UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number: 2-97254-NY
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FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 88-0206732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 Brannan Street
San Francisco, California 94107
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (415) 284-0444
Securities registered pursuant to Section 12(b) of the Act: 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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 31, 1998 was $1,002,579, based on the fair market value
of the Company's Common Stock as of that date as determined by the Board of
Directors. Shares of Common Stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the registrant's Common Stock outstanding on March
31, 1998, was as follows: 11,179,029 shares of Class A Common Stock, par value
$0.00001 per share, and 3,032,000 shares of Class B Common Stock, par value
$0.00001 per share.
1
FORWARD-LOOKING STATEMENTS
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This Annual Report on Form 10-K contains forward-looking statements that
have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on current
expectations, estimates and projections about the Company's industry,
management's beliefs, and certain assumptions made by the Company's management.
Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict; therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties includes those set forth herein under
"Factors That May Affect Future Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Unless required by
law, the Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the risk factors set forth in other
reports or documents the Company will file from time to time with the Securities
and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K.
PART I
Item 1. Business
Overview
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FirstAmerica Automotive, Inc. (the "Company") is one of the largest
automotive retailers in Northern California, operating, as of December 31, 1997,
11 dealerships in Northern California and 3 dealerships in San Diego County.
The Company plans to open a multi-brand, vehicle and repair service center in
downtown San Francisco, in the second half of 1998. The Company sells new and
used cars and light trucks, sells replacement parts, provides vehicle
maintenance, warranty and repair services and arranges related financing and
insurance products ("F&I") for its customers. At its fifteen locations, certain
of which represent multiple new vehicle dealerships, the Company offers eleven
domestic and foreign product lines, which consist of Buick, Dodge, GMC, Honda,
Isuzu, Lexus, Mitsubishi, Nissan, Pontiac, Toyota and Volkswagen. On a pro
forma combined basis including the Company's 1997 dealership acquisitions, the
Company had revenues of $604 million and retail unit sales of 18,027 new and
8,664 used vehicles in 1997. Based on statistical ranking information published
by Automotive News, an industry trade publication, the Company believes that in
1997, it would have been the sixteenth largest dealer group nationwide, based on
pro forma retail new vehicle unit sales, and the twenty-sixth largest dealer
group nationwide based on pro forma gross revenues.
Effective July 11, 1997, the Company, which prior to such date had no
significant assets or operations, combined (the "Combination") with a group of
six automobile dealerships under the common ownership and control of Thomas A.
Price, the Company's President and Chief Executive Officer, and other
stockholders (the "Price Dealerships"). The stockholders of the Price
Dealerships received 5,526,000 shares of Class A Common Stock of the Company in
connection with the Combination, which shares represent a controlling interest
in the Company. During 1997, the Company acquired a dealership from Donald V.
Strough, the Company's Chairman, and an additional seven dealerships from
unrelated third parties.
In addition to its traditional dealership operations, the Company has (i)
commenced development of a multi-brand, full service vehicle maintenance and
repair center in the downtown San Francisco area, which is scheduled to open
during the second half of 1998, (ii) developed a "Used Car Auto Factory" concept
to centralize procurement, reconditioning and wholesale disposal of used cars,
and (iii) obtained authorization from Nissan Motor Company ("Nissan") to form
"Smart Nissan," a program to combine multiple Nissan dealerships with contiguous
markets in the San Francisco Bay Area (including the Nissan dealerships owned by
the Company) into a single regional dealership group that will have centralized
pricing, inventory management, marketing and other economies of scale.
2
All financial information contained herein, unless indicated as being
presented on a pro forma basis, represents the historical financial information
of the Price Dealerships prior to July 1997 and financial information of each
other dealership from the respective dates of acquisition.
RECENT, PENDING AND FUTURE ACQUISITIONS
- ---------------------------------------
The Company intends to continue to pursue a strategic acquisition strategy
led by a management team with extensive experience in the acquisition and
management of automotive retailing businesses and to capitalize on and continue
to enhance the excellent relationships the Company enjoys with the various
automobile manufacturers (the "Manufacturers") which the Company currently holds
dealer agreements.
The Company's Chairman, Donald V. Strough, has more than 35 years
experience in managing, acquiring and selling new car dealerships, having
acquired and operated more than 20 California dealerships representing more than
45 franchises. Thomas A. Price, the Company's President and Chief Executive
Officer, also has 35 years of automobile industry experience and has been a
consistent innovator and leader among automobile dealers in California. In
addition, the Company's other executive officers, regional general managers and
dealership general managers have on average more than 15 years of automotive
retailing experience. The Company's dealerships are among those dealerships
that have won the highest attainable manufacturer awards measuring quality and
customer satisfaction. Various members of the management team have been
recognized as leaders in the automotive retailing industry, serving at various
times in leadership positions in state and national industry organizations,
including several manufacturer dealer councils which act as liaisons between the
manufacturers and dealer groups.
The Company intends to pursue acquisitions using cash, debt, equity or a
combination thereof. Although the Company has identified and has held
preliminary discussions with several potential acquisition candidates, at this
time it does not have agreements to effect any such acquisitions other than the
pending acquisitions of Ritchey Fipp Chevrolet and Burgess Honda. There is no
assurance that the Company will consummate any future acquisitions, that they
will be on terms favorable to the Company or that financing for such
acquisitions will be available. All future acquisitions by the Company will be
contingent upon the consent of the applicable manufacturer. No assurance can be
given that any such consents will be obtained.
Since December 31, 1997, the Company has consummated or signed definitive
agreements to purchase three additional dealerships for an aggregate purchase
price of approximately $18.9 million. The acquisitions consist of Beverly Hills
BMW (consummated April 1, 1998), Ritchey Fipp Chevrolet and Burgess Honda (both
anticipated to close in late May 1998, subject to manufacturers' approval).
