<PAGE>
As filed with the Securities and Exchange Commission on July 21, 1999
Registration No. 333-75907
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 88-0206732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
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. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Proposed Maximum Aggregate
Title of Each Class of Amount to be Offering Price Offering Amount of
Securities to be Registered(a) Registered(b) per Share(c) Price(c) Registration Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7,549,460
Common Stock ($0.00001 par value).... shares $17.00 $128,340,820 $35,679(d)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</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) Includes shares the underwriters have the option to purchase to cover
over-allotments, if any.
(c) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
(d) $35,684 previously paid.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. 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 and it 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 July 21, 1999
PROSPECTUS
6,565,460 Shares
[FIRST AMERICA AUTOMOTIVE, INC. LOGO APPEARS HERE]
Common Stock
------------
This is FirstAmerica Automotive, Inc.'s initial public offering of common
stock. We are selling 6,250,000 of the shares and our stockholders are selling
315,460 of the shares.
We expect the public offering price to be between $15 and $17 per share.
Currently, no public market exists for the shares. Our common stock has been
approved for listing 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 10 of this prospectus.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<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 984,000 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.
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>
<CAPTION>
Dealership Brands Location
---------- ------ --------
<S> <C> <C>
California
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
First Nissan-Marin Nissan San Rafael, CA
Concord Nissan Nissan Concord, CA
Concord Toyota Toyota Concord, CA
Concord Honda Honda Concord, CA
Honda of Serramonte Honda Colma, CA
Dublin Volkswagen/Dodge Volkswagen, Dodge Dublin, CA
Dublin Nissan Nissan Dublin, CA
First Dodge-Marin Dodge San Rafael, CA
Ford of San Rafael Ford San Rafael, CA
Autobahn Motors(a) Mercedes-Benz Belmont, CA
Hayward Honda(a) Honda Hayward, CA
Golden Gate Acura(a) Acura Colma, CA
San Jose/Silicon Valley Area:
Stevens Creek Nissan Nissan San Jose, CA
Capitol Nissan Nissan San Jose, CA
St. Claire
Cadillac/Oldsmobile(a) Cadillac, Oldsmobile San Jose, CA
Stevens Creek BMW
Motorsport(a) BMW San Jose, CA
Stevens Creek Honda(a) Honda San Jose, CA
Los Angeles Area:
Beverly Hills BMW BMW Beverly Hills, CA
Volkswagen of Woodland Hills Volkswagen Woodland Hills, CA
Kramer Honda-Volvo(a) Honda, Volvo Santa Monica, CA
South Bay Chrysler Plymouth
Jeep(a) Chrysler, Plymouth, Jeep Torrance, CA
San Diego Area:
Poway Dodge Dodge Poway, CA
Poway Honda Honda Poway, CA
Poway Toyota Toyota Poway, CA
Poway Chevrolet Chevrolet Poway, CA
Nevada
Las Vegas Area:
Falconi's Tropicana Honda(a) Honda Las Vegas, NV
</TABLE>
--------
(a) Acquisition is pending.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 10
Dilution................................................................. 23
1998, 1999 and Pending Acquisitions...................................... 24
Use of Proceeds.......................................................... 27
Dividend Policy.......................................................... 27
Capitalization........................................................... 28
Selected Historical Consolidated Financial Data.......................... 29
Unaudited Pro Forma Consolidated Financial Data.......................... 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 39
Business................................................................. 53
Management............................................................... 78
Transactions with Related Parties........................................ 86
Principal and Selling Stockholders....................................... 88
Description of Capital Stock............................................. 90
Shares Eligible for Future Sale.......................................... 94
United States Federal Tax Considerations for Non-United States Holders... 96
Underwriting............................................................. 99
Legal Matters............................................................ 102
Experts.................................................................. 102
Where You Can Find More Information About Us............................. 103
Manufacturers' Disclaimer................................................ 103
Index to Consolidated Financial Statements............................... F-1
</TABLE>
3
<PAGE>
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 0.435993 for 1 reverse stock split to be
effective 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 in the California market based on
new vehicle sales. 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 19 new domestic and foreign brands through 29 new vehicle dealerships,
assuming completion of our pending acquisitions which will add 8 new brands
and 9 new dealerships. For the year ended December 31, 1998 we had pro forma
revenue of $1.4 billion and pro forma operating income of $38.0 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.(/1/) 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.
. We currently market a full range of automobiles and related products
and services through the Internet which may be purchased at our
dealerships.
. We created a "Dealer Services" division to maximize cost savings by
centralizing and consolidating the purchasing power of our
dealerships.
Company Strengths
Focused Acquisition Strategy. We apply a systematic approach and thorough
review process to acquire:
. larger, well managed multiple franchise dealerships or multiple
dealership groups located in metropolitan or high-growth suburban
markets; and
. smaller, 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.
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.
- -------
(1)Based on data from Crain Communications, Inc.'s "1999 Market Data Book."
4
<PAGE>
A Leader in the California Market. We currently operate all of our
dealerships in California. We are one of the largest automotive retailers in
California, measured by retail sales of new vehicles.
Used Vehicle Inventory Management. Our Auto Factory division enables 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.
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.
High Levels of Customer Service. We provide high levels of customer
service in order to establish strong consumer loyalty and engender good
relations with manufacturers. 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.
Experienced Management Team. Our Chairman, Chief Executive Officer and
Chief Operating Officer have, on average, 32 years of experience in the
automotive retailing industry. We have other experienced managers throughout
our organization and obtain a large number of skilled and experienced employees
from the acquired dealerships' existing management.
Business Strategy
Growth Through Acquisitions. We intend to capitalize on the continuing
consolidation of the highly fragmented automotive retailing industry.
Benefits of Scale. We intend to improve the performance of our existing
and acquired dealerships by consolidating our purchasing power to reduce our
costs and implementing other cost-saving practices.
Take Advantage of Regional Presence. We believe there are significant
opportunities and benefits from operating clusters of dealerships in contiguous
areas.
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.
Capitalize on Market Trends. Part of our strategy is to maintain a
competitive advantage by adapting to new trends including:
. Marketing through the Internet.
. Developing a proprietary database of customer information.
. Focusing on luxury brands.
Train, Develop and Motivate Employees. We have invested substantial
resources in developing training programs at all levels of our organization.
5
<PAGE>
1998, 1999 and Pending Acquisitions
Listed below are our 1998, 1999 and pending dealership acquisitions which
we expect to complete upon consummation of this offering.
<TABLE>
<CAPTION>
1998
Pro Forma
Revenue Year
Dealership Brands Location (in millions) Acquired
---------- ------ -------- ------------- --------
<S> <C> <C> <C> <C>
Beverly Hills BMW....... BMW Beverly Hills, CA $ 81.1 1998
Honda of Serramonte..... Honda Colma, CA 29.2 1998
Concord Toyota.......... Toyota Concord, CA 67.0 1998
Volkswagen of Woodland
Hills.................. Volkswagen Woodland Hills, CA 13.8 1998
Poway Chevrolet......... Chevrolet Poway, CA 30.7 1999
First Dodge-Marin(a).... Dodge San Rafael, CA 17.5 1999
Ford of San Rafael(a)... Ford San Rafael, CA 32.0 1999
Kramer Honda-Volvo(b)... Honda, Volvo Santa Monica, CA 74.7 Pending
Lucas Dealership
Group:................. 339.6 Pending
Autobahn Motors(c)..... Mercedes-Benz Belmont, CA Pending
Hayward Honda(c)....... Honda Hayward, CA Pending
St. Claire Cadillac/
Oldsmobile(c)......... Cadillac, Oldsmobile San Jose, CA Pending
Stevens Creek BMW
Motorsport(c)......... BMW San Jose, CA Pending
Stevens Creek
Honda(c).............. Honda San Jose, CA Pending
Golden Gate Acura(c)... Acura Colma, CA Pending
South Bay Chrysler
Plymouth Jeep(b)....... Chrysler, Plymouth, Jeep Torrance, CA 45.6 Pending
Falconi's Tropicana
Honda(b)............... Honda Las Vegas, NV 43.4 Pending
</TABLE>
- --------
(a) Based on monthly dealer statements prepared for manufacturers.
(b) This acquisition is pending and is expected to close shortly after
consummation of this offering.
(c) This acquisition is pending and its consummation is a condition to the
closing of this offering.
Risk Factors
See "Risk Factors" beginning on page 10 and 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. The most significant
risk factors include:
Intense competition in vehicle retailing and related businesses could
reduce our sales and our profit margins.
Automobile manufacturers exercise significant control over our operations
and we are dependent on them and their performance to successfully operate our
business.
If we are not able to complete desired acquisitions our growth may be
slower than anticipated because our principal growth strategy is to make
acquisitions.
6
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered:
By us............................... 6,250,000 shares
By the selling stockholders......... 315,460 shares
Total shares offered.............. 6,565,460 shares
Shares to be outstanding after this
offering................................ 13,646,879 shares
Use of proceeds......................... We estimate that the net proceeds to be received
by us from this offering (without exercise of
the over-allotment option) will be approximately
$91.0 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 27 and
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Liquidity and Capital
Resources" on page 45.
Risk factors............................ See "Risk Factors" beginning on page 10 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>
The 13,646,879 shares outstanding after this offering include 562,945
shares of common stock issuable upon exercise of outstanding options at a
weighted average exercise price of $7.10, 162,059 shares of common stock
issuable upon exercise of warrants at an average exercise price of $2.38,
43,599 shares of common stock issuable upon conversion of outstanding
promissory notes at a conversion price of $9.17 per share and exclude 676,728
shares of common stock issuable upon exercise of options that may be granted
under our 1997 and 1998 stock option plans. These share numbers also do not
include up to an aggregate of 984,000 shares of common stock that may be sold
by us upon exercise of the over-allotment option granted to the underwriters.
Of the shares being sold by the selling stockholders in the offering, 160,684
shares will come from the exercise of warrants and conversion of promissory
notes. See "Principal and Selling Stockholders" on page 88.
FirstAmerica was incorporated in Delaware in 1997. Our principal
executive offices are located at 601 Brannan Street, San Francisco, California
94107 and our telephone number is (415) 284-0444.
7
<PAGE>
Summary Historical and Pro Forma Consolidated Financial and Operating Data
The following table presents our summary historical and pro forma
financial and operating data. The summary historical consolidated financial
data presented below as of December 31, 1996, 1997 and 1998 were derived from
our audited consolidated financial statements. The summary historical
consolidated financial data presented for the three months ended March 31, 1998
and 1999 were derived from our unaudited interim financial statements. The
historical financial information should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
The unaudited pro forma information for the twelve months ended December
31, 1998 and the three months ended March 31, 1999 were prepared as if the debt
repayment and financing, and the 1998, 1999 and pending acquisitions described
under "Unaudited Pro Forma Consolidated Financial Data" had been consummated on
January 1, 1998. The unaudited pro forma balance sheet data as of March 31,
1999 was prepared as if these events were consummated on March 31, 1999.
The pro forma information should be read in conjunction with the pro forma
financial information set forth under "Unaudited Pro Forma Consolidated
Financial Data." The unaudited pro forma statements of operations information
does not purport to represent what our results of operations or financial
condition actually would have been or what operations would be if the
transactions that give rise to the pro forma adjustments had occurred on the
dates assumed.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------- ----------------------------
Historical Pro Forma Actual Pro Forma
------------------------------ ---------- ----------------- ---------
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ---------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Sales
New vehicle............ $200,185 $290,281 $475,847 $ 864,575 $ 94,945 $151,274 $240,159
Used vehicle........... 81,706 111,616 191,829 324,359 41,796 51,789 80,388
Service and parts...... 42,416 58,707 91,134 188,410 18,840 27,431 50,299
Other dealership
revenues, net......... 8,215 13,444 24,261 36,185 5,036 7,705 10,377
-------- -------- -------- ---------- -------- -------- --------
Total sales.......... 332,522 474,048 783,071 1,413,529 160,617 238,199 381,223
Cost of sales........... 288,918 406,296 663,902 1,192,786 136,199 201,263 321,164
-------- -------- -------- ---------- -------- -------- --------
Gross profit........... 43,604 67,752 119,169 220,743 24,418 36,936 60,059
Selling, general and
administrative
expenses............... 38,330 58,761 99,603 175,938 20,658 30,739 48,011
Depreciation and
amortization........... 611 678 1,952 6,828 399 1,045 1,973
Combination and related
expenses............... -- 2,268 -- -- -- -- --
-------- -------- -------- ---------- -------- -------- --------
Operating income........ 4,663 6,045 17,614 37,977 3,361 5,152 10,075
Interest expense, floor
plan................... 2,922 3,669 5,521 8,670 1,180 1,506 2,143
Interest expense,
other.................. -- 1,866 5,432 6,939 891 1,778 1,643
Other (income)/expense.. -- -- -- (215) -- (1,253) (1,273)
-------- -------- -------- ---------- -------- -------- --------
Income before income
taxes................. 1,741 510 6,661 22,583 1,290 3,121 7,562
Income tax expense...... 48 446 2,864 9,936 555 1,342 3,327
-------- -------- -------- ---------- -------- -------- --------
Net income............. $ 1,693(a) $ 64 $ 3,797 $ 12,647 $ 735 $ 1,779 $ 4,235
======== ======== ======== ========== ======== ======== ========
Pro forma net income
(loss) per common
share--diluted......... $ 0.43 $ (0.03) $ 0.53 $ 0.98 $ 0.10 $ 0.25 $ 0.32
======== ======== ======== ========== ======== ======== ========
</TABLE>
(continued on following page)
8
<PAGE>
Summary Historical and Pro Forma Consolidated Financial and Operating Data
(continued)
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
---------------------------------------- ----------------------------
Historical Pro Forma Actual Pro Forma
----------------------------- --------- ----------------- ---------
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- --------- ------- -------- ---------
(in thousands, except vehicle unit data)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Consolidated Financial and
Operating Data:
New vehicle units sold.. 9,450 13,835 20,468 36,167 4,336 6,372 9,743
Used vehicle units
sold--retail........... 4,921 6,639 9,901 16,388 2,433 2,585 3,869
New vehicle sales
revenue................ $200,185 $290,281 $475,847 $864,575 $94,945 $151,274 $240,159
Used vehicle sales
revenue--retail........ $ 67,944 $ 90,436 $141,946 $246,356 $32,791 $ 39,601 $ 61,677
Used vehicle sales
revenue--wholesale..... $ 13,762 $ 21,180 $ 49,883 $ 78,003 $ 9,005 $ 12,188 $ 18,711
Gross margin............ 13.1% 14.3% 15.2% 15.6% 15.2% 15.5% 15.8%
New vehicle gross
margin................. 6.5% 6.5% 7.8% 8.2% 7.6% 7.7% 8.2%
Used vehicle gross
margin--retail......... 8.1% 9.8% 9.6% 10.0% 9.4% 10.3% 10.2%
Used vehicle gross
margin--wholesale...... (0.0)% 0.4% 5.1% 2.6% 5.9% 7.0% 3.9%
Service and parts gross
margin................. 40.0% 45.2% 45.8% 46.2% 45.6% 46.3% 46.2%
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------------- ---------------------------
Historical Actual Pro Forma
---------------------------- ----------------- ---------
1996 1997 1998 1998 1999 1999
------- -------- -------- -------- -------- ---------
(in thousands, except vehicle unit data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Total assets............ $56,127 $124,002 $178,452 $124,155 $201,547 $363,206
Short-term debt,
including floor plan
notes.................. 39,161 72,619 103,989 68,355 117,593 143,855
Long-term debt.......... -- 21,938 34,547 21,987 38,724 81,245
Total liabilities....... 51,247 114,000 163,157 113,489 184,543 264,153
Redeemable preferred
stock.................. -- 3,439 3,579 3,478 3,609 --
Stockholders' equity.... 4,880(a) 6,563 11,716 7,188 13,395 99,053
</TABLE>
- --------
(a) Stockholders equity is presented net of advances to stockholders during
1996. Accordingly, the change in stockholders equity is reflected net of
stockholders' advances.
9
<PAGE>
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. 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 approximately
22,100 new vehicle dealership locations in the United States in 1998.(/1/) 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;
. Internet-based vehicle retailers which sell directly to consumers;
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. These and other manufacturers may also
directly enter our retail markets 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.
- --------
(1)Source: Crain Communications, Inc.'s "Automotive News" dated March 22, 1999.
10
<PAGE>
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 in the
Automotive Retailing Industry" on page 73.
Automobile manufacturers exercise significant control over our operations and
we are dependent on them to operate our business.
Inability To Obtain Desirable New Vehicles May Reduce Profit Margins and Total
Sales
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 our 1998 acquisitions,
1999 acquisitions and pending 1999 acquisitions as of January 1, 1998:
<TABLE>
<CAPTION>
Percentage of Our
1998 Pro Forma
Manufacturer New Vehicle Revenues
------------ --------------------
<S> <C>
BMW................................................... 10.1%
DaimlerChrysler....................................... 20.2%
Honda/Acura........................................... 25.1%
Nissan................................................ 13.7%
Toyota:
Toyota.............................................. 13.1%
Lexus............................................... 5.8%
All others............................................ 12.0%
</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 BMW, DaimlerChrysler, Honda, Nissan or Toyota 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, as a condition to obtaining additional allocations of
popular vehicles, manufacturers require us to purchase a larger number of less
desirable vehicles than we otherwise would and this could increase our
inventory carrying costs because these vehicles may take longer to sell, as
well as lower our profit margins and make it more difficult for us to reach our
sales goals.
A Manufacturer's Difficulties May Cause Lower Sales
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.
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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 of 663,000 in 1997 compared to 558,000 in 1998.(/1/) During the first six
months of 1998, unit sales for Nissan totaled 261,000 compared to 278,000 in
the same period in 1999.(/2/) If our manufacturers, particularly BMW, Toyota,
Nissan, DaimlerChrysler or Honda, each of whom accounted for more than 10% of
our pro forma 1998 new vehicle revenues, are not able to successfully design,
manufacture, deliver and market their vehicles, the manufacturer's reputation
and our ability to sell the manufacturer's vehicles would likely be harmed.
Significant Control Over Our Dealership Operations By Manufacturers May Cause
Lower Sales and Reduce Profits
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. See
"Business--Relationships with Automobile Manufacturers" on page 69. 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 would reduce our ability to sell that manufacturer's
vehicles and 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
reduce our profitability and could have a material adverse effect on our
business.
Changes in Manufacturers' Sales Incentive and Other Dealership Support
Programs May Reduce Our Profitability
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 program could result in reduced
sales or profitability for that manufacturer's dealerships that we operate and
could have a material adverse effect on our business.
Manufacturers Could Grant Additional Franchises in Our Markets Causing
Greater Competition and Reduction in Sales and Profitability
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.
- --------
(1)Source: Crain Communications, Inc.'s "Automotive News" dated January 11,
1999.
(2)Source: Crain Communications, Inc.'s "Automotive News" dated July 5, 1999.
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If we are not able to complete desired acquisitions our growth may be slower
than anticipated because our principal growth strategy is to make 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:
Acquisitions May Not Be Completed And Growth May Be Slowed If Manufacturers
Withhold Consent
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
management;
. 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 DaimlerChrysler area in which each dealership is included.
. 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 have agreed that prior to acquiring any additional Mercedes Benz
dealerships, we will maintain sales penetration levels and customer
satisfaction levels not less than the average levels for Mercedes-
Benz's top 55 market regions within the region where we desire to
acquire a dealership.
. We will not seek additional Ford or Lincoln Mercury dealerships
unless we are meeting Ford's performance criteria at the time of any
proposed acquisitions.
We may not be able to meet CSI scores or other standards required of us
by the manufacturers in the future.
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Our Growth May be Slowed If Manufacturers Impose Limits on the Number and
Location of Dealerships We Can 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. In addition to
potentially limiting our ability to complete acquisitions, these restrictions
may delay or prevent a change of control of our company since an acquisition of
us by a third party would require manufacturer consent. See "Business--
Relationships with Automobile Manufacturers" on page 69. 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 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
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:
. Fourteen Honda dealerships in the State of California, with
specific limitations in various geographic regions of
California;
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. Two Acura dealerships in Honda-defined metropolitan markets
having two or more Acura dealerships;
. Three Acura dealerships in any one of the six Acura geographic
zones as defined by Honda; and
. Five Acura dealerships nationally.
In addition, the number of Honda dealerships we may own is further
limited by geographic zone and national unit sales volume restrictions,
which are described in more detail under "Business--Relationships with
Automobile Manufacturers" on page 69.
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 Dodge/Chrysler/Plymouth/Jeep 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.
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.
Mercedes-Benz. Our agreement with Mercedes-Benz provides that we
may not own more than two Mercedes-Benz automobile dealerships in
Mercedes-Benz defined metropolitan markets or three Mercedes-Benz
dealerships in Mercedes-Benz defined regions; provided, however, that
the total number of our Mercedes-Benz dealerships nationally shall not
be more than the greater of four dealerships or the number of
dealerships that would exceed 3% of the total Mercedes-Benz passenger
units sold in the United States.
Ford. Our agreement with Ford Motor Company provides that, in
addition to the Ford dealership we own, we may acquire two additional
Ford, and two Lincoln Mercury dealerships by the end of June 2000. We
may not acquire additional Ford dealerships which would result in our
owning Ford or Lincoln Mercury dealerships with sales that would exceed
2% of the total Ford or Lincoln Mercury retail sales volume sold in any
state or nationally; provided, however, at Ford's discretion, Ford may
increase the 2% limitation to up to 5% of Ford or Lincoln Mercury sales
nationally or in a state. Further, we may not own more than one Ford
dealership in a market with three or less authorized Ford dealerships or
own or control more than 25% of the Ford authorized dealerships in a
Ford-defined market having four or more authorized Ford dealerships.
Further, we may not own more than one Lincoln-Mercury dealership in a
market with three or less authorized Lincoln-Mercury dealerships, or own
or control more than 25% of the Lincoln-Mercury authorized dealerships
in a Lincoln-Mercury defined market having four or more authorized
Lincoln-Mercury dealerships.
We currently own three Toyota, one Lexus, six Nissan, three Honda, four
Dodge, one Ford, one Chevrolet, 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 and three Acura dealerships. Most other car manufacturers
have similar restrictions on acquisitions.
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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.
Our Growth May be Slowed If We Are Not 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. The
Company has a commitment from Ford Motor Credit Company for a new $350 million
credit facility effective upon consummation of this offering, subject to
customary terms and conditions, including minimum net proceeds from this
offering of $75 million. This commitment includes an acquisition line of credit
for up to $150 million. However, we may not be able to satisfy the closing
conditions to the Ford Motor credit facility or obtain enough additional debt
or equity financing to finance future acquisitions, which could harm our growth
strategy and business. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" on page 45.
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. The Ford Motor Credit Company commitment provides floor plan
financing to our wholly-owned dealership subsidiaries for up to $200 million.
As of March 31, 1999 we had approximately $156.3 million of indebtedness, which
included $96.1 million of floor plan financing or approximately $225.1 million
of indebtedness, including $142.5 million of floor plan financing on a pro
forma basis. Substantially all of our assets are pledged to secure this
indebtedness, which may impede our ability to borrow from other sources. If the
timing of acquisitions should accelerate or the number of acquisitions
increase, we may require additional floor plan financing which may not be
available on favorable terms, if at all.
Our Growth May Be Slowed If 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. These restrictions may impede our ability to raise
needed capital or to issue stock as consideration for future acquisitions,
which could harm our growth strategy and business.
. 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 may force us to sell our Honda or Acura dealerships if any
person or entity acquires 5% of our common stock (10% for an
institutional investor), and Honda considers that person or entity to
be incompatible with the interests of Honda.
. 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.
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. 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. As a result, we will be in violation of
the Mitsubishi agreement unless we obtain Mitsubishi's consent to
consummate the offering. Mitsubishi represented less than 2% of our
sales on a pro forma basis in 1998 and the three months ended March
31, 1999.
. DaimlerChrysler must provide prior written consent to any change in
control of our company.
. Mercedes-Benz may force a sale of their franchise if any person or
entity acquires 20% of our common stock and if Mercedes-Benz
reasonably determines that such individual or entity is unqualified
to own a Mercedes-Benz dealership, or has interests incompatible with
Mercedes-Benz.
. Ford may force a sale of their franchises if 50% or more of our
common stock is acquired by an individual or entity and Ford
reasonably believes such event will have a material adverse effect on
its reputation or the ownership by such individual or entity is
incompatible with the interests of Ford.
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 before completing an acquisition. These requirements may
restrict or delay acquisitions, and may increase the cost of completing these
transactions which could harm our growth strategy and business.
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;
. 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.
There are unavoidable risks regarding the actual operating condition of
the dealerships we target for acquisition. 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.
We may not adequately anticipate all of the demands that our growth will
impose on our systems, procedures and structures, including our financial and
reporting control systems, data processing systems and management structure. If
we cannot adequately anticipate and respond to these demands, our business
could be materially harmed.
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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 reduce our
revenues and earnings.
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 six months ended June 30, 1999, industry retail unit
sales increased 7.0% compared to the six months ended June 30, 1998 as a result
of retail truck sales gains of 8.7% and retail car sales gains of 5.4%. For the
year ended December 31, 1998, industry unit sales increased 2.9% as a result of
retail truck sales gains of 7.9% offset by retail car declines of 1.2% from the
same period in 1997.(/1/) 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. All but one of our dealerships currently are
located in the San Francisco Bay Area, San Jose/Silicon Valley, San Diego and
Los Angeles 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.
Our substantial debt may diminish our ability to raise capital, reduce our
working capital and put us at a competitive disadvantage versus competitors
with less debt.
As of March 31, 1999, our total consolidated long-term indebtedness was
$38.7 million and our total consolidated short-term indebtedness, including
floor plan notes payable, was $117.6 million. We may incur significant
additional debt in connection with our future acquisitions, including obtaining
a new credit facility with Ford Motor Credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" on page 45 and "Capitalization" on page 28.
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 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;
- --------
(1)Based on data from Crain Communications, Inc.'s "Automotive News" dated
January 11, 1999.
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. 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 reduce our ability to effectively manage operations and execute our
growth strategy.
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. Dave Moeller, our Vice President of Finance,
and Stephen Jones, one of our Regional General Managers, do not have employment
agreements. All of our other executive officers, Regional Vice Presidents and
Regional General Managers have entered into employment agreements with us. See
"Management--Employment Contracts and Change of Control Arrangements" on page
80.
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 effect 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. Any violation by us of these laws and regulations could result in civil
and criminal penalties being levied against us or in a cease and desist order
against our non-complying operations. Future regulations may be more stringent
and require us to incur significant additional costs.
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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 and the board of
directors may 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. Thomas A. Price, our Chief Executive
Officer, will own approximately 19.1% after this offering and our executive
officers and directors as a group will own approximately 39.3% after this
offering. In addition, 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 "Transactions with Related Parties" on page 86.
Provisions in our certificate of incorporation and bylaws, Delaware law, and
our dealer agreements 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
. 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 stockholders owning
15% or more of our outstanding voting stock from
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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, and By-law Provisions" on page 92.
Restrictions imposed by our dealer agreements may impede or prevent any
potential takeover bid. Generally, our franchise agreements impose restrictions
upon the transferability of any significant percentage of our stock to any one
person or entity who may be unqualified, as defined by the manufacturer, to own
one of its dealerships. The inability of a person or entity to qualify with one
or more of our manufacturers may prevent or seriously impede a potential
takeover bid.
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. Our common stock has been approved for listing 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 99.
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 $17.50 per share in net tangible book
value per share from the initial offering price. See "Dilution" on page 23.
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 6,565,460 shares sold in
this offering will be freely transferable. Of the other 6,473,498 shares
outstanding, 6,334,113 shares will be "restricted securities" as defined in
Rule 144 under the Securities Act and will be transferable in the near future,
71,080 shares are freely transferable, 631,251 shares issued or issuable upon
exercise of options will be freely tradable upon exercise subject to a lock-up
with us until 180 days following the effective date of this prospectus, and
44,976 shares of common stock issuable upon exercise of warrants outstanding
after this offering will be restricted securities, of which 36,256 shares will
be subject to lock-up agreements. In addition, after this offering holders of
6,063,641 shares will have registration rights. See "Shares Eligible for Future
Sale" on page 94.
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 50.
A major earthquake or other natural disaster could cause costly physical damage
and reduce revenues.
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'
21
<PAGE>
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.
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,
statements regarding:
. our acquisition plans;
. our financing plans;
. trends affecting our industry or 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 are described under
"Risk Factors" beginning on page 10 and 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;
. 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.
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.
22
<PAGE>
DILUTION
Our pro forma consolidated net tangible book value (deficit) as of March
31, 1999 was $(26,282,000), or $(4.01) 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 March
31, 1999, other than to give effect to our sale of 6,250,000 shares of common
stock in this offering at an assumed initial public offering price of $16.00
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 (deficit) as of March 31, 1999 would have been
approximately $(19,238,000), or $(1.50) per share. This represents an immediate
increase in our net tangible book value of $2.51 per share to existing
stockholders and an immediate dilution of $17.50 per share to the purchasers of
common stock in this offering. If the initial public offering price is higher
or lower than $16.00 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>
<S> <C> <C>
Assumed initial public offering price per share............ $16.00
Pro forma net tangible book value per share as of March
31, 1999................................................ $(4.01)
Increase in net tangible book value attributable to new
public investors........................................ 2.51
------
Pro forma net tangible book value per share after this
offering.................................................. (1.50)
------
Dilution per share to new public investors................. $17.50
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31,
1999, 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 $16.00
per share and before deducting estimated underwriting discounts and offering
expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 6,559,970 51.2% $ 13,395,000 11.8% $ 2.04
New public investors.... 6,250,000 48.8 100,000,000 88.2 16.00
---------- ----- ------------ -----
Total................. 12,809,970 100.0% $113,395,000 100.0%
========== ===== ============ =====
</TABLE>
The tables above assume that (1) the underwriters' over-allotment option
will not be exercised, (2) no options have been granted or are exercised after
March 31, 1999 and (3) all convertible debt and warrants have not been
converted or exercised into common stock. As of March 31, 1999, there were
outstanding options to purchase an aggregate of 631,251 shares of common stock
under our 1997 stock option plan, with a weighted average exercise price of
$6.38 per share, warrants to purchase 162,059 shares of common stock with a
weighted average exercise price of $2.38 per share and 43,599 shares issuable
upon conversion of outstanding promissory notes at a conversion price of $9.17
per share. To the extent these options or warrants are exercised or this
convertible debt is converted, there will be further dilution to the new public
investors. See "Description of Capital Stock--Stock Options" on page 91,
"Shares Eligible for Future Sale" on page 94 and note 10 of the notes to our
consolidated financial statements on page F-18.
23
<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 those
practices and policies which we have learned in our experience to be the most
effective in managing dealerships. Although many of the dealerships that we
acquire are well-managed, profitable dealerships, by focusing on higher margin
products and services, as well as implementing 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 Dealership 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 in West Los Angeles in the heart of Beverly
Hills, California. On April 1, 1998, we acquired substantially all of the
operating assets of Beverly Hills BM, Ltd., for $11.7 million in cash. 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.
Honda of Serramonte
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 $3.8 million in cash. We viewed this purchase as an
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 $12.6 million in cash. 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 was an example of our strategy
of acquiring single dealerships in existing markets, 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.
24
<PAGE>
Volkswagen of Woodland Hills
On November 19, 1998, we acquired Volkswagen of Woodland Hills for
$600,000 in cash. 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 revenues of approximately $3.3 million. In 1998, this
dealership had retail sales of 497 new and 123 used vehicles, and had revenues
of approximately $13.8 million. We believe 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.
1999 Dealership Acquisitions
Poway Chevrolet
On March 2, 1999, we acquired the operating assets of Poway Chevrolet for
$3.7 million, which was financed with $2.0 million in seller notes and $1.7
million in cash. The dealership is located on Poway Road, in Poway, northern
San Diego County, California. In 1998, Ritchey Fipp had retail sales of 667 new
and 942 used vehicles, and had revenues of $30.7 million. This acquisition is
an example of our strategy of acquiring single dealerships in existing markets,
in order to increase market penetration and benefit from economies of scale. We
currently operate multiple dealerships in Poway, which include 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 our
dealerships in Poway.
First Dodge-Marin
On April 21, 1999, we acquired the operating assets of Marin Dodge
located in San Rafael, California for $4.2 million in cash. 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 in the fourth
quarter of 1999 to a newly constructed facility in San Rafael with more
convenient freeway access. Marin Dodge, our existing Marin Nissan dealership
and our pending San Rafael Ford acquisition will form a multiple franchise
dealership in Marin County. With the establishment of this group, we have
initiated our first branded naming of our dealerships to reflect the
FirstAmerica Automotive identity and image as First Nissan-Marin and First
Dodge- Marin.
Ford of San Rafael
On June 30, 1999, we acquired substantially all of the operating assets
of San Rafael Ford, Inc., located in San Rafael, California for approximately
$6.7 million in cash. In 1998, this dealership had revenues of approximately
$32 million.
Pending Dealership Acquisitions
Lucas Dealership Group
In May 1999, we signed an agreement to acquire Lucas Dealership Group,
Inc., which operates six dealerships throughout the San Francisco Bay Area, for
approximately $68.9 million in cash. These dealerships include Autobahn Motors
(Mercedez-Benz), Hayward Honda, St. Claire Cadillac/Oldsmobile, Stevens Creek
BMW Motorsport, Golden Gate Acura and Stevens Creek Honda. These dealerships
sell BMW, Honda, DaimlerChrysler and General Motors vehicles. In 1998, these
dealerships had combined revenues of approximately $339.6 million. This
offering is contingent on the closing of the Lucas Dealership Group
acquisition. We have received approval for this acquisition from BMW, Honda,
DaimlerChrysler and General Motors and we anticipate receiving written approval
from Honda with respect to Golden Gate Acura after the closing.
25
<PAGE>
Falconi's Tropicana Honda
On May 11, 1999, we signed an agreement to acquire substantially all of
the operating assets of Falconi's Motors, Inc., a Honda dealership located in
Las Vegas, Nevada for approximately $15.8 million in cash. In 1998, this
dealership had revenues of approximately $43.4 million. We intend to complete
this acquisition shortly after consummation of this offering. We have received
approval from Honda for this acquisition. This acquisition is not contingent on
the completion of this offering.
Kramer Honda-Volvo
On May 15, 1999, we signed an agreement to acquire all of the outstanding
capital stock of Kramer Motors Incorporated, which operates both a Honda
dealership and a Volvo dealership, both located in Santa Monica, California,
for approximately $14 million in cash. In 1998, these dealerships had combined
revenues of approximately $74.7 million per financial statements. We intend to
complete this acquisition shortly after consummation of this offering. We have
received approval from Honda and Volvo for this acquisition. This acquisition
is not contingent on the completion of this offering.
South Bay Chrysler Plymouth Jeep
On May 19, 1999, we signed an agreement to acquire substantially all of
the operating assets of South Bay Chrysler Plymouth Jeep, Inc., a Chrysler
dealership located in Torrance, California for approximately $12.3 million in
cash. In 1998, this dealership had revenues of approximately $45.6 million. We
intend to complete this acquisition shortly after consummation of this
offering. We have received approval for this acquisition from DaimlerChrysler.
This acquisition is not contingent on the completion of this offering.
26
<PAGE>
USE OF PROCEEDS
Our net proceeds from our sale of 6,250,000 shares of common stock in
this offering will be approximately $91.0 million, assuming an initial public
offering price of $16.00 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 $105.6
million. We intend to use the net proceeds, along with funds from obtaining a
new credit facility, which includes aggregate acquisition lines of credit of
$150 million and $200 million of floor plan financing, to:
. fund our pending acquisitions in the amount of $111.0 million, of
which approximately $76.4 million will be provided by the
acquisition lines of credit component of our new credit facility,
$9.4 million will be provided by the floor plan facility, and $25.2
million will be provided by proceeds from this offering. (See "1998,
1999 and Pending Acquisitions--Pending Dealership Acquisitions" on
page 25);
. repay our existing secured lines of credit, under which we had
approximately $18.4 million outstanding as of March 31, 1999 on a
pro forma basis (this facility had interest rates ranging from prime
minus 35 basis points to prime plus 200 basis points and matures in
July 2000);
. repay our outstanding loan from Mr. Price in the amount of $1
million plus accrued interest at a rate of 7.4% per year, and repay
our outstanding loan from 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 $2.0 million; and
. redeem our outstanding redeemable preferred stock in the amount of
$4.4 million at a redemption price of 107.5% plus accrued dividends.
We are in the process of obtaining a new credit facility with Ford Motor
Credit that will consist of up to $200 million of floor plan financing and an
acquisition line of credit up to $150 million and matures in July 2002. 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 we will be restricted from paying dividends on our common stock. Our
dealer agreements may indirectly restrict the payment of dividends in that the
dealer agreements typically require that we maintain minimum capital levels in
connection with each of the dealerships.
