility on or before consummation of this offering and to utilize a portion
of this new facility to repay, among other things, our floor plan notes and
existing acquisition line of credit.
Senior Notes and Preferred Stock
In July 1997, we entered into a securities purchase agreement with an
institutional lender to provide an aggregate funding commitment of up to $40
million. The commitment consisted of $36 million of 12.375% senior notes, $3.5
million 8% Cumulative Redeemable Preferred Stock, or CRPS, and $0.5 million
Redeemable Preferred Stock, or RPS, and up to 5 million shares of our Class B
common stock.
During 1997, we received $28 million of the $40 million commitment from the
institutional lender. In exchange, we issued senior notes with a principal
amount of $24 million at a discount of $2.2 million, 3,500 shares of CRPS at a
discount of $0.6 million, 500 shares of RPS at a discount of $0.1 million and
3,032,000 shares of
38
<PAGE>
Class B common stock at $0.92 per share. The senior notes, CRPS and RPS are due
June 30, 2005. We used these proceeds primarily to acquire dealerships.
During 1998, we received the remaining $12 million of the $40 million
commitment from the institutional lender. In exchange, we issued senior notes
with a principal amount of $12 million at a discount of $1 million and 0.5
million shares of Class B common stock at $2.00 per share. The senior notes are
due June 30, 2005. We used the proceeds to acquire a dealership.
The senior notes are unsecured and rank behind all debts of our operating
subsidiaries, rank equal to our other existing and future senior indebtedness,
and are senior in right of payment to any additional subordinated debt. The
CRPS and RPS shares rank behind all of our debt and the debt of our subsidiaries
and have priority over our common stock. We can redeem all the senior notes in
whole or in part, at any time, upon notice to the holders of the senior notes.
The redemption price for the period July 1, 1998 to June 30, 1999 is 108.75% of
the principal balance and decreases 1.25% on July 1 of each year thereafter.
The redemption price per share on June 30, 2005 is equal to the CRPS liquidation
preference of $1,000 and the RPS liquidation preference of $1,720. If the
aggregate outstanding principal balance of the senior notes is less than $2
million at any time, we are required to redeem all outstanding senior notes.
On July 1, 2003 and July 1, 2004, we must redeem senior notes in the
aggregate principal amount equal to the lesser of (a) 30% of the aggregate
principal amount of senior notes issued or (b) the aggregate amount of issued
and outstanding senior notes on such date, at the applicable redemption price
plus all accrued and unpaid interest on the senior notes to the redemption date.
On June 30, 2005, we must redeem all remaining issued and outstanding senior
notes, paying all outstanding principal and accrued and unpaid interest.
If we make a public offering of our stock, we may within 45 days of the
completion of this offering, redeem all the outstanding senior notes. If this
occurs, the redemption price for the period from July 1, 1998 to June 30, 1999
will range from 104.375% to 102% of the principal balance, or approximately $1.3
million. We intend to use part of the proceeds of this offering to repay the
senior notes.
For financial reporting purposes, the difference between the issue price
and the face value of each security is recorded as a discount and is amortized
over the life of each security using the effective interest method. The senior
notes discount amortization is included in interest expense and the CRPS and RPS
discount amortization is recorded as a deduction from retained earnings.
We intend to redeem the senior notes and the redeemable preferred stock
with the proceeds from this offering. For financial reporting purposes, the
redemption premium, the unamortized discount, and the remaining portion of the
loan origination costs will be an extraordinary charge to earnings at the time
of redemption.
Acquisitions Closed During 1998
. On April 1, 1998, we acquired substantially all of the operating assets
of Beverly Hills, BM, Ltd., a BMW automobile dealership located in
Beverly Hills, California.
. On June 12, 1998, we acquired substantially all of the operating assets
of Starfire Body Shop located in San Jose, California.
. On June 19, 1998, we acquired substantially all of the operating assets
of Burgess British Cars, Inc., a Honda dealership located in Daly City,
California.
. On October 1, 1998, we acquired all of the outstanding capital stock of
a Toyota dealership known as Concord Toyota located in Concord,
California.
39
<PAGE>
. On November 19, 1998 we acquired substantially all of the operating
assets of Volkswagen of Woodland Hills located in Woodland Hills,
California.
. On December 31, 1998 we acquired all of the outstanding capital stock of
an automotive-related software company, DSW & Associates, Inc., commonly
known as Auto Town.
The aggregate consideration paid for the acquisitions completed during 1998
was $29.8 million, consisting of $29.0 million in cash and 335,015 shares of our
Class A common stock. We financed these acquisitions with $13.0 million
borrowed on our secured line of credit, $11.0 million from the issuance of
senior notes, $4.0 million from the issuance of other notes payable, $1.0
million from the issuance of Class B common stock and $0.8 million from cash
provided by operations.
Acquisitions and Disposition Closed After December 31, 1998 and Pending
Acquisitions
We completed one dealership acquisition in March 1999 and currently have
one dealership acquisition pending. The aggregate estimated purchase price for
the two acquisitions is approximately $8.0 million, including initial
capitalization. We financed the completed acquisition with $2.0 million of
notes payable to the sellers and a $1.0 million note payable to our Chief
Executive Officer, Thomas A. Price.
In March 1999, we sold the operating assets of Serramonte GMC/Pontiac/Buick
to the manufacturer and recorded net proceeds of approximately $1.8 million and
an estimated gain of $1.0 million net of taxes, which will be recognized in the
first quarter of 1999.
Pro Forma Capital Needs
Our principal source of growth has been, and we expect will continue to be,
from acquisitions. We believe that our existing capital resources will be
sufficient to fund our current acquisition commitments. We will need to raise
additional capital to fund our future acquisitions. We may raise this capital
through the public or private issuance of equity, including this offering, or
debt securities, or through additional borrowings from financial institutions.
We are currently negotiating with various institutional lenders to enter into a
new credit facility. Although we believe we will be able to secure a new credit
facility, we may not be able to obtain sufficient funding to finance our
acquisition strategy.
Seasonality and Quarterly Fluctuations
Our sales are usually lower in the first and fourth quarters of each year
largely due to consumer purchasing patterns during the holiday season, inclement
weather and the reduced number of business days during the holiday season. As a
result, our financial performance is generally lower during the first and fourth
quarters than during the other quarters of each fiscal year. We believe that
interest rates, 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 fluctuations of operating results from quarter to
quarter.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard 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 the fiscal years beginning after December 15, 1997.
We have determined that net income and comprehensive income are the same for the
periods presented.
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. We operate in
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two business segments, automotive and software. We believe that our automobile
operations constitute our only significant operating segment.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This Statement of Position
requires the capitalization of eligible costs of specialized activities related
to computer software developed or obtained for internal use. We believe the
adoption of this Statement of Position will not have a material effect on our
financial position or results of operations. The Statement is effective for
fiscal years beginning after December 15, 1998. We adopted this Statement of
Position on January 1, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting the Cost of Start Up Activities,"
which requires costs related to start-up activities to be expensed as incurred.
The statement requires that initial application be reported as a cumulative
effect of a change in accounting principle. The adoption of this statement will
have an immaterial impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities." This Standard establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and hedging activities. The Statement will become effective
for us beginning on January 1, 2000. The implementation of the provisions of
this Statement does not have an impact on our financial statements for the year
ended December 31, 1998.
Amortization of Goodwill
Goodwill as of December 31, 1998 was $34.0 million, or 19.0% of our total
assets. Goodwill represents the excess purchase price over the estimated fair
value of the tangible and measurable intangible assets purchased in an
acquisition. Generally accepted accounting principles require that goodwill be
amortized over the period benefited, not to exceed 40 years. We have determined
that the period benefited by most of our goodwill is over forty years and
therefore we are amortizing this goodwill over a 40-year period. Earnings
reported in periods following an acquisition would be overstated if we
attributed a forty-year benefit period to intangible assets that should have had
a shorter benefit period. In later years, we would be burdened by a continuing
charge against earnings without the associated benefit to income valued by our
management in arriving at the price paid for businesses acquired. Earnings in
later years also could be significantly affected if our management then
determined that the remaining balance of goodwill was impaired. We periodically
compare the carrying value of goodwill to the anticipated undiscounted future
cash flows from operations of the businesses we have acquired to evaluate the
recoverability of goodwill.
Inflation
We believe that the relatively moderate rate of inflation over the past few
years has not had a significant impact on our revenues or profitability.
Interest rates have been relatively stable during this period.
Year 2000 Project
We are in the process of addressing the impact on our operations of
computer programs that are unable to distinguish between the year 1900 and the
year 2000.
Year 2000 Readiness Preparation
Our year 2000 program is comprised of several individual projects which
address primarily the following broad areas: data processing systems, embedded
technology in equipment and facilities, vendor and supplier risk, and
contingency planning. We have 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 our
continuing operations.
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We are in the process of updating our data processing systems. We have
converted or will complete conversion of all of our noncompliant software and
computer systems for our existing operations to compliant systems by the end of
the third quarter of 1999. The most critical data processing systems are the
dealership management systems in our dealerships. As a result of an unrelated
project to integrate computing systems across the company, these dealer
management systems have been replaced or upgraded with year 2000 compliant
software and hardware platforms. This conversion project is fully complete and
we expect to test for compliance by the end of the third quarter of 1999.
Although we are converting to year 2000 compliant systems, management
recognizes that it could potentially acquire a dealership that does not have
year 2000 compliant systems. As part of our 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 our company.
We are currently assessing the readiness preparations of our major
suppliers. Manufacturers of vehicles and parts have been identified as our most
critical suppliers, and inquiries are underway regarding their year 2000
readiness plans and status. Contingency plans will be developed based on
written risk assessments of major suppliers' states of readiness. In addition,
financial institutions that have been identified as critical suppliers of
inventory financing and customer financing are in the process of being evaluated
for year 2000 compliance.
We also recognize that there may be embedded technology in our equipment
and facilities that could be impacted by the year 2000 issue. We have a project
plan in place to address this issue, and are in the process of evaluating
service equipment, other equipment and telephone systems for year 2000
compliance. Service equipment that is not year 2000 compliant has been
identified and will be replaced. All other equipment identified as not being
year 2000 compliant will also be replaced.
Year 2000 Risks
The principal risk and most likely worst case scenario associated with the
year 2000 program is the risk of disrupting our operations due to operational
failure of third-party suppliers, primarily vehicle manufacturers. Such
failures could materially and adversely affect our ability to obtain vehicles
and parts for sale. Although our inquiries are underway, we do not yet have the
information to estimate the likelihood of significant disruptions among our
suppliers. We believe that, with the completion of the year 2000 project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Year 2000 Costs
The conversion of our data processing systems and its related costs have
been incorporated into our planned replacement or upgrade of its software and
other computer systems and therefore we have not experienced any significant
incremental costs that are specifically related to year 2000 compliance issues.
Total year 2000 project costs for replacing or upgrading our noncompliant
equipment and facilities are estimated to be approximately $1 million.
Estimated total project costs could change in the future as analysis continues.
Year 2000 Contingency Planning
We are assessing the consequences if our year 2000 initiative is not
completed on schedule. Upon completion of this assessment, we will begin
contingency planning. In addition, we are in the process of developing business
contingency plans that address the actions that would be taken if critical
business operations were disrupted due to system or supplier failure. We expect
the plan development and validation to be completed by the fourth quarter
of 1999.
Year 2000 Forward-looking Statements
This discussion of the implications of the year 2000 for us contains
numerous forward-looking statements based on inherently uncertain information.
Statements about the cost of the project and the date on which we plan
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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, we may not achieve these
estimates or there may be a delay in, or increased costs associated with, the
implementation of the year 2000 program. In addition, we place a high degree of
reliance on computer systems of third parties, such as vendors, suppliers, and
financial institutions. Although we are assessing the readiness of these third
parties and will prepare contingency plans, the failure of these third parties
to modify their systems in advance of December 31, 1999 could have a material
adverse effect on our business.
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BUSINESS
We are a leading automotive retailer and consolidator in the highly
fragmented automotive retailing industry. We currently operate in four major
metropolitan markets in California, and are focusing our consolidation strategy
in the western United States. We generate revenues through the sale and lease
of new and used vehicles, service and parts sales, financing fees, vehicle
insurance commissions, extended service warranty sales, after-market product
sales and collision repair service revenues. We sell 10 domestic and foreign
brands, consisting of BMW, Chevrolet, Dodge, Honda, Isuzu, Lexus, Mitsubishi,
Nissan, Toyota and Volkswagen through 19 new vehicle dealerships, assuming
completion of our pending acquisitions. For the year ended December 31, 1998 we
had pro forma revenue of $890.8 million and pro forma operating income of $21.7
million.
We believe California's strong demographics provide significant
opportunities for future expansion into current and new markets within the
state. California accounted for more than ten percent of new vehicle
registrations in the United States in 1998. In addition, the metropolitan
markets where we do business are projected to have population growth of more
than double the national average and personal income growth of over 30% higher
than the national average through 2005. Our Chairman and Chief Executive
Officer have each been operating dealerships in California for over 25 years,
which we believe provides us with a competitive advantage in these
demographically favorable markets. We are opportunistically evaluating
potential acquisitions in other areas in the western United States, specifically
in markets with demographics similar to those of our current markets.
We are committed to delivering superior customer service. Our goal is to
build long-term relationships with our customers which we believe will enhance
our FirstAmerica Automotive brand and create significant repeat and referral
business.
Our innovative executive management team has developed and is executing
several new initiatives to enhance our competitive position.
. We created the "Auto Factory" division to implement an efficient used
vehicle inventory control system. Auto Factory centralizes the wholesale
disposal of used vehicles on a company-wide basis and the procurement,
reconditioning and management of used vehicle inventory on a regional
basis. Auto Factory allows us to create significant economies of scale
and enhance our control over used vehicle inventory. We believe this
centralized approach to used vehicle management differentiates us from
our competitors.
. We have been using the Internet for marketing and communications since
1995, and we currently market a full range of automobiles and related
products and services through the Internet which may be purchased at our
dealerships. We believe the California market is particularly well
suited to Internet sales initiatives, given its strong presence in the
technology sector. Over 10% of our December 1998 new vehicle sales
resulted from leads generated through the Internet including our own Web
site, www.anyauto.com, and Web sites of third-party lead providers. We
believe that many of these sales are incremental to our traditional
dealership business.
. We created a "Dealer Services" division to maximize cost savings by
centralizing and consolidating the purchasing power of our dealerships
for the procurement of finance and insurance products, or F&I, extended
warranty service contracts and aftermarket products. Additionally, our
Dealer Services division provides recruiting, training and standardized
F&I policies.
We operate using a flexible corporate infrastructure to support our growth.
This structure is designed to maintain a decentralized operational approach that
strikes a balance between entrepreneurship at the dealership level and well-
managed, efficient, centralized executive and administrative operations at the
corporate level through the implementation of best practices in our dealership
network.
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Company Strengths
Focused Acquisition Strategy
We have a focused acquisition strategy designed to maximize our overall
objectives. We apply a systematic approach to all of our acquisitions in which
we analyze numerous factors including:
. Opportunity to expand market share and optimize product mix;
. Return on investment and earnings per share;
. Manufacturer relationship and support of acquisitions;
. Quality of location and facilities;
. Operational and cultural fit with our organization; and
. Reputation and experience of existing management.
We focus on acquiring dealerships in contiguous markets to maximize the
benefits of our corporate infrastructure and existing presence in a particular
region. We seek (1) "platform" acquisitions which are generally established,
profitable, well managed multiple franchise dealerships located in metropolitan
or high-growth suburban markets, and (2) "tuck-in" acquisitions which are
typically single franchise dealerships that will allow us to take advantage of
the buying power of our dealerships in a region and provide greater breadth of
products and services in our markets. We believe that by acquiring and
integrating platforms with experienced existing management, we will be able to
effectively operate the dealerships with a management team that understands the
local market. We believe "tuck-ins" enable us to obtain cost efficiencies on a
regional level in areas including facility and personnel utilization, vendor
consolidation and advertising.
While we have only acquired profitable platforms, we have and will continue
to consider the acquisition of dealerships that may not be operating at optimal
performance levels, but which we believe represent strong opportunities for
enhanced performance when managed by us or provide greater breadth in our
product offerings. Where we have identified an adjacent market with operating
potential, but no available or appropriate platforms, we may selectively acquire
one or more smaller dealerships and develop our own platform.
Extensive Experience and Ability to Integrate and Improve Acquisitions
Our executive officers have substantial experience in successfully
integrating and improving businesses they have acquired, collectively having
acquired and integrated more than 50 dealerships during their careers. The
reputation and experience of our executive officers in the automotive retailing
industry and our proven ability to add value to dealerships that we acquire make
us attractive to potential sellers who may want to obtain equity consideration
or continue operating the dealerships.
A Leader in the California Market
We currently operate all of our dealerships in California, which has
extremely strong demographics. The following are characteristics of this
market:
. In 1998, over 33.5 million people lived in California, representing over
12.4% of the U.S. population. California's population is concentrated in
several large metropolitan regions. Approximately 26 million people, or
77.4% of the total California population, reside in the Los Angeles, San
Diego and San Francisco Bay areas, the regions where we currently
operate dealerships. From 1990 to 1998, California's population grew by
12.7% compared to the nation's overall population growth of 8.6%.
. As a result of its population density and growth rate, California had
1.6 million new vehicle registrations, or more than 10% of the nation's
total in 1998.
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. From 1994 to 1998, personal income levels in California increased 3.9%
per year compared to the national average of 3.1%. Personal income grew
at 4.2% per year for the same period in the San Francisco Bay area and
San Diego.
. The general strength of the California economy may be attributed to the
state's diverse economy. The technology, biotechnology, agriculture,
tourism, and entertainment industries are concentrated in California and
have fueled the economy's growth over the last five years.
It is our intention to grow within our existing and new metropolitan
markets in California and in other areas in the western United States which are
exhibiting similar favorable demographic trends. Targeted markets may include
Las Vegas, Reno, Phoenix, Seattle, Portland, and other urban centers in the
western United States.
Used Vehicle Inventory Management
In an effort to increase the profitability and efficiency of our used
vehicle business, we created the Auto Factory division. Auto Factory
centralizes the wholesale disposal of used vehicles on a company-wide basis and
the procurement, reconditioning and management of used vehicle inventory on a
regional basis. Auto Factory is managed by an individual who has over 22 years
of relevant experience in used car operations. We believe Auto Factory creates
significant economies of scale and enhances our control over our used vehicle
inventory. In addition, Auto Factory complements our acquisition strategy by
enabling us to improve the used vehicle inventory management process of our
acquired dealerships and provides competitive advantages over small dealers in
the used vehicle business. Some of the operations and benefits provided by Auto
Factory include:
. In addition to regional procurement of used vehicles, Auto Factory
operates on a centralized, company-wide basis for opportunistic, large
purchases of off-lease, rental and fleet vehicles.
. Auto Factory operates as a wholesale auction house for all of our
dealerships as well as third parties, maximizing our profit on used
vehicle sales. Our gross margin for wholesale sales of our own used
vehicles increased to 5.1% in 1998 from 0.4% in 1997, primarily due to
our bi-weekly wholesale auctions.
. Auto Factory operates two regional reconditioning centers designed to
reduce reconditioning costs, efficiently distribute reconditioning work
among our service facilities and maintain quality control over
reconditioning so that we can profitably sell FAA-branded warranties
with our used cars.
. Auto Factory manages the market-driven redistribution of used vehicles
among our dealerships.
. The results of Auto Factory's purchasing and sales activities are shared
with all of our dealerships to provide timely and accurate used car
inventory and trade-in valuation information.
In addition, we have implemented "best practices" policies focused on
constantly monitoring our used vehicle inventory levels. We believe that
focusing on inventory turnover enables us to efficiently manage our cost of
capital and produce consistent margins.
Centralized Corporate Infrastructure with Decentralized Operations
We have developed a corporate infrastructure that centralizes executive
management functions while maintaining an entrepreneurial environment at the
dealership level. Our dealerships manage their operations on a decentralized
basis within the broad parameters set by management so that they can provide
superior customer service and a region-specific responsiveness to the market.
Local in-depth knowledge of customers' needs and preferences is important in
maximizing market penetration.
High Levels of Customer Service
We provide high levels of customer service. Our sales department focuses
on providing customers with an unpressured, informative shopping experience
while interactively helping to identify their personal objectives and
constraints. Our service departments seek to provide our customers with a
professional and reliable service experience. The dealerships regard service
and repair activities as an integral part of their overall approach to
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customer service, which provides an opportunity to form ongoing relationships
with our customers and deepen customer loyalty. Among our innovations to enhance
customer service, we have incorporated child play areas, coffee bars and
information kiosks in selected dealerships. Our goal is to build long-term
relationships with our customers that we believe will enhance the FirstAmerica
Automotive brand and create significant repeat and referral business,
potentially in our higher margin products and services.
Beyond establishing strong consumer loyalty, our focus on customer
satisfaction also engenders good relations with manufacturers. Manufacturers
generally measure consumer satisfaction by a survey given to new vehicle buyers
and service customers. Some manufacturers offer specific performance incentives
if certain consumer satisfaction levels are achieved by a dealer. Manufacturers
can withhold approval of acquisitions if a dealer fails to maintain a minimum
consumer satisfaction score. We have never been denied manufacturer approval of
acquisitions based on consumer satisfaction scores. To keep management focused
on customer satisfaction, we include consumer satisfaction results as a
component of our incentive compensation program.
We have received a number of dealer quality and customer satisfaction
awards from various manufacturers. These awards represent the manufacturers'
highest recognition for dealer excellence as measured by high consumer
satisfaction scores combined with exceptional operational and sales performance.
We received the following manufacturers' awards in 1998:
<TABLE>
<CAPTION>
<S> <C>
Lexus Elite Award............................. Lexus of Serramonte
Chrysler's Five-Star Certification............ Serramonte Dodge
Toyota President's Award...................... Melody Toyota
Honda President's Award....................... Concord Honda
</TABLE>
Experienced Management Team
We are focused on identifying, recruiting and retaining highly skilled and
experienced individuals at every level of our organization. We obtain a large
number of skilled and experienced employees from the management of profitable
platforms that we have acquired. We believe that this strategy provides
substantial depth of management in our organization. Three members of our
executive management team, Chairman Donald V. Strough, Chief Executive Officer
and President Thomas A. Price and Chief Operating Officer Charles R. Oglesby
have, on average, 32 years of experience in the automotive retailing industry.
During the course of their individual careers, Messrs. Strough, Price and
Oglesby have each owned and/or operated several individual dealerships. The
fourth member of our executive management team, Chief Financial and
Administrative Officer Debra Smithart, was formerly the chief financial officer
of a publicly held, multi-concept restaurant developer and operator which grew
from less than 30 to over 1,000 stores during her tenure at that company. In
addition to our executive management team, we also have two regional vice
presidents and three regional general managers who have, on average, 18 years of
industry experience. We believe that this first-hand operating experience of our
executive management, regional vice presidents and regional general managers
will enable us to continue to acquire and integrate dealerships into our
organization quickly and effectively.
Business Strategy
Growth Through Acquisitions
We intend to capitalize on the continuing consolidation of the highly
fragmented automotive retailing industry. In 1998, the approximately 22,600 new
vehicle dealerships in the U.S. generated more than $500 billion in total sales
revenue and sold more than 30 million new and used vehicles. In that year the
largest 100 dealership groups generated approximately $62 billion in total
vehicle sales revenue, comprising less than 15% of the industry total. These
100 largest dealership groups also sold nearly 3 million new and used vehicles
in 1997, or approximately 10% of all vehicles sold by franchised dealers. As
capital requirements to operate competitive dealerships continue to increase and
owners who were granted franchises in the 1950s and 1960s approach retirement
age, many individual dealers are seeking exit opportunities. We believe that
our management's strong reputation of being able to identify and close
acquisitions in our markets will assist us in continuing to successfully
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acquire and integrate dealership operations to capitalize on the consolidation
trend in the automotive retailing industry.
Benefits of Scale
We intend to improve the performance and profitability of our existing and
acquired dealerships by utilizing our corporate infrastructure to consolidate
our purchasing power and reduce our costs. We believe we have demonstrated
that, upon acquiring a dealership, we can improve its earnings by utilizing our
management experience to eliminate duplicative functions and services and
implement best practices, including used vehicle inventory management. We have
successfully enhanced the profitability of our existing dealerships and both
platform and tuck-in acquisitions. Other benefits include:
. Improved terms on bank and floor plan financing. We have benefited from
significant cost savings by consolidating the purchasing power of the
dealerships in connection with our floor plan financing. For example, we
have reduced the interest rate on our floor plan financing by 1.25% in
1998.
. Savings from centralized procurement of products and services. As we
increase our size, we are able to purchase various products and services
at lower costs. Through our "Dealer Services" operation, we offer a wide
range of financing and leasing alternatives for the purchase of
vehicles. As a result of increased size and scale, we have negotiated
increased commissions on the origination of customer vehicle financing,
which result in incremental F&I commissions. By consolidating coverage
providers, we estimate that our 1998 insurance costs would have been
reduced by 14% for similar coverage.
Take Advantage of Regional Presence
We believe there are significant opportunities and benefits from operating
clusters of dealerships in contiguous areas. We encourage the sharing of
resources and have implemented technology initiatives that allow us to
effectively cross-sell products and services by referring customers to our other
dealerships. Direct benefits of our regional focus include:
. Reduced advertising costs. As a result of our larger size, we are able
to reduce regional advertising costs by creating multi-dealership
advertisements and increasing our buying power with advertising agencies
and publications.
. Personnel utilization. As a result of our regional clustering strategy,
we are able to utilize the same personnel to perform various
administrative functions for multiple dealerships. This effectively
lowers the administrative overhead attributable to each dealership.
. Regional inventory management. As a result of regionally centralized
procurement, reconditioning, inventory management and wholesale disposal
of used vehicles through Auto Factory, we have reduced our inventory
holding costs and increased our wholesale used vehicle gross margins.
. Increase brand awareness. Our goal is for the FirstAmerica Automotive
name, logo, and www.anyauto.com Internet address to become symbols of
outstanding customer service, value, convenience and selection. We have
established a consistent look and message in all of our advertising.
FirstAmerica Automotive branded formats are now in use for all print,
radio, television and Internet advertising. We consistently use our
corporate colors, logo and Internet address to develop brand identity
and to solidify a clear image in the consumer's mind.
Expand High Margin Activities
We will continue to expand our higher margin businesses, including the
following:
. Used vehicles. Retail used vehicle sales typically generate higher gross
margins than new vehicle sales because of limited comparability among
used vehicles and the somewhat subjective nature of their valuation. Our
experience indicates that there are opportunities at acquired
dealerships to improve all aspects of their used vehicle operations and,
through the Auto Factory, used vehicle inventory control.
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. Finance and insurance. Each sale of a new or used vehicle provides the
opportunity for us to earn financing fees and to sell extended warranty
service contracts. We believe there are opportunities at acquired
dealerships to increase earnings from the sale of F&I and warranty
products.
. Service and parts. Each of our dealerships offers a fully integrated
service and parts department. The service and parts business can offset
cyclical reductions in vehicle sales to the extent customers repair and
service vehicles rather than replace them. We believe there are
opportunities to increase the number of service customers we retain at
our dealerships through improved customer service. In addition, at some
of our dealerships, we have expanded our service capacity through
increased hours of operation.
Capitalize on Market Trends
Part of our strategy is to maintain a competitive advantage by identifying
and quickly adapting to new industry and market trends. We have created several
initiatives to capitalize on current market trends, including:
. Marketing through the Internet. Partially due to the technologically
sophisticated markets in which we operate, over 10% of our December 1998
new vehicle sales resulted from leads generated through the Internet. We
believe that many of these sales are incremental to our traditional
dealership business. Each of our dealerships has a Web site and we
provide a number of services at our main Web site at www.anyauto.com,
including:
- new vehicle ordering;
- links to manufacturers' Web sites for new vehicle product
information;
- access to our used vehicle inventory with photos of each vehicle;
- service appointment scheduling;
- Internet-only specials, promotions and coupons;
- parts and accessories ordering;
- maps, directions and photos of each of our dealerships and their
management; and
- employment opportunities with us.
We have utilized our Web site as a tool to sell our products and services
since 1995, and it is featured prominently in our advertising campaigns.
We also maintain exclusive territories with leading referral services.
. Proprietary database technology. We have developed a proprietary
database of customer information, which allows us to provide higher
levels of customer service and maximize our cross-selling opportunities.
When a customer interacts with any part of our organization, we obtain
the vehicle identification number and driver's license number from the
customer. We enter this data into our computer system and a profile for
the vehicle and the customer is developed. This profile allows us to
target our service efforts and cross-sell to the customer. For example,
by utilizing this data, we can notify customers when they are due for
servicing, or when their lease may be coming due and offer the
appropriate products and services.
. Focus on luxury brands. Several luxury manufacturers including BMW,
Lexus and Mercedes are now designing products which are affordable to a
broader range of consumers. Without compromising quality, these
manufacturers are producing products that are priced competitively with
non-luxury brands. As these products provide higher margins and greater
retention of service customers, we are focused on increasing our
percentage of sales of luxury brands to 25% - 30% in the near future.
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Train, Develop and Motivate Employees
We believe that recruiting and retaining our employees is critical to the
success of our organization. We have invested substantial resources in
developing training programs at all levels of our organization to insure the
highest quality service for our customers. Our training is managed at the
corporate level to insure consistency, but is delivered at the local level to
adapt to the different needs of our customers in different markets. We utilize
outside resources to supplement our internal training for safety and loss
prevention, technical service repair, customer satisfaction and interaction and
employee supervisory management. We believe that it is critical to motivate
management to achieve our overall objectives and we have devised an incentive
system that provides partial compensation in the form of stock options and a
stock purchase plan for employees down to the department manager level at our
dealerships. We believe that providing shared ownership through equity
participation will align our interests with those of our investors.
Industry Overview
With more than $600 billion in 1998 sales, automotive retailing is the
largest retail trade sector in the United States. The industry is highly
fragmented and largely privately held with approximately 22,600 automobile
dealership locations representing more than 49,000 franchised dealerships. In
1998, U.S. franchised automobile dealers sold 15.6 million new vehicles for
sales of approximately $311.7 billion, and 15.9 million used vehicles for sales
of approximately $193.4 billion. It is estimated that sales by franchised
automobile dealers account for one-fifth of the nation's total retail sales of
all products and merchandise. Since 1994, new vehicle revenues have grown at a
2.0% compound annual rate. Over the same period, used vehicle revenues by
franchised dealers have grown at a 5.4% compound annual rate. Slower unit
volume growth over this time period has been offset by the rising prices of new
and late-model, high-quality used vehicles. Automobile sales are affected by
many factors, including employment rates, income growth, interest rates, weather
patterns and other national and local economic conditions, automotive
innovations and general consumer sentiment.
The following table sets forth new and used vehicle sales by franchised
automotive dealers in the United States for each year from 1994 to 1998. New
vehicles can only be sold at retail by franchised dealerships. The following
table excludes sales of used vehicles by non-franchised dealerships and casual
sales by individuals.
<TABLE>
<CAPTION>
United States Franchised Dealers' Vehicle Sales
--------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(units in millions; dollars in billions)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales....................... 15.1 14.8 15.1 15.2 15.6
New vehicle sales............................ $288.5 $293.3 $298.9 $301.2 $311.7
Used vehicle unit sales(a)................... 15.1 15.7 15.7 15.9 15.9
Used vehicle sales........................... $156.5 $172.9 $184.2 $196.2 $193.4
Total vehicle sales.......................... $445.0 $466.2 $483.1 $497.4 $505.1
Annual growth in total vehicle sales......... 12.8% 4.8% 3.6% 3.0% 1.5%
- ---------------------------------------------
</TABLE>
(a) Includes retail and wholesale sales.
Source: CNW Marketing/Research; Automotive News
The contiguous Pacific states of California, Oregon and Washington
accounted for 13.0% of new vehicle registrations in 1997, with California alone
accounting for 10.3%. The Pacific states above along with Arizona, Colorado,
Idaho, Montana, Nevada, New Mexico, Utah and Wyoming accounted for approximately
19.1% of new vehicle registrations in the United States in 1997.
Manufacturers originally established franchised dealer networks for the
distribution of their vehicles as single-dealership, single-owner operations.
