FIRSTAMERICA AUTOMOTIVE INC /DE/, 10-Q, 1999-08-16

FIRSTAMERICA AUTOMOTIVE INC /DE/
10-Q, 1999-08-16
AUTO DEALERS & GASOLINE STATIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
_________________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1999 or

[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________

Commission File Number 2-97254-NY
_________________

FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 88-0206732
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

601 Brannan Street,
San Francisco, California 94107
(Address of principal executive offices) (Zip code)

(415) 284-0444
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of Exchange on which registered
------------------- ------------------------------------
None None

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
__________________

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
---

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of July 31, 1999:

Class A Common Stock, $0.00001 par value 11,670,711
Class B Common Stock, $0.00001 par value 3,532,000
Class C Common Stock, $0.00001 par value 0
================================================================================

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements
<PAGE>

PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements

<TABLE>
<CAPTION>
Page
<S> <C>
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 .................................................... 3

Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1999 and 1998....................................... 5

Condensed Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 1999.......................................................... 6

Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998................................................. 7

Notes to Condensed Consolidated Financial Statements.................................... 8

Item 2. Management's Discussion and Analysis of Financial Condition and
Operating Results.............................................................. 13

Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 22

PART II -- OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K............................................... 22

Signatures.................................................................................. 23
</TABLE>

2
<PAGE>

PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FIRSTAMERICA AUTOMOTIVE, INC.

Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents................... $ 2,339 $ 2,191
Contracts in transit........................ 18,667 13,567
Accounts receivable, net.................... 16,020 18,460
Inventories................................. 120,919 90,947
Deferred income taxes....................... 853 853
Deposits, prepaid expenses and other........ 5,713 2,996
-------- --------
Total current assets...................... 164,511 129,014

Property and equipment, net................. 12,137 9,879

Other assets:
Loan origination and other costs, net...... 2,815 3,107
Other noncurrent assets.................... 1,452 2,457
Goodwill and other intangible assets, net.. 40,499 33,995
-------- --------
Total assets.............................. $221,414 $178,452
======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
<PAGE>

FIRSTAMERICA AUTOMOTIVE, INC.

Condensed Consolidated Balance Sheets (continued)

(In thousands, except share data)
(Unaudited)

<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Stockholders' Equity 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Floor plan............................................................... $110,048 $ 81,452
Secured lines of credit.................................................. 24,950 17,025
Notes payable and other.................................................. 5,053 5,512
Accounts payable......................................................... 6,210 6,009
Accrued liabilities...................................................... 13,379 13,028
Deferred revenue......................................................... 1,640 2,054
-------- --------
Total current liabilities............................................. 161,280 125,080

Long-term liabilities:
Capital lease obligation and other long term notes....................... 5,361 1,386
Senior notes, net of (discount of $2,679 in 1999 and $2,839 in 1998)..... 33,321 33,161
Deferred income taxes.................................................... 1,055 1,055
Deferred revenue......................................................... 1,762 2,475
-------- --------
Total liabilities..................................................... 202,779 163,157
======== ========

Cumulative redeemable preferred stock, $.00001 par value; 3,500 shares
issued and outstanding in 1999 and 1998 (net of discount of $421 in 1999
and $456 in 1998, liquidation preference of $3,500 in 1999 and 1998)..... 3,079 3,044

Redeemable preferred stock, $.00001 par value; 500 shares issued and
outstanding in 1999 and 1998 (net of discount of $60 in 1999 and $65 in
1998, liquidation preference of $640 in 1999 and $600 in 1998)............ 560 535

Stockholders' equity:
Common stock, $0.00001 par value:
Class A, 30,000,000 shares authorized, 11,670,711 shares issued and
outstanding in 1999 and 11,514,044 issued and outstanding in 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............................................... 8,571 8,320
Retained earnings........................................................ 6,425 3,396
-------- --------
Total stockholders' equity............................................ 14,996 11,716
-------- --------
$221,414 $178,452
======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

4
<PAGE>

FIRSTAMERICA AUTOMOTIVE, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share data)
(Unaudited)

<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales:
New vehicle....................................... $ 169,873 $ 104,673 $ 321,147 $ 199,618
Used vehicle...................................... 60,292 50,353 112,081 92,148
Service and parts................................. 28,278 22,210 55,709 41,050
Other dealership revenues, net.................... 9,062 5,815 16,767 10,852
----------- ----------- ----------- -----------
Total sales.................................. 267,505 183,051 505,704 343,668

Cost of sales:
New vehicle....................................... 157,082 96,398 296,778 184,174
Used vehicle...................................... 54,125 45,751 100,969 83,922
Service and parts................................. 15,140 11,991 29,863 22,243
----------- ----------- ------------ -----------
Total cost of sales.......................... 226,347 154,140 427,610 290,339
----------- ----------- ------------ -----------
Gross profit................................. 41,158 28,911 78,094 53,329