27
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999
(1) on a historical basis, and (2) on a pro forma basis, to reflect this
offering, our 1999 completed and pending acquisitions, with the exception of
San Rafael Ford, and a new credit facility. The following table should be read
in conjunction with "Use of Proceeds" on page 27, "Unaudited Pro Forma
Consolidated Financial Data" on page 31, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" beginning on page 39 and our
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus.
Short-term debt as of March 31, 1999 was $117.6 million including floor
plan notes payable of $96.1 million, and on a pro forma basis as of March 31,
1999 was $143.9 million including floor plan notes payable of $142.5 million.
<TABLE>
<CAPTION>
March 31, 1999
--------------------
Historical Pro Forma
---------- ---------
(in thousands except
share data)
<S> <C> <C>
Long-term debt:
Senior notes, net of discount of $2,759................. $33,241 $ --
Credit facility......................................... -- 76,405
Other debt.............................................. 5,483 4,840
------- --------
Total long-term debt.................................. 38,724 81,245
Redeemable preferred stock:
8% cumulative redeemable preferred stock; 3,500 shares
issued and outstanding net of discount of $438,
liquidation preference of $3,500....................... 3,062 --
Redeemable preferred stock; 500 shares issued and
outstanding net of discount of $63, liquidation
preference of $610..................................... 547 --
Stockholders' equity:
Common Stock, 100,000,000 shares authorized; 13,038,959
shares issued and outstanding on a pro forma basis..... -- --
Class A common stock, 30,000,000 shares authorized;
5,020,043 shares issued and outstanding at March 31,
1999; Pro forma none................................... -- --
Class B common stock, 5,000,000 shares authorized;
1,539,927 shares issued and outstanding at March 31,
1999; Pro forma none................................... -- --
Class C common stock, 30,000,000 shares authorized; no
shares issued and outstanding at March 31, 1999; Pro
forma none............................................. -- --
Preferred Stock 10,000,000 shares authorized; no shares
issued and outstanding................................. -- --
Additional paid-in capital.............................. 8,320 99,320
Retained earnings....................................... 5,075 (267)
------- --------
Total stockholders' equity............................ 13,395 99,053
------- --------
Total capitalization................................ $55,728 $180,298
======= ========
</TABLE>
28
<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 statement of
operations data for the three months ended March 31, 1998 and 1999 and the
balance sheet data as of March 31, 1998 and 1999 was derived from our
unaudited interim financial statements.
The financial data presented below as of March 31, 1998 and 1999 and the
three months then ended, in the opinion of management, reflect all
adjustments, consist of only normal, recurring adjustments necessary for a
fair presentation of such data and have been prepared in accordance with the
accounting principles followed in the presentation of our audited financial
statements for the year ended December 31, 1998. Operating results for the
three months ended March 31, 1999 are not necessarily indicative of results to
be expected for the full fiscal year.
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 39 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 which was
accounted for as a reverse acquisition, and the consolidated financial
information of the Company thereafter which includes all dealerships acquired
by us from the dates of their acquisition. The net income (loss) per common
share--diluted (proforma) reflects the Company's 0.435993 for 1 reverse stock
split.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
----------- -------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Sales
New vehicle............ $134,980 $147,088 $200,185 $290,281 $475,847 $ 94,945 $151,274
Used vehicle........... 53,280 60,967 81,706 111,616 191,829 41,796 51,789
Service and parts...... 30,441 33,428 42,416 58,707 91,134 18,840 27,431
Other dealership
revenues, net......... 3,680 6,702 8,215 13,444 24,261 5,036 7,705
-------- -------- -------- -------- -------- -------- --------
Total sales............ 222,381 248,185 332,522 474,048 783,071 160,617 238,199
Cost of sales........... 189,757 213,463 288,918 406,296 663,902 136,199 201,263
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 32,624 34,722 43,604 67,752 119,169 24,418 36,936
Selling, general and
administrative
expenses............... 28,424 30,060 38,330 58,761 99,603 20,658 30,739
Depreciation and
amortization........... 284 381 611 678 1,952 399 1,045
Combination and related
expenses............... -- -- -- 2,268 -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income....... 3,916 4,281 4,663 6,045 17,614 3,361 5,152
Interest expense, floor
plan................... 2,160 2,864 2,922 3,669 5,521 1,180 1,506
Interest expense,
other.................. -- -- -- 1,866 5,432 891 1,778
Other (income)/expense.. -- -- -- -- -- -- (1,253)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. 1,756 1,417 1,741 510 6,661 1,290 3,121
Income tax expense...... 47 26 48 446 2,864 555 1,342
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 1,709(a) $ 1,391(a) $ 1,693(a) $ 64 $ 3,797 $ 735 $ 1,779
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share--diluted
pro forma.............. $ 0.43 $ 0.35 $ 0.43 $ (0.03) $ 0.53 $ 0.10 $ 0.25
======== ======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding--
diluted pro forma...... 2,409 2,409 2,409 4,759 6,508 6,424 6,882
======== ======== ======== ======== ======== ======== ========
</TABLE>
(continued on following page)
29
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(continued)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
----------- -------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Consolidated
Financial and Operating
Data:
New vehicle units
sold.................. 6,861 7,116 9,450 13,835 20,468 4,336 6,372
Used vehicle units
sold--retail.......... 3,428 3,720 4,921 6,639 9,901 2,433 2,585
New vehicle sales
revenue............... $134,980 $147,088 $200,185 $290,281 $475,847 $ 94,945 $151,274
Used vehicle sales
revenue--retail....... $ 44,253 $ 51,586 $ 67,944 $ 90,436 $141,946 $ 32,791 $ 39,601
Used vehicle sales
revenue--wholesale.... $ 9,027 $ 9,381 $ 13,762 $ 21,180 $ 49,883 $ 9,005 $ 12,188
Gross margin........... 14.7 % 14.0 % 13.1 % 14.3% 15.2% 15.2% 15.5%
New vehicle gross
margin................ 5.5 % 5.8 % 6.5 % 6.5% 7.8% 7.6% 7.7%
Used vehicle gross
margin--retail........ 7.6 % 8.2 % 8.1 % 9.8% 9.6% 9.4% 10.3%
Used vehicle gross
margin--wholesale..... (0.0)% (2.9)% (0.0)% 0.4% 5.1% 5.9% 7.0%
Service and parts gross
margin................ 44.3 % 43.5 % 40.0 % 45.2% 45.8% 45.6% 46.3%
Consolidated Balance
Sheet Data:
Total assets........... $ 46,403 $ 54,423 $ 56,127 $124,002 $178,452 $124,155 $201,547
Short-term debt,
including floor plan.. 30,574 37,537 39,161 72,619 103,989 68,355 117,593
Long-term debt......... 686 112 -- 21,938 34,547 21,987 38,724
Total liabilities...... 39,830 47,779 51,247 114,000 163,157 113,489 184,543
Redeemable preferred
stock................. -- -- -- 3,439 3,579 3,478 3,609
Stockholders' equity... 6,573(b) 6,644(b) 4,880(b) 6,563 11,716 7,188 13,395
</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.
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
Our historical consolidated statement of operations 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 the
respective dates of acquisition:
<TABLE>
<CAPTION>
Acquisition Date
----------- ----
<S> <C>
Beverly Hills BMW............................................ April 1998
Honda of Serramonte.......................................... June 1998
Concord Toyota............................................... October 1998
Volkswagen of Woodland Hills................................. November 1998
</TABLE>
Our historical consolidated statement of operations for the three months
ended March 31, 1999 includes the results of operations of Poway Chevrolet
completed during the three months ended March 31, 1999 from its date of
acquisition and the results of Serramonte GMC until it was sold during March
1999.
The following unaudited pro forma consolidated statements of operations
for the year ended December 31, 1998 and the three months ended March 31, 1999
are derived from our historical consolidated statements of operations for
those periods, adjusted to give effect to the following events, as if those
events had occurred on January 1, 1998:
. 1998 Acquisitions--The historical results of the 1998 acquisitions
are reflected in the pro forma consolidated statements of operations
for the year ended December 31, 1998 for the period from January 1,
1998 to their respective dates of acquisition;
. 1999 Completed/Pending Acquisitions--The historical results of
operations of the 1999 completed and pending acquisitions (other than
the Lucas Dealership Group) are reflected in the pro forma
consolidated statements of operations for the year ended December 31,
1998 and the three months ended March 31, 1999. Our completed and
pending acquisitions include the following dealerships:
<TABLE>
<CAPTION>
1999 Completed and Pending Acquisitions Date
--------------------------------------- ----
<S> <C>
Poway Chevrolet............................................... March 1999
First Dodge-Marin............................................. April 1999
Falconi's Tropicana Honda..................................... Pending
Kramer Honda-Volvo............................................ Pending
South Bay Chrysler Plymouth Jeep.............................. Pending
</TABLE>
The results of Ford of San Rafael have not been included as such
results are not material.
. Lucas Dealership Group--The historical results for the Lucas
Dealership Group, with reclassifications to conform to our
presentation, are reflected in the pro forma consolidated statements
of operations for the year ended December 31, 1998 and the three
months ended March 31, 1999; and
. Pro Forma Adjustments--The pro forma adjustments for this offering
include the related use of proceeds, the new credit facility and
related acquisition adjustments.
The following unaudited pro forma consolidated balance sheet as of March
31, 1999 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
occurred on March 31, 1999:
. Lucas Dealership Group--The historical combined statement of assets
and liabilities of certain dealerships of the Lucas Dealership Group,
Inc., are reflected in the pro forma consolidated balance sheet as of
March 31, 1999;
31
<PAGE>
. 1999 Completed/Pending Acquisitions--The historical combined balance
sheets of the 1999 completed and pending acquisitions (other than the
Lucas Dealership Group) are reflected in the pro forma consolidated
balance sheet as of March 31, 1999; and
. Acquisition Adjustments and Financing Adjustments--The acquisition
and financing adjustments for this offering include the related use
of proceeds and new credit facility and acquisition adjustments.
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-4. The unaudited pro forma consolidated
data and accompanying notes do not contain proforma adjustments relating to two
acquisitions and a disposition, because the effects of these transactions are
not material. 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.
32
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
1999
Completed/ Lucas
1998 Pending Dealership Pro Forma
Historical Acquisitions Acquisitions Group Adjustments Pro Forma
---------- ------------ ------------ ---------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Sales:
New vehicle............ $475,847 $49,594 $129,521 $209,613 $ -- $ 864,575
Used vehicle........... 191,829 18,281 39,376 76,968 (2,095)(a) 324,359
Service and parts...... 91,134 9,240 41,771 46,265 -- 188,410
Other, net............. 24,261 1,795 3,363 6,766 -- 36,185
-------- ------- -------- -------- ------- ----------
Total sales........... 783,071 78,910 214,031 339,612 (2,095) 1,413,529
Cost of sales:
New vehicle............ 438,726 46,148 118,260 190,895 (206)(b) 793,823
Used vehicle........... 175,753 16,776 35,725 71,593 (2,308)(a)(b) 297,539
Service and parts...... 49,423 5,161 24,164 22,633 43 (b) 101,424
-------- ------- -------- -------- ------- ----------
Total cost of sales... 663,902 68,085 178,149 285,121 (2,471) 1,192,786
-------- ------- -------- -------- ------- ----------
Gross profit.......... 119,169 10,825 35,882 54,491 376 220,743
Operating expenses:
Selling, general and
administrative
expenses.............. 99,603 9,980 28,545 47,723 (9,913)(c) 175,938
Depreciation and
amortization.......... 1,952 163 496 1,406 2,811 (d) 6,828
-------- ------- -------- -------- ------- ----------
Operating income....... 17,614 682 6,841 5,362 7,478 37,977
Other (income)/expenses:
Interest expense, floor
plan.................. 5,521 514 2,155 1,688 (1,208)(e) 8,670
Interest expense,
other................. 5,432 309 506 -- 692 (f) 6,939
Other (income)/
expense............... -- (15) (3,102) (3,014) 5,916 (g) (215)
-------- ------- -------- -------- ------- ----------
Income before taxes... 6,661 (126) 7,282 6,688 2,078 22,583
Income tax expense...... 2,864 11 81 2,883 4,097 (h) 9,936
-------- ------- -------- -------- ------- ----------
Net income............ $ 3,797 $ (137) $ 7,201 $ 3,805 $(2,019) $ 12,647
======== ======= ======== ======== ======= ==========
Net income per share--
diluted................ $ 0.53 $ 0.98
======== ==========
Weighted average common
shares--diluted........ 6,508 12,984
======== ==========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations)
33
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
1999
Completed/ Lucas
Pending Dealership Pro Forma
Historical Acquisitions Group Adjustments Pro Forma
---------- ------------ ---------- ----------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Sales:
New vehicle............ $151,274 $32,983 $55,902 $ -- $240,159
Used vehicle........... 51,789 9,774 19,364 (539)(a) 80,388
Service and parts...... 27,431 9,884 12,984 -- 50,299
Other, net............. 7,705 871 1,801 -- 10,377
-------- ------- ------- ------- --------
Total sales........... 238,199 53,512 90,051 (539) 381,223
Cost of sales:
New vehicle............ 139,696 30,122 50,575 302 (b) 220,695
Used vehicle........... 46,844 9,084 18,065 (604)(a) 73,389
Service and parts...... 14,723 5,634 6,674 49 (b) 27,080
-------- ------- ------- ------- --------
Total cost of sales... 201,263 44,840 75,314 (253) 321,164
-------- ------- ------- ------- --------
Gross profit.......... 36,936 8,672 14,737 (286) 60,059
Operating expenses:
Selling, general and
administrative
expenses.............. 30,739 6,649 12,260 (1,637)(c) 48,011
Depreciation and
amortization.......... 1,045 123 345 460 (d) 1,973
-------- ------- ------- ------- --------
Operating income...... 5,152 1,900 2,132 891 10,075
Other (income)/expenses:
Interest expense, floor
plan ................. 1,506 518 427 (308)(e) 2,143
Interest expense, other
...................... 1,778 104 -- (239)(f) 1,643
Other
(income)/expense...... (1,253) (290) (425) 695 (g) (1,273)
-------- ------- ------- ------- --------
Income before taxes .. 3,121 1,568 2,130 743 7,562
Income tax expense .... 1,342 19 872 1,094 (h) 3,327
-------- ------- ------- ------- --------
Net income............ $ 1,779 $ 1,549 $ 1,258 $ (351) $ 4,235
======== ======= ======= ======= ========
Net income per common
share--diluted......... $ 0.25 $ 0.32
======== ========
Weighted average common
shares--diluted........ 6,882 13,456
======== ========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations)
34
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statements of Operations
(a) Represents the elimination of revenues and cost of sales for Falconi's
Tropicana Honda related to operations that will not be acquired. The
elimination totaled $2,095 in sales and $2,214 in cost of sales for the
year ended December 31, 1998 and $539 in sales and $604 in cost of sales
for the three months ended March 31, 1999.
(b) Reflects the change in accounting for inventories from the last-in, first-
out method to specific identification method for new vehicles of $206, used
vehicles of $94 and parts of $(43) for the year ended December 31, 1998,
and new vehicles of $302, and parts of $49 for the three months ended March
31, 1999.
(c) Reflects the decrease in selling, general and administrative expenses
related to the reduction in salaries, fringe benefits, and related expenses
of owners, officers and employees of the acquired dealerships who will not
become employees of ours pursuant to the acquisition and will not be
replaced, and contractual adjustments to compensation for those employees
who are retained. This decrease for the year ended December 31, 1998 is
$8,434 and for the three months ended March 31, 1999 is $1,579 of which
$6,126 and $1,335, respectively, related to the Lucas Dealership Group. The
remaining adjustment for the year ended December 31, 1998 primarily
reflects a net decrease of $93 in rent and expenses related to facilities
not acquired or leased and $23 for the three months ended March 31, 1999
and other expenses relating to operations that will not be acquired of
$1,386 for the year ended December 31, 1998 and $35 for the three months
ended March 31, 1999.
(d) Reflects the incremental increase in amortization of intangible assets,
primarily goodwill and intellectual property, resulting from the 1998 and
1999 completed and pending acquisitions as if the acquisitions occurred as
of January 1, 1998. The adjustment for goodwill amortization was $2,061 for
the year ended December 31, 1998 and $460 for the three months ended March
31, 1999. The adjustment for other intangible asset amortization for the
year ended December 31, 1998 consisted of $660 of intellectual property
amortization and $90 of favorable lease amortization. There was no
adjustment for other intangible asset amortization for the three months
ended March 31, 1999.
(e) The adjustment reflects a reduction of 50 basis points in our historical
annual floor plan interest rate applied to our average outstanding debt of
$72.4 million as of December 31, 1998 and $86.0 million as of March 31,
1999 as if the refinancing of our floor plan facility with the Ford Motor
Credit facility occurred as of the beginning of the period. In addition,
the adjustment reflects an average reduction of approximately 150 basis
points in the historical annual floor plan interest rate applied to the
completed and pending dealership acquisitions average outstanding debt of
$55.6 million as of December 31, 1998 and $47.6 million as of March 31,
1999 as if the refinancing occurred at the beginning of the period.
(f) Reflects the incremental interest associated with debt of $82.6 million
that will be outstanding upon completion of this offering and the
application of the use of proceeds from this offering as if the offering
had occurred on January 1, 1998. The effective annual interest rate was
8.4% for the year ended December 31, 1998 and 8.0% for the three months
ended March 31, 1999.
(g) Reflects the elimination of pre-acquisition interest income earned by
acquired dealerships and interest income earned by pending dealership
acquisitions on investments of cash and cash equivalents in the amounts of
$2,307 and $608 for the year December 31, 1998 and the three months ended
March 31, 1999, respectively. This eliminated interest income amount
includes interest income related to the Lucas Group of $1,234 and $338 for
the year ended December 31, 1998 and the three months ended March 31, 1999,
respectively. Management fees earned by the Lucas Group in the amount of
$1,778 and $87 for the year ended December 31, 1998 and the three months
ended March 31, 1998 have also been eliminated. In addition, a legal
settlement in favor of Kramer Honda-Volvo in the amount of $1,831 for the
year ended December 31, 1998 was eliminated.
(h) Reflects the net increase in the provision for income taxes resulting from
acquisitions and pro forma adjustments above, computed using a combined
statutory income tax rate of 44%.
35
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
As of March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
1999
Lucas Completed/
Dealership Pending Acquisition Financing Pro
FAA Group Acquisitions Adjustments Subtotal Adjustments Forma
-------- ---------- ------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.. $ 3,530 $21,888 $ 8,170 $(30,058)(a) $ 3,530 $ -- $ 3,530
Contracts in transit....... 16,625 3,496 2,361 (3,244)(b) 19,238 19,238
Accounts receivable........ 16,744 9,063 5,198 (3,774)(c) 27,231 27,231
Inventories................ 108,169 27,483 25,209 5,990 (d) 166,851 166,851
Deferred income taxes...... 853 -- -- -- 853 853
Deposits, prepaids and
other..................... 2,492 777 554 (273)(e) 3,550 3,550
-------- ------- ------- -------- -------- -------- --------
Total current assets....... 148,413 62,707 41,492 (31,359) 221,253 -- 221,253
Property and equipment...... 11,082 3,197 5,659 1,349 (f) 21,287 21,287
Other assets:
Loan origination and other
costs..................... 2,955 -- -- -- 2,955 (2,955)(v) --
Other noncurrent assets.... 2,375 -- 815 (815)(g) 2,375 2,375
Goodwill and other
intangible assets......... 36,722 647 -- 80,922 (h) 118,291 118,291
-------- ------- ------- -------- -------- -------- --------
Total assets............... $201,547 $66,551 $47,966 $ 50,097 $366,161 $ (2,955) $363,206
======== ======= ======= ======== ======== ======== ========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Current liabilities:
Floor plan................. $ 96,105 $25,796 $20,564 $ -- $142,465 $142,465
Secured lines of credit.... 16,450 -- -- 1,928 (i) 18,378 $(18,378)(v) 0
Notes payable and other.... 5,038 -- 6,627 (6,275)(j) 5,390 (4,000)(v) 1,390
Accounts payable........... 8,532 2,503 1,043 (391)(k) 11,687 11,687
Accrued liabilities........ 14,764 6,346 3,651 (2,433)(l) 22,328 22,328
Deferred income tax........ -- -- -- 575 (m) 575 575
Deferred revenue........... 1,984 -- 273 (273)(n) 1,984 1,984
-------- ------- ------- -------- -------- -------- --------
Total current liabilities.. 142,873 34,645 32,158 (6,869) 202,807 (22,378) 180,429
Long-term liabilities:
Capital lease obligations
and other long-term
notes..................... 5,483 -- 596 (239)(o) 5,840 (1,000)(v) 4,840
Long-term debt Ford........ -- -- 101,648 (p) 101,648 (25,243)(p) 76,405
Senior notes, net.......... 33,241 -- -- -- 33,241 (33,241)(v) --
Deferred income taxes...... 995 247 -- 2,428 (q) 3,670 (3,142)(v) 528
Deferred revenue........... 1,951 -- 699 (699)(r) 1,951 1,951
-------- ------- ------- -------- -------- -------- --------
Total liabilities.......... 184,543 34,892 33,453 96,269 349,157 (85,004) 264,153
-------- ------- ------- -------- -------- -------- --------
Redeemable preferred stock:
Cumulative redeemable
preferred stock........... 3,062 -- -- -- 3,062 (3,062)(v) --
Redeemable preferred
stock..................... 547 -- -- -- 547 (547)(v) --
Stockholders' equity:
Common stock............... -- -- 221 (221)(s) -- --
Additional paid-in
capital................... 8,320 -- 72 (72)(t) 8,320 91,000 (w) 99,320
Retained earnings.......... 5,075 31,659 14,220 (45,879)(u) 5,075 (5,342)(x) (267)
-------- ------- ------- -------- -------- -------- --------
Total stockholders'
equity.................... 13,395 31,659 14,513 (46,172) 13,395 85,658 99,053
-------- ------- ------- -------- -------- -------- --------
Total liabilities and
stockholders' equity....... $201,547 $66,551 $47,966 $ 50,097 $366,161 $ (2,955) $363,206
======== ======= ======= ======== ======== ======== ========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet)
36
<PAGE>
Notes to Unaudited Pro Forma Consolidated Balance Sheet
(a) Reflects the elimination of cash and cash equivalents not acquired.
(b) Reflects the elimination of contracts in transit not acquired.
(c) Reflects the elimination of the carrying value of accounts receivable not
acquired for the following acquisitions: Falconi's Tropicana Honda of
$2,806 and all others $968.
(d) Reflects the change in accounting for inventories from the Lucas Dealership
Group's and Falconi's Tropicana Honda's last in, first-out method to the
Company's specific identification method. The adjustment was $5,751 for the
Lucas Dealership Group and $239 for Falconi's Tropicana Honda.
(e) Reflects the elimination of deposits, prepaid and other assets not
acquired.
(f) Reflects an adjustment to Kramer Honda-Volvo of $1,758 to record land at
fair value. The remaining adjustment of $(409) for Falconi's Tropicana
Honda represents the elimination of the carrying value of fixed assets not
acquired. These fixed assets had useful lives ranging from 5 to 7 years.
(g) Reflects the elimination of other noncurrent assets not acquired.
(h) Reflects the goodwill calculated on the preliminary allocation of the
aggregate purchase price of the completed and pending acquisitions based on
the estimated fair value in excess of the net assets acquired and to be
acquired and the elimination of $647 of goodwill in the Lucas Dealership
Group historical balance sheet. The amount of goodwill and the
corresponding amortization actually recorded may ultimately be different
from amounts estimated here, depending on the actual fair value of tangible
net assets acquired at closing of the acquisitions. The estimated purchase
price for the acquisitions consists of the following (in thousands):
<TABLE>
<CAPTION>
Purchase Net Tangible
Acquisition Price Assets Acquired Goodwill
----------- -------- --------------- --------
<S> <C> <C> <C>
Lucas Dealership Group..................... $68,868 $13,180 $55,688
First Dodge-Marin.......................... 4,373 2,920 1,453
Falconi's Tropicana Honda.................. 15,787 3,637 12,150
South Bay Chrysler Plymouth Jeep........... 12,298 6,448 5,850
Kramer Honda-Volvo......................... 14,000 7,572 6,428
</TABLE>
(i) Reflects the funding of the acquisition of the acquisition of First Dodge-
Marin from an existing line of credit with a financial company.
(j) Reflects the elimination of notes payable and other liabilities not assumed
for South Bay Chrysler Plymouth Jeep of $5,980 and other acquired
dealerships of $295.
(k) Reflects the elimination of accounts payable not assumed for acquired
dealerships.
(l) Reflects the elimination of accrued liabilities not assumed for Falconi's
Tropicana Honda of $1,848 and other dealerships acquired of $585.
(m) Represents the current portion of deferred income taxes associated with
book basis and tax basis differences upon acquisition for the following
acquisitions: Lucas Dealership Group of $575.
(n) Reflects the elimination of current deferred revenue not assumed for
Falconi's Tropicana Honda.
(o) Reflects the elimination of capital lease obligations and other long term
notes not assumed.
(p) Reflects the funding of pending acquisitions drawn from the new credit
facility which the Company anticipates will be classified as long term
debt.
(q) Represents the noncurrent portion of deferred income taxes associated with
book basis and tax basis differences upon acquisition for the Lucas
Dealership Group of $1,725 and Kramer Honda-Volvo $703.
(r) Reflects the elimination of noncurrent deferred revenue not assumed for
Falconi's Tropicana Honda.
(s) Reflects the elimination of common stock not acquired.
(footnotes continued on following page)
37
<PAGE>
(t) Reflects the elimination of additional paid in capital.
(u) Reflects the elimination of the net assets not acquired for the Lucas
Dealership Group of $31.7 million and the elimination of retained earnings
related to Kramer Honda-Volvo of $7.4 million and $6.8 for all other
dealerships acquired or pending.
(v) Reflects the redemption of debt with the proceeds from this offering, the
elimination of deferred loan fees of $2,955, the elimination of the
discount on the senior notes of $2,759 and the related tax impact of
$3,142. The redemption of debt includes the following items:
<TABLE>
<S> <C>
Senior notes........................................................ $36,000
Secured lines of credit............................................. 18,378
Other notes payable................................................. 5,000
Redeemable preferred stock.......................................... 3,609
-------
Subtotal.......................................................... 62,987
Redemption premiums and dividends................................... 2,770
-------
Total proceeds used to redeem debt................................ $65,757
=======
</TABLE>
(w) Reflects the estimated net proceeds to be received from the issuance of
common stock at the assumed per share price of the offering of $16.00 which
is the mid-point of the range set forth on the front cover.
(x) Reflects the impact to retained earnings associated with the write off of
loan acquisition fees, discount on senior notes and preferred stock, and
the redemption premium, net of taxes from the above described financing
transactions.
38
<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-4.
Overview
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, because popular models tend to
have higher margins and manufacturer promotions may include dealer incentives,
which increase margins. 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.
39
<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>
Three
Months
Year Ended Ended March
December 31, 31,
------------------- ------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales
New vehicles.......................... 60.2% 61.2% 60.8% 59.1% 63.5%
Used vehicles......................... 24.6% 23.6% 24.5% 26.0% 21.8%
Service and parts..................... 12.8% 12.4% 11.6% 11.8% 11.5%
Other dealership revenues, net........ 2.4% 2.8% 3.1% 3.1% 3.2%
----- ----- ----- ----- -----
Total sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 86.9% 85.7% 84.8% 84.8% 84.5%
----- ----- ----- ----- -----
Gross profit........................ 13.1% 14.3% 15.2% 15.2% 15.5%
Selling, general and administrative
expenses............................... 11.5% 12.4% 12.7% 12.9% 12.9%
Depreciation and amortization........... 0.2% 0.1% 0.2% 0.2% 0.4%
Combination and related expenses........ -- 0.5% -- -- --
----- ----- ----- ----- -----
Operating Income.................... 1.4% 1.3% 2.3% 2.1% 2.2%
</TABLE>
New vehicle sales statistics:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Units..................... 9,450 13,835 20,468 4,336 6,372
Sales (in thousands)...... $200,185 $290,281 $475,847 $94,945 $151,274
Gross profit (in
thousands)............... $ 12,907 $ 18,869 $ 37,121 $ 7,170 $ 11,578
Gross margin.............. 6.5% 6.5% 7.8% 7.6% 7.7%
Gross profit per unit..... $ 1,366 $ 1,364 $ 1,814 $ 1,654 $ 1,817
Used vehicle retail sales statistics, excluding wholesale sales and
units:
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Units..................... 4,921 6,639 9,901 2,433 2,585
Sales (in thousands)...... $ 67,944 $ 90,436 $141,946 $32,791 $ 39,601
Gross profit (in
thousands)............... $ 5,522 $ 8,841 $ 13,560 $ 3,091 $ 4,089
Gross margin.............. 8.1% 9.8% 9.6% 9.4% 10.3%
Gross profit per unit..... $ 1,122 $ 1,332 $ 1,370 $ 1,270 $ 1,582
Service and parts statistics:
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Sales (in thousands)...... $ 42,416 $ 58,707 $ 91,134 $18,840 $ 27,431
Gross profit (in
thousands)............... $ 16,966 $ 26,512 $ 41,711 $ 8,588 $ 12,708
Gross margin.............. 40.0% 45.2% 45.8% 45.6% 46.3%
</TABLE>
40
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Sales. Our sales increased $77.6 million, or 48.3%, to $238.2 million for
the three months ended March 31, 1999 from $160.6 million in 1998. We acquired
four dealerships in 1998 and one dealership in 1999, which for the periods
following their acquisition accounted for $57.1 million or 74.0% of the
increase in 1999 first quarter sales.
New vehicles. We sold a variety of domestic and imported vehicle
brands ranging from economy to luxury vehicles, as well as sport utility
vehicles, minivans and light trucks. In the first three months of 1999 we
sold 6,372 new vehicles, generating revenues of $151.3 million, which
constituted 63.5% of our total sales. In the first three months of 1998 we
sold 4,336 new vehicles, generating revenues of $94.9 million, which
constituted 59.1 % of our total sales. The increase in revenues and units
was due primarily to the five dealerships acquired between January 1, 1998
and March 31, 1999. Average unit prices increased 8.4% to $23,740 from
$21,897 per vehicle due to the higher mix of luxury vehicles we sold in
1999. We anticipate an increase in the number of luxury vehicles we sell as
we acquire additional dealerships that sell these vehicles.
Used vehicles. We sold a variety of makes and models of used vehicles
and light trucks of varying model years and prices. In the first three
months of 1999, we sold 2,585 retail used vehicles and 1,960 wholesale used
vehicles. In the first three months of 1998, we sold 2,433 retail used
vehicles and 1,657 wholesale used vehicles. Total revenues from used
vehicle sales increased 23.9%, to $51.8 million in the first three months
of 1999 from $41.8 million in the first three months of 1998, primarily due
to the dealerships we acquired between January 1, 1998 and March 31, 1999.
Retail and wholesale used vehicle sales comprised 21.8% of our total sales
in the first three months of 1999 compared to 26.0% of our total sales in
the first three months of 1998 because of the greater increase in our sales
of new vehicles. Our average price per used vehicle unit increased 11.5% to
$11,395 from $10,219 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 45.6% to $27.4 million in the first three months of 1999
from $18.8 million in the first three months of 1998, primarily due to
dealerships acquired between January 1, 1998 and March 31, 1999.
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 and manufacturers. Fees from the sale of vehicle
financing notes and warranty service contracts are recorded at the time of
the sale of the vehicles net of a reserve for future chargebacks. The
reserve for future chargebacks is estimated based on historical operating
results and the termination provisions of the applicable contracts. Other
dealership revenues increased 53.0% to $7.7 million in the first three
months of 1999 from $5.0 million in the first three months of 1998 due
primarily to dealerships acquired. Commission expense related to financing
fees and warranty service contracts is included in selling, general and
administrative expense and was approximately $1.2 million for the first
three months of 1999, compared to $0.9 million for the first three months
of 1998.
Gross profit. Gross profit increased 51.3% to $36.9 million in the first
three months of 1999 from $24.4 million in the first three months of 1998. Our
overall gross margins increased to 15.5% in the first three months of 1999,
from 15.2% in the first three months of 1998, 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
7.7% in the first three months of 1999, from 7.6% in the first three months of
1998. The gross margin on used vehicle sales increased to 9.5% in the first
three months of 1999 from 8.7% in the first three months of 1998. Gross margins
on service and parts increased to 46.3% in the first three months of
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1999 from 45.6% in the first three months of 1998, primarily due to increased
emphasis on service operations and profitability.
Selling, general and administrative expense. Our selling, general and
administrative expense increased $10.1 million, or 48.8%, to $30.7 million in
the first three months of 1999 from $20.7 million in the first three months of
1998. Selling, general and administrative expense as a percentage of sales
remained constant at 12.9% in the first three months of 1999 and the first
three months of 1998. The increase in dollars was due primarily to increases in
compensation for additional personnel, management, and overhead as a result of
acquired dealerships.
Depreciation and amortization. Depreciation and amortization expense
increased $0.6 million, or 162%, to $1.0 million in the first three months of
1999 from $0.4 million in the first three months of 1998. The increase was due
to additional depreciation and goodwill amortization from acquired dealerships.
Interest expense. Floor plan interest expense increased $0.3 million, or
27.5%, to $1.5 million in the first three months of 1999 from $1.2 million in
the first three months of 1998 primarily as a result of increased floor plan
debt in 1999 from the acquired dealerships. Interest expense other than floor
plan increased $0.9 million, or 99.5%, to $1.8 million in the first three
months of 1999 from $0.9 million in the first three months of 1998. The
increase was due to debt incurred in dealerships we acquired.
Income tax expense. Income tax expense increased to $1.3 million in the
first three months of 1999 from $0.6 million in the first three months of 1998
due to higher pretax income in 1999. Our effective income tax rate was 43% for
the first three months of 1999. Our effective tax rate in the future may be
affected by non-deductible expenses such as goodwill associated with certain
types of acquisitions.
Net income. As a result of the items discussed above, net income
increased to $1.8 million in the first three months of 1999 from $0.7 million
in the first three months of 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 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, and
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. This increase was
offset by a $23 million or 16.2% decline in the sale of new Nissan vehicles
in 1998 as compared to 1997. This decrease was consistent with Nissan's
unit sales decrease of 15.8% in the United States during the year ended
December 31, 1998. We intend to further diversify our brands in 1999
through acquisitions.
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.
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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 and manufacturers. Fees from the sale of vehicle
financing notes and warranty service contracts are recorded at the time of
the sale of the vehicles net of a reserve for future chargebacks. The
reserve for future chargebacks is estimated based on historical operating
results and the termination provisions of the applicable contracts. 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. Commission expense related to financing fees and warranty
service contracts is included in selling, general and administrative
expense and was approximately $2.2 million and $3.8 million for the years
ended December 31, 1997 and 1998.
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.
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.
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Year Ended December 31, 1997 Compared to Year Ended December 31, 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. Commission expense related to financing fees and
warranty service contracts is included in selling, general and
administrative expense and was approximately $1.5 million and $2.2 million
for the years ended December 31, 1996 and 1997.
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 was primarily due to our emphasis on improving the
used vehicle reconditioning process and implementation of standardized
management policies and procedures across our dealerships. 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 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
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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 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 March 31, 1999, we had working
capital of $5.5 million including $3.5 million in cash. At December 31, 1998,
we had working capital of $3.9 million including $2.2 million in cash.
In the first three months of 1999, operating activities resulted in net
cash provided by operations of $2.3 million compared to $1.3 million used in
operations in the first three months of 1998. The increase was attributable to
a reduction in receivables and contracts in transit and an increase in
inventories which was offset by increases in accounts payable and accrued
liabilities and floor plan notes payable compared to the prior period. In 1998,
operating activities resulted in net cash provided by operations of $4.3
million compared to net cash used in operations of $7.6 million in 1997. The
increase in net cash provided in 1998 compared to 1997 was attributable
principally to a reduction in purchased inventory, and an increase in net
income, partially offset by a decrease in accounts payable and accrued
liabilities compared to the prior year.
In the first three months of 1999, the net cash used in investing
activities totaled $0.9 million, which consisted of $1.7 million used for
acquisitions and $1.1 million of capital expenditures for information systems
and improvements to existing facilities. This net cash used was offset by
proceeds from a sale of a dealership of $1.9 million. This net cash used
compared to $0.5 million in the first three months of 1998 which was used for
capital expenditures. During 1998, net cash used in investing activities
totaled $33.6 million and in 1997 totaled $12.8 million. The majority of cash
used in investing activities was for acquisitions.