On April 1, 1998, the Company purchased substantially all of the assets of
Beverly Hills BMW, excluding real property for approximately $11.9 million. For
1997 Beverly Hills BMW had retail sales of 769 new and 183 used vehicles and
total revenues of approximately $54 million. This acquisition further
implements the Company's growth strategy by adding a high-profile, well-managed
luxury product dealership having significant presence in a new market.
Ritchey Fipp Chevrolet is located in the San Diego market, where the
Company has existing operations. For 1997, Ritchey Fipp had retail sales of
approximately 713 new and 511 used vehicles with total revenues of approximately
$30.3 million. This acquisition will fit into the Company's "fill-in" growth
strategy where single point dealerships can be acquired in existing markets
allowing for increased market penetration, leveraging of certain costs and
economies of scale. The Company has agreed to pay approximately $3.2 million
for substantially all of the assets of the Ritchey Fipp Chevrolet.
The Company plans to acquire the assets of Burgess Honda and relocate its
operations to the Company's existing Serramonte Boulevard location in Colma,
California. For 1997 Burgess Honda had retail sales of 1,023 new and 211 used
vehicles, and total revenues of approximately $18.2 million. The Company has
agreed to pay approximately $3.8 million for the assets of Burgess Honda.
3
With the acquisition of Beverly Hills BMW, and upon the closing of the
acquisitions of Ritchey Fipp Chevrolet and Burgess Honda, the Company will own
17 dealerships selling 13 product lines.
Automobile retailing is highly competitive. The Company's competition
includes franchised automobile dealerships, some with greater resources than the
Company, selling the same or similar makes of vehicles offered by the Company.
Other competitors include private market buyers and sellers of used vehicles,
used vehicle dealers, service center chains and independent service and repair
shops. For further discussion of competition affecting the Company's business,
see "Factors That May Affect Future Results -- Competition" and "Business --
Competition."
The following table sets forth information relating to the Company's pro
forma gross revenues for the year ended December 31, 1997, as if all dealerships
owned as of December 31, 1997, were acquired on January 1, 1997:
(in thousands)
New vehicles.................................... $ 375,294
Used vehicles................................... 143,696
Parts and service............................... 74,780
Finance and insurance........................... 10,324
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Total.......................................... $ 604,094
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STRATEGY
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The Company's long term objective is to participate in the consolidation of
the automotive retailing industry and to building a premier retail organization
of committed automotive professionals. Key elements of the Company's strategy
to achieve this objective include the acquisition of additional dealerships and
the enhancement of the Company's new vehicle dealerships by increasing sales of
higher margin products and services.
Acquire Profitable Dealerships. The Company intends to implement an aggressive,
well-disciplined, approach to acquisitions by pursuing (i) "platform
acquisitions" (large, profitable and well-managed dealerships) in large
metropolitan and high growth suburban geographic markets that the Company does
not currently serve and (ii) smaller "fill-in" acquisitions that will allow the
Company to enhance product line diversity, capitalize on economies of scale and
offer a greater breadth of products and services in each of the markets in which
the Company operates. With respect to "fill-in" acquisitions, the Company has
and will continue to consider the acquisition of dealerships which may not be
profitable but in the opinion of management represent strong opportunities for
enhanced performance under Company control. Acquisitions create opportunities
for economies of scale, including more favorable financing terms from lenders,
more sophisticated inventory management of new cars, used cars and parts, and
cost savings from the consolidation of administrative functions such as risk
management, employee training and employee benefits.
Leverage Strong Regional Presence. The Company has been focused and will
continue to focus initially on acquisition opportunities in California, where it
seeks to be the market leader. In addition, the Company believes its "Smart
Nissan" program will lead to the acquisition of several Nissan dealerships in
the San Francisco Bay Area. Although the Company has a strong market position
in Northern California, which it intends to expand, the Company's ultimate goal
is to develop a national chain of professionally-managed retail dealerships,
used car retail outlets, and supporting service businesses. The Company
initially intends to broaden its focus to include well-managed dealerships and
related businesses throughout the Western states.
Pursue Opportunities in Ancillary Products and Services. The Company intends to
pursue opportunities to increase its sales of higher-margin products and
services by expanding its service centers and after-market products businesses.
After-market products, such as custom wheels, anti-theft devices, telephones and
other accessories, enable dealerships to capture incremental revenue on new and
used vehicle sales.
4
Expand Reconditioning and Service Center Business. The Company's reconditioning
and service business provides favorable margins and is not significantly
affected by economic cycles or consumer spending habits. As the Company
increases its penetration of regional markets, starting with the San Francisco
Bay Area, it intends to consolidate this business and possibly expand it to
include body repair work that is currently being referred to local specialty
shops.
Increase Wholesale Parts Business. Over time, the Company plans to capitalize
on its growing representation of numerous manufacturers to increase its sales of
factory authorized parts to wholesale buyers such as independent mechanical and
body repair garages, and rental and commercial fleet operators.
Enhance Profit Opportunities in Finance and Insurance. The Company offers its
customers a wide range of financing and leasing alternatives for the purchase of
vehicles and third-party extended warranty service contracts. As a result of
its size and scale, the Company believes it will be able to negotiate more
favorable terms with lending institutions. Likewise, the Company expects to
negotiate to increase the fees it earns on selling third party extended warranty
service contracts.
Used Vehicle Sales. The Company believes that the used vehicle departments at
several of its dealerships can be improved. In 1998, the Company intends to
develop used vehicle facilities where management believes opportunities exist.