Operating expenses:
Selling, general and administrative............... 33,894 23,782 64,633 44,440
Depreciation and amortization..................... 1,127 566 2,172 965
----------- ----------- ------------ -----------
Operating income............................. 6,137 4,563 11,289 7,924

Other income/(expense):
Interest expense, floor plan...................... (1,652) (1,509) (3,158) (2,689)
Interest expense, other........................... (1,941) (1,152) (3,719) (2,043)
Gain on sale of dealership........................ -- -- 1,253 --
----------- ----------- ------------ -----------

Income before income taxes................... 2,544 1,902 5,665 3,192

Income tax expense..................................... 1,094 818 2,436 1,373
----------- ----------- ------------ -----------
Net income................................... $ 1,450 $ 1,084 $ 3,229 $ 1,819
=========== =========== ============ ===========

Net income per common share-basic..................... $ 0.09 $ 0.07 $ 0.20 $ 0.11
=========== =========== ============ ===========

Weighted average common shares outstanding-basic....... 15,222,651 14,211,067 15,144,750 14,218,400
=========== =========== ============ ===========

Net income per common share-diluted.................... $ 0.09 $ 0.07 $ 0.19 $ 0.11
=========== =========== ============ ===========

Weighted average common shares outstanding-diluted..... 15,899,046 14,820,671 15,841,784 14,778,160
=========== =========== ============ ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>

FIRSTAMERICA AUTOMOTIVE, INC.

Condensed Consolidated Statement of Stockholders' Equity
Six months ended June 30, 1999
(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
Stock options exercised........................ 157 -- -- -- 251 -- 251
Preferred dividend and liquidation preference.. (160) (160)
Amortization of discount....................... (40) (40)
Net income..................................... 3,229 3,229
----------- -------- -------- -------- -------- -------- --------
Balance, June 30, 1999......................... 11,671 $ -- 3,532 $ -- $ 8,571 $ 6,425 $ 14,996
=========== ======== ======== ======== ======== ======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

6
<PAGE>

FIRSTAMERICA AUTOMOTIVE, INC.

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 3,229 $ 1,819
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 2,172 708
Noncash interest expense................................... 453 257
Deferred warranty revenue, net............................ (678) (135)
Gain on sale of dealership................................. (1,253) --
Changes in operating assets and liabilities:
Receivables and contracts in transit....................... (2,661) (8,780)
Inventories................................................ (19,361) (9,142)
Other assets............................................... (731) (965)
Floor plan notes payable................................... 19,480 13,549
Accounts payable and accrued liabilities................... 377 3,518
-------- --------
Net cash provided by operating activities................. 1,027 829
-------- --------

Cash flows from investing activities:
Capital expenditures......................................... (2,060) (2,704)
Acquisitions, net of cash acquired........................... (6,740) (15,481)
Proceeds from sale of dealership............................. 1,900 --
Deposits on pending acquisitions............................. (1,398) --
-------- --------
Net cash used in investing activities..................... (8,298) (18,185)
-------- --------

Cash flows from financing activities:
Borrowings on notes payable and other........................ 1,188 4,385
Repayments on notes payable and other........................ (680) --
Borrowings on secured lines of credit........................ 8,175 12,525
Repayments on secured lines of credit........................ (250) --
Prepaid financing costs...................................... (1,125) --
Proceeds from issuance of common stock....................... 251 --
Loan origination costs....................................... -- (151)
Preferred stock dividend..................................... (140) (140)
-------- --------
Net cash provided by financing activities................. 7,419 16,619
-------- --------
Net increase (decrease) in cash and equivalents........... 148 (737)

Cash at beginning of period.................................... 2,191 2,924
-------- --------
Cash at end of period.......................................... $ 2,339 $ 2,187
======== ========

Cash paid during the period for:
Interest..................................................... $ 6,440 $ 3,786
Income taxes................................................. 2,084 1,222
Non-cash activity was as follows:
Capital lease obligation..................................... 559 --
Discount on senior notes 161 --
Notes payable to sellers..................................... (2,000) --
</TABLE>

See accompanying notes to condensed consolidated financial statements.

7
<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, Ford, Honda, Isuzu, Lexus, Mitsubishi, Nissan, Toyota, and
Volkswagen.

The Company's plan is to continue making opportunistic acquisitions in the
western United States subject to obtaining adequate financing. The Company
currently operates in the following four metropolitan markets:

* San Francisco Bay Area * San Jose/Silicon Valley
* San Diego * Los Angeles

(b) Basis of Financial Statement Presentation

The financial information included herein for the three and six month
periods ended June 30, 1999 and 1998 is unaudited; however, such information
reflects all adjustments consisting only of normal recurring adjustments which

<PAGE>

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.

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.

(d) Comprehensive Income

The Company has determined that net income and comprehensive income are the
same for the periods presented.