In return for distribution rights within specified territories, manufacturers
exerted significant influence over such matters as a dealer's location,
inventory size and composition
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and merchandising programs, as well as the identity of owners and managers. This
strict control contributed to the proliferation of small dealerships, which at
their peak in the late 1940s numbered in excess of 46,000 dealership locations.
Several manufacturers went out of business in the 1950s, and the number of
dealership locations decreased to approximately 36,000 by 1960.
When fuel shortages forced dramatic increases in gasoline prices in the
1970s, foreign manufacturers increased their penetration of the U.S. market with
fuel-efficient, low-cost vehicles. As a result of these competitive pressures,
dealers were able to negotiate significant changes in the traditional
distribution system with manufacturers. Dealers began to add foreign franchises
and the concept of the multi-franchise automobile dealer, or megadealer,
emerged, prompting the significant acquisition and consolidation activities of
the 1980s. The easing of restrictions against megadealers, competitive
pressures upon undercapitalized dealerships and the aging of dealership owners
have led to further consolidation of the industry. Since 1960, the number of
dealership locations has declined 37% to the current level of approximately
22,600.
As the industry has evolved, so has the dealership profile. Over the past
three decades, there has been a trend toward fewer, but larger, dealerships.
Although significant consolidation has taken place since its inception, today
the industry remains highly fragmented, with the largest 100 dealer groups
generating approximately 12% of total sales revenues. We believe that these
factors, together with increasing capital requirements and the aging of
dealership owners seeking a viable exit strategy, provide an attractive
environment for our consolidation program.
As with retailers generally, automobile dealership profitability varies
widely and depends in part on the effective management of inventory, marketing,
financial controls and responsiveness to customers. Since 1993, retail
automobile dealerships in the United States have earned on average between 12.7%
and 13.4% total gross margin on sales. New vehicle sales were the smallest
proportionate contributor to dealers' gross profits during this period, earning
an average gross margin of 6.4% in 1997. Used vehicle sales provided higher
gross margins than new vehicle sales during this period, with an average retail
used vehicle gross margin of 10.8% in 1997. Dealerships also offer a range of
other services and products, including repair and warranty work, replacement
parts, extended service contracts, financing and credit insurance.
Cyclicality
The automotive manufacturing industry tends to be very sensitive to
economic cycles. Conversely, the pre-tax profit margins of the automotive
retailing industry have been relatively stable in the period between 1979 and
1997. The following chart shows the historical relationship between the profit
margins of the automotive retailing and automotive manufacturing industries:
Automotive Retailing vs. Manufacturing Historical Pretax Margins
[Line Chart Appears Here]
<TABLE>
<CAPTION>
Automotive Retailing Big Three
Pretax Margins Pretax Margins
-------------------- --------------
<S> <C> <C>
1979 1.48 0.65
1980 0.94 -8.48
1981 1.52 -2.30
1982 1.77 -0.20
1983 2.00 6.06
1984 2.10 9.38
1985 2.10 7.96
1986 2.05 6.98
1987 2.00 7.34
1988 1.71 6.44
1989 1.00 4.32
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Automotive Retailing Big Three
Pretax Margins Pretax Margins
-------------------- --------------
<S> <C> <C>
1990 1.00 0.08
1991 1.00 -3.54
1992 1.39 -0.02
1993 1.60 4.89
1994 1.80 7.94
1995 1.40 5.85
1996 1.53 6.35
1997 1.37 6.49
</TABLE>
We believe that the relative stability of the automotive retailing industry
relative to the automotive manufacturing industry is due to a number of factors
including:
. the automotive retailing sector derives only 10% of its profits from the
sale of new vehicles, with the balance provided by the sale of used
vehicles and other automotive products and services;
. 60%-65% of the automotive retailing sector's costs are variable,
relating to personnel, advertising and inventory finance costs;
. sales and service employees are typically compensated based on
production levels;
. manufacturers typically increase dealer incentives when sales slow,
offsetting volume declines; and
. the diversity in offering import and domestic brands tends to lessen the
impact of a decline in one brand.
Dealerships
After giving effect to our pending acquisitions, we will own 11 dealerships
in the San Francisco Bay Area market, two dealerships in the San Jose/Silicon
Valley market, two dealerships in the Los Angeles market, and four dealerships
in the San Diego market.
Since July 1997, we have grown significantly as a result of the acquisition
and integration of new vehicle dealerships and an increase in revenues at our
existing dealerships. The following table lists the name, brands and
location of the dealerships acquired by or awarded to us or our predecessors and
the dealerships to be acquired by us pursuant to our pending acquisitions:
<TABLE>
<CAPTION>
Dealership Brands Location
- ---------------------------------------- ---------------------- -----------------
<S> <C> <C>
San Francisco Bay Area:
Serramonte Auto Plaza: Nissan Colma, CA
Isuzu Colma, CA
Dodge Colma, CA
Mitsubishi Colma, CA
Lexus of Serramonte Lexus Colma, CA
Melody Toyota Toyota San Bruno, CA
Marin Nissan Nissan San Rafael, CA
Concord Nissan Nissan Concord, CA
Concord Toyota Toyota Concord, CA
Concord Honda Honda Concord, CA
Serramonte Honda Honda Colma, CA
Dublin Volkswagen/Dodge Volkswagen, Dodge Dublin, CA
Dublin Nissan Nissan Dublin, CA
First Dodge - Marin(a) Dodge San Rafael, CA
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Dealership Brands Location
---------------------------------------- ---------------------- -----------------
<S> <C> <C>
San Jose/Silicon Valley:
Stevens Creek Nissan Nissan Santa Clara, CA
Capitol Nissan Nissan San Jose, CA
Los Angeles Area:
Beverly Hills BMW BMW Beverly Hills, CA
Volkswagen of Woodland Hills Volkswagen Woodland Hills, CA
San Diego Area:
Poway Dodge Dodge Poway, CA
Poway Honda Honda Poway, CA
Poway Toyota Toyota Poway, CA
Ritchey Fipp Chevrolet Chevrolet Poway, CA
--------------------------------------------
</TABLE>
(a) Acquisition is pending.
Dealership Management
We operate using a flexible corporate infrastructure to support our growth.
This structure is designed to maintain a decentralized operational approach that
strikes a balance between entrepreneurship at the dealership level and well-
managed, efficient, centralized executive and administrative operations at the
corporate level that seeks the implementation of best practices in our
dealership network.
We organize the operations of our dealerships geographically. Currently,
one of our two regional vice presidents oversees the East San Francisco Bay Area
and the other oversees the West San Francisco Bay Area. These regional vice
presidents report to our chief operating officer. The general managers of our
luxury dealerships and our Southern California dealerships also report directly
to our chief operating officer. Regional and single-point general managers
report to the regional vice presidents. Depending on the size of the dealership
and the proximity of clustered dealerships, a group of two to five dealerships
could be managed by a single regional general manager with a general sales
manager and a parts and service director reporting directly to the regional
general manager. The regional vice presidents and their general managers report
to executive management on a regular basis as to the operating performance of
the dealerships in their regions and prepare comprehensive monthly financial and
operating statements. Executive management meets quarterly with operations
management to evaluate operating performance, to address changing customer
preferences and operational concerns and to share best practices.
A team of department managers compliment each general manager. These
department managers aid in the operation of the dealerships. The general sales
manager is responsible for the operations, personnel, financial performance and
customer satisfaction performance of the new vehicle sales, used vehicle sales
and F&I departments. The service and parts director is primarily responsible
for the operations, personnel, financial and customer satisfaction performance
of the service, parts and collision repair departments.
A human resources specialist and a financial controller support each
region. Additionally, at the corporate level there is a vice president of
service and parts who provides standardized policies and product selection,
procedures, performance measurement and benchmarking, and training programs to
the parts and service department personnel throughout the organization. The F&I
departments in our dealerships receive similar corporate oversight, training and
recruitment of personnel from our centralized dealer services division which is
also responsible for the selection, standardization and negotiation of all
financing, warranty and aftermarket products sold through the dealership F&I
departments.
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<PAGE>
We have formed advisory boards made up of our executive management,
regional vice presidents and luxury dealership general managers in order to
identify and share best practices. We believe these advisory boards will
promote the widespread application of strategic programs, facilitate the
integration of future acquisitions and improve operating efficiency and customer
satisfaction.
New Vehicle Sales
We sell 10 U.S., Asian and European brands of economy, family, sports and
luxury cars and light trucks and sport utility vehicles. We believe that our
brand, product and price diversity reduces our risk from changes in customer
preferences, product supply shortages and aging products. See "Risk Factors --
Manufacturers exercise significant control over our operations and we need them
to operate our business" on page 12.
The following table sets forth for the year ended December 31, 1998,
information relating to the brands of new vehicles sold at retail by us on a pro
forma basis:
<TABLE>
<CAPTION>
Brand New Vehicles Sold Percentage
----------------- ----------------------- --------------
<S> <C> <C>
BMW 1,113 4.7%
Chevrolet 667 2.8%
Dodge 3,693 15.6%
Honda 4,018 17.0%
Isuzu 303 1.3%
Lexus 1,234 5.2%
Mitsubishi 683 2.9%
Nissan 5,694 24.1%
Toyota 5,235 22.1%
Volkswagen 1,005 4.3%
------ -----
Total 23,645 100.0%
</TABLE>
New vehicle retail sales include traditional new vehicle retail lease
transactions and lease-type transactions, both of which may be arranged by the
dealerships. New vehicle leases generally have short terms, which bring the
consumer back to the market sooner than if the purchase were debt financed. In
addition, leases provide our dealerships with a steady source of late-model,
off-lease vehicles for their used vehicle inventory. Generally, leased vehicles
remain under factory warranty for the term of the lease, which allows the
dealerships to provide repair service to the lessee throughout the lease term.
Our dealerships seek to provide customer-oriented service designed to meet
the needs of our customers and establish lasting relationships that will result
in repeat and referral business. For example, the dealerships strive to:
. employ more efficient selling approaches;
. utilize computer technology that decreases the time necessary to
purchase a vehicle;
. engage in extensive follow-up after a sale in order to develop long-term
relationships with customers; and
. extensively train their sales staff to be able to meet the needs of each
customer.
The dealerships continually evaluate innovative ways to improve the buying
experience for their customers. We believe that our ability to share best
practices among our dealerships gives us an advantage over smaller dealerships.
Used Vehicle Sales
We sell a broad variety of makes and models of used cars, vans, light
trucks and sport utility vehicles at each of our dealerships. Sales of used
vehicles have become an increasingly significant source of profit for the
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<PAGE>
dealerships. Consumer demand for used vehicles has increased as prices of new
vehicles have risen and as more high-quality used vehicles have become
available. Furthermore, used vehicles typically generate higher gross margins
than new vehicles because of their limited comparability and the somewhat
subjective nature of their valuation. We intend to continue growing our used
vehicle sales operations by maintaining a high-quality inventory, providing
competitive prices and extended service contracts for our used vehicles and
continuing to promote used vehicle sales.
Vehicle customers can use our Web site, www.anyauto.com, to electronically
search our used vehicle inventory by model, feature and price requirements. The
site displays a color picture of each vehicle and can also generate a data sheet
with price and other information, as well as a map showing the vehicle's
location.
The following table sets forth information on our used vehicle sales:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
Actual Pro Forma
------------------------------- ---------
1996 1997 1998 1998
------- ------ ------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Retail unit sales.......................... 4,921 6,639 9,901 11,443
Retail sales revenue....................... $67,944 $ 90,436 $141,946 $162,857
Retail gross profit........................ $ 5,522 $ 8,841 $ 13,560 $ 15,981
Retail gross margin........................ 8.1% 9.8% 9.6% 9.8%
Average gross profit per retail unit sold.. $ 1,122 $ 1,332 $ 1,370 $ 1,397
Wholesale unit sales....................... 3,073 4,182 7,137 7,953
Wholesale sales revenue.................... $13,762 $ 21,180 $ 49,883 $ 53,768
Wholesale gross profit..................... $ (5) $ 86 $ 2,517 $ 2,415
Wholesale gross margin..................... (0.0)% 0.4% 5.1% 4.5%
Total unit sales........................... 7,994 10,821 17,038 19,396
Total revenue.............................. $81,706 $111,616 $191,829 $216,625
Total gross profit......................... $ 5,517 $ 8,927 $ 16,077 $ 18,396
Total gross margin......................... 6.8% 8.0% 8.4% 8.5%
</TABLE>
Profits from sales of used vehicles depend primarily on the dealerships'
ability to obtain a high-quality supply of used vehicles at the right price and
effectively manage that inventory. Our new vehicle operations provide our used
vehicle operations with a large supply of high-quality trade-ins and off-lease
vehicles, which are the best sources of high-quality used vehicles.
We created the "Auto Factory" division to implement an efficient used
vehicle inventory control system. Auto Factory centralizes the wholesale
disposal of used vehicles on a company-wide basis and the procurement,
reconditioning and management of used vehicle inventory on a regional basis.
Auto Factory is managed by an individual who has over 22 years of relevant
experience in used car operations. The dealerships supplement their used
vehicle inventory with vehicles purchased by our regional Auto Factory operation
at "closed" auctions that may be attended only by new vehicle dealers and which
offer off-lease, rental and fleet vehicles, and at "open" auctions that offer
repossessed vehicles and vehicles sold by other dealers. In addition to our
regional procurement of used vehicles, Auto Factory operates on a centralized,
company-wide basis for opportunistic, large purchases of off-lease, rental and
fleet vehicles. Auto Factory also conducts a bi-weekly sealed bid auction to
dispose of customer trade-in vehicles in poor condition or vehicles which remain
unsold for a specified period of time. The results of Auto Factory's purchasing
and sales activities are shared with all of our dealerships to provide timely
and accurate used car inventory and trade-in valuation information. This
process allows Auto Factory to maximize our profits on used vehicle sales and
provide inventory to our dealerships on a cost effective basis to meet current
regional customer demand. Additionally, Auto Factory manages the market-driven
redistribution of used vehicles among our dealerships.
We transport all used vehicles we acquire to one of our two regional
reconditioning centers. We offer retail used vehicles that pass a 135-point
reconditioning process at one of the centers, where certified technicians
inspect, adjust, clean, repaint, repair or replace mechanical, cosmetic and
safety features to meet our standards.
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<PAGE>
These vehicles are sold with a 60-day bumper-to-bumper limited warranty, a 30-
day exchange guarantee and 24-hour free roadside assistance for one year.
We have taken several initiatives since August 1998 to enhance customer
confidence in our used vehicles, including offering extended warranties,
stocking higher-quality, late-model used cars and our branded "Pre-Owned, Pre-
Loved" certification program.
Service and Parts Sales
We provide service and parts at each of our factory-authorized dealerships.
We utilize a total of approximately 386 service bays at our locations to provide
both warranty and non-warranty services. Service and parts sales provide higher
gross margins than vehicle sales.
In the second half of 1998, we opened our downtown San Francisco multi-
brand, full-service vehicle maintenance and repair center. This 36,000 square
foot, 38 service bay facility utilizes state of the art information management
and automotive repair equipment. Our ability to service multiple makes in one
centralized location provides us an excellent recruitment and training facility
for technicians at the service center and for our dealerships. The service
center provides convenience to current sales customers in the San Francisco Bay
area, and is intended to increase our service retention.
The following table sets forth information regarding our service and parts
sales:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
Actual Pro Forma
----------------------------- ---------
1996 1997 1998 1998
-------- -------- ------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Sales......................... $42,416 $58,707 $91,134 $107,123
Gross profit.................. 16,966 26,512 41,711 47,976
Gross margin.................. 40.0% 45.2% 45.8% 44.8%
</TABLE>
Our dealerships seek to retain each vehicle purchaser as a customer of the
dealership's service and parts departments. The dealerships have systems in
place that track their customers' maintenance records and notify owners of
vehicles purchased or serviced at the dealerships when their vehicles are due
for periodic services. The dealerships regard service and repair activities as
an integral part of their overall approach to customer service, which provides
an opportunity to foster ongoing relationships with the dealership's customers
and deepen customer loyalty.
Our dealerships' parts departments support their sales and service
departments. Each of the dealerships sells factory-approved parts for vehicle
makes and models sold by that dealership. These parts are either used in
repairs made by the dealership or sold at retail to its customers or at
wholesale to independent repair shops and other dealerships. Currently, most of
our dealerships employ their own parts managers and independently control their
parts inventory and sales. Some contiguous dealerships share parts inventories
and personnel. Our dealerships that sell the same new vehicle makes have access
to each other's computerized inventories and frequently obtain unstocked parts
from our other dealerships.
Dealer Services
We have created a Dealer Services division to maximize cost savings by
centralizing and consolidating the purchasing power of all of our dealerships.
Specifically, this division:
. Selects and procures products including financing, leasing, service and
warranty contracts, pre-paid maintenance plans and after-market
automotive products, negotiates vendor contracts and monitors vendor
performance;
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. Designs menu-priced finance product offerings for our F&I departments
that we believe result in high CSI scores, increased net profits and
customer retention for our dealerships;
. Develops point of purchase materials to be used as a marketing tool in
the dealerships to promote our menu of product offerings, finance and
leasing programs;
. Provides recruiting, training, sharing of best practices, oversight and
consulting services to the F&I departments of our dealerships;
. Develops F&I personnel through classroom training, personal coaching and
direct customer contact to create a system where F&I personnel market
products efficiently and in a less adversarial manner, and monitors
financial performance and customer satisfaction levels;
. Assures compliance of F&I departments with corporate policies and
guidelines, federal and state regulatory requirements and dealership
performance targets, and provides F&I personnel to quickly integrate
acquired dealerships; and
. Provides assistance in the special finance groups with sub-prime lending
activities, and conducts daily review meetings at the dealership and
regional level to close all open transactions.
Finance and Insurance
We offer our customers a wide range of financing and leasing alternatives
for the purchase of vehicles. In addition, we offer customers warranty or
extended service contracts.
We sell our vehicle financing contracts and leases to other parties,
instead of directly financing sales. This reduces our exposure to loss from
financing activities. We receive a fee from the lender for originating and sale
of the loan or lease but we are assessed a chargeback fee by the lender if a
loan is canceled, in most cases, within 90 days of making the loan. Early
cancellation can result from early repayment because of refinancing of the loan,
the sale or trade-in of the vehicle, or default on the loan. We establish an
allowance to absorb estimated chargebacks and refunds. F&I revenue is recorded
net of these chargebacks.
Sales and Marketing
Our sales philosophy is to provide customer-oriented service designed to
meet the needs of a diverse, increasingly sophisticated and demanding body of
automotive consumers. We seek to provide our customers with a satisfying,
pleasant and informative retailing experience that entails "one-stop" shopping
convenience, no-haggle competitive pricing and a sales staff that is
knowledgeable about our product offerings and responsive to the customer's
needs. Continuous training of our sales force focuses on providing skills that
improve each salesperson's interactions with customers. A key management tool
for us is the customer service index, or CSI score, which is derived from data
accumulated by manufacturers through customer surveys. Management carefully
monitors these scores to improve dealership operations and uses these as a
factor in determining compensation.
Our marketing efforts focus on continuing and increasing business with
existing customers as well as referral and new customers. We employ mass-
marketing and advertising in various media, including television, radio,
newspaper, billboard, direct mail and the Internet to attract a broad retail
customer base and to establish us as a recognized brand name. We have
successfully capitalized on our presence in our markets through a comprehensive
marketing plan that focuses on our overall name/brand recognition and also on
more specific product/dealership advertising. We use most forms of media in our
advertising, including television, radio and print.
Our goal is for the FirstAmerica Automotive name, logo and www.anyauto.com
Internet address to become symbols of outstanding customer service, value,
convenience and selection. Once a consumer does business with any of our
dealerships we want that consumer to feel that he or she has chosen a company
that can supply a lifetime of automotive products and services. We are
continuing to develop our FirstAmerica Automotive brand through a multi-level
process:
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<PAGE>
. We have established a consistent look and message in all of our
advertising. FirstAmerica Automotive branded formats are now in use for
all print, radio, television and Internet advertising. We consistently
use our corporate colors, logo and Internet address to develop brand
identity and to solidify a clear image in the consumer's mind. Our
newspaper advertising campaign won the Dealer Automotive Newspaper
Display Advertising Award for best campaign by an individual dealer in
1996, 1997 and 1998 and for best of show in 1997 and 1998.
. We recently launched a company-wide consumer benefit program, which
initially focuses on our used car operations. This program includes our
introduction of our used car reconditioning, certification and roadside
assistance program, "Pre-Owned, Pre-Loved."
. We intend to update dealership signage in all locations to include our
logo. All of our company vehicles including customer shuttles and parts
delivery trucks will include our name and logo.
. We plan to migrate dealership names in markets where we have a cluster
of dealerships to include "FirstAmerica Automotive" in the dealership's
name and signage, along with our logo.
Our goal is to create an advertising program that focuses on building a
long-term relationship with consumers, but does not alienate any particular
manufacturer. As we build brand awareness we intend to become less reliant on
price point advertising and more focused on delivering a value message.
Additionally, we have adopted a three-tiered Internet marketing strategy.
The first tier uses our own Web site, www.anyauto.com, which provides users
access to information related to all of our dealerships. We include the
Internet address of this site in all of our marketing material. The second tier
involves using our relationship with www.autotown.com to provide additional
customer prospects through a credible third-party provider of comparative
automotive information. Finally, we use our buying power to obtain the lowest-
cost leads from most major Internet purchase request providers, including Auto-
by-Tel, Autoweb.com, Auto Mall U.S.A. and CarPoint. We have a staff in each of
our dealerships dedicated to handling Internet prospects as well as regional
Internet directors to assist in training and process development. In addition,
we have an advisory committee that explores future product development and
alternative distribution methods seeking to use the Internet's potential as a
source of additional revenue. We believe the California market is particularly
well suited to Internet sales initiatives. Over 10% of our December 1998 new
vehicle sales resulted from leads generated through the Internet including our
own Web site, www.anyauto.com, and Web sites of third-party lead providers.
Auto Town
In late 1998, we purchased Auto Town which develops proprietary software
applications for automobile dealerships. These applications serve four primary
functions: (1) Web site administration, (2) customer tracking, (3) inventory
tracking and (4) an easy-to-use finance and insurance module that is fully
integrated with leading accounting packages. These software applications are
designed to enhance dealership sales, efficiencies and profitability. We
currently intend to sell Auto Town in the second quarter of 1999. We intend to
make this sale because we believe that Auto Town will need significantly
increased capital resources, and we believe the best use of our resources will
be for future acquisitions. We expect to maintain several ongoing financial and
operational relationships with Auto Town, including a long-term arrangement in
which Auto Town's software products will be available to us.
Relationships with Manufacturers
Each of our dealerships operates under one or more separate sales and
service or dealer agreements with one or more manufacturers that govern the
relationship between the dealership and the manufacturer. Through our
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<PAGE>
wholly owned subsidiaries, we currently have 22 dealer agreements with nine
manufacturers. We have entered into one or more dealer agreements with the
following manufacturers:
<TABLE>
<S> <C>
. BMW . Mitsubishi
. DaimlerChrysler . Nissan
. General Motors . Toyota
. Honda . Volkswagen
. Isuzu
</TABLE>
In general, each dealer agreement specifies the location of the dealership
in a specified market area. Each dealer agreement also requires the dealer to
meet specified standards regarding showrooms, facilities and equipment for
servicing vehicles, inventories, minimum net working capital, personnel training
and other aspects of dealership operations. Each dealer agreement also gives
each manufacturer the right to approve the dealership's general manager and any
material change in management or ownership of the dealership. Each manufacturer
may terminate a dealer agreement under limited circumstances, like a change in
control of the dealership without manufacturer approval, material impairment of
the financial condition of the dealership, insolvency or bankruptcy of the
dealership or a material breach of other provisions of the dealer agreement.
Manufacturers' policies regarding public ownership of dealerships continue
to evolve as the consolidation of automobile dealerships by publicly held
companies progresses. We believe that these policies will continue to change as
more dealership groups sell their stock to the public and as established public
dealership groups acquire more dealerships. All of the manufacturers with which
we currently have dealer agreements have approved us as a publicly held entity.
Some of the manufacturers have, however, placed restrictions on our ability to
acquire additional dealerships as well as on the transferability of our common
stock. These policies could have a material adverse effect on our business.
See "Risk Factors - Automobile manufacturers exercise significant control over
operations and we are dependent on them to operate our business" on page 12.
The following is a summary of our dealership agreements with our four
leading manufacturers.
Toyota/Lexus
Under our agreement with Toyota, the number of Toyota dealerships we may
acquire is restricted to:
. the greater of one dealership or twenty percent of the Toyota dealer
count in a "Metro" market (Metro markets are multiple Toyota dealership
markets within some geographic areas as defined by Toyota);
. the lesser of five dealerships or 5% of the Toyota dealerships within
regional geographic areas designated by Toyota; and
. seven Toyota dealerships nationally.
Our agreement with Toyota also limits the number of Lexus dealerships we
may acquire to not more than:
. two Lexus dealerships in any Area regional geographic area designated by
Toyota; or
. three Lexus dealerships nationally.
We currently own and operate three Toyota dealerships and one Lexus
dealership. Subject to the restrictions limiting the acquisition by us of
additional dealerships within specified geographic regions, we are currently
limited to acquiring not more than four additional Toyota dealerships and two
additional Lexus dealerships. Under our agreement with Toyota, Toyota has the
right to approve any acquisition of 20% or more of the voting power of our
outstanding stock by any person or entity. If Toyota reasonably determines that
the person or entity is unqualified, or has interests incompatible with Toyota,
we must reacquire the stock until the person or entity holds less than 20%. If
we cannot reacquire the stock, Toyota may force us to sell our dealerships, or
Toyota may purchase the dealerships from us.
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<PAGE>
After we entered into our agreement with Toyota, Toyota modified its policy
on public ownership of multiple dealerships. Under the current Toyota policy, a
single owner may own and operate in excess of seven Toyota dealerships if the
owner can demonstrate that it meets capitalization and management requirements
established by Toyota for multiple dealer ownership. The multiple ownership
policy limits the number of Toyota dealerships in a region provided that the
number of dealerships in a region varies depending on whether the sales volume
of the dealerships are less than 9% of the sales volume of the entire region.
Toyota's San Francisco region provides for a limit of three Toyota dealerships,
as long as the dealerships have a combined sales volume of more than 9% of the
regions or up to four dealerships as long as the sales volume of the combined
dealerships is less than 9% of the region. Further, Toyota's policy provides
that no owner shall own or control dealerships that represent more than 20% of
the dealerships in a Metro market as defined by Toyota. We have not yet entered
into an agreement with Toyota finalizing these new terms.
Nissan
Nissan restricts us from owning Nissan dealerships which account for
either:
. more than 5% of Nissan's total national competitive segment
registrations based on the sum of the retail competitive segment
registrations in our primary marketing areas, or
. 20% of any Nissan region's total competitive segment registrations
contained in all of our primary marketing areas in that region.
In addition to a customary agreement with Nissan, we have entered into a
contiguous market ownership agreement, or CMO, with Nissan for us to own and
operate multiple and contiguous Nissan dealerships in two contiguous markets in
the San Francisco Bay area. These CMO agreements provide that if we want to
sell one Nissan dealership within the CMO, Nissan has the right to require that
we sell all of our Nissan dealerships within the CMO area. Further, if we want
to sell or transfer one of our two San Francisco Bay Area contiguous market
areas without Nissan's consent, Nissan may require us to sell or transfer one or
all, or any combination of these areas or dealerships to a proposed buyer
acceptable to Nissan. Termination of one Nissan dealer services agreement
within a CMO constitutes termination of all dealer agreements within that CMO.
DaimlerChrysler
Our agreements with DaimlerChrysler do not restrict the number of
DaimlerChrysler dealerships we may acquire. DaimlerChrysler currently
considers, on a case by case basis, any acquisition that would cause an
acquiring company to own more than ten DaimlerChrysler dealerships nationally,
six in the same DaimlerChrysler-defined zone or two in the same market.
Further, our agreements with DaimlerChrysler limit our ability to acquire
additional DaimlerChrysler dealerships unless our current dealerships have CSI
ratings equal to or better than zone averages. Our agreements require that we
obtain DaimlerChrysler's consent prior to selling more than 50% of our company.
Honda/Acura
Our current agreement with Honda limits our ability to acquire additional
Honda dealerships and restricts the transferability of our common stock. Our
agreement with Honda limits our ownership and acquisition of Honda dealerships
to not more than:
. one Honda dealership in a Metro market, a geographical area designated
by Honda, having two to ten Honda dealerships;
. two Honda dealerships in a Metro market having 11 to 20 Honda
dealerships;
. three Honda dealerships in a Metro market having 21 or more Honda
dealerships;
. 4% of the Honda dealerships in any one of ten Honda-defined geographic
zones; and
. seven Honda dealerships nationally.
Our agreement with Honda further limits our ownership of Acura dealerships
to not more than:
. one Acura dealership in a Metro market having two or more Acura
dealerships;
. two Acura dealerships in any one of six Acura geographic zones, as
defined by Honda; and
. three Acura dealerships nationally.
Our agreement with Honda further requires that specific current
stockholders retain voting control of us. This requirement restricts the number
of shares we can sell to the public. Honda also has the right to disapprove the
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acquisition by any individual or entity of more than 5% of our outstanding
capital stock. If this type of acquisition takes place without Honda's consent,
Honda may force us to sell all of the assets of our Honda and Acura dealerships.
Honda has proposed a new agreement to replace our current agreement. Under
the proposed agreement, Honda's general policy regarding ownership of Honda
dealerships by publicly traded companies would apply to us. Under this
agreement, we would be permitted to acquire in excess of the current maximum
number of Honda and Acura dealerships. Each of our future acquisitions would
still be subject to Honda's approval. Specific geographic or unit-based
ownership limitations are being negotiated. The new agreement would not
prohibit public trading of our stock or require a specific ownership percentage
by our current stockholders. We would not be required to obtain Honda's consent
to any equity offering. The new agreement would, however, provide that Honda
may force us to sell our dealerships if a person or entity with interests
adverse to Honda acquires more than 5% (or 10% if the entity is an institutional
investor) of our outstanding stock.
California Law
Statutes in California and other states in which we may expand limit
manufacturers' control over dealerships.
. Under California law, despite any contrary terms in a dealer agreement,
manufacturers may not unreasonably withhold approval for the sale of a
dealership. Acceptable grounds for disapproval include the
unsatisfactory financial condition of the proposed transferee and the
unsatisfactory experience in the automobile business of the proposed
transferee, including CSI scores and sales results of the proposed
transferee with respect to other automobile dealerships owned or
operated by the proposed transferee.
. Despite any provision in the franchise agreement, no manufacturer may
modify, replace, enter into, relocate, terminate, or refuse to renew a
franchise agreement without good cause. Good cause considerations
include, among other things, the amount of business transacted by the
franchisee as compared to business available to the franchisee, whether
the proposed termination or modification is injurious or beneficial to
the public welfare, whether the franchisee has adequate motor vehicles
sales and service facilities and qualified personnel, and the extent of
the franchisee's failure to comply with the terms of the franchise
agreement.
. Prior to the termination of a franchise, the dealer has the right to a
hearing before the California New Motor Vehicle Board where the
manufacturer will have the burden of proof that the franchisee has
violated the franchise agreement.
. The manufacturer may not appoint new dealers or allow the relocation of
any dealers without notifying dealers in the relevant market area who
will have a right to file a protest with the California New Motor
Vehicle Board prior to the opening of a new dealership. A protest will
determine whether good cause appears for the appointment of a new dealer
in a market area. Good cause considerations include whether the
manufacturer is adequately represented in the area and if it is in the
best interest of the public to establish a new dealership in the market
area.
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Competition
Automobile retailing is a highly competitive business with over 22,600
franchised automobile dealerships in the United States at the beginning of 1998.
Our competition includes:
. dealerships selling the same or similar makes of our new and used
vehicles in the same markets as us and sometimes at lower prices than
ours;
. other franchised dealers;
. private market buyers and sellers of used vehicles;
. used vehicle dealers; and
. service center chains and independent service and repair shops.
Gross profit margins on sales of new vehicles have been generally declining
since 1986. We do not have any cost advantage in purchasing new vehicles from
the manufacturers. We typically rely on advertising, merchandising, sales
expertise, service reputation and dealership locations to sell new vehicles.