In the first three months of 1999, net cash used in financing activities
totaled $9,000, which consisted of repayments on secured lines of credit and
notes payable, partially offset by borrowings. In the first three months of
1998, net cash provided from financing activities totaled $0.9 million which
consisted of borrowings on secured lines of credit and notes payable. 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 in the
amount of $9.6 million and to purchase inventories in the amount of $3.4
million. 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, $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.
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We believe that the net proceeds from this offering, together with funds
generated through future operations and availability of borrowings under our
new credit facility, will be sufficient to fund our debt service and working
capital requirements and any seasonal operating requirements, including our
currently anticipated internal growth for our existing businesses, for the
foreseeable future. We expect to fund any future acquisitions from our future
cash flow from operations, additional debt financing or the issuance of common
stock, preferred stock or other convertible instruments.
Floor Plan 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. We also have an overadvance facility, which
provides revolver advances, of $14.3 million in excess of the borrowing base as
defined in the loan agreement.
As of March 31, 1999, we had floor plan notes payable of $96.1 million,
revolving advances outstanding of $12.2 million, and overadvances outstanding
of $4.3 million. At December 31, 1998, we had floor plan notes payable of $81.5
million, revolving advances outstanding of $12.7 million and overadvances
outstanding of $4.3 million. At December 31, 1997, we had floor plan notes
payable of $67.4 million and revolving advances of $4.0 million. There were no
overadvances as of December 31, 1997. There were no discretionary advances
outstanding as of March 31, 1999, 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 and the interest rate
on the overadvances equals prime plus 200 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
in compliance with all material covenants under the loan agreement. The loan
agreement will be replaced with a new credit facility, which will be available
to us upon completion of this offering.
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 of 8% Cumulative Redeemable Preferred Stock and $0.5 million of
Redeemable Preferred Stock and up to 1,814,335 million shares of our Class B
common stock.
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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 Cumulative
Redeemable Preferred Stock at a discount of $0.6 million, 500 shares of
Redeemable Preferred Stock at a discount of $0.1 million and 1,321,931 shares
of Class B common stock at $2.11 per share. The senior notes, Cumulative
Redeemable Preferred Stock and Redeemable Preferred Stock 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 217,997
shares of common stock at $4.59 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
Cumulative Redeemable Preferred Stock and Redeemable Preferred Stock 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, 1999 to June 30, 2000 is 107.5% 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 Cumulative Redeemable
Preferred Stock liquidation preference of $1,000 and the Redeemable Preferred
Stock 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, 1999 to June 30, 2000
will be approximately $1.9 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 Cumulative
Redeemable Preferred Stock and Redeemable Preferred Stock 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.
We have obtained a commitment from Ford Motor Credit Company for a new
$350 million credit facility. The facility will be effective upon consummation
of this offering, subject to customary terms and conditions, including minimum
net proceeds from the offering of $75 million. We expect the facility will
provide floor plan financing to our wholly-owned dealership subsidiaries of up
to $200 million, and an acquisition line of credit for up to $150 million. We
expect to replace our existing floor plan facility, under which we had
approximately $96.1 million outstanding as of March 31, 1999 (this facility had
an interest rate of prime minus 75 basis points), with our new facility from
Ford Motor Credit. After the completion of our pending acquisitions, we expect
to have approximately $58 million available under our new floor plan facility.
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The new credit facility will have an initial term of three years and will
be secured by all of our assets and our subsidiaries' assets. The interest rate
on the floor plan component of the facility will be prime rate minus 1.25%. The
interest rates on the acquisition line of credit will be based on the one month
commercial paper rate plus 2.75% on the first $30 million of borrowings, plus
3.75% on the next $75 million and plus 4.75% on the remaining $45 million
available under the facility. The following financial covenants must be
observed by us when we borrow funds under the acquisition lines of credit:
. we must maintain positive cash flow;
. the ratio of our current assets to our current liabilities must be
equal to or better than 1.2:1;
. the ratio of our earnings to our fixed expense must be equal to or
better than 1.2:1;
. the ratio of our adjusted debt, which is total debt less floor plan
debt, to our earnings before interest, taxes, depreciation and
amortization must be less than or equal to 2.75:1;
. the ratio of our adjusted debt to our adjusted tangible base capital,
which represents total tangible assets less total liabilities plus
goodwill, must be less than or equal to 1.4:1.
In addition, there will be restrictions relating to:
. the amount of indebtedness we may incur;
. the sale of any of our dealerships and other assets;
. liens which may be placed on our assets;
. investments we may make; and
. dividends and other payments we may make to our stockholders.
Upon consummation of the offering and the application of the proceeds
therefrom, the Company expects $150 million will be available to be drawn under
these facilities for acquisitions. The Company intends to draw approximately
$76 million of this amount to finance completion of all pending acquisitions.
Acquisitions Closed During 1998
. In 1998, we acquired four automobile dealerships, a body shop and an
automobile-related software company, DSW & Associates, Inc., commonly
known as Auto Town, through purchases of assets or capital stock.
The aggregate consideration paid for the acquisitions completed during
1998 was $29.8 million, consisting of $29.0 million in cash and 146,064 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, one in April 1999,
one in June 1999 and currently have nine dealership acquisitions pending. We
financed the completed acquisitions with $2.0 million of notes payable to the
sellers, a $1.0 million note payable to our Chief Executive Officer, Thomas A.
Price, and a $4.0 million revolver advance. The aggregate estimated purchase
price for the pending nine 1999 acquisitions is approximately $111.0 million,
including initial capitalization. The funding of our pending acquisitions will
be provided by the acquisition line of credit component of our new credit
facility ($76.4 million), by the floor plan facility ($9.4 million), and by
proceeds from this offering ($25.2 million). We also have a financing
commitment letter for the Lucas Dealership Group acquisition, which will be
used in the
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event this offering is not consummated before the closing of such acquisition.
The back up financing commitment was provided by investment funds managed by
Trust Company of the West, a stockholder of the Company.
In March 1999, we sold the operating assets of Serramonte
GMC/Pontiac/Buick to the manufacturer and recorded net proceeds of
approximately $1.9 million and an estimated gain of $0.7 million net of taxes,
which was recognized in the first quarter of 1999.
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 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.
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Amortization of Goodwill
Goodwill as of December 31, 1998 was $34.0 million, or 19.0% of our total
assets, and as of March 31, 1999 was $36.7 million, or 18.2% 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.
Quantitative and Qualitative Disclosure About Market Risks
Our primary market risk exposure is interest rate risk. A change in the
U.S. prime interest rate would affect the rate at which we could borrow funds
under our floor plan and secured line of credit borrowing facilities. We
estimate that a one percent increase or decrease in our variable rate debt
would result in an increase or decrease, respectively, in interest expense of
approximately $1 million in 1999. We estimate that a two percent increase or
decrease in our variable rate debt would result in an increase or decrease,
respectively, in interest expense of approximately $2 million in 1999. Our
senior notes are at fixed rates. Our remaining financing instrumentalities are
immaterial.
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.
We are in the process of updating our existing data processing systems.
We have converted 90% and 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.
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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 intend to convert any noncompliant acquired
dealerships systems before December 31, 1999. As of the date of this Prospectus
we have been informed that all recently acquired or anticipated acquisitions
have compliant dealer management systems. The dealer management system is the
only system within a dealership capable of preventing a store from conducting
business.
We are currently assessing the readiness preparations of our suppliers.
Manufacturers of vehicles and parts have been identified as our most critical
suppliers. In addition, we have communicated by writing, telephone and
electronic mail with our suppliers of dealer management systems,
telecommunications equipment, service equipment and transportation services to
respond to inquiries regarding their year 2000 readiness plans and status. We
have also reviewed year 2000 information available on suppliers' websites. All
critical suppliers have responded that they are year 2000 compliant. Some non-
critical suppliers who are identified as non-compliant will be replaced. 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. Our primary financial vendor has
indicated full year 2000 compliance. Any major failure of our primary financial
vendor would cause delays of deposits, payables, payroll, flooring payments,
credit card transactions and electronic fund transfers, and would otherwise
impact our ability to do business. No non-primary financial vendors have been
identified as critical. Non-critical vendors identified as non-compliant will
be replaced as necessary.
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 completed
our evaluation of service equipment, other equipment and telephone systems for
year 2000 compliance. All other equipment identified as not being year 2000
compliant will be replaced by the end of the third quarter of 1999.
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. We believe that significant disruptions among our
suppliers are not likely. 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 has 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 less than $1 million. In addition, 20 employees
have been assigned on a part-time basis to complete the year 2000 project, and
one employee has been assigned on a full-time basis to the project. Estimated
total project costs could change in the future as analysis continues.
Year 2000 Contingency Planning
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 to be completed
by the end of November 1999. Contingency planning will identify areas of
concern where we can execute an effective backup plan relying on completely
manual, paper based, processes and alternate suppliers of required services.
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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 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 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 19 domestic and foreign brands,
consisting of Acura, BMW, Cadillac, Chevrolet, Chrysler, Dodge, Ford, Honda,
Isuzu, Jeep, Lexus, Mercedes-Benz, Mitsubishi, Nissan, Oldsmobile, Plymouth,
Toyota, Volkswagen and Volvo through 29 new vehicle dealerships, assuming
completion of our pending acquisitions. For the year ended December 31, 1998 we
had pro forma revenue of $1,414 million and pro forma operating income of $38.0
million. For the three months ended March 31, 1999 we had pro forma revenue of
$381.2 million and pro forma operating income of $10.1 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.(/1/) 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.(/2/) 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, as discussed below. We believe Auto
Factory's 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. We believe that
approximately 9% of our May 1999 year to date 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 acquisition of financing and insurance, extended
warranty service contracts and aftermarket products. Additionally,
our Dealer Services division provides recruiting, training and
standardized finance and insurance department policies.
- --------
(1) Based on data from Crain Communications, Inc.'s "1999 Market Data Book."
(2) Based on data from the Center for Continuing Study of the California
Economy's "California Economic Growth, 1999 Edition."
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The Company's Automotive Retailing Strengths and Advantages
Focused Dealership 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 to acquire:
. larger, well managed multiple franchise dealerships or multiple
dealership groups located in metropolitan or high-growth suburban
markets; and
. smaller, 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 established, multiple
franchise dealerships and multiple dealership groups with experienced existing
management, we will be able to effectively operate the dealerships with a
management team that understands the local market. We believe that acquiring
single dealerships that can be integrated with our existing dealership network
enables 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 multiple franchise dealerships and
multiple dealership groups 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 multiple franchise dealerships or
multiple dealership groups, we may selectively acquire one or more smaller
dealerships and develop our own group.
Extensive Experience and Ability to Integrate and Improve Dealership
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.
The California Automotive Retailing 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.
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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%.(/1/)
. 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.(/2/)
. 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.(/1/)
. 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 include Las
Vegas, where we have agreed to acquire one dealership, and may include 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 acquisition, 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 acquisition of used vehicles, Auto Factory
makes large purchases of off-lease, rental and fleet vehicles on a
centralized, company-wide basis.
. Auto Factory sells vehicles from our dealerships and vehicles we
acquire from third parties at bi-weekly wholesale auctions. These
auctions improve our profit from these sales by creating a
competitive bidding environment for these vehicles. 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 the 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 FirstAmerica Automotive
branded warranties with our used cars.
. Auto Factory redistributes our used vehicles among our dealerships
according to market demand.
. 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 the most effective operating practices
of our dealerships throughout our dealership network in order to focus 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.
- --------
(1) Statistics in this paragraph are based on data from the Center for
Continuing Study of the California Economy's "California Economic Growth,
1999 Edition."
(2) Based on data from Crain Communications, Inc.'s "1999 Market Data Book."
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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 customer
service. These activities provide 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 minimum 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>
<S> <C>
Elite of Lexus Award................................. Lexus of Serramonte
DaimlerChrysler'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 multiple franchise dealerships and multiple dealership groups 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
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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.
Automotive Retailing Business Strategy
Growth Through Dealership Acquisitions
We intend to capitalize on the continuing consolidation of the highly
fragmented automotive retailing industry. In 1998, the approximately 22,100 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.(/1/)(/2/) In 1998,
the largest 100 dealership groups generated approximately $71 billion in total
vehicle sales revenue, comprising less than 15% of the industry total.(/3/)
These 100 largest dealership groups also sold over 3 million new and used
vehicles in 1998, or approximately 10% of all vehicles sold by franchised
dealers.(/4/) 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 acquire and integrate dealership operations to capitalize on
the consolidation trend in the automotive retailing industry.
Benefits of Multiple Dealership Ownership
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 those practices and policies which we have learned in
our experience to be the most effective for managing dealerships. We have
successfully enhanced the profitability of our existing dealerships and
multiple franchise dealership, multiple dealership group and single dealership
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 reduced the interest rate on our floor plan financing by
0.75% in 1998 and in 1999 we negotiated an additional rate reduction
of 0.50%.
. Savings from centralized acquisition 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, we have
negotiated increased commissions on the origination of customer
vehicle financing, which result in incremental finance and insurance
commissions. By consolidating coverage providers, we estimate that
our 1998 insurance costs were reduced by 14% for similar coverage.
- --------
(1) Source: Crain Communications, Inc.'s "Automotive News" dated March 22,
1999.
(2) Source: CNW Marketing/Research, Bandon, Oregon.
(3) Based on data from Crain Communications, Inc.'s "1999 Market Data Book" and
"Automotive News" dated March 22, 1999.
(4) Based on data from Crain Communications, Inc.'s "1999 Market Data Book" and
CNW Marketing/ Research, Bandon, Oregon.
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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
acquisition, 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 seek 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.
. 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 financing
and insurance and warranties.
. 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.
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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, we believe approximately
9% of our May 1999 year to date 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 selling tool 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 customer's vehicle identification number
and driver's license number. 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 sales efforts to the customer.
For example, by utilizing this data, we can notify customers when
they are due for servicing, or when their lease is 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.
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 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 employees' interests with those of our investors.
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<PAGE>
Overview of the Automotive Retailing Industry
With more than $600 billion in 1998 sales, automotive retailing is the
largest retail trade sector in the United States.(/1/) The industry is highly
fragmented and largely privately held with approximately 22,100 automobile
dealership locations representing approximately 47,000 franchised
dealerships.(/2/) 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.(/3/) 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.(/4/) Since 1994, new
vehicle revenues have grown at a 2.0% compound annual rate.(/5/) Over the same
period, used vehicle revenues by franchised dealers have grown at a 5.4%
compound annual rate.(/5/) 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 13.4% of new vehicle registrations in 1998, with California alone
accounting for 10.6%. The Pacific states above along with Arizona, Colorado,
Idaho, Montana, Nevada, New Mexico, Utah and Wyoming accounted for
approximately 19.5% of new vehicle registrations in the United States in
1998.(/6/)
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 and merchandising programs, as well as the
identity of owners and managers. This strict control
- --------
(1) Source: CNW Marketing/Research, Bandon, Oregon.
(2) Source: Crain Communications, Inc.'s "Automotive News" dated March 22,
1999.
(3) Based on data from Crain Communications, Inc.'s "Automotive News" dated
January 11, 1999 and CNW Marketing/Research, Bandon, Oregon.
(4) Source: the National Automobile Dealers Association Web site at
www.nada.org/nadadata
(5) Based on data from CNW Marketing/Research, Bandon, Oregon.
(6) All statistics in this paragraph are based on data from Crain
Communications, Inc.'s "1999 Market Data Book."
60
<PAGE>
contributed to the proliferation of small dealerships, which at their peak in
the late 1940s numbered in excess of 46,000 dealership locations.(/1/) Several
manufacturers went out of business in the 1950s, and the number of dealership
locations decreased to approximately 36,000 by 1960.(/2/)
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 on 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 39% to the current level
of approximately 22,100.(/3/)
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 less than 15% of total sales revenue in 1998.(/4/) 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 13.1% 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 6.5% in 1998. 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 1998.(/5/) Dealerships
also offer a range of other services and products, including repair and
warranty work, replacement parts, extended service contracts, financing and
credit insurance.
- --------
(1) Source: Crain Communications, Inc.'s "Automotive News" dated February 11,
1985.
(2) Source: Crain Communications, Inc.'s "Automotive News" dated March 18,
1985.
(3) Based on data from Crain Communications, Inc.'s "Automotive News" dated
March 18, 1985 and March 22, 1999.
(4) Based on data from Crain Communications, Inc.'s "1999 Market Data Book" and
"Automotive News" dated March 22, 1999.
(5) The source for all statistics in this paragraph is Crain Communications,
Inc.'s "1999 Market Data Book."
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<PAGE>
Economic Cycles in Automotive Retailing and Manufacturing
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
1998. 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(/1/)
[Chart appears here]
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(/2/);
. a significant portion 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.
- --------
(1) Based on data from FactSet.
(2) Source: ADT Automotive 1997 Used Car Market Report.
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<PAGE>
Automotive Dealerships
After giving effect to our pending acquisitions, we will own fifteen
dealerships in the San Francisco Bay Area market, five dealerships in the San
Jose/Silicon Valley market, four dealerships in the Los Angeles market, four
dealerships in the San Diego market and one dealership in the Las Vegas market.
Since July 1997, we have grown significantly as a result of the acquisition 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
Honda of Serramonte Honda Colma, CA
Melody Toyota Toyota San Bruno, CA
First Nissan-Marin Nissan San Rafael, CA
Concord Nissan Nissan Concord, CA
Concord Toyota Toyota Concord, CA
Concord Honda Honda Concord, CA
Dublin Volkswagen/Dodge Volkswagen, Dodge Dublin, CA
Dublin Nissan Nissan Dublin, CA
First Dodge-Marin Dodge San Rafael, CA
Ford of San Rafael Ford San Rafael, CA
Autobahn Motors(a) Mercedes Belmont, CA
Hayward Honda(a) Honda Hayward, CA
Golden Gate Acura(a) Acura Colma, CA
San Jose/Silicon Valley Area:
Stevens Creek Nissan Nissan San Jose, CA
Capitol Nissan Nissan San Jose, CA
St. Claire
Cadillac/Oldsmobile(a) Cadillac, Oldsmobile San Jose, CA
Stevens Creek BMW
Motorsport(a) BMW San Jose, CA
Stevens Creek Honda(a) Honda San Jose, CA
Los Angeles Area:
Beverly Hills BMW BMW Beverly Hills, CA
Volkswagen of Woodland Hills Volkswagen Woodland Hills, CA
Kramer Honda-Volvo(a) Honda, Volvo Santa Monica, CA
South Bay Chrysler Plymouth
Jeep(a) Chrysler, Plymouth, Jeep Torrance, CA
San Diego Area:
Poway Dodge Dodge Poway, CA
Poway Honda Honda Poway, CA
Poway Toyota Toyota Poway, CA
Poway Chevrolet Chevrolet Poway, CA
Las Vegas Area:
Falconi's Tropicana Honda(a) Honda Las Vegas, NV
</TABLE>
- --------
(a)Acquisition is pending.
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<PAGE>
Dealership Management
We organize the operations of our dealerships geographically. In our
management system, local dealers have the flexibility to act within guidelines
set by executive management. 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 compare operating experiences.
A team of department managers complements 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 finance and insurance 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
finance and insurance 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 finance and insurance departments.
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 successful dealership management policies and 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 19 U.S., Asian and European brands of economy, family, sports and
luxury cars and light trucks and sport utility vehicles assuming completion of
our pending acquisitions. 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--Automobile manufacturers
exercise significant control over our operations and we are dependent on them
to operate our business" on page 11.
64
<PAGE>
The following table sets forth for the year ended December 31, 1998 and
the three months ended March 31, 1999, information relating to the brands of
new vehicles sold at retail by us on a pro forma basis (excluding Ford):
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, 1998 Ended March 31, 1999
---------------------------- ----------------------------
Brand New Vehicles Sold Percentage New Vehicles Sold Percentage
----- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Acura........... 522 1.4% 124 1.3%
BMW............. 1,982 5.6% 546 5.6%
Buick........... 96 0.3% 26 0.3%
Cadillac........ 522 1.4% 189 1.9%
Chevrolet....... 667 1.8% 184 1.9%
Chrysler........ 318 0.9% 106 1.1%
Dodge........... 3,693 10.2% 1,034 10.6%
GMC............. 164 0.5% 42 0.4%
Honda........... 11,436 31.6% 2,925 30.0%
Isuzu........... 303 0.8% 62 0.6%
Jeep............ 675 1.9% 181 1.9%
Lexus........... 1,234 3.4% 345 3.5%
Mercedes-Benz... 1,199 3.3% 307 3.2%
Mitsubishi...... 683 1.9% 165 1.7%
Nissan.......... 5,694 15.7% 1,504 15.4%
Oldsmobile...... 305 0.8% 161 1.7%
Plymouth........ 167 0.5% 22 0.2%
Pontiac......... 152 0.4% 41 0.4%
Toyota.......... 5,235 14.5% 1,365 14.0%
Volkswagen...... 570 1.6% 299 3.1%
Volvo........... 550 1.5% 115 1.2%
------ ----- ----- -----
Total........... 36,167 100.0% 9,743 100.0%
====== ===== ===== =====
</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
operating experiences and know-how among our dealerships gives us an advantage
over smaller dealerships.
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<PAGE>
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
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, including the vehicle's
location.
The following table sets forth information on our used vehicle sales:
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
--------------------------------------- ---------------------------
Actual Pro Forma Actual Pro Forma
---------------------------- --------- ---------------- ---------
1996 1997 1998 1998 1998 1999 1999
------- -------- -------- --------- ------- ------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Retail unit sales....... 4,921 6,639 9,901 16,388 2,433 2,585 3,869
Retail sales revenue.... $67,944 $ 90,436 $141,946 $246,356 $32,791 $39,601 $61,677
Retail gross profit..... $ 5,522 $ 8,841 $ 13,560 $ 24,755 $ 3,091 $ 4,089 6,262
Retail gross margin..... 8.1 % 9.8% 9.6% 10.0% 9.4% 10.3% 10.2%
Average gross profit per
retail unit sold....... $ 1,122 $ 1,332 $ 1,370 $ 1,511 $ 1,270 $ 1,582 $1,618
Wholesale unit sales.... 3,073 4,182 7,137 11,550 1,657 1,960 2,908
Wholesale sales
revenue................ $13,762 $ 21,180 $ 49,883 $ 78,003 $ 9,005 $12,188 18,711
Wholesale gross profit.. $ (5) $ 86 $ 2,517 $ 2,065 $ 533 $ 856 737
Wholesale gross margin.. (0.0)% 0.4% 5.1% 2.6% 5.9% 7.0% 3.9%
Total unit sales........ 7,994 10,821 17,038 27,938 4,090 4,545 6,777
Total revenue........... $81,706 $111,616 $191,829 $324,359 $41,796 $51,789 80,388
Total gross profit...... $ 5,517 $ 8,927 $ 16,077 $ 26,820 $ 3,624 $ 4,945 6,999
Total gross margin...... 6.8 % 8.0% 8.4% 8.3% 8.7% 9.5% 8.7%
</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.
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 acquisition of used
vehicles, Auto Factory makes large purchases of off-lease, rental and fleet
vehicles on a centralized, company-wide basis. 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. This
process allows Auto Factory to improve our profits on used vehicle sales and
provide inventory to our dealerships on a cost effective basis to meet regional
customer demand.
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
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<PAGE>
technicians inspect, adjust, clean, repaint, repair or replace mechanical,
cosmetic and safety features to meet our standards. 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 428 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 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>
Three Months Ended March
Year Ended December 31, 31,
------------------------------------ ---------------------------
Actual Pro Forma Actual Pro Forma
------------------------- --------- ---------------- ---------
1996 1997 1998 1998 1998 1999 1999
------- ------- ------- --------- ------- ------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales......... $42,416 $58,707 $91,134 $188,410 $18,840 $27,431 $50,299
Gross profit.. 16,966 26,512 41,711 86,986 8,588 12,708 23,219
Gross margin.. 40.0% 45.2% 45.8% 46.2% 45.6% 46.3% 46.2%
</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 promotes 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 finance and
insurance 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, oversight and consulting services to
the finance and insurance departments of our dealerships;
. Develops finance and insurance personnel through classroom training,
personal coaching and direct customer contact to create a system
where our personnel market products efficiently and in a less
adversarial manner, and monitors financial performance and customer
satisfaction levels;
. Assures compliance of finance and insurance departments with
corporate policies and guidelines, federal and state regulatory
requirements and dealership performance targets, and provides finance
and insurance personnel to quickly integrate acquired dealerships;
and
. Provides assistance to our finance departments with sub-prime lending
activities, and conducts daily review meetings at the dealership and
regional level to close all open transactions.
Vehicle Financing and Insurance Activities
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. Finance and insurance
revenue is recorded net of these chargebacks.
Company-wide and Dealership Specific Sales and Marketing Activities
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.
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
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<PAGE>
can supply a lifetime of automotive products and services. We are continuing to
develop our FirstAmerica Automotive brand through a multi-level process:
. 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 1997, 1998 and 1999 and for best of show in
1998 and 1999.
. 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.
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 obtain additional
potential customers through a 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. Approximately 9% of our May 1999
year to date 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.
Relationships with Automobile 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 wholly
owned subsidiaries, we currently have 24 dealer agreements with 10
manufacturers. We have entered into one or more dealer agreements with the
following manufacturers:
<TABLE>
<S> <C>
.BMW .Isuzu
.DaimlerChrysler .Mitsubishi
.Ford .Nissan
.General Motors .Toyota (includes Lexus)
.Honda .Volkswagen
</TABLE>
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<PAGE>
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; and
. 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 dealer agreement typically provides
for a term of a specified period of time ranging from one to five
years and upon expiration we expect to renew each of our dealer
agreements in the ordinary course of business.
Generally, each dealer agreement provides for non-renewal or termination
by the manufacturer 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, conviction of a dealer, manager or owner of certain crimes,
misrepresentations of certain information by the dealership or dealer, manager
or owner to the manufacturer, failure to adequately operate the dealership,
failure to maintain a license, permit or authorization required for the
conduct of business, or material breach of other provisions of the dealer
agreement. The ability of a manufacturer to deny the renewal of a dealer
agreement, or terminate a dealer agreement is limited by applicable law. See
"--Governmental Regulations and Environmental Matters Affecting the Automotive
Retailing Industry--California Automobile Dealership Laws" on page 74.
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. 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 11.
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 regional geographic area designated by
Toyota; or
. three Lexus dealerships nationally.
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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.
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 intend to enter into an agreement with Toyota
consistent with the above 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
DaimlerChrysler currently considers, on a case by case basis, any
acquisition that would cause an acquiring company to own more than ten
Dodge/Chrysler/Plymouth/Jeep 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 a transfer of control of our company.
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Honda/Acura
Under our agreement with Honda the number of Honda and Acura dealerships
we may acquire is restricted to:
. Fourteen Honda dealerships in the State of California, with specific
limitations in various geographic regions of California;
. Two Acura dealerships in Honda-defined metropolitan markets having
two or more Acura dealerships;
. Three Acura dealerships in any of the six Acura geographic zones, as
defined by Honda; and
. Five Acura dealerships nationally.
In addition, the number of Honda dealerships we may own is further
limited by geographic zone and national unit sales volume restrictions. We may
not acquire additional Honda dealerships if our Honda dealerships' unit sales
exceed:
. 5% of the total Honda unit sales in any one of the ten Honda-defined
geographic zones (other than California) through December 31, 1999;
. 10% of the total Honda unit sales in any one of the ten Honda-defined
geographic zones through December 31, 2000;
. 15% of the total Honda unit sales in any one of the ten Honda-defined
geographic zones through June 30, 2004;
. 17.5% of the total Honda unit sales in any one of the ten Honda-
defined geographic zones after June 30, 2004;
. 5% of the total Honda unit sales in the United States through June
30, 2000;
. 6.5% of the total Honda unit sales in the United States through June
30, 2001;
. 7.75% of the total Honda unit sales in the United States through June
30, 2002;
. 9.0% of the total Honda unit sales in the United States through June
30, 2003;
. 10% of the total Honda unit sales in the United States through June
30, 2004; and
. 12% of the total Honda unit sales in the United States after June 30,
2004.
Volvo
Volvo has approved our contemplated ownership structure. Should we desire
to acquire additional Volvo dealerships, we would expect to enter into a master
agreement with Volvo similar to our agreements with other manufacturers.
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.
. Under California law, 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
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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.
Competition in the Automotive Retailing Industry
Automobile retailing is a highly competitive business with approximately
22,100 franchised automobile dealerships in the United States at the beginning
of 1999.(/1/) 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.
- --------
(1) Source: Crain Communications, Inc.'s "Automotive News" dated March 22,
1999.
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. 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 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. We will also be selling vehicles in Las Vegas upon the
closing of our acquisition of Falconi's Tropicana Honda. 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 10.
Governmental Regulations and Environmental Matters Affecting the Automotive
Retailing Industry
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 Automobile 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
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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 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.
Automobile 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 risks 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
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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 with respect to our
existing operations will not, individually or in the aggregate, have a material
adverse effect on our results of operations or financial condition. However,
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 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. Ten of these
leases are with related parties. See "Transactions with Related Parties" on
page 86.
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 Automobile Manufacturers" on page 69.
Employees
As of May 31, 1999, we employed 1,609 people, of whom approximately 194
were employed in executive and managerial positions, 379 were employed in non-
managerial sales positions, 814 were employed in non-managerial parts, service
and other positions and 222 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
some of our 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 reduce our ability to effectively manage operations and execute
our growth strategy" on page 19.
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We believe that our relationship with our employees is good.
Approximately 68 of our employees, primarily 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 11.
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 due to the high value of vehicle inventory
and the nature of the automobile business. Our insurance covers our tangible
assets including our vehicle inventory, by means of comprehensive property
coverage including losses related to floods, earthquakes and employee
dishonesty. In connection with our normal business activities including
automobile service, vehicle sales and auto financing, we are insured for claims
from third parties and employees by means of the following coverages: general
liability, garage liability, employee benefit liability, pollution liability,
workers compensation, umbrella liability, errors and omissions insurance,
fiduciary liability and directors and officers liability. We believe this broad
coverage and the limits of insurance we maintain is comparable to the standards
found in 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
Name Age Position Officer 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...... 49 Secretary and Director 1995
Jean-Marc Chapus........ 40 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. Mr. Price's term as a director will expire in
the year 2001.
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 1965 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. Mr.
Strough's term as a director will expire in the year 2001.
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. Mr. Bercovich's term as a director will expire in the
year 1999.
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. Mr. Chapus's
term as a director will expire in the year 2000.
H. Robert Heller was appointed as a director in January 1999. Mr. Heller
has served as a director and Executive Vice President of Fair, Isaac and
Company since 1994. 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. Mr.
Heller's term as a director will expire in the year 2000.
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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 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 13
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 1997, Mr. Patterson was a general manager with Bankston Lincoln
Mercury in Dallas, Texas. From February 1987 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
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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.
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
80
<PAGE>
executive management. The salary, bonus and benefits are guaranteed unless he
is terminated for cause, voluntarily terminates his employment, dies or becomes
disabled. If any of the foregoing occur, Mr. Price is only entitled to amounts
already accrued under this agreement prior to that event.
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 benefits are guaranteed unless he
is terminated for cause, voluntarily terminates his employment, dies or becomes
disabled. If any of the foregoing occur, Mr. Strough is only entitled to
amounts already accrued under this agreement prior to that event.
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 122,078 shares
of common stock at a price of $2.11 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 43,599 shares of common stock
upon our acquisition of the Concord Toyota dealership. The exercise price of
these options is $4.59. 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. If Mr. Hallock is
terminated for cause, voluntarily terminates his employment other than for good
reason following a change of control, dies or becomes disabled, Mr. Hallock is
only entitled to amounts already accrued under this agreement prior to that
event.
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 87,199 shares of common stock at a price of $9.17
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, or is terminated by us
other than for cause 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.
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 130,798 shares of common stock at a price of
$9.17 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, or is
terminated by us other than for cause 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.
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<PAGE>
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.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------------- ------------
Securities
Name and Principal Other Annual Underlying
Position Year Salary Bonus Compensation(a) Options
------------------ ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas A. Price......... 1998 $508,800 $127,200(c) $14,400 --
President and Chief
Executive Officer 1997 470,500(b) -- 9,885 --
Donald V. Strough....... 1998 424,000 106,000(c) 7,200 --
Chairman 1997 108,000 -- -- --
Charles R. Oglesby...... 1998(d) 141,667 85,000(e) 47,301 133,705
Chief Operating Officer
Debra L. Smithart....... 1998 300,000 142,500(c) 17,072 --
Chief Financial and
Administrative Officer 1997 50,000 18,750(f) 1,100 87,199
Steven S. Hallock....... 1998 389,000 275,000(c) 8,900 43,599
Regional Vice President 1997 333,000 620,000(g) 5,000 122,078
David J. Moeller........ 1998 105,000 57,300(c) -- 10,900
Vice President of
Finance
</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.
The following table provides information regarding stock option grants
made during 1998 to the persons named in the Summary Compensation Table. No
stock appreciation rights were granted to executive officers for the fiscal
year ended December 31, 1998. 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 "Management--Employment Contracts and Change of Control
Arrangements" on page 80. We granted options to purchase 221,484 shares of
common stock for the fiscal year ended December 31, 1998. 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.
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<PAGE>
Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates
of Stock Price
% of Total Options Appreciation for
Granted to Option Term(a)
Options Granted Employees in Exercise Price Expiration ------------------------
Name (Shares) Fiscal Year per Share Date 5% 10%
- ---- --------------- ------------------ -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Oglesby...... 133,705(b) 60.4 $9.17 9/1/08 -- (c) $ 364,162
Steven S. Hallock....... 43,599(d) 19.7 4.59 10/1/08 $ 125,779 318,748
David J. Moeller........ 10,900(b) 4.9 9.17 2/9/08 -- (c) 16,718
</TABLE>
- --------
(a) 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.
(b) The options vest ratably over 60 months from the date of grant.
(c) 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.
(d) These options are fully vested.
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 Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at 12/31/98 12/31/98 ($)
------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles R. Oglesby........ 8,913 124,791 -- (a) -- (a)
Steven S. Hallock......... 80,223 85,455 $149,600 $274,400
Debra L. Smithart......... 20,346 66,852 -- (a) -- (a)
David J. Moeller.......... -- 10,900 -- (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 $5.32 per share, as of
December 31, 1998, minus an exercise price of $9.17 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 1,307,979. As of March 31, 1999, no options were
exercised, options to purchase of a total of 631,251 shares at
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<PAGE>
a weighted average exercise price of $6.38 per share were outstanding, and
676,728 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 five
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.
1999 Employee Stock Purchase Plan
On April 7, 1999, the board of directors adopted our 1999 Employee Stock
Purchase Plan. A total of 218,000 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
annual increases 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 employed for more than a specific number
of hours per week and more than five months per year. The purchase plan will be
implemented in specified 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
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<PAGE>
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:
. 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.
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<PAGE>
TRANSACTIONS WITH RELATED PARTIES
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 1,740,310 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 317,191 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 dealership group to us on July 11, 1997.
Mr. Cziska received 356,958 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
579,871 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 199,249 shares of our Class A Common Stock to
the Price Trust u/t/d 10/5/88 for $457, or $0.002 per share. Mr. Price is a
trustee of this trust.
On March 31, 1997, we sold 87,199 shares of our Class A Common Stock to
our Regional Vice President Steven S. Hallock for $200, or $0.002 per share.
The Tom Price dealership group was compensated for services provided to
us prior to the initial combination of our dealerships. The services included
data processing services related to a shared main frame computer, allocated
legal costs, shared advertising and management and professional services. We
paid approximately $800,000 for these services performed during fiscal 1997.
The dealerships included in the Tom Price dealership group had approximately
$332 million in annual revenue and $38.9 million of selling, general and
administrative expenses during the year ended December 31, 1996.
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, real property which is leased to us. In addition, Rosewood
Village Associates acquired approximately $0.8 million of 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.
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<PAGE>
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.
We lease two dealership properties from the Strough Revocable Trust of
1983. In 1998, annual obligations on these leases totaled approximately
$563,000. 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.
For additional information regarding related party transactions see
footnote 15 to our Notes to Consolidated Financial Statements on page F-22.
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
March 31, 1999 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. This origination
fee was paid to Mr. Strough for providing financing to us on terms we believed
to be more favorable than financing available from a bank or an institutional
lender. The origination fee itself was comparable to similar fees which we
would have paid to a lender providing less favorable terms. 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 Poway Chevrolet dealership. We pay Mr.
Price interest at 7.4% per year. 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 obtained in an 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:
. the transaction has been approved by a majority of the members of our
board of directors and a majority of our independent directors; or
. 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.
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. The percentages listed for before this offering were
calculated on the basis of 6,628,276 shares outstanding prior to this offering
and the percentages listed for after the offering were calculated on the basis
of 13,038,959 shares outstanding after this offering. Shares of common stock
underlying options or warrants exercisable or debt convertible within 60 days
of June 30, 1999 are deemed to be outstanding for purposes of calculating the
beneficial ownership of the holder of options or warrants or convertible debt.