(2) Acquisitions and Disposition

Acquisitions and Disposition Completed During the Six Months Ended June 30, 1999

In March 1999, the Company acquired substantially all of the operating
assets of Ritchey Fipp Chevrolet, a Chevrolet dealership located in Poway,
California. In April 1999, the Company acquired substantially all of the
operating assets of Marin Dodge, a Chrysler dealership located in San Rafael,
California. In June 1999, the Company acquired substantially all of the
operating assets of San Rafael Ford, a Ford dealership located in San Rafael,
California. The acquisitions were accounted for using the purchase method of
accounting and the operating results of these dealerships have been included in
the Company's results of operations since the date they were acquired. The
purchase prices have been allocated to assets acquired and liabilities assumed
based on the fair values on the acquisition date. Amounts recorded for these
acquisitions were as follows: current assets, net of cash acquired, of $11.1
million, fixed assets of $1.0 million, goodwill and other intangibles of $6.3
million, notes payable to the sellers of $2.0 million, and floor plan and other
liabilities of $9.7 million.

The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the acquisitions completed during

9
<PAGE>

the period from January 1, 1998 to June 30, 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>
Six months ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
Total sales $527,660 $449,294
Income before taxes 5,360 3,126
Net income 3,003 1,751
Net income per common share-diluted $ 0.18 $ 0.10
</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
Marin Dodge April 1999
San Rafael Ford June 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 an after-tax gain of $0.7 million.

(3) Inventories

Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
New vehicles $ 89,904 $65,152
Used vehicles 24,150 20,049
Parts and accessories 6,865 5,746
-------- -------
Inventories $120,919 $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 June 30, Six months ended June 30,
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income per income statement $1,450 $1,084 $3,229 $1,819

Less:
Cumulative redeemable preference dividends 70 70 140 140
Redeemable preferred stock liquidation
preference accretion 10 20 20 40
Cumulative and redeemable preferred stock
discount amortization 20 20 40 40
------ ------ ------- -------

Net income applicable to common stockholders 1,350 974 3,029 1,599

Add:
Interest charges applicable to convertible debt 5 7 11 13
------ ------ ------ ------

Net income applicable to common stockholders
and assumed conversions $1,355 $ 981 $3,040 $1,612
====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Diluted Earnings Per Share:
Weighted average common shares outstanding-basic 15,223 14,211 15,145 14,218

Net effect of dilutive stock options 327 283 360 255
Net effect of warrants 249 227 237 205
Net effect of convertible notes 100 100 100 100
------- ------- ------- -------

Total weighted average common shares
outstanding-diluted 15,899 14,821 15,842 14,778
======= ======= ======= =======

Net income per common share-diluted $ 0.09 $ 0.07 $0.19 $ 0.11
======= ======= ======= =======
</TABLE>

<PAGE>

(5) Floor Plan Notes Payable and Secured Lines of Credit

The Company currently has a $175 million loan and security agreement with a
financial company. The loan agreement matures in July 2000.

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
by used vehicle and parts inventories. The loan agreement also provides for a
discretionary line of credit of up to $25 million that the financial company
makes available at its absolute discretion. The Company also has an over advance
facility of $14.3 million which provides revolver advances in excess of the
borrowing base as defined in the loan agreement.

As of June 30, 1999, the Company had floor plan notes payable of $110.0
million, revolver advances outstanding of $12.4 million and over advances
outstanding of $12.6 million. There were no discretionary advances outstanding
as of June 30, 1999.

In the second quarter of 1999, the Company borrowed $2.7 million under the
over advance facility to complete the acquisition of Marin Dodge, $4.3 million
to complete the San Rafael Ford acquisition, and $1.6 million for deposits on
pending acquisitions. The remaining available balance on the over advance
facility is $1.7 million.

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.

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.

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.

Our loan agreement contains various financial covenants such as minimum
interest coverage, working capital, and maximum debt to equity ratios. The
Company is in compliance with all material covenants under the loan agreement.
The over advances are due December 15, 1999.

(6) Operating Segments

The Company operates primarily in the automotive segment. The Company
sells new vehicles, used vehicles, light trucks, after-market automotive
products and replacement parts. In addition, it provides vehicle maintenance
and repair services, and arranges related financing and warranty products for
its automotive customers.

On December 31, 1998, the Company acquired 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 June 30,
------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---------- -------- ----------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 267,329 $183,051 $ 176 $ -- $267,505 $183,051
Income (loss) before taxes 3,303 1,902 (759) -- 2,544 1,902
Total assets (period end) 220,317 162,021 1,097 -- 221,414 162,021
</TABLE>

<TABLE>
<CAPTION>
Automotive Technology Total Company
Six months ended June 30,
------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 505,255 $ 343,668 $ 449 $ -- $ 505,704 $343,668
Income (loss) before taxes 6,946 3,192 (1,281) -- 5,665 3,192
Total assets (period end) 220,317 162,021 1,097 -- 221,414 162,021
</TABLE>

11
<PAGE>

(7) Related Party Transactions

In March 1999, the Company acquired substantially all of the operating
assets of Ritchey 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%, and 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 common stock in a
public offering. The Company would use the proceeds from the public offering to
fund pending acquisitions, repay outstanding loans to principal stockholders
including accrued interest, redeem secured lines of credit, redeem outstanding
senior notes including accrued interest and redemption premiums, and redeem
preferred stock including accrued dividends and redemption premiums.