The following factors could have a significant impact on our business:
. Increasing competition in the used car market from non-traditional
outlets such as nationwide networks of used vehicle "superstores" like
AutoNation or CarMax which use sales techniques including one-price and
"no-haggle" shopping. Some of these used car superstores have opened in
markets where our dealerships compete. No-haggle sales methods are also
being attempted for new car sales by at least one of these superstores
and dealers for Saturn and other makes.
. We, along with our competition, are beginning to use the Internet as
part of the sales process. Consumers are using the Internet to
comparison shop for vehicles, which may further reduce margins for new
and used cars.
. Some recent market entrants may be capable of operating on smaller gross
margins than ours and may have greater financial, marketing and
personnel resources than ours.
. Ford, General Motors and Saturn have acquired dealerships in various
cities in the United States. Other manufacturers may also directly enter
the retail market in the future, which could have a material adverse
effect on our business.
. The increased popularity of short-term vehicle leasing has also resulted
in a large increase in the number of late-model used vehicles available
in the market, which puts added pressure on the profit margin on used
vehicle sales.
. As we seek to acquire dealerships in new markets and strive to gain
market share, we may face significant competition, including competition
from other publicly owned dealer groups.
We believe that the principal competitive factors in vehicle sales are:
. the marketing campaigns conducted by manufacturers;
. the ability of dealerships to offer a wide selection of the most popular
vehicles; and
. the location of dealerships and the quality of customer service.
Other competitive factors include customer preference for makes of
automobiles, pricing (including manufacturer rebates and other special offers)
and warranties. We believe our dealerships are competitive in all of these
areas.
In addition to competition for vehicle sales, our dealerships compete
against other franchised dealers to perform warranty repairs and other vehicle
dealers, franchised and independent service center chains and
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independent garages for non-warranty repair and routine maintenance business.
We believe that the principal competitive factors in parts and service sales
are:
. price;
. the use of factory-approved replacement parts;
. the familiarity with a dealer's makes and models;
. convenience; and
. the quality of customer service.
A number of regional and national chains offer selected parts and service
at prices that may be lower than our prices.
Our finance and insurance business and other related businesses, which have
higher contributions to earnings than the sale of new and used vehicles, are
subject to strong competition from a broad range of financial institutions which
may increase if these third parties are able to sell products over the Internet.
We believe that the principal competitive factors in providing financing are
convenience, interest rates and contract terms.
Our success depends, in part, on national and regional automobile-buying
trends, local and regional economic factors and other regional competitive
pressures. We sell our vehicles in the greater San Francisco Bay Area, the San
Jose metropolitan area, San Diego County and in the Los Angeles market, all of
which are in California. Conditions and competitive pressures affecting these
markets, like price-cutting by dealers in these areas, or in any new markets we
enter, could adversely affect us, although the retail automobile industry as a
whole might not be affected. See "Risk Factors - Intense competition in vehicle
retailing and related businesses could reduce our profit margins" on page 11.
Governmental Regulations and Environmental Matters
A number of regulations affect the business of marketing, selling,
financing and servicing automobiles. We are also subject to laws and
regulations relating to business corporations generally.
California Dealership Laws
The relationship between an automobile dealership and a manufacturer is
governed by various federal and state laws established to protect dealerships
from the generally unequal bargaining power between the parties. Federal laws,
as well as California state law, prohibit a manufacturer from terminating or
failing to renew a dealer agreement without good cause. Under California law, a
manufacturer may not require a dealer to accept any vehicle, part or accessory
not voluntarily ordered by the dealer, to refuse to deliver any new vehicle,
part or accessory advertised by the manufacturer as available, or to require
monetary participation in any sales promotion or advertising campaign.
Manufacturers are entitled to approve or disapprove a proposed transferee in
connection with any transfer of a dealership. Further, a dealer is entitled to
seek judicial relief to prevent a manufacturer from establishing a competing
dealership of the same vehicle make within the dealer's relevant market area.
Under California law as well as the laws of other states into which we may
expand, we must obtain a license in order to establish, operate or relocate a
dealership or operate an automotive repair service. The licensing of automobile
dealerships in California is principally within the jurisdiction of the
California Department of Motor Vehicles. In addition to establishing licensing
requirements, California law also regulates aspects of the conduct of our
business, including our advertising and sales practices. Other states may have
similar requirements.
Lemon Laws
Our operations are also subject to consumer protection laws known as "Lemon
Laws." These laws typically require a manufacturer or dealer to replace a new
vehicle or accept it for a full refund within one year after
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initial purchase if the vehicle does not conform to the manufacturer's express
warranties and the dealer or manufacturer, after a reasonable number of
attempts, is unable to correct or repair the defect. Federal laws require
written disclosures to be provided on new vehicles, including anticipated gas
mileage and pricing information.
Import Restrictions
The imported automobiles we purchase are subject to U.S. customs duties.
In the ordinary course of our business, we may, from time to time, be subject to
claims for duties, penalties, liquidated damages, or other charges. Currently,
U.S. customs duties are generally assessed at 2.5% of the customs value of the
automobiles imported, as classified pursuant to the Harmonized Tariff Schedule
of the United States. See "Risk Factors -- Imported product restrictions and
foreign trade risk may impair our ability to sell foreign vehicles profitably"
on page 19.
Financing Laws
Our financing activities with customers are subject to federal truth-in-
lending, consumer leasing and equal credit opportunity regulations as well as
state and local motor vehicle finance laws, installment finance laws, usury laws
and other installment sales laws. Some states regulate finance fees that may be
paid as a result of vehicle sales.
Environmental Laws
Federal, state and local environmental regulations, including regulations
governing air and water quality, the clean-up of contaminated property and the
storage and disposal of gasoline, oil and other materials, also apply to us and
our dealership properties. As with automobile dealerships generally, and
service parts and body shop operations in particular, our business involves the
use, storage, handling and contracting for recycling or disposal of hazardous or
toxic substances or wastes and other environmentally sensitive materials. Our
business also involves the past and current operation and/or removal of
aboveground and underground storage tanks containing these substances or wastes.
Accordingly, we are subject to regulation by federal, state and local
authorities which establish health and environmental quality standards, provide
for liability related to those standards, and in some circumstances provide
penalties for violations of those standards. We are also subject to laws,
ordinances and regulations governing remediation of contamination at facilities
we operate or to which we send hazardous or toxic substances or wastes for
treatment, recycling or disposal.
We believe that we do not have any material environmental liabilities and
that compliance with environmental laws and regulations will not, individually
or in the aggregate, have a material adverse effect on our results of operations
or financial condition. Further, environmental laws and regulations are complex
and subject to frequent change. In addition, in connection with our
acquisitions, it is possible that we will assume or become subject to new or
unforeseen environmental costs or liabilities, some of which may be material.
Compliance with current or amended, or new or more stringent, laws or
regulations, stricter interpretations of existing laws or the future discovery
of environmental conditions subject us to additional expenditures and these
expenditures may be material. See "Risk Factors -- Governmental regulation and
environmental regulation compliance costs may have a material adverse effect on
our profits" on page 19.
We believe that we comply in all material respects with the laws affecting
our business. Possible penalties for violation of any of these laws include
revocation of our licenses and fines. In addition, many laws may give customers
a private cause of action.
Facilities
Our principal executive offices are located at 601 Brannan St., San
Francisco, California 94107, and our telephone number is (415) 284-0444. These
executive offices are located on the premises occupied by our downtown San
Francisco service center.
Our dealerships are generally located along major U.S. or interstate
highways. One of the principal factors we consider in evaluating an acquisition
candidate is its location. We prefer to acquire dealerships located along
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major thoroughfares, primarily interstate highways with ease of access, which
can be easily visited by prospective customers.
We lease over 35 properties that are utilized by our dealership operations,
generally under long term leases. There are six leases that will expire by
March 31, 2000. We intend to renew only three of these leases and we believe we
will be able to renew these leases on acceptable terms, but we may not be able
to do so. We do not intend to renew the other three leases that will expire by
March 31, 2000 because we intend to relocate these operations. We believe that
our facilities are adequate for our current needs. Certain of these leases are
with related parties. See "Certain Transactions" on page 75.
Under the terms of our franchise agreements with manufacturers, we must
maintain an appropriate appearance and design of our facilities and we are
restricted in our ability to relocate our dealerships. See "Business --
Relationships with Manufacturers" on page 58.
Employees
As of March 31, 1999, we employed 1,583 people, of whom approximately 166
were employed in executive and managerial positions, 410 were employed in non-
managerial sales positions, 781 were employed in non-managerial parts, service
and other positions and 226 were employed in administrative support positions.
We believe that many dealerships in the retail automobile industry have
difficulty in attracting and retaining qualified personnel for a number of
reasons, including the historical inability of dealerships to provide employees
with an equity interest in the profitability of the dealerships. We provide
certain executive officers, managers and other employees with stock options and
all employees with a stock purchase plan. We believe these types of equity
incentives are attractive to our existing and prospective employees. See "Risk
Factors -- The loss of key personnel and our limited management and personnel
resources could adversely affect our operations and growth" on page 19.
We believe that our relationship with our employees is good. Approximately
74 of our service technicians are represented by a labor union. Because of our
dependence on manufacturers, we may be affected by labor strikes, work slowdowns
and walkouts at a manufacturer's manufacturing facilities. See "Risk Factors --
Automobile manufacturers exercise significant control over our operations and we
are dependent on them to operate our business" on page 12.
Legal Proceedings and Insurance
From time to time, we are named in claims involving the manufacture of
automobiles, contractual disputes and other matters arising in the ordinary
course of our business. Currently, no legal proceedings are pending against or
involve us that, we believe, could reasonably be expected to have a material
adverse effect on our business, financial condition or results of operations.
Automobile dealerships generally require significant levels of insurance
covering a broad variety of risks because of their vehicle inventory and the
nature of their business. We have an umbrella policy as well as insurance on
our real property, comprehensive coverage for our vehicle inventory, general
liability insurance, employee dishonesty coverage and errors and omissions
insurance in connection with our vehicle sales and financing activities. We
believe that the amount of insurance coverage we maintain is typical for our
industry.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages as of the date of this
prospectus, are as follows:
<TABLE>
<CAPTION>
Director or Officer
Name Age Position Since
- ------------------------------- --- ------------------------------------------------ --------------------
<S> <C> <C> <C>
Thomas A. Price.................. 55 Chief Executive Officer, President and Director 1996
Donald V. Strough................ 62 Chairman and Director 1995
W. Bruce Bercovich............... 48 Secretary and Director 1995
Jean-Marc Chapus................. 39 Director 1997
H. Robert Heller................. 59 Director 1999
Charles R. Oglesby............... 52 Chief Operating Officer 1998
Debra L. Smithart................ 44 Chief Financial and Administrative Officer 1997
David J. Moeller................. 31 Vice President of Finance 1999
</TABLE>
Thomas A. Price has been our Chief Executive Officer, President and a
director since September 1996. From March 1976 to June 1997, Mr. Price owned
and operated nine vehicle dealerships. Mr. Price has worked in the automobile
industry since 1963 in various capacities including marketing and field
assignments at Ford Motor Company. Mr. Price is currently a member of the Lexus
National Dealer Advisory Board and he is a charter member of the J.D. Power
Superdealer Roundtable.
Donald V. Strough has been our chairman and a director since October 1995.
As chairman, Mr. Strough is an executive officer and is responsible for, with
Mr. Price, strategic planning and acquisitions. From May 1990 to October 1995,
Mr. Strough owned and operated six dealerships with nine franchises. From 1963
to May 1990, Mr. Strough owned and operated the Val Strough Dealership Group,
which, upon its sale in 1990, consisted of 12 separate automotive dealerships
and 19 new vehicle franchises. Mr. Strough is a former President of the
Northern California Chevrolet Dealers Association.
W. Bruce Bercovich has been our Secretary and a director since October
1995. Mr. Bercovich has been a partner in the California law firm Kay & Merkle
since 1977. Mr. Bercovich has extensive experience in the acquisition and sale
of automobile dealerships, having been involved in the acquisition or sale of
over 100 dealerships.
Jean-Marc Chapus has been a director since July 1997. Mr. Chapus has
served as a Managing Director for Trust Company of the West and President of
TCW/Crescent Mezzanine L.L.C., a private investment fund, since March 1995.
From December 1991 to March 1995, Mr. Chapus was a Managing Director of Crescent
Capital Corporation. Mr. Chapus serves as a director of Home Asset Management
Company and is a trustee of Starwood Hotels & Resorts.
H. Robert Heller was appointed as a director in January 1999. Mr. Heller
has served as a director of Fair, Isaac and Company since 1994, and as its
Executive Vice President since 1996. At Fair, Isaac and Company, he is
responsible for the corporate services group, including marketing information
services, human resources, corporate affairs and real estate. From 1991 to 1993,
Mr. Heller was President and Chief Executive Officer of Visa U.S.A. Mr. Heller
is a former Governor of the Federal Reserve System, and has had an extensive
career in banking, international finance, government service and education.
Charles R. Oglesby has been our Chief Operating Officer since September
1998. From March 1996 to September 1998, Mr. Oglesby was President of Union
City Toyota in Union City, Georgia. From May 1995 to
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March 1996, Mr. Oglesby was an independent consultant in the automotive
retailing industry. From February 1992 to May 1995, Mr. Oglesby was President
and CEO of the Superior Automotive Corporation, which consisted of 14
dealerships in Kansas City, Kansas.
Debra L. Smithart has been our Chief Financial and Administrative Officer
since October 1997. From June 1985 to October 1997, Ms. Smithart was Executive
Vice President and Chief Financial Officer of Brinker International, a major
restaurant operator and franchisor with over 1,000 locations and annual sales of
approximately $1.8 billion.
David J. Moeller has been our Vice President of Finance since April 1999.
From February 1998 to April 1999, Mr. Moeller was our Director of Corporate
Finance. From July 1997 to February 1998, Mr. Moeller was a manager in the
mergers and acquisitions department of KPMG, LLP. From June 1993 to July 1997,
Mr. Moeller held various positions in the audit department of KPMG, LLP.
Key Personnel
Steven S. Hallock has been a Regional Vice President since April 1999. Mr.
Hallock oversees our dealerships in Alameda, Contra Costa and Santa Clara
counties in the San Francisco/San Jose metropolitan areas. From October 1998 to
April 1999, Mr. Hallock was a Regional General Manager. From March 1997 to
October 1998, Mr. Hallock was our Chief Operating Officer. Prior to March 1997
Mr. Hallock was Chief Executive Officer of the HG Dealership Group for 15
years, which consisted of five dealerships in Concord, California.
James D. Evans has been a Regional Vice President since April 1999. Mr.
Evans oversees our dealerships in Marin, San Francisco and northern San Mateo
counties. From October 1997 to April 1999, Mr. Evans was a Regional General
Manager. From October 1994 to September 1997, Mr. Evans was Director of
Operations for United Auto Group in Danbury, Connecticut. Mr. Evans has over 12
years of experience in various capacities with vehicle dealerships.
John M. Driebe has been a Regional General Manager since July 1997. From
August 1989 to June 1997, Mr. Driebe was the general manager and vice president
of Lexus of Serramonte. Mr. Driebe has over 18 years of experience in sales and
management of vehicle dealerships.
Jerald L. Patterson, Jr. has been a Regional General Manager since
February 1997. He oversees our San Diego area dealerships. From September 1995
to January 1996, Mr. Patterson was a general manager with Bankston Lincoln
Mercury in Dallas, Texas. From February 1988 to August 1995, Mr. Patterson was a
general manager with Superior Automotive Corporation in Kansas City, Kansas.
Stephan R. Jones has been a Regional General Manager since April 1998. He
is responsible for our Los Angeles area dealerships. From January 1998 to March
1998, Mr. Jones was general manager of Beverly Hills BMW. From October 1992 to
December 1997, Mr. Jones was a general sales manager with Rusnak/Westlake in
Westlake Village, California.
Board of Directors
Our board currently consists of five members and upon completion of this
offering will be divided into three classes. Mr. Bercovich will be a Class I
director, Messrs. Heller and Chapus will be Class II directors and Messrs. Price
and Strough will be Class III directors. Class I directors serve until the
annual meeting of stockholders to be held in 1999, Class II directors serve
until the annual meeting to be held in 2000 and Class III directors serve until
the annual meeting to be held in 2001. We intend to elect two new independent
directors after the completion of this offering.
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Board Committees
Our board has two standing committees: an audit committee and a
compensation committee. The audit committee consists of Messrs. Bercovich,
Chapus and Heller. The compensation committee consists of Messrs. Bercovich,
Chapus and Heller. Set forth below is a summary of the principal functions of
each committee. Following this offering, we intend to appoint our two new
independent directors to the audit committee and the compensation committee.
Audit Committee
The audit committee recommends the appointment of our independent auditors,
determines the scope of the annual audit to be made, reviews the conclusions of
the auditors and reports the findings and recommendations thereof to the board,
reviews our auditors, the adequacy of our system of internal control and
procedures and the role of management in connection therewith, reviews
transactions between us and its officers, directors and principal stockholders,
and performs other functions and exercises such other powers as the board from
time to time may determine.
Compensation Committee
The compensation committee administers some of our compensation and
employee benefit plans, annually reviews and determines executive officer
compensation, including annual salaries, bonus performance goals, bonus plan
allocations, stock option grants and other benefits, direct and indirect, of all
our executive officers and other senior officers. The compensation committee
administers our 1997 stock option plan and our 1999 employee stock purchase
plan, makes recommendations for individual stock option grants to the full board
under the plans it administers, and periodically reviews our executive
compensation programs. The policy of the compensation committee's program for
executive officers is to link pay to business strategy and performance to
attract, retain and reward key executives while also providing performance
incentives and awarding equity-based compensation to align the long-term
interests of executive officers with those of our stockholders.
Director Compensation
Directors do not receive any cash compensation for their services as
members of the board of directors, although they are reimbursed for their
reasonable expenses. We expect to offer to non-employee directors stock options
for their service on our board.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of the board of directors. Mr. Price, our
President, Chief Executive Officer and a director, participated in deliberations
concerning executive compensation.
Employment Contracts and Change of Control Arrangements
In July 1997, we entered into an employment agreement with Mr. Price under
which he is employed as our President and Chief Executive Officer through July
1, 2002, which term may be extended upon the mutual agreement of the parties.
Mr. Price receives a base annual salary of $508,800 and an annual performance
bonus of up to 50% of his base salary. Mr. Price also receives all standard
benefits provided to executive management. The salary, bonus and benefits are
guaranteed unless he is terminated for cause, voluntarily terminates his
employment, dies or becomes disabled.
In July 1997, we entered into an employment agreement with Mr. Strough
under which he is employed as our Chairman through July 1, 2002, which term may
be extended upon the mutual agreement of the parties. Mr. Strough receives a
base annual salary of $424,000 and an annual performance bonus of up to 50% of
his base salary. Mr. Strough also receives all standard benefits provided to
executive management. The salary, bonus and
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benefits are guaranteed unless he is terminated for cause, voluntarily
terminates his employment, dies or becomes disabled.
In March 1997, we entered into an at-will employment agreement with Steven
S. Hallock. In October 1998, Mr. Hallock became a regional vice president, and
his employment agreement was amended to reflect his change in position. Mr.
Hallock receives a base annual salary of $300,000 and an annual performance
bonus. Mr. Hallock also receives all standard benefits provided to senior
management. Mr. Hallock was granted options to purchase 280,000 shares of common
stock at a price of $0.92 per share under our 1997 stock option plan. These
options vest monthly from the date of grant over a 60 month period. If Mr.
Hallock terminates his employment agreement for good reason following a change
of control, his options will vest immediately. In addition, Mr. Hallock received
fully vested options to acquire up to 100,000 shares of common stock upon our
acquisition of the Concord Toyota dealership. The exercise price of these
options is $2.00. If Mr. Hallock terminates his employment for good reason
following a change of control or is terminated by us other than for cause, he is
entitled to receive continued salary payments for a period of one year plus an
amount equal to the average of his previous performance bonuses and his
remaining unvested options will vest immediately. This amount will be paid in
twelve equal monthly installments.
In March 1999, we entered into an at-will employment agreement with Ms.
Smithart. Ms. Smithart receives a base annual salary of $300,000, and an annual
performance bonus of up to 50% of her base salary. Ms. Smithart is entitled to
all standard benefits provided to executive management. Ms. Smithart was
granted options to purchase 200,000 shares of common stock at a price of $4.00
per share under our 1997 Stock Option Plan. These options vest monthly from the
date of grant over a 48 month period. If Ms. Smithart terminates her employment
agreement for good reason following a change of control, her options will vest
immediately, and she is entitled to receive continued salary payments for a
period of one year plus an amount equal to the average of her previous
performance bonuses. If Ms. Smithart is terminated for cause, she will not be
entitled to any compensation or benefits other than those already earned. If
terminated for other than cause, Ms. Smithart is entitled to receive continued
salary payments for a period of one year and an amount equal to the average of
her previous performance bonuses.
In March 1999, we entered into an at-will employment agreement with Charles
R. Oglesby. Mr. Oglesby receives a base annual salary of $425,000, and an
annual performance bonus of up to 60% of his base salary. Mr. Oglesby is
entitled to all standard benefits provided to executive management. Mr. Oglesby
was granted options to purchase 300,000 shares of common stock at a price of
$4.00 per share under our 1997 Stock Option Plan. These options vest monthly
from the date of grant over a 60 month period. If Mr. Oglesby terminates his
employment agreement for good reason following a change of control, his options
will vest immediately, and he is entitled to receive continued salary payments
for a period of one year plus an amount equal to the average of his previous
performance bonuses. If Mr. Oglesby is terminated for cause, he will not be
entitled to any compensation or benefits other than those already earned. If
terminated for other than cause, Mr. Oglesby is entitled to receive continued
salary payments for a period of one year and an amount equal to the average of
his previous performance bonuses.
Executive Compensation
The following table sets forth information concerning the compensation paid
by us during the fiscal years ended December 31, 1997 and December 31, 1998 to
our Chief Executive Officer and our four other most highly paid executive
officers.
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Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------- ---------------------
Name and Other Annual Securities Underlying
Principal Position Year Salary Bonus Compensation(a) Options
------------------ ---- ------ ----- --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Thomas A. Price
President and Chief Executive Officer...... 1998 $508,800 $127,200(c) $14,400 --
1997 470,500(b) -- 9,885 --
Donald V. Strough
Chairman................................... 1998 424,000 106,000(c) 7,200 --
1997 108,000 -- -- --
Charles R. Oglesby
Chief Operating Officer.................... 1998(d) 141,667 85,000(e) 47,301 306,667
Debra L. Smithart
Chief Financial and Administrative Officer. 1998 300,000 142,500(c) 17,072 --
1997 50,000 18,750(f) 1,100 200,000
Steven S. Hallock
Regional Vice President.................... 1998 389,000 275,000(c) 8,900 100,000
1997 333,000 620,000(g) 5,000 280,000
David J. Moeller
Vice President of Finance.................. 1998 105,000 57,300(c) -- 25,000
</TABLE>
- --------------------------------
(a) Consists of car allowances and relocation amounts.
(b) Includes $230,500 paid to Mr. Price prior to the acquisition of the former
Tom Price dealerships.
(c) Consists of accrued bonus payments unpaid as of December 31, 1998.
(d) Mr. Oglesby joined us in September 1998 replacing Mr. Hallock as our Chief
Operating Officer.
(e) Consists of $85,000 of an accrued guaranteed bonus payment unpaid as of
December 31, 1998.
(f) Consists of $18,750 of an accrued guaranteed bonus payments paid in 1998.
(g) Includes a one-time sign-on bonus of $500,000 and an accrued guaranteed
bonus payment paid in 1998.
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<PAGE>
The following table provides information regarding stock option grants made
during 1998 to the persons named in the Summary Compensation Table:
Option Grants in 1998*
<TABLE>
<CAPTION>
% of Total Options
Granted to Value at Assumed Annual Rates
Options Granted Employees in Exercise Price of Stock Price Appreciation for
Name (Shares)(a) Fiscal Year(b) per Share(a) Expiration Date(c) Option Term(d)
- -----------------------------------------------------------------------------------------------------------------------------------
5% 10%
------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Oglesby 306,667(e) 60.4 $4.00 9/1/08 (f) $364,162
Steven S. Hallock 100,000(g) 19.7 2.00 10/1/08 $125,779 318,748
David J. Moeller 25,000(e) 4.9 4.00 2/9/08 (f) 16,718
</TABLE>
__________________
(*) No stock appreciation rights were granted to executive officers for the
fiscal year ended December 31, 1998.
(a) All options granted in 1998 were granted under our 1997 Stock Option Plan.
Under the 1997 option plan, the board of directors retains discretion to
modify the terms, including the price, of outstanding options. See also
"Executive Compensation Employment Contracts and Change of Control
Arrangements" on page 68.
(b) We granted options to purchase 508,000 shares of common stock for the
fiscal year ended December 31, 1998.
(c) Options may terminate before their expiration date upon the termination of
optionee's status as an employee or upon the optionee's death or
disability.
(d) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
SEC and do not represent our estimate or projection of the future common
stock price. This table does not take into account any appreciation in the
price of the common stock to date.
(e) The options vest ratably over 60 months from the date of grant.
(f) The exercise price of the options exceeded the fair market value of the
common stock on the date of issuance. At the assumed appreciation rate of
5%, there is no potential positive realizable value of the options.
(g) These options are fully vested.
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<PAGE>
The persons named in the following table did not exercise options during
1998. The following table provides information concerning the value of
unexercised options held as of December 31, 1998, by the executive officers
named in the Summary Compensation Table above:
1998 Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The-Money Options
Unexercised Options at 12/31/98 at 12/31/98($)
---------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles R. Oglesby 20,444 286,223 (a) (a)
Steven S. Hallock 184,000 196,000 $149,600 $274,400
Debra L. Smithart 46,667 153,333 (a) (a)
David J. Moeller -- 25,000 (a) (a)
</TABLE>
- -----------------------
(a) These options have no positive realizable value based on a fair market
value as determined by the board of directors of $2.32 per share, as of
December 31, 1998, minus an exercise price of $4.00 per share.
1997 Stock Option Plan
Our 1997 Stock Option Plan was adopted by the board of directors on July
10, 1997 and subsequently approved by the stockholders. The 1997 option plan
provides for the grant of incentive stock options to employees, within the
meaning of Section 422 of the Internal Revenue Code, and for the grant of
nonstatutory stock options to employees, non-employee directors and consultants.
In April 1999, the amount of shares reserved for issuance under the
1997 option plan was increased to 3,000,000. As of March 31, 1999, no options
were exercised, options to purchase of a total of 1,447,847 shares at a weighted
average exercise price of $2.78 per share were outstanding, and 1,552,153 shares
were available for future option grants.
The 1997 option plan is administered by compensation committee of the board
of directors. Subject to the provisions of the 1997 option plan, the
compensation committee has the authority to select the persons to whom options
are granted and determine the terms of each option, including:
. the number of shares of common stock covered by the option;
. when the option becomes exercisable;
. the per share option exercise price, which, in the case of incentive
stock options, must be at least 100% of the fair market value of a
share of common stock as of the date of grant, in the case of options
granted to persons who own 10% or more of our total combined voting
power (of our parent or subsidiary) must be at least 110% of the fair
market value of a share of common stock as of the date of grant, and,
in the case of nonstatutory stock options, must be at least 85% of the
fair market value of a share of common stock as of the date of grant;
and
. the duration of the option (which may not exceed ten years, or five
years for incentive stock options granted to 10% shareholders).
Generally, options granted under the 1997 option plan vest over four years,
and are non-transferable other than by will or the laws of descent and
distribution. In the event of some types of changes in control, the acquiring
or successor corporation may assume or substitute for options outstanding under
the 1997 option plan, or these options shall terminate. Options granted to our
officers provide for partial acceleration upon a change in control.
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<PAGE>
1999 Employee Stock Purchase Plan
On April 7, 1999, the board of directors adopted our 1999 Employee Stock
Purchase Plan. A total of shares of common stock have been
reserved for issuance under the purchase plan, none of which have been issued as
of the effective date of this offering. In addition, the purchase plan
authorizes an annual increase of in the number of shares of common
stock issuable under the plan, beginning January 1, 2000. The purchase plan,
which is intended to qualify under Section 423 of the Internal Revenue Code, is
administered by the compensation committee of our board of directors. Our
employees, including our officers and directors who are also employees, are
eligible to participate in the purchase plan if these persons are customarily
employed for more than a specific number of hours per week and more than five
months per year. The purchase plan will be implemented by consecutive offering
periods generally six months in duration. The first offering period under the
purchase plan will commence on the effective date of this offering. Shares will
be purchased on the last day of each offering period. The board of directors
may change the dates or duration of one or more offering periods, but no
offering period may exceed 27 months. The purchase plan permits eligible
employees to purchase common stock through payroll deductions at a price no less
than 85% of the lower of the fair market value of the common stock on the first
day of the offering period or the purchase date. Participants generally may not
purchase more than a specified number of shares on any purchase date or stock
having a value, measured at the beginning of the offering period, greater than
$25,000 in any calendar year. In the event of a change in control, the board of
directors may accelerate the purchase date of the then current purchase
period(s) to a date prior to the change in control, or the acquiring corporation
may assume or replace the outstanding purchase rights under the purchase plan.
401(k) Plan
We provide a tax-qualified employee savings and retirement 401(k) plan
which covers our eligible employees. Under our 401(k) plan, employees may elect
to reduce their current annual compensation up to the lesser of 15% or the
statutorily prescribed limit ($10,000 in calendar year(s) 1998 and 1999), and
have the amount of those reductions ("elective deferrals") contributed to the
401(k) plan. The 401(k) plan provides for discretionary matching contributions
by us to those who do not receive a discretionary profit sharing contribution in
an amount not to exceed 25% of each participant's first $2,400 of elective
deferrals. The 401(k) plan is intended to qualify under Sections 401(a) and
401(k) of the Internal Revenue Code, so that contributions by employees or by us
to the 401(k) plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan, and so that contributions will
be deductible by us when made. The trustee of the 401(k) plan invests the
assets of the 401(k) plan in the various investment options as directed by the
participants.
Limitation of Liability and Indemnification
Under the Delaware General Corporation Law, we have adopted provisions in
our Amended and Restated Certificate of Incorporation which eliminate the
personal liability of our directors for a breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law regarding
unlawful stock repurchase and dividend payment; or
. for any transaction from which the director derived an improper
personal benefit.
Our charter also allows us to indemnify our officers, directors and other
agents to the full extent permitted by Delaware law. We intend to enter into
indemnification agreements with each of our directors and officers which will
give them additional contractual reassurances regarding the scope of
indemnification and which may provide additional procedural protection. The
indemnification agreements may require actions including:
73
<PAGE>
. indemnifying officers and directors against liabilities that may arise
because of their status as officers or directors;
. advancing expenses, as incurred, to officers and directors in
connection with a legal proceeding, subject to very limited
exceptions; or
. obtaining directors' and officers' insurance.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees where indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
74
<PAGE>
CERTAIN TRANSACTIONS
The following are descriptions of various transactions we have entered into
with our officers or directors. We did not obtain appraisals or other opinions
from independent parties in connection with these transactions. We believe that
these transactions have been entered into at fair market value, on terms similar
to those that we would be able to obtain from unrelated third parties.
Organization
Thomas A. Price, our President, Chief Executive Officer and a director,
transferred to us his holdings in the Tom Price dealership group on July 11,
1997. Mr. Price received 3,991,600 shares of our Class A Common Stock and $4.4
million.
T. Al Babbington, our Vice President of Marketing and Strategic Planning,
sold his interest in the former Tom Price dealerships to us on July 11, 1997.
Mr. Babbington received 626,000 shares of our Class A Common Stock and $165,000.
Fred Cziska, our Vice President of Parts, Service and Purchasing, sold his
interest in the former Tom Price dealerships to us on July 11, 1997. Mr. Cziska
received 704,400 shares of our Class A Common Stock and $675,000.
Donald V. Strough, our Chairman, sold his interest in a Honda dealership
located in Concord, California to us on July 11, 1997. Mr. Strough received
1,330,000 shares of our Class A Common Stock. In connection with this
transaction, we recorded a receivable from Mr. Strough in the amount of
$470,000, which was subsequently repaid.
Steven S. Hallock, our Regional Vice President for the San Francisco East
Bay region, sold his interest in a Nissan dealership located in Concord,
California to us on July 11, 1997. Mr. Hallock received $2.9 million.