These shares are not deemed to be outstanding for purposes of calculating the
beneficial ownership of each other person. Of the shares being sold in the
offering, 117,084 of these shares may be sold from shares issued upon the
exercise of warrants. If these holders elect to utilize a cashless exercise
method, approximately 15,440 additional warrants will be utilized as payment of
the exercise price and will no longer be outstanding after this offering.
<TABLE>
<CAPTION>
Before Offering After Offering
------------------------ ------------------------
Number of Shares Number Number of Shares
of Common of Shares of Common
Beneficial Owner Stock Owned Percent Offered Stock Owned Percent
- ---------------- ---------------- ------- --------- ---------------- -------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers(a)
W. Bruce Bercovich(b)... 438,173 6.6% 21,796 416,377 3.2%
Jean-Marc Chapus(c)..... 1,539,927 23.2% 1,539,927 11.8%
Thomas A. Price(d)...... 2,495,049 37.6% 2,495,049 19.1%
Donald V. Strough(e).... 634,370 9.6% 634,370 4.9%
Charles R. Oglesby...... 24,513 * 24,513 *
Debra Smithart.......... 38,149 * 38,419 *
David J. Moeller........ 3,270 * 3,270 *
Executive officers and
directors as a group
(seven persons)........ 5,173,451 78.1% 21,796 5,151,655 39.3%
Other 5% Stockholders
T. Al Babbington(f)..... 326,274 4.9% 21,800 304,475 2.3%
Fred Cziska(g).......... 366,041 5.5% 366,041 2.8%
The TCW Group, Inc.(c).. 1,539,927 23.2% 1,539,927 11.8%
Other Stockholders
Douglas Y. Bech......... 56,679 * 23,980 32,699 *
Ralph McBride........... 6,540 * 6,540 0 --
Thomas R. Powers........ 56,679 * 23,980 32,699 *
Jack R. Tompkins........ 39,239 * 13,080 26,160 *
Brian Tucker............ 21,800 * 21,800 0 --
Bert Wollen............. 76,299 1.2% 21,800 54,499 *
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Before Offering After Offering
------------------------ ------------------------
Number of Shares Number Number of Shares
of Common of Shares of Common
Other Stock Owned Percent Offered Stock Owned Percent
----- ---------------- ------- --------- ---------------- -------
<S> <C> <C> <C> <C> <C>
Michael Gibbons......... 45,359(h) * 45,359 0 --
Scott Lang.............. 45,359(h) * 22,679 22,679 *
Philip Kaszar........... 7,403(h) * 7,403 0 --
Glenn Pollack........... 7,403(h) * 7,403 0 --
Brown, Gibbons, Lang &
Company, L.P........... 34,240(h) * 34,240 0 --
Donald Sanders.......... 10,900(i) * 10,900 0 --
Kathy Sanders........... 6,540(i) * 6,540 0 --
John Drury.............. 6,540(i) * 6,540 0 --
John Mundy.............. 545(i) * 545 0 --
Clyde Drexler........... 16,350(i) * 16,350 0 --
George Ball............. 2,725(i) * 2,725 0 --
</TABLE>
- --------
* Less than 1%.
(a) The address of each of the directors and executive officers is c/o
FirstAmerica Automotive, 601 Brannan St., San Francisco, CA 94107.
(b) Includes 257,236 shares of common stock held by Embarcadero Automotive,
LLC, 126,438 shares held by BB Investments, and 54,499 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.
(c) 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.
(d) Includes 2,495,049 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.
(e) Includes 634,370 shares owned by the Strough Revocable Trust of 1983, as
amended. Mr. Strough and his wife are co-trustees of this trust.
(f) Mr. Babbington is our vice president of marketing and strategic planning.
The address for Mr. Babbington is c/o FirstAmerica Automotive, 601 Brannan
St., San Francisco, CA 94107.
(g) Mr. Cziska is our vice president of parts, service and purchasing. The
address for Mr. Cziska is c/o FirstAmerica Automotive, 601 Brannan St., San
Francisco, CA 94107.
(h) Represents shares issuable upon exercise of outstanding warrants.
(i) Represents shares issuable upon the conversion of convertible debt.
The following table identifies the shares of common stock underlying
options exercisable within 60 days of June 30, 1999 that are deemed to be
outstanding for purposes of calculating beneficial ownership of shares of
common stock of each listed person:
<TABLE>
<CAPTION>
Number of Shares
Which May be Acquired
by Exercising Options
on or Before
Beneficial Owner August 29, 1999
---------------- ---------------------
<S> <C>
Charles R. Oglesby................................... 24,513
Debra Smithart....................................... 38,149
David J. Moeller..................................... 3,270
T. Al Babbington..................................... 9,083
Fred Cziska.......................................... 9,083
</TABLE>
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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 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 100,000,000
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 are outstanding. Under
some 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
10,000,000 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
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<PAGE>
purposes could, among other things, under some circumstances, have the effect
of delaying, deferring or preventing a change in control.
On July 11, 1997, we issued 3,500 shares of Cumulative Redeemable
Preferred Stock, due June 30, 2005, and 500 shares of Redeemable Preferred
Stock, due June 30, 2005. As of March 31, 1999, 3,500 shares of Cumulative
Redeemable Preferred Stock and 500 shares of Redeemable Preferred Stock were
issued and outstanding. We intend to use part of the proceeds of this offering
to redeem all outstanding shares of Cumulative Redeemable Preferred Stock and
Redeemable Preferred Stock.
Our Cumulative Redeemable Preferred Stock is redeemable at our option,
mandatorily on June 30, 2005, or upon a change of control at the option of the
Cumulative Redeemable Preferred Stock holders. If we elect to redeem the
Cumulative Redeemable Preferred Stock, we must pay the following:
. $1,000; plus
. any accumulated and unpaid dividends thereon; plus
. a per share premium, equal to $75.00 on June 30, 1999, declining by
$12.50 on June 30 of each following year until it reaches zero on
June 30, 2005.
On June 30, 2005, we must redeem the Cumulative Redeemable Preferred
Stock for $1,000 per share plus all accumulated and unpaid dividends thereon.
Dividends on the Cumulative Redeemable Preferred Stock accumulate at $80 per
share per year, payable semi-annually. The dividend increases to $140 per share
per year for any period for which a semi-annual payment was missed and during
any subsequent periods until all amounts are paid. If we undergo a change of
control, we must redeem the Cumulative Redeemable Preferred Stock for $1,010
per share. If we choose to redeem these shares between June 30, 1999 and June
29, 2000, we will be required to pay a total of $1,075 per share, plus any
accumulated and unpaid dividends thereon. Accumulated dividends on July 1, 1999
were equal to $6.66 per share.
Our Redeemable Preferred Stock is also redeemable at our option,
mandatorily on June 30, 2005, or upon a change in control at the option of the
Redeemable Preferred Stock holders. If we choose to redeem the Redeemable
Preferred Stock, we must pay the following:
. the liquidation preference for these shares, which is an amount equal
to $1,240 per share on June 30, 1999, increasing by $80 per share on
June 30 of each following year until it reaches $1,720 per share on
June 30 of 2005; plus
. a redemption premium, set at 7.5% of the per share liquidation
preference as of June 30, 1999, declining by 1.25% of the per share
liquidation preference per year until this premium reaches zero in
the year 2005.
On June 30, 2005, we must redeem the Redeemable Preferred Stock for
$1,720 per share. If we undergo a change of control, we must redeem the
Redeemable Preferred Stock for 101% of the then applicable liquidation
preference per share. If we choose to redeem these shares between June 30, 1999
and June 29, 2000, we will be required to pay $1,333 per share.
Stock Options
We approved the 1997 Stock Option Plan under which an aggregate of
1,307,979 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
632,088 shares of common stock. The options vest over a five year period, and
expire if unexercised ten years from the date of grant.
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<PAGE>
During 1998, we granted options to purchase 177,885 shares of common
stock at an exercise price of $9.17 per share and 43,599 shares of common stock
at an exercise price of $4.59 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 162,059 shares of common
stock. Of these, warrants to acquire 144,619 shares are exercisable at $2.11
per share and warrants to acquire 17,440 shares are exercisable at $4.59 per
share. Our warrants are exercisable until either five or ten years from the
date of issuance. Holders of warrants to acquire 153,339 shares (of which
117,084 shares are being sold in this offering) 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
Following this offering, holders of approximately 6,063,641 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 and By-law Provisions
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.
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.
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<PAGE>
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 78.
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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<PAGE>
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 January 1,
1998.
Upon completion of this offering, we will have outstanding 13,038,959
shares of common stock, assuming the issuance of 6,250,000 shares of common
stock by us in this offering. Of the shares outstanding after the offering, the
6,565,460 shares sold in this offering by us and the selling stockholders and
71,080 shares currently outstanding 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
--------- ---------------------------------
<C> <S>
6,402,419.. Sold by us in reliance on exemptions from the registration
requirements of the Securities Act. 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.
Of these shares, 6,157,529 are subject to lock-up agreements
as described below. Holders of 6,031,091 of these shares have
registration rights.
44,976..... Issuable upon exercise of outstanding warrants, 36,255 of
which are subject to lock-up agreements described below.
562,945.... Issuable upon exercise of options granted under our 1997
option plan. All of these shares are registered for sale
under the Securities Act. These shares may not be sold until
180 days after the date of this prospectus. We have agreed
with Merrill Lynch not to waive these restrictions without
their consent. An additional 676,728 shares are available for
grant under the stock option plan as of March 31, 1999.
68,306..... Shares issued upon exercise of options and registered for sale
under the Securities Act. These shares may not be sold until
180 days after the date of this prospectus. We have agreed
with Merrill Lynch not to waive these restrictions without
their consent.
</TABLE>
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, 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 generally
permits 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 preceding three months,
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<PAGE>
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 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
After the completion of this offering, holders of 6,193,785 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 101. 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.
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<PAGE>
UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of material U.S. federal income and
estate tax consequences of the ownership and disposition of our common stock
applicable to non-U.S. holders. A "non-U.S. holder" is a person other than:
. an individual who is a citizen or resident of the U.S.;
. a corporation, partnership or other entity created or organized in
the U.S. or under the laws of the U.S. or of any political
subdivision thereof, other than a partnership treated as foreign
under U.S. Treasury regulations;
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of source; and
. a trust, in general, if it is subject to the primary supervision of a
court within the U.S. and the control of one or more U.S. persons.
An individual may generally be treated as a resident alien, instead of a
non-resident alien, by, among other things, being present in the U.S. for at
least 31 days in the calendar year and for a total of at least 183 days during
a three-year period ending in the current calendar year--counting for these
purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year. Resident aliens are subject to tax as if they were
U.S. citizens.
This discussion does not consider:
. U.S. state and local or non-U.S. tax consequences;
. specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is
a partnership, that the U.S. tax consequences of holding and
disposing of our common stock may be affected by certain
determinations made at the partner level;
. the tax consequences for the shareholders, partners or beneficiaries
of a non-U.S. holder;
. special tax rules that may apply to certain non-U.S. holders,
including without limitation, banks, insurance companies, dealers in
securities and traders in securities; or
. special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, applicable Treasury regulations, and administrative and
judicial interpretations as of the date of this prospectus, all of which may
change retroactively or prospectively. The following summary is for general
information. Each non-U.S. holder should consult a tax advisor regarding the
U.S. federal tax consequences of holding and disposing of our common stock, as
well as any tax consequences under the laws of any U.S. state, local or other
U.S. or non-U.S. taxing jurisdiction.
Dividends
Dividends paid to a non-U.S. holder of common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or such lower
rate which an applicable income tax treaty specifies. Non-U.S. holders should
consult their tax advisors regarding their entitlement to benefits under a
relevant income tax treaty.
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<PAGE>
Dividends that are effectively connected with a non-U.S. holder's conduct
of a trade or business in the U.S. or, if an income tax treaty applies,
attributable to a permanent establishment, or, in the case of an individual, a
"fixed base" in the U.S. ("U.S. trade or business income") are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but generally are not subject to the 30% withholding tax if the non-U.S.
holder files the appropriate U.S. Internal Revenue Service form with the payer.
Any U.S. trade or business income received by a non-U.S. holder that is a
corporation may be subject to an additional "branch profits tax" at a 30% rate
or such lower rate which an applicable income tax treaty specifies.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above and for purposes
of determining the applicability of an income tax treaty rate. For dividends
paid after 2000:
. a non-U.S. holder of common stock that claims the benefit of an
income tax treaty rate generally will be required to satisfy
applicable certification and other requirements;
. in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners
of the partnership, and the partnership will be required to provide
certain information, including a U.S. taxpayer identification number;
and
. look-through rules will apply to tiered partnerships;
A non-U.S. holder of common stock that is eligible for a reduced rate of U.S.
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income
tax in respect of gain recognized on a disposition of common stock unless:
. the gain is U.S. trade or business income, in which case the branch
profits tax described above may also apply to a corporate non-U.S.
holder;
. the non-U.S. holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the U.S. Internal
Revenue Code, is present in the United States for more than 182 days
in the taxable year of the disposition and meets certain other
requirements;
. the non-U.S. holder is subject to tax under provisions of U.S. tax
law applicable to certain U.S. expatriates; or
. we are or have been a "U.S. real property holding corporation" for
U.S. federal income tax purposes at any time during the shorter of
the five-year period ending on the date of disposition and the non-
U.S. holder's holding period for the common stock.
The tax relating to stock in a "U.S. real property holding corporation"
will not apply to a non-U.S. holder whose holdings, actual and constructive, at
all times during the applicable period, amount to 5% or less of the common
stock, provided that the common stock is regularly traded on an established
securities market. Generally, a corporation is a "U.S. real property holding
corporation" if the fair market value of its "U.S. real property interests"
equals or exceeds 50% of the sum of the fair market value of its worldwide real
property interests and its other assets used or held for use in a trade or
business. We believe that we have not been and are not, and we do not
anticipate becoming, a "U.S. real property holding corporation" for U.S.
federal income tax purposes.
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Federal Estates Taxes
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax, unless an applicable estate tax treaty provides otherwise.
Information Reporting Requirements and Backup Withholding Tax
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of the dividends paid to that holder and any tax
withheld with respect to those dividends. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting those dividends and withholding may also be made
available, under an applicable income tax treaty or agreement, to the tax
authorities in the country in which the non-U.S. holder resides.
Under some circumstances, U.S. Treasury regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, non-U.S. holders of common stock
generally will be exempt from information reporting and backup withholding on
dividends paid prior to 2001 to an address outside the U.S. For dividends paid
after 2000, however, a non-U.S. holder of common stock that fails to certify
its non-U.S. holder status in accordance with applicable U.S. Treasury
regulations may be subject to backup withholding at a rate of 31% on payments
of dividends.
The payment of the proceeds of the disposition of common stock by or
through the U.S. office of a broker generally will be subject to information
reporting and backup withholding at a rate of 31% unless the holder certifies
its status as a non-U.S. holder under penalties of perjury or otherwise
establishes an exemption. The payment of the proceeds of the disposition by a
non-U.S. holder of common stock by or through a non-U.S. office of a non-U.S.
broker will not be subject to backup withholding or information reporting
unless the non-U.S. broker is a "U.S. related person". In the case of the
payment of proceeds from disposition of common stock by or through a non-U.S.
office of a broker that is a U.S. person or a "U.S. related person,"
information reporting, but currently not backup withholding, on the payment
applies unless, in general, the holder certifies its status as a non-U.S.
holder under penalties of perjury or the broker has documentary evidence in its
files that the holder is a non-U.S. holder and the broker has no actual
knowledge to the contrary. For this purpose, a "U.S. related person" is:
. a "controlled foreign corporation" for U.S. federal income tax
purposes;
. a foreign person 50% or more of whose gross income from all sources
for the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are
effectively connected with the conduct of a U.S. trade or business;
or
. effective after 2000, a foreign partnership (A) at least 50% of the
capital or profits interest in which is owned by U.S. persons, or (B)
that is engaged in a U.S. trade or business.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a "U.S. related person" unless certain certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge that the holder is a U.S. person. Non-U.S. holders should consult
their own tax advisors regarding the application of information reporting and
backup withholding to them.
Any amounts withheld under the backup withholding rules from a payment to
a non-U.S. holder will be refunded or credited against the holder's U.S.
federal income tax liability, if any, if the required information is furnished
to the U.S. Internal Revenue Service.
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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....................................................... 6,565,460
=========
</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 some 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 legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
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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 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
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
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 With
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 $2,000,000 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 984,000
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 satisfaction of specified 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.
100
<PAGE>
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
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.
Notwithstanding the foregoing, we may, during the lock-up period, issue
securities (1) to a third party as consideration for our acquisition from the
third party of a car dealership, provided the third party executes a lock-up
agreement similar to the one described above for a period expiring 180 days
after the date of the prospectus, or (2) pursuant to options, warrants and
stock purchase plans described in this prospectus.
New York Stock Exchange Listing
Our common stock has been approved for listing 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;
. our financial information;
. the history of, and the prospects for, our company and the industry
in which we compete;
. an assessment of our management, its past and present operations;
. the prospects for, and timing of, future revenues of our company;
. our 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.
101
<PAGE>
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 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.
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 consolidated financial statements 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 combined statements of Certain Dealerships, Assets and Liabilities of
Lucas Dealership Group, Inc. as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
102
<PAGE>
The financial statements of Valley Automotive Center as of December 31,
1996 and 1995 and the two year periods then ended; the financial statements of
Beverly Hills BMW, Ltd., (dba Beverly Hills BMW) as of December 31, 1997 and
1996 and for each of the three years ended December 31, 1997; the financial
statements of Burgess Honda as of September 30, 1997 and 1996 and for each of
the years in the three year period ended September 30, 1997; the financial
statements of Vacation Motors, (dba Concord Toyota) as of September 30, 1998
and December 31, 1997 and the periods then ended, DSW & Associates, Inc. (dba
Autotown) as of December 31, 1998 and 1997 and the two years then ended; the
financial statements of Ritchey Fipp Chevrolet as of December 31, 1998 and for
the year then ended, the financial statements of South Bay Chrysler Plymouth
Jeep as of December 31, 1998 and the year then ended, 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 as well as free of
charge on the SEC's Web site.
MANUFACTURERS' DISCLAIMER
No manufacturer 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.
103
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FirstAmerica Automotive, Inc.
Audited Financial Statements
Report of Independent Auditors........................................ F-5
Consolidated Balance Sheets as of December 31, 1998 and 1997.......... F-6
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.................................................. F-7
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996..................................... F-8
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................. F-9
Notes to Consolidated Financial Statements............................ F-10
Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998.................................................... F-26
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998........................................ F-27
Condensed Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1999.......................................... F-28
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998........................................ F-29
Notes to Condensed Consolidated Financial Statements.................. F-30
Included are the statements required by Rule 3-05 of Regulation S-X for
completed and probable acquisitions.
Valley Automotive Center
Independent Auditors' Report............................................ F-35
Balance Sheet as of December 31, 1996 and 1995, and June 30, 1997
(unaudited).......................................................... F-36
Statements of Operations and Owner's Equity for the years ended
December 31, 1996 and 1995 and the six months ended June 30, 1997
(unaudited).......................................................... F-37
Statements of Cash Flows for the years ended December 31, 1996 and
1995 and for the six months ended June 30, 1997 (unaudited).......... F-38
Notes to the Financial Statements..................................... F-39
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Beverly Hills BMW
Independent Auditors' Report............................................ F-45
Balance Sheets as of December 31, 1997 and 1996, and March 31, 1998
(unaudited).......................................................... F-46
Statements of Operations and Retained Earnings for the three years
ended December 31, 1997, 1996 and 1995, and for the three months
ended March 31, 1998 and 1997 (unaudited)............................ F-47
Statements of Cash Flows for the three years ended December 31, 1997,
1996 and 1995, and for the three months ended March 31, 1998 and 1997
(unaudited).......................................................... F-48
Notes to the Financial Statements..................................... F-49
Burgess Honda
Independent Auditors' Report............................................ F-54
Balance Sheets as of September 30, 1997 and 1996, and March 31, 1998
(unaudited).......................................................... F-55
Statements of Operations and Retained Earnings for the three years
ended September 30, 1997, 1996 And 1995, and the six months ended
March 31, 1998 and 1997 (unaudited).................................. F-56
Statement Cash Flows for the three years ended September 30, 1997,
1996 and 1995 and the six months ended March 31, 1998 and 1997
(unaudited).......................................................... F-57
Notes to the Financial Statements..................................... F-58
Vacation Motors, dba Concord Toyota
Independent Auditors' Report............................................ F-63
Balance Sheets as of September 30, 1998 and December 31, 1997......... F-64
Statements of Operations and Retained Earnings for the years ended
December 31, 1997 and 1996 and the nine months ended September 30,
1998................................................................. F-65
Statements of Cash Flows for the years ended December 31, 1997 and
1996 and the nine months ended September 30, 1998.................... F-66
Notes to the Financial Statements..................................... F-67
DSW & Associates, Inc. dba Autotown
Independent Auditors' Report............................................ F-72
Consolidated Balance Sheets as of December 31, 1998 and 1997.......... F-73
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997........................................................ F-74
Consolidated Statements of Shareholders' Deficit for the years ended
December 31, 1998 and 1997........................................... F-75
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997........................................................ F-76
Notes to the Consolidated Financial Statements........................ F-77
Ritchey Fipp Chevrolet
Independent Auditors' Report............................................ F-84
Balance Sheets as of December 31, 1998 and March 2, 1999 (unaudited).. F-85
Statements of Operations and changes in Retained Earnings for the year
ended December 31, 1998 and the periods ended March 2, 1999 and March
31, 1998 (unaudited)................................................. F-86
Statements of Cash Flows for the year ended December 31, 1998 and the
periods ended March 2, 1999 and March 31, 1998 (unaudited)........... F-87
Notes to the Financial Statements..................................... F-88
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Lucas Dealership Group, Inc. and Subsidiaries
Independent Auditors' Report........................................... F-93
Combined Statement of Assets and Liabilities as of December 31, 1998
and 1997, and March 31, 1999 (unaudited)............................ F-94
Combined Statements of Sales, Cost of Sales and Direct Operating
Expense for the years ended December 31, 1998, 1997 and 1996 and the
three months ended March 31, 1999 and 1998 (unaudited).............. F-95
Combined Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 and the three months ended March 31, 1999 and
1998 (unaudited).................................................... F-96
Notes to the Financial Statements.................................... F-97
South Bay Chrysler Plymouth Jeep
Independent Auditors' Report........................................... F-104
Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited)......................................................... F-105
Statements of Operations and Retained Earnings for the year ended
December 31, 1998 and the three months ended March 31, 1999 and 1998
(unaudited)......................................................... F-106
Statements of Cash Flows for the year ended December 31, 1998 and the
three months ended March 31, 1999 and 1998 (unaudited).............. F-107
Notes to the Financial Statements.................................... F-108
</TABLE>
F-3
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
F-4
<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 and financial
statement schedule 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-5
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
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
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
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-6
<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-7
<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-8
<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-9
<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:
<TABLE>
<S> <C>
.San Francisco Bay Area .San Jose/Silicon Valley
.San Diego .Los Angeles
</TABLE>
(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-10
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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:
<TABLE>
<S> <C>
Leasehold improvements....................................... 5 to 20 years
Equipment.................................................... 5 to 10 years
Furniture, signs and fixtures................................ 5 to 10 years
Company vehicles............................................. 5 years
</TABLE>
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-11
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-12
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-13
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(dollars in
thousands except
per share data)
(unaudited)
<S> <C> <C>
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)
</TABLE>
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):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
F-14
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Inventories
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
New vehicles............................................... $65,152 $58,344
Used vehicles.............................................. 20,049 15,040
Parts and accessories...................................... 5,746 5,223
------- -------
Inventories................................................ $90,947 $78,607
======= =======
</TABLE>
(5) Property and Equipment
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------- ------
<S> <C> <C>
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
======= ======
</TABLE>
(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
F-15
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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.
F-16
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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%
F-17
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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.
F-18
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the Company's outstanding stock options
(in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997
--------------------- ---------------------
Number Weighted Number Weighted
of Average 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-19
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
- --------
(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.
(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.
F-20
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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):
<TABLE>
<CAPTION>
Years Ended
December
31,
------------
1998 1997
------ ----
<S> <C> <C>
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
====== ====
</TABLE>
The income tax rate on pre-tax income differed from the federal statutory
rate as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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 compensation.................... -- 56 % --
Other................................................ 1% 15 % --
--- --- ---
Total.............................................. 43% 88 % 3 %
=== === ===
</TABLE>
F-21
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
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
======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Year ended December 31, 1996........................... $592 $122 $714
==== ==== ====
</TABLE>
(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.
F-22
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-23
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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
---------------
Related Capital
Years ending December 31, Parties Other 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>
F-24
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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)
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).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
F-25
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 3,530 $ 2,191
Contracts in transit................................... 16,625 13,567
Accounts receivable, net............................... 16,744 18,460
Inventories............................................ 108,169 90,947
Deferred income taxes.................................. 853 853
Deposits, prepaid expenses and other................... 2,492 2,996
-------- --------
Total current assets................................ 148,413 129,014
Property and equipment, net............................ 11,082 9,879
Other assets:
Loan origination and other costs, net................. 2,955 3,107
Other noncurrent assets............................... 2,375 2,457
Goodwill, net......................................... 36,722 33,995
-------- --------
Total assets........................................ $201,547 $178,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan............................................ $ 96,105 $ 81,452
Secured lines of credit............................... 16,450 17,025
Notes payable and other............................... 5,038 5,512
Accounts payable...................................... 8,532 6,009
Accrued liabilities................................... 14,764 13,028
Deferred revenue...................................... 1,984 2,054
-------- --------
Total current liabilities........................... 142,873 125,080
Long-term liabilities:
Capital lease obligation and other long term notes.... 5,483 1,386
Senior notes, net of discount of $2,759 in 1999 and
$2,839 in 1998....................................... 33,241 33,161
Deferred income taxes................................. 995 1,055
Deferred revenue...................................... 1,951 2,475
-------- --------
Total liabilities................................... 184,543 163,157
-------- --------
Cumulative redeemable preferred stock, $.00001 par
value; 3,500 shares issued and outstanding in 1999 and
1998 (net of discount of $438 in 1999 and $456 in
1998, liquidation preference of $3,500 in 1999 and
1998)................................................. 3,062 3,044
Redeemable preferred stock, $.00001 par value; 500
shares issued and outstanding in 1999 and 1998 (net of
discount of $63 in 1999 and $65 in 1998, liquidation
preference of $610 in 1999 and $600 in 1998).......... 547 535
Stockholders' equity:
Common stock, $0.00001 par value:
Class A, 30,000,000 shares authorized, 11,514,044
shares issued and outstanding in 1999 and 1998..... -- --
Class B, 5,000,000 shares authorized, 3,532,000
shares issued and outstanding in 1999 and 1998..... -- --
Class C, 30,000,000 shares authorized, 0 shares
issued and outstanding............................. -- --
Additional paid-in capital............................ 8,320 8,320
Retained earnings..................................... 5,075 3,396
-------- --------
Total stockholders' equity.......................... 13,395 11,716
-------- --------
$201,547 $178,452
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-26
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Sales:
New vehicle.......................................... $ 151,274 $ 94,945
Used vehicle......................................... 51,789 41,796
Service and parts.................................... 27,431 18,840
Other dealership revenues, net....................... 7,705 5,036
---------- ----------
Total sales........................................ 238,199 160,617
Cost of sales:
New vehicle.......................................... 139,696 87,775
Used vehicle......................................... 46,844 38,172
Service and parts.................................... 14,723 10,252
---------- ----------
Total cost of sales................................ 201,263 136,199
---------- ----------
Gross profit......................................... 36,936 24,418
Operating expenses:
Selling, general and administrative.................. 30,739 20,658
Depreciation and amortization........................ 1,045 399
---------- ----------
Operating income................................... 5,152 3,361
Other income/(expense):
Interest expense, floor plan......................... (1,506) (1,180)
Interest expense, other.............................. (1,778) (891)
Gain on sale of dealership........................... 1,253 --
---------- ----------
Income before income taxes......................... 3,121 1,290
Income tax expense..................................... 1,342 555
---------- ----------
Net income......................................... $ 1,779 $ 735
========== ==========
Net income per common share--basic..................... $ 0.11 $ 0.04
========== ==========
Weighted average common shares outstanding--basic...... 15,065,984 14,224,845
========== ==========
Net income per common share--diluted................... $ 0.11 $ 0.04
========== ==========
Weighted average common shares outstanding--diluted.... 15,783,657 14,734,763
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-27
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FirstAmerica Automotive, Inc.
Common Stock
----------------------------------
Class A Class B
---------------- ---------------- Paid-in Retained Total
Shares Amount Shares Amount Capital Earnings Equity
-------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998................... 11,514 $ -- 3,532 $ -- $8,320 $3,396 $11,716
Preferred dividend and
liquidation
preference............. (80) (80)
Amortization of
discount............... (20) (20)
Net income.............. 1,779 1,779
-------- ------- ------- ------- ------ ------ -------
Balance, March 31,
1999................... 11,514 $ -- 3,532 $ -- $8,320 $5,075 $13,395
======== ======= ======= ======= ====== ====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 1,779 $ 735
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 1,045 268
Noncash interest expense................................ 230 113
Deferred warranty revenue, net.......................... (364) 56
Gain on sale of dealership.............................. (1,253) --
Deferred taxes.......................................... (60) --
Changes in operating assets and liabilities:
Receivables and contracts in transit................... (1,341) (4,958)
Inventories............................................ (13,425) 3,873
Other assets........................................... 212 88
Floor plan notes payable............................... 11,419 (4,257)
Accounts payable and accrued liabilities............... 4,021 2,761
--------- --------
Net cash provided by (used in) operating
activities......................................... 2,263 (1,321)
--------- --------
Cash flows from investing activities:
Capital expenditures..................................... (1,109) (457)
Acquisitions, net of cash acquired....................... (1,706) --
Proceeds from sale of dealership........................ 1,900 --
--------- --------
Net cash used in investing activities............... (915) (457)
--------- --------
Cash flows from financing activities:
Borrowings on notes payable and other.................... 1,009 255
Borrowings on secured lines of credit.................... -- 600
Repayments on secured lines of credit.................... (575) --
Repayments on notes payable and other.................... (443) --
--------- --------
Net cash (used in) provided by financing
activities......................................... (9) 855
--------- --------
Net increase (decrease) in cash and equivalents..... 1,339 (923)
Cash at beginning of period............................... 2,191 2,924
--------- --------
Cash at end of period..................................... $ 3,530 $ 2,001
========= ========
Cash paid during the period for:
Interest................................................. $ 3,047 $ 1,941
Income taxes............................................. 124 --
Non-cash activity was as follows:
Capital lease obligation................................. 619 --
Preference dividends declared but not paid............... 70 70
Notes payable to sellers................................. 2,000 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Business
FirstAmerica Automotive, Inc. (the "Company") is a leading automotive
retailer and consolidator in the highly fragmented automotive retailing
industry. The Company currently operates in four major metropolitan markets in
California, and is focusing its consolidation strategy in the western United
States. The Company generates 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. The Company sells a variety of domestic and foreign brands, including
BMW, Chevrolet, Dodge, Honda, Isuzu, Lexus, Mitsubishi, Nissan, 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:
<TABLE>
<S> <C>
.San Francisco Bay Area .San Jose/Silicon Valley
.San Diego .Los Angeles
</TABLE>
(b) Basis of Financial Statement Presentation
The financial information included herein for the three month periods
ended March 31, 1999 and 1998 is unaudited; however, such information reflects
all adjustments consisting only of normal recurring adjustments which are, in
the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
The financial information as of December 31, 1998 is derived from
FirstAmerica Automotive, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999. The interim condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto
included in the Company's Form 10-K. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for the full year.
All significant intercompany transactions and balances have been
eliminated in the accompanying condensed consolidated financial statements.
Certain prior period amounts have been reclassified to conform with the current
financial statement presentation.
(d) 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.
(e) Comprehensive Income
The Company has determined that net income and comprehensive income are
the same for the periods presented.
F-30
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Acquisitions
Acquisition and Disposition Completed During the Quarter Ended March 31, 1999
In March 1999, the Company acquired substantially all of the operating
assets of Richey Fipp Chevrolet, a Chevrolet dealership located in Poway,
California. The acquisition was accounted for using the purchase method of
accounting and the operating results of this dealership have been included in
the Company's results of operations since the date it was acquired. The
purchase price has been allocated to assets acquired and liabilities assumed
based on the fair values on the acquisition date. Amounts recorded for this
acquisition were as follows: current assets, net of cash acquired, of $4.2
million, fixed assets of $0.2 million, goodwill and other intangibles of $3.0
million, and floor plan and other liabilities of $3.7 million.
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the acquisitions completed
during the period from January 1, 1998 to March 31, 1999 (see list of
acquisitions below) had occurred as of January 1, 1998 after giving effect to
certain adjustments, including amortization of goodwill, interest expense on
acquisition debt, reductions in floor plan interest expense resulting from re-
negotiated floor plan financing agreements, change in accounting for
inventories from last-in, first-out method to the Company's specific
identification method for accounting for inventories, 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, 1998. These results
are also not necessarily indicative of the results of future operations:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Total sales............................................. $243,978 $211,333
Income before taxes..................................... 3,212 1,171
Net income.............................................. 1,831 667
Net income per common share--diluted.................... $ 0.11 $ 0.04
</TABLE>
The acquisitions incorporated into the above unaudited pro forma
financial information include the following:
<TABLE>
<CAPTION>
Acquisition Date
----------- -------------
<S> <C>
Beverly Hills BMW............................................ April 1998
Serramonte Honda............................................. June 1998
Concord Toyota............................................... October 1998
Volkswagen of Woodland Hills................................. November 1998
Auto Town.................................................... December 1998
Poway Chevrolet.............................................. March 1999
</TABLE>
In March 1999, the Company sold the operating assets of Serramonte
GMC/Pontiac/Buick to General Motors, Inc. and received proceeds of
approximately $1.9 million and recorded a pretax gain of $1.3 million.
F-31
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Inventories
Inventories is comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
New vehicles........................................ $ 78,179 $65,152
Used vehicles....................................... 23,685 20,049
Parts and accessories............................... 6,305 5,746
-------- -------
Inventories......................................... $108,169 $90,947
======== =======
</TABLE>
(4) Earnings Per Share
The following table reconciles basic and diluted earnings per share (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1999 1998
-------- -------
<S> <C> <C>
Net income per income statement.......................... $ 1,779 $ 735
Less:
Cumulative redeemable preference dividends............. 70 70
Redeemable preferred stock liquidation preference
accretion............................................. 10 20
Cumulative and redeemable preferred stock discount
amortization.......................................... 20 20
-------- ------
Net income applicable to common stockholders............. 1,679 625
Add:
Interest charges applicable to convertible debt........ 6 7
-------- ------
Net income applicable to common stockholders and assumed
conversions............................................. $ 1,685 $ 632
======== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-------------
1999 1998
------ ------
<S> <C> <C>
Diluted Earnings Per Share:
Weighted average common shares outstanding--basic......... 15,066 14,225
Net effect of dilutive stock options...................... 394 227
Net effect of warrants.................................... 224 183
Net effect of convertible notes........................... 100 100
------ ------
Total weighted average common shares outstanding--diluted... 15,784 14,735
====== ======
Net income per common share--diluted........................ $ 0.11 $ 0.04
====== ======
</TABLE>
(5) Floor Plan Notes Payable and Secured Lines of Credit
The Company currently has a $175 million loan and security agreement with
an institutional lender. The loan agreement matures in July 2000.
F-32
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The loan and security agreement permits the Company to borrow up to $115
million in floor plan notes payable, limited by new and a portion of used
vehicle inventory, and provides for revolver advances up to $35 million,
secured and restricted by the used vehicle and parts inventory borrowing base
as defined in the loan agreement. Revolver advances are classified as secured
lines of credit in the accompanying financial statements. The loan agreement
also provides for a discretionary line of credit of up to $25 million that an
institutional lender may make available at its absolute discretion. The Company
also has an over advance facility of $5.0 million in excess of the borrowing
base as defined in the loan agreement.
The Company's 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.
In April 1999, the institutional lender increased the over advance
facility to allow the Company to borrow an additional $9.3 million, resulting
in an over advance facility of $14.3 million. The Company borrowed $2.7 million
under this agreement to complete the acquisition of Marin Dodge.
As of March 31, 1999, the Company had floor plan notes payable of $96.1
million, revolver advances outstanding of $12.2 million and over advances
outstanding of $4.3 million. There were no discretionary advances outstanding
as of March 31, 1999.