The Company has an agreement with Ford Motor Credit Company for a new $350
million credit facility. The facility would be effective upon consummation of a
public offering, subject to customary terms and conditions, including minimum
net proceeds for the offering of $75 million. The Company expects the facility
will provide floor plan financing to its wholly-owned dealership subsidiaries of
up to $200 million, and an acquisition line of credit for up to $150 million.
The Company would replace its existing floor plan facility, under which the
Company had approximately $110.0 outstanding as of June 30, 1999 (this facility
had an interest rate of prime minus 75 basis points), with the new facility from
Ford Motor Credit. The new credit facility would have an initial term of three
years and would be secured by substantially all of the Company's assets and its
subsidiaries' assets. The interest rate on the floor plan component of the
facility would be prime rate minus 1.25%. The interest rates on the acquisition
line of credit would be based on the one month commercial paper rate plus 2.75%
on the first $30 million of borrowings, plus 3.75% on the amount of borrowings
in excess of $30 million but less than the total scaled assets as defined and
not to exceed total borrowings of $75 million, plus 4.75% on the amount of
borrowings in excess of scaled assets or $45 million whichever is less.

Pending Acquisitions

In May 1999, the Company entered into an agreement to acquire all of the
outstanding capital stock of the Lucas Dealership Group, Inc. which operates
three dealerships in the San Francisco Bay Area and three in the San
Jose/Silicon Valley area. The Company has also entered into agreements to

12
<PAGE>

acquire the assets of two multiple franchise dealerships in the Los Angeles area
and a dealership in the Las Vegas area. The estimated aggregate cash purchase
price for these acquisitions is approximately $111 million. 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 that 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. In the event
the Company is not able to consummate its public offering, the Company will seek
alternative financing to complete its remaining pending acquisitions. There are
no assurances that the Company will be able to secure such financing on terms
acceptable to it.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q contains forward-looking statements. These statements are
necessarily subject to risk and uncertainty. Actual results could differ
materially from those projected in these forward looking statements as a result
of certain risks including those set forth in the Company's 1998 Annual Report
on Form 10-K or the Company's registration statement on Form S-1 as filed with
the Securities and Exchange Commission. These risk factors include, but are not
limited to, the cyclical nature of automobile sales, the intense competition in
the automobile retail industry, and the Company's ability to obtain additional
sources of capital through debt or equity, negotiate profitable acquisitions,
and secure manufacturer approvals for such acquisitions.

Overview

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 currently sell the following domestic and
foreign brands: BMW, Chevrolet, Dodge, Ford, Honda, Isuzu, Lexus, Mitsubishi,
Nissan, Toyota and Volkswagen.

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

<PAGE>

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.

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 ended June 30, Six months ended June 30,
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Sales
New vehicles.................................. 63.5% 57.2% 63.5% 58.1%
Used vehicles................................. 22.5% 27.5% 22.2% 26.8%
Service and parts............................. 10.6% 12.1% 11.0% 11.9%
Other dealership revenues, net................ 3.4% 3.2% 3.3% 3.2%
------------ ------------ ----------- -----------
Total sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 84.6% 84.2% 84.6% 84.5%
------------ ------------ ----------- -----------
Gross profit................................ 15.4% 15.8% 15.4% 15.5%
Selling, general and administrative
expenses..................................... 12.7% 13.0% 12.8% 12.9%
Depreciation and amortization.................. 0.4% 0.3% 0.4% 0.3%
------------ ------------ ----------- -----------

Operating Income............................ 2.3% 2.5% 2.2% 2.3%

</TABLE>

New vehicle sales statistics:

<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Units.......................................... 7,094 4,441 13,466 8,777
Sales (in thousands)........................... $ 169,873 $ 104,673 $ 321,147 $ 199,618
Gross profit (in thousands).................... $ 12,791 $ 8,275 $ 24,369 $ 15,444
Gross margin................................... 7.5% 7.9% 7.6% 7.7%
Gross profit per unit.......................... $ 1,803 $ 1,863 $ 1,810 $ 1,760
</TABLE>

Used vehicle retail sales statistics, excluding wholesale sales and units:

<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Units.......................................... 2,875 2,716 5,460 5,149
Sales (in thousands)........................... $ 46,089 $ 38,259 $ 85,690 $ 71,050
Gross profit (in thousands).................... $ 5,272 $ 3,852 $ 9,362 $ 6,942
Gross margin................................... 11.4% 10.1% 10.9% 9.8%
Gross profit per unit.......................... $ 1,834 $ 1,418 $ 1,715 $ 1,348
</TABLE>

Service and parts statistics:

<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Sales (in thousands)........................... $ 28,278 $ 22,210 $ 55,709 $ 41,050
Gross profit (in thousands).................... $ 13,138 $ 10,219 $ 25,846 $ 18,807
Gross margin................................... 46.5% 46.0% 46.4% 45.8%
</TABLE>

<PAGE>

Three Months Ended June 30,1999 Compared to Three Months Ended June 30,1998

Sales. Our sales increased $84.5 million, or 46.1%, to $267.5 million for
the three months ended June 30, 1999 from $183.0 million in 1998. We acquired
four dealerships in 1998 and three dealerships in 1999, which for the periods
following their acquisition accounted for $51.8 million of the increase in 1999
sales. The remaining increase of $32.7 million is due to increased sales at
dealerships owned for longer than one year.