On April 23, 1997, we sold 457,000 shares of our Class A Common Stock to
the Price Trust u/t/d 10/5/88 for $457, or $0.001 per share. Mr. Price is a
trustee of this trust.
On March 31, 1997, we sold 200,000 shares of our Class A Common Stock to
our Regional Vice President Steven S. Hallock for $200, or $0.001 per share.
The Tom Price dealership group was compensated for certain services
provided to us prior to the initial combination of our dealerships. We paid
approximately $800,000 for these services performed during fiscal 1997. Mr.
Price was President of the Tom Price dealership group.
Leases
In 1997, Rosewood Village Associates, a partnership in which Donald V.
Strough serves as general partner and holds an 85% equity interest, acquired
from a third party, certain real property which is leased to us. In addition,
Rosewood Village Associates acquired approximately $0.8 million of certain
leasehold improvements from us. Rosewood Village Associates leases this
property, the leasehold improvements, and one other dealership property to us.
Annual obligations on these leases totaled approximately $900,000 in 1998.
In 1997, we leased one dealership property and one dealership service
repair property under agreements from the Price Trust. In 1998, we leased an
additional dealership property under an agreement with the Price Trust. In
1998, annual obligations on these leases totaled approximately $2,532,000. Mr.
Price and his spouse are the sole beneficiaries of the Price Trust.
We lease one dealership property from Bay Automotive Properties LLC.
Annual obligations on this lease totaled approximately $576,000 in 1998. Thomas
A. Price and Donald V. Strough are both members of Bay Automotive, with equal
interests.
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<PAGE>
We lease two dealership properties from the Strough Revocable Trust of
1983. In 1998, annual obligations on these leases totaled approximately
$638,000. Mr. Strough and his spouse are co-trustees of this trust.
The Price Trust owns the real property at 601 Brannan Street, San
Francisco, California, where our executive offices and downtown San Francisco
service and repair center are located. We have made leasehold improvements with
an approximate value of $2,400,000 to this property. These leasehold
improvements were sold to Mr. Price for a sale price equal to our cost, then
leased back to us through a ground lease. Mr. Price and his spouse are the sole
beneficiaries of the Price Trust. Annual obligations on this lease totaled
$540,000 in 1998.
Other Related Party Transactions
W. Bruce Bercovich, our Secretary and a director, is a partner in the San
Francisco, California law firm of Kay & Merkle. Kay & Merkle received
approximately $360,000 from us as compensation for legal services performed
during fiscal 1998, and approximately $360,000 for 1997.
In June 1998, Donald V. Strough loaned us $4,000,000 to assist in the
financing of the acquisition of our Burgess Honda dealership. We pay Mr.
Strough interest determined at prime plus 62.5 basis points, or 8.375% as of
December 31, 1998 on this amount in accordance with the terms of a letter
agreement between Mr. Strough and us. In connection with Mr. Strough's loan to
us, he was paid a one-time loan origination fee of $120,000. We intend to use
part of the proceeds of this offering to repay this loan in full.
In March 1999, Thomas A Price loaned us $1,000,000 to assist in the
financing of the acquisition of our Ritchey Fipp Chevrolet dealership. We pay
Mr. Price interest at a rate equal to our senior credit facilities. We intend
to use part of the proceeds of this offering to repay this loan in full.
Charter Provisions
Upon consummation of this offering, our charter will require that
transactions between us and our affiliates must be no less favorable to us than
would be an identical arm's-length transaction with an unrelated third party.
In addition, we may not enter into transactions with our affiliates involving
aggregate payments in excess of $500,000 unless (1) the transaction has been
approved by a majority of the members of our board of directors and a majority
of our independent directors, or (2) we have received an opinion as to the
financial fairness of the transaction from an investment banking or appraisal
firm of national standing.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, immediately before this offering and
immediately after this offering, the ownership of our voting stock, including
optioned shares, assuming the conversion of all of the outstanding shares of our
common stock by:
. each of our directors;
. each of our executive officers, including our chief executive officer;
. all of our directors and executive officers as a group;
. each stockholder who is known to us to beneficially own five percent
or more of our outstanding voting stock; and
. other stockholders.
<TABLE>
<CAPTION>
Before Offering After Offering
-------------------------- -----------------------------
Number of
Shares of Number of Number of Shares
Common Stock Shares of Common Stock
Beneficial Owner(a) Owned Percent(b) Offered Owned Percent
- -------------------- ------------ ----------- ---------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
W. Bruce Bercovich(c) 1,005,000 6.7%
Jean-Marc Chapus(d) 3,532,000 23.5%
Thomas A. Price(e) 5,722,681 38.0%
Donald V. Strough(f) 1,455,000 9.7%
Charles R. Oglesby(g) 40,889 *
Debra Smithart(h) 75,000 *
David J. Moeller(i) 6,250 *
Executive officers and directors 11,836,820 78.7%
as a group (seven persons)(j)
Other 5% Stockholders
T. Al Babbington(k) 745,847 5.0%
Fred Cziska(l) 837,057 5.6%
The TCW Group, Inc.(d) 3,532,000 23.5%
Other Stockholders
Douglas Y. Bech 130,000 *
Ralph McBride 15,000 *
Thomas R. Powers 130,000 *
Jack R. Tompkins 90,000 *
Brian Tucker 50,000 *
Bert Wollen 175,000 1.2%
</TABLE>
- ----------------------
* Less than 1%.
(a) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.
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<PAGE>
(b) The percentages listed were calculated on the basis of 15,046,044 shares
outstanding. Shares of common stock underlying options exercisable within
60 days of May 31, 1999 are deemed to be outstanding for purposes of
calculating the beneficial ownership of the holders of options or shares of
common stock.
(c) Includes 590,000 shares of common stock held by Embarcadero Automotive,
LLC, 290,000 shares held by BB Investments, and 125,000 shares held by
Geary Plaza Irrevocable Trust. Mr. Bercovich may be deemed to be a
beneficial owner of these shares because he is a managing member of
Embarcadero Automotive, LLC, a general partner of BB Investments, and a
trustee of Geary Plaza Irrevocable Trust. Mr. Bercovich disclaims
beneficial ownership of all shares held by Geary Plaza Irrevocable Trust.
Alexandra Strough, daughter of Chairman Donald V. Strough, is the sole
beneficiary of Geary Plaza Irrevocable Trust.
(d) Number of shares which may be deemed beneficially owned includes shares
held by various trusts and investment partnerships related to or managed by
affiliates of the TCW Group, Inc., of which Mr. Chapus is a managing
director. Mr. Chapus disclaims beneficial ownership of all shares held by
these trusts and investment partnerships. The address of The TCW Group,
Inc. is 11100 Santa Monica Blvd., Suite 2000, Los Angeles, CA 94025.
(e) Includes 5,722,681 shares of common stock held by the Price Trust. Mr.
Price may be deemed to be a beneficial owner of these shares because he is
a trustee of this trust.
(f) Includes 1,455,000 shares owned by the Strough Revocable Trust of 1983, as
amended. Mr. Strough and his wife are co-trustees of this trust.
(g) Includes 40,889 shares which may be acquired by exercising options on or
before May 31, 1999.
(h) Includes 75,000 shares which may be acquired by exercising options on or
before May 31, 1999.
(i) Includes 6,250 shares which may be acquired by exercising options on or
before May 31, 1999.
(j) See footnotes (c) through (i). Includes 122,139 shares which may be
acquired by exercising options on or before May 31, 1999.
(k) Mr. Babbington is our vice president of marketing and strategic planning.
Includes 18,333 shares which may be acquired by exercising options on or
before May 31, 1999.
(l) Mr. Cziska is our vice president of parts, service and purchasing.
Includes 18,333 shares which may be acquired by exercising options on or
before May 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering and our application of the proceeds, our
capital stock will consist of shares of common stock and no shares of preferred
stock. We assume that the underwriters' over-allotment option will not be
exercised. The following summary of certain provisions of the common stock and
the preferred stock does not purport to be complete and is subject to, and
qualified in its entirety by our charter and bylaws and by applicable law.
Common Stock
After completion of this offering, we will have authorized
million shares of common stock with a par value of $0.00001 per share.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock will
be entitled to the following:
Dividends
Holders of common stock are entitled to receive dividends out of assets
legally available for the payment of dividends at the times and in the amounts
as the board of directors from time to time may determine.
Voting
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. Cumulative voting for the election
of directors is not authorized by our charter, which means that the holders of a
majority of the shares voted can elect all of the directors then standing for
election.
Preemptive Rights, Conversion and Redemption
The common stock is not entitled to preemptive rights and is not subject to
conversion or redemption.
Liquidation, Dissolution and Winding-up
Upon our liquidation, dissolution or winding-up, the holders of common
stock will be entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any preferred stock.
We are prohibited from paying dividends on our common stock so long as any
shares of Cumulative Redeemable Preferred Stock, or CRPS, are outstanding.
Under certain circumstances we are prohibited from paying dividends on our
common stock under the terms of our financing agreements.
Preferred Stock
Upon completion of this offering, we will be authorized to issue up to
shares of preferred stock with par value of $0.00001 per share. Our
board of directors is authorized, without action by the stockholders, to
designate and issue preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions on these shares.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things, under some circumstances, have the
effect of delaying, deferring or preventing a change in control.
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<PAGE>
On July 11, 1997, we issued 3,500 shares of CRPS, due June 30, 2005, and
500 shares of Redeemable Preferred Stock, or RPS, due June 30, 2005. As of
December 31, 1998, 3,500 CRPS and 500 RPS were issued and outstanding. We
intend to use part of the proceeds of this offering to redeem all outstanding
shares of CRPS and RPS.
Stock Options
We approved the 1997 Stock Option Plan under which an aggregate of
3,000,000 shares of common stock are currently reserved for issuance to our
employees, non-employee directors and consultants. The 1997 option plan permits
awards are either incentive or nonstatutory stock options. The exercise price
of the options, in the case of incentive stock options, must be at least 100% of
the fair market value of a share of common stock as of the date of grant. The
exercise price of options granted to 10% shareholders must be at least 110% of
the fair market value of a share of common stock as of the date of grant. The
exercise price of nonstatutory stock options must be at least 85% of the fair
market value of a share of common stock as of the date of grant. As of December
31, 1998, we granted options to employees covering an aggregate of 1,449,767
shares of common stock. The options vest over a five year period, and expire if
unexercised ten years from the date of grant.
During 1998, we granted options to purchase 408,000 shares of common stock
at an exercise price of $4.00 per share and 100,000 shares of common stock at an
exercise price of $2.00 per share. The fair value of each option grant in 1998
was estimated based on the date of grant using the Black-Scholes option
valuation model with expected volatility of 50%, risk-free interest of 4.75%,
and an expected option life of 5.0 years.
Under the option agreements, each option holder has agreed not to sell,
contract to sell, or otherwise dispose of any of the shares of common stock
issuable upon exercise of outstanding options or enter into any agreement that
transfers in whole or in part the economic consequence of the ownership of the
common stock without our consent for a period of 180 days after the date of this
prospectus. We have agreed not to consent without Merrill Lynch's approval.
Warrants
In 1997 and 1998 we issued warrants to acquire 371,700 shares of common
stock. Of these, warrants to acquire 331,700 shares are exercisable at $0.92
per share and warrants to acquire 40,000 shares are exercisable at $2.00 per
share. Our warrants are exercisable until either five or ten years from the
date of issuance. Holders of warrants to acquire 351,700 shares have entered
into lock-up agreements under which they have agreed not to sell, contract to
sell, or otherwise dispose of any of their shares of common stock or enter into
any agreement that transfers in whole or in part the economic consequences of
the ownership of the common stock without the consent of Merrill Lynch for a
period of 180 days after the date of this prospectus.
Registration Rights of Certain Holders
Following this offering, holders of approximately 14,648,119 shares of our
common stock are entitled to require us to register their shares for sale in the
public market. According to the agreements in which we granted these
registration rights, and subject to limitations in each of the agreements, one
holder may require us to register its shares on up to three separate occasions.
These registrations must be at least 12 months apart, and must offer at least
$5.0 million of the holder's and its affiliates' securities in each
registration.
Delaware Law, Charter, By-law and Certain Franchise Agreement Provisions
Certain provisions of Delaware Law and of our charter and by-laws,
summarized in the following paragraphs, may be considered to have an
antitakeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
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<PAGE>
Delaware Antitakeover Law
We are subject to the provisions of Delaware law, including Section 203.
In general, Section 203 prohibits a public Delaware corporation from engaging in
a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which such person became an
interested stockholder unless: (a) prior to such date, the board approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or (b) upon becoming an
interested stockholder, the stockholder then owned at least 85% of the voting
stock; or (c) subsequent to such date, the business combination is approved by
both the board and by holders of at least 66 2/3% of the corporation's
outstanding voting stock, excluding shares owned by the interested stockholder.
For these purposes, the term "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder." An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of the
corporation's voting stock. Although Section 203 permits a corporation to elect
not to be governed by its provisions, we have not to date made this election.
Classified Board of Directors
Upon completion of this offering, our by-laws will provide for the board of
directors to be divided into three classes of directors serving staggered three-
year terms. As a result, approximately one-third of the board of directors will
be elected each year. Classification of the board of directors expands the time
required to change the composition of a majority of directors and may tend to
discourage a takeover bid for us. Moreover, under Delaware law, in the case of
a corporation having a classified board of directors, the stockholders may
remove a director only for cause. This provision, when coupled with the
provision of the by-laws authorizing only the board of directors to fill vacant
directorships, will preclude our stockholders from removing incumbent directors
without cause and simultaneously gaining control of the board of directors by
filing the vacancies with their own nominees. See "Management" on page 66.
Special Meetings of Stockholders
Upon completion of this offering, our by-laws will provide that special
meetings of stockholders may be called only by the chairman or by the secretary
or any assistant secretary at the request in writing of a majority of our board
of directors. The by-laws will also provide that no action required to be taken
or that may be taken at any annual or special meeting of stockholders may be
taken without a meeting; the powers of stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied. These
provisions may make it more difficult for stockholders to take action opposed by
the board of directors.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of our common stock. We began
filing periodic reports under the Exchange Act beginning with the filing of our
Annual Report on Form 10-K for the year ended December 31, 1997. We were
obligated to begin making these filings when we exceeded 300 registered holders
of our common stock and had at least $10 million in assets as of December 31,
1997.
Upon completion of this offering, we will have outstanding
shares of common stock, assuming the issuance of
shares of common stock in this offering and no exercise of options after March
31, 1999. Of these shares, the shares sold in this offering
will be freely transferable and may be resold without restriction or further
registration under the Securities Act. However, if shares are purchased by
"affiliates," as that term is defined in Rule 144 under the Securities Act,
sales of shares by those affiliates would be subject to limitations and
restrictions described below.
In addition, the following shares of common stock may be issued by us or
become available for public sale:
<TABLE>
<CAPTION>
Number of Shares of
Common Stock Manner of Holding and/or Issuance
---------------------------------
<S> <C>
14,879,934/(a)/ Sold by us in reliance on exemptions from the
registration requirements of the Securities Act.
166,110 Freely tradable.
371,700/(b)/ Issuable upon exercise of outstanding warrants.
100,000/(c)/ Issuable upon conversion of outstanding convertible
promissory notes.
1,447,847/(d)/ Issuable upon exercise of options granted under our
1997 option plan. All of these shares are registered
for sale under the Securities Act.
</TABLE>
- -------------------------------
(a) All of these shares are "restricted securities" as defined in Rule 144
under the Securities Act and may be resold in compliance with Rule 144.
Holders of 14,648,119 of these shares have registration rights. Of these
shares, are subject to lock-up agreements described below.
(b) Of the 371,700 shares issuable upon exercise of these warrants, 351,700
shares are subject to lock-up agreements described below.
(c) The shares issuable upon conversion of the convertible notes will be
"restricted securities" as defined in Rule 144 under the Securities Act and
may be resold in compliance with Rule 144.
(d) Shares issuable upon exercise of options granted under the 1997 option plan
will be subject to restrictions set forth in individual stock option
agreements which prevent the sale of these shares without our consent for a
period from the date the registration statement of which this prospectus is
a part was originally filed with the SEC to the date which is 180 days
after the date of this prospectus. We have agreed with Merrill Lynch
not to waive these restrictions without their consent. An additional
1,552,153 shares are available for grant under the stock option plan.
Rule 144
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year may, under certain circumstances, resell within any three-
month period, such number of shares as does not exceed the greater of one
percent of the then-outstanding shares of common stock or the average weekly
trading volume of common stock during the four calendar weeks prior to such
resale. Rule 144 also permits, under certain circumstances, the resale of
shares without any quantity limitation by a person who has satisfied a two-year
holding period and who is not, and has not been for the
82
<PAGE>
preceding three months, an affiliate of ours. In addition, holding periods of
successive non-affiliate owners are aggregated for purposes of determining
compliance with these one- and two-year holding period requirements.
The availability of shares for sale or actual sales under Rule 144 or
pursuant to registration rights and the perception that such shares may be sold
may have a material adverse effect on the market price of the common stock.
Sales under Rule 144 or pursuant to registration rights also could impair our
ability to market additional equity securities.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144.
Lock-Up Agreements
Holders of 14,946,619 shares of common stock that are outstanding or
issuable upon the exercise of outstanding warrants, including our officers and
directors, have agreed not to, among other things, sell, contract to sell, or
otherwise dispose of any of their shares of common stock without the consent of
Merrill Lynch from the date the registration statement of which this
prospectus is a part was originally filed with the SEC to the date which is 180
days after the date of this prospectus. See "Underwriting - No Sales of Similar
Securities" on page 85. In addition, we have agreed not to grant waivers to the
lock-up contained in the stock option agreements without the prior written
consent of Merrill Lynch.
83
<PAGE>
UNDERWRITING
General
We intend to offer our common stock in the United States and Canada through
a number of underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and BancBoston Robertson
Stephens, Inc. are acting as representatives of each of the underwriters named
below. Subject to the terms and conditions set forth in a purchase agreement
among our company, the selling stockholders and the underwriters, we and the
selling stockholders have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from our company
and the selling stockholders, the number of shares of common stock set forth
opposite its name below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation.....
BancBoston Robertson Stephens, Inc......................
----------
Total.........................................
==========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in that agreement, to purchase all of the
shares of common stock being sold under the terms of such agreement if any of
the shares of common stock being sold under the terms of that agreement are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against some liabilities, including some liabilities under the Securities Act,
or to contribute to payments the underwriters may be required to make in respect
of those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us and the selling stockholders that the
underwriters propose initially to offer the shares of common stock to the public
at the initial public offering price set forth on the cover page of this
prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of common stock. The underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of common
stock to certain other dealers. After the initial public offering, the public
offering price, concession and discount may change.
84
<PAGE>
The following table shows the per share and total public offering price,
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to us and the selling
stockholders. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Without Over- With Over-
Allotment Allotment
Per Share Option Option
--------- ------------ ----------
<S> <C> <C> <C>
Public offering price....................................... $ $ $
Underwriting discount....................................... $ $ $
Proceeds, before expenses, to FirstAmerica Automotive....... $ $ $
Proceeds, before expenses, to the selling stockholders..... $ $ $
</TABLE>
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $ and are payable by us.
Over-Allotment Option
We granted an option to the underwriters, exercisable for 30 days after the
date of this prospectus, to purchase up to an aggregate of additional
shares of our common stock at the public offering price set forth on the cover
page of this prospectus, less the underwriting discount. The underwriters may
exercise this option solely to cover over-allotments, if any, made on the sale
of our common stock offered hereby. To the extent that the underwriters
exercise this option, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of our common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares offered hereby to be sold to some
of our directors, officers, employees, distributors, dealers, business
associates and related persons. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
those persons purchase the reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
No Sales of Similar Securities
We and our executive officers and directors and all of the selling
stockholders and holders of _____ additional shares and warrants have agreed,
with certain exceptions, without the prior written consent of Merrill Lynch on
behalf of the underwriters for a period (1) from the date the registration
statement is initially filed with the SEC for existing stockholders and (2) from
the date of the prospectus for the other persons, in each case to the date 180
days after the date of this prospectus, not to directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into
or exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the
agreement or with respect to which the person executing the agreement
later acquires the power of disposition, or file, our cause or request
to be filed, a registration statement under the Securities Act relating
to any shares of our common stock or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise.
85
<PAGE>
New York Stock Exchange Listing
We intend to file an application to list our common stock on the NYSE under
the symbol "FAA." In order to meet the requirements for listing of our common
stock on that exchange, the underwriters have undertaken to sell lots of 100 or
more shares to a minimum of 2,000 beneficial owners.
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us, the selling stockholders and the representatives and the lead managers. The
factors to be considered in determining the initial public offering price, in
addition to prevailing market conditions, are the valuation multiples of
publicly traded companies that the representatives and the lead managers believe
to be comparable to us, certain of our financial information, the history of,
and the prospects for, our company and the industry in which we compete, and an
assessment of our management, its past and present operations, the prospects
for, and timing of, future revenues of our company, the present state of our
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to ours.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market subsequent
to this offering at or above the initial public offering price.
The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered in this offering.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase our common stock. As an exception to these rules, the
representatives are permitted to engage in transactions that stabilize the price
of our common stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with this offering, i.e., if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock in
the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of our common stock in the open market to reduce the underwriters' short
position or to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group members
who sold those shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither our company nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
our company nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
86
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Gray Cary Ware & Freidenrich llp, Palo Alto, California. Various
legal matters relating to our common stock will be passed upon for the
underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York.
EXPERTS
The financial statements and schedule of FirstAmerica Automotive, Inc. as
of December 31, 1998 and December 31, 1997 and for each of the years in the
three-year period ended December 31, 1998 have been included herein in the
registration statement in reliance upon the report of KPMG, LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Beverly Hills BMW, Ltd., (dba Beverly Hills,
BMW) as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997; the financial statements of
California Carriage Ltd., (dba Concord Honda Pontiac) as of December 31, 1996;
the financial statements of Steven A. Halleck Enterprises Inc., (dba Concord
Nissan) as of December 31, 1996 and the financial statements of Valley
Automotive Center as of December 31, 1996 and 1995 all appearing in this
Prospectus and Registration Statement have been audited by KPMG, LLP,
independent certified public accountants, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance on such report given
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports with the SEC. These reports
and information relate to our business, financial condition and other matters.
You may read and copy these reports, proxy statements and other information at
the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may obtain information on the operation of the
SEC's Public Reference Room in Washington, D.C. by calling the SEC at 1-800-SEC-
0330. Copies may be obtained from the SEC upon payment of the prescribed fees.
The SEC maintains an Internet Web site that contains reports, proxy and
information statements and other information regarding us and other registrants
that file electronically with the SEC. The address of the SEC's site is
http://www.sec.gov. This information may also be read and copied at the offices
of the NYSE at 20 Broad Street, New York, New York 10005.
This prospectus is a part of a registration statement on Form S-1 filed by
us with the SEC. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits thereto. Statements about
the contents of contracts or other documents contained in this prospectus or in
any other filing to which we refer you are not necessarily complete. You should
review the actual copy of these documents filed as an exhibit to the
registration statement or the other filing. Copies of the registration
statement and these exhibits may be obtained from the commission as indicated
above upon payment of the fees prescribed by the commission.
MANUFACTURERS' DISCLAIMER
No manufacturer (as defined in this prospectus) has been involved, directly
or indirectly, in the preparation of this prospectus or in the offering being
made hereby. No manufacturer has made any statements or representations in
connection with the offering or has provided any information or materials that
were used in connection with the offering, and no manufacturer has any
responsibility for the accuracy or completeness of this prospectus.
87
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FirstAmerica Automotive, Inc.:
We have audited the accompanying consolidated balance sheets of
FirstAmerica Automotive, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
FirstAmerica Automotive, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG, LLP
San Francisco, California
March 19, 1999
F-2
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Balance Sheets
As of December 31,
(In thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
- ---------------------------------------- --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents............. $ 2,191 $ 2,924
Contracts in transit.................. 13,567 9,454
Accounts receivable................... 18,460 11,061
Inventories........................... 90,947 78,607
Deferred income taxes................. 853 618
Deposits, prepaid expenses and other.. 2,996 2,614
--------- ---------
Total current assets................. 129,014 105,278
Property and equipment.................. 9,879 6,348
Other assets:
Loan origination and other costs, net
of amortization of $754 in 1998 and
$195 in 1997......................... 3,107 3,407
Other noncurrent assets............... 2,457 2,629
Goodwill and other intangible assets.. 33,995 6,340
--------- ---------
Total assets......................... $178,452 $124,002
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Balance Sheets (continued)
As of December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1998 1997
- ---------------------------------------- -------- --------
<S> <C> <C>
Current liabilities:
Floor plan........................... $ 81,452 $ 67,401
Secured lines of credit.............. 17,025 4,000
Notes payable and other.............. 5,512 1,218
Accounts payable..................... 6,009 5,275
Accrued liabilities.................. 13,028 8,804
Deferred revenue..................... 2,054 2,034
--------- ---------
Total current liabilities........ 125,080 88,732
Long-term liabilities:
Capital lease obligation and
equipment loan...................... 1,386 --
Senior notes, net of discount of
$2,839 in 1998 and $2,062 in 1997... 33,161 21,938
Deferred income taxes................ 1,055 269
Deferred revenue..................... 2,475 3,061
--------- ---------
Total liabilities................ 163,157 114,000
--------- ---------
Commitments and contingencies (note 17)
Cumulative redeemable preferred stock,
$.00001 par value; 3,500 shares issued
and outstanding in 1998 and 1997 (net
of discount of $456 in 1998 and $526
in 1997, liquidation preference of
$3,500 in 1998 and 1997)............. 3,044 2,974
Redeemable preferred stock, $.00001 par
value; 500 shares issued and
outstanding in 1998 and 1997 (net of
discount of $65 in 1998 and $75 in
1997, liquidation preference of $600
in 1998 and $540 in 1997)............ 535 465
Stockholders' equity:
Common stock, $0.00001 par value:
Class A, 30,000,000 shares
authorized, 11,514,044 shares
issued and outstanding in 1998
and 11,201,152 shares in 1997... -- --
Class B, 5,000,000 shares
authorized, 3,532,000 shares
issued and outstanding in 1998
and 3,032,000 shares in 1997.... -- --
Class C, 30,000,000 shares
authorized, 0 issued and
outstanding..................... -- --
Additional paid-in capital........... 8,320 6,544
Retained earnings.................... 3,396 19
--------- ---------
Total stockholders' equity........ 11,716 6,563
--------- ---------
$178,452 $124,002
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Operations
Years ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Sales:
New vehicle.......................... $475,847 $290,281 $200,185
Used vehicle......................... 191,829 111,616 81,706
Service and parts.................... 91,134 58,707 42,416
Other dealership revenues, net....... 24,261 13,444 8,215
--------- --------- ---------
Total sales....................... 783,071 474,048 332,522
Cost of sales:
New vehicle.......................... 438,726 271,412 187,278
Used vehicle......................... 175,753 102,689 76,190
Service and parts.................... 49,423 32,195 25,450
--------- --------- ---------
Total cost of sales............... 663,902 406,296 288,918
--------- --------- ---------
Gross profit...................... 119,169 67,752 43,604
Operating expenses:
Selling, general and administrative.. 99,603 58,761 38,330
Depreciation and amortization........ 1,952 678 611
Combination and related expenses..... -- 2,268 --
--------- --------- ---------
Operating income.................. 17,614 6,045 4,663
Other expense:
Interest expense, floor plan......... (5,521) (3,669) (2,922)
Interest expense, other.............. (5,432) (1,866) --
--------- --------- ---------
Income before income taxes........ 6,661 510 1,741
Income tax expense....................... 2,864 446 48
--------- --------- ---------
Net income........................ $ 3,797 $ 64 $ 1,693
========= ========= =========
Pro forma net income (unaudited)......... $ 1,027
=========
Net income (loss) per common share-basic. $0.24 $(0.01) $0.19
========= ========= =========
Weighted average common shares-basic..... 14,341 10,915 5,526
========= ========= =========
Net income (loss) per common
share-diluted........................... $0.23 $(0.01) $0.19
========= ========= =========
Weighted average common shares
outstanding-diluted.................... 14,928 10,915 5,526
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
FirstAmerica Automotive, Inc.
Common Stock
-------------------------------------
Price Class A Class B
Dealerships' ------------------- ----------------- Paid-in Retained Total
Equity Shares Amount Shares Amount Capital Earnings Equity
------------ -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996......................$ 6,644 -- $ -- -- $ -- $ -- $ -- $ 6,644
Stock issuance................................ 250 -- -- -- -- -- -- 250
Net income.................................... 1,693 -- -- -- -- -- -- 1,693
Distributions to S corporation stockholders... (3,707) -- -- -- -- -- -- (3,707)
-------- -------- ------- ------ ------- ------ ------- --------
Balance, December 31, 1996....................$ 4,880 -- $ -- -- $ -- $ -- $ -- $4,880
Distributions to S corporation stockholders... (4,000) -- -- -- -- -- -- (4,000)
Exchange of stock related to Combination...... (880) 7,841 -- -- -- 880 -- --
Stock issuance for acquisitions............... -- 1,620 -- -- -- 1,490 -- 1,490
Stock issuance relating to financing.......... -- -- -- 3,032 -- 2,789 -- 2,789
Stock issuance, net........................... -- 1,740 -- -- -- 1,554 -- 1,554
Preferred dividend and liquidation preference. -- -- -- -- -- (169) -- (169)
Amortization of discount...................... -- -- -- -- -- -- (45) (45)
Net income.................................... -- -- -- -- -- -- 64 64
-------- -------- ------- ------ ------- ------ ------- --------
Balance, December 31, 1997.................... $ -- 11,201 $ -- 3,032 $ -- $ 6,544 $ 19 $ 6,563
Stock issuance for acquisitions............... -- 335 -- -- -- 776 -- 776
Stock issuance relating to financing.......... -- -- -- 500 -- 1,000 -- 1,000
Stock redemptions............................. -- (22) -- -- -- -- -- --
Preferred dividend and liquidation preference. -- -- -- -- -- -- (340) (340)
Amortization of discount...................... -- -- -- -- -- -- (80) (80)
Net income.................................... -- -- -- -- -- -- 3,797 3,797
-------- -------- ------- ------ ------- ------ ------- --------
Balance, December 31, 1998.................... $ -- 11,514 $ -- 3,532 $ -- $ 8,320 $3,396 $11,716
========= ======== ======= ====== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Cash Flows
Years ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 3,797 $ 64 $ 1,693
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization............................... 1,952 678 611
Non-cash interest expense................................... 782 195 --
Deferred income taxes....................................... (659) (349) --
Non-cash stock compensation................................. -- 701 --
Amortization of deferred revenue............................ (457) (373) 1,048
Changes in operating assets and liabilities:
Receivables and contracts in transit..................... (8,606) (8,007) 718
Inventories.............................................. (4,391) (17,087) (567)
Other assets............................................. (500) (815) (192)
Floor plan notes payable................................. 9,504 7,918 809
Accounts payable and accrued liabilities................. 2,899 9,489 77
-------- -------- -------
Net cash provided by (used in) operating activities...... 4,321 (7,586) 4,197
-------- -------- -------
Cash flows from investing activities:
Capital expenditures............................................ (4,594) (1,090) (805)
Acquisitions, net of cash acquired.............................. (28,980) (11,726) --
-------- -------- -------
Net cash used in investing activities.................... (33,574) (12,816) (805)
-------- -------- -------
Cash flows from financing activities:
Borrowings on secured lines of credit........................... 13,025 4,000 --
Proceeds from issuance of Senior Notes.......................... 11,000 21,851 --
Proceeds from notes payable and other........................... 4,033 -- --
Repayments on notes payable and other........................... -- (1,632) 167
Loan origination costs.......................................... (258) (3,602) --
Proceeds from issuance of common stock.......................... 1,000 2,789 250
Proceeds from issuance of preferred stock....................... -- 3,360 --
Distributions to S Corporation stockholders..................... -- (4,000) (3,707)
Preference dividend paid........................................ (280) (108) --
-------- -------- -------
Net cash provided by (used in) financing activities...... 28,520 22,658 (3,290)
-------- -------- -------
Net increase/(decrease) in cash and equivalents.......... (733) 2,256 102
Cash at beginning of period........................................ 2,924 668 566
-------- -------- -------
Cash at end of period.............................................. $ 2,191 $ 2,924 $ 668
======== ======== =======
Cash paid during the period for:
Interest........................................................ $ 4,053 $ 5,311 $ 2,941
Income taxes.................................................... 3,803 885 16
Non-cash activity was as follows:
Common stock issued for acquisitions............................ 776 1,490 --
Common stock issued as compensation............................. -- 701 --
Capital lease obligation........................................ 703 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Organization and Combination
In July 1997, FirstAmerica Automotive, Inc., a public company with no
significant assets or operations, 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.