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. Interest rates on
the floor plan notes and the revolver and over advances are variable and change
based on movements in the prime rate. The interest rate on the floor plan notes
equals prime minus 75 basis points, the interest rate on the revolver advances
equals prime minus 35 basis points, and the interest rate on the over advances
equals prime plus 200 basis points.
(6) Operating Segments
The Company operates primarily in the automotive segment. 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.
The Company acquired on December 31, 1998 Auto Town, a software company
that provides software products and internet services to automobile
dealerships.
Summarized financial information concerning the Company's two segments is
shown in the following table (in thousands):
<TABLE>
<CAPTION>
Automotive Technology Total Company
----------------- ------------- -----------------
Three Months Ended March 31,
-------------------------------------------------
1999 1998 1999 1998 1999 1998
-------- -------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenues.......... $237,926 $160,617 $ 273 $ -- $238,199 $160,617
Income (loss) before
taxes.................. 3,643 1,290 (522) -- 3,121 1,290
Total assets (period
end)................... 199,731 124,155 1,816 -- 201,547 124,155
</TABLE>
F-33
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Related Party Transactions
In March 1999, the Company acquired substantially all of the operating
assets of Richey Fipp Chevrolet. The $3.7 million purchase price was partly
financed from the proceeds of a $1.0 million loan from the Chief Executive
Officer of the Company and $1.0 million in notes to each of the two selling
parties, one of whom became an employee of the Company after the acquisition.
The annual interest rate on the loan from the Chief Executive Officer is 7.4%
and there is no stated maturity date on the note. The annual interest rate on
each of the $1.0 million notes payable to the sellers is 10.5%. The principal
amount on each note is due in March 2003. The seller notes and Chief Executive
Officer's note are included in other long-term notes in the accompanying
condensed consolidated financial statements.
(8) Subsequent Events
Public Offering and New Credit Facility
In April 1999, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission proposing to sell approximately
$100 million of common stock in a public offering. The Company intends to use
the proceeds from the public offering to fund pending acquisitions, repay
outstanding loans to principal stockholders including accrued interest, redeem
outstanding senior notes including accrued interest and redemption premiums,
and redeem preferred stock including accrued dividends and redemption premiums.
In addition, the Company is currently negotiating a new credit facility that
will replace the current floor plan facility, provide additional floor plan
borrowing capacity, and provide additional borrowing capacity to complete
acquisitions. This new credit facility is expected to be available upon the
closing of the Company's pending public offering.
Acquisition Completed Subsequent to March 31, 1999 and Pending Acquisitions
In April 1999, the Company acquired substantially all of the operating
assets of Marin Dodge for $4.2 million. In May 1999, the Company entered into
an agreement to acquire all of the outstanding capital stock of the Lucas
Dealership Group, Inc. which, at the time of closing, will consist of six
dealerships including seven new vehicle franchises in the San Jose/Silicon
Valley area. The Company has also entered into agreements to acquire the assets
of a single franchise dealership in the San Francisco Bay area, a multiple
franchise dealership in the Los Angeles area, and a dealership in the Las Vegas
area. The estimated aggregate cash purchase price for these acquisitions is
approximately $100 million, net of cash acquired. The Company intends to fund
the acquisitions with proceeds from its common stock offering and new credit
facility. The Company also has a financing commitment letter for the Lucas
Dealership Group acquisition, which will be used in the event the Company's
public offering is not consummated before the closing of such acquisition. The
back up financing commitment was provided by investment funds managed by Trust
Company of the West, a shareholder of the Company.
F-34
<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.
/s/ KPMG, LLP
San Francisco, California
January 9, 1998
F-35
<PAGE>
VALLEY AUTOMOTIVE CENTER
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) December 31,
June 30, ---------------
1997 1996 1995
----------- ------- -------
ASSETS
<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
====== ======= =======
<CAPTION>
LIABILITIES AND OWNER'S EQUITY
<S> <C> <C> <C>
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.
F-36
<PAGE>
VALLEY AUTOMOTIVE CENTER
STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) Year Ended December 31,
Six Months Ended ------------------------
June 30, 1997 1996 1995
---------------- ----------- -----------
<S> <C> <C> <C>
Sales:
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.
F-37
<PAGE>
VALLEY AUTOMOTIVE CENTER
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
(Unaudited) December 31,
Six Months Ended --------------
June 30, 1997 1996 1995
---------------- ----- -------
<S> <C> <C> <C>
Cash flows from operating activities:
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>
See accompanying notes to financial statements.
F-38
<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. The
historical financial statements do not necessarily reflect the results of
operations or financial position that would be indicative of the results after
the acquisition by FirstAmerica Automotive, Inc.
(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:
<TABLE>
<S> <C>
Leasehold improvements...................................... 10 years
Equipment................................................... 5 to 7 years
Furniture and fixtures...................................... 5 to 7 years
Company vehicles............................................ 7 years
</TABLE>
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.
F-39
<PAGE>
VALLEY AUTOMOTIVE CENTER
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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.
F-40
<PAGE>
VALLEY AUTOMOTIVE CENTER
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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 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>
June 30, December 31,
1997 --------------
(Unaudited) 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.
F-41
<PAGE>
VALLEY AUTOMOTIVE CENTER
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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
------------------------- -------------------------
June 30, December 31, June 30, December 31,
1997 ------------- 1997 -------------
(Unaudited) 1996 1995 (Unaudited) 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>
June 30, December 31,
1997 ----------------
(Unaudited) 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>
(5) Income Taxes
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
December
June 30, 31,
1997 ----------
(Unaudited) 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>
F-42
<PAGE>
VALLEY AUTOMOTIVE CENTER
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
June 30, December 31,
1997 ---------------
(Unaudited) 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>
December
June 30, 31,
1997 ---------
(Unaudited) 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>
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.
F-43
<PAGE>
VALLEY AUTOMOTIVE CENTER
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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):
<TABLE>
<S> <C>
Inventories.......................................................... $418
Property and other assets............................................ 21
----
Net proceeds....................................................... $439
====
</TABLE>
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.
F-44
<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 each of the
years in the three-year period 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 years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG, LLP
San Francisco, California
March 5, 1999
F-45
<PAGE>
BEVERLY HILLS BMW
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 ---------------
(Unaudited) 1997 1996
----------- ------- -------
ASSETS
<S> <C> <C> <C>
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
======= ======= =======
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C> <C>
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-46
<PAGE>
BEVERLY HILLS BMW
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Twelve Months Ended
----------------------- December 31,
1998 1997 -------------------------
(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-47
<PAGE>
BEVERLY HILLS BMW
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Twelve Months Ended
----------------------- December 31,
1998 1997 -----------------------
(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-48
<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.
The historical financial statements do not necessarily reflect the
results of operations or financial position that would be indicative of the
results after the acquisition by FirstAmerica Automotive, Inc.
(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:
<TABLE>
<S> <C>
Leasehold improvements..................................... 5 to 10 years
Equipment.................................................. 5 to 7 years
Furniture and fixtures..................................... 5 to 7 years
Company vehicles........................................... 5 years
</TABLE>
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.
F-49
<PAGE>
BEVERLY HILLS BMW
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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.
(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 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.
F-50
<PAGE>
BEVERLY HILLS BMW
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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.
(2) Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 1996
----------- ------ ------
(Unaudited)
<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, December 31, March 31, December 31,
1998 1997 1996 1998 1997 1996
----------- ------ ------ ----------- ------ ------
(Unaudited) (Unaudited)
<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-51
<PAGE>
BEVERLY HILLS BMW
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 --------------
(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
====== ====== ======
(5) Long-term Debt
Long-term debt consists of the following (in thousands):
<CAPTION>
March 31, December 31,
1998 --------------
(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.
F-52
<PAGE>
BEVERLY HILLS BMW
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
=======
(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):
<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 $1,311,00 for 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 of 1998, the Company was acquired by FirstAmerica Automotive,
Inc. No adjustments related to the acquisition are reflected in the
accompanying historical financial statements.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstAmerica Automotive, Inc.:
We have audited the accompanying balance sheets of Burgess Honda (as
defined in note 1) as of September 30, 1997 and 1996 and the related statements
of operations and retained earnings and cash flows for each of the years in the
three-year period ended September 30, 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 Burgess Honda (as
defined in note 1) as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG, LLP
San Francisco, California
September 3, 1998
F-54
<PAGE>
BURGESS HONDA
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1998 -------------
(Unaudited) 1997 1996
----------- ------ ------
ASSETS
<S> <C> <C> <C>
Cash................................................. $1,072 $1,463 $1,041
Accounts receivable (note 2)......................... 744 351 340
Inventories (note 3)................................. 1,518 1,451 1,462
Deposits and prepaid expenses........................ 70 79 102
Prepaid costs--extended warranty service contracts... 22 24 23
------ ------ ------
Total current assets............................. 3,426 3,368 2,968
Property and equipment, net (note 4)................. 172 175 215
Other assets:
Prepaid costs--extended warranty service
contracts......................................... 29 37 57
Note receivable, related party (note 6)............ 323 329 341
------ ------ ------
Total assets..................................... $3,950 $3,909 $3,581
====== ====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable................................... $ 28 $ 32 $ 22
Accrued liabilities................................ 372 324 328
Floor plan notes payable (note 3).................. 1,426 1,489 1,295
Deferred revenue--extended warranty service
contracts......................................... 44 48 47
------ ------ ------
Total current liabilities........................ 1,870 1,893 1,692
Deferred revenue--extended warranty service
contracts........................................... 59 75 113
------ ------ ------
Total liabilities................................ 1,929 1,968 1,805
Commitments (note 5)
Stockholder's equity:
Common stock....................................... 45 45 45
Retained earnings.................................. 1,976 1,896 1,731
------ ------ ------
Total stockholder's equity....................... 2,021 1,941 1,776
------ ------ ------
$3,950 $3,909 $3,581
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
BURGESS HONDA
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31, Twelve Months Ended
----------------------- September 30,
1998 1997 -------------------------
(Unaudited) (Unaudited) 1997 1996 1995
----------- ----------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales:
Vehicle.................. $11,047 $ 8,685 $20,718 $16,203 $15,086
Service, parts, and oth-
er...................... 2,183 1,949 3,205 3,727 3,722
------- ------- ------- ------- -------
Total sales............ 13,230 10,634 23,923 19,930 18,808
Cost of sales.............. 11,296 8,995 20,233 16,764 15,659
------- ------- ------- ------- -------
Gross profit........... 1,934 1,639 3,690 3,166 3,149
Operating expenses:
Selling, general and
administrative.......... 1,501 1,456 3,185 2,759 2,551
Depreciation and
amortization............ 28 29 59 57 57
------- ------- ------- ------- -------
Operating income....... 405 154 446 350 541
Other income (expense):
Interest income.......... 31 41 90 69 72
Interest expense, floor
plan.................... (59) (60) (119) (140) (193)
Other, net............... 37 39 18 52 56
------- ------- ------- ------- -------
Income before income
taxes................... 414 174 435 331 476
Income tax expense......... 6 3 7 5 7
------- ------- ------- ------- -------
Net income............. 408 171 428 326 469
Retained earnings,
beginning of period....... 1,896 1,731 1,731 1,622 1,563
Distributions.............. (328) (158) (263) (217) (410)
------- ------- ------- ------- -------
Retained earnings, end of
period.................... $ 1,976 $ 1,744 $ 1,896 $ 1,731 $ 1,622
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
BURGESS HONDA
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31, Year Ended
----------------------- September 30,
1998 1997 ----------------------
(Unaudited) (Unaudited) 1997 1996 1995
----------- ----------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................... $ 408 $ 171 $ 428 $ 326 $ 469
Adjustments to reconcile net
income to net cash
provided by (used in)
operating activities:........
Depreciation and
amortization............... 28 29 59 57 57
Amortization of deferred
warranty revenue........... (10) (12) (16) (16) (12)
Changes in operating assets
and liabilities:...........
Receivables and contracts
in transit................ (393) 117 (11) (38) 63
Inventories................ (67) 266 53 758 (606)
Other assets............... 6 (34) 12 99 277
Flooring notes payable..... (63) (197) 194 (974) 441
Accounts payable and
accrued liabilities....... 44 213 5 32 (148)
Deposits and prepaid
expenses.................. 9 15 23 3 (46)
------ ------ ------ ------ ------
Net cash (used in)
provided by operating
activities............... (38) 568 747 247 495
------ ------ ------ ------ ------
Cash flows from investing ac-
tivities:
Capital expenditures, net..... (25) (58) (62) (84) (70)
------ ------ ------ ------ ------
Net cash used in investing
activities............... (25) (58) (62) (84) (70)
------ ------ ------ ------ ------
Cash flows from financing ac-
tivities:
Distributions to stockholder.. (328) (158) (263) (217) (410)
------ ------ ------ ------ ------
Net cash (used in)
provided by financing
activities............... (328) (158) (263) (217) (410)
------ ------ ------ ------ ------
Net increase (decrease) in
cash..................... (391) 352 422 (54) 15
Cash at beginning of the
period........................ 1,463 1,041 1,041 1,095 1,080
------ ------ ------ ------ ------
Cash at end of the period...... $1,072 $1,393 $1,463 $1,041 $1,095
====== ====== ====== ====== ======
Supplemental disclosures of
cash flow information:
Cash paid during the year for
interest..................... $ 58 $ 58 $ 119 $ 148 $ 186
====== ====== ====== ====== ======
Cash paid during the year for
taxes........................ $ 7 $ 7 $ 12 $ 14 $ 16
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE>
BURGESS HONDA
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Business
Burgess Honda (the Company) constitutes the portion of the assets,
liabilities and operations of Burgess British Cars, Inc. that were subsequently
sold to FirstAmerica Automotive, Inc. (note 8). The Company offers a broad
range of products and services including new Honda vehicles as well as used
vehicles, vehicle financing and insurance and replacement parts and service.
The historical financial statements do not necessarily reflect the
results of operations or financial position that would be indicative of the
results after the acquistion by FirstAmerica Automotive, Inc.
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations and cash flows for Burgess Honda, certain of
which were subsequently sold to FirstAmerica Automotive, Inc. (note 8). The
operations of Burgess Honda represent the revenue and direct expenses of the
Company, do not include any allocation of costs from Burgess British Cars, Inc.
and may not be indicative of operations that would be incurred on a stand-alone
basis.
(c) Cash and Cash Equivalents
The Company 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, new vehicle cost
is determined by using the last-in, first-out (LIFO) basis. Used vehicle cost
is determined using the specific identification basis. Parts and accessories
cost is determined using the first-in, first-out (FIFO) basis.
(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:
<TABLE>
<S> <C>
Leasehold improvements...................................... 15 years
Equipment................................................... 5 to 7 years
Furniture and fixtures...................................... 5 to 7 years
Company vehicles............................................ 5 years
</TABLE>
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) Income Taxes
The Company elected S Corporation status for federal and state income tax
reporting purposes. Federal income taxes on S Corporation income were payable
by the individual stockholders rather than the corporation. California state
income taxes for S Corporations are 1.5% of pretax income.
F-58
<PAGE>
BURGESS HONDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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 $102,000 and $217,000 for the unaudited six
month periods ended March 31, 1998 and 1997, respectively, and $372,000,
$261,000 and $159,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
(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, 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 Company recognizes fees from the sale of third party 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.
F-59
<PAGE>
BURGESS HONDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company enters into dealer sales and service agreements (Dealer
Agreements) with the manufacturer. The Dealer Agreements generally limit the
location of the dealership and mandates the manufacturer's approval rights over
changes in dealership management and ownership. The manufacturer is also
entitled to terminate the agreement if the dealership is in material breach of
the terms.
(2) Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1998 -------------
(Unaudited) 1997 1996
----------- ------ ------
<S> <C> <C> <C>
Contracts in transit and vehicle receivables... $559 $ 165 $ 191
Trade.......................................... 80 62 95
Manufacturer and other......................... 112 128 58
Total accounts receivable...................... 751 355 344
Less allowance for doubtful accounts........... 7 4 4
---- ------ ------
Accounts receivable, net....................... $744 $ 351 $ 340
==== ====== ======
</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, September 30, March 31, September 30,
1998 -------------- 1998 -------------
(Unaudited) 1997 1996 (Unaudited) 1997 1996
----------- ------ ------ ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
New vehicles............ $1,127 $1,076 $1,094 $1,426 $1,489 $1,295
Used vehicles........... 426 421 427 -- -- --
Parts and accessories... 246 235 203 -- -- --
LIFO Reserve............ (281) (281) (262) -- -- --
------ ------ ------ ------ ------ ------
Inventories, net........ $1,518 $1,451 $1,462 $1,426 $1,489 $1,295
====== ====== ====== ====== ====== ======
</TABLE>
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at prime plus 2.0% and are secured by new
vehicles and vehicle receivables. The floor plan agreement permits the Company
to borrow up to $3.5 million; borrowings are limited by new vehicle inventory
levels.
LIFO provisions were $19,000 and $49,000 for the years ended September
30, 1997 and 1996, respectively, and are included in cost of sales in the
statement of operations.
F-60
<PAGE>
BURGESS HONDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1998 --------------
(Unaudited) 1997 1996
----------- ------- ------
<S> <C> <C> <C>
Leasehold improvements......................... $ 563 $ 562 $ 544
Equipment...................................... 182 185 183
Company vehicles............................... 109 105 110
Furniture and fixtures......................... 163 161 161
----- ------- ------
1,017 1,013 998
Less accumulated depreciation.................. 845 838 783
----- ------- ------
Property and equipment, net.................... $ 172 $ 175 $ 215
===== ======= ======
</TABLE>
(5) Commitments
The minimum rental commitments under operating leases which have terms
greater than one year after September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending September 30:
-------------------------
<S> <C>
1998................................................................. $ 31
1999................................................................. 25
2000................................................................. 22
2001................................................................. 14
Thereafter........................................................... --
----
$ 92
====
</TABLE>
Amounts paid under operating leases were $15,000 and $7,500 for the
unaudited six months ended March 31, 1998 and 1997, respectively, and $30,000,
$15,000 and $15,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
(6) Related Party Transactions
Lease
The Company rents its facilities from the sole stockholder for $35,000
per month. Rental expense under a month to month agreement between the Company
and the sole stockholder totaled $210,000 for each of the unaudited six month
periods ended March 31, 1998 and 1997, and $420,000 per year for the years
ended September 30, 1997, 1996, and 1995, respectively.
F-61
<PAGE>
BURGESS HONDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Notes Receivable from Related Parties
Notes receivable from related parties consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1998 -----------------
(Unaudited) 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Notes receivable from Menlo Honda........... $250,000 $250,000 $250,000
Notes receivable from stockholder........... 73,000 79,000 91,000
-------- -------- --------
$323,000 $329,000 $341,000
======== ======== ========
</TABLE>
(7) 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. Contributions to
the Plan were $21,000 and $16,000 for the unaudited six month periods ended
March 31, 1998 and 1997, respectively, and $61,000, $40,000 and $52,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
(8) Subsequent Events
In June of 1998, the Company was acquired by FirstAmerica Automotive,
Inc. No adjustments related to the acquisition are reflected in the
accompanying historical financial statements.
F-62
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Vacation Motors, Inc.
DBA Concord Toyota
And
The Board of Directors
FirstAmerica Automotive, Inc.:
We have audited the accompanying balance sheets of Vacation Motors, Inc.
(DBA Concord Toyota) as of September 30, 1998 and December 31, 1997 and the
related statements of operations and retained earnings and cash flows for the
nine month period ended September 30, 1998 and years ended December 31, 1997
and 1996. These financial statements are the responsibility of FirstAmerica
Automotive, Inc. and Vacation Motors, Inc. 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 Vacation Motors,
Inc. (DBA Concord Toyota) as of September 30, 1998 and December 31, 1997, and
the results of its operations and retained earnings and its cash flows for the
nine month period ended September 30, 1998 and the year ended December 31, 1997
and 1996, in conformity with generally accepted accounting principles.
/s/ KPMG, LLP
San Francisco, California
December 15, 1998
F-63
<PAGE>
VACATION MOTORS, INC.--dba CONCORD TOYOTA
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Receivable from affiliate (note 6).................. $1,250 $ 297
Accounts receivable, net (note 2)................... 1,288 1,050
Note receivable, related party (note 6)............. -- 515
Inventories, net (note 3)........................... 1,709 4,415
Deposits and prepaid expenses....................... 18 34
Prepaid costs--extended warranty service contracts.. 135 155
------ ------
Total current assets............................ 4,400 6,466
Property and equipment, net (note 4)................ 331 493
Other assets:
Prepaid costs--extended warranty service
contracts........................................ 221 321
Other noncurrent assets (note 6).................. -- 252
------ ------
Total assets.................................... $4,952 $7,532
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 363 $ 262
Sales tax payable................................. 342 267
Accrued liabilities............................... 56 169
Note payable, related party (note 6).............. -- 400
Floor plan notes payable (note 3)................. 2,226 3,990
Deferred revenue-extended warranty service
contracts........................................ 270 309
------ ------
Total current liabilities....................... 3,257 5,397
Long-term debt...................................... 20 9
Deferred revenue--extended warranty service
contracts.......................................... 441 643
------ ------
Total liabilities............................... 3,718 6,049
------ ------
Commitments (note 5)
Stockholder's equity:
Common stock...................................... 50 50
Retained earnings................................. 1,184 1,433
------ ------
Total stockholder's equity...................... 1,234 1,483
------ ------
$4,952 $7,532
====== ======
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE>
VACATION MOTORS, INC.-- dba CONCORD TOYOTA
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Years Ended
Ended December 31,
September 30, ----------------
1998 1997 1996
------------- ------- -------
<S> <C> <C> <C>
Sales:
Vehicle....................................... $43,744 $61,017 $61,410
Service, parts and other...................... 6,789 8,858 7,027
------- ------- -------
Total sales................................. 50,533 69,875 68,437
Cost of sales................................. 44,301 61,133 60,162
------- ------- -------
Gross profit.................................. 6,232 8,742 8,275
Operating expenses:
Selling, general and administrative........... 5,052 6,521 5,767
Depreciation and amortization................. 87 96 90
------- ------- -------
Operating income.............................. 1,093 2,125 2,418
Other income (expense):
Interest expense.............................. (307) (228) (257)
Other, net.................................... (35) 105 24
------- ------- -------
Income before income taxes.................... 751 2,002 2,185
Income tax expense............................ 10 30 32
------- ------- -------
Net income.................................... 741 1,972 2,153
Retained earnings, beginning of period........ 1,433 1,965 1,531
Distributions................................. (990) (2,504) (1,719)
------- ------- -------
Retained earnings, end of period.............. $ 1,184 $ 1,433 $ 1,965
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
VACATION MOTORS, INC.--dba CONCORD TOYOTA
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Years Ended
Ended December 31,
September 30, ----------------
1998 1997 1996
------------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 741 $ 1,972 $ 2,153
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............... 87 96 90
Amortization of deferred warranty revenue... (121) (81) (36)
LIFO adjustment............................. (28) (183) (553)
Changes in operating assets and liabilities:
Receivable from affiliate.................. (953) (305) 18
Accounts receivable........................ (238) 149 (195)
Inventories................................ 2,924 (1,185) 25
Note receivable-related party.............. 515 80 --
Deposits and prepaid expenses.............. 16 95 (99)
Other noncurrent assets.................... -- 6 101
Flooring notes payable..................... (1,764) 1,493 26
Accounts payable and accrued liabilities... 63 89 (23)
------- ------- -------
Net cash provided by operating
activities............................... 1,242 2,226 1,507
------- ------- -------
Cash flows from investing activities:
Capital expenditures........................... (115) (89) (88)
------- ------- -------
Net cash used in investing activities..... (115) (89) (88)
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt.................. 11 100 300
Payments on note payable-related party........ (400) (8) --
Distributions to stockholder.................. (738) (2,229) (1,719)
------- ------- -------
Net cash used in financing activities..... (1,127) (2,137) (1,419)
------- ------- -------
Net increase (decrease) in cash........... -- -- --
Cash at beginning of the period................ -- -- --
------- ------- -------
Cash at end of the period...................... $ -- $ -- $ --
======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest......... $ 307 $ 228 $ 257
======= ======= =======
Cash paid during the year for taxes............ $ 10 $ 30 $ 32
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
VACATION MOTORS, INC.--dba CONCORD TOYOTA
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Business
Vacation Motors, Inc. (DBA Concord Toyota) (the "Company"), an automobile
dealership, offers a broad range of products and services including new Toyota
vehicles as well as used vehicles, vehicle financing and insurance and
replacement parts and service.
The historical financial statements do not necessarily reflect the
results of operations or financial position that would be indicative of the
results after the acquistion by FirstAmerica Automotive, Inc.
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations and cash flows for Vacation Motors, Inc. The
Company was subsequently sold to FirstAmerica Automotive, Inc. (note 8).
(c) Cash Concentration Account
The Company's bank account is linked to an affiliate's 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
Inventories are stated at the lower of cost or market. New vehicle cost
is determined by using the last-in, first-out ("LIFO") basis. 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.
(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:
<TABLE>
<S> <C>
Leasehold improvements...................................... 15 years
Equipment................................................... 5 to 7 years
Company vehicles............................................ 5 years
Furniture and fixtures...................................... 5 to 7 years
</TABLE>
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) Income Taxes
The Company elected S Corporation status for federal and state income tax
reporting purposes. Federal income taxes on S Corporation income were payable
by the individual stockholders rather than the corporation. California state
income taxes for S Corporations are 1.5% of pretax income.
F-67
<PAGE>
VACATION MOTORS, INC.--dba CONCORD TOYOTA
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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 $805,000 for the nine month period ended
September 30, 1998, and $782,000 and $791,000 for the years ended December 31,
1997 and 1996, 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, 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 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.
F-68
<PAGE>
VACATION MOTORS, INC.--dba CONCORD TOYOTA
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Contracts in transit and
vehicle receivables.... $ 871 $ 580
Trade................... 198 220
Manufacturer and other.. 219 284
------ ------
Total accounts receiv-
able................... 1,288 1,084
Less allowance for
doubtful accounts...... -- (34)
------ ------
Accounts receivable,
net.................... $1,288 $1,050
====== ======
</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 related floor plan notes payable were as follows (in
thousands):
<TABLE>
<CAPTION>
Inventory Cost Floor Plan Notes Payable
-------------------------- --------------------------
September 30, December 31, September 30, December 31,
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
New vehicles............ $ 2,147 $ 4,039 $2,226 $3,990
Used vehicles........... 767 1,597 -- --
Parts and accessories... 274 286 -- --
LIFO Reserve............ (1,479) (1,507) -- --
------- ------- ------ ------
Inventories, net........ $ 1,709 $ 4,415 $2,226 $3,990
======= ======= ====== ======
</TABLE>
Inventory floor plan notes payable consist of notes to a financing
institution that bear interest at prime plus 1.125% and are secured by new
vehicles and vehicle receivables. The floor plan agreement permits the Company
to borrow up to $5.5 million; borrowings are limited by new vehicle inventory
levels.
LIFO adjustments were $28,000 for the nine months ended September 30,
1998 and $183,000 and $553,000 for the years ended December 31, 1997 and 1996,
respectively, and are included in cost of sales in the accompanying statements
of operations.
F-69
<PAGE>
VACATION MOTORS, INC.--dba CONCORD TOYOTA
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Leasehold improvements.......................... $ 607 $ 607
Equipment....................................... 350 331
Company vehicles................................ 81 271
Furniture and fixtures.......................... 253 157
------ ------
1,291 1,366
Less accumulated depreciation................... (960) (873)
------ ------
Property and equipment, net..................... $ 331 $ 493
====== ======
</TABLE>
(5) Commitments
The minimum rental commitments under operating leases which have terms
greater than one year after December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Three months ending December 31, 1998................................ $ 34
Year ending December 31,
1999............................................................... 137
2000............................................................... 144
2001............................................................... 144
2002............................................................... 144
2003............................................................... 144
Thereafter......................................................... 96
----
$843
====
</TABLE>
Amounts paid under operating leases were $101,000 for the nine months
ended September 30, 1998, and $134,000 and $134,000 for the years ended
December 31, 1997 and 1996, respectively.
(6) Related Party Transactions
Transactions with Related Parties
In 1998, the Company transferred investment property with a book value of
$252,000 to the sole stockholder of the Company. The transaction was treated as
a non-cash distribution and is included in other noncurrent assets in the
accompanying financial statements.
In 1997, the Company transferred $275,000, the cash surrender value of a
life insurance policy to the sole stockholder of the Company. The transaction
was treated as a non-cash distribution and is included in other noncurrent
assets in the accompanying financial statements.
Included in vehicle sales for the year ended December 31, 1996 are sales
totaling $618,000 made to a relative of the sole stockholder. The sales
resulted in a gross profit of $6,000.
F-70
<PAGE>
VACATION MOTORS, INC.--dba CONCORD TOYOTA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Receivable from Affiliate
Cash is managed by an affiliate of the Company. The receivable from this
affiliate was $1,250,000 at September 30, 1998 and $297,000 at December 31,
1997. (See note 1.)
Note Receivable and Note Payable with Related Parties
Note receivable and note payable with related parties consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Note receivable from stockholder................ $ -- $515
===== ====
Note payable to related party................... $ -- $400
===== ====
</TABLE>
The note payable to related party is payable on demand, bears interest
at prime plus 1.125% and is unsecured. Interest is paid monthly.
(7) Employee Benefits
The Company provides a 401(k) Plan and Trust Agreement (the Plan) that
covers substantially all employees of the Company. The amount of the Company's
annual contribution to the Plan is at the discretion of the Board of
Directors. Contributions to the Plan were $21,000 for the nine month period
ended September 30, 1998, and $33,000 and $28,000 for the years ended December
31, 1997 and 1996, respectively.
As of September 30, 1998, approximately 35% of the Company's employees
were represented by a union.
(8) Subsequent Events
In October 1998, all of the outstanding capital stock of the Company was
acquired by FirstAmerica Automotive, Inc. No adjustments related to the
acquisition are reflected in the accompanying historical financial statements.
F-71
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
FirstAmerica Automotive, Inc.:
We have audited the accompanying consolidated balance sheets of DSW &
Associates, Inc. d/b/a Auto Town as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of FirstAmerica Automotive, Inc. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DSW &
Associates, Inc. as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG, LLP
San Francisco, California
March 15, 1999
F-72
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
ASSETS:
<S> <C> <C>
Cash........................ $ 61,994 $ 168,027
Accounts receivable, net
(note 2)................... 23,680 18,284
Prepaid expenses and other
assets..................... 72,237 49,428
Total current assets.... 157,911 235,739
Fixed assets, net (note 3).. 36,148 50,854
Software and intellectual
property, net (note 4)..... 192,456 19,978
Other noncurrent assets..... 10,985 18,058
----------- -----------
Total assets............ $ 397,500 $ 324,629
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accounts payable and accrued
liabilities................ $ 322,213 $ 250,430
Notes payable to related
parties (note 12)............. 307,516 335,173
Demand notes payable........ 234,236 216,503
Convertible notes payable
(note 8)................... 1,119,703 857,588
Advances from FAA (note 7).. 1,080,003 --
Deferred revenue (note 6)... 20,960 189,026
Current portion of capital
lease obligation........... 7,513 6,616
----------- -----------
Total current liabili-
ties................... 3,092,144 1,855,336
Deferred revenue (note 6)... 275,000 --
Noncurrent portion of capi-
tal lease obligation....... 11,479 14,497
----------- -----------
Total liabilities....... 3,378,623 1,869,833
Commitments (note 9)
Shareholders' deficit:
Preferred stock, $0.001
par value:
Series A, 10,000,000
shares authorized; none
issued................. -- --
Series B, 1,000,000
shares authorized;
938,220 issued and out-
standing............... 938 --
Common stock, $0.001 par
value; 30,000,000 shares
authorized; 9,427,047 and
4,875,550 issued and out-
standing................. 9,427 4,876
Additional paid-in capi-
tal...................... 270,167 50,829
Accumulated deficit....... (3,261,655) (1,600,909)
----------- -----------
Total shareholders' def-
icit................... (2,981,123) (1,545,204)
----------- -----------
$ 397,500 $ 324,629
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Product revenues.................................... $ 639,014 $ 532,439
Cost of revenues.................................... 472,343 261,082
----------- -----------
Gross profit.......................................... 166,671 271,357
Operating expenses:
General and administrative.......................... (259,465) (327,201)
Sales and marketing................................. (403,683) (676,949)
Research and development............................ (960,594) (437,908)
----------- -----------
Total costs and expenses.......................... (1,623,742) (1,442,058)
Operating loss........................................ (1,457,071) (1,170,701)
Interest expense.................................... (202,875) (50,496)
----------- -----------
Loss before income taxes.............................. (1,659,946) (1,221,197)
Income tax expense.................................. (800) (800)
----------- -----------
Net loss.............................................. $(1,660,746) $(1,221,997)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-74
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Series B Preferred
---------------- -------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------ ---------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 4,410,000 $4,410 -- $ -- $ -- $ (378,912) $ (374,502)
Stock issuance.......... 460,550 461 -- -- 804 -- 1,265
Stock issuance for
acquisition............ 5,000 5 -- -- 25 -- 30
Debt to equity
conversion............. -- -- -- -- 50,000 -- 50,000
Net loss................ -- -- -- -- -- (1,221,997) (1,221,997)
--------- ------ ---------- -------- -------- ----------- -----------
Balance, December 31,
1997................... 4,875,550 4,876 -- -- 50,829 (1,600,909) (1,545,204)
Stock issuance as
compensation........... 3,202,819 3,203 -- -- 141,443 -- 144,646
Stock issuance for
acquisition............ 767,634 768 938,220 938 66,342 -- 68,048
Exercise of stock
options................ 581,044 580 -- -- 11,553 -- 12,133
Net loss................ -- -- -- -- -- (1,660,746) (1,660,746)
--------- ------ ---------- -------- -------- ----------- -----------
Balance, December 31,
1998................... 9,427,047 $9,427 938,220 $ 938 $270,167 $(3,261,655) $(2,981,123)
========= ====== ========== ======== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net loss............................................ $(1,660,746) $(1,221,997)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 34,533 23,301
Deferred revenue amortization, net................ 106,934 189,026
Non-cash stock compensation....................... 144,646 461
Changes in operating assets and liabilities:
Accounts receivable............................. (259) 56,954
Prepaid expenses and other assets............... (15,736) (48,808)
Accounts payable and accrued liabilities........ 71,783 185,995
Capitalized software............................ (15,556) (56)
----------- -----------
Net cash used in operating activities......... (1,334,401) (815,124)
Cash flows used in investing activities:
Capital expenditures............................ (15,134) (3,379)
Cash paid for acquisitions...................... (98,704) (20,004)
----------- -----------
Net cash used in investing activities......... (113,838) (23,383)
Cash flows from financing activities:
Borrowings on demand notes payable.............. 17,733 225,712
Payments on notes to related parties............ (27,657) (77,747)
Borrowings on convertible notes payable......... 262,115 857,588
Advances from FAA............................... 1,080,003 --
Exercise of stock options....................... 12,133 --
Payments on capital lease....................... (2,121) (1,040)
----------- -----------
Net cash provided by financing activities..... 1,342,206 1,004,513
Net increase (decrease) in cash............... (106,033) 166,006
Cash at the beginning of the period................. 168,027 2,021
----------- -----------
Cash at the end of the period....................... $ 61,994 $ 168,027
=========== ===========
Non-cash activity:
Debt conversion................................... $ -- $ 50,000
Stock issued for acquisitions..................... $ 68,048 $ 30
Common stock issued as compensation............... $ 144,646 $ 461
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE>
DSW & ASSOCIATES, INC.--d/b/a AUTO TOWN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)Summary of Significant Accounting Policies
Organization and Business
DSW & Associates, Inc., d/b/a Auto Town, is a privately held California
corporation that provides application software products and Web page design
services to automobile dealerships throughout the United States. Auto Town
application software products include Clock Tower Manager, InventoryTrak,
CustomerTrak and Trip It.
Auto Town was incorporated in California in July 1995. Auto Town's
principal executive office is located at 1120 Capitol Expressway Auto Mall, San
Jose, California 95136. Except as noted herein, all references to "Auto Town"
or the "Company" shall mean DSW & Associates, Inc.
As discussed in note 13, on December 31, 1998, FirstAmerica Automotive,
Inc. ("FAA") acquired Auto Town.
The historical financial statements do not necessarily reflect the
results of operations or financial position that would be indicative of the
results after the acquistion by FirstAmerica Automotive, Inc.
Basis of Presentation
The accompanying financial statements include the accounts of DSW &
Associates, Inc. and its wholly owned subsidiary, DealerSoft Technologies, Inc.
All significant intercompany transactions and balances have been eliminated.
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.