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 three months ended June 30,
1999 we sold 7,094 new vehicles, generating revenues of $169.9 million,
which constituted 63.5% of our total sales. In the three months ended June
30, 1998 we sold 4,441 new vehicles, generating revenues of $104.7 million,
which constituted 57.2 % of our total sales. The increase in revenues and
units was due primarily to the six dealerships acquired between April 1,
1998 and June 30, 1999 and a very strong new vehicle market. Of this
increase $35.0 million, or 53.7%, was due to dealerships acquired between
January 1, 1998 and June 30, 1999, and the remaining $30.2 million, or
46.3%, was due to increased sales at dealerships owned for longer than one
year. Average unit prices increased 1.6% to $23,946 in 1999 from $23,570 in
1998 per vehicle due to the higher mix of luxury vehicles, high-demand
trucks, and sport utility 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 three months
ended June 30, 1999, we sold 2,875 retail used vehicles and 2,021 wholesale
used vehicles. In the three months ended June 30, 1998, we sold 2,716
retail used vehicles and 1,430 wholesale used vehicles. Total revenues from
used vehicle sales increased 19.7%, to $60.3 million in the three months
ended June 30, 1999 from $50.4 million in the three months ended June 30,
1998. The increase in revenues was due to dealerships acquired between
January 1, 1998 and June 30, 1999. Retail and wholesale used vehicle sales
comprised 22.5% of our total sales in the three months ended June 30, 1999
compared to 27.5% of our total sales in the three months ended June 30,
1998. The decrease in used vehicle sales as a percentage of total sales is
primarily attributable to the change in product mix related to a strong
demand for new vehicles over the prior period. Our average price per used
vehicle unit increased 1.4% to $12,315 in 1999 from $12,145 in 1998 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 27.4% to $28.3 million in the three months ended June 30,
1999 from $22.2 million in the three months ended June 30, 1998. Of the
increase in revenues, $5.2 million, or 86%, was due to dealerships acquired
between January 1, 1998 and June 30, 1999, and the remaining $0.9 million,
or 14%, was due to increased sales at dealerships owned for longer than one
year.

Other dealership revenues, net. Other dealership revenues primarily
include fees earned on the sale of vehicle financing notes and

15
<PAGE>

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 55.9% to $9.1 million in the
three months ended June 30, 1999 from $5.8 million in the three months
ended June 30, 1998. Of the increase in revenues, $1.5 million, or 45.0%,
was due to dealerships acquired between January 1, 1998 and June 30, 1999,
and the remaining $1.8 million, or 55.0%, was due to increased sales at
dealerships owned for longer than one year.

Gross profit. Gross profit increased 42.4% to $41.2 million in the three
months ended June 30, 1999 from $28.9 million in the three months ended June 30,
1998. Our overall gross margins decreased to 15.4% in the three months ended
June 30, 1999, from 15.8% in the three months ended June 30, 1998, primarily due
to a change in product mix of a higher percentage of new vehicle sales as a
percentage of total sales. The gross margin on new vehicle sales decreased to
7.5% in the three months ended June 30, 1999, from 7.9% in the three months
ended June 30, 1998 primarily due to an emphasis on higher unit volume. The
gross margin on used vehicle sales increased to 10.2% in the three months ended
June 30, 1999 from 9.1% in the three months ended June 30, 1998. Gross margins
on service and parts increased to 46.5% in the three months ended June 30, 1999
from 46.0% in the three months ended June 30, 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 42.5%, to $33.9 million in
the three months ended June 30, 1999 from $23.8 million in the three months
ended June 30, 1998. Selling, general and administrative expense as a percentage
of sales decreased to 12.7% in the three months ended June 30, 1999 compared to
13.0% in the three months ended June 30, 1998. The decrease was due primarily to
leveraging the cost of our infrastructure, partially offset by increased
selling, general and administrative costs of $0.9 million related to Auto Town,
which we acquired on December 31, 1998.

Depreciation and amortization. Depreciation and amortization expense
increased $0.5 million, or 99%, to $1.1 million in the first three months of
1999 from $0.6 million in the three months ended June 30, 1998. The increase was
due to additional depreciation and goodwill amortization from acquired
dealerships and the acquisition of Auto Town. Of the increase, $0.2 million
related to Auto Town.