On a pro forma basis, in 1997, the Company sold at retail 8,664 used vehicles
and its used vehicle operations generated $144 million in revenues, or 24% of
total auto dealership revenues. Retail used vehicle sales typically generate
higher gross margins than new car sales because of limited comparability among
used vehicles and the somewhat subjective nature of their valuation. The
Company believes that used vehicles sales represent an opportunity to enhance
profit because of (i) the increased availability of late-model, low-mileage used
automobiles from the large supply of vehicles coming off short-term leases and
from rental company fleets; (ii) the generally improved quality of motor
vehicles; and (iii) the increasing differential between new and used vehicle
prices.
OPERATING STRATEGY
- ------------------
The Company's operating objectives are (i) to focus on customer
satisfaction throughout the organization in order to build long-term customer
relationships, and (ii) capitalize on operating efficiencies which will enhance
its financial performance. The Company seeks to achieve these objectives by
implementing the following operating strategies:
Establish Significant Presence in Each Geographic Market. The Company believes
that by establishing a significant market presence in operating regions,
beginning in Northern California, it will be able to provide superior customer
service through a market-specific sales, service, marketing and inventory
strategy. It is the Company's strategy, for instance, that the savings in a
market on reduced advertising costs will be re-deployed into customer service
and customer retention programs.
Achieve High Levels of Customer Satisfaction. Customer satisfaction has been
and will continue to be a focus of the Company. The Company's personalized
sales process is intended to satisfy customers by providing high-quality,
affordable vehicles in a positive, unpressured, "customer friendly" buying
environment. Among the innovations the Company is incorporating in selected
showrooms are child-care services, coffee bars and information kiosks. The
Company's service departments also seek to provide its customers with a
professional and reliable service experience of a consistently high standard.
Beyond establishing strong customer loyalty, this focus on customer satisfaction
engenders good relations with Manufacturers. Manufacturers generally measure
the customer satisfaction index ("CSI"), which is a result of a survey given to
new vehicle buyers. Some Manufacturers offer specific performance incentives,
on a per vehicle basis, if certain CSI levels (which vary by Manufacturer) are
achieved by a dealer. Manufacturers can withhold approval of acquisitions if a
dealer fails to maintain a minimum CSI score.
5
To keep management focused on customer satisfaction, the Company includes CSI
results as a component of its incentive compensation program for general
managers and sales and service personnel in all of its dealerships. The
Company's most recent CSI scores indicate that the majority of its dealerships'
scores equaled or exceeded the average CSI scores for applicable regions.
Train and Develop Qualified Management. The Company requires all of its
employees, from service technicians to regional general managers, to participate
in in-house training programs. The Company leverages the experience of senior
management, along with third party trainers from manufacturers, industry
affiliates and vendors, to train all employees. This training regimen is a
convenient and effective way to share best practices among the Company's
employees at all levels of the various dealerships. The Company believes that
its comprehensive training of all employees at every level of their career path
offers the Company a competitive advantage over other dealership groups in the
development and retention of its workforce.
Offer a Diverse Range of Automotive Products and Services. The Company offers a
broad range of automotive products and services, including a wide selection of
new and used vehicles, vehicle financing and insurance programs, replacement
parts and maintenance and repair programs. As of December 31, 1997, the
Company's dealerships offered 11 product lines ranging from economy to luxury
brands consisting of Buick, Dodge, GMC, Honda, Isuzu, Lexus, Mitsubishi, Nissan,
Pontiac, Toyota and Volkswagen. The Company has subsequently acquired a BMW
dealership. The Company also offers a variety of used vehicles at a broad range
of prices. Offering numerous new vehicle product lines enables the Company to
satisfy a variety of customers, reduces dependence on any one Manufacturer and
reduces exposure to Manufacturer supply problems and product cycles as well as
changes in consumer preferences.
Capitalize on Efficiencies in Operations. Because management compensation is
based primarily on dealership performance and expense reduction, operating
efficiencies are a significant management focus. As the Company pursues its
acquisition strategy, the Company's size and market presence should provide it
with an opportunity to negotiate favorable terms for advertising, insurance,
purchasing, bank financings, employee benefit plans and other vendor contracts.
Utilize Professional Management Practices and Incentive-Based Compensation
Programs. As a result of the Company's size, the Company's senior management
has instituted a multi-tiered management structure to effectively supervise its
dealership operations. The Company maintains a series of wholly-owned
subsidiary corporations to own and operate its dealerships. Each such
subsidiary may hold a single dealer agreement from a single manufacturer or
multiple dealer agreements from several manufacturers. In an effort to align
management's interest with that of the Company's stockholders, a portion of the
incentive compensation program will be implemented for each executive officer,
regional general manager and other key employees in the form of stock options,
with additional incentives based on the performance of individual profit
centers. The Company believes that this organizational structure, with room for
advancement and a planned equity participation program, will effectively
motivate its employees.
Apply Technology Throughout Operations. The Company is focusing on enhanced
utilization of current technology throughout the dealerships. The Company uses
computer-based technology to monitor its dealerships' daily operating
performance, consolidate administrative functions and maximize cash management.
The Company has reached favorable agreements with automotive industry systems
providers to integrate custom software programs, such as customer tracking and
data warehousing programs. The programs will help manage inventory as well as
maximize efficiency in sales, F&I, parts and service operations. The Company
will continuously implement best practices and expand state of the art software
programs to its acquired dealerships. The Company is currently implementing a
wide area network that serves regional hubs with a goal to maximize efficiency
and reduce per user costs as the Company expands.
Market on the Internet. The Company's California customer base is very active
on the Internet and the Company has been utilizing the Internet for marketing
and communications since 1995. The Company currently offers a full range of
automotive products and services over the Internet and maintains exclusive
territories with leading referral services. Internet users can search the
Company's inventory for specific vehicles and view digital
6
photographs of vehicles on line at the Company's proprietary web site
(www.anyauto.com.) The Company is aggressively expanding its Internet marketing
with the goal of increasing its market share while decreasing advertising and
other variable expenses. This technology will also streamline processes at the
dealership level allowing for support of higher closing ratios for sales
requests generated via on-line referral services such as Auto-by-Tel.