FirstAmerica Automotive, Inc. and the Price Dealerships are collectively
referred to as "FirstAmerica" or the "Company".
(b) Business
The Company is a leading automotive retailer and consolidator in the highly
fragmented automotive retailing industry. We currently operate in four major
metropolitan markets in California, and are focusing our consolidation strategy
in the western United States. Our source of revenues consists of all activities
typical of automotive dealerships. These consist of the sale and lease of new
and used vehicles, parts and service sales, collision repair service revenues,
financing fees, vehicle insurance commissions, document processing fees,
extended service warranty sales, and after-market product sales. As of December
31, 1998, we sold 12 domestic and foreign brands consisting of BMW, Buick,
Dodge, Honda, Isuzu, GMC, Lexus, Mitsubishi, Nissan, Pontiac, Toyota and
Volkswagen.
The Company's plan is to continue making opportunistic acquisitions in
the western United States. The Company currently operates in the following four
metropolitan markets:
. San Francisco Bay Area . San Jose/Silicon Valley
. San Diego . Los Angeles
(c) Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the
accounts of FirstAmerica Automotive, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform with the current financial statement presentation.
(d) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash balances consist of demand deposits.
(e) Inventories
Inventories are stated at the lower of cost or market value. Vehicle
cost is determined by using the specific identification method. Parts and
accessories cost is determined by using the first-in, first-out method (FIFO).
F-8
<PAGE>
(f) Property and Equipment
Property and equipment, including improvements that significantly
extend useful lives, are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using a straight-line basis over the shorter of the
lease term or estimated useful lives of the assets.
The range of estimated useful lives is as follows:
Leasehold improvements 5 to 20 years
Equipment 5 to 10 years
Furniture, signs and fixtures 5 to 10 years
Company vehicles 5 years
The cost of maintenance, repairs and minor renewals is expensed as
incurred. When an asset is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the account, and any gain or loss
is credited or charged to income.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance reduces deferred tax assets when it
is more likely than not that some or all of the deferred tax assets will not be
realized. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Prior to January 1, 1997, the Company was an S Corporation for federal
and state income tax reporting purposes. Federal and state income taxes on the
income of an S Corporation are payable by the individual stockholders rather
than the corporation. The Company terminated its S Corporation status effective
January 1, 1997.
(h) Financial Instruments
The carrying amount of current assets and current liabilities
approximates fair value because of the short-term nature of these instruments.
The carrying amount of long-term debt is not determinable because of the
structure of the transaction.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature, involve uncertainties and matters of significant judgment,
and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(i) Goodwill and Other Intangible Assets
Goodwill on acquired dealership operations, which represents the
excess of purchase price over the fair value of net assets acquired, is
amortized on a straight-line basis over 40 years. The Company evaluates the
periods of amortization continually to determine whether later events and
circumstances warrant revised estimates of useful lives.
F-9
<PAGE>
Goodwill on software company and other intangible assets are primarily
acquired software and intellectual property. Other intangible assets are
amortized on a straight-line basis over 5 years.
Accumulated amortization of goodwill and other intangibles totaled
approximately $619,000 and $125,000 as of December 31, 1998 and 1997,
respectively. Amortization expense charged to operations totaled $494,000,
$102,000 and $23,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(j) Impairment of Long-Lived Assets
The carrying value of long-lived assets, including intangibles, is reviewed
if the facts and circumstances, such as significant declines in revenues,
earnings or cash flows or material adverse changes in the business climate,
suggest that it may be impaired. The Company performs its review by comparing
the book value of long-lived assets to the estimated undiscounted cash flows
relating to such assets. If any impairment in the value of the long-lived assets
is indicated, the carrying value of the long-lived assets is adjusted to reflect
such impairment calculated based on the discounted cash flows of the impaired
assets or the assets fair value, as appropriate.
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(l) Revenue Recognition
Vehicle sales revenue is recognized upon delivery. Service and parts
revenues are recognized at the time of product sale or completion of service.
Other dealership revenues include finance fees received for notes sold to
finance companies. Finance fees are recognized, net of anticipated chargebacks,
upon acceptance of the credit by the finance companies. These fees are included
in other dealership revenues in the consolidated statements of operations.
The Company recognizes fees from the sale of third party extended
warranty service contracts at the time of sale. Where the Company is the
primary obligor of the extended warranty service contract, the costs directly
related to sales of the contracts are deferred and charged to expense over the
periods that the revenues are recognized. Warranty service contract revenues
are included in other dealership revenues in the consolidated statements of
operations.
(m) Advertising
Advertising costs are expensed in the period in which advertising
occurs and are included in selling, general and administrative expenses in the
consolidated statements of operations. Advertising expense totaled $9.1
million, $5.9 million and $3.8 million for 1998, 1997 and 1996, respectively.
(n) Major Suppliers and Dealer Agreements
The Company purchases substantially all of its new vehicles and
inventory from various manufacturers at the prevailing prices charged by the
manufacturers. A manufacturer's inability or unwillingness to supply the
dealerships with an adequate supply of popular models could affect the Company's
overall sales.
The Company enters into dealer sales and service agreements ("Dealer
Agreements") with each manufacturer. The Dealer Agreement generally limits the
location of the dealership and grants the manufacturer approval rights over
changes in dealership management and ownership. A manufacturer is also entitled
to cancel the Dealer Agreement if the dealership is in material breach of its
terms.
The Company's ability to acquire additional dealerships depends, in
part, on obtaining manufacturers' approval.
(o) Pro Forma 1996 Net Income and Per Share Amounts
Pro forma 1996 net income reflects income tax expense as if the
Company had terminated its S Corporation status on January 1, 1996, and had
normal statutory tax rates for 1996 (see Note 13). In addition, since the
capital structure of the Price Dealerships prior to the Combination is not
comparable to the capital structure
F-10
<PAGE>
subsequent to the Combination, pro forma net income per share for 1996 is
presented based on the 5,526,000 shares issued to the Price Dealership
stockholders in the Combination.
(p) Stock-based Compensation
As allowed under the provisions of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", the Company recognizes compensation
expense using the intrinsic value-based method of valuing stock options
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations. Under the intrinsic value-
based method, compensation cost is measured as the amount by which the quoted
market price of the Company's stock at the date of grant exceeds the stock
option exercise price.
(q) Comprehensive Income
The Company has determined that net income and comprehensive income
are the same for the periods presented.
(2) Acquisitions
Acquisitions Completed During the Year Ended December 31, 1998
On April 1, 1998, the Company acquired substantially all of the operating
assets of Beverly Hills, BMW, Ltd., a BMW automobile dealership located in West
Los Angeles, California. On June 12, 1998, the Company acquired substantially
all of the operating assets of Starfire Body Shop located in San Jose,
California. On June 19, 1998, the Company acquired substantially all of the
operating assets of Burgess British Cars, Inc., a Honda automobile dealership
located in Daly City, California. On October 19, 1998, the Company acquired all
of the outstanding capital stock of an authorized Toyota automobile dealership
commonly known as Concord Toyota located in Concord, California. On November 19,
1998, the Company acquired substantially all of the operating assets of Woodland
Hills Volkswagen. On December 31, 1998, the Company completed the acquisition of
an automotive-related software company, DSW & Associates, Inc., commonly known
as Auto Town. The aggregate consideration paid for the acquisitions completed
during 1998 was $29.8 million, consisting of $29.0 million in cash and 0.3
million shares of Class A Common Stock.
All of the acquisitions were accounted for using the purchase method of
accounting and the operating results of these acquisitions have been included in
the Company's results of operations since the date they were acquired. The
purchase prices have been allocated to assets acquired and liabilities assumed
based on the fair values on the acquisition dates. Amounts recorded for these
acquisitions were as follows: current assets, net of cash acquired, of $10.4
million, fixed assets of $0.8 million, goodwill and other intangibles of $27.5
million, floor plan and other liabilities of $7.8 million, and recognition of
deferred tax liability of $1.1 million.
F-11
<PAGE>
Acquisitions Completed During the Year Ended December 31, 1997
During 1997, the Company acquired substantially all of the operating
assets of eight automobile dealerships. The aggregate consideration paid for
the acquired dealerships during 1997 was $13.2 million, consisting of $11.7
million in cash, 1.6 million shares of Class A Common Stock, and warrants to
acquire up to 20,000 shares of Class A Common Stock. Amounts recorded for these
acquisitions were as follows: current assets, net of cash acquired, of $25.9
million, fixed assets of $3.4 million, non-current assets of $0.1 million,
goodwill of $4.8 million and floor plan notes payable and current liabilities of
$21.0 million.
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the acquisitions completed
in 1998 and 1997 had occurred as of January 1, 1997 after giving effect to
certain adjustments, including amortization of goodwill, interest expense on
acquisition debt, reductions in floorplan interest expense resulting from re-
negotiated floorplan financing agreements and related income tax effects. The
pro forma results have been prepared for comparative purposes only and are not
necessarily indicative of results of operations that would have occurred had the
acquisitions been completed on January 1, 1997. These results are also not
necessarily indicative of the results of future operations:
(Unaudited)
(dollars in thousands except per share data)
1998 1997
------------------- ---------------------
Total sales $ 874,223 $ 756,035
Income (loss) before taxes 4,521 (2,308)
Net income (loss) 2,577 (1,316)
Net income (loss) per common
share - diluted $ 0.15 $ (0.12)
Acquisitions Closed After December 31, 1998 and Pending Acquisitions
We completed one dealership acquisition in March 1999 and currently have
one automobile dealership acquisition pending. The aggregated estimated purchase
price for the two acquisitions is approximately $8.0 million. We financed the
completed acquisition with $2.0 million of notes payable to sellers and a $1.0
million note payable to the CEO of the Company. We will finance the pending
acquisition utilizing our secured lines of credit.
(3) Accounts Receivable
Accounts receivable is comprised of the following (in thousands):
December 31,
-------------------------------------------
1998 1997
------------------- ---------------------
Accounts receivable $ 16,341 $ 10,648
Accounts receivable - related
party (Note 15) 2,528 733
----------- ------------
Total accounts receivable 18,869 11,381
Less allowance for doubtful accounts 409 320
----------- ------------
Accounts receivable, net $ 18,460 $ 11,061
=========== ============
(4) Inventories
Inventories are comprised of the following (in thousands):
December 31,
-------------------------------------------
1998 1997
------------------- ---------------------
New vehicles $ 65,152 $ 58,344
Used vehicles 20,049 15,040
Parts and accessories 5,746 5,223
----------- ------------
Inventories $ 90,947 $ 78,607
=========== ============
F-12
<PAGE>
(5) Property and Equipment
Property and equipment is comprised of the following (in thousands):
December 31,
-------------------------------------------
1998 1997
------------------- ---------------------
Leasehold improvements $ 3,255 $ 2,392
Equipment 3,413 2,924
Furniture, signs and fixtures 5,576 2,333
Company vehicles 1,088 832
----------- ------------
Total property and equipment 13,332 8,481
Less accumulated depreciation 3,453 2,133
----------- ------------
Property and equipment, net $ 9,879 $ 6,348
=========== ============
(6) Floor Plan Notes Payable and Secured Lines of Credit
In July 1997, the Company entered into a three year $175 million Loan
and Security Agreement with a financial company, replacing an existing $37
million line of credit to the Company. The Loan and Security Agreement matures
in July 2000.
The Loan and Security 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 an additional line of credit up to $35 million
("Revolver Advances"), restricted by used vehicle and parts inventory. The Loan
and Security Agreement also provides a discretionary line up to $25 million
("Discretionary Advances") which the financial company makes at its absolute
discretion upon request of the Company.
Floor plan notes payable 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 and Security Agreement is exceeded. The
Loan and Security Agreement grants a collateral interest in substantially all of
the Company's assets.
As of December 31, 1998 and 1997, the Company had floor plan notes payable
of $81.5 and $67.4 million, respectively, and outstanding Revolver Advances of
$17.0 and $4.0 million, respectively. Revolver Advances are classified as
secured lines of credit in the accompanying financial statements. There were no
Discretionary Advances outstanding as of December 31, 1998 and 1997. As of
December 31, 1998 and 1997, $5.0 million and zero of the Revolver Advances were
guaranteed by a Trust affiliated with the Chief Executive Officer.
The availability 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.
Interest rates on the floor plan notes and the Revolver Advances are
variable and change based on movements in the prime rate. The interest rates
equal the prime rate minus 35 to 75 basis points, which was 8.15% to 7.00% and
8.15% to 7.75% at December 31, 1998 and 1997. During 1998 and 1997, the average
monthly borrowing on the floor plan notes and Revolver Advances was $73.4 and
$44.0 million and $13.5 and $0.3 million, respectively, and the aggregate
average interest rate was 7.67% and 7.75%, respectively. Interest expense was
$6.7 and $3.8 million at December 31, 1998 and 1997.
The Loan and Security Agreement contains various financial covenants
such as minimum interest coverage, working capital, and maximum debt to equity
ratios.
F-13
<PAGE>
(7) Senior Notes
At the time of the Combination (see Note 1), the Company entered into
a Securities Purchase Agreement with a financial company to provide an aggregate
funding commitment of up to $40 million. In exchange for the $40 million, the
Company had the ability to issue on a pro-rata basis up to $36 million of
12.375% Senior Notes, $3.5 million of 8% Cumulative Redeemable Preferred Stock
("CRPS"), and $0.5 million Redeemable Preferred Stock ("RPS"), and up to 5
million shares of the Company's Class B Common Stock, par value $0.00001 per
share.
In 1997, the Company had received $28 million from the financial company.
In exchange, the Company issued notes with a principal amount of $24 million at
a discount of $2.2 million, 3,500 shares of CRPS at a discount of $0.6 million,
500 shares of RPS at a discount of $0.1 million and 3,032,000 shares of Class B
Common Stock at $0.92 per share. The notes and the preferred stock are due June
30, 2005 (see Note 8).
In 1998, the Company received an additional $12.0 million from the
financial company. In exchange, the Company issued 12.375% Senior Notes with a
principal amount of $12.0 million at a discount of $1.0 million, and issued 0.5
million shares of Class B Common Stock at $2.00 per share. The notes are due
June 30, 2005.
For financial reporting purposes, the difference between the issue
price and the face value of each security is recorded as a discount and is
amortized over the life of each security using the effective interest method.
The discount amortization on the notes is included in interest expense, and the
CRPS and RPS discount amortization is recorded as a deduction from retained
earnings. The Company incurred $3.5 and $1.5 million in interest expense
related to the notes during 1998 and 1997, including $224,000 and $88,000,
respectively, for the non-cash amortization of discount.
The notes are unsecured and subordinated to all debts of the Company's
operating subsidiaries, rank pari passu to the Company's other existing and
future senior indebtedness, and are senior in right of payment to any future
subordinated debt of the Company. The CRPS and RPS shares will be subordinate
to all the debt of the Company and its subsidiaries and have priority over the
common stock of the Company.
On July 1, 2003 and July 1, 2004, the Company shall redeem the notes
in the aggregate principal amount equal to the lesser of (a) 30% of the
aggregate principal amount of notes issued or (b) the aggregate amount of issued
and outstanding notes on such date. On these dates, the Company shall redeem
the notes, at the applicable redemption price plus all accrued and unpaid
interest on the notes to the redemption date. On June 30, 2005, the Company
shall redeem all remaining issued and outstanding notes, including accrued and
unpaid interest.
The Company can redeem all the notes or any part thereof, at any time,
upon due notice to the holders of the notes. The redemption price for the
period beginning July 1, 1998 through June 30, 1999 is 108.75% of the principal
balance and decreases by 1.25% for each year on July 1, thereafter. The
redemption price on June 30, 2005 is equal to the CRPS and RPS liquidation
preference of $1,000 and $1,720 respectively. If the aggregate outstanding
principal balance of the notes, at any time, is less than $2 million, the
Company is required to redeem all outstanding notes. If the Company has a
public offering of its stock, the Company may within 45 days of consummation of
public offering, redeem all the outstanding notes. In such circumstances, the
redemption price for the period July 1, 1998 to June 30, 1999 is 104.375% of the
principal balance and decreases by 0.625% for each year on July 1, thereafter.
The Securities Purchase Agreement contains various financial covenants
such as minimum interest coverage, and non-financial covenants including
limitations on the Company's ability to pay dividends, retire or acquire debt,
make capital expenditures, and sell assets.
(8) Redeemable Preferred Stock
The Company has 10,000 shares of authorized Preferred Stock with par
value of $0.00001 per share. In connection with the Securities Purchase
Agreement (see Note 7), the Company issued 3,500 shares of CRPS, due
F-14
<PAGE>
June 30, 2005, with a par value of $0.00001 per share, and 500 shares of RPS,
due June 30, 2005, with a par value of $0.00001 per share. As of December 31,
1998 and 1997, 3,500 CRPS and 500 RPS were issued and outstanding.
CRPS
The holders of CRPS are entitled to receive a dividend at an annual
rate of 8% of CRPS, payable, equally, on May 31, and November 30 of each year.
Any unpaid dividends accrue cumulatively at an annual rate of 14%. The Company
is required to redeem the CRPS on June 30, 2005, but CRPS may be redeemed, all
or in part, at any time prior to that date at the Company's election.
The liquidation preference for each share of CRPS is $1,000. The
redemption price per share (expressed as a percentage of the CRPS liquidation
preference) for the period beginning June 30, 1998 to June 29, 1999, is 108.75%
of the CRPS liquidation preference and decreases by 1.25% for each year on June
30, thereafter. The redemption price per share on June 30, 2005, is equal to
the CRPS liquidation preference.
RPS
The holders of RPS are not entitled to receive any dividends. Each
RPS share has an initial liquidation preference of $1,080, which increases by
$80 per share each year on June 30. The RPS liquidation preference will be
$1,720 on June 30, 2005. All the RPS, or any part thereof, may be redeemed for
cash at the Company's election. The redemption price per share (expressed as a
percentage of the RPS liquidation preference) for the period June 30, 1998 to
June 29, 1999 is 108.75% of the RPS liquidation preference and decreases by
1.25% for each year on June 30, thereafter. The redemption price per share on
June 30, 2005, is equal to the RPS liquidation preference.
The Preferred Stock has no voting rights except (a) as required by the
law of the State of Delaware, (b) to approve certain transactions that would
otherwise violate the terms of Agreement governing the sale of Preferred Stock
by the Company (see Note 7), and (c) to elect a director to the Board of
Directors to represent the CRPS stockholders if dividends on CRPS remain in
arrears and unpaid for two semiannual dividend periods, or, if the Company fails
to mandatorily redeem the Preferred Stock after June 30, 2005.
During 1998 and 1997, the Company recorded $280,000 and $128,000 as
CRPS preference dividend, $60,000 and $40,000 for the accretion of the RPS
liquidation preference with a corresponding charge to paid in capital, and
$80,200 and $45,000 for the non-cash amortization of the discount with a
corresponding charge to retained earnings.
(9) Common Stock
The Company has authorized Class A Common Stock of 30 million shares,
Class B Common Stock of 5 million shares, and Class C Common Stock of 30 million
shares, all with a par value of $0.00001 per share.
The Class A and Class B Common Stock have equal voting rights and the
Class C Common Stock is non-voting, except as otherwise required by Delaware
law. Class B Common Stockholders, voting as a separate class, are entitled to
elect one Director to the Board of Directors of the Company. Each share of
Class B Common Stock will be automatically converted into one share of Class A
Common Stock upon the closing of a firm commitment to register at least $50
million of Common Stock under the Securities Act of 1933. Class C Common Stock
will be issued only under certain conditions as defined in the Certificate of
Incorporation.
The Company is prohibited from paying dividends on its common stock so
long as any shares of CRPS are outstanding. Under certain circumstances
pursuant to the terms of its financing agreements, the Company is prohibited
from paying dividends on its common stock.
F-15
<PAGE>
(10) Stock Options
The Company's Board of Directors has approved the 1997 Stock Option Plan,
as amended through October 27, 1998, (the "Option Plan"), pursuant to which an
aggregate of 1.5 million shares of Class A Common Stock were reserved for
issuance to key employees of the Company. The Option Plan permits awards of
either incentive or non-qualified stock options. The exercise price of the
options may not be less than the fair market value as determined by a committee
of the Board of Directors. As of December 31, 1998, the Company has granted
options to employees covering an aggregate of 1,450,000 shares of Class A common
stock. The options vest over a five year period, and expire if unexercised ten
years from the date of grant.
The following table summarizes the Company's outstanding stock options
(in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997
--------------------------- ----------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 942 $2.65 -- $ --
Granted 508 $3.61 942 $2.65
Exercised -- -- -- --
Forfeited 2 $4.00 -- --
--------- -------
Options outstanding, end of year 1,448 $2.78 942 $2.65
========= =======
Options exercisable, end of year 360 $2.20 103 $2.09
========= ========
</TABLE>
The Company has elected the disclosure requirements of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123") and continues to recognize compensation expense as prescribed
in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). Under this method of accounting for stock options,
compensation cost is measured as the amount by which the fair value of the
company's stock at the grant date exceeds the stock option exercise price. For
the years ended December 31, 1998 and 1997, compensation expense was $0 and
$701,000, respectively.
The weighted average remaining contractual life of options outstanding is
9.0 years. The weighted average fair value of options granted was $0.73 during
1998 and $0.25 during 1997. The fair value of each option grant is estimated
based on the date of grant using the Black-Scholes option valuation model with
the following assumptions used for grants made in 1998: expected common stock
price volatility of 50%, risk-free interest of 4.75%, and an expected option
life of 5.0 years. The following assumptions were used for grants made in 1997:
expected volatility of 42%, risk-free interest of 6.25%, and an expected option
life of 5.5 years.
Had compensation expense of the Company's stock-based compensation
plan been determined based on the fair value method prescribed by SFAS No. 123,
the Company's pro forma net income and diluted earnings per share for the years
ended December 31, 1998 and 1997 would have been (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Net income
As reported $3,797 $ 64
Pro forma 3,679 18
Net income (loss) per common share - basic
As reported $ 0.24 $(0.01)
Pro forma 0.23 (0.02)
Net income (loss) per common share - diluted
As reported $ 0.23 $(0.01)
Pro forma 0.22 (0.02)
</TABLE>
F-16
<PAGE>
(11) Warrants
During 1998 and 1997, the Company issued warrants to purchase
approximately 40,000 and 332,000 shares of Class A Common Stock at an exercise
price of $2.00 and $0.92 per share respectively. The warrants expire in 2002
and 2003 and were issued in connection with obtaining financing of the senior
notes.
(12) Earnings Per Share
The following table reconciles basic and diluted earnings per share
for the years ended December 31, 1998, 1997, and 1996 (in thousands, except per
share data):
1998 1997 1996
-------- ------- -------
Net income per income statement (a) $ 3,797 $ 64 $ 1,027
Less:
Cumulative redeemable preference dividends 280 128 --
Redeemable preferred stock liquidation
preference accretion 60 40 --
Cumulative and redeemable preferred stock
discount amortization 80 45 --
-------- ------- -------
Net income applicable to common stockholders 3,377 (149) 1,027
Add:
Interest charges applicable to convertible debt 44 -- --
-------- ------- -------
Net income applicable to common stockholders and
assumed conversions $ 3,421 $ (149) $ 1,027
======== ======= =======
Basic Earnings Per Share:
Weighted average common shares
outstanding-basic (b) 14,341 10,915 5,526
======== ======= =======
Net income (loss) per common share-basic $ 0.24 $ (0.01) $ 0.19
======== ======= =======
Diluted Earnings Per Share:
Weighted average common shares
outstanding-basic (b) 14,341 10,915 5,526
Net effect of dilutive stock options 282 -- --
Net effect of warrants 205 -- --
Net effect of convertible notes 100 -- --
-------- ------- -------
Total weighted average common shares
outstanding-diluted (b) 14,928 10,915 5,526
======== ======= =======
Net income (loss) per common share-diluted (c) $ 0.23 $ (0.01) $ 0.19
======== ======= =======
- ---------------------------------------
(a) Net income for 1996 is presented on a pro forma basis to reflect net income
that would have been reported if the Company had been a C Corporation
instead of an S Corporation for the year ended December 31, 1996. See Note
13 on Income Taxes.
F-17
<PAGE>
(b) Since the capital structure of the Price Dealerships prior to the
combination is not comparable to the capital structure subsequent to the
combination, the number of weighted average shares, both basic and diluted,
for 1996 is presented based on the 5,526,000 shares issued to the Price
Dealership stockholders in the Combination.
(c) In 1997, diluted earnings per share does not include dilutive securities,
such as options and warrants, as their inclusion would be anti-dilutive for
1997.
(13) Income Taxes
On January 1, 1997, the Company terminated its S Corporation election
and elected C Corporation status. This change in tax status resulted in the
immediate recognition of $214,000 in net deferred tax assets. In connection
with the change in tax status, the Company changed its method of valuing
inventories from the last-in first-out ("LIFO") method to the specific
identification method. This change resulted in a tax liability of $1.4 million
and is payable equally over the next six years ("LIFO recapture").
Income tax expense (benefit) consists of the following (in thousands):
Years Ended December 31,
-------------------------
1998 1997
--------- ----------
Current
Federal $ 2,795 $ 625
State 728 170
--------- ----------
Total Current 3,523 795
Deferred
Federal (523) (306)
State (136) (43)
--------- ----------
Total Deferred (659) (349)
--------- ----------
Total $ 2,864 $ 446
========= ==========
The income tax rate on pre-tax income differed from the federal
statutory rate as follows:
Years Ended December 31,
-------------------------------------
1998 1997 1996
------- -------- --------
Computed tax expense 34% 34% 34%
State taxes 6% 25% --
Permanent difference 2% -- --
S Corporation status -- -- (31%)
Change in tax status to C
corporation including LIFO
recapture -- (42%) --
Non-deductible stock -- 56% --
compensation
Other 1% 15% --
------- -------- --------
Total 43% 88% 3%
======= ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, are presented below (in thousands):
F-18
<PAGE>
Deferred tax assets: 1998 1997
-------- --------
Extended warranty service contracts $ 1,001 $ 1,184
State taxes 217 58
Accrued bonuses and vacation 624 204
Allowance for doubtful accounts 210 132
Other accrued liabilities 306 32
-------- --------
Total deferred tax assets 2,358 1,610
Deferred tax liabilities:
Acquired tax basis difference (1,210) --
LIFO recapture (988) (1,160)
Other (362) (101)
-------- --------
Total deferred tax liabilities (2,560) (1,261)
-------- --------
Net deferred tax (liabilities)
assets $ (202) $ 349
======== ========
Pro Forma Income Taxes
Prior to January 1, 1997, the Company was an S Corporation. The
following unaudited pro forma provision for income taxes reflects the components
of income tax expense that would have been reported if the Company had been a C
Corporation for the year ended December 31, 1996 (in thousands):
Federal State Total
------- ----- -----
Year ended December 31, 1996 $592 $122 $714
======= ===== =====
(14) Employee Benefit Plans
Substantially all of the employees of the Company are eligible to
participate in the FirstAmerica Automotive, Inc. Retirement Savings Plan ("the
Plan"), a defined contribution plan, after meeting minimum service requirements.
Employees of acquired companies are eligible to join the Plan if or when the
minimum service criteria has been met. Service completed at the time of
acquisition will apply towards the meeting of the criteria. The Company has
recorded matching contributions in the amount of approximately $440,000,
$334,000, and $196,000, in 1998, 1997 and 1996, respectively.
(15) Related Party Transactions
Accounts Receivable
The Company had accounts receivable from related parties of $2.5 million at
December 31, 1998. Of this amount, $2.4 million relates to a receivable from the
Chief Executive Officer of the Company related to leasehold improvements paid by
the Company on a building the Company leases from the CEO. The Company was
subsequently reimbursed for the original cost of the leasehold improvements in
January 1999. The remaining $0.1 million relates to an advance to an executive.
Operating Leases
The Company leases facilities under various agreements from a Trust
affiliated with the Chief Executive Officer ("CEO") of the Company, and from
partnerships in which the Chairman of the Company and the CEO are partners.
During 1997, a partnership in which the Chairman of the Company is a partner
purchased a facility leased by the Company. As part of the acquisition, the
partnership reimbursed the Company $0.8 million for leasehold improvements.
F-19
<PAGE>
These leases have an initial term of 15 years and are renewable at the
option of the Company. Selling, general and administrative expense includes
related party rental expense of $4.6 million, $2.3 million, and $1.7 million in
1998, 1997, and 1996, respectively.
Acquisitions
On June 1998, the Company acquired substantially all of the operating
assets of a Honda automobile dealership located in Daly City, California. The
purchase price was partially 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 of Agreement, the Chairman is entitled to a 3%
origination fee on the loan, and the Company will be responsible for interest
payments to the commercial bank that made a $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 terms of the origination fee paid to the
Chairman are no less favorable to the Company than those arranged with other
parties. The $4.0 million loan outstanding at December 31, 1998 is included in
other notes payable in the accompanying condensed consolidated financial
statements. As of December 31, 1998 the origination fee in the amount of
$120,000 is outstanding and is included in accrued liabilities in the
accompanying financial statements.
On October 1, 1998, the Company completed the acquisition of an
authorized Toyota automobile dealership. Pursuant to a Stock Purchase Agreement
dated July 17, 1998, the Company acquired all of the outstanding capital stock
from the Seller. The Seller's trustee is the father of 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. In connection
with the acquisition, the Company issued options to purchase 100,000 shares of
Class A Common Stock at an exercise price of $2.00 per share to the officer of
the Company as a finders fee, in accordance with the terms of his employment
agreement with the Company.
During 1997, the Company issued 1.3 million shares of its Class A Common
Stock in exchange for substantially all the operating assets of a dealership
owned by the Chairman of the Company. The Chairman was indebted to the Company
in the amount of approximately $500,000 as a result of this transaction, which
was subsequently paid.
During 1997, the Company acquired substantially all the operating
assets of a dealership owned by an officer of the Company for $2.9 million.
The Company believes it purchased the dealerships acquired from related
parties under terms no less favorable than those arranged with other parties.
Management Services
In July 1997, a Company affiliated with the CEO provided management
services to the Company. Selling, general and administrative expense includes
approximately $0.8 million and $1.8 million for the years ended December 31,
1997 and 1996, respectively for data processing, executive compensation,
professional, and other services.
Legal Services
A law firm, in which one of the Directors of the Company is a partner,
provides legal services to the Company which amounted to approximately $0.4
million in both 1998 and 1997.
Notes Payable
The Company had $0.6 million of convertible notes payable due to
stockholder at December 31, 1998 and 1997, respectively. These notes are
convertible into Class A Common Stock at $4.00 per share.
F-20
<PAGE>
(16) Operating Segments
The Company operates primarily in the automotive segment in California. The
Company sells new vehicles, used vehicles, light trucks, and replacement parts.
In addition, it provides vehicle maintenance and repair services, and arranges
related financing and warranty products for its automotive customers.
To supplement its core business, the Company acquired on December 31,
1998 a software company, Auto Town, that provides software products and services
to automobile dealerships. The acquisition was accounted for as a purchase, and
the results of operations were not included prior to December 31, 1998.
(17) Commitments and Contingencies
Operating and Capital Leases
All of the Company's operations are conducted in leased facilities.
The Company leases certain facilities from certain officers of the Company (see
Note 15). The minimum future rental payments by the Company as of December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
------------------------------
Years ending December 31, Related Parties Other Capital Leases
- ---------------------------------------- --------------- ------------ ---------------
<S> <C> <C> <C>
1999 $ 5,024 $5,964 $ 177
2000 5,125 5,617 177
2001 5,300 5,006 177
2002 5,124 4,540 177
2003 5,129 4,409 154
Thereafter 33,371 19,616 --
------- ------- -----
Total minimum lease payments $59,073 $45,152 862
======= =======
Less amount representing interest (159)
-----
Present value of net minimum lease payments $ 703
=====
</TABLE>
The current portion of capital lease payments of $122,000 is included
in notes payable and other in the accompanying consolidated financial
statements.