Interest expense. Floor plan interest expense increased $0.2 million, or
9.6%, to $1.7 million in the three months ended June 30, 1999 from $1.5 million
in the three months ended June 30, 1998 primarily as a result of increased floor
plan debt in 1999 from the acquired dealerships. Interest expense other than
floor plan increased $0.7 million, or 68.5%, to $1.9 million in the first three
months of 1999 from $1.2 million in the three months ended June 30, 1998. The
increase was due to debt incurred in financing dealerships we acquired.

16
<PAGE>

Income tax expense. Income tax expense increased to $1.1 million in the
three months ended June 30, 1999 from $0.8 million in the three months ended
June 30, 1998 due to higher pretax income in 1999. Our effective income tax rate
was 43% for the three months ended June 30, 1999 and 1998. 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 $1.5 million in the three months ended June 30, 1999 from $1.1 million in the
three months ended June 30, 1998.

Six Months Ended June 30,1999 Compared to Six Months Ended June 30,1998

Sales. Our sales increased $162.0 million, or 47.1%, to $505.7 million for
the six months ended June 30, 1999 from $343.7 million in 1998. We acquired four
dealerships in 1998 and three dealerships in 1999, which for the periods
following their acquisition accounted for $108.9 million of the increase in 1999
sales. The remaining increase of $53.1 million is due to increased sales at
dealerships owned for longer than one year.

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 six months of 1999 we
sold 13,466 new vehicles, generating revenues of $321.1 million, which
constituted 63.5% of our total sales. In the first six months of 1998 we
sold 8,777 new vehicles, generating revenues of $199.6 million, which
constituted 58.1% of our total sales. The increase in revenues and units
was due primarily to the seven dealerships acquired between January 1, 1998
and June 30, 1999 and a very strong new vehicle market. Of the increase in
revenues, $74.0 million, or 60.9%, of the increase in revenues was due to
dealerships acquired between January 1, 1998 and June 30, 1999, and the
remaining $47.5 million, or 39.1%, was due to increased sales at
dealerships owned for longer than one year. Average unit prices increased
4.9% to $23,849 in 1999 from $22,743 in 1998 per vehicle due to the higher
mix of luxury vehicles, high-demand trucks, and sport utility 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 six months
of 1999, we sold 5,460 retail used vehicles and 3,981 wholesale used
vehicles. In the first six months of 1998, we sold 5,149 retail used
vehicles and 2,936 wholesale used vehicles. Total revenues from used
vehicle sales increased 21.6%, to $112.1 million in the first six months of
1999 from $92.1 million in the first six months of 1998. The increase in
revenues was due to dealerships acquired between January 1, 1998 and June
30, 1999. Retail and wholesale used vehicle sales comprised 22.2% of our
total sales in the first six months of 1999 compared to 26.8% of our total
sales in the first six months of 1998. The decrease in used vehicle sales
as a percentage of total sales is primarily attributable to the change in
product mix related to a strong demand for new vehicles over the prior
period. Our average price per used vehicle unit increased 4.2% to $11,872
in 1999 from $11,397 in 1998 per vehicle.

Service and parts. Service and parts includes revenue from the sale
of parts, accessories, maintenance and repair services. Service and parts

17
<PAGE>

revenue increased 35.7% to $55.7 million in the first six months of 1999
from $41.0 million in the first six months of 1998. Of the increase in
revenues, $11.3 million, or 77.3%, was due to dealerships acquired between
January 1, 1998 and June 30, 1999, and the remaining $3.4 million, or
22.7%, was due to increased sales at dealerships owned for longer than one
year.

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 54.5% to $16.8 million in the first six
months of 1999 from $10.9 million in the first six months of 1998. Of the
increase in revenues, $2.7 million, or 45.0% was due to dealerships
acquired between January 1, 1998 and June 30, 1999, and the remaining $3.2
million, or 55.0% was due to increased sales at dealerships owned for
longer than one year.

Gross profit. Gross profit increased 46.4% to $78.1 million in the first
six months of 1999 from $53.3 million in the first six months of 1998. Our
overall gross margins decreased to 15.4% in the first six months of 1999, from
15.5% in the first six months of 1998, primarily due to a change in product mix
of a higher percentage of new vehicle sales as a percentage of total sales. The
gross margin on new vehicle sales decreased to 7.6% in the first six months of
1999, from 7.7% in the first six months of 1998 primarily due to an emphasis on
higher unit volume. The gross margin on used vehicle sales increased to 9.9% in
the first six months of 1999 from 8.9% in the first six months of 1998. Gross
margins on service and parts increased to 46.4% in the first six months of
1999 from 45.8% in the first six 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 $20.2 million, or 45.4%, to $64.6 million in
the first six months of 1999 from $44.4 million in the first six months of 1998.
Selling, general and administrative expense as a percentage of sales decreased
to 12.8% in the first six months of 1999 from 12.9% in the first six months of
1998. The decrease was due primarily to leveraging the costs of our
infrastructure, partially offset by increased selling, general and
administrative costs of $1.6 million related to Auto Town, which we acquired on
December 31, 1998.