DEALERSHIP OPERATIONS
- ---------------------
New Vehicle Sales. The Company sells 11 product lines of cars, light trucks and
sport utility vehicles. The products have a broad range of prices from lower
priced, or economy vehicles, to luxury vehicles. The Company believes that its
product and price diversity reduces the risk of changes in customer preferences,
product supply shortages and aging products. Sales of new vehicles in 1997 were
approximately $375.3 million on a pro forma basis and approximately 6.8% of 1997
pro forma sales were of a luxury brand (Lexus). See "Factors That May Affect
Future Results -- Dependence on Automobile Manufacturers."
The following table sets forth, by product line, information relating to
the Company's pro forma new vehicle revenues for 1997 as if all dealerships had
been with the Company throughout the year:
NEW VEHICLE REVENUES
----------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------
PERCENTAGE OF NEW
PRODUCT LINE NEW VEHICLE REVENUES VEHICLE REVENUES
- ------------ ---------------------- --------------------
(in thousands)
Buick.............................................. $ 3,815 1.0%
Dodge.............................................. 57,211 15.3%
GMC................................................ 3,707 1.0%
Honda.............................................. 40,577 10.8%
Isuzu.............................................. 6,436 1.7%
Lexus.............................................. 25,376 6.8%
Mitsubishi......................................... 19,711 5.3%
Nissan............................................. 143,501 38.2%
Pontiac............................................ 6,730 1.8%
Toyota............................................. 64,672 17.2%
Volkswagen......................................... 3,558 0.9%
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Total Total................................... $ 375,294 100%
========= ==========
The Company seeks to provide customer-oriented service and to build lasting
customer relationships that will result in repeat and referral business. Sales
techniques and processes vary depending on the product line and local market
conditions. All of the Company's dealerships use computer technology for
prospecting and customer follow-up and extensively train sales staff to meet the
needs of customers.
Substantially all of the Company's new vehicles are acquired from
Manufacturers. Manufacturers' allocation of vehicle inventory is based
primarily on sales volume and input from dealers. Vehicle purchases are
financed through revolving credit facilities known in the industry as floor plan
lending.
The Company has started a group sales and marketing effort for Nissan
vehicles called "Smart Nissan." Under the Smart Nissan effort, all advertising
costs will be leveraged across the Smart Nissan dealership group. Smart Nissan
consists of the following dealerships owned and operated by the Company:
Serramonte Nissan, Stevens Creek Nissan, Marin Nissan, Concord Nissan, Dublin
Nissan and Capitol Nissan. The Company is considering plans to acquire
additional Nissan dealers in the San
7
Francisco Bay Area under Smart Nissan. The Company intends to grow the Smart
Nissan concept so that Smart Nissan will have multiple sales locations, parts
and service centers and computer links to credit unions.
Used Vehicle Sales. The Company sells a broad variety of makes and models of
used cars, vans, trucks and sport utility vehicles. On a pro forma basis in
1997, the Company sold 8,664 retail used vehicles. Used vehicle retail sales
for 1997 represented 32% of pro forma total retail unit sales.
The Company has formed a subsidiary, FAA Auto Factory, Inc. ("AFI") to
centralize the procurement, reconditioning, inventory management and wholesale
disposal of used vehicles. This streamlined process allows AFI to act as its
own internal auction house, providing for inventories that meet current consumer
market trends and maximizing the Company's profit on used vehicle sales. AFI
sets standardized operating policies across the Company's dealerships for used
vehicle operations. Additionally, AFI manages the market-driven redistribution
of used vehicles among the Company's dealerships. The Company believes the
establishment of AFI creates significant economies of scale, enhances control
over used vehicle inventory, and provides a competitive advantage over small
dealers.
Profits from used vehicle sales are dependent primarily on the ability to
source low-cost, high-quality used vehicles and to effectively manage inventory.
The Company's dealerships acquire their used vehicles through trade-ins, lease
expirations directly from rental car companies and auctions. Off-lease vehicles
are regarded as the highest quality in their age class due to their low mileage
and good condition relative to fleet and rental vehicles. When a leasing
customer declines to purchase the vehicle upon expiration of the lease, industry
practice is to offer it to the dealer that originated the transaction before
offering it to other dealers or selling it at auction. In addition, the Company
purchases a significant portion of its used vehicle inventory at auctions, which
offer off-lease, rental and fleet vehicles. Such auctions can be attended only
by new vehicle dealers.
The Company has taken several initiatives to enhance customer confidence in
the used vehicles that it sells, including offering third-party extended
warranties, stocking higher-quality, late-model used vehicles and participating
in manufacturer certification programs. Under such manufacturer certification
programs, which are available exclusively to new vehicle dealers, manufacturers
support used vehicles with extended manufacturer warranties and attractive
financing options. The Company performs the rigorous inspections and
reconditioning required for certification. Management believes that its size is
an advantage over smaller new vehicle dealers, who may not receive a sufficient
supply of used vehicles to justify dedicating resources to the certification
process. In addition, the Company believes that it can increase its margins on
used vehicle sales by utilizing AFI to centralize procurement, reconditioning,
inventory management and wholesale disposal of its used vehicles for its
dealerships.
The Company emphasizes retail sales of used vehicles in order to benefit
from the higher gross margins of used vehicle sales. To improve the
marketability of used vehicles, the Company is implementing a proprietary,
standard used vehicle certification program at each of its locations. The
certification program will include a 100 plus point inspection program, a three
day customer return policy, and a standard 60 day warranty.