The non-current portion of the capital leases of $581,000 and the non-
current portion of an equipment financing loan of $805,000, which bears interest
at 8.25% and amortizes monthly expiring in December 2002, are included in
capital lease obligation and equipment loan in the accompanying financial
statements .
Rental expense for operating leases was $9.0 million, $5.8 million,
and $2.8 million in 1998, 1997 and 1996, respectively.
Litigation
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position or the future results of operations and cash flows.
(18) Combination and Related Expenses
During 1997, the Company incurred $2.3 million in certain legal,
accounting, consulting and compensation expenses associated with the combination
and development of its organization and business plan. There were no
combination and related expenses in 1998.
(19) Subsequent Event
In March 1999, the Company sold the operating assets of Serramonte GMC to
the manufacturer and recorded net proceeds of approximately $1.7 million.
(20) Summary of Quarterly Financial Data (Unaudited)
F-21
<PAGE>
The following table summarizes the Company's results of operations as
presented in the Consolidated Statements of Income by quarter for 1998 and 1997
(in thousands, except per share data).
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
Year Ended December 31, 1998
- -------------------------------------------------------------------------------
Total sales $160,617 $183,051 $223,486 $215,917
Gross profit 24,418 28,911 33,739 32,101
Operating income 3,361 4,563 5,552 4,138
Income before income taxes 1,290 1,902 2,812 657
Net income 735 1,084 1,603 375
Net income per share - diluted 0.04 0.07 0.10 0.02
Year Ended December 31, 1997
- -------------------------------------------------------------------------------
Total sales $ 93,024 $ 97,050 $139,172 $144,802
Gross profit 12,433 13,616 19,275 22,428
Operating income 1,093 (518) 2,131 3,339
Income before income taxes 271 (1,441) 416 1,264
Net income (loss) 34 (179) 51 158
Net income (loss) per share - diluted 0.01 (0.02) 0 0
F-22
<PAGE>
================================================================================
Shares
[LOGO]
Common Stock
________________
PROSPECTUS
________________
Merrill Lynch & Co.
Donaldson, Lufkin & Jenrette
BancBoston Robertson Stephens
, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be borne by the registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. All
expenses other than the SEC registration fee, the NASD filing fee and the NYSE
listing fee are estimated.
<TABLE>
<CAPTION>
Amount to be
Paid
----------------
<S> <C>
Registration fee........................................ $27,800
NASD filing fee......................................... $10,500
NYSE listing fee........................................ *
Transfer agent and registrar fees....................... *
Accounting fees and expenses............................ *
Legal fees and expenses................................. *
Blue Sky qualification fees and expenses................ *
Printing and engraving.................................. *
Miscellaneous expenses.................................. *
--------------
Total................................................... $
==============
</TABLE>
- ----------------------------------
* To be furnished by amendment
Item 14. Indemnification of Directors and Officers.
Our by-laws effectively provide that we shall, to the full extent permitted
by Section 145 of the General Corporation Law of the State of Delaware, as
amended from time to time, indemnify all persons whom it may indemnify pursuant
thereto. In addition, our charter eliminates personal liability of its
directors to the full extent permitted by Section 102(b)(7) of the General
Corporation Law of the State of Delaware, as amended from time to time.
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification shall be made if such person shall have been
adjudged liable to the corporation, unless and only to the extent that the court
in which the action or suit was brought shall determine upon application that
the defendant officers or directors are reasonably entitled to indemnity for
such expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit that
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith of which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing stock out of other than lawfully available
funds or (iv) for any transaction from which the director derived an improper
personal benefit. No such provision shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such provision
becomes effective.
We also maintain insurance against liabilities under the Securities Act of
1933 for the benefit of our officers and directors.
II-1
<PAGE>
Section 6 of the purchase agreement between the underwriters and us (filed
as Exhibit 1.1 to this registration statement) provides that the underwriters
severally and not jointly will indemnify and hold us harmless and each of our
directors, officers or controlling persons from and against any liability caused
by any statement or omission in the registration statement or prospectus based
upon information furnished to us by the underwriters for use in the registration
statement or prospectus. The purchase agreement also provides that we indemnify
the underwriters and each person, if any, who controls any underwriter against
certain liabilities under the Securities Act of 1933, as amended.
Item 15. Recent Sales of Unregistered Securities.
On July 1, 1997, we reincorporated from Nevada into Delaware by merging
into a wholly-owned Delaware subsidiary formed specifically for this purpose.
On June 16, 1997, one hundred shares of the Delaware subsidiary's common stock
were issued in connection with its formation under an exemption to the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
found in Section 4(2) thereof. Because the Delaware corporation is deemed as a
matter of law to be the surviving corporation in the reincorporation, these one
hundred shares are deemed to have been issued by us.
In connection with the reincorporation, we are also deemed to have issued
shares of the Delaware corporation to all of its stockholders in exchange for
their shares in the Nevada corporation.
On March 31, 1997, we issued 200,000 shares of our common stock to Steven
Hallock for $200 pursuant to an agreement between us and Mr. Hallock dated
November, 1996 and based on a valuation of our common stock on such date.
On March 31, 1997, we issued 20,000 shares of our common stock to Matthew
Travis for $20.00.
On April 23, 1997, we issued 479,000 shares of our common stock to the
Price Trust u/d/t 10/5/88 for $479.00 in cash. This issuance was pursuant to an
agreement with us to issue such shares dated November, 1996 and based on a
valuation of our common stock on such date.
On July 10, 1997, we issued warrants to purchase 303,200 shares of our
common stock to Brown, Gibbons, Lang & Company, LP in partial consideration for
consulting services performed for us. The exercise price of such warrants is
$0.92 per share. These warrants are exercisable at any time prior to July 10,
2002.
On July 10, 1997, we issued warrants to purchase 5,000 shares of our common
stock to T.J. Hollerhoff in partial consideration for services performed for us.
The exercise price of such warrants is $0.92 per share. These warrants are
exercisable at any time prior to July 10, 2007.
On July 10, 1997, we issued warrants to purchase 2,500 shares of our common
stock to Carlanne Foushee in partial consideration for services performed for
us. The exercise price of such warrants is $0.92 per share. These warrants are
exercisable at any time prior to July 10, 2007.
On July 10, 1997, we issued warrants to purchase 1,000 shares of our common
stock to Martha Walker in partial consideration for services performed for us.
The exercise price of such warrants is $0.92 per share. These warrants are
exercisable at any time prior to July 10, 2007.
In connection with the acquisition of the Mr. Thomas A. Price's interest in
the Price Dealerships by us on July 11, 1997, we issued 3,991,600 shares of our
common stock to the Price Trust u/d/t 10/5/88 in exchange for shares of common
stock of the corporations comprising the Price Dealerships.
In connection with our acquisition of Mr. Donald V. Strough's interest in a
Honda dealership located in Concord, California on October 15, 1997, we issued
1,330,000 shares of our common stock to the Strough Revocable Trust. This
issuance was pursuant to an agreement with us to issue such shares dated July
11, 1997 and based on a valuation of our Class A Common Stock on such date.
II-2
<PAGE>
In connection with the acquisition of Mr. T. Al Babbington's interest in
the Price Dealerships by us on July 11, 1997, we issued 626,000 shares of our
common stock to Mr. Babbington in exchange for shares of common stock of the
corporations comprising the Price Dealerships.
In connection with the acquisition of Mr. Fred Cziska's interest in the
Price Dealerships by us on July 11, 1997, we issued 704,400 shares of our common
stock to Mr. Cziska in exchange for shares of common stock of the corporations
comprising the Price Dealerships.
In connection with the acquisition of Mr. John Driebe's interest in the
Price Dealerships by us on July 11, 1997, we issued 204,000 shares of our common
stock to Mr. Driebe in exchange for shares of common stock of the corporations
comprising the Price Dealerships.
In connection with our acquisition of Valley Auto Center on July 11, 1997,
we issued 290,000 shares of our common stock to Asian Pacific Industries, a
Washington corporation.
On September 15, 1997, we issued warrants to purchase up to 20,000 shares
of our common stock to Capman, Inc. as partial consideration for certain assets
acquired by us. The exercise price of such warrants is $0.92 per share. These
warrants are exercisable at any time prior to September 15, 2002.
In connection with our lending arrangements, on July 11, 1997, we issued
$24,000,000 in notes, 3,032,000 shares of our Class B Common Stock for an
aggregate consideration of $2,789,440, a total of 3,500 shares of our 8%
Cumulative Redeemable Preferred Stock due 2005 for an aggregate consideration of
$3,500,000, and 500 shares of our Redeemable Preferred Stock for an aggregate
consideration of $500,000 to three affiliates of the Trust Company of the West.
In connection with and in partial consideration for consulting services
performed for us, on October 1, 1998, we issued warrants to purchase 40,000
shares of our common stock to Brown, Gibbons, Lang & Company LP. The exercise
price of these warrants is $2.00 per share. These warrants are exercisable at
any time prior to October 1, 2003.
In connection with our lending arrangements, on October 1, 1998, we issued
$12,000,000 in notes and 500,000 shares of our common stock for an aggregate
consideration of $1,000,000 to three affiliates of Trust Company of the West.
In connection with our acquisition of DSW & Associates, Inc., d/b/a Auto
Town, on December 31, 1998, we issued an aggregate of 335,015 shares of our
common stock to former shareholders of Auto Town.
The issuances described above were deemed exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about us or had access, through employment
or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules.
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
1.1++++ Form of Underwriting Agreement.
2.1.1* Agreement and Plan of Reorganization dated July 1, 1997 by
and among the Company, California Carriage, Ltd., dba Concord
Honda and Donald V. Strough, Trustee of the Strough 1983
Revocable Trust.
2.1.2* Agreement and Plan of Reorganization dated July 1, 1997 by
and among the Company, Price Auto Holding, Inc., dba Melody
Toyota, Price Trust utd 10/5/84, Fred Cziska and FAA San
Bruno, Inc.
II-3
<PAGE>
2.1.3* Agreement and Plan of Reorganization dated July 1, 1997 by
and among the Company, Serramonte Motorcars, Inc., dba Lexus
of Serramonte, Price Trust utd 10/5/84, Fred Cziska, John
Driebe and FAA Serramonte L, Inc.
2.1.4* Agreement and Plan of Reorganization dated July 1, 1997
between the Company, Cziska Price, Inc., dba Stevens Creek
Nissan, the shareholders of Cziska Price, Inc. and FAA
Stevens Creek, Inc.
2.1.5* Agreement and Plan of Reorganization dated July 1, 1997
between the Company, Transcar Leasing, Inc., dba Serramonte
Auto Plaza, the shareholders of Transcar Leasing, Inc. and
FAA Serramonte GM, Inc.
2.1.6* Asset Purchase Agreement dated March 14, 1997 by and among
FAA Concord N, Inc., Concord Nissan, Inc. and Steven Hallock.
2.1.7* Stock Purchase Agreement dated July 1, 1997, by and between
the Company, the Price Trust u/t/d 10/5/84 and Smart Nissan,
Inc.
2.1.8* Asset Purchase Agreement dated March 19, 1997 by and between
the Company and Asian Pacific Industries, Inc.
2.1.9* Asset Purchase Agreement dated January 23, 1997 by and among
the Company, Auto Center of Poway, Inc., Thomas Nokes and H.
Matthew Travis.
2.1.10* Asset Purchase Agreement dated January 23, 1997 by and among
the Company, Auto Center of North County, Inc., Thomas Nokes
and H. Matthew Travis.
2.1.11** Asset Purchase Agreement dated January 29, 1998 by and among
the Company, Burgess British Cars, Inc., and Keith Burgess.
2.1.12** Letter of Agreement dated June 11, 1998 by and between the
Company and Donald V. Strough.
2.1.13*** Asset Purchase Agreement dated January 1998 by and among the
Company, Beverly Hills BM, Ltd., dba Beverly Hills BMW
("Seller"), and Ross Gilbert.
2.1.14*** Asset Purchase Agreement dated July 17, 1997 by and among the
Company, Golden Sierra Auto Group, dba Capitol Nissan and
Capman, Inc.
2.1.15+ Stock Purchase Agreement dated July 17, 1998, by and between
Graybehl Family Trust, dated March 22, 1978, Concord Toyota
Sales, Inc., and the Company.
2.1.16+ First Amendment to Stock Purchase Agreement dated October 1,
1998, by and between the Company, Vacation Motors, and the
Graybehl Family Trust, dated March 22, 1978.
2.1.17+ Second Amendment to Stock Purchase Agreement dated October
13, 1998 by and between the Company, Vacation Motors, and the
Graybehl Family Trust, dated March 22, 1978.
2.1.18++ Agreement and Plan of Reorganization, dated December 8, 1998,
among the Company, DSW Acquisition Corporation, DSW
Associates, Inc., and certain shareholders of DSW Associates,
Inc.
3.1* Amended and Restated Certificate of Incorporation, dated
July 8, 1997.
3.2+++ By-Laws.
II-4
<PAGE>
4.1* Stockholders' Agreement dated July 11, 1997 by and among the
Company and its stockholders, Thomas Price, Donald Strough,
Steven Hallock, Fred Cziska, Al Babbington, John Driebe,
Embarcadero Automotive, LLC, Raintree Capital LLC, BB
Investments and certain affiliates of Trust Company of the
West.
4.1.1* Securities Purchase Agreement dated as of July 11, 1997 by
and among the Company, certain of its wholly-owned
subsidiaries and Trust Company of the West and certain of its
affiliates, as purchasers.
4.1.2* Amendment No. 1 to Securities Purchase Agreement dated as of
January 9, 1998 by and among each of FAA Capitol N, Inc., FAA
Auto Factory, Inc. and each of the parties to the Securities
Purchase Agreement dated as of July 11, 1997.
4.1.3+++ Amendment No. 1 to Stockholders Agreement dated as of October
13, 1998, by and among the Company, Thomas A. Price, Donald
Strough and certain affiliates of Trust Company of the West.
4.1.4+++ Amendment No. 2 to Securities Purchase Agreement, dated as of
June 10, 1998, by and among each of FAA Beverly Hills, Inc.,
FAA Poway G, Inc., FAA Serramonte H, Inc. and each of the
parties to the Securities Purchase Agreement dated as of July
11, 1997.
4.1.5+++ Amendment No. 3 to Securities Purchase Agreement, dated as of
October 13, 1998, by and among each of FAA Concord T, Inc., a
California corporation and each of the parties to the
Securities Purchase Agreement dated as of July 11, 1997.
4.1.6+++ Amendment No. 4 to Securities Purchase Agreement, dated as of
November 19, 1998, by and among each of FAA Woodland Hills
VW, Inc. and each of the parties to the Securities Purchase
Agreement dated as of July 11, 1997.
4.1.7+++ Amendment No. 5 to Securities Purchase Agreement, dated as of
December 31, 1998, by and among each of DSW Associates, Inc.
and each of the parties to the Securities Purchase Agreement
dated as of July 11, 1997.
4.1.8**** Amendment No. 6 to Securities Purchase Agreement, dated as of
December 31, 1998, by and among each of the parties to the
Securities Purchase Agreement dated as of July 11, 1997, as
amended.
5.1++++ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1* Loan and Security Agreement by and between General Electric
Capital Corporation, and 13 subsidiaries of the Company dated
as of July 2, 1997.
10.1.1* Intercreditor and Subordination Agreement dated as of July 8,
1997 by and among TCW/Crescent Mezzanine Partners, L.P.,
TCW/Crescent Mezzanine Trust, TCW/Crescent Mezzanine
Investment Partners, L.P., and General Electric Capital
Corporation.
10.2* Agreement between American Honda Motor Co., Inc. and the
Company dated as of May 1, 1997 by and among the Company,
Donald V. Strough, Thomas A. Price, Steven S. Hallock, Fred
Cziska, Al Babbington, John Driebe, Raintree Capital, LLC, BB
Investments, Brown Gibbons & Lang, L.P. and American Honda
Motor Co., Inc.
10.2.1**** Honda Automobile Dealer Sales and Service Agreement dated as
of September 15, 1998 by and between the Company and American
Honda Motor Co., Inc.
II-5
<PAGE>
10.3* Nissan Dealer Agreement Sales and Service Agreement Standard
Provisions, dated as of July 16, 1997 by and between Nissan
Division, Nissan Motor Corporation in U.S.A. and the Company.
10.3.1* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
FAA Serramonte, Inc.
10.3.2* Nissan Contiguous Market Ownership Holding Company Agreement
dated June 30, 1997 by and among Nissan Motor Corporation in
U.S.A., the Company, FAA Concord N, Inc., and FAA Dublin N,
Inc.
10.3.3* Nissan Dealer Term Sales and Service Agreement dated as of
July 16, 1997 by and between Nissan Motor Corporation in
U.S.A. and FAA Dublin N, Inc.
10.3.4* Nissan Contiguous Market Ownership Addendum dated July 16,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Dublin N, Inc. and the Company.
10.3.5* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (FAA Dublin N,
Inc.).
10.3.6* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
Smart Nissan, Inc.
10.3.7* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, Smart Nissan, Inc. and the Company.
10.3.8* Nissan Contiguous Market Holding Company Agreement dated June
30, 1997 by and between Nissan Motor Corporation in U.S.A.
and the Company (Smart Nissan, Inc.; FAA Serramonte, Inc.).
10.3.9* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (Smart Nissan,
Inc.).
10.3.10* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Serramonte, Inc., and the Company.
10.3.11* Nissan Contiguous Market Ownership Holding Company Agreement
dated June 30, 1997 by and between Nissan Motor Corporation
in U.S.A. and the Company (FAA Serramonte, Inc.).
10.3.12* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
FAA Stevens Creek, Inc.
10.3.13* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Stevens Creek, Inc. and the Company.
10.3.14* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (FAA Stevens
Creek, Inc.).
II-6
<PAGE>
10.3.15* Nissan Dealer Term Sales and Service Agreement dated as of
September 25, 1997 by and between Nissan Motor Corporation in
U.S.A. and FAA Capitol N, Inc.
10.3.16* Nissan Contiguous Market Ownership Addendum dated September
25, 1997 by and among Nissan Motor Corporation in U.S.A.,
Thomas A. Price, FAA Capitol N, Inc. and the Company.
10.3.17* Nissan Contiguous Market Ownership Holding Company Agreement
dated September 25, 1997 by and between Nissan Motor
Corporation in U.S.A. and the Company (FAA Capitol N, Inc.).
10.3.18* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Concord N, Inc. and the Company.
10.3.19* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
FAA Concord N, Inc.
10.3.20* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (FAA Concord N,
Inc.)
10.4* Toyota Dealer Agreement dated as of April 24, 1997 by and
between Toyota Motor Sales, U.S.A., Inc. and FAA Poway T,
Inc.
10.4.1* Agreement dated as of May 2, 1997 between the Company and
Toyota Motor Sales, U.S.A., Inc.
10.4.2* Toyota Dealer Agreement dated as of June 30, 1997 by and
between the Company and Toyota Motor Sales, USA, Inc.
10.4.3* Lexus Dealer Agreement dated as of June 30, 1997 between
Lexus and FAA Serramonte L, Inc.
10.4.4 Toyota Dealer Agreement (Concord Toyota) dated as of October
1, 1998 by and between the Company and Toyota Motor Sales,
USA, Inc.
10.5* Dealer Sales and Service Agreement dated as of June 13, 1997
by and between Mitsubishi Motor Sales of America, Inc. and
FAA Serramonte, Inc.
10.6* Isuzu Dealer Sales and Service Agreement effective May 1,
1997 by and between American Isuzu Motors, Inc. and FAA
Serramonte, Inc.
10.6.1* Supplemental Agreement to Dealer Sales and Service Agreement
dated as of May 1, 1997 by and among FAA Serramonte, Inc. dba
Serramonte Auto Plaza, the Company and American Isuzu Motors,
Inc.
10.7* Master Agreement dated as of July 1, 1997 between FAA
Serramonte, Inc. d/b/a Dodge of Serramonte; FAA Poway D, Inc.
d/b/a Poway Dodge; FAA Dublin VWD, Inc., d/b/a Dublin Dodge;
the Company; Thomas A. Price and Chrysler Corporation.
10.7.1* Chrysler Corporation Dodge Sales and Services Agreement dated
as of May 9, 1997 by and between FAA Poway D, Inc., dba Poway
Dodge and Chrysler Corporation.
10.7.2* Chrysler Corporation Dodge Sales and Services Agreement dated
as of July 7, 1997 by and between FAA Serramonte Inc. D,
Inc., dba Dodge of Serramonte Dodge and Chrysler Corporation.
II-7
<PAGE>
10.7.3* Chrysler Corporation Dodge Sales and Services Agreement dated
as of July 18, 1997 between FAA Dublin VWD, Inc., dba Dublin
Dodge and Chrysler Corporation.
10.8* Pontiac-GMC Division Pontiac Dealer Sales and Service
Agreement dated as of June 30, 1997 between General Motors
Corporation, Pontiac and Transcar Leasing, Inc., dba
Serramonte Pontiac-Buick-GMC.
10.9* Lease Agreement dated as of September 18, 1997 by and among
Bay Automotive Properties, LLC, the Company and FAA Capitol
N, Inc.
10.9.1* Lease Agreement dated as of July 1, 1997 by and among the
Price Trust u/t/d 10/5/84, the Company and FAA Serramonte L,
Inc.
10.9.2* Lease Agreement dated as of April 15, 1998 by and among Price
Trust u/t/d 10/5/84, the Company and FAA Serramonte H, Inc.
10.9.3* Lease Agreement dated as of July 1, 1997 among Price Trust
u/t/d 10/5/84, the Company and FAA Serramonte L, Inc.
10.9.4* Lease Agreement dated as of July 1, 1997 among Rosewood
Village Associates, the Company and California Carriage
Limited.
10.9.5* Lease dated as of July 1, 1997 among Rosewood Village
Associates, the Company and FAA Stevens Creek, Inc.
10.10* Executive Employment Agreement dated as of July 1, 1997 by
and between the Company and Donald V. Strough.
10.10.1* Executive Employment Agreement dated as of July 1, 1997 by
and between the Company and Thomas A. Price.
10.10.2* Employment Agreement dated as of March 1, 1997 by and between
the Company and Steven S. Hallock.
10.10.3* Noncompetition Agreement dated as of July 8, 1997 by and
among Thomas A. Price, Donald Strough and the Company.
10.10.4**** Executive Employment Agreement dated as of March 30, 1999 by
and between the Company and Debra L. Smithart.
10.10.5**** Executive Employment Agreement dated as of March 30, 1999 by
and between the Company and Charles Oglesby.
10.11+++ FirstAmerica Automotive, Inc. 1997 Stock Option Plan.
10.12++++ 1999 Employee Stock Purchase Plan.
10.13++++ Form of Indemnification Agreement for directors and officers.
11.1 Statements of Computation of Pro Forma Common Shares and
Equivalents (see footnote 12 to our consolidated financial
statements).
21.1**** Subsidiaries of the Company.
23.1 Consent of KPMG, LLP.
II-8
<PAGE>
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of attorney (included on signature page).
99.1 Financial Statements as of December 31,1996 and 1997 for
Beverly Hills BM, Ltd., dba Beverly Hills BMW (with
independent auditors' report thereon) and March 31, 1998,
unaudited.
99.2 Financial Statements as of December 31,1996 for California
Carriage Ltd., dba Concord Honda Pontiac (with independent
auditors' report thereon) and September 30, 1997, unaudited.
99.3 Financial Statements as of December 31,1996 for Steven
Hallock Enterprises, Inc., dba Concord Nissan (with
independent auditors' report thereon) and June 30, 1997,
unaudited.
99.4 Financial Statements as of December 31,1995 and 1996 for
Valley Automotive Center (with independent auditors' report
thereon) and June 30, 1997, unaudited.
_____________
* As filed with the SEC in our annual report on Form 10-K on May 14,
1998.
** As filed with the SEC in our current report on Form 8-K on July 6,
1998.
*** As filed with the SEC in our quarterly report on Form 10-Q on
August 14, 1998.
**** As filed with the SEC in our annual report on Form 10-K on March 31,
1999.
+ As filed with the SEC in our current report on Form 8-K on October 16,
1998.
++ As filed with the SEC in our current report on Form 8-K on January
14, 1999.
+++ As filed with the SEC in our current report on Form S-8 on March 16,
1999.
++++ To be filed by amendment.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-9
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, County of
San Francisco, State of California, on the 7th day of April, 1999.
FIRSTAMERICA AUTOMOTIVE, INC.
By: /s/ Thomas A. Price
_____________________________________
Thomas A. Price
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and officers of FirstAmerica Automotive,
Inc., do hereby constitute and appoint Mr. Thomas A. Price and Ms. Debra L.
Smithart each with full power of substitution, our true and lawful attorney-in-
fact and agent to do any and all acts and things in our names and in our behalf
in our capacities stated below, which acts and things either of them may deem
necessary or advisable to enable FirstAmerica Automotive, Inc. to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Registration Statement, including specifically, but not limited to, power and
authority to sign for any and all of us in our names, in the capacities stated
below, any and all amendments (including post-effective amendments) hereto and
any subsequent registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission; and we do hereby ratify and confirm all that they shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------------------------- ------------------------------- ----------------------
<S> <C> <C>
/s/ Thomas A. Price President, Chief Executive April 7, 1999
- -------------------------------------------------------- Officer and Director (Principal
Thomas A. Price Executive Officer)
/s/ Debra L. Smithart Chief Financial and April 7, 1999
- --------------------------------------------------------- Administrative Officer
Debra L. Smithart (Principal Financial and
Accounting Officer)
/s/ Donald V. Strough Chairman of the Board of April 7, 1999
- --------------------------------------------------------- Directors
Donald V. Strough
/s/ W. Bruce Bercovich Director April 7, 1999
- ---------------------------------------------------------
W. Bruce Bercovich
/s/ Jean Marc Chapus Director April 7, 1999
- ---------------------------------------------------------
Jean-Marc Chapus
/s/ Robert Heller Director April 7, 1999
- ---------------------------------------------------------
H. Robert Heller
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
1.1++++ Form of Underwriting Agreement.
2.1.1* Agreement and Plan of Reorganization dated July 1, 1997 by
and among the Company, California Carriage, Ltd., dba Concord
Honda and Donald V. Strough, Trustee of the Strough 1983
Revocable Trust.
2.1.2* Agreement and Plan of Reorganization dated July 1, 1997 by
and among the Company, Price Auto Holding, Inc., dba Melody
Toyota, Price Trust utd 10/5/84, Fred Cziska and FAA San
Bruno, Inc.
2.1.3* Agreement and Plan of Reorganization dated July 1, 1997 by
and among the Company, Serramonte Motorcars, Inc., dba Lexus
of Serramonte, Price Trust utd 10/5/84, Fred Cziska, John
Driebe and FAA Serramonte L, Inc.
2.1.4* Agreement and Plan of Reorganization dated July 1, 1997
between the Company, Cziska Price, Inc., dba Stevens Creek
Nissan, the shareholders of Cziska Price, Inc. and FAA
Stevens Creek, Inc.
2.1.5* Agreement and Plan of Reorganization dated July 1, 1997
between the Company, Transcar Leasing, Inc., dba Serramonte
Auto Plaza, the shareholders of Transcar Leasing, Inc. and
FAA Serramonte GM, Inc.
2.1.6* Asset Purchase Agreement dated March 14, 1997 by and among
FAA Concord N, Inc., Concord Nissan, Inc. and Steven Hallock.
2.1.7* Stock Purchase Agreement dated July 1, 1997, by and between
the Company, the Price Trust u/t/d 10/5/84 and Smart Nissan,
Inc.
2.1.8* Asset Purchase Agreement dated March 19, 1997 by and between
the Company and Asian Pacific Industries, Inc.
2.1.9* Asset Purchase Agreement dated January 23, 1997 by and among
the Company, Auto Center of Poway, Inc., Thomas Nokes and H.
Matthew Travis.
2.1.10* Asset Purchase Agreement dated January 23, 1997 by and among
the Company, Auto Center of North County, Inc., Thomas Nokes
and H. Matthew Travis.
2.1.11** Asset Purchase Agreement dated January 29, 1998 by and among
the Company, Burgess British Cars, Inc., and Keith Burgess.
2.1.12** Letter of Agreement dated June 11, 1998 by and between the
Company and Donald V. Strough.
2.1.13*** Asset Purchase Agreement dated January 1998 by and among the
Company, Beverly Hills BM, Ltd., dba Beverly Hills BMW
("Seller"), and Ross Gilbert.
2.1.14*** Asset Purchase Agreement dated July 17, 1997 by and among the
Company, Golden Sierra Auto Group, dba Capitol Nissan and
Capman, Inc.
2.1.15+ Stock Purchase Agreement dated July 17, 1998, by and between
Graybehl Family Trust, dated March 22, 1978, Concord Toyota
Sales, Inc., and the Company.
2.1.16+ First Amendment to Stock Purchase Agreement dated October 1,
1998, by and between the Company, Vacation Motors, and the
Graybehl Family Trust, dated March 22, 1978.
2.1.17+ Second Amendment to Stock Purchase Agreement dated October
13, 1998 by and between the Company, Vacation Motors, and the
Graybehl Family Trust, dated March 22, 1978.
2.1.18++ Agreement and Plan of Reorganization, dated December 8, 1998,
among the Company, DSW Acquisition Corporation, DSW
Associates, Inc., and certain shareholders of DSW Associates,
Inc.
3.1* Amended and Restated Certificate of Incorporation, dated
July 8, 1997.
3.2+++ By-Laws.
1
<PAGE>
4.1* Stockholders' Agreement dated July 11, 1997 by and among the
Company and its stockholders, Thomas Price, Donald Strough,
Steven Hallock, Fred Cziska, Al Babbington, John Driebe,
Embarcadero Automotive, LLC, Raintree Capital LLC, BB
Investments and certain affiliates of Trust Company of the
West.
4.1.1* Securities Purchase Agreement dated as of July 11, 1997 by
and among the Company, certain of its wholly-owned
subsidiaries and Trust Company of the West and certain of its
affiliates, as purchasers.
4.1.2* Amendment No. 1 to Securities Purchase Agreement dated as of
January 9, 1998 by and among each of FAA Capitol N, Inc., FAA
Auto Factory, Inc. and each of the parties to the Securities
Purchase Agreement dated as of July 11, 1997.
4.1.3+++ Amendment No. 1 to Stockholders Agreement dated as of October
13, 1998, by and among the Company, Thomas A. Price, Donald
Strough and certain affiliates of Trust Company of the West.
4.1.4+++ Amendment No. 2 to Securities Purchase Agreement, dated as of
June 10, 1998, by and among each of FAA Beverly Hills, Inc.,
FAA Poway G, Inc., FAA Serramonte H, Inc. and each of the
parties to the Securities Purchase Agreement dated as of July
11, 1997.
4.1.5+++ Amendment No. 3 to Securities Purchase Agreement, dated as of
October 13, 1998, by and among each of FAA Concord T, Inc., a
California corporation and each of the parties to the
Securities Purchase Agreement dated as of July 11, 1997.
4.1.6+++ Amendment No. 4 to Securities Purchase Agreement, dated as of
November 19, 1998, by and among each of FAA Woodland Hills
VW, Inc. and each of the parties to the Securities Purchase
Agreement dated as of July 11, 1997.
4.1.7+++ Amendment No. 5 to Securities Purchase Agreement, dated as of
December 31, 1998, by and among each of DSW Associates, Inc.
and each of the parties to the Securities Purchase Agreement
dated as of July 11, 1997.
4.1.8**** Amendment No. 6 to Securities Purchase Agreement, dated as of
December 31, 1998, by and among each of the parties to the
Securities Purchase Agreement dated as of July 11, 1997, as
amended.
5.1++++ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1* Loan and Security Agreement by and between General Electric
Capital Corporation, and 13 subsidiaries of the Company dated
as of July 2, 1997.
10.1.1* Intercreditor and Subordination Agreement dated as of July 8,
1997 by and among TCW/Crescent Mezzanine Partners, L.P.,
TCW/Crescent Mezzanine Trust, TCW/Crescent Mezzanine
Investment Partners, L.P., and General Electric Capital
Corporation.