Depreciation and amortization. Depreciation and amortization expense
increased $1.2 million, or 125.0%, to $2.2 million in the first six months of
1999 from $1.0 million in the first six months of 1998. The increase was due

18
<PAGE>

to additional depreciation and goodwill amortization from acquired dealerships
and the acquisition of Auto Town. Of the increase, $0.4 million related to Auto
Town.

Interest expense. Floor plan interest expense increased $0.5 million, or
17.4%, to $3.2 million in the first six months of 1999 from $2.7 million in
the first six 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 $1.7 million, or 82.0%, to $3.7 million in the first six months
of 1999 from $2.0 million in the first six months of 1998. The increase was
due to debt incurred in financing dealerships we acquired.

Income tax expense. Income tax expense increased to $2.4 million in the
first six months of 1999 from $1.4 million in the first six months of 1998
due to higher pretax income in 1999. Our effective income tax rate was 43% for
the first six months of 1999 and 1998. 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 and the sale of a
dealership in the first quarter with an after-tax gain of $0.7 million, net
income increased to $3.2 million in the first six months of 1999 from $1.8
million in the first six months of 1998.

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 June 30,1999, we had working capital of $3.2
million including $2.3 million in cash.

In the first six months of 1999, operating activities resulted in net
cash provided by operations of $1.0 million compared to $0.8 million used in
operations in the first six months of 1998. The increase was attributable to
a decrease in receivables and contracts in transit and an increase in floor plan
notes payable, partially offset by an increase in inventories compared to the
prior year period.

In the first six months of 1999, the net cash used in investing activities
totaled $8.3 million, which consisted of $6.7 million used for acquisitions,
$2.1 million of capital expenditures for information systems and improvements to
existing facilities, and $1.4 million for deposits on pending acquisitions,
offset by proceeds from a sale of a dealership of $1.9 million. This compared to
$18.2 million in the first six months of 1998 which consisted of acquisitions of
$15.5 million and $2.7 million for capital expenditures for information systems
and improvements to existing facilities.

In the first six months of 1999, net cash provided by financing activities
totaled $7.4, which consisted of borrowings and repayments on secured lines of
credit and notes payable and prepaid financing costs. Included in net cash
provided by financing activities are proceeds of a $1.0 million loan from the
Chief Executive Officer of the Company related to the financing of the Ritchey
Fipp Chevrolet acquisition. Additionally, we financed this acquisition with

19
<PAGE>

$2.0 million in notes to the selling parties. In the first six months of 1998,
net cash provided by financing activities totaled $16.6 million which consisted
of borrowings on secured lines of credit and notes payable.

In April 1999, we filed a registration statement on Form S-1 with the
Securities and Exchange Commission proposing to sell common stock in a public
offering. We intend to use the proceeds from the public offering to fund pending
acquisitions, repay outstanding loans to principal stockholders including
accrued interest, redeem secured lines of credit, redeem outstanding senior
notes including accrued interest and redemption premiums, and redeem preferred
stock including accrued dividends and redemption premiums.

We have an agreement with Ford Motor Credit Company for a new $350 million
credit facility. The facility would be effective upon consummation of a public
offering, subject to customary terms and conditions, including minimum net
proceeds for the offering of $75 million. We expect the facility would 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 would
expect to replace our existing floor plan facility, under which we had
approximately $110.0 outstanding as of June 30, 1999 (this facility had an
interest rate of prime minus 75 basis points), with the new facility from Ford
Motor Credit. The new credit facility would have an initial term of three years
and would be secured by substantially all of our assets and our subsidiaries'
assets. The interest rate on the floor plan component of the facility would be
prime rate minus 1.25%. The interest rates on the acquisition line of credit
would be based on the one month commercial paper rate plus 2.75% on the first
$30 million of borrowings, plus 3.75% on the amount of borrowings in excess of
$30 million but less than the total scaled assets as defined and not to exceed
total borrowings of $75 million, plus 4.75% on the amount of borrowings in
excess of scaled assets or $45 million whichever is less.

Upon consummation of a public offering of common stock and the
application of the proceeds therefrom, we expect $150 million would be available
to be drawn under these facilities for acquisitions. We intend to draw
approximately $76 million of this amount to finance completion of all pending
acquisitions. We also have a financing commitment letter for the Lucas
Dealership Group acquisition, which will be used in the event that our 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 us. In the event we are not able to consummate our
public offering, we will seek alternative financing to complete our remaining
pending acquisitions. There are no assurances that we will be able to secure
such financing on terms acceptable to us.

Floor Plan Notes Payable and Secured Lines of Credit

We currently have a $175 million loan and security agreement with a
financial company. The loan agreement matures in July 2000.

20
<PAGE>

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 over advance facility of $14.3 million
which provides revolver advances in excess of the borrowing base as defined in
the loan agreement.