Parts and Service. The Company provides service and parts at each of its
factory-authorized dealerships. The Company provides maintenance and repair
services at sixteen of its new vehicle dealership facilities. In the second half
of 1998, the Company intends to open its downtown San Francisco multi-brand,
full service vehicle maintenance and repair center. This 40,000 square foot, 38
service bay facility will utilize state of the art technology for both
information management and automotive equipment. The ability to service
multiple makes in one centralized location will provide an excellent recruitment
and training facility for technicians at the service center and for the
Company's dealerships. The service center is intended to provide convenience to
current sales customers, resulting in overall increased service retention, with
a goal of increasing revenues derived from higher margin products and services.
The Company utilizes a total of approximately 255 service bays at all of its
locations to provide both warranty and non-warranty services. Service and parts
sales provide higher gross margins than vehicle sales.
Historically, the automotive repair industry has been highly fragmented.
However, the Company believes the increased use of advanced technology in
vehicles has made it difficult for independent repair shops to perform
8
major or technical repairs. Additionally, manufacturers permit warranty work to
be performed only at franchised dealerships. Given the increasing technological
complexity of motor vehicles and the trend to long term warranties, the Company
believes an increasing percentage of repair work will be performed at factory-
authorized new car dealerships.
The Company regards its service operations as an integral part of its
overall approach to customer service. Vehicle service provides additional
opportunities to build long-term customer relationships. The Company uses
service follow-up and other techniques to attract and retain service customers.
Although individual dealerships vary based on markets and product lines, many
Company dealerships use variable rate or "menu" pricing structures to improve
customer satisfaction with repair service.
Sales of factory authorized equipment and parts to wholesale customers are
an integral component of parts operations at certain of the Company's
dealerships. The Company plans to capitalize on its representation of numerous
manufacturers and its experience as a wholesale parts distributor in order to
increase sales of factory authorized equipment and parts to wholesale customers.
The Company's agreements with its Manufacturers authorize it to distribute
original equipment parts for all of the product lines it represents. The
Company is adopting uniform policies at all of its dealerships with respect to
pricing, returns and order processing, in order to improve service to its
wholesale customers. The Company also intends to introduce discount and
incentive programs for its wholesale customers based upon the overall volume of
parts purchased from all dealerships.
Finance and Insurance. The Company offers its customers a wide range of
financing and leasing alternatives for the purchase of vehicles. In addition,
as a part of each sale, the Company offers extended warranty service contracts,
a variety of custom accessories, anti-theft devices and chemical protection
treatments. The Company's revenue from financing, accessory sales and extended
warranty transactions was approximately $10.3 million in 1997, on a pro forma
basis. The Company believes that its customers' ability to obtain financing at
its dealerships significantly enhances the Company's ability to sell new and
used vehicles. The Company provides a variety of financing and leasing
alternatives in order to meet the specific needs of each potential customer.
The Company further believes that its ability to obtain custom-tailored
financing for each customer on a "same day" basis provides an advantage over
many of its competitors, particular smaller competitors, which do not generate
sufficient volume to attract the diversity of financing sources that are
available to the Company. The dealerships are able to provide a customer with a
broader array of lease payment alternatives and, consequently, appeal to a term
buyer who is trying to purchase a vehicle of choice at or below a specific
monthly payment. During 1997 the Company arranged financing for approximately
50% of its new vehicle sales and approximately 55% of its used vehicle sales.
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by the Company. New vehicle leases
generally have terms of two to four years. Lease customers, therefore, return
to the new vehicle market more frequently. Leases also provide a source of
late-model, generally low mileage, vehicles for the Company's used vehicle
inventory at generally lower costs than other means of acquiring used vehicles.
Generally, leased vehicles are under warranty for the entire lease term, which
allows the Company to provide repair service to the lessee throughout the lease
term.
The Company sells its vehicle financing contracts and leases to other
parties, instead of directly financing sales, which reduces the Company's
exposure to losses from financing activities. The Company receives fees from
lenders for originating and assigning the loans and leases but is assessed a
charge back fee by lenders if a loan is canceled, in most cases, within 90 days
or within the first three payments of the loan origination. The Company
believes that its high volume of business makes its contracts more attractive to
lenders which may enable the Company to receive higher fees. Moreover, the
relatively low early payoff rate of the Company's sold contracts has allowed the
Company to negotiate better terms with lenders.
In addition to its financing activities, the Company offers extended
service contracts in connection with the sale of new and used vehicles.
Extended warranty service contracts on new vehicles supplement the warranties
offered by Manufacturers, and on used vehicles such contracts supplement any
remaining Manufacturer warranty or serve as the primary service contract.
9
Dealership Management. The Company's non-luxury dealerships are divided into
geographic zones under the authority of a regional general manager. The
regional general manager is responsible for coordinating all sales, financial,
and customer satisfaction performance at each one of the dealerships under his
control. The regional general manager relies on a general manager to assist in
the selection, training, and retention of dealership personnel. All of the
individual operating subsidiaries of the Company report to the regional general
manager who then reports to the Company's Chief Operating Officer (the "COO") on
a regular basis and provides the COO with a comprehensive monthly financial and
operating statement of the dealerships under his control. General managers are
responsible for the day to day operation of their dealerships and the
development of personnel employed at their locations. General managers of the
luxury product dealerships report directly to the COO.
In an effort to better serve the Company's consumers and to address the
vast demographic differences in the geographic areas in which the Company
operates, the Company has regionalized its training programs for sales
personnel, service advisors, parts personnel, receptionists and cashiers. To
support these efforts, the Company is developing customer retention and
relationship management programs. The Company evaluates individual and
dealership performance against each Manufacturer's regional and national
established standards. Most personnel having customer contact in each
dealership have a portion of their compensation linked to customer satisfaction
requirements established by the Manufacturer and the Company.
SALES AND MARKETING
- -------------------
The Company's marketing and advertising activities vary among its
dealerships and its markets. The Company advertises primarily through
newspapers, radio and direct mail and regularly conducts special promotions
designed to focus vehicle buyers on its product offerings. Under arrangements
with manufacturers, the Company receives a subsidy for a portion of its
advertising expenses incurred in connection with a manufacturer's vehicles.