Revenue Recognition
Revenues earned under software license agreements with automobile
dealerships are generally recognized when the license agreement has been signed
and the software has been installed. Revenue from post-contract customer
support is recognized ratably over the period the customer support services are
provided, and software services revenue is recognized as services are
performed. Royalty revenue is recognized when the conditions of the royalty
agreement are met.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the respective assets, generally three to five
years, on a straight-line basis.
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. 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.
F-77
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to December 1, 1997, the Company was an S Corporation for federal
and state income tax reporting purposes. Federal income taxes on the income of
an S Corporation are payable by the individual shareholders rather than the
corporation. The State of California taxes the income of S Corporations at the
rate of 1.5%. The Company terminated its S Corporation status effective
November 30, 1997 and deferred tax assets and liabilities were immaterial prior
to the termination.
Stock-Based Compensation
As permitted under the Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," Auto Town has
elected to follow Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," in accounting for stock-based
awards and compensation to employees. See note 10.
Capitalized Software Costs
In accordance with Statement of Financial Accounting Standards No. 86
("SFAS 86"), "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," development costs are expensed as incurred until
establishment of technological feasibility, after which additional direct costs
are capitalized. The Company establishes technological feasibility upon
completion of a working model.
Advertising Expenses
Auto Town accounts for advertising costs as expense in the period in
which they are incurred. Advertising expenses for 1998 and 1997 were $8,787 and
$321,053, respectively.
(2) Accounts Receivable
Accounts receivable consists of license fees due from automobile
dealerships and software services revenue, and is net of allowances for
doubtful accounts as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Accounts receivable..................................... $115,407 $21,759
Allowance for doubtful accounts......................... (91,727) (3,475)
-------- -------
$ 23,680 $18,284
======== =======
</TABLE>
(3) Property and Equipment
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Computer equipment..................................... $ 95,812 $ 88,303
Furniture and fixtures................................. 17,457 7,807
-------- --------
113,269 96,110
Less accumulated depreciation.......................... (77,121) (45,256)
-------- --------
$ 36,148 $ 50,854
======== ========
</TABLE>
F-78
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Capitalized Software Costs
Capitalized software costs are amortized over a five year useful life.
Information related to capitalized software costs is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Acquired from The RAMAC Corporation..................... $159,590 $ --
Capitalized developed software.......................... 15,556 --
Acquired from DealerSoft, Inc........................... 20,034 20,034
-------- -------
195,180 20,034
Amortization............................................ (2,724) (56)
-------- -------
Ending balance.......................................... $192,456 $19,978
======== =======
</TABLE>
(5) Acquisitions
On December 9, 1998, Auto Town acquired the proprietary software
"LeaseTrak" and "Trip It" along with certain other assets from The RAMAC
Corporation ("RAMAC"), a software company. The acquisition was accounted for
using the purchase method of accounting. The purchase price of $166,752
consisted of $98,704 in cash, 938,220 shares of Series B Preferred Stock (see
note 10) and 767,634 shares of Common Stock, both issued at a fair market value
estimated at $0.04 per share. The purchase price was allocated to the fair
market value of the assets acquired as follows:
<TABLE>
<S> <C>
Accounts receivable............................................... $ 5,137
Equipment......................................................... 2,025
Software.......................................................... 159,590
--------
Total............................................................. $166,752
========
</TABLE>
On November 21, 1997, Auto Town purchased all of the outstanding shares
of DealerSoft Technologies, Inc. for $20,004 in cash and 5,000 shares of Auto
Town's Common Stock issued at a fair market value of $0.006 per share plus
royalty payments to the seller equal to 1.5% of Auto Town's sales of the
CustomerTrak. The acquisition was accounted for using the purchase method of
accounting. DealerSoft's sole asset was the CustomerTrak software license and
the purchase price of $20,034 was allocated to software.
(6) Deferred Revenue
Deferred revenue consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Deferred service revenue--current....................... $ 20,960 $189,026
Deferred royalty revenue--noncurrent.................... 275,000 --
-------- --------
$295,960 $189,026
======== ========
</TABLE>
F-79
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred royalty revenue represents cash received under a development
contract, license agreement and future royalty contract executed in July 1998
with an automobile insurance information services company to develop an
automobile database software application. The agreement provides for the
information services company to fund the development process, up to a maximum
of $500,000. The funding advances are non-refundable, and Auto Town received
and deferred $275,000 during 1998. Auto Town is entitled to a royalty fee of
20% of the revenues earned by the automobile insurance information services
company related to the use of Auto Town's software product. The royalty fees
due to Auto Town are first offset against the non-refundable funding advances.
Deferred service revenue represents Standard Dealer Master Agreements
with automobile dealerships that constitute the bulk of Auto Town's revenues
and require Auto Town to provide maintenance and support. License fees are
renewed annually and expire through 1999.
(7) Advances from FAA
In June 1998, Auto Town's shareholders executed an agreement with FAA
relating to a 60 day evaluation of Auto Town products as part of a possible
acquisition of Auto Town by FAA.
In September 1998, Auto Town executed another agreement with FAA whereby
FAA agreed to advance funds to Auto Town for operations. The agreements further
provided that in the event that the purchase of Auto Town by FAA not be
completed, FAA would be entitled to site licenses to use Auto Town technology
and intellectual property.
As of December 31, 1998, $1,080,003 in funds had been advanced by FAA to
Auto Town. On December 31, 1998, FAA acquired Auto Town. See note 13.
(8) Subordinated Secured Convertible Notes Payable
On December 31, 1997, Auto Town agreed to sell up to $1,750,000 in
Subordinated Secured Convertible Notes Payable ("Notes") to certain investors.
The Notes bore interest at 10%, matured on December 30, 1998 and principal and
interest were payable on that date. The Notes were secured by all of Auto
Town's intellectual property. As of December 31, 1998, $1,085,000 in Notes were
outstanding, plus $34,703 in accrued interest, as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---------- --------
<S> <C> <C>
Related parties........................................ $ 407,103 $235,086
Other.................................................. 712,600 622,502
---------- --------
$1,119,703 $857,588
========== ========
</TABLE>
On December 31, 1998, the Notes were converted into shares of FAA Class A
Common Stock simultaneous with the acquisition of Auto Town by FAA. See note
13.
F-80
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Commitments
Auto Town entered into a five-year equipment capital lease agreement in
April 1996 with a leasing company to purchase computer equipment. The future
minimum lease obligation, including interest, follows:
<TABLE>
<S> <C>
1999............................................................. $ 9,515
2000............................................................. 9,515
2001............................................................. 3,172
Thereafter....................................................... --
--------
$ 22,202
Interest......................................................... (3,210)
--------
$ 18,992
========
</TABLE>
(10) Shareholders' Equity
Due to Auto Town's continued operating losses and inability to secure
financing for current operations, for approximately three months in early 1998
certain Auto Town employees were offered the option to receive shares of Common
Stock in lieu of their salaries. As part of this agreement, 2,998,797 shares of
Common Stock valued at $114,043 were issued. In December 1998, 204,022 shares
of Auto Town Common Stock valued at $30,603 were also issued to an employee as
compensation.
In August 1997, an Auto Town officer and shareholder converted $50,000 of
notes payable to additional paid-in capital.
Class A Common Stock
Auto Town has authorized Common Stock of 30,000,000 shares with a par
value of $0.001 per share. Common Stock shareholders have voting rights equal
to Preferred Stock Series B shareholders on an as-converted basis.
Preferred Stock--Series B
Auto Town has 1,000,000 shares of authorized Series B Preferred Stock
("SBPS") with par value of $0.001 per share. In connection with the acquisition
of certain assets from RAMAC in December 1998, Auto Town issued 938,220 shares
of SBPS to RAMAC (see note 5). The SBPS converted to 938,220 shares of Auto
Town Common Stock on December 31, 1998 when Auto Town was acquired by FAA (see
note 13) which was then converted to shares of FAA Common Stock on the
acquisition date.
Stock Option Plan
During 1997, the Company had reserved 1,500,000 shares of Common Stock
for issuance under its 1997 Stock Option Plan (the "Plan"). Options are granted
to employees, consultants, contractors or other service providers already
owning more than 10% of the voting power of all classes of stock at 110% of the
fair market value on the date of grant. Consultants, contractors or other
service providers owning less than 10% of the voting power of all classes of
stock could be granted nonstatutory stock options to purchase Common Stock at
exercise prices no less than 85% of the fair market value per share on the date
of the grant.
F-81
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Generally, options granted were exercisable to the extent of 20% on the
anniversary date of each grant and expired 5 years from the grant date.
Information with respect to stock option and stock purchase rights activity is
as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available Options Exercise
for Grant Outstanding Price per Share Price
--------- ----------- --------------- --------
<S> <C> <C> <C> <C>
Balances, January 1,
1997.................... -- -- -- --
Authorized............... 1,500,000 -- -- --
Grants................... (505,000) 505,000 $ 0.0067 $0.0067
Balances, December 31,
1997.................... 995,000 505,000 $ 0.0067 $0.0067
Grants................... (610,000) 610,000 $ 0.0460 $0.0460
Cancellations............ 105,520 (105,520) $ 0.0460 $0.0460
Exercises................ -- (581,044) $0.0460-$0.0067 $0.0204
Balances, December 30,
1998.................... 490,520 428,436 $0.0460-$0.0067 $0.0204
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been recognized.
Had compensation cost been determined consistent with Financial Accounting
Standards Board's SFAS No. 123, the Company's net loss would not have been
materially affected. The fair value of each option grant under SFAS No. 123 is
estimated on the date of grant using the minimum-value method assuming no
dividend yield, a risk-free interest rate of 4.75% and a weighted average life
of one year.
(11) Income Taxes
Prior to December 1, 1997, Auto Town 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. California state income taxes for S corporations are 1.5%
of pretax income. Auto Town terminated its S corporation status effective
November 30, 1997. Deferred tax assets and liabilities were immaterial prior to
the change in tax status. The following provision for income taxes reflects the
deferred tax assets and liabilities for the one month period ended December 31,
1997 and year ended December 31, 1998, the periods for which Auto Town was a C
Corporation. Management does not believe that it is more likely than not that
the deferred tax asset will be realized due to uncertainties arising from Auto
Town's ability to become profitable. Accordingly, a valuation allowance equal
to the net asset amount has been established.
The provision for income taxes consist of the following:
<TABLE>
<CAPTION>
Years ended
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Current:
Federal................................................... $ -- $ --
State..................................................... 800 800
800 800
Deferred:
Federal................................................... -- --
State..................................................... -- --
------ ------
Total income tax expense.................................... $ 800 $ 800
====== ======
</TABLE>
F-82
<PAGE>
DSW & ASSOCIATES, INC.--dba AUTO TOWN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss.................................. $ 683,297 $ 69,116
Less: valuation allowance........................... (619,461) (69,116)
--------- --------
63,836 --
Deferred tax liabilities:
Software............................................ 63,836 --
--------- --------
Net deferred tax assets............................... $ -- $ --
========= ========
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before income taxes.
The sources and tax effects of the difference are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Income tax benefit at statutory rate of 34%........ $(564,382) $(415,207)
Plus: State tax expense............................ 800 800
Losses prior to change in tax status to C
Corporation....................................... -- 346,091
Change in valuation allowance...................... 550,345 69,116
Other.............................................. 14,037 --
--------- ---------
Provision for income taxes......................... $ 800 $ 800
========= =========
</TABLE>
Proforma Income Taxes
Prior to December 1, 1997, Auto Town was an S Corporation. For the year
ended December 31, 1997, the pro forma provision for income taxes is equal to
the actual provision for income taxes due to operating losses for the year.
(12) Related Party Transactions
Since inception, Auto Town's president and chief executive officer has
funded portions of Auto Town's working capital requirements by securing
personal loans which were not guaranteed by Auto Town. Amounts due the officer
totaled $307,516 and $335,173 at December 31, 1998 and 1997, respectively. The
loans to Auto Town were unsecured and bore interest at 15% to 20%, the same
rate that was due by the officer to the third parties.
Auto Town rented its main corporate facility and another location under a
month to month lease from an Auto Town director during 1998 and 1997 for
$25,000 and $23,400, respectively. Rental expense is included in general and
administrative expense in the financial statements.
(13) Subsequent Events
On December 31, 1998, The Company was acquired by FirstAmerica Automotive
Inc. No adjustments related to the acquisition are reflected in the
accompanying historical financial statements.
F-83
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
FirstAmerica Automotive, Inc.
We have audited the accompanying balance sheet of Ritchey Fipp Chevrolet
as of December 31, 1998, and the related statement of operations and changes in
retained earnings, and cash flows for the year 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 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 Ritchey Fipp
Chevrolet as of December 31, 1998, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG, LLP
April 30, 1999
San Francisco, California
F-84
<PAGE>
RITCHEY FIPP CHEVROLET
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) Year Ended
March 2, 1999 December 31, 1998
------------- -----------------
ASSETS
<S> <C> <C>
Cash.......................................... $ 479 $ 402
Accounts receivable, net of allowance (note
2)........................................... 909 815
Inventories (note 3).......................... 2,749 3,122
Deposits and prepaid expenses................. 53 59
------ ------
Total current assets...................... 4,190 4,398
Property, plant and equipment, net of
accumulated depreciation (note 4)............ 181 198
------ ------
Total assets.............................. $4,371 $4,596
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable............................ $ 279 $ 262
Accrued liabilities......................... 364 359
Inventory floor plan notes payable (note
3)......................................... 2,631 3,045
Deposit..................................... 100 --
Capital lease obligation.................... 8 8
Current portion of long term debt........... 50 50
------ ------
Total current liabilities................. 3,432 3,724
Capital lease obligation...................... 28 30
Long term debt (note 7)....................... 275 283
------ ------
Total liabilities......................... 3,735 4,037
Commitments (note 6)
Shareholder's equity:
Common stock................................ 719 719
Retained earnings........................... 842 715
------ ------
1,561 1,434
Due from owners............................... (925) (875)
------ ------
Total shareholder's equity................ 636 559
------ ------
$4,371 $4,596
====== ======
</TABLE>
See accompanying notes to financial statements.
F-85
<PAGE>
RITCHEY FIPP CHEVROLET
STATEMENT OF OPERATIONS AND CHANGES IN RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
(Unaudited) Three Months Twelve Months
Period Ended Ended Ended
March 2, 1999 March 31, 1998 December 31, 1998
------------- -------------- -----------------
<S> <C> <C> <C>
Sales:
Vehicle....................... $4,450 $5,885 $23,378
Service, parts and other...... 1,329 1,927 7,327
------ ------ -------
Total sales................. 5,779 7,812 30,705
Cost of sales................. 4,878 6,566 25,509
------ ------ -------
Gross profit................ 901 1,246 5,196
Operating expenses:
Selling, general and
administrative............... 709 1,018 4,188
Depreciation and
amortization................. 17 25 91
------ ------ -------
Operating income............ 175 203 917
Other income (expense):
Interest expense.............. (44) (28) (302)
Other, net.................... (2) 45 86
------ ------ -------
Income before income taxes...... 129 220 701
Income tax benefit/(expense).... (2) (3) (4)
------ ------ -------
Net income...................... 127 217 697
Beginning retained earnings..... 715 18 18
------ ------ -------
Ending retained earnings........ $ 842 $ 235 $ 715
====== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-86
<PAGE>
RITCHEY FIPP CHEVROLET
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
(Unaudited) Three Months Twelve
Period Ended Ended Months Ended
March 2, 1999 March 31, 1998 December 31, 1998
------------- -------------- -----------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income..................... $ 127 $217 $ 697
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 17 25 91
Change in assets and
liabilities:
Accounts receivable......... (94) 243 154
Inventories................. 373 698 1,001
Deposits and prepaid
expenses................... 6 48 160
Notes receivable, related
party -- -- --
Accounts payable............ 17 56 (25)
Accrued liabilities......... 5 53 38
Inventory floor plan notes
payable.................... (413) (683) (1,263)
----- ---- ------
Net cash provided by
operating activities...... 38 657 853
----- ---- ------
Cash flows from investing
activities:
Capital expenditures, net...... -- (47) (87)
Deposit received related to
sale (note 9)................. 100 -- --
----- ---- ------
Net cash provided (used) by
investing activities...... 100 (47) (87)
----- ---- ------
Cash flows from financing
activities:
Repayments on long term debt... (8) (13) (50)
Proceeds from capital lease.... -- -- 38
Repayments on capital lease.... (2) -- --
Payment on shareholders notes.. (51) (81) (500)
----- ---- ------
Net cash used by financing
activities................ (61) (94) (512)
----- ---- ------
Net increase in cash....... 77 516 254
Cash, beginning of period....... 402 148 148
----- ---- ------
Cash, end of period............. $ 479 $664 $ 402
===== ==== ======
Supplementary disclosures of
cash flow information:
Cash paid for interest expense.. $ 12 $ 28 $ 53
===== ==== ======
Cash paid for income taxes...... $ 2 $-- $ 5
===== ==== ======
</TABLE>
See accompanying notes to financial statements.
F-87
<PAGE>
RITCHEY FIPP CHEVROLET
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Business
Ritchey Fipp Chevrolet (the "Company) is an automobile dealership that
serves customers located principally in San Diego, California. The Company
offers a broad range of products and services that include new Chevrolet
vehicles and trucks as well as used vehicles and trucks, vehicle financing and
insurance, and replacement parts and service. In March 1999, the Company was
sold to FirstAmerica Automotive, Inc. (FAA) (note 9).
The historical financial statements do not necessarily reflect the
results of operations or financial position that would be indicative of the
results after the acquistion by FirstAmerica Automotive, Inc.
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations, and cash flows for the Company, of which
substantially all of the operating assets were subsequently sold to
FirstAmerica Automotive, Inc. (note 9).
(c) Cash and Cash Equivalents
The company considers all highly liquid investments with a maturity of
three months or less from the purchase date to be cash equivalents.
(d) Inventories
New and used vehicles are stated at the lower of cost or market, new
vehicle cost is determined by using the last-in, first-out (LIFO) basis. Used
vehicle cost is determined using the specific identification method. Parts and
accessories cost is determined using the last-in, first-out (LIFO) basis.
(e) Property and Equipment
Property and equipment are stated at cost. Property and equipment are
being depreciated over the estimated useful life of the assets. The range of
estimated useful lives and depreciation methods are as follows:
<TABLE>
<S> <C>
Equipment.................................................... 7 years
Furniture and fixtures....................................... 5 to 7 years
Company vehicles............................................. 5 years
</TABLE>
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
The Company elected S Corporation status for federal and state income tax
reporting purposes. Federal income taxes on S Corporation income were payable
by the individual stockholders rather than the corporation. California State
income taxes for S Corporations are 1.5% of pretax income.
F-88
<PAGE>
RITCHEY FIPP CHEVROLET
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 amount of
the note payable approximates fair value.
(h) Advertising
The Company expenses production and other costs of advertising.
Advertising expenses were approximately $79,284 for the unaudited period ended
March 2, 1999, $124,374 for the unaudited three months ended March 31, 1998 and
$493,650 for the twelve months ended December 31, 1998.
(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.
(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.
F-89
<PAGE>
RITCHEY FIPP CHEVROLET
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 2, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Contracts in transit and vehicle receivables.... $466 $231
Trade........................................... 376 411
Manufacturer and other.......................... 71 177
---- ----
Total accounts receivable..................... 913 819
Less allowance for doubtful accounts............ (4) (4)
---- ----
Accounts receivable, net...................... $909 $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.
(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)
March 2, December 31, March 2, December 31,
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
New vehicles............. $2,355 $2,730 $2,372 $2,662
Used vehicles............ 789 742 259 383
Parts and accessories.... 200 269 -- --
LIFO Reserve............. (595) (619) -- --
------ ------ ------ ------
Total.................... $2,749 $3,122 $2,631 $3,045
====== ====== ====== ======
</TABLE>
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at 7.75% and are secured by new and used
vehicles and vehicle receivables. In March 1999, the Company was sold to First
America Automotive, Inc. (note 9) and all floor plan notes payable were paid.
A LIFO liquidation of $24,541 for the unaudited period ended March 2,
1999 and a provision of $54,388 were recorded for the year ended December 31,
1998 were recorded and are included in cost of sales in the statement of
operations.
F-90
<PAGE>
RITCHEY FIPP CHEVROLET
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 2, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Equipment......................................... $ 298 $ 298
Company vehicles.................................. 62 62
Furniture and fixtures............................ 431 431
----- -----
791 791
Less accumulated depreciation..................... (610) (593)
----- -----
Property and equipment, net....................... $ 181 $ 198
===== =====
</TABLE>
(5) Related Party Transactions
Lease
The Company rents its facilities from a shareholder. Rental expense
totaled $70,552 for the unaudited period ended March 2, 1999, $90,564 for the
unaudited three months ended March 31, 1998 and $366,784 for the year ended
December 31, 1998.
(6) Leases
The Company is obligated under a capital lease for certain equipment that
expires on August 1, 2003. At March 2, 1999 and December 31, 1998, the gross
amount of equipment recorded under the capital lease were as follows (in
thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 2, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Equipment......................................... $41 $41
Less accumulated depreciation..................... (5) (3)
--- ---
$36 $38
=== ===
</TABLE>
Depreciation of assets held under capital leases is included with
depreciation expense.
Future minimum capital lease payments as of December 31, 1998 are:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Year ending December 31,
1999........................................................ $ 8
2000........................................................ 8
2001........................................................ 8
2002........................................................ 8
Thereafter.................................................. 5
---
$37
===
</TABLE>
F-91
<PAGE>
RITCHEY FIPP CHEVROLET
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Long Term Debt
Long-term debt at March 2, 1999 and December 31, 1998 consists of the
following (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 2, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Promissory note payables in monthly installments
of $4,166.67, including interest, with final
payment of $216,637 due May 15, 2001........... $325 $333
Less current installments....................... 50 50
---- ----
$275 $283
==== ====
</TABLE>
Future maturities of long-term debt for each of the five years
subsequent to as of December 31, 1998 are (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Year ending December 31,
1999........................................................ $ 50
2000........................................................ 50
2001........................................................ 233
----
$333
====
</TABLE>
(8) Employee Benefits
The Company has a 401(k) Plan (the Plan), which covers substantially all
employees of the Company. The annual contribution to the plan is at the
discretion of the Owners. Contributions to the Plan were $0 and $7,000 for the
unaudited period ended March 2, 1999 and for the year ended December 31, 1998,
respectively.
(9) Subsequent Events
In March of 1999, the Company was acquired by FirstAmerica Automotive,
Inc. No adjustments related to the acquisition are reflected in the
accompanying historical financial statements.
F-92
<PAGE>
INDEPENDENT AUDITORS' REPORT
Lucas Dealership Group, Inc.:
We have audited the accompanying combined statements of assets and
liabilities of Certain Dealerships, Assets and Liabilities of Lucas Dealership
Group, Inc. which are enumerated in Note 1 to the accompanying financial
statements, as of December 31, 1998 and 1997, and the related combined
statements of sales, cost of sales and direct operating expenses and of cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of Lucas Dealership Group, Inc.
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 audits provide a reasonable basis
for our opinion.
The accompanying combined financial statements were prepared to present
the assets and liabilities of Certain Dealerships, Assets and Liabilities of
Lucas Dealership Group, Inc., and the related statements of sales, cost of
sales and direct operating expenses and cash flows, and are not intended to be
a complete presentation of Lucas Dealership Group, Inc.'s financial position,
results of operations and cash flows.
In our opinion, the combined financial statements referred to above,
present fairly, in all material respects, the assets and liabilities of Certain
Dealerships, Assets and Liabilities of Lucas Dealership Group, Inc. which are
enumerated in Note 1 to the accompanying financial statements, as of December
31, 1998 and 1997, and the related sales, cost of sales, direct operating
expenses and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
May 21, 1999
San Jose, California
F-93
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF
LUCAS DEALERSHIP GROUP, INC.
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
(In thousands)
<TABLE>
<CAPTION>
December 31,
March 31, ---------------
1999 1998 1997
----------- ------- -------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................. $21,888 $12,286 $13,364
Receivables, net.................................. 12,559 12,032 12,548
Inventories....................................... 26,269 27,647 22,546
Other current assets.............................. 777 1,556 1,270
------- ------- -------
Total current assets............................ 61,493 53,521 49,728
Rental vehicles, net................................ 1,214 1,243 1,203
Property and equipment, net......................... 3,197 3,299 3,900
Other assets........................................ 647 713 996
------- ------- -------
Total assets........................................ $66,551 $58,776 $55,827
======= ======= =======
LIABILITIES
Current liabilities
Notes payable--direct inventory financing......... $25,796 $24,434 $19,487
Accounts payable.................................. 2,503 2,654 2,361
Accrued and other liabilities..................... 6,346 6,182 5,822
------- ------- -------
Total current liabilities....................... 34,645 33,270 27,670
Deferred income taxes............................... 247 477 430
------- ------- -------
Total liabilities................................... 34,892 33,747 28,100
------- ------- -------
Net assets.......................................... $31,659 $25,029 $27,727
======= ======= =======
</TABLE>
See notes to combined financial statements.
F-94
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF
LUCAS DEALERSHIP GROUP, INC.
COMBINED STATEMENTS OF SALES, COST OF SALES AND
DIRECT OPERATING EXPENSES
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------- ---------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales:
New and used vehicle sales.. $ 77,010 $ 68,882 $293,645 $258,989 $214,279
Parts and service........... 12,984 11,410 46,265 42,146 38,995
Finance income.............. 858 693 3,398 3,146 2,288
--------- --------- -------- -------- --------
Total..................... 90,852 80,985 343,308 304,281 255,562
--------- --------- -------- -------- --------
Cost of sales:
New and used vehicles....... 70,220 62,995 268,665 237,309 196,466
Parts and service........... 6,674 5,746 22,633 20,499 19,490
--------- --------- -------- -------- --------
Total..................... 76,894 68,741 291,298 257,808 215,956
--------- --------- -------- -------- --------
Gross profit.................. 13,958 12,244 52,010 46,473 39,606
--------- --------- -------- -------- --------
Other operating income:
Interest income............. 338 269 1,234 1,161 853
Other....................... 447 540 2,287 2,697 1,687
--------- --------- -------- -------- --------
Total..................... 785 809 3,521 3,858 2,540
--------- --------- -------- -------- --------
Other operating expenses:
Selling and administrative.. 12,428 11,308 47,484 43,337 37,710
Interest.................... 185 294 1,359 1,218 1,402
--------- --------- -------- -------- --------
Total..................... 12,613 11,602 48,843 44,555 39,112
--------- --------- -------- -------- --------
Income before income taxes.... 2,130 1,451 6,688 5,776 3,034
Provision for income taxes.... 872 631 2,883 2,592 1,500
--------- --------- -------- -------- --------
Net income.................... 1,258 820 3,805 3,184 1,534
Net assets, beginning of
period....................... 25,029 27,727 27,727 23,968 21,406
Dividend distribution from
unconsolidated subsidiaries.. -- 300 1,113 400 900
Investment in unconsolidated
subsidiary................... -- -- (3,270) -- --
Net change in shareholder
receivable/payable........... 5,372 961 (4,346) 175 128
--------- --------- -------- -------- --------
Net assets, end of period..... $ 31,659 $ 29,808 $ 25,029 $ 27,727 $ 23,968
========= ========= ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-95
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF
LUCAS DEALERSHIP GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
-------------------- -------------------------
1999 1998 1998 1997 1996
--------- --------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................. $ 1,258 $ 820 $ 3,805 $ 3,184 $ 1,534
Adjustments to reconcile net
income to net cash provided
(used) by operating
activities:
Depreciation and
amortization.............. 345 429 1,406 1,389 1,300
Deferred income taxes...... 236 86 (156) (146) (9)
(Gain) loss on dispositions
of property and equipment
and rental and leased
vehicles.................. (17) (161) 2 (300) 151
Changes in assets and
liabilities:
Receivables............... (527) (2,614) 516 (747) (1,143)
Inventories............... 1,378 (1,302) (5,102) (1,737) (4,834)
Other current assets...... 313 (691) 247 160 606
Notes payable--direct
inventory financing...... 1,362 773 4,947 230 2,151
Accounts payable.......... (151) 1,563 293 (153) 406
Accrued and other
liabilities.............. 164 749 32 1,700 (714)
--------- --------- ------- ------- -------
Net cash provided by
(used for) operating
activities............. 4,361 (348) 5,990 3,580 (552)
--------- --------- ------- ------- -------
Cash flows from investing
activities:
Proceeds from dispositions
of property and equipment
and rental and leased
vehicles................... 164 324 562 1,238 176
Purchases of property and
equipment and rental and
leased vehicles............ (290) (446) (1,127) (2,473) (2,057)
Other assets................ (5) (19) -- -- (224)
--------- --------- ------- ------- -------
Net cash used for
investing activities... (131) (141) (565) (1,235) (2,105)
--------- --------- ------- ------- -------
Cash flows from financing
activities:
Long-term debt borrowings... -- -- -- -- 139
Repayment of long-term debt
and capital leases......... -- -- -- (139) (9)
Net change in shareholder
receivable/payable......... 5,372 961 (4,346) 175 128
Dividends from affiliates... -- 300 1,113 400 900
Investment in affiliates.... -- -- (3,270) -- --
--------- --------- ------- ------- -------
Net cash provided by
(used for) financing
activities............. 5,372 1,261 (6,503) 436 1,158
--------- --------- ------- ------- -------
Net increase (decrease) in
cash and equivalents......... 9,602 772 (1,078) 2,781 (1,499)
Cash and equivalents at
beginning of period.......... 12,286 13,364 13,364 10,583 12,082
--------- --------- ------- ------- -------
Cash and equivalents at end of
period....................... $ 21,888 $ 14,136 $12,286 $13,364 $10,583
========= ========= ======= ======= =======
Supplemental cash flows
information -
Cash paid during the period
for:
Interest................... $ 33 $ 295 $ 1,018 $ 1,077 $ 1,263
========= ========= ======= ======= =======
</TABLE>
See notes to combined financial statements.
F-96
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited)
(1) Background and Basis of Presentation
The accompanying combined financial statements have been prepared for the
purpose of presenting Certain Dealerships, Assets and Liabilities of Lucas
Dealership Group, Inc. ("Lucas"). The combined financial statements represent
certain assets and liabilities of six dealerships, doing business as, Autobahn
Motors, Hayward Honda, Saint Claire Cadillac/Oldsmobile, Stevens Creek BMW
Motorsport, Stevens Creek Honda, and Golden Gate Cadillac/Acura as well as
certain other assets and liabilities of Lucas (collectively the "Certain
Dealerships"). The combined financial statements exclude the results of
businesses previously distributed to the Lucas shareholders or expected to be
distributed prior to the completion of the merger described in Note 2,
including Autocorp (a leasing and fleet sales business) and six Saturn
dealerships. The combined financial statements also exclude certain personal
assets (shareholder receivables and payables and certain nonbusiness assets).
The statement of sales, cost of sales and direct operating expenses, and
cash flows for the periods indicated exclude the effects of the changes in the
assets not included in these financial statements and include allocations of
certain corporate expenses to the Certain Dealerships based upon estimates of
actual corporate services performed on behalf of the Certain Dealerships. The
allocations effectively allocate all of the expenses of the corporate offices
to the dealerships. The amount of corporate expenses pertaining to the Certain
Dealerships (including salaries, bonuses, rent, professional services, and
other expenses) reflected in these financial statements is based primarily on a
flat fee which varies per dealership plus a percentage of the dealerships' net
income, which management of Lucas believes to be a reasonable allocation
method.
The accompanying combined financial statements are derived from the
historical accounting records of Lucas. These historical financial statements
are not intended to be a complete presentation of the financial position,
results of operations and cash flows related to the Certain Dealerships, Assets
and Liabilities of Lucas Dealership Group, Inc. The historical operating
results may not be indicative of future results.
(2) Pending Acquisition
On May 3, 1999 Lucas entered into an Agreement and Plan of Merger (the
"Agreement") with FirstAmerica Automotive, Inc. Under the terms of the
Agreement, Lucas will sell the six dealerships listed in Note 1 above, as well
as as certain other assets and liabilities and all of the stock of Lucas, for
consideration of approximately $65 million, subject to certain adjustments.
On May 4, 1999 Lucas sold the Cadillac franchise right which was owned by
Golden Gate Cadillac/Acura. Lucas continues to operate the related Acura
franchise. The cash purchase price was approximately $600,000 and Lucas expects
to record a gain on this transaction. The accompanying financial statements
include the results of the franchise sold for all periods presented.
(3) Summary of Significant Accounting Policies
Concentration of Credit Risk--At December 31, 1998, substantially all of
the Certain Dealerships' business activities are located in Northern
California. The Certain Dealerships perform credit evaluations of their
customers and maintain reserves for potential credit losses.
The Certain Dealerships purchase substantially all of their new vehicles
and parts and accessories inventories from General Motors Corporation, American
Honda Motors Corporation, Mercedes Benz of North
F-97
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited)
America Incorporated and BMW of North America. There are receivables and
payables in the normal course of business with these companies.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses as of the dates and for the periods presented. Actual
results could differ from those estimates. Significant estimates include
depreciable lives, income taxes and accrued liabilities.
Cash and Equivalents include highly liquid debt investments with
maturities of three months or less when purchased.
Inventories include new vehicles and demonstrators, used vehicles and
parts and accessories which are stated at cost, determined using the last-in,
first-out (LIFO) method, which is not in excess of market. Other inventories
consist primarily of gasoline, tires and oil and are stated at cost, on a
first-in, first-out (FIFO) basis, which is not in excess of market.
Rental Vehicles are stated at specifically identified cost. Rental
vehicles are used as short-term rentals for customers. They are depreciated
straight-line over 36 months but are typically sold during the model year.
Property and Equipment are stated at cost. Depreciation and amortization
are provided on a straight-line basis over the estimated useful lives of the
respective assets, principally three to seven years.
Intangible Assets relate to the purchase of two dealerships and are
included in other assets. The excess of costs over net tangible assets acquired
is amortized over periods ranging from five to ten years. At December 31, 1998,
1997 and 1996, the net book value of intangible assets was $713,000, $996,000
and $1,278,000, respectively (net of accumulated amortization of $2,110,000,
$1,827,000 and $1,545,000, respectively). Amortization expense was $283,000,
$282,000, and $281,000 in 1998, 1997 and 1996, respectively.
Income Taxes are accounted for using an asset and liability approach.
Deferred income taxes result from temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Such differences relate primarily to
accelerated depreciation for tax return purposes. Income tax amounts herein
represent allocations computed as if the Certain Dealerships had filed a tax
return on a combined basis.
Recently Issued Accounting Standard--In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total, the change in net assets
during the period from nonowner sources. For the periods presented, net income
is equivalent to comprehensive income, as the Certain Dealerships had no items
of other comprehensive income.
Unaudited Financial Statements--The accompanying unaudited combined
financial statements as of March 31, 1999 and for the three-month periods ended
March 31, 1999 and 1998 have been prepared by Lucas pursuant to the rules of
the Securities and Exchange Commission ("SEC") and, in the opinion of Lucas,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the Certain Dealerships, Assets and Liabilities of Lucas
Dealership Group and the related sales, cost of sales and direct
F-98
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited)
operating expenses and cash flows. Certain information and footnote disclosure
normally included in combined financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules. Lucas believes that the disclosures made are
adequate to keep the information presented from being misleading. The results
of operations for the three months ended March 31, 1999, are not necessarily
indicative of the results to be expected for the full year.
(4) Receivables
Receivables at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Contracts in transit..................................... $ 3,926 $ 4,008
Vehicles, service and parts.............................. 3,828 4,405
Factory.................................................. 1,518 1,182
Dealer trade............................................. 1,036 907
Other accounts receivable................................ 1,109 1,429
Warranty claims.......................................... 378 323
Due from finance companies............................... 250 307
------- -------
Total.................................................... 12,045 12,561
Allowance for doubtful accounts.......................... (13) (13)
------- -------
Net...................................................... $12,032 $12,548
======= =======
</TABLE>
(5) Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 ---------------
(Unaudited) 1998 1997
----------- ------- -------
<S> <C> <C> <C>
New vehicles and demonstrators................ $17,630 $18,507 $14,149
Used vehicles................................. 5,850 6,295 5,827
Parts and accessories......................... 2,482 2,549 2,328
Other......................................... 307 296 242
------- ------- -------
Total......................................... $26,269 $27,647 $22,546
======= ======= =======
</TABLE>
If the FIFO method of inventory accounting had been used to value all
inventories, inventories would have been $5,751,000, $6,092,000 and $5,880,000
higher than reported at March 31, 1999, December 31, 1998 and 1997,
respectively.
For the three-month periods ended March 31, 1999 and 1998 and the years
ended December 31, 1998 and 1997, the LIFO valuation method had the effect of
(increasing) decreasing income before income taxes by approximately $(314,000),
$10,000, $212,000 and $100,000 and net income by approximately $188,000,
$6,000, $127,000 and $60,000, respectively.