10.2* Agreement between American Honda Motor Co., Inc. and the
Company dated as of May 1, 1997 by and among the Company,
Donald V. Strough, Thomas A. Price, Steven S. Hallock, Fred
Cziska, Al Babbington, John Driebe, Raintree Capital, LLC, BB
Investments, Brown Gibbons & Lang, L.P. and American Honda
Motor Co., Inc.
10.2.1**** Honda Automobile Dealer Sales and Service Agreement dated as
of September 15, 1998 by and between the Company and American
Honda Motor Co., Inc.
2
<PAGE>
10.3* Nissan Dealer Agreement Sales and Service Agreement Standard
Provisions, dated as of July 16, 1997 by and between Nissan
Division, Nissan Motor Corporation in U.S.A. and the Company.
10.3.1* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
FAA Serramonte, Inc.
10.3.2* Nissan Contiguous Market Ownership Holding Company Agreement
dated June 30, 1997 by and among Nissan Motor Corporation in
U.S.A., the Company, FAA Concord N, Inc., and FAA Dublin N,
Inc.
10.3.3* Nissan Dealer Term Sales and Service Agreement dated as of
July 16, 1997 by and between Nissan Motor Corporation in
U.S.A. and FAA Dublin N, Inc.
10.3.4* Nissan Contiguous Market Ownership Addendum dated July 16,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Dublin N, Inc. and the Company.
10.3.5* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (FAA Dublin N,
Inc.).
10.3.6* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
Smart Nissan, Inc.
10.3.7* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, Smart Nissan, Inc. and the Company.
10.3.8* Nissan Contiguous Market Holding Company Agreement dated June
30, 1997 by and between Nissan Motor Corporation in U.S.A.
and the Company (Smart Nissan, Inc.; FAA Serramonte, Inc.).
10.3.9* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (Smart Nissan,
Inc.).
10.3.10* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Serramonte, Inc., and the Company.
10.3.11* Nissan Contiguous Market Ownership Holding Company Agreement
dated June 30, 1997 by and between Nissan Motor Corporation
in U.S.A. and the Company (FAA Serramonte, Inc.).
10.3.12* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
FAA Stevens Creek, Inc.
10.3.13* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Stevens Creek, Inc. and the Company.
10.3.14* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (FAA Stevens
Creek, Inc.).
3
<PAGE>
10.3.15* Nissan Dealer Term Sales and Service Agreement dated as of
September 25, 1997 by and between Nissan Motor Corporation in
U.S.A. and FAA Capitol N, Inc.
10.3.16* Nissan Contiguous Market Ownership Addendum dated September
25, 1997 by and among Nissan Motor Corporation in U.S.A.,
Thomas A. Price, FAA Capitol N, Inc. and the Company.
10.3.17* Nissan Contiguous Market Ownership Holding Company Agreement
dated September 25, 1997 by and between Nissan Motor
Corporation in U.S.A. and the Company (FAA Capitol N, Inc.).
10.3.18* Nissan Contiguous Market Ownership Addendum dated June 30,
1997 by and among Nissan Motor Corporation in U.S.A., Thomas
A. Price, FAA Concord N, Inc. and the Company.
10.3.19* Nissan Dealer Term Sales and Service Agreement dated June 30,
1997 by and between Nissan Motor Corporation in U.S.A. and
FAA Concord N, Inc.
10.3.20* Nissan Contiguous Market Ownership Areas Formation and
Linkage Agreement dated June 30, 1997 by and between Nissan
Motor Corporation in U.S.A. and the Company (FAA Concord N,
Inc.)
10.4* Toyota Dealer Agreement dated as of April 24, 1997 by and
between Toyota Motor Sales, U.S.A., Inc. and FAA Poway T,
Inc.
10.4.1* Agreement dated as of May 2, 1997 between the Company and
Toyota Motor Sales, U.S.A., Inc.
10.4.2* Toyota Dealer Agreement dated as of June 30, 1997 by and
between the Company and Toyota Motor Sales, USA, Inc.
10.4.3* Lexus Dealer Agreement dated as of June 30, 1997 between
Lexus and FAA Serramonte L, Inc.
10.4.4 Toyota Dealer Agreement (Concord Toyota) dated as of October
1, 1998 by and between the Company and Toyota Motor Sales,
USA, Inc.
10.5* Dealer Sales and Service Agreement dated as of June 13, 1997
by and between Mitsubishi Motor Sales of America, Inc. and
FAA Serramonte, Inc.
10.6* Isuzu Dealer Sales and Service Agreement effective May 1,
1997 by and between American Isuzu Motors, Inc. and FAA
Serramonte, Inc.
10.6.1* Supplemental Agreement to Dealer Sales and Service Agreement
dated as of May 1, 1997 by and among FAA Serramonte, Inc. dba
Serramonte Auto Plaza, the Company and American Isuzu Motors,
Inc.
10.7* Master Agreement dated as of July 1, 1997 between FAA
Serramonte, Inc. d/b/a Dodge of Serramonte; FAA Poway D, Inc.
d/b/a Poway Dodge; FAA Dublin VWD, Inc., d/b/a Dublin Dodge;
the Company; Thomas A. Price and Chrysler Corporation.
10.7.1* Chrysler Corporation Dodge Sales and Services Agreement dated
as of May 9, 1997 by and between FAA Poway D, Inc., dba Poway
Dodge and Chrysler Corporation.
10.7.2* Chrysler Corporation Dodge Sales and Services Agreement dated
as of July 7, 1997 by and between FAA Serramonte Inc. D,
Inc., dba Dodge of Serramonte Dodge and Chrysler Corporation.
4
<PAGE>
10.7.3* Chrysler Corporation Dodge Sales and Services Agreement dated
as of July 18, 1997 between FAA Dublin VWD, Inc., dba Dublin
Dodge and Chrysler Corporation.
10.8* Pontiac-GMC Division Pontiac Dealer Sales and Service
Agreement dated as of June 30, 1997 between General Motors
Corporation, Pontiac and Transcar Leasing, Inc., dba
Serramonte Pontiac-Buick-GMC.
10.9* Lease Agreement dated as of September 18, 1997 by and among
Bay Automotive Properties, LLC, the Company and FAA Capitol
N, Inc.
10.9.1* Lease Agreement dated as of July 1, 1997 by and among the
Price Trust u/t/d 10/5/84, the Company and FAA Serramonte L,
Inc.
10.9.2* Lease Agreement dated as of April 15, 1998 by and among Price
Trust u/t/d 10/5/84, the Company and FAA Serramonte H, Inc.
10.9.3* Lease Agreement dated as of July 1, 1997 among Price Trust
u/t/d 10/5/84, the Company and FAA Serramonte L, Inc.
10.9.4* Lease Agreement dated as of July 1, 1997 among Rosewood
Village Associates, the Company and California Carriage
Limited.
10.9.5* Lease dated as of July 1, 1997 among Rosewood Village
Associates, the Company and FAA Stevens Creek, Inc.
10.10* Executive Employment Agreement dated as of July 1, 1997 by
and between the Company and Donald V. Strough.
10.10.1* Executive Employment Agreement dated as of July 1, 1997 by
and between the Company and Thomas A. Price.
10.10.2* Employment Agreement dated as of March 1, 1997 by and between
the Company and Steven S. Hallock.
10.10.3* Noncompetition Agreement dated as of July 8, 1997 by and
among Thomas A. Price, Donald Strough and the Company.
10.10.4**** Executive Employment Agreement dated as of March 30, 1999 by
and between the Company and Debra L. Smithart.
10.10.5**** Executive Employment Agreement dated as of March 30, 1999 by
and between the Company and Charles Oglesby.
10.11+++ FirstAmerica Automotive, Inc. 1997 Stock Option Plan.
10.12++++ 1999 Employee Stock Purchase Plan.
10.13++++ Form of Indemnification Agreement for directors and officers.
11.1 Statements of Computation of Pro Forma Common Shares and
Equivalents (see footnote 12 to our consolidated financial
statements).
21.1**** Subsidiaries of the Company.
23.1 Consent of KPMG, LLP.
5
<PAGE>
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of attorney (included on signature page).
99.1 Financial Statements as of December 31,1996 and 1997 for
Beverly Hills BM, Ltd., dba Beverly Hills BMW (with
independent auditors' report thereon) and March 31, 1998,
unaudited.
99.2 Financial Statements as of December 31,1996 for California
Carriage Ltd., dba Concord Honda Pontiac (with independent
auditors' report thereon) and September 30, 1997, unaudited.
99.3 Financial Statements as of December 31,1996 for Steven
Hallock Enterprises, Inc., dba Concord Nissan (with
independent auditors' report thereon) and June 30, 1997,
unaudited.
99.4 Financial Statements as of December 31,1995 and 1996 for
Valley Automotive Center (with independent auditors' report
thereon) and June 30, 1997, unaudited.
_____________
* As filed with the SEC in our annual report on Form 10-K on May 14,
1998.
** As filed with the SEC in our current report on Form 8-K on July 6,
1998.
*** As filed with the SEC in our quarterly report on Form 10-Q on
August 14, 1998.
**** As filed with the SEC in our annual report on Form 10-K on March 31,
1999.
+ As filed with the SEC in our current report on Form 8-K on October 16,
1998.
++ As filed with the SEC in our current report on Form 8-K on January
14, 1999.
+++ As filed with the SEC in our current report on Form S-8 on March 16,
1999.
++++ To be filed by amendment.
6
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
FirstAmerica Automotive, Inc.
We consent to the inclusion in the Registration Statement of FirstAmerica
Automotive, Inc. on Form S-1 of (i) our report dated March 19, 1999 on the
consolidated financial statements of FirstAmerica Automotive, Inc. as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998; (ii) our report dated March 5, 1999 on the financial
statements of Beverly Hills BM, Ltd., (dba Beverly Hills, BMW) as of December
31, 1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997; (iii) our audit report dated November 14, 1997 on the
financial statements of California Carriage Ltd., (dba Concord Honda Pontiac) as
of December 31, 1996; (iv) our report dated September 19, 1997 on the financial
statements of Steven A. Halleck Enterprises Inc., (dba Concord Nissan) as of
December 31, 1996; and (v) our report dated January 9, 1998 on the financial
statements of Valley Automotive Center as of December 31, 1996 and 1995.
The audits referred to on our report dated March 19, 1999, included the related
financial statement schedules as of December 31, 1998 and for each of the years
in the three-year period ended December 31, 1998, included in the registration
statement. The financial statement schedules of FirstAmerica Automotive, Inc.
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
We also consent to the reference to our firm under the headings "Selected
Historical Consolidated Financial Data" and "Experts" in the Prospectus.
/s/ KPMG, LLP
San Francisco, California
April 7, 1999
<PAGE>
EXHIBIT 99.1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 2-297254-NY 88-0206732
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
601 BRANNAN STREET
SAN FRANCISCO, CA 94107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 284-0444
(Former name, former address and former fiscal year, if changed
since last report)
<PAGE>
BEVERLY HILLS BMW
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT F-2
FINANCIAL STATEMENTS
Balance sheets F-3
Statements of operations and retained earnings F-5
Statements of cash flows F-6
Notes to financial statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstAmerica Automotive, Inc.:
We have audited the accompanying balance sheets of Beverly Hills BM, LTD. (DBA
Beverly Hills BMW) as of December 31, 1997 and 1996 and the related statements
of operations and retained earnings and cash flows for the three years ended
December 31, 1997. These financial statements are the responsibility of
FirstAmerica Automotive Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Beverly Hills BMW (as defined
in note 1) as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the three year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
March 5, 1999
F-2
<PAGE>
BEVERLY HILLS BMW
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997 1996
----------- -------- ---------
<S> <C> <C> <C>
Assets
Cash $ 856 $ - $ -
Accounts receivable (note 2) 2,186 2,662 1,446
Inventories (note 3) 6,840 6,192 7,696
Deposits and prepaid expenses 36 76 86
----------- -------- ---------
Total current assets 9,918 8,930 9,228
Property and equipment, net (note 4) 563 602 690
Goodwill 1,467 1,500 1,633
----------- -------- ---------
Total assets $11,948 $11,032 $11,551
=========== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
BEVERLY HILLS BMW
BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997 1996
----------- -------- ---------
<S> <C> <C> <C>
Liabilities and Partners' Capital
Current liabilities:
Cash overdraft $ - $ 236 $ 499
Due to affiliate 195 195 195
Accounts payable 174 184 114
Accrued liabilities 1,265 1,270 1,007
Floor plan notes payable (note 3) 5,608 4,652 6,002
Current portion of long-term debt (note 5) 373 373 377
----------- -------- ---------
Total current liabilities 7,615 6,910 8,194
Long-term debt, net of current portion (note 5) 2,431 2,525 2,898
----------- -------- ---------
Total liabilities 10,046 9,435 11,092
Commitments (note 6)
Partners' capital:
Paid in capital 404 404 404
Retained earnings 1,498 1,193 55
----------- -------- ---------
Total partners' capital 1,902 1,597 459
----------- -------- ---------
$11,948 $11,032 $11,551
=========== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
BEVERLY HILLS BMW
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997 TWELVE MONTHS ENDED DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1997 1996 1995
------------ ------------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sales:
Vehicle $15,446 $10,777 $45,021 $39,491 $33,591
Service, parts, and other 2,182 2,261 8,709 8,368 8,260
------------ ------------- -------- --------- -----------
Total sales 17,628 13,038 53,730 47,859 41,851
Cost of sales 14,802 10,774 44,443 39,282 35,043
------------ ------------- -------- --------- -----------
Gross profit 2,826 2,264 9,287 8,577 6,808
Operating expenses:
Selling, general and administrative 2,134 1,563 6,842 6,466 6,042
Depreciation and amortization 72 61 249 243 240
------------ ------------- -------- --------- -----------
Operating income 620 640 2,196 1,868 526
Other income (expense):
Interest income 4 2 45 18 26
Interest expense (198) (226) (861) (871) (968)
Other, net (1) 1 (2) (18) (35)
------------ ------------- -------- --------- -----------
Net Income (loss) 425 417 1,378 997 (451)
Retained earnings (deficit), beginning of period 1,193 55 55 (717) (119)
Distributions (120) (60) (240) (225) (147)
------------ ------------- -------- --------- -----------
Retained earnings (deficit), end of period $ 1,498 $ 412 $ 1,193 $ 55 $ (717)
============ ============= ======== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
BEVERLY HILLS BMW
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997 YEAR ENDED ENDED DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1997 1996 1995
------------ ------------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 425 $ 417 $ 1,378 $ 997 $(451)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 72 61 249 243 240
Changes in operating assets and liabilities:
Receivables and contracts in transit 476 (152) (1,216) 326 (689)
Inventories (648) 1,220 1,504 (2,042) 34
Deposits and prepaid expenses 40 (20) 10 (5) 41
Cash overdraft (236) (499) (263) 27 184
Flooring notes payable 956 (760) (1,350) 394 711
Accounts payable and accrued liabilities (15) (33) 333 19 505
------------ ------------- -------- --------- -----------
Net cash (used in) provided by operating activities 1,070 234 645 (41) 575
------------ ------------- -------- --------- -----------
Cash flows from investing activities:
Capital expenditures, net - (7) (28) (22) (49)
------------ ------------- -------- --------- -----------
Net cash used in investing activities - (7) (28) (22) (49)
------------ ------------- -------- --------- -----------
Cash flows from financing activities:
Proceeds from long-term debt - - - 666 -
Payments on long-term debt (94) (95) (377) (378) (379)
Distributions to stockholder (120) (60) (240) (225) (147)
------------ ------------- -------- --------- -----------
Net cash (used in) provided by financing activities (214) (155) (617) 63 (526)
------------ ------------- -------- --------- -----------
Net increase in cash 856 72 - - -
Cash at beginning of the period - - - -
------------ ------------- -------- --------- -----------
Cash at end of the period $ 856 $ 72 $ - $ - $
============ ============= ======== ========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 161 $ 163 $ 642 $ 653 $ 648
============ ============= ======== ========= ===========
Cash paid during the year for taxes $ - $ - $ - $ - $ -
============ ============= ======== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
BEVERLY HILLS BMW
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BUSINESS
Beverly Hills BMW (the Partnership) was formed as a general partnership
on January 15, 1994 in order to acquire certain assets to operate as an
authorized dealer in BMW automobiles, and other BMW products. In
addition, the Partnership retails and wholesales replacement parts and
used automobiles and provides vehicle servicing. The Partnership
commenced operations in April of 1994.
(b) BASIS OF PREPARATION
The accompanying financial statements reflect the historical financial
position, results of operations and cash flows for Beverly Hills BMW,
all of which were subsequently sold to FirstAmerica Automotive, Inc.
(note 8).
(c) CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity
of three months or less from the purchase date to be cash equivalents.
(d) INVENTORIES
Inventories are stated at the lower of cost or market, vehicle cost is
determined using the specific identification basis. Parts and
accessories cost is determined using the first-in, first-out (FIFO)
basis which approximates the lower of cost or market.
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Property and equipment are
being depreciated on a straight-line basis over the estimated useful
life of the assets. Leasehold improvements are amortized straight-line
over the shorter of the lease term or estimated useful life of the
asset. The range of estimated useful lives are as follows:
Leasehold improvements 5 to 10 years
Equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Company vehicles 5 years
The cost of maintenance and repairs is expensed as incurred, while
significant renewals and betterments are capitalized. When an asset is
retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the account, and any gain or loss is
credited or charged to income.
(f) GOODWILL
Goodwill is being amortized using the straight-line method over 15
years.
(g) INCOME TAXES
The Partnership files its income tax return on the accrual basis and
does not pay income taxes, as any income or loss is included in the tax
returns of the individual partners. Accordingly, no provision for taxes
is made in the financial statement.
F-7
<PAGE>
(h) FINANCIAL INSTRUMENTS
The carrying amounts of trade receivables, trade payables, accrued
liabilities and short-term borrowings approximate fair value because of
the short-term nature of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
(i) ADVERTISING
The Partnership expenses production and other costs of advertising as
incurred. Advertising expenses were $38,000 and $90,000 for the
unaudited three month periods ended March 31, 1998 and 1997,
respectively, and $311,000, $364,000 and $278,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(j) CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the
Partnership's customer base.
(k) USE OF ESTIMATES
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(l) REVENUE RECOGNITION
Vehicle sales revenue is recognized upon delivery, when the sales
contract is signed and down payment has been received. Notes received
from buyers are generally sold to finance companies. Finance fees are
received for notes sold to finance companies and are recognized, net of
anticipated charge backs, upon acceptance of the credit by the finance
companies. These fees are included in service, parts, and other
revenues in the statements of operations. Parts and service revenues
are recognized at the time of sale or service.
The Partnership recognizes fees from the sale of third party extended
warranty service contracts at the time of sale. Warranty service
contract revenues are included in service, parts, and other revenues in
the statements of operations.
(m) MAJOR SUPPLIER AND DEALER AGREEMENT
The Partnership purchases substantially all of its new vehicles and
inventory from one manufacturer at the prevailing prices charged by the
manufacturer. The Partnership's overall sales could be impacted by the
manufacturer's inability or unwillingness to supply the dealership with
an adequate supply of popular models.
F-8
<PAGE>
(2) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997 1996
------------- ------- -------
<S> <C> <C> <C>
Contracts in transit and vehicle receivables $1,780 $2,139 $1,014
Trade 62 109 167
Manufacturer and other 344 414 265
------ ------ ------
Total accounts receivable $2,186 $2,662 $1,446
====== ====== ======
</TABLE>
Contracts in transit receivables are due from financial institutions
and regional banks for funding of customer vehicle purchases and are
normally collected within 30 days. Trade receivables primarily consist
of commercial receivables for parts sales and finance receivables from
financial institutions for financing commissions. Manufacturer and
other receivables consist of amounts due from manufacturers for rebates
on vehicle purchases (holdbacks), manufacturer incentives and
reimbursable warranty coverage expenses.
(3) INVENTORIES AND FLOOR PLAN NOTES PAYABLE
Inventories and floor plan notes payable were as follows (in
thousands):
<TABLE>
<CAPTION>
INVENTORY COST FLOOR PLAN NOTES PAYABLE
MARCH 31, 1998 DECEMBER 31, MARCH 31, 1998 DECEMBER 31,
(UNAUDITED) 1997 1996 (UNAUDITED) 1997 1996
------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New vehicles $ 4,825 $ 3,145 $ 5,671 $ 4,750 $ 3,106 $ 5,320
Used vehicles 943 1,808 927 198 689 60
Rental vehicles,net 617 769 611 660 857 622
Parts and accessories 455 470 487 -- -- --
------------------------------------- -------------------------------------------
Inventories $ 6,840 $ 6,192 $ 7,696 $ 5,608 $ 4,652 $ 6,002
===================================== ===========================================
</TABLE>
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at prime plus .5% (9% at December 31,
1997, 8.75% at December 31, 1996) and are secured by vehicles and
vehicle receivables. The floor plan agreement permits the Partnership
to borrow up to $7 million; borrowings are limited by vehicle inventory
levels.
F-9
<PAGE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997 1996
----------- ------- --------
<S> <C> <C> <C>
Leasehold improvements $ 546 $ 546 $ 536
Equipment 234 234 227
Company vehicles - 50 53
Furniture and fixtures 140 140 126
----------- ------- --------
920 970 942
Less accumulated depreciation (357) (368) (252)
----------- ------- --------
Property and equipment, net $ 563 $ 602 $ 690
=========== ======= ========
</TABLE>
(5) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997 1996
----------- ------- --------
<S> <C> <C> <C>
BMW Financial Services Term Loan #1 $1,361 $1,445 $1,778
BMW Financial Services Term Loan #2 43 53 93
RGBMW, Inc. 1,400 1,400 1,400
City National Bank - - 4
----------- ------- --------
2,804 2,898 3,275
Less current portion (373) (373) (377)
----------- ------- --------
Long-term debt, net $2,431 $2,525 $2,898
=========== ======= ========
</TABLE>
BMW Financial Services term loans #1 and #2, each secured by
substantially all the assets of Beverly Hills BMW, are payable in
monthly principal installments of $27,778 and $3,333 respectively, plus
interest charged at a rate of interest equal to BMW Financial Services
prime interest rate plus 0.5%. Term loan #1 has a maturity date of
April 2000. Term loan #2 has a maturity date of April 1999
In April 1994, RGBMW, Inc., an affiliate, provided Beverly Hills BMW a
working capital loan of $1,400,000 secured by all the assets of the
partnership and payable in 72 monthly installments bearing interest at
the prime interest rate plus 1.5%. This loan is subordinate to all and
any indebtedness or obligations owed by the partnership to BMW of North
America, Inc. and/or BMW Financial Services, Inc. and shall be secured
by all the junior security interest in all of the assets of the
partnership. All monthly principal and interest payments since
inception have been deferred by affiliate. Per Partnership Agreement,
interest is being accrued monthly. Accrued interest at December 31,
1997 and 1999 was $614,000 and $431,000, respectively.
City National Bank debt is unsecured, payable in monthly installments
of $500 and was paid off in September 1997.
The following is a schedule of the future maturities of long-term debt (in
thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1998 $ 373
1999 1,746
2000 779
Thereafter -
-------
$ 2,898
=======
</TABLE>
F-10
<PAGE>
(6) COMMITMENTS
The minimum rental commitments under operating leases which have terms
greater than one year after December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1998 $ 1,176
1999 1,176
2000 1,176
2001 1,176
2002 1,176
Thereafter 5,880
-------
$11,760
=======
</TABLE>
Amounts paid under operating leases totaled $337,000 and $335,000 for
the unaudited three months ended March 31, 1998 and 1997,respectively
and $1,344,000, $1,334,000 and $1,311,00for the years ended December
31, 1997, 1996 and 1995, respectively.
(7) RELATED PARTY TRANSACTIONS
LEASE
The Partnership leases a portion of its facilities from RGBM
Corporation, an affiliate,for $60,000 per month. Rental expense under
the terms of the agreement between the Partnership and the affiliate
totaled $180,000 for each of the unaudited three month periods ended
March 31, 1998 and 1997, and $720,000 per year for each of the years
ended December 31, 1997, 1996, and 1995, respectively.
DUE TO AFFILIATE
Due to affiliate of $195,000 relates to leasehold improvements funded
by an affiliated company.
(8) SUBSEQUENT EVENTS
In April 1998, substantially all of the operating assets of the Partnership
were acquired by FirstAmerica Automotive, Inc. No adjustments related to
the acquisition are reflected in the accompanying historical financial
statements.
F-11
<PAGE>
Exhibit 99.2
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
CONTENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT 2
FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations and Owner's Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6
1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
FirstAmerica Automotive, Inc.
We have audited the accompanying balance sheet of California Carriage, Ltd.
(d.b.a. Concord Honda Pontiac) as of December 31, 1996, and the related
statement of operations and owner's equity and cash flows for the year then
ended. These financial statements are the responsibility of FirstAmerica
Automotive, Inc. management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of California Carriage, Ltd.
(d.b.a. Concord Honda Pontiac) as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
November 14, 1997
2
<PAGE>
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
Assets 1997 1996
- ------ -------------------------- --------------------------
<S> <C> <C>
Cash $ 47 $ -
Accounts receivable, net (note 2) 1,268 944
Receivable from manufacturer (note 11) 174 -
Inventories, net (note 3) 2,680 4,307
Deposits and prepaid expenses 285 135
Deferred tax asset 104 -
Prepaid costs-extended warranty service contracts 89 54
-------------------------- --------------------------
Total current assets 4,647 5,440
Property and equipment, net (note 4) 624 505
Prepaid costs-extended warranty service contracts 141 87
Deferred tax asset 46 -
Other noncurrent assets - 8
Goodwill, net (note 1) 1,320 1,353
-------------------------- --------------------------
Total assets $ 6,778 $ 7,393
========================== ==========================
Liabilities and Shareholder's Equity
Bank overdraft $ - $ 104
Accounts payable and accrued liabilities 665 267
Notes payable to shareholder - 430
Due to affiliate (note 7) 482 462
Current maturities of long-term debt (note 6) 300 300
Inventory floor plan notes payable (note 3) 2,623 4,105
Deferred revenue - extended warranty service contracts 199 118
-------------------------- --------------------------
Total current liabilities 4,269 5,786
Deferred revenue - extended warranty service contracts 290 189
Long term debt (note 6) 543 768
-------------------------- --------------------------
Total liabilities 5,102 6,743
Commitments (note 9)
Total owner's equity 1,676 650
-------------------------- --------------------------
$ 6,778 $ 7,393
========================== ==========================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended Year ended
September 30, December 31,
1997 1996
------------------------ --------------------
Sales:
<S> <C> <C>
Vehicle $ 27,539 $ 28,846
Service, parts and other 4,356 5,179
------------------------ --------------------
Total sales 31,895 34,025
Cost of sales 27,362 29,347
------------------------ --------------------
Gross profit 4,533 4,678
Operating expenses:
Selling, general and administrative 3,805 4,295
Depreciation and amortization 141 168
------------------------ --------------------
Operating income 587 215
Other income (expense):
Interest expense (220) (425)
Other income (expense) (13) 4
Gain on sale of dealership assets (note 11) 775 --
------------------------ --------------------
Income (loss) before income taxes 1,129 (206)
Income tax expense (103) (1)
------------------------ --------------------
Net income (loss) $ 1,026 $ (207)
Owner's equity, beginning of period 650 857
------------------------ --------------------
Owner's equity, end of period $ 1,676 $ 650
======================== ====================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CALIFORNIA CARRIAGE LTD
D.B.A. CONCORD HONDA PONTIAC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended Year ended
September 30, December 31,
1997 1996
------------------- -------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 1,026 $ (124)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Gain on sale of dealership (775) -
Deferred income taxes (150) (66)
Depreciation and amortization 141 168
Amortization of deferred warranty revenue 93 125
Changes in operating assets and liabilities:
Accounts receivable, net (324) 250
Inventories, net 853 961
Deposits and prepaid expenses (150) (52)
Other noncurrent assets 8 (8)
Floor plan notes payable (882) (1,253)
Accounts payable and accrued liabilities 418 (39)
------------------ ------------------
Net cash provided by (used in) operating activities 258 (38)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures (227) (28)
Receivable from manufacturer for sale of dealership (174) -
Proceeds from sale of dealership 949 -
------------------ ------------------
Net cash provided by (used in) investing activities 548 (28)
------------------ ------------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft (104) 104
Payments on long term debt (225) -
Payments on notes payable to shareholder (430) (45)
------------------ ------------------
Net cash provided by (used in) financing activites (759) 59
------------------ ------------------
Net increase (decrease) in cash 47 (7)
Cash at beginning of period - 7
------------------ ------------------
Cash at end of period $ 47 $ -
================== ==================
Supplemental cash flow information:
Cash paid during the year for interest $ 240 $ 412
================== ==================
Cash paid during the year for taxes $ 96 $ 1
================== ==================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
(a) Organization and Business
California Carriage, Ltd. (d.b.a. Concord Honda Pontiac) (the "Company") is
an automobile dealership that serves customers located principally in
northern California. The company offers a broad range of products and
services that include new Honda and Pontiac vehicles as well as used
vehicles and light trucks, vehicle financing and insurance, and replacement
parts and service. The company sold its Pontiac operations to the
manufacturer in September, 1997 (note 11). In October, 1997 the Company
was acquired by FirstAmerica Automotive, Inc. (note 12).
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations, and cash flows for the Company.
(c) Inventories
New and used vehicles are stated at the lower of cost or market; cost is
determined by using the specific identification method. Parts and
accessories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method which approximates market value.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment are
being depreciated over the estimated useful life of the assets. Leasehold
improvements are amortized over the shorter of the lease term or estimated
useful life of the asset. The range of estimated useful lives and
depreciation methods are as follows:
Leasehold improvements 15 years
Equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Company vehicles 5 years
Maintenance and repairs are expensed as incurred, while significant
renewals and betterments are capitalized. When an asset is retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the account, and any gain or loss is credited or charged to
income.
6
<PAGE>
(e) Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standard (SFAS) No. 109,
"Accounting for Income Taxes". Under SFAS 109, deferred income tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance reduces
deferred tax assets when it is more likely than not that some or all of the
deferred tax assets would not be realized. The effect on deferred income
tax assets and liabilities of changes in tax rates is recognized in income
in the period that includes the enactment date.
(f) Financial Instruments
The carrying amount of trade receivables, trade payables, accrued
liabilities and short term borrowings approximate fair value because of the
short-term nature of these instruments. Fair value estimates are made at a
specific point in time, based on relevant market information about the
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates. The carrying amount of the note payable approximates
fair value.
(g) Goodwill
Goodwill represents the excess of purchase price over the fair value of net
assets acquired and is being amortized on a straight-line basis over 40
years. The Company periodically assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The assessment of
the recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
The Company recorded goodwill in connection with the acquisition of its
Honda dealership operations in 1995. Goodwill is shown net of accumulated
amortization of approximately $77,000 and $44,000 at September 30, 1997 and
December 31, 1996, respectively.
(h) Advertising
The Company expenses production and other costs of advertising. Advertising
expenses were approximately $339,000 for the nine months ended September
30, 1997 and $446,000 for the year ended December 31, 1996.
(i) Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer
base.
(j) Use of Estimates
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
7
<PAGE>
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(k) Revenue Recognition
Vehicle sales revenue is recognized upon delivery. Notes received from
buyers are generally sold to finance companies. Finance fees are received
for notes sold to finance companies and are recognized, net of anticipated
charge backs, upon acceptance of the credit by the finance companies. These
fees are included in service, parts, and other revenues in the statements
of operations. Parts and service revenues are recognized at the time of
sale or service.
The Company recognizes fees from the sale of separately priced extended
warranty service contracts at the time of sale. For extended warranty
service contracts where the Company is the primary obligor of the contract,
the costs directly related to sales of the contracts are deferred and
charged to expense proportionately as the revenues are recognized. Warranty
service contract revenues are included in service, parts, and other
revenues in the statements of operations.
(l) Major Supplier and Dealer Agreement
The Company purchases substantially all of its new vehicles and inventory
from one manufacturer at the prevailing prices charged by the manufacturer.
The Company's overall sales could be impacted by the manufacturer's
inability or unwillingness to supply the dealership with an adequate supply
of popular models.