Because of its market presence in certain markets, the Company believes it has
been able to realize cost savings on its advertising expenses due to volume
discounts and other concessions from media. The Company also believes its
consolidated marketing campaigns within particular markets result in enhanced
name recognition of particular dealerships and sales volume when compared with
smaller competitors in the same markets. The Company has been utilizing the
Internet for marketing and communications since 1995. The Company currently
offers a full range of automotive products and services over the Internet and
maintains exclusive territories with leading referral services. The Company is
aggressively expanding its Internet marketing to maintain a leading edge
position with a goal of increasing its market share while decreasing advertising
and other variable expenses.
RELATIONSHIPS WITH MANUFACTURERS
- --------------------------------
Each of the Company's dealerships operates under one or more separate sales
and service or dealer agreements ("Dealer Agreements" and individually a "Dealer
Agreement") with one or more Manufacturers which govern the relationship between
the dealership and the Manufacturers. The Company, through its wholly owned
subsidiaries, currently has 21 separate Dealer Agreements with 9 manufacturers.
The Company has entered into one or more Dealer Agreements with American Honda
Motor Co., Inc. ("Honda"), Toyota Motor Sales, Inc. ("Toyota"), Chrysler
Corporation, General Motors Corporation, American Isuzu Motors, Inc., Mitsubishi
Motor Sales of America, Inc., Nissan Motor Corporation U.S.A. ("Nissan"),
Volkswagen of America, Inc., and BMW of North America, Inc. In general, each
Dealer Agreement specifies the location of the dealership for the sale of
vehicles and for the performance of certain approved services in a specified
market area. A Dealer Agreement requires the dealer to meet specified standards
regarding showrooms, facilities and equipment for servicing vehicles,
inventories, minimum net working capital, personnel training, and other aspects
of the business of operating the dealership. Each Dealer Agreement also gives
each Manufacturer the right to approve the dealership's general manager and any
material change in management or ownership of the dealership. Each Manufacturer
may terminate a Dealer Agreement under certain limited circumstances, such as a
change in control of the dealership without Manufacturer approval, material
impairment of the financial condition of the dealership, insolvency or
bankruptcy of the dealership or a material breach of other provisions of the
Dealer Agreement.
In addition to the customary Dealer Agreement between Nissan and the
Company, the Company has entered into a Contiguous Market Ownership Agreement
with Nissan and related agreements for the establishment
10
of four Contiguous Market Ownership Areas (each a "CMO") in the San Francisco
Bay Area. Each CMO agreement provides for the Company to own and operate
multiple and contiguous Nissan Dealerships in each market. Such agreements
provide that in the event the Company desires to sell one Nissan dealership
within a specific CMO, Nissan has the right to require that the Company sell all
or none of such dealerships within such CMO. Further, in the event the Company
desires to sell or transfer one of its four San Francisco Bay Area CMO's without
Nissan's consent, Nissan in its reasonable discretion may require that the
Company sell or transfer one or all, or any combination, of the CMO's in the San
Francisco Bay Area to a proposed buyer acceptable to Nissan. Further, the Dealer
Agreements and CMO agreements and related agreements between the Company and
Nissan provide that disputes involving the agreements between Nissan and the
Company are not subject to California state regulations regarding
manufacture/dealer disputes, but subject to mediation and binding arbitration
between the Company and Nissan.
Manufacturers' policies regarding public ownership of dealerships continue
to evolve as the consolidation of automobile dealerships by publicly-held
companies moves forward. The Company believes 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 the Company currently has Dealer Agreements have
approved the Company as a publicly-held entity. Certain of the Manufacturers
have, however, placed restrictions on the Company's ability to acquire
additional dealerships as well as on the transferability of the Company's common
stock, which policies could have a material adverse effect on the Company. See
"Factors Which May Affect Future Results -- Dependence on Automobile
Manufacturers," " -- Manufacturers' Restrictions on Acquisitions," " -- Stock
Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" and
" -- Concentration of Voting Power."
Pursuant to an agreement between the Company and Toyota (the "Toyota
Agreement"), the number of Toyota dealerships which the Company may acquire is
restricted to: (i) 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 certain geographic areas as defined by Toyota); (ii)
the lesser of five dealerships or five percent of the Toyota dealerships within
a Toyota region ("Toyota Region" refers to regional geographic areas as
designated by Toyota); and (iii) seven Toyota dealerships nationally. The
Toyota Agreement also limits the number of Lexus dealerships which may be
acquired by the Company to not more than: (i) two Lexus dealerships in any Area
("Area" referring to regional geographic areas as designated by Toyota) and (ii)
three Lexus dealerships nationally. The Company currently owns and operates two
Toyota dealerships and one Lexus dealership and, subject to the restrictions
limiting the acquisition by the Company of additional dealerships within
specified geographic regions, it is currently limited to acquiring not more than
five additional Toyota dealerships and two additional Lexus dealerships. The
Toyota Agreement grants Toyota the right to approve an acquisition by any
individual or entity of twenty percent or more of the ownership or voting rights
of the Company. In the event that any such acquisition occurs with respect to
an individual or entity not approved by Toyota, the Toyota Agreement requires
the Company to take action to remediate the unapproved acquisition. Such action
to remediate an unapproved stock acquisition shall include the acquisition by
the Company of the stock acquired by such unapproved person or entity. In the
event the Company fails to reacquire the stock acquired by the unapproved entity
or obtain the consent of Toyota to such acquisition, Toyota shall have the right
to require the Company to either sell its Toyota dealerships or Toyota will have
the right to purchase the Company's Toyota dealerships.