F-99
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited)
(6) Property and equipment
Property and equipment at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Leasehold improvements................................... $ 3,324 $ 3,393
Furniture and office equipment........................... 3,922 3,852
Machinery and equipment.................................. 2,603 2,647
Company vehicles......................................... 659 652
------- -------
Total.................................................... 10,508 10,544
Accumulated depreciation and amortization................ (7,209) (6,644)
------- -------
Net...................................................... $ 3,299 $ 3,900
======= =======
</TABLE>
(7) Notes payable--Direct Inventory Financing
New vehicles, demonstrators and rental vehicles are financed under notes
payable bearing interest generally at the bank's reference rate (7.75% at
December 31, 1998). The notes are collateralized by such vehicles and are due
when the related vehicles are sold. The notes require each dealership to
maintain specific financial covenants. At December 31, 1998, the dealerships
were in compliance with these covenants.
(8) Accrued and Other Liabilities
Accrued and other liabilities at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Sales and property taxes..................................... $1,983 $1,892
Salaries, wages and commissions.............................. 1,111 1,005
Vehicle deposits............................................. 583 742
Bonuses--officers and employees.............................. 756 509
Interest..................................................... 175 141
Income taxes payable......................................... 225 155
Other accrued liabilities.................................... 1,349 1,378
------ ------
Total........................................................ $6,182 $5,822
====== ======
</TABLE>
F-100
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited)
(9) Income Taxes
The provisions for income taxes (which represent allocations computed as
if the Certain Dealerships had filed a tax return on a combined basis) consist
of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $2,376 $ 2,186 $ 1,127
State........................................... 663 552 382
------ ------- -------
Total............................................ 3,039 2,738 1,509
------ ------- -------
Deferred:
Federal......................................... (124) (163) 9
State........................................... (32) 17 (18)
------ ------- -------
Total............................................ (156) (146) (9)
------ ------- -------
Total provision for income taxes................. $2,883 $ 2,592 $ 1,500
====== ======= =======
</TABLE>
The effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate.......... 35.0 % 35.0 % 35.0 %
State taxes, net of
federal effect......... 6.0 6.0 6.0
Non-deductible insurance
premium................ 2.0 1.2 4.3
Imputed interest
expense................ 0.5 1.4 2.2
Meals and
entertainment.......... 0.3 1.2 2.0
Other................... (0.7) 0.1 (0.1)
---- ---- ----
Total................... 43.1 % 44.9 % 49.4 %
==== ==== ====
</TABLE>
The items giving rise to deferred taxes were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Reserves not recognized for tax purposes........................ $508 $375
Capitalized inventory........................................... 114 97
State taxes..................................................... 225 187
Other........................................................... 32 17
---- ----
Total deferred tax assets........................................ 879 676
---- ----
Deferred tax liabilities:
Accelerated depreciation and amortization....................... 448 398
Other........................................................... 29 32
---- ----
Total deferred tax liabilities................................... 477 430
---- ----
$402 $246
==== ====
</TABLE>
F-101
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited)
(10) Retirement Plan
Lucas contributes to various union-sponsored pension plans (defined
contribution plans), covering all union mechanics and service personnel. The
related pension expense for the Certain Dealerships for these plans in 1998,
1997 and 1996 was $479,000, $387,000 and $343,000, respectively.
Nonunion employees may participate in the Lucas Dealership Group Savings
and Investment and Profit-Sharing Plan (the Plan). The Plan has two
components. The first is the 401(k) component, whereby employees may
contribute up to 15% of their annual compensation. Lucas matches one-half of
the employee's contribution, limited to $50 per employee per month, and may
make additional contributions at the discretion of the Board of Directors.
Cash contributions for the Certain Dealerships were $107,000, $103,000 and
$89,000 for 1998, 1997 and 1996, respectively. All participating employees are
100% vested. Nonunion employees are also eligible to participate in the second
component of the Plan, the profit-sharing component. Contributions are made at
the discretion of the Board of Directors and vest over a seven-year period,
beginning after the third year. Cash contributions were $242,000, $192,400 and
$173,000 for 1998, 1997 and 1996, respectively.
(11) Commitments
The Certain Dealerships lease five facilities from Lucas' majority
shareholder under agreements which expire in 2005. The other facility lease,
leased from an unrelated party, expires in 2000. Future minimum rental
payments at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Related
Party Other Total
------- ----- -------
<S> <C> <C> <C>
1999................................................. $ 3,136 $264 $ 3,400
2000................................................. 3,136 -- 3,136
2001................................................. 3,136 -- 3,136
2002................................................. 3,136 -- 3,136
2003................................................. 3,136 -- 3,136
Thereafter........................................... 6,272 -- 6,272
------- ---- -------
Total................................................ $21,952 $264 $22,216
======= ==== =======
</TABLE>
Rental expense for 1998, 1997 and 1996 was $3,621,000, $3,367,000 and
$3,269,000, respectively.
(12) Related Party
The Certain Dealerships' sales to, purchases from, and balances with
their unconsolidated subsidiaries are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue from vehicle, parts, or service sales............... $221 $324 $123
Cost of vehicle, parts, or services purchased............... 219 306 120
Balance at year end:
Receivable................................................. 327 956
Payable.................................................... 10 36
</TABLE>
F-102
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 is unaudited)
In addition, the Certain Dealerships paid fees for fixed asset purchases
from a related party in the amounts of $620,000, $222,000, and $55,000 in
December 31, 1998, 1997, and 1996, respectively.
(13) Pending Litigation
The Company is involved in various legal proceedings. Management, after
reviewing these proceedings with legal counsel, believes the aggregate
liability, if any, will not materially affect the combined financial condition
or results of operations of the Certain Dealerships.
F-103
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstAmerica Automotive, Inc.:
We have audited the accompanying balance sheet of South Bay Chrysler as
of December 31, 1998, and the related statements of operations and changes in
retained earnings, 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 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 South Bay Chrysler
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG, LLP
June 4, 1999
San Francisco, California
F-104
<PAGE>
SOUTH BAY CHRYSLER
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents.............................. $ 7,515 $ 6,301
Contracts in transit (note 2).......................... 203 676
Accounts receivable (note 2)........................... 528 594
Inventories (note 3)................................... 6,281 6,489
Deposits and prepaid expenses.......................... 129 78
------- -------
Total current assets............................... 14,656 14,138
Property and equipment, net (note 4)................... 167 180
------- -------
Total assets....................................... $14,823 $14,318
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Floor plan notes payable (note 3).................... $ 4,582 $ 4,999
Accounts payable..................................... 234 360
Accrued liabilities.................................. 478 472
Note payable to shareholder (Note 6)................. 5,980 5,455
------- -------
Total current liabilities.......................... 11,274 11,286
------- -------
Total liabilities.................................. 11,274 11,286
Commitments (note 5)
Shareholder's equity:
Common stock......................................... 100 100
Retained earnings.................................... 3,449 2,932
------- -------
Total shareholder's equity......................... 3,549 3,032
------- -------
$14,823 $14,318
======= =======
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE>
SOUTH BAY CHRYSLER
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------- Year Ended
1999 1998 December 31,
(Unaudited) (Unaudited) 1998
----------- ----------- ------------
<S> <C> <C> <C>
Sales:
Vehicle................................. $10,526 $ 9,269 $38,862
Service, parts, and other............... 1,799 1,677 6,806
------- ------- -------
Total sales........................... 12,325 10,946 45,668
Cost of sales............................. 10,482 9,227 38,665
------- ------- -------
Gross profit.......................... 1,843 1,719 7,003
Operating expenses:
Selling, general and administrative..... 1,205 1,223 5,403
Depreciation and amortization........... 17 6 23
------- ------- -------
Operating income...................... 621 490 1,577
Other income (expense):
Flooring interest expense............... (124) (148) (583)
Interest income......................... 121 125 525
Interest expense........................ (93) (113) (444)
------- ------- -------
Income before income taxes............ 525 354 1,075
Income tax expense........................ 8 5 16
------- ------- -------
Net income............................ 517 349 1,059
Retained earnings, beginning of period.... 2,932 2,736 2,736
Distributions to shareholders............. -- (863) (863)
------- ------- -------
Retained earnings, end of period.......... $ 3,449 $ 2,222 $ 2,932
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE>
SOUTH BAY CHRYSLER
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------- Year Ended
1999 1998 December 31,
(Unaudited) (Unaudited) 1998
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 517 $ 349 $ 1,059
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization.......... 17 6 23
Changes in operating assets and
liabilities:
Receivables and contracts in transit.. 539 625 (100)
Inventories........................... 208 (3,982) (2,622)
Accounts payable and accrued
liabilities.......................... (120) 1,975 1,092
Deposits and prepaid expenses......... (51) (4) (2)
Proceeds from (repayments of) flooring
notes payable........................ (417) 4,188 2,914
------ ------- -------
Net cash provided by operating
activities.......................... 693 3,157 2,364
------ ------- -------
Cash flows from investing activities:
Capital expenditures, net................ (4) (1) (4)
------ ------- -------
Net cash provided by/(used in)
investing activities................ (4) (1) (4)
------ ------- -------
Cash flows from financing activities:
Proceeds from note payable to
shareholder............................. 525 -- --
Distributions to shareholder............. -- (863) (863)
------ ------- -------
Net cash (used in) provided by
financing activities................ 525 (863) (863)
------ ------- -------
Net increase (decrease) in cash...... 1,214 2,293 1,497
Cash at beginning of the period........... 6,301 4,804 4,804
------ ------- -------
Cash at end of the period................. $7,515 $ 7,097 $ 6,301
====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE>
SOUTH BAY CHRYSLER
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Business
South Bay Chrysler (the Company) constitutes the assets, liabilities and
operations of South Bay Chrysler Plymouth Inc. of which certain operating
assets of the Company are under contract for sale to FirstAmerica Automotive,
Inc. (FAA) (note 7). The Company offers a broad range of products and services
including new Chrysler vehicles as well as used vehicles, vehicle financing and
insurance and replacement parts and service.
The historical financial statements do not necessarily reflect the
results of operations or financial position that would be indicative of the
results after the acquisition by FirstAmerica Automotive, Inc. (FAA).
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations and cash flows for South Bay Chrysler, certain
assets of which are under contract to be sold to FirstAmerica Automotive, Inc.
The historical operating results may not be indicative of the results after the
acquisition by FAA.
(c) Cash and Cash Equivalents
The Company 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, new and used
vehicle cost are determined by using specific identification basis. Parts and
accessories cost is determined using the first-in, first-out (FIFO) basis.
(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:
<TABLE>
<S> <C>
Leasehold improvements.......................................... 10 years
Equipment....................................................... 7 years
Furniture and fixtures.......................................... 7 years
Company vehicles................................................ 5 years
</TABLE>
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-108
<PAGE>
SOUTH BAY CHRYSLER
NOTES TO FINANCIAL STATEMENTS--(Continued)
(f) Income Taxes
The Company elected S Corporation status for federal and state income tax
reporting purposes. Federal income taxes on S Corporation income were payable
by the individual stockholders rather than the corporation. California state
income taxes for S Corporations are 1.5% of pretax income.
(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 $130,000 and $125,000 for the unaudited
three month periods ended March 31, 1999 and 1998, respectively, and $489,000
for the year ended December 31, 1998.
(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, 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 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.
F-109
<PAGE>
SOUTH BAY CHRYSLER
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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.
The Company enters into dealer sales and service agreements (Dealer
Agreements) with the manufacturer. The Dealer Agreements generally limit the
location of the dealership and mandates the manufacturer's approval rights over
changes in dealership management and ownership. The manufacturer is also
entitled to terminate the agreement if the dealership is in material breach of
the terms.
(2) Accounts Receivable and Contracts in Transit
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(unaudited) 1998
----------- ------------
<S> <C> <C>
Contracts in transit.............................. $203 $676
==== ====
Trade and vehicle receivables..................... $333 $351
Manufacturer and other............................ 195 243
---- ----
Total accounts receivable......................... $528 $594
==== ====
</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, March 31,
1999 December 31, 1999 December 31,
(unaudited) 1998 (unaudited) 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
New vehicles............ $4,741 $5,012 $4,582 $4,999
Used vehicles........... 1,149 1,057 -- --
Parts and accessories... 391 420 -- --
------ ------ ------ ------
Inventories, net........ $6,281 $6,489 $4,582 $4,999
====== ====== ====== ======
</TABLE>
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at prime plus 0.75% and are secured by new
vehicles and vehicle receivables. The floor plan agreement limits flooring by
new vehicle inventory levels.
F-110
<PAGE>
SOUTH BAY CHRYSLER
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
Leasehold improvements............................ $266 $266
Equipment......................................... 248 245
Company vehicles.................................. 10 10
Furniture and fixtures............................ 191 190
---- ----
715 711
Less accumulated depreciation..................... 548 531
---- ----
Property and equipment, net....................... $167 $180
==== ====
</TABLE>
(5) Related Party Transactions
Note Payable to Related Parties
Note payable to related parties consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
Note payable to shareholder....................... $ 5,980 $ 5,455
------- -------
$ 5,980 $ 5,455
======= =======
</TABLE>
Interest is payable on the loan at prime plus 0.75%. In the year ended 31
December 1998 the interest paid on the loan amounted to $444,000. In the three
months ended 31 March 1999 and 31 March 1998 the interest amounted to $93,000
and $113,000 respectively.
(6) Commitments
The minimum rental commitments under operating leases which have terms
greater than one year after December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999.............................................................. $582
2000.............................................................. 594
------
Thereafter........................................................ $1,176
======
</TABLE>
Amounts paid under operating leases were $194,000 and $189,000 for the
unaudited three months ended March 31, 1999 and 1998, respectively, and
$764,186 for the year ended December 31, 1998.
(7) Subsequent Events
Certain operating assets of the company are under contract for sale to
FirstAmerica Automotive, Inc.
F-111
<PAGE>
Pictures of FAA dealerships
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,565,460 Shares
[FIRST AMERICA AUTOMOTIVE, INC. LOGO APPEARS HERE]
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................................................. $ 35,679
NASD filing fee.................................................. 10,500
NYSE listing fee................................................. 105,600
Transfer agent and registrar fees................................ 20,000
Accounting fees and expenses..................................... 900,000
Legal fees and expenses.......................................... 750,000
Blue Sky qualification fees and expenses......................... 15,000
Printing and engraving........................................... 125,000
Miscellaneous expenses........................................... 38,221
----------
Total.......................................................... $2,000,000
==========
</TABLE>
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
II-1
<PAGE>
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.
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 87,199 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 8,720 shares of our common stock to Matthew
Travis for $20.00.
On April 23, 1997, we issued 208,841 shares of our common stock to the
Price Trust u/d/t 10/5/88 for $479 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 132,193 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 $2.11 per share. These warrants are exercisable at any time prior to July
10, 2002.
On July 10, 1997, we issued warrants to purchase 2,180 shares of our
common stock to T.J. Hollerhoff in partial consideration for services
performed for us. The exercise price of such warrants is $2.11 per share.
These warrants are exercisable at any time prior to July 10, 2007.
On July 10, 1997, we issued warrants to purchase 1,090 shares of our
common stock to Carlanne Foushee in partial consideration for services
performed for us. The exercise price of such warrants is $2.11 per share.
These warrants are exercisable at any time prior to July 10, 2007.
On July 10, 1997, we issued warrants to purchase 436 shares of our
common stock to Martha Walker in partial consideration for services performed
for us. The exercise price of such warrants is $2.11 per share. These warrants
are exercisable at any time prior to July 10, 2007.
II-2
<PAGE>
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 1,740,310 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 579,871 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.
In connection with the acquisition of Mr. T. Al Babbington's interest in
the Price Dealerships by us on July 11, 1997, we issued 317,191 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 356,958 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 103,366 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 126,438 shares of our common stock to Asian Pacific Industries,
a Washington corporation.
On September 15, 1997, we issued warrants to purchase up to 8,720 shares
of our common stock to Capman, Inc. as partial consideration for certain assets
acquired by us. The exercise price of such warrants is $2.11 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
an aggregate of $24,000,000 in notes at a discounted price of $21,800,000,
1,321,931 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 $2,900,000, and 500 shares of
our Redeemable Preferred Stock for an aggregate consideration of $400,000 to
TCW/Crescent Mezzanine Partners, L.P., TCW/Crescent Mezzanine Trust,
TCW/Crescent Mezzanine Investment Partners, L.P., TCW Leveraged Income Trust,
L.P., Crescent/Mach I Partners, L.P., and TCW Shared Opportunity Fund II, L.P.
Each of these entities is an affiliate 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 17,440
shares of our common stock to Brown, Gibbons, Lang & Company LP. The exercise
price of these warrants is $4.59 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 an aggregate of $12,000,000 in notes at a discounted price of
$11,000,000 and 217,997 shares of our common stock for an aggregate
consideration of $1,000,000 to TCW/Crescent Mezzanine Partners, L.P.,
TCW/Crescent Mezzanine Trust, TCW/Crescent Mezzanine Investment Partners, L.P.,
TCW Leveraged Income Trust, L.P., Crescent/Mach I Partners, L.P., and TCW
Shared Opportunity Fund II, L.P.
In connection with our acquisition of DSW & Associates, Inc., d/b/a Auto
Town, on December 31, 1998, we issued an aggregate of 146,064 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.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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 Form of Amended and Restated Certificate of Incorporation (to be
effective upon completion of offering).
3.2+++ By-Laws.
3.4 Form of Amended and Restated By-Laws (to be effective upon
completion of offering).
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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 Form of 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.
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.).
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.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of attorney (previously filed).
</TABLE>
- --------
* 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.
++++ As filed with the SEC in Amendment No. 1 to our registration statement on
Form S-1 on June 28, 1999.
II-7
<PAGE>
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.
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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to the 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
21st day of July, 1999.
FIRSTAMERICA AUTOMOTIVE, INC.
/s/ Thomas A. Price
By: _________________________________
Thomas A. Price
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas A. Price President, Chief Executive July 21, 1999
______________________________________ Officer and Director
Thomas A. Price (Principal Executive
Officer)
/s/ Debra L. Smithart * Chief Financial and July 21, 1999
______________________________________ Administrative Officer
Debra L. Smithart (Principal Financial and
Accounting Officer)
/s/ Donald V. Strough * Chairman of the Board of July 21, 1999
______________________________________ Directors
Donald V. Strough
/s/ W. Bruce Bercovich * Director July 21, 1999
______________________________________
W. Bruce Bercovich
/s/ Jean Marc Chapus * Director July 21, 1999
______________________________________
Jean Marc Chapus
/s/ H. Robert Heller * Director July 21, 1999
______________________________________
H. Robert Heller
By: * /s/ Thomas A. Price July 21, 1999
______________________________________
Thomas A. Price
(Attorney-in-fact)
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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 Form of Amended and Restated Certificate of Incorporation (to be
effective upon completion of offering).
3.2+++ By-Laws.
3.4 Form of Amended and Restated By-Laws (to be effective upon
completion of offering).
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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 Form of 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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.).
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of attorney (previously filed).
</TABLE>
- --------
* 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.
++++ As filed with the SEC in Amendment No. 1 to our registration statement on
Form S-1 on June 28, 1999.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FIRSTAMERICA AUTOMOTIVE, INC.
FirstAmerica Automotive, Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is FirstAmerica Automotive, Inc., the
corporation was originally incorporated under the name of FirstAmerica
Automotive, Inc. Delaware, and the original Certificate of Incorporation of the
corporation was filed with the Secretary of State of the State of Delaware on
June 16, 1997.
2. The amendment to the Certificate of Incorporation of the corporation
was filed with the Secretary of State of the State of Delaware on July 8, 1997.
The Certificate of Designation of Preferences of 8% Cumulative Redeemable
Preferred Stock Due 2005 and the Certificate of Designation of Preferences of
Redeemable Preferred Stock Due 2005 of the Corporation were also filed with the
Secretary of State of the State of Delaware on July 8, 1997.
3. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate of Incorporation (the
"Restated Certificate") restates and integrates and further amends the
provisions of the Certificate of Incorporation of this corporation.
4. The text of the Restated Certificate as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety as
follows:
FIRST: The name of this corporation is FirstAmerica Automotive, Inc.
-----
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the
City of Dover, County of Kent. The name of the registered agent at that address
is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
1
<PAGE>
FOURTH: Upon the effectiveness of this Restated Certificate (the
------
"Effective Time") and without further action on the part of the Corporation or
the holders of its stock, each share of the Class A Common Stock, each share of
the Class B Common Stock and each share of the Class C Common Stock of the
Corporation outstanding immediately prior thereto, shall be reclassified,
changed and converted as and into, one (1) fully paid and nonassessable share of
Common Stock of the Corporation, with the rights and privileges found in this
Restated Certificate, and at such time each holder of record of the Class A
Common Stock, Class B Common Stock and Class C Common Stock of the Corporation
shall, without further action, be and become the holder of one (1) share of the
Common Stock of the Corporation (hereinafter sometimes referred to as the
"Reclassification"). Following the Effective Time, each stock certificate
representing shares of Class A Common Stock, Class B Common Stock or Class C
Common Stock outstanding immediately prior to the Effective Time shall represent
the number of shares of Common Stock into which the shares of Class A Common
Stock, Class B Common Stock or Class C Common Stock represented by each such
stock certificate shall become hereunder.
FIFTH: Also, at the Effective Time and without further action on the part
-----
of the Corporation or the holders of its stock, each share of the Common Stock
of the Corporation outstanding pursuant to the Reclassification as described
above, shall be changed and converted into .435993 of a fully paid and
nonassessable share of the Common Stock of the Corporation.
SIXTH:
-----
2
<PAGE>
(a) The Corporation is authorized to issue two classes of shares,
designated "Preferred Stock" and "Common Stock," respectively. The total number
of shares of Preferred Stock authorized to be issued is Ten Million
(10,000,000), par value $0.00001 per share. The total number of shares of
Common Stock authorized to be issued is One Hundred Million (100,000,000), par
value $0.00001 per share.
(b) The Preferred Stock may be divided into such number of series as
the Board of Directors may determine. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges and restrictions granted
to and imposed upon any wholly unissued series of Preferred Stock, and to fix
the number of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any series subsequent to the issue of shares of that
series.
SEVENTH: Subject to preferences that may be applicable to any Preferred
-------
Stock outstanding at the time, the holders of outstanding shares Common Stock
will be entitled to the following:
(a) Subject to the prior rights of holders of all classes of stock at
the time outstanding having prior rights as to dividends, the holders of the
Common Stock shall be entitled to receive, when and as declared by the Board of
Directors, out of any assets of this Corporation legally available there for,
such dividends as may be declared from time to time by the Board of Directors.
3
<PAGE>
(b) Upon the liquidation, dissolution or winding up of this
Corporation, the holders of Common Stock will be entitled to share ratably in
all assets remaining after payment of liabilities and the liquidation of any
Preferred Stock.
(c) The holders of Common Stock will not be entitled to any
preemptive, conversion or redemption rights.
(d) The holder of each share of Common Stock shall have the right to
one vote, and shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of this Corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by law.
EIGHTH: The following provisions are inserted for the management of the
------
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Restated
Certificate or the Bylaws of the Corporation, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be exercised
or done by the Corporation.
(b) The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
(c) On and after the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly underwritten registered public
offering (the "IPO"), any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be
4
<PAGE>
effected by any consent in writing by such stockholders. Prior to such sale,
unless otherwise provided by law, any action which may otherwise be taken at any
meeting of the stockholders may be taken without a meeting and without prior
notice, if a written consent describing such actions is signed by the holders of
outstanding shares having not less than the minimum number of votes which would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
(d) Special meetings of stockholders of the Corporation may be called
only (i) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption).
NINTH:
-----
(a) The number of directors shall initially be set at five (5) and,
thereafter, shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption). Upon the closing of the IPO, the directors shall be
divided into three classes with the term of office of the first class (Class I)
to expire at the first annual meeting of the stockholders following the IPO; the
term of office of the second class (Class II) to expire at the second annual
meeting of stockholders held following the IPO; the term of office of the third
class (Class III) to expire at the third annual meeting of stockholders; and
thereafter for each such term to expire at each third succeeding annual meeting
of stockholders after such election. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, a vacancy
5
<PAGE>
resulting from the removal of a director by the stockholders as provided in
paragraph (c) below may be filled at a special meeting of the stockholders held
for that purpose. All directors shall hold office until the expiration of the
term for which elected, and until their respective successors are elected,
except in the case of the death, resignation, or removal of any director.
(b) Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation or other cause (other than removal from office
by a vote of the stockholders) may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the next annual meeting of stockholders
at which the term of office of the class to which they have been elected
expires, and until their respective successors are elected, except in the case
of the death, resignation, or removal of any director. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
(c) Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class. Vacancies in the Board of Directors resulting from such removal may be
filled by a majority of the directors then in office, though less than a quorum,
or by the stockholders as provided in paragraph (a) above. Directors so chosen
shall hold office for a term expiring at the next annual meeting of stockholders
at which the term of office of the class to which they have been elected
expires, and
6
<PAGE>
until their respective successors are elected, except in the case of the death,
resignation, or removal of any director.
TENTH: The Board of Directors is expressly empowered to adopt, amend or
-----
repeal Bylaws of the Corporation and the Certificate of Incorporation. Any
adoption, amendment or repeal of Bylaws of the Corporation or the Certificate of
Incorporation by the Board of Directors shall require the approval of a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the Board). The
stockholders shall also have power to adopt, amend or repeal the Bylaws of the
Corporation or the Certificate of Incorporation. Any adoption, amendment or
repeal of Bylaws of the Corporation or amendment of the Certificate of
Incorporation by the stockholders shall require, in addition to any vote of the
holders of any class or series of stock of the Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a single class.
ELEVENTH: A director of the Corporation shall not be personally liable to
--------
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (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 or which involved intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit.
7
<PAGE>
If the Delaware General Corporation Law is hereafter amended to authorize
the further elimination or limitation of the liability of a director, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of this Article
ELEVENTH by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
TWELFTH:
-------
Transactions between the Corporation and its affiliates must be no less
favorable to the Corporation than would be available to the Corporation in
arm's-length transactions dealing with an unrelated third party. In addition,
the Corporation may not enter into transactions between the Corporation and its
affiliates involving aggregate payments in excess of $500,000 unless (i) the
transaction has been approved by a majority of members of the Corporation's
Board of Directors and a majority of the Corporation's independent directors or
(ii) the Corporation has received an opinion as to the financial fairness of the
transaction from an investment banking or appraisal firm of national standing.
8
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed by the undersigned duly authorized officer of
the Corporation on this __th day of ________, 1999.
FirstAmerica Automotive, Inc.
a Delaware corporation
By:
---------------------------
Thomas A. Price, President
9
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
FIRSTAMERICA AUTOMOTIVE, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
<S> <C> <C>
ARTICLE I STOCKHOLDERS.............................................. 1
Section 1.1 Annual Meeting......................................... 1
Section 1.2 Special Meetings....................................... 1
Section 1.3 Notice of Meetings..................................... 1
Section 1.4 Quorum................................................. 1
Section 1.5 Conduct of the Stockholders' Meeting................... 2
Section 1.6 Conduct of Business.................................... 2
Section 1.7 Notice of Stockholder Business......................... 2
Section 1.8 Proxies and Voting..................................... 3
Section 1.9 Stock List............................................. 3
ARTICLE II BOARD OF DIRECTORS........................................ 4
Section 2.1 Number and Term of Office.............................. 4
Section 2.2 Vacancies and Newly Created Directorships.............. 4
Section 2.3 Removal................................................ 4
Section 2.4 Regular Meetings....................................... 5
Section 2.5 Special Meetings....................................... 5
Section 2.6 Quorum................................................. 5
Section 2.7 Participation in Meetings by Conference Telephone...... 5
Section 2.8 Conduct of Business.................................... 5
Section 2.9 Powers................................................. 5
Section 2.10 Compensation of Directors.............................. 6
Section 2.11 Nomination of Director Candidates...................... 6
ARTICLE III COMMITTEES................................................ 7
Section 3.1 Committees of the Board of Directors................... 7
Section 3.2 Conduct of Business.................................... 8
ARTICLE IV OFFICERS.................................................. 8
Section 4.1 Generally.............................................. 8
Section 4.2 Chairman of the Board.................................. 8
Section 4.3 President.............................................. 8
Section 4.4 Vice President......................................... 8
Section 4.5 Treasurer / Chief Financial Officer.................... 9
Section 4.6 Secretary.............................................. 9
Section 4.7 Delegation of Authority................................ 9
Section 4.8 Removal................................................ 9
Section 4.9 Action With Respect to Securities of Other Corporations 9
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE V STOCK....................................... 9
Section 5.1 Certificates of Stock.................... 9
Section 5.2 Transfers of Stock....................... 10
Section 5.3 Record Date.............................. 10
Section 5.4 Lost, Stolen or Destroyed Certificates... 10
Section 5.5 Regulations.............................. 10
ARTICLE VI NOTICES..................................... 10
Section 6.1 Notices.................................. 10
Section 6.2 Waivers.................................. 10
ARTICLE VII MISCELLANEOUS............................... 11
Section 7.1 Facsimile Signatures..................... 11
Section 7.2 Corporate Seal........................... 11
Section 7.3 Reliance Upon Books, Reports and Records. 11
Section 7.4 Fiscal Year.............................. 11
Section 7.5 Time Periods............................. 11
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS... 11
Section 8.1 Right to Indemnification................. 11
Section 8.2 Right of Claimant to Bring Suit.......... 12
Section 8.3 Non-Exclusivity of Rights................ 13
Section 8.4 Indemnification Contracts................ 13
Section 8.5 Insurance................................ 13
Section 8.6 Effect of Amendment...................... 13
ARTICLE IX AMENDMENTS.................................. 13
Section 9.1 Amendment of Bylaws...................... 13
</TABLE>
ii
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
A DELAWARE CORPORATION
AMENDED AND RESTATED BYLAWS
ARTICLE I
STOCKHOLDERS
------------
Section 1.1 Annual Meeting. An annual meeting of the
----------- --------------
stockholders, for the election of directors to succeed those whose terms expire
and for the transaction of such other business as may properly come before the
meeting, shall be held at such place, on such date, and at such time as the
Board of Directors shall each year fix, which date shall be within thirteen
months subsequent to the later of the date of incorporation or the last annual
meeting of stockholders.
Section 1.2 Special Meetings. Special meetings of the
----------- ----------------
stockholders, for any purpose or purposes prescribed in the notice of the
meeting, may be called only by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exists any vacancies in previously authorized directorships at the
time any such resolution is presented to the Board of Directors for adoption).
Business transacted at special meetings shall be confined to the purpose or
purposes stated in the notice.
Section 1.3 Notice of Meetings. Written notice of the place, date,
----------- ------------------
and time of all meetings of the stockholders shall be given, not less than ten
(10) nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 1.4 Quorum. At any meeting of the stockholders, the
----------- ------
holders of at least a majority of all of the outstanding shares of the stock
entitled to vote at the meeting, present in person or by proxy, shall constitute
a quorum for all purposes, unless or except to the extent that the presence of a
larger number may be required by law.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may
<PAGE>
adjourn the meeting to another place, date, or time.
If a notice of any adjourned special meeting of stockholders is sent
to all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 1.5 Conduct of the Stockholders' Meeting. At every meeting
----------- ------------------------------------
of the stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by
the Chairman, attendance at the stockholders' meeting is restricted to
stockholders of record, persons authorized in accordance with Section 8 of these
Amended and Restated Bylaws to act by proxy, and officers of the Corporation.
Section 1.6 Conduct of Business. The Chairman shall call the
----------- -------------------
meeting to order, establish the agenda, and conduct the business of the meeting
in accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Amended and Restated Bylaws to the contrary, no business shall be
conducted at a meeting except in accordance with the procedures set forth in
this Section 1.6 and Section 1.7, below. The Chairman of a meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this Section 1.6 and Section 1.7, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
Section 1.7 Notice of Stockholder Business. At an annual or
----------- ------------------------------
special meeting of the stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before a meeting, business must be (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(b) properly brought before the meeting by or at the direction of the Board of
Directors, (c) properly brought before an annual meeting by a stockholder, or
(d) properly brought before a special meeting by a stockholder, but if, and only
if, the notice of a special
<PAGE>
meeting provides for business to be brought before the meeting by stockholders.
For business to be properly brought before a meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder proposal to be presented at an
annual meeting shall be received at the Corporation's principal executive
offices not less than 120 calendar days in advance of the date that the
Corporation's (or the Corporation's predecessor's) proxy statement was released
to stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been changed by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
or in the event of a special meeting, notice by the stockholder to be timely
must be received not later than the close of business on the tenth day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual or
special meeting (a) a brief description of the business desired to be brought
before the annual or special meeting and the reasons for conducting such
business at the special meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Section 1.8 Proxies and Voting. At any meeting of the
----------- ------------------
stockholders, every stockholder entitled to vote may vote in person or by proxy
authorized by an instrument in writing or by a transmission permitted by law
filed in accordance with the procedure established for the meeting. No
stockholder may authorize more than one proxy for his shares.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
Subject to Section 9.1, all elections shall be determined by a
plurality of the votes cast, and except as otherwise required by law or as
specified in the Corporation's Certificate of Incorporation, all other matters
shall be determined by a majority of the votes cast.
Section 1.9 Stock List. A complete list of stockholders entitled
----------- ----------
to vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his or her name, shall be open to the examination of any
such stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within
<PAGE>
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number of
shares held by each of them.
ARTICLE II
BOARD OF DIRECTORS
------------------
Section 2.1 Number and Term of Office. The number of directors
----------- -------------------------
shall be five (5), and the number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). Upon the closing of the
first sale of the Corporation's common stock pursuant to a firmly underwritten
registered public offering (the "IPO"), the directors shall be divided into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders held after the IPO (Class I), the term of office
of the second class to expire at the second annual meeting of stockholders held
after the IPO (Class II), the term of office of the third class to expire at the
third annual meeting of stockholders held after the IPO and thereafter for each
such term to expire at each third succeeding annual meeting of stockholders
after such election (Class III). A vacancy resulting from the removal of a
director by the stockholders as provided in Article II, Section 2.3 below may be
filled at special meeting of the stockholders held for that purpose. All
directors shall hold office until the expiration of the term for which elected
and until their respective successors are elected, except in the case of the
death, resignation or removal of any director.
Section 2.2 Vacancies and Newly Created Directorships. Subject to
----------- -----------------------------------------
the rights of the holders of any series of Preferred Stock then outstanding,
newly created directorships resulting from any increase in the authorized number
of directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause (other than removal
from office by a vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the next annual meeting of
stockholders. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 2.3 Removal. Subject to the rights of holders of any
----------- -------
series of Preferred Stock then outstanding, any directors, or the entire Board
of Directors, may be removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class. Vacancies in the Board of Directors resulting from such removal
may be filled by a majority of the directors then in office, though less than a
quorum, or by the stockholders as
<PAGE>
provided in Article II, Section 2.1 above. Directors so chosen shall hold office
until the new annual meeting of stockholders.
Section 2.4 Regular Meetings. Regular meetings of the Board of
----------- ----------------
Directors shall be held at such place or places, on such date or dates, and at
such time or times as shall have been established by the Board of Directors and
publicized among all directors. A notice of each regular meeting shall not be
required.
Section 2.5 Special Meetings. Special meetings of the Board of
----------- ----------------
Directors may be called by one-third of the directors then in office (rounded up
to the nearest whole number) or by the chief executive officer and shall be held
at such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not fewer than
five (5) days before the meeting or by telegraphing or personally delivering the
same not fewer than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 2.6 Quorum. At any meeting of the Board of Directors, a
----------- ------
majority of the total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any meeting, a majority of
those present may adjourn the meeting to another place, date, or time, without
further notice or waiver thereof.
Section 2.7 Participation in Meetings by Conference Telephone.
----------- -------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may participate
in a meeting of such Board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other and such participation shall constitute presence
in person at such meeting.
Section 2.8 Conduct of Business. At any meeting of the Board of
----------- -------------------
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
requited by law. Action may be taken by the Board of Directors without a
meeting if all members thereof consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors.
Section 2.9 Powers. The Board of Directors may, except as
----------- ------
otherwise required by law, exercise all such powers and do all such acts and
things as may be exercised or done by the Corporation, including, without
limiting the generality of the foregoing, the unqualified power:
(a) To declare dividends from time to time in accordance with law;
(b) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
<PAGE>
(c) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary
in connection therewith;
(d) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(e) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and
agents;
(f) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may
determine;
(g) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(h) To adopt from time to time regulations, not inconsistent with
these Amended and Restated Bylaws, for the management of the
Corporation's business and affairs.