(2) Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Contracts in transit and vehicle receivables $1,121 $ 880
Trade 247 214
Manufacturer and other 80 13
-------------------------------------
Total accounts receivable 1,448 1,107
Less allowance for doubtful accounts (180) (163)
-------------------------------------
Accounts receivable, net $1,268 $ 944
=====================================
</TABLE>
Contracts in transit receivables are due from financial institutions and
regional banks for funding of customer vehicle purchases and are normally
collected within 30 days. Trade receivables primarily consist of commercial
receivables for parts sales and finance receivables from financial
institutions for financing commissions. Manufacturer and other receivables
consist of amounts due from manufacturers for rebates on vehicle purchases
(holdbacks), manufacturer incentives and reimbursable warranty coverage
expenses.
8
<PAGE>
(3) Inventories and Floor Plan Notes Payable
Inventories and related floor plan notes payable are as follows (in
thousands):
<TABLE>
<CAPTION>
Inventory Cost Floor Plan Notes Payable
-------------------------------------------------------------------------
(unaudited) (unaudited)
September 30, December 31, September 30, December 31,
1997 1996 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New vehicles $1,970 $2,886 $2,623 $4,105
Used vehicles 443 1,024
Parts and accessories 267 397
-------------------------------------------------------------------------
Total $2,680 $4,307 $2,623 $4,105
=========================================================================
</TABLE>
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at 8.5% and are secured by new vehicles and
vehicle receivables. The borrowing agreement permits the Company to borrow
an aggregate of $5,400,000, restricted by vehicle inventory levels. As of
September 30, 1997 and December 31, 1996, approximately $0 and $700,000 in
notes payable were out of trust. In October, 1997 the Company was acquired
by First America Automotive, Inc. (note 12) and all floor plan notes
payable were paid.
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Equipment $ 323 $ 322
Company vehicles 304 113
Leasehold improvements 19 -
Furniture and fixtures 247 231
-------------------------------------
893 666
Less accumulated depreciation (269) (161)
-------------------------------------
Property and equipment, net $ 624 $ 505
=====================================
</TABLE>
9
<PAGE>
(5) Income Taxes
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1997 1996
---------------------------------
<S> <C> <C>
Current:
Federal $ 215 $ -
State 38 1
---------------------------------
253 1
Deferred:
Federal (128) -
State (22) -
---------------------------------
Income tax expense $ 103 $ 1
=================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets as of September 30, 1997 and
December 31, 1996, are presented below (in thousands):
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1997 1996
-----------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance and accruals $ 104 $ 97
Extended warranty service contracts 104 76
Net operating loss carryover - 233
Valuation allowance - (355)
-----------------------------------
Deferred tax assets 208 51
Deferred tax liabilities:
Property and equipment 22 22
Goodwill 36 29
-----------------------------------
Deferred tax liabilities 58 51
===================================
Net deferred tax assets $ 150 $ -
===================================
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Expected pro forma income tax expense 34% 34%
State income tax expense, net of federal tax effect 6 -
Change in valuation allowance (31) (34)
-------------------------------------
9% - %
=====================================
</TABLE>
10
<PAGE>
(6) Long Term Debt
Long term debt consists of a note payable due the sole shareholder for
amounts borrowed in connection with the acquisition of the Honda and
Pontiac dealerships in 1995. Principal is payable at $25,000 per month and
the interest rate varies from 9 to 9.5%. The note matures on October 11,
2000. Amounts due as of September 30, 1997 and December 31, 1996 were
$843,000 and $1,068,000, respectively. Maturities of long term debt for the
five years subsequent to September 30, 1997 are as follows (in thousands):
Three months ending December 31, 1997 $ 75
Years ending December 31, 1998 300
1999 300
2000 168
Thereafter -
----
$843
====
(7) Due to Affiliate
Amounts due to an affiliate totaled approximately $482,000 and $462,000 as
of September 30, 1997 and December 31, 1996, respectively, including
accrued interest. The amount due is unsecured, principal and interest is
due on demand, and accrues interest at 5.8% per year.
(8) Shareholder Notes Payable
In 1996, the Company borrowed $430,000 from the sole shareholder at
interest rates varying from 9 to 9.5%. The note was repaid in 1997.
(9) Commitments
(a) Operating Leases
The future minimum rental commitments under operating leases after
September 30, 1997 were as follows (in thousands):
Three months ended December 31, 1997 $ 128
Years ending December 31:
1998 510
1999 510
2000 510
2001 510
Thereafter 5,355
------
$7,523
======
Rental expense for all operating leases was approximately $334,000 for nine
months ended September 30, 1997 and $409,000 for 1996.
11
<PAGE>
(10) Employee Benefits
The Company provides a 401(k) Plan and Trust Agreement (the Plan). The Plan
covers substantially all employees of the Company. The annual contribution
to the plan is at the discretion of the Board of Directors. There were no
contributions to the Plan for the nine months ended September 30, 1997 or
the year ended December 31, 1996.
(11) Sale of Pontiac Dealership
In September 1997, the Company sold its Pontiac franchise and related
dealership inventories assets to the manufacturer at a gain of
approximately $775,000, which is included in other income in the
accompanying financial statements. Assets sold consisted of the following
(in thousands):
New vehicle inventories, net of
floor-plan liability $ 87
Parts and accessories 87
Gain on sale 775
----
Proceeds $949
====
As of September 30, 1997, the manufacturer owed the Company approximately
$174,000 in connection with the sale. Revenues related to the Pontiac
dealership were $3.9 million and $5.6 million for the nine months ended
September 30, 1997 and the year ended December 31, 1996, respectively.
(12) Subsequent Event
In October of 1997, substantially all of the operating assets of the
Company were acquired by First America Automotive, Inc. No adjustments
related to the acquisition are reflected in the accompanying historical
financial statements.
12
<PAGE>
EXHIBIT 99.3
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT 2
FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations 4
Statements of Shareholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstAmerica Automotive, Inc.
We have audited the accompanying balance sheet of Steven A. Hallock Enterprises,
Inc. (d.b.a. Concord Nissan) as of December 31, 1996, and the related statement
of operations, shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of FirstAmerica Automotive,
Inc. management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Steven A. Hallock Enterprises,
Inc. (d.b.a. Concord Nissan) as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
September 19, 1997
<PAGE>
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited) December 31,
June 30, 1997 1996
------------- ------------
<S> <C> <C>
Assets
- ------
Cash (note 6) $ - $ -
Accounts receivable, net (note 2) 1,318 741
Inventories, net (note 3) 3,428 3,733
Deposits and prepaid expenses 56 20
Prepaid costs-extended warranty service contracts 173 123
Deferred income taxes 21 21
------------- ------------
Total current assets 4,996 4,638
Property and equipment, net (note 4) 125 130
Prepaid costs-extended warranty service contracts 260 244
Receivable from shareholder 36 201
Deferred income taxes 132 134
------------- ------------
Total assets $ 5,549 $ 5,347
============= ============
Liabilities and Shareholders' Equity
- ------------------------------------
Due to affiliate (note 6) $ 1,434 $ 85
Accounts payable and accrued liabilities 689 692
Note payable, related party (note 6) 812 1,100
Inventory floor plan notes payable (note 3) 2,147 2,693
Deferred revenue - extended warranty service contracts 260 237
------------- ------------
Total current liabilities 5,342 4,807
Deferred revenue - extended warranty service contracts 502 469
------------- ------------
Total liabilities 5,844 5,276
Commitments (note 6)
Shareholders' equity:
Common shares, no par value, authorized 7,500 shares;
issued and outstanding 1,200 shares in 1997
and 1996 - -
Additional paid-in capital 30 30
Advances to shareholders (454) -
Retained earnings 129 41
------------- ------------
Total shareholders' equity (295) 71
------------- ------------
$ 5,549 $ 5,347
============= ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
Six months ended Year Ended
June 30, December 31,
1997 1996
--------------------- -------------------
<S> <C> <C>
Sales:
Vehicle $ 20,419 $ 35,488
Service, parts and other 2,344 5,551
--------------------- -------------------
Total sales 22,763 41,039
Cost of sales (19,705) (35,026)
--------------------- -------------------
Gross profit 3,058 6,013
Operating expenses:
Selling, general and administrative 2,599 5,446
Depreciation and amortization 15 26
--------------------- -------------------
Operating income 444 541
Other expense:
Interest expense (151) (334)
Other expense (147) (107)
--------------------- -------------------
Income before income taxes 146 100
Income tax expense 58 41
--------------------- -------------------
Net income $ 88 $ 59
===================== ===================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Retained
Common shares Advances earnings
---------------------------- Additional to (accumulated
Shares Amount paid-in capital Shareholders deficit) Total
------------- ------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,306 $ - $ 180 $ - $ (18) $ 162
Net income - - - - 59 59
Retirement of shares (106) - (150) - - (150)
------------- ------------- --------------- --------------- ---------------- ----------------
Balance, December 31, 1996 1,200 - 30 - 41 71
Net income (unaudited) - - - - 88 88
Advances to shareholder - - - (454) - (454)
------------- ------------- --------------- --------------- ---------------- ----------------
Balance, June 30, 1997 1,200 $ - $ 30 $ (454) $ 129 $ (295)
============= ============= =============== =============== ================ ================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
STEVEN A.HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
Six months ended Year ended
June 30, December 31,
1997 1996
------------------------ ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 88 $ 59
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Deferred income taxes 2 (29)
Depreciation and amortization 15 26
Amortization of deferred warranty revenue (10) 60
Changes in operating assets and liabilities:
Accounts receivable (577) 378
Inventories, net 305 (991)
Deposits and prepaid expenses (36) (19)
Other noncurrent assets 165 18
Floor plan notes payable (546) (59)
Accounts payable and accrued liabilities (3) (191)
------------------------------------------------
Net cash used in operating activities (597) (748)
------------------------ ---------------------
Cash flows from investing activities:
Capital expenditures (10) -
------------------------ ---------------------
Net cash used in investing activities (10) -
------------------------ ---------------------
Cash flows from financing activities:
Increase (decrease) in due to affiliate 1,349 (202)
Borrowings (repayments) on notes payable to shareholder (288) 1,100
Advances to shareholders (454) -
Retirement of common stock - (150)
Distributions to shareholders - -
------------------------ ---------------------
Net cash provided by financing activities 607 748
------------------------ ---------------------
Net change in cash - -
Cash at beginning of period - -
======================== =====================
Cash at end of period $ - $ -
======================== =====================
Supplemental cash flow information:
Cash paid during the year for interest $ 125 $ 319
======================== =====================
Cash paid during the year for taxes $ 45 $ 107
======================== =====================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Business
Steven A. Hallock Enterprises, Inc. d.b.a. Concord Nissan (the
"Company") is an automobile dealership that serves customers located
principally in northern California. The Company offers a broad range of
products and services that include new Nissan vehicles as well as used
vehicles and light trucks, vehicle financing and insurance, and
replacement parts and service.
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations, and cash flows for the Company. In
July, 1997 substantially all of the operating assets of the Company
were sold to FirstAmerica Automotive, Inc. (note 9). The operations of
Concord Nissan represent the revenue and direct expenses of the
Company, do not include any allocation of costs from H.G. Automotive,
Inc., and may not be indicative of operations that would have resulted
on a stand-alone basis.
(c) Cash Concentration Account
H.G. Automotive, Inc., an affiliate and shareholder of the Company,
provides centralized cash management services to the Company. Amounts
due to H.G. Automotive, Inc. for disbursements made on behalf of the
Company are included in amounts due to affiliate in the accompanying
financial statements (note 6).
(d) Inventories
New vehicles are stated at the lower of cost or market. Cost is
determined by using the last-in, first-out (LIFO) method. Used vehicles
are stated at the lower of cost or market value. Cost is determined
using the specific identification method. Parts and accessories are
stated at the lower of cost or market. Cost is determined using the
first-in, first-out method which approximates market value.
(e) Property and Equipment
Property and equipment are stated at cost and are being depreciated
over the estimated useful life of the assets. Leasehold improvements
are amortized over the shorter of the lease term or estimated useful
life of the asset. The range of estimated useful lives and depreciation
methods are as follows:
Leasehold improvements 25 years
Equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Company vehicles 5 years
7
<PAGE>
Maintenance and repairs are expensed as incurred, while significant
renewals and betterments are capitalized. When an asset is retired or
otherwise disposed of, the related cost and accumulated depreciation
are removed from the account, and any gain or loss is credited or
charged to income.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standard (SFAS) No.
109, "Accounting for Income Taxes". Under SFAS 109, deferred income tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. A valuation allowance reduces deferred tax assets when it is
more likely than not that some or all of the deferred tax assets would
not be realized. The effect on deferred income tax assets and
liabilities of changes in tax rates is recognized in income in the
period that includes the enactment date.
(g) Financial Instruments
The carrying amount of trade receivables, trade payables, accrued
liabilities and short term borrowings approximate fair value because of
the short-term nature of these instruments. Fair value estimates are
made at a specific point in time, based on relevant market information
about the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. The carrying
value of the note payable approximates fair value.
(h) Advertising
The Company expenses production and other costs of advertising.
Advertising expenses were approximately $245,000 for the six months
ended June 30, 1997 and $559,000 for 1996.
(i) Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base.
(j) Use of Estimates
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Revenue Recognition
Vehicle sales revenue is recognized upon delivery. Notes received from
buyers are generally sold to finance companies. Finance fees are
received for notes sold to finance companies and are recognized, net of
anticipated charge backs, upon acceptance of the credit by the finance
companies. These fees are included in service, parts, and other
revenues in the statements of operations. Parts and service revenues
are recognized at the time of sale or service.
8
<PAGE>
The Company recognizes fees from the sale of separately priced extended
warranty service contracts at the time of sale. For extended warranty
service contracts where the Company is the primary obligor of the
contract, the costs directly related to sales of the contracts are
deferred and charged to expense proportionately as the revenues are
recognized. Warranty service contract revenues are included in service,
parts, and other revenues in the statements of operations.
(l) Major Supplier and Dealer Agreement
The Company purchases substantially all of its new vehicles and
inventory from one manufacturer at the prevailing prices charged by the
manufacturer. The Company's overall sales could be impacted by the
manufacturer's inability or unwillingness to supply the dealership with
an adequate supply of popular models.
(2) Accounts Receivable
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
------------------------------------
<S> <C> <C>
Contracts in transit and vehicle receivables $ 1,092 $ 581
Trade 154 207
Manufacturer and other 125 4
------------------------------------
Total accounts receivable 1,371 792
Less allowance for doubtful accounts (53) (51)
------------------------------------
Accounts receivable, net $ 1,318 $ 741
====================================
</TABLE>
Contracts in transit receivables are due from financial institutions
and regional banks for funding of customer vehicle purchases and are
normally collected within 30 days. Trade receivables primarily consist
of commercial receivables for parts sales and finance receivables from
financial institutions for financing commissions. Manufacturer and
other receivables consist of amounts due from manufacturers for rebates
on vehicle purchases (holdbacks), manufacturer incentives and
reimbursable warranty coverage expenses.
(3) Inventories and Floor Plan Notes Payable
Inventory and related floor plan notes payable were as follows (in
thousands):
<TABLE>
<CAPTION>
Inventory Cost Floor Plan Notes Payable
-----------------------------------------------------------------------
(unaudited) December 31, (unaudited) December 31,
June 30, 1997 1996 June 30, 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
New vehicles $2,297 $2,870 $2,147 $2,693
Used vehicles 1,248 1,105 - -
Parts and accessories 212 179 - -
LIFO reserve, net (329) (421)
-----------------------------------------------------------------------
Inventories, net $3,428 $3,733 $2,147 $2,693
=======================================================================
</TABLE>
9
<PAGE>
If the specific identification method of inventory accounting were used
by the Company, net income would have decreased by $92,000 for the six
months ended June 30, 1997 and increased by $21,000 for the year ended
December 31, 1996.
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at 8.375% for both the six months ended
June 30,1997 and year ended December 31, 1996, and are secured by new
vehicles and vehicle receivables. The floor plan agreement permits the
Company to borrow up to $3,500,000. Borrowings are limited by new
vehicle levels.
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
------------------------------------
<S> <C> <C>
Leasehold improvements $ 119 $ 109
Equipment 253 253
Company vehicles 42 44
Furniture and fixtures 55 54
469 460
Less accumulated depreciation (344) (330)
----- -----
Property and equipment, net $ 125 $ 130
===== =====
</TABLE>
(5) Income Taxes
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
------------------- --------------------
<S> <C> <C>
Current:
Federal $ 48 $ 35
State 8 6
------------------- --------------------
56 41
Deferred:
Federal 2 -
State - -
------------------- --------------------
Income tax expense $ 58 $ 41
=================== ====================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets as of June 30, 1997 and
December 31, 1996, are presented below (in thousands):
10
<PAGE>
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
-----------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance and accruals $ 21 $ 21
Extended warranty service contracts 132 134
----------------- -----------------
Total deferred tax assets $153 $ 155
================= =================
</TABLE>
Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to pretax income from
continuing operations as a result of the following:
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Expected pro forma income tax expense 34% 34%
State income tax expense, net of federal tax effect 6 6
Other, net - 1
------------------- -----------------
40% 41%
=====================================
</TABLE>
(6) Related Party Transactions
(a) Lease
The Company conducts its operations from facilities leased from an
affiliate, under a 25 year noncancellable operating lease expiring
2014. The lease payment is a fixed amount of $35,000 per month.
The future minimum rental commitments under operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
Six months ending December 31, 1997: $ 210
Years ending December 31, 1998 420
1999 420
2000 420
2001 420
Thereafter 5,250
-----------
$ 7,140
===========
</TABLE>
Rental expense for all operating leases was approximately $300,000 and
$536,000 for six months ended June 30, 1997 and year ended December 31,
1996, respectively.
(b) Note Payable to Related Party
On April 1, 1996, the Company issued a $1,100,000 note payable to
Steven A. Hallock, President and shareholder. The note is callable upon
30 days notice. Interest accrued at 9.5% per annum. As of June 30, 1997
and December 31, 1996, the unpaid balance was $812,000 and $1,100,000,
respectively.
(c) Due to Affiliate
H.G. Automotive, Inc., an affiliate and shareholder of the Company,
provides centralized cash management services to the Company. Amounts
due for disbursements made on behalf of the Company were $1,434,000 and
$85,000 at June 30, 1997 and December 31, 1996, respectively.
11
<PAGE>
(7) Employee Benefits
The Company provides a 401(k) Plan and Trust Agreement (the Plan) that
covers substantially all employees of the Company and is managed by
H.G. Automotive, Inc. The annual contribution to the Plan is at the
discretion of the Board of Directors. Contributions to the Plan were
approximately $15,000 and $21,000 for the six months ended June 30,
1997 and the year ended December 31, 1996, respectively.
(8) Repurchased and Retired Shares
In 1996 the Company repurchased and retired 106 outstanding shares of
common stock from H.G. Automotive, Inc., at a cost of $150,000.
(9) Subsequent Events
In July 1997, substantially all of the operating assets of the Company
were acquired by FirstAmerica Automotive, Inc. No adjustments related
to the acquisition are reflected in the accompanying historical
financial statements.
12
<PAGE>
Exhibit 99.4
VALLEY AUTOMOTIVE CENTER
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT 2
FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations and Owner's Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6
</TABLE>
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstAmerica Automotive, Inc.:
We have audited the accompanying balance sheets of Valley Automotive Center (as
defined in note 1) as of December 31, 1996 and 1995, and the related statements
of operations and owner's equity and cash flows for the years then ended.
These financial statements are the responsibility of FirstAmerica Automotive,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Automotive Center (as
defined in note 1) as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
January 9, 1998
2
<PAGE>
VALLEY AUTOMOTIVE CENTER
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
Assets 1997 1996 1995
- ------ ------------------ ------------ ------------
<S> <C> <C> <C>
Cash $ 1 $ 1 $ 1
Accounts receivable, net (note 2) 1,076 1,965 1,815
Inventories (note 3) 6,935 7,289 7,284
Deposits and prepaid expenses 85 201 274
Prepaid costs-extended warranty service contracts 110 104 84
------------- ------------ ------------
Total current assets 8,207 9,560 9,458
Property and equipment, net (note 4) 1,021 1,129 1,048
Deferred tax asset 214 192 124
Prepaid costs-extended warranty service contracts 171 160 86
Other noncurrent assets 35 31 47
------------- ------------ ------------
Total assets $ 9,648 $ 11,072 $ 10,763
============= ============ ============
Liabilities and Shareholder's Equity
- ------------------------------------
Accounts payable and accrued liabilities $ 572 $ 706 $ 661
Deferred tax liability 83 78 48
Inventory floor plan notes payable (note 3) 5,093 4,182 4,313
Deferred revenue - extended warranty service contracts 211 188 153
------------- ------------ ------------
Total current liabilities 5,959 5,154 5,175
Deferred revenue - extended warranty service contracts 324 292 157
------------- ------------ ------------
Total liabilities 6,283 5,446 5,332
Commitments (note 6)
Owner's equity 3,365 5,626 5,431
------------- ------------ ------------
$ 9,648 $ 11,072 $ 10,763
============= ============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
VALLEY AUTOMOTIVE CENTER
STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
Six months ended Year ended December 31,
June 30, 1997 1996 1995
-------------------- -------------- ---------------
Sales:
<S> <C> <C> <C>
Vehicle $ 19,340 $ 34,673 $ 31,630
Service, parts and other 4,465 9,459 8,166
--------------- ------------- -----------
Total sales 23,805 44,132 39,796
Cost of sales (19,867) (36,562) (33,244)
--------------- ------------- -----------
Gross profit 3,938 7,570 6,552
Operating expenses:
Selling, general and administrative 3,476 6,264 5,601
Depreciation and amortization 69 134 116
--------------- ------------- -----------
Operating income 393 1,172 835
Other income (expense):
Interest expense (259) (481) (441)
Other, net 108 111 18
--------------- ------------- -----------
Income before income taxes 242 802 412
Income tax expense 97 321 165
--------------- ------------- -----------
Net income 145 481 247
Owner's equity, beginning of period 5,626 5,431 6,758
Distributions (2,406) (286) (1,574)
--------------- ------------- -----------
Owner's equity, end of period $ 3,365 $ 5,626 $ 5,431
=============== ============= ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
VALLEY AUTOMOTIVE CENTER
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended Years Ended December 31,
June 30, 1997 1996 1995
--------------------- --------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 145 $ 481 247
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 69 134 116
Gain on disposal of property and equipment -- (82) (3)
Deferred income taxes (17) (38) (25)
Amortization of deferred warranty revenue 38 76 5
Changes in operating assets and liabilities:
Accounts receivable 889 (150) (221)
Inventories (64) (5) (438)
Deposits and prepaid expenses 116 73 (83)
Other noncurrent assets (4) 16 20
Flooring notes payable 911 (131) 2,423
Accounts payable and accrued liabilities (134) 45 227
---------------- ------------- --------------
Net cash (used in) provided by
operating activities 1,949 419 2,268
---------------- ------------- --------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 62 110 9
Capital expenditures (44) (243) (703)
Proceeds from sale of Audi dealership 439 -- --
---------------- ------------- --------------
Net cash used in investing activities 457 (133) (694)
---------------- ------------- --------------
Cash flows from financing activities:
Advances from (dividends to) parent (2,406) (286) (1,574)
---------------- ------------- --------------
Net cash (used in) provided by
financing activities (2,406) (286) (1,574)
---------------- ------------- --------------
Net change in cash -- -- --
Cash at beginning of the period 1 1 1
---------------- ------------- --------------
Cash at end of the period $ 1 $ 1 $ 1
================ ============= ==============
Supplemental cash flow information:
Cash paid for interest $ 232 $ 498 450
================ ============= ==============
Cash paid for income taxes $ 120 $ 248 $ 142
================ ============= ==============
</TABLE>
5
<PAGE>
VALLEY AUTOMOTIVE CENTER
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Business
Valley Automotive Center (the "Company") is the automobile dealership which
constitutes the portion of the assets, liabilities and operations of Asian
Pacific Industries, Inc. that were subsequently sold to FirstAmerica
Automotive, Inc. (note 9). Asian Pacific Industries, Inc. is a wholly owned
subsidiary of British MotorCar Distributors, Ltd. ("BMCD"). The Company
offers a broad range of products and services, including a wide selection
of new Volkswagen, Nissan and Dodge vehicles as well as used vehicles and
light trucks, vehicle financing and insurance, and replacement parts and
service.
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations, and cash flows for the Company. The Valley
Automotive Center operations presented herein represent the revenue and
direct expenses of the Company, do not include any allocation of costs from
Asian Pacific Industries, Inc.'s other operations, and may not be
indicative of operations that would have resulted on a stand-alone basis.
(c) Cash Concentration Account
The Company's bank account is linked to its parent company's cash
concentration account. Cash balances (or deficits) at the end of each day
are automatically transferred to (or from) the concentration account, so
that at the end of any particular day, as well as at year-end, the
Company's bank account has a zero balance.
(d) Inventories
Vehicles are stated at the lower of cost or market. New and used vehicle
cost is determined using the specific identification basis. Parts and
accessories cost is determined using the first-in, first-out method, which
approximates the lower of cost or market value.
(e) Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over the estimated useful life of the
assets. Leasehold improvements are amortized over the lease term or
estimated useful life of the asset, whichever is less. Estimated useful
lives ranged as follows:
Leasehold improvements 10 years
Equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Company vehicles 7 years
Maintenance and repairs are expensed as incurred and significant renewals
and betterments are capitalized. When an asset is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed
from the account, and any gain or loss is credited or charged to income.
6
<PAGE>
(f) Income Taxes
The Company's operations as described herein are included in the
consolidated financial statements of Asian Pacific Industries, Inc. (note
1), a wholly owned subsidiary of BMCD. The Company's accounts are included
in BMCD's consolidated income tax return. The Company's income tax expense
is presented as if the Company had prepared and filed its income tax
returns on a stand-alone basis.
The Company's income taxes are prepared using the asset and liability
method as prescribed by Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes". Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing tax assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance reduces deferred tax assets when it is more
likely than not some or all of the deferred taxes will not be realized.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(g) Financial Instruments
The carrying amount of trade receivables, trade payables, accrued
liabilities and short-term borrowings approximate fair value because of the
short-term nature of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(h) Advertising
The Company expenses production and other costs of advertising as incurred.
Advertising expenses were $330,309 for six months ended June 30, 1997 and
$557,786 and $563,004 for 1996 and 1995, respectively. Advertising expenses
are included in selling, general and administrative expenses in the
accompanying financial statements.
(i) Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base.
(j) Use of Estimates
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(k) Revenue Recognition
Vehicle sales revenue is recognized upon delivery. Notes received from
buyers are generally sold to finance companies. Finance fees are received
for notes sold to finance companies and are recognized, net of anticipated
charge backs, upon acceptance of the credit by the finance companies. These
fees are included in
7
<PAGE>
service, parts, and other revenues in the statements of operations. Parts
and service revenues are recognized at the time of sale or service.
The Company recognizes fees from the sale of separately priced extended
warranty service contracts at the time of sale. For extended warranty
service contracts where the Company is the primary obligor of the contract,
the costs directly related to sales of the contracts are deferred and
charged to expense proportionately as the revenues are recognized. Warranty
service contract revenues are included in service, parts, and other
revenues in the statements of operations.
(l) Major Supplier and Dealer Agreement
The Company purchases substantially all of its new vehicles and inventory
from manufacturers at the prevailing prices charged by the manufacturers.
The Company's overall sales could be impacted by the manufacturers'
inability or unwillingness to supply the dealership with an adequate supply
of popular models.
(m) Advances from and Distributions to Parent
The amounts and timing of advances from and distributions to parent are
determined by and are under the control of the Company's parent, BMCD, and
are therefore reflected as additions to and deductions from stockholder's
equity.
(2) Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Contracts in transit and vehicle receivables $ 898 $ 1,567 $ 1,347
Trade 199 275 197
Manufacturer and other 51 193 321
--------------- --------------- --------------
Total accounts receivable 1,148 2,035 1,865
Less allowance for doubtful accounts (72) (70) (50)
--------------- --------------- --------------
Accounts receivable, net $ 1,076 $ 1,965 $ 1,815
=============== =============== ==============
</TABLE>
Contracts in transit receivables are due from financial institutions and
regional banks for funding of customer vehicle purchases and are normally
collected within 30 days. Trade receivables primarily consist of commercial
receivables for parts sales, and finance receivables from financial
institutions for financing commissions. Manufacturer and other receivables
consist of amounts due from manufacturers for rebates on vehicle purchases
(holdbacks), manufacturer incentives, and reimbursable warranty coverage
expenses.
8
<PAGE>
(3) Inventories and Floor Plan Notes Payable
Inventories and related floor plan notes payable were as follows (in
thousands):
<TABLE>
<CAPTION>
Inventory Cost Floor Plan notes payable
(unaudited) December 31, (unaudited) December 31,
June 30, June 30,
1997 1996 1995 1997 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
New vehicles $ 5,652 $ 5,654 $ 5,265 $ 5,093 $ 4,182 $ 4,313
Used vehicles 634 845 1,309 -- -- --
Parts and accessories 649 790 710 -- -- --
------- ------- ------- ------- ------- -------
Inventories $ 6,935 $ 7,289 $ 7,284 $ 5,093 $ 4,182 $ 4,313
======= ======= ======= ======= ======= =======
</TABLE>
Inventory floor plan notes payable consist of notes to a financing
institution that bear interest at 8.25%, 8.25% and 8.65% as of June 30,
1998 and December 31, 1997 and 1996, respectively. Inventory floor plan
notes payable are secured by new vehicles and vehicle receivables. The
floor plan agreement permits the Company to borrow up to $5,250,000.
Borrowings are limited by new vehicle levels.
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Leasehold improvements $ 1,144 $ 841 $ 934
Equipment 764 750 725
Company vehicles 78 92 79
Furniture and fixtures 169 525 343
---------------- ---------------- ----------------
2,155 2,208 2,081
Less accumulated depreciation (1,134) (1,079) (1,033)
---------------- ---------------- ----------------
Property and equipment, net $ 1,021 $ 1,129 $ 1,048
================ ================ ================
</TABLE>
9
<PAGE>
(5) Income Taxes
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996 1995
---------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 97 $ 305 $ 140
State 17 54 25
---------------- -------------- --------------
114 359 165
---------------- -------------- --------------
Deferred:
Federal (14) (32) -
State (3) (6) -
---------------- -------------- --------------
Total $ 97 $ 321 $ 165
---------------- -------------- --------------
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Computed tax expense 34% 34% 34%
State income taxes 6% 6% 6%
---- ---- ----
40% 40% 40%
---- ---- ----
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liability are presented
below (in thousands):
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Allowance and accruals $ 29 $ 28 $ 20
Extended service warranty contracts 102 86 56
----- ----- -----
Total deferred tax assets $ 131 $ 114 $ 76
===== ===== =====
</TABLE>
(6) Commitments
The future minimum rental commitments under operating leases which have
terms greater than one are as follows:
<TABLE>
<S> <C>
Six months ending December 31, 1997 $360,000
Year ending December 31, 1998 540,000
Thereafter -
$900,000
========
</TABLE>
10
<PAGE>
Operating lease rental expense totaled $360,000 for the six months ended
June 30, 1997 and $720,000 and $540,000 for 1996 and 1995, respectively.
(7) Related Party Transactions
(a) Lease
The Company conducted its operations from facilities leased from an
affiliate of the Company under a 45 month noncancellable operating lease
expiring in 1998. The lease payment is a fixed amount of $15,000 per month.
(b) Sale of Audi Dealership
In June 1997, the Company sold its Audi dealership operations to an
affiliate of the Company. The sales price approximated cost and no gain or
loss was recorded on the sale. Assets sold were as follows (in thousands):
Inventories $418
Property and other assets 21
----
Net proceeds $439
====
Revenues related to the Audi dealership were $1.2 million for the six
months ended June 30, 1997 and $2.5 million and $2.4 million for the years
ended December 31, 1996 and 1995, respectively.
(8) Employee Benefits
The Company provides a 401(k) Plan and Trust Agreement (the "Plan") that
covers substantially all employees of the Company and is managed by BMCD.
The annual contribution to the Plan is at the discretion of the Board of
Directors. Contributions to the Plan totaled approximately $48,000 for the
six months ended June 30, 1997, and $42,000 and $30,000 for 1996 and 1995,
respectively.
(9) Subsequent Event
In July of 1997, the Company was acquired by FirstAmerica Automotive, Inc.
No adjustments related to the acquisition are reflected in the accompanying
historical financial statements.
11