Subsequent to the execution by the Company of the Agreement with Toyota
referred to herein above, Toyota has modified its policy on public ownership of
multiple dealerships. Under the current Toyota Division Multiple Ownership
Policy, a single owner may own and operate in excess of seven Toyota dealerships
provided that the owner can demonstrate that it meets, on a consolidated basis,
capitalization and management requirements established by Toyota for multiple
level 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 such dealerships are less than
nine percent of the sales volume of the entire region. The San Francisco Region
provides for a limit of three Toyota dealerships, provided that such dealerships
have a combined sales volume of more than nine percent of the region or up to
four dealerships within the San Francisco Region, provided the sales volume of
the combined dealerships is less than nine percent of the region. Further, the
policy
11
provides that no owner shall own or control dealerships that represent more than
twenty percent of the dealership count in a metro market as defined by Toyota.
In connection with its Honda dealerships, the Company has entered into an
Agreement with Honda (the "Honda Agreement") which limits the Company's ability
to acquire additional Honda dealerships and further restricts the
transferability of the Company's common stock. The Honda Agreement limits the
Company's ownership and acquisition of Honda dealerships to not more than: (i)
one Honda dealership in a Metro market (i.e., a geographical area designated by
Honda) having two to ten Honda dealerships; (ii) in a Metro market having eleven
to twenty Honda dealerships, to no more than two Honda dealerships; (iii) in a
Metro market having twenty-one or more Honda dealerships, to no more than three
Honda dealerships; (iv) to not more than four percent of the Honda dealerships
in any one of ten Honda zones (large geographic areas designated by Honda); and
(v) to not more than seven Honda dealerships nationally. The Honda Agreement
further limits the Company's ownership of Acura dealerships to not more than (i)
one Acura dealership in a Metro market having two or more Acura dealerships;
(ii) two Acura dealerships in any one of six Acura zones, (i.e. large
geographical areas designated by Honda); and (iii) three Acura dealerships
nationally. The Honda Agreement further requires that certain of the Company's
currently existing stockholders retain in the aggregate more than fifty percent
of the outstanding voting rights with respect to the Company. Honda also retains
the right to disapprove the acquisition by any individual or entity of more than
five percent of the Company's outstanding capital stock. If an individual or
entity which is not approved by Honda acquires in excess of five percent of the
Company's outstanding capital stock, Honda has the right to require the sale by
the Company of all of the assets of the Honda and Acura dealerships then owned
by the Company at their fair market value, which, in the event of dispute is to
be determined by binding arbitration. The Honda Agreement, by reason of its
requirement that certain of the Company's current shareholders retain more than
fifty percent of the voting control, restricts the number of voting shares of
the Company that can be offered for sale to the public.
In addition, Dealer Agreements generally provide that in the event that a
person or entity acquires more than twenty percent of the Company's common stock
and the applicable Manufacturer determines that such person or entity is not
qualified to hold an ownership interest, the Company may be required to take
action to remediate such disapproved ownership. Such action to remediate an
unapproved stock acquisition shall include the acquisition by the Company of the
stock acquired by such unapproved person or entity. In the event the Company
fails to reacquire the stock acquired by the unapproved entity or obtain the
consent of the various manufacturers to such acquisition, the manufacturers
shall have the right to require the Company to either sell such manufacturers'
dealerships or, in certain cases, such manufacturers will have the right to
purchase such manufacturers' dealerships.
COMPETITION
- -----------
The retail automotive industry is highly competitive and fragmented. The
new and used automobile sectors are characterized by a large number of
independent operators. Depending on the geographic market, the Company competes
with both dealers offering the same product lines as the Company and dealers
offering other manufacturers' vehicles. The Company also competes for vehicle
sales with auto brokers and leasing companies. The Company competes with small,
local dealerships and with large multi-franchise auto dealerships. Many of the
Company's larger competitors seeking to execute a similar consolidation strategy
as the Company's, such as Republic Industries, Inc., are larger and have greater
financial and marketing resources and are more widely known than the Company.
The Company also competes with regional and national car rental companies,
which sell their used rental cars, and used automobile "superstores," such as
AutoNation and CarMax. In the future, new competitors may enter the automotive
retailing market, including automobile manufacturers (such as Ford) that decide
to acquire direct ownership of retail dealerships. In addition, the used
vehicle superstores generally offer a greater and more varied selection of
vehicles than the Company's dealerships. As the Company seeks to acquire
dealerships in new markets, it may face significant competition (including
competition from other publicly-owned dealer groups) as it strives to gain
market share. See "Factors That May Affect Future Results -- Competition."
12
The Company believes that the principal competitive factors in vehicle
sales are the marketing campaigns conducted nationally by manufacturers and
locally by the dealerships, the ability of dealerships to offer a wide selection
of the most popular vehicles, the location of dealerships and the quality of
customer service. Other competitive factors include customer preference for
makes of vehicles, pricing (including manufacturer rebates and other special
offers) and warranties. In addition to competition for vehicle sales, the
Company also competes with other auto dealers, service stores, auto parts
retailers and independent mechanics in providing parts and service. The Company
believes 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 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 the Company's prices. In arranging financing for its customers'
vehicle purchases, the Company competes with a broad range of financial
institutions offering comparable vehicle financing alternatives. The Company
believes that the principal competitive factors in providing financing are
convenience, interest rates and contract terms.
The Company's success depends, in part, on national and regional
automobile-buying trends, local and regional economic factors and other regional
competitive pressures. The Company sells its vehicles in the greater San
Francisco Bay Area, the San Jose Metropolitan Area, San Diego County and most
recently in the Los Angeles markets, all of which are in California. Conditions
and competitive pressures affecting these markets, such as price-cutting by
dealers in these areas, or in any new markets the Company enters, could
adversely affect the Company, although the retail automobile industry as a whole
might not be affected. See "Factors That May Affect Future Results --
Competition."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
- -----------------------------------------------
The Company's operations are subject to various federal, state and local
laws and regulations including those related to taxing and licensing of
vehicles, consumer protection, insurance, advertising, used vehicle sales,
zoning and land use, and labor matters. The Company also is subject to laws and
regulations relating to business corporations generally.