Section 2.10 Compensation of Directors. Directors, as such, may
------------ -------------------------
receive, pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 2.11 Nomination of Director Candidates. Subject to the
------------ ---------------------------------
rights of holders of any class or series of Preferred Stock then outstanding,
nominations for the election of Directors may be made by the Board of Directors
or a proxy committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of Directors generally. However, any
stockholder entitled to vote in the election of Directors generally may nominate
one or more persons for election as Directors at a meeting only if timely notice
of such stockholder's intent to make such nomination or nominations has been
given in writing to the Secretary of the Corporation. To be timely, a
stockholder nomination for a director to be elected at an annual meeting shall
be received at the Corporation's principal executive offices not less than 120
calendar days in advance of the date that the Corporation's (or the
Corporation's Predecessor's) Proxy statement was released to stockholders in
connection with the previous year's annual meeting of stockholders, except that
if no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, or in the event
of a nomination for director to be elected at a special meeting, notice by the
stockholders to be timely must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
special meeting was mailed or such public disclosure was made. Each such notice
shall set forth: (a) the name and address of the stockholder who intends to
make the nomination and of the person or persons to be nominated; (b) a
representation that the
<PAGE>
stockholder is a holder of record of stock of the Corporation entitled to vote
for the election of Directors on the date of such notice and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected.
In the event that a person is validly designated as a nominee in
accordance with this Section 2.11 and shall thereafter become unable or
unwilling to stand for election to the Board of Directors, the Board of
Directors or the stockholder who proposed such nominee, as the case may be, may
designate a substitute nominee upon delivery, not fewer than five days prior to
the date of the meeting for the election of such nominee, of a written notice to
the Secretary setting forth such information regarding such substitute nominee
as would have been required to be delivered to the Secretary pursuant to this
Section 2.11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors
determines that a nomination of any candidate for election as a Director at such
meeting was not made in accordance with the applicable provisions of this
Section 2.11, such nomination shall be void; provided, however, that nothing in
this Section 2.11 shall be deemed to limit any voting rights upon the occurrence
of dividend arrearages provided to holders of Preferred Stock pursuant to the
Preferred Stock designation for any series of Preferred Stock.
ARTICLE III
COMMITTEES
----------
Section 3.1 Committees of the Board of Directors. The Board of
----------- ------------------------------------
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a director or
directors to serve as the member or members, designating, if it desires, other
directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law if the
resolution which designates the committee or a supplemental resolution of the
Board of Directors shall so provide. In the absence or disqualification of any
member of any committee and any alternate member in his place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may by
<PAGE>
unanimous vote appoint another member of the Board of Directors to act at the
meeting in the place of the absent or disqualified member.
Section 3.2 Conduct of Business. Each committee may determine the
----------- -------------------
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; one-
third of the authorized members shall constitute a quorum unless the committee
shall consist of one or two members, in which event one member shall constitute
a quorum; and all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all members
thereof consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
--------
Section 4.1 Generally. The officers of the Corporation shall
----------- ---------
consist of a President, one or more Vice Presidents, a Secretary and a
Treasurer. The Corporation may also have, at the discretion of the Board of
Directors, a Chairman of the Board and such other officers as may from time to
time be appointed by the Board of Directors. Officers shall be elected by the
Board of Directors, which shall consider that subject at its first meeting after
every annual meeting of stockholders. Each officer shall hold office until his
or her successor is elected and qualified or until his or her earlier
resignation or removal. The Chairman of the Board, if there shall be such an
officer, and the President shall each be members of the Board of Directors. Any
number of offices may he held by the same person.
Section 4.2 Chairman of the Board. The Chairman of the Board, if
----------- ---------------------
there shall be such an officer, shall, if present, preside at all meetings of
the Board of Directors, and exercise and perform such other powers and duties as
may be from time to time assigned to him by the Board of Directors or prescribed
by these bylaws.
Section 4.3 President. The President shall be the chief executive
----------- ---------
officer of the Corporation. Subject to the provisions of these bylaws and to
the direction of the Board of Directors, he or she shall have the responsibility
for the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him or her
by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation.
Section 4.4 Vice President. Each Vice President shall have such
----------- --------------
powers and duties as may be delegated to him or her by the Board of Directors.
One Vice President shall be designated by the Board to perform the duties and
exercise the powers of the President in the event of the President's absence or
disability.
<PAGE>
Section 4.5 Treasurer/Chief Financial Officer. The
----------- -----------------------------------
Treasurer/Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The Treasurer/Chief Financial Officer shall deposit all moneys and
other valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the President, the Chief Executive Officer, or the
directors, upon request, an account of all his or her transactions as
Treasurer/Chief Financial Officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the Board of Directors or the Amended and Restated Bylaws.
Section 4.6 Secretary. The Secretary shall issue all authorized
----------- ---------
notices for, and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. The Secretary shall have the authority to designate and appoint
assistant secretaries to assist in the administration and performance of his or
her duties. He or she shall have charge of the corporate books and shall
perform such other duties as the Board of Directors may from time to time
prescribe.
Section 4.7 Delegation of Authority. The Board of Directors may
----------- -----------------------
from time to time delegate the powers or duties of any officer to any other
officers or agents, notwithstanding any provision hereof.
Section 4.8 Removal. Any officer of the Corporation may be removed
----------- -------
at any time, with or without cause, by the Board of Directors.
Section 4.9 Action With Respect to Securities of Other
----------- ------------------------------------------
Corporations. Unless otherwise directed by the Board of Directors, the
President or any officer of the Corporation authorized by the President shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of stockholders of or with respect to any action of
stockholders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE V
STOCK
-----
Section 5.1 Certificates of Stock. Each stockholder shall be
----------- ---------------------
entitled to a certificate signed by, or in the name of the Corporation by, the
President or a Vice President, and by the Secretary or an Assistant Secretary,
or the Treasurer or an Assistant Treasurer, certifying the number of shares
owned by him or her. Any of or all the signatures on the certificate may be
facsimile.
<PAGE>
Section 5.2 Transfers of Stock. Transfers of stock shall be made
----------- ------------------
only upon the transfer books of the Corporation kept at an office of the
Corporation or by transfer agents designated to transfer shares of the stock of
the Corporation. Except where a certificate is issued in accordance with
Section 4 of Article V of these bylaws, an outstanding certificate for the
number of shares involved shall be surrendered for cancellation before a new
certificate is issued therefor.
Section 5.3 Record Date. The Board of Directors may fix a record
----------- -----------
date, which shall not be more than sixty (60) nor fewer than ten (10) days
before the date of any meeting of stockholders, nor more than sixty (60) days
prior to the time for the other action hereinafter described, as of which there
shall be determined the stockholders who are entitled: to notice of or to vote
at any meeting of stockholders or any adjournment thereof; to receive payment of
any dividend or other distribution or allotment of any rights; or to exercise
any rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
Section 5.4 Lost, Stolen or Destroyed Certificates. In the event
----------- --------------------------------------
of the loss, theft or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations as the Board of Directors may
establish concerning proof of such loss, theft or destruction and concerning the
giving of a satisfactory bond or bonds of indemnity.
Section 5.5 Regulations. The issue, transfer, conversion and
----------- -----------
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
-------
Section 6.1 Notices. Except as otherwise specifically provided
----------- -------
herein or required by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the mails, postage paid, or by sending such notice by
prepaid telegram, mailgram, telecopy or commercial courier service. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
Section 6.2 Waivers. A written waiver of any notice, signed by a
----------- -------
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
<PAGE>
ARTICLE VII
MISCELLANEOUS
Section 7.1 Facsimile Signatures. In addition to the provisions
----------- --------------------
for use of facsimile signatures elsewhere specifically authorized in these
bylaws, facsimile signatures of any officer or officers of the Corporation may
be used whenever and as authorized by the Board of Directors or a committee
thereof.
Section 7.2 Corporate Seal. The Board of Directors may provide a
----------- --------------
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 7.3 Reliance Upon Books, Reports and Records. Each
----------- ----------------------------------------
director, each member of any committee designated by the Board of Directors, and
each officer of the Corporation shall, in the performance of his duties, be
fully protected in relying in good faith upon the books of account or other
records of the Corporation, including reports made to the Corporation by any of
its officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.
Section 7.4 Fiscal Year. The fiscal year of the Corporation shall
----------- -----------
be as fixed by the Board of Directors.
Section 7.5 Time Periods. In applying any provision of these
----------- ------------
bylaws which require that an act be done or not done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Section 8.1 Right to Indemnification. Each person who was or is
----------- ------------------------
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative ("proceeding"), by reason of the fact that he or she or a person
of whom he or she is the legal representative, is or was a director, officer or
employee of the Corporation or is or was serving at the request of the
Corporation as a director, officer or employee of another corporation, or of a
Partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer or employee or in
any other capacity while serving as a director, officer or employee, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by Delaware Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such
<PAGE>
amendment permits the Corporation to provide broader indemnification rights than
said Law permitted the Corporation to provide prior to such amendment) against
all expenses, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties, amounts paid or to be paid in settlement and
amounts expended in seeking indemnification granted to such person under
applicable law, this bylaw or any agreement with the Corporation) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer or employee and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
Section 8.2 of this Article VIII, the Corporation shall indemnify any such
person seeking indemnity in connection with an action, suit or proceeding (or
part thereof) initiated by such person only if (a) such indemnification is
expressly required to be made by law, (b) the action, suit or proceeding (or
part thereof) was authorized by the Board of Directors of the Corporation, (c)
such indemnification is provided by the Corporation, in its sole discretion,
pursuant to the powers vested in the Corporation under the Delaware General
Corporation Law, or (d) the action, suit or proceeding (or part thereof) is
brought to establish or enforce a right to indemnification under an indemnity
agreement or any other statute or law or otherwise as required under Section 145
of the Delaware General Corporation Law. Such right shall be a contract right
and shall include the right to be paid by the Corporation expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, unless the Delaware General Corporation Law then so prohibits,
the payment of such expenses incurred by a director or officer of the
Corporation in his or her capacity as a director or officer (and not in any
other capacity in which service was or is tendered by such person while a
director or officer, including, without limitation. service to an employee
benefit plan) in advance of the final disposition of such proceeding, shall be
made only upon delivery to the Corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
Section 8.2 Right of Claimant to Bring Suit. If a claim under
----------- -------------------------------
Section 8.1 of this Article VIII is not paid in full by the Corporation within
ninety (90) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if such suit is not frivolous or
brought in bad faith, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The burden of proving such claim shall be on the
claimant. It shall be a defense to any such action (other then an action
brought to enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any, has
been tendered to this Corporation) that the claimant has not met the standards
of conduct which make it permissible under the Delaware General Corporation Law
for the Corporation to indemnify the claimant for the amount claimed. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) that the claimant
<PAGE>
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that claimant has not met the applicable standard
of conduct.
Section 8.3 Non-Exclusivity of Rights. The rights conferred on any
----------- -------------------------
person in Sections 8.1 and 8.2 shall not be exclusive of any other right which
such persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 8.4 Indemnification Contracts. The Board of Directors is
----------- -------------------------
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VIII.
Section 8.5 Insurance. The Corporation shall maintain insurance to
----------- ---------
the extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
Section 8.6 Effect of Amendment. Any amendment, repeal or
----------- -------------------
modification of any provision of this Article VIII by the stockholders and the
directors of the Corporation shall not adversely affect any right or protection
of a director or officer of the Corporation existing at the time of such
amendment, repeal or modification.
ARTICLE IX
AMENDMENTS
----------
Section 9.1 Amendment of Bylaws and Certificate of Incorporation.
----------- ----------------------------------------------------
The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws
of the Corporation. Any adoption, amendment or repeal of Bylaws of the
Corporation by the Board of Directors shall require the approval of a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the Board). The
stockholders shall also have power to adopt, amend or repeal the Bylaws of the
Corporation and the Certificate of Incorporation. Any adoption, amendment or
repeal of Bylaws of the Corporation or the Certificate of Incorporation by the
stockholders shall require, in addition to any vote of the holders of any class
or series of stock of the Corporation required by law or by the Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and two
thirds percent (66-2/3%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.
<PAGE>
CERTIFICATE OF SECRETARY
I hereby certify that I am the duly elected and acting Secretary of
FirstAmerica Automotive, Inc., a Delaware corporation (the "Corporation"), and
that the foregoing Amended and Restated Bylaws, comprising thirteen (13) pages,
constitute the Bylaws of the Corporation as duly adopted by the Board of
Directors of the Corporation at a meeting duly held on April 7, 1999.
IN WITNESS WHEREOF, I have hereunto subscribed my name on April 7,
1999.
/s/ W. Bruce Bercovich
-----------------------------
W. Bruce Bercovich, Secretary
<PAGE>
EXHIBIT 5.1
[Form of Legal Opinion of Gray Cary Ware & Freidenrich LLP]
, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: FirstAmerica Automotive, Inc. Registration Statement on Form S-3
(File No. 333-75907)
Ladies and Gentlemen:
As counsel to FirstAmerica Automotive, Inc. (the "Company"), we are
rendering this opinion in connection with a proposed sale of those certain
shares of the Company's newly-issued Common Stock and those certain additional
shares of the Company's Common Stock held by certain stockholders as set forth
in the Registration Statement on Form S-1 to which this opinion is being filed
as Exhibit 5.1 (the "Shares"). We have examined all instruments, documents and
records which we deemed relevant and necessary for the basis of our opinion
hereinafter expressed. In such examination, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to us
as copies.
We express no opinion with respect to (i) the availability of equitable
remedies or (ii) the effect of bankruptcy, insolvency, reorganization,
moratorium or equitable principles relating to or limiting creditors' rights
generally.
Based on such examination, we are of the opinion that the Shares
identified in the above-referenced Registration Statement will be, upon
effectiveness of the Registration Statement and receipt by the Company of
payment therefor, validly authorized, legally issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectuses
constituting a part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
_______________________________________
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
EXHIBIT 10.12
FIRSTAMERICA AUTOMOTIVE, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Establishment, Purpose and Term of Plan.
---------------------------------------
1.1 Establishment. The FirstAmerica Automotive, Inc. 1999 Employee
Stock Purchase Plan (the "Plan") is hereby established effective as of the
effective date of the initial registration by the Company of its Stock under
Section 12 of the Securities Exchange Act of 1934, as amended (the "Effective
Date").
1.2 Purpose. The purpose of the Plan is to advance the interests
of Company and its stockholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock.
The Company intends that the Plan qualify as an "employee stock purchase plan"
under Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
1.3 Term of Plan. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. Definitions and Construction.
----------------------------
2.1 Definitions. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "Board" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "Code" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "Committee" means a committee of the Board duly appointed
to administer the Plan and having such powers as specified by the Board. Unless
the powers of the Committee have been specifically limited, the Committee shall
have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "Company" means FirstAmerica Automotive, Inc., a Delaware
corporation, or any successor corporation thereto.
<PAGE>
(e) "Compensation" means, with respect to any Offering Period,
base wages or salary, overtime, bonuses, commissions, shift differentials,
payments for paid time off, payments in lieu of notice, and compensation
deferred under any program or plan, including, without limitation, pursuant to
Section 401(k) or Section 125 of the Code. Compensation shall be limited to
amounts actually payable in cash or deferred during the Offering Period.
Compensation shall not include moving allowances, payments pursuant to a
severance agreement, termination pay, relocation payments, sign-on bonuses, any
amounts directly or indirectly paid pursuant to the Plan or any other stock
purchase or stock option plan, or any other compensation not included above.
(f) "Eligible Employee" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "Employee" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while on any military
leave, sick leave, or other bona fide leave of absence approved by the Company
of ninety (90) days or less. If an individual's leave of absence exceeds ninety
(90) days, the individual shall be deemed to have ceased to be an Employee on
the ninety-first (91st) day of such leave unless the individual's right to
reemployment with the Participating Company Group is guaranteed either by
statute or by contract. The Company shall determine in good faith and in the
exercise of its discretion whether an individual has become or has ceased to be
an Employee and the effective date of such individual's employment or
termination of employment, as the case may be. For purposes of an individual's
participation in or other rights, if any, under the Plan as of the time of the
Company's determination, all such determinations by the Company shall be final,
binding and conclusive, notwithstanding that the Company or any governmental
agency subsequently makes a contrary determination.
(h) "Fair Market Value" means, as of any date if on such date
the Stock is listed on a national or regional securities exchange or market
system or is regularly quoted by a recognized securities dealer, the Fair Market
Value of a share of Stock shall be the closing sale price of a share of Stock
(or the mean of the closing bid and asked prices of a share of Stock if the
Stock is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq
SmallCap Market, such other national or regional securities exchange or market
system constituting the primary market for the Stock, or by such recognized
securities dealer, as reported in the Wall Street Journal or such other source
-------------------
as the Company deems reliable. If the relevant date does not fall on a day on
which the Stock has traded, the date on which the Fair Market Value is
established shall be the last day on which the Stock was so traded prior to the
relevant date, or such other appropriate day as determined by the Board, in its
discretion. If, on the relevant date, the Stock is not listed on a national or
regional securities exchange or market system and is not regularly quoted by a
recognized securities dealer, the Fair Market Value of a share of Stock shall be
as determined in good faith by the Board.
<PAGE>
(i) "Offering" means an offering of Stock as provided in
Section 6. Offerings may be sequential or concurrent.
(j) "Offering Date" means, for any Offering, the first day of
the Offering Period.
(k) "Offering Period" means a period established in accordance
with Section 6.1.
(l) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "Participant" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(n) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(o) "Participating Company Group" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.
(p) "Purchase Date" means, for any Offering, the last day of
the Offering Period; provided, however, that the Board in its discretion may
establish one or more additional Purchase Dates during any Offering Period.
(q) "Purchase Price" means the price at which a share of Stock
may be purchased under the Plan, as determined in accordance with Section 9.
(r) "Purchase Right" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(s) "Stock" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(t) "Subscription Agreement" means a written agreement in such
form as specified by the Company, stating an Employee's election to participate
in the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
<PAGE>
(u) "Subscription Date" means the last business day prior to
the Offering Date of an Offering Period or such earlier date as the Company
shall establish.
(v) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. Administration.
--------------
3.1 Administration by the Board. The Plan shall be administered by
the Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the administration of the
Plan, or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or the
Purchase Right. Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights; provided,
however, that all Participants granted Purchase Rights shall have the same
rights and privileges within the meaning of Section 423(b)(5) of the Code. All
expenses incurred in connection with the administration of the Plan shall be
paid by the Company.
3.2 Authority of Officers. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 Policies and Procedures Established by the Company. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
<PAGE>
4. Shares Subject to Plan.
----------------------
4.1 Maximum Number of Shares Issuable. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be five hundred thousand (500,000)
cumulatively increased on January 1, 2001 and each January 1 thereafter until
and including January 1, 2010 by a number of shares (the "Annual Increase")
equal to the lesser of (a) ________ percent (___%) of the number of shares of
Stock issued and outstanding on the last day of the preceding fiscal year or (b)
_______________________ (__________) shares, and shall consist of authorized but
unissued or reacquired shares of Stock, or any combination thereof. If an
outstanding Purchase Right for any reason expires or is terminated or canceled,
the shares of Stock allocable to the unexercised portion of that Purchase Right
shall again be available for issuance under the Plan.
4.2 Adjustments for Changes in Capital Structure. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan, the Annual Increase
and each Purchase Right, and in the Purchase Price. If a majority of the shares
of the same class as the shares subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "New Shares"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 4.2 shall
be rounded down to the nearest whole number, and in no event may the Purchase
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Purchase Right. The adjustments determined by the Board pursuant
to this Section 4.2 shall be final, binding and conclusive.
5. Eligibility.
-----------
5.1 Employees Eligible to Participate. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who has not completed at least three (3)
months of continuous employment with the Participating Company Group as of the
commencement of the applicable Offering Period; or
(b) Any Employee who is customarily employed by the
Participating Company Group for twenty (20) hours or less per week; or
<PAGE>
(c) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 Exclusion of Certain Stockholders. Notwithstanding any
provision of the Plan to the contrary, no Employee shall be granted a Purchase
Right under the Plan if, immediately after such grant, the Employee would own,
or hold options to purchase, stock of the Company or of any Parent Corporation
or Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
6. Offerings.
---------
The Plan initially shall be implemented on and after the Effective
Date by sequential Offerings of approximately six (6) months duration or such
other duration as the Board shall determine (an "Offering Period"); provided,
however, that the first Offering Period (the "Initial Offering Period") shall
commence on the Effective Date and end on or about January 31, 2000. Subsequent
Offering Periods shall commence on or about February 1 and August 1 of each year
and end on or about the last days of the next July and January, respectively,
occurring thereafter. Notwithstanding the foregoing, the Board may establish, a
different duration effective for one or more future Offering Periods, different
commencing or ending dates for such Offering Periods or concurrent Offering
Periods; provided, however, that no Offering Period may have a duration
exceeding twenty-seven (27) months. If the first or last day of an Offering
Period is not a day on which the national securities exchanges or Nasdaq Stock
Market are open for trading, the Company shall specify the trading day that will
be deemed the first or last day, as the case may be, of the Offering Period.
7. Participation in the Plan.
-------------------------
7.1 Initial Participation. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless the Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for such subsequent Offering Period. An Employee who becomes
an Eligible Employee after the Offering Date of an Offering Period shall not be
eligible to participate in that Offering Period but may participate in any
subsequent Offering Period provided the Employee is still an Eligible Employee
as of the Offering Date of such subsequent Offering Period.
7.2 Continued Participation. A Participant shall automatically
participate in the next Offering Period commencing immediately after the
Purchase Date of each Offering
<PAGE>
Period in which the Participant participates provided that the Participant
remains an Eligible Employee on the Offering Date of the new Offering Period and
has not either (a) withdrawn from the Plan pursuant to Section 12.1 or (b)
terminated employment as provided in Section 13. A Participant who may
automatically participate in a subsequent Offering Period, as provided in this
Section, is not required to deliver any additional Subscription Agreement for
the subsequent Offering Period in order to continue participation in the Plan.
However, a Participant may deliver a new Subscription Agreement for a subsequent
Offering Period in accordance with the procedures set forth in Section 7.1 if
the Participant desires to change any of the elections contained in the
Participant's then effective Subscription Agreement. In the event that the Board
establishes concurrent Offerings, Eligible Employees may not participate
simultaneously in more than one Offering.
8. Right to Purchase Shares.
------------------------
8.1 Grant of Purchase Right. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in that Offering Period
shall be granted automatically a Purchase Right consisting of an option to
purchase the lesser of (a) that number of whole shares of Stock determined by
dividing Twelve Thousand Five Hundred Dollars ($12,500) by the Fair Market Value
of a share of Stock on such Offering Date or (b) ______________ (_______) shares
of Stock. No Purchase Right shall be granted on an Offering Date to any person
who is not, on such Offering Date, an Eligible Employee.
8.2 Pro Rata Adjustment of Purchase Right. Notwithstanding the
provisions of Section 8.1, if the Board establishes an Offering Period (other
than the Initial Offering Period) of any duration other than six months, then
(a) the dollar amount in Section 8.1 shall be determined by multiplying
$2,083.33 by the number of months (rounded to the nearest whole month) in the
Offering Period and rounding to the nearest whole dollar, and (b) the share
amount in Section 8.1 shall be determined by multiplying __________ shares by
the number of months (rounded to the nearest whole month) in the Offering Period
and rounding to the nearest whole share.
8.3 Calendar Year Purchase Limitation. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Offering Date for such Offering
Period. The limitation described in this Section shall be applied in
conformance with applicable regulations under Section 423(b)(8) of the Code.
<PAGE>
9. Purchase Price.
--------------
The Purchase Price at which each share of Stock may be acquired in an
Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period or
(b) the Fair Market Value of a share of Stock on the Purchase Date. Unless
otherwise provided by the Board prior to the commencement of an Offering Period,
the Purchase Price for that Offering Period shall be eighty-five percent (85%)
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on
the Purchase Date.
10. Accumulation of Purchase Price through Payroll Deduction.
--------------------------------------------------------
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 Amount of Payroll Deductions. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set
forth the percentage of the Participant's Compensation to be deducted on each
payday during an Offering Period in whole percentages of not less than one
percent (1%) (except as a result of an election pursuant to Section 10.3 to stop
payroll deductions effective following the first payday during an Offering) or
more than ten percent (10%). The Board may change the foregoing limits on
payroll deductions effective as of any future Offering Date.
10.2 Commencement of Payroll Deductions. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 Election to Change or Stop Payroll Deductions. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company's
designated office an amended Subscription Agreement authorizing such change on
or before the Change Notice Date, as defined below. A Participant who elects,
effective following the first payday of an Offering Period, to decrease the rate
of his or her payroll deductions to zero percent (0%) shall nevertheless remain
a Participant in the current Offering Period unless such Participant withdraws
from the Plan as provided in Section 12.1. The "Change Notice Date" shall be a
date prior to the end of the first pay period for which such election is to be
effective as established by the Company from time to time and announced to the
Participants. Unless otherwise established by the Company, the Change Notice
Date shall be the seventh (7th) day prior to the end of the first pay period for
which such election is to be effective.
10.4 Administrative Suspension of Payroll Deductions. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company
<PAGE>
deems advisable to avoid accumulating payroll deductions in excess of the amount
that could reasonably be anticipated to purchase the maximum number of shares of
Stock permitted (a) under the Participant's Purchase Right or (b) during a
calendar year under the limit set forth in Section 8.3. Payroll deductions shall
be resumed at the rate specified in such Participant's then effective
Subscription Agreement at the beginning, respectively, of (a) the next Offering
Period or (b) the next Offering Period the Purchase Date of which falls in the
following calendar year, unless the Participant has either withdrawn from the
Plan as provided in Section 12.1 or has ceased to be an Eligible Employee.
10.5 Participant Accounts. Individual bookkeeping accounts shall
be maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose.
10.6 No Interest Paid. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
10.7 Voluntary Withdrawal from Plan Account. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company's designated office a written notice on a form
provided by the Company for such purpose. A Participant who withdraws the
entire remaining balance credited to his or her Plan account shall be deemed to
have withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn
shall be returned to the Participant as soon as practicable after the notice of
withdrawal and may not be applied to the purchase of shares in any Offering
under the Plan. The Company may from time to time establish or change
limitations on the frequency of withdrawals permitted under this Section,
establish a minimum dollar amount that must be retained in the Participant's
Plan account, or terminate the withdrawal right provided by this Section.
11. Purchase of Shares.
------------------
11.1 Exercise of Purchase Right. On the Purchase Date of an
Offering Period, each Participant who has not withdrawn from the Plan and whose
participation in the Plan has not otherwise terminated before such Purchase Date
shall automatically acquire pursuant to the exercise of the Participant's
Purchase Right the number of whole shares of Stock determined by dividing (a)
the total amount of the Participant's payroll deductions accumulated in the
Participant's Plan account during the Offering Period and not previously applied
toward the purchase of Stock by (b) the Purchase Price. However, in no event
shall the number of shares purchased by the Participant during an Offering
Period exceed the number of shares subject to the Participant's Purchase Right.
No shares of Stock shall be purchased on a Purchase Date on behalf of a
Participant whose participation in the Offering or the Plan has terminated
before such Purchase Date.
11.2 Pro Rata Allocation of Shares. If the number of shares of
Stock which might be purchased by all Participants in the Plan on a Purchase
Date exceeds the number of
<PAGE>
shares of Stock available in the Plan as provided in Section 4.1, the Company
shall make a pro rata allocation of the remaining shares in as uniform a manner
as practicable and as the Company determines to be equitable. Any fractional
share resulting from such pro rata allocation to any Participant shall be
disregarded.
11.3 Delivery of Certificates. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant of a
certificate representing the shares acquired by the Participant on such Purchase
Date; provided that the Company may deliver such shares to a broker designated
by the Company that will hold such shares for the benefit of the Participant.
Shares to be delivered to a Participant under the Plan shall be registered in
the name of the Participant, or, if requested by the Participant, in the name of
the Participant and his or her spouse, or, if applicable, in the names of the
heirs of the Participant.
11.4 Return of Cash Balance. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash balance to be returned to a Participant pursuant to the preceding sentence
is less than the amount that would have been necessary to purchase an additional
whole share of Stock on such Purchase Date, the Company may retain the cash
balance in the Participant's Plan account to be applied toward the purchase of
shares in the subsequent Offering Period.
11.5 Tax Withholding. At the time a Participant's Purchase Right
is exercised, in whole or in part, or at the time a Participant disposes of some
or all of the shares he or she acquires under the Plan, the Participant shall
make adequate provision for the federal, state, local and foreign tax
withholding obligations, if any, of the Participating Company Group which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 Expiration of Purchase Right. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 Reports and Stockholder Information to Participants. Each
Participant who has exercised all or part of his or her Purchase Right shall
receive, as soon as practicable after the Purchase Date, a report of such
Participant's Plan account setting forth the total payroll deductions
accumulated prior to such exercise, the number of shares purchased, the Purchase
Price for such shares, the date of purchase and the cash balance, if any,
remaining immediately after such purchase that is to be refunded or retained in
the Participant's Plan account pursuant to Section 11.4. The report required by
this Section may be delivered in such form and by such means, including by
electronic transmission, as the Company may determine. In addition, each
Participant shall be provided information concerning the Company equivalent to
that information generally made available to the Company's common stockholders.
<PAGE>
12. Withdrawal from Offering or Plan.
--------------------------------
12.1 Voluntary Withdrawal from the Plan. A Participant may
withdraw from the Plan by signing and delivering to the Company's designated
office a written notice of withdrawal on a form provided by the Company for this
purpose. Such withdrawal may be elected at any time prior to the end of an
Offering Period; provided, however, that if a Participant withdraws from the
Plan after a Purchase Date, the withdrawal shall not affect shares acquired by
the Participant on such Purchase Date. A Participant who voluntarily withdraws
from the Plan is prohibited from resuming participation in the Plan in the same
Offering from which he or she withdrew, but may participate in any subsequent
Offering by again satisfying the requirements of Sections 5 and 7.1. The
Company may impose, from time to time, a requirement that the notice of
withdrawal from the Plan be on file with the Company's designated office for a
reasonable period prior to the effectiveness of the Participant's withdrawal.
12.2 Return of Payroll Deductions. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Section 12.1, the Participant's accumulated
payroll deductions which have not been applied toward the purchase of shares
shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan shall terminate. Such accumulated payroll deductions to be refunded
in accordance with this Section may not be applied to any other Offering under
the Plan.
13. Termination of Employment or Eligibility.
----------------------------------------
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or upon the failure of a Participant to remain
an Eligible Employee, the Participant's participation in the Plan shall
terminate immediately. In such event, the Participant's accumulated payroll
deductions which have not been applied toward the purchase of shares shall, as
soon as practicable, be returned to the Participant or, in the case of the
Participant's death, to the person or persons entitled thereto under Section 16,
and all of the Participant's rights under the Plan shall terminate. Interest
shall not be paid on sums returned pursuant to this Section 13. A Participant
whose participation has been so terminated may again become eligible to
participate in the Plan by satisfying the requirements of Sections 5 and 7.1.
14. Change in Control.
-----------------
14.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
<PAGE>
(b) A "Change in Control" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "Transaction")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 Effect of Change in Control on Purchase Rights. In the event
of a Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "Acquiring
Corporation"), may assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Offering Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
15. Nontransferability of Purchase Rights.
-------------------------------------
Neither payroll deductions credited to a Participant's Plan account
nor a Participant' Purchase Right may be assigned, transferred, pledged or
otherwise disposed of in any manner other than by will or the laws of descent
and distribution or as provided in Section 16. Any such attempted assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw from the Plan as provided
in Section 12.1. A Purchase Right shall be exercisable during the lifetime of
the Participant only by the Participant.
16. Designation of Beneficiary.
--------------------------
16.1 Designation Procedure. A Participant may file a written
designation of a beneficiary who is to receive (a) shares and cash, if any, from
the Participant's Plan account if the Participant dies subsequent to a Purchase
Date but prior to delivery to the Participant of such shares and cash or (b)
cash, if any, from the Participant's Plan account if the Participant dies prior
to the exercise of the Participant's Purchase Right. If a married Participant
designates a beneficiary other than the Participant's spouse, the effectiveness
of such designation shall be
<PAGE>
subject to the consent of the Participant's spouse. A Participant may change his
or her beneficiary designation at any time by written notice to the Company.
16.2 Absence of Beneficiary Designation. If a Participant dies
without an effective designation pursuant to Section 16.1 of a beneficiary who
is living at the time of the Participant's death, the Company shall deliver any
shares or cash credited to the Participant's Plan account to the Participant's
legal representative.
17. Compliance with Securities Law.
------------------------------
The issuance of shares under the Plan shall be subject to compliance
with all applicable requirements of federal, state and foreign law with respect
to such securities. A Purchase Right may not be exercised if the issuance of
shares upon such exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any securities exchange or market system upon which the Stock
may then be listed. In addition, no Purchase Right may be exercised unless (a)
a registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
18. Rights as a Stockholder and Employee.
------------------------------------
A Participant shall have no rights as a stockholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
19. Legends.
-------
The Company may at any time place legends or other identifying symbols
referencing any applicable federal, state or foreign securities law restrictions
or any provision
<PAGE>
convenient in the administration of the Plan on some or all of the certificates
representing shares issued under the Plan. The Participant shall, at the request
of the Company, promptly present to the Company any and all certificates
representing shares acquired pursuant to a Purchase Right in the possession of
the Participant in order to carry out the provisions of this Section. Unless
otherwise specified by the Company, legends placed on such certificates may
include but shall not be limited to the following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
20. Notification of Disposition of Shares.
-------------------------------------
The Company may require the Participant to give the Company prompt
notice of any disposition of shares acquired by exercise of a Purchase Right
within two years from the date of granting such Purchase Right or one year from
the date of exercise of such Purchase Right. The Company may require that until
such time as a Participant disposes of shares acquired upon exercise of a
Purchase Right, the Participant shall hold all such shares in the Participant's
name (or, if elected by the Participant, in the name of the Participant and his
or her spouse but not in the name of any nominee) until the lapse of the time
periods with respect to such Purchase Right referred to in the preceding
sentence. The Company may direct that the certificates evidencing shares
acquired by exercise of a Purchase Right refer to such requirement to give
prompt notice of disposition.
21. Notices.
-------
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
22. Indemnification.
---------------
In addition to such other rights of indemnification as they may have
as members of the Board or officers or employees of the Participating Company
Group, members of the Board and any officers or employees of the Participating
Company Group to whom authority to act for the Board or the Company is delegated
shall be indemnified by the Company against all reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or
<PAGE>
in connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
23. Amendment or Termination of the Plan.
------------------------------------
The Board may at any time amend or terminate the Plan, except that (a)
such termination shall not affect Purchase Rights previously granted under the
Plan, except as permitted under the Plan, and (b) no amendment may adversely
affect a Purchase Right previously granted under the Plan (except to the extent
permitted by the Plan or as may be necessary to qualify the Plan as an employee
stock purchase plan pursuant to Section 423 of the Code or to obtain
qualification or registration of the shares of Stock under applicable federal,
state or foreign securities laws). In addition, an amendment to the Plan must
be approved by the stockholders of the Company within twelve (12) months of the
adoption of such amendment if such amendment would authorize the sale of more
shares than are authorized for issuance under the Plan or would change the
definition of the corporations that may be designated by the Board as
Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing sets forth the FirstAmerica Automotive, Inc. 1999 Employee
Stock Purchase Plan as duly adopted by the Board of Directors of the Company on
April 7, 1999.
/s/ W. Bruce Bercovich
----------------------
Secretary
<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, Amendment No. 2, 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 January 9, 1998 on
the financial statements of Valley Automotive Center as of December 31, 1996
and 1995 and the two year period then ended; (iii) 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; (iv) our report dated September 3, 1998 on
the financial statements of Burgess Honda as of September 30, 1997 and 1996 and
for each of the years in the three-year period ended September 30, 1997; (v)
our report dated December 15, 1998 on the financial statements of Vacation
Motors (dba Concord Toyota) as of September 30, 1998 and December 31, 1997 and
the nine month period ended September 30, 1998 and the years ended December 31,
1997 and 1996; (vi) our audit report dated March 15, 1999 on the financial
statements of DSW & Associates, Inc. (dba Autotown) as of December 31, 1998 and
1997 and the two years then ended; (vii) our report dated April 30, 1999 on the
financial statements of Ritchey Fipp Chevrolet as of December 31, 1998 and the
year then ended; (viii) our report dated June 4, 1999 on the financial
statements of South Bay Chrysler Plymouth Jeep as of December 31, 1998 and the
year then ended.
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
July 20, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-75907 of FirstAmerica Automotive, Inc. on Form S-1 of our report dated
May 21, 1999 with respect to the combined financial statements of Certain
Dealerships, Assets and Liabilities of Lucas Dealership Group, Inc. appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ Deloitte & Touche LLP
San Jose, California
July 20, 1999