As of June 30, 1999, we had floor plan notes payable of $110.0 million,
revolver advances outstanding of $12.4 million and over advances outstanding of
$12.6 million. There were no discretionary advances outstanding as of June 30,
1999.

In the second quarter of 1999, we borrowed $2.7 million under the over
advance facility to complete the acquisition of Marin Dodge, $4.3 million to
complete the San Rafael Ford acquisition, and $1.6 million for deposits on
pending acquisitions. The remaining available balance on the over advance
facility is $1.7 million.

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.

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 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 over
advances are due December 15, 1999.

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 5 million shares of our Class B common
stock.

During 1997, we received $28 million of the $40 million commitment from the
institutional lender. In exchange, we issued senior notes with a principal

21
<PAGE>

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 3,032,000 shares of
Class B common stock at $0.92 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 500,000
shares of common stock at $2.00 per share. The senior notes are due June 30,
2005. We used the proceeds to acquire a dealership.

The senior notes are unsecured and rank behind all debts of our operating
subsidiaries, rank equal to our other existing and future senior indebtedness,
and are senior in right of payment to any additional subordinated debt. The
CRPS and RPS shares rank behind all of our debt and the debt of our subsidiaries
and have priority over our common stock. We can redeem all the senior notes in
whole or in part, at any time, upon notice to the holders of the senior notes.
The redemption price for the period July 1, 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. We intend to redeem the
senior notes and the preferred stock in connection with our public offering of
common stock and anticipated new credit facility.

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

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. For financial reporting
purposes, the redemption premium, the remaining unamortized discount and the
remaining portion of the loan origination costs will be an extraordinary charge
to earnings at the time of redemption.

22
<PAGE>

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 of
new dealerships may also cause substantial fluctuations of operating results
from quarter to quarter.

New Accounting Pronouncements

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. The adoption of
this Statement of Position did 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 Statement is effective for
fiscal years beginning after December 15, 1998. We adopted this Statement of
Position on January 1, 1999. The adoption of this statement did not have a
material impact on our consolidated financial statements.

In June 1998, the Financial Accounting Standards Board (FASB) 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. In June 1999, the FASB
issued Statement No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." The
Statement will become effective for us beginning on January 1, 2001. The
implementation of the provisions of this Statement does not have an impact on
our financial statements for the six months ended June 30, 1999.

Amortization of Goodwill

Goodwill as of June 30, 1999 was $40.5 million, or 18.3% 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

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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 immediately following an acquisition would be overstated if
we attributed a forty-year benefit period to intangible assets that should have
had a shorter benefit period. In later years, we would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by our management in arriving at the price paid for businesses acquired.
Earnings in later years also could be significantly affected if our management
then determined that the remaining balance of goodwill was impaired. We
periodically compare the carrying value of goodwill to the anticipated
undiscounted future cash flows from operations of the businesses we have
acquired to evaluate the recoverability of goodwill.

Inflation

We believe that the relatively moderate rate of inflation over the past few
years has not had a significant impact on our revenues or profitability.
Interest rates have been relatively stable during this period.

Year 2000 Project

We are in the process of addressing the impact on our operations of
computer programs that are unable to distinguish between the year 1900 and the
year 2000.

Year 2000 Readiness Preparation

Our year 2000 program is comprised of several individual projects which
address primarily the following broad areas: data processing systems, embedded
technology in equipment and facilities, vendor and supplier risk, and
contingency planning. We have created a year 2000 task force that has assigned
a priority to all projects and broadly classified projects into critical and
non-critical categories indicating the importance of the function to our
continuing operations.

We are in the process of updating our 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.

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. All recently acquired acquisitions
and pending acquisitions have compliant dealer management systems. The dealer

24
<PAGE>

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 approximately $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

25
<PAGE>

we can execute an effective backup plan relying on completely manual, paper
based, processes and alternate suppliers of required services.

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.

Item 3. Quantitative and Qualitative Disclosures 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 $1.4
million for the year ended June 30, 2000. 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 $2.8 million for the year ended
June 30, 2000. Our senior notes are at fixed rates. Our remaining financial
instrument liabilities are immaterial.

PART II -- OTHER INFORMATION

Item 6. Exhibits and Reports and Form 8-K

(a) Exhibits

The exhibits filed as a part of this report are listed below.

EXHIBIT NUMBER DESCRIPTION
- -------------- -----------

27.1 Financial Data Schedule

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended June 30, 1999.

26
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

FIRSTAMERICA AUTOMOTIVE, INC.

Dated: August 16, 1999 By: /s/ THOMAS A. PRICE
----------------------------------------------
Thomas A. Price
President, Chief Executive Officer, and Director
(Principal Executive Officer)

By: /s/ DEBRA L. SMITHART
----------------------------------------------
Debra L. Smithart
Chief Financial and Administrative Officer
(Principal Financial and Accounting Officer)

<PAGE>

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