Under California law as well as the laws of other states into which the
Company may expand, the Company must obtain a license in order to establish,
operate or relocate a dealership or operate an automotive repair service. These
laws also regulate the Company's conduct of business, including its advertising
and sales practices. Other states have similar requirements.
The relationship between an automobile dealership and a manufacturer is
governed by various federal and state laws established to protect dealerships
from the generally unequal bargaining power between the parties. Federal laws,
as well as California state law, prohibit a manufacturer from terminating or
failing to renew a dealer agreement without good cause. Under California law, a
manufacturer may not require a dealer to accept any vehicle, part or accessory
not voluntarily ordered by the dealer, to refuse to deliver any new vehicle,
part or accessory advertised by the manufacturer as available, or to require
monetary participation in any sales promotion or advertising campaign.
Manufacturers are entitled to approve or disapprove a proposed transferee in
connection with any transfer of a dealership. Further, a dealer is entitled to
seek judicial relief to prevent a manufacturer from establishing a competing
dealership of the same vehicle make within the dealer's relevant market area.
The Company's operations are also subject to laws governing consumer
protection. Automobile dealers and manufacturers are subject to so-called
"Lemon Laws" that require a manufacturer 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 certain written disclosures to be provided on new
vehicles, including mileage and pricing information.
The Company's F&I activities with its 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 laws regarding installment credit. Some states regulate
finance fees that may be paid in
13
connection with vehicle sales. State and federal environmental regulations,
including regulations governing air and water quality and the storage and
disposal of gasoline, oil and other materials, also apply to the Company.
The Company believes that it complies in all material respects with the
laws affecting its business. Possible penalties for violation of any of these
laws include revocation of the Company's licenses and fines. In addition, many
laws may give customers a private cause of action.
As with automobile dealerships generally, and service, parts and body shop
operations in particular, the Company's business involves the use, storage,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
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. The Company's business also involves the
past and current operation and/or removal of above ground and underground
storage tanks containing such substances or wastes. Accordingly, the Company is
subject to regulation by federal, state and local authorities establishing
health and environmental quality standards, and liability related thereto, and
providing penalties for violations of those standards. The Company is also
subject to laws, ordinances and regulations governing remediation of
contamination at facilities it operates or to which it sends hazardous or toxic
substances or wastes for treatment, recycling or disposal.
The Company believes that it does not have any material environmental
liabilities and that compliance with environmental laws and regulations will
not, individually or in the aggregate, have a material adverse effect on the
Company's results of operations or financial condition. In addition, a certain
level of protection is provided with any potential environmental issues relating
to leased facilities in that a portion of such leases provide for indemnity by
the landlord with respect to any contamination or other similar condition
existing as of the commencement of the Company's lease. Notwithstanding the
Company's belief that it does not have any material environmental liabilities,
environmental laws and regulations are complex and subject to frequent change.
There can be no assurance that compliance with amended, new or more stringent
laws or regulations, stricter interpretations of existing laws or the future
discovery of problematic environmental conditions will not require additional
expenditures by the Company, or that such expenditures will not be material.
See "Factors That May Affect Future Results -- Adverse Effect of Government
Regulation; Environmental Regulation Compliance Costs."
EMPLOYEES
- ---------
As of December 31, 1997, the Company employed 1,034 people, of whom
approximately 135 were employed in executive and managerial positions, 320 were
employed in non-managerial sales positions, 443 were employed in non-managerial
parts, service and other positions and 136 were employed in administrative
support positions. Approximately 60 employees are covered by collective
bargaining agreements with labor unions. The Company's management believes that
it has good relations with its employees.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 601 Brannan
Street, San Francisco, California 94107 and its telephone number is (415) 284-
0444. The Company leases all of the facilities used in connection with its
business. The Company believes its facilities are currently adequate for its
needs and are in good repair. In connection with its acquisition strategy, the
Company seeks to structure its transactions to avoid owning real property.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is named in claims involving the manufacture
of automobiles, contractual disputes and other matters arising in the ordinary
course of the Company's business. Currently, no legal proceedings are pending
against or involve the Company that, in the opinion of management, could
reasonably be expected to have a material adverse effect on the Company's
business, financial condition or results of operations.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for any class of the
Company's common stock. As of December 31, 1997, there were approximately 296
holders of record of the Company's Class A Common Stock and six holders of
record of the Company's Class B Common Stock. Because many of such shares of
Class A Common Stock are held by brokers and other institutions on behalf of
stockholders, the Company is unable to estimate the exact number of stockholders
represented by the holders of record, but it believes the actual number of
underlying holders of record to be in excess of 300.
The Company has not paid dividends on any class of its common stock for
the Company's two most recent fiscal years or any subsequent interim period,
excluding S corporation distributions for the Price Dealerships. The Company
currently intends to retain future earnings, if any, to finance the development
and expansion of its business and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. The Company's Certificate of
Incorporation restricts payment of dividends on the Company's capital.
Specifically, it prohibits the payment of dividends on its common stock so long
as any shares of the Company's 8% Cumulative Redeemable Preferred Stock due 2005
remain outstanding and any dividends owed thereon remain unpaid. Under the terms
of its financing arrangements, the Company is also subject to restrictions on
paying dividends on its common stock.
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------
On July 1, 1997, the Company 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 the
Company.
In connection with the reincorporation, the Company is also deemed to
have issued shares of the Delaware corporation to all of its stockholders in
exchange for their shares in the Nevada corporation. This issuance of shares was
made under an exemption to the registration requirements of the Act found in
Section (a)(2) of Rule 145 promulgated thereunder.
On March 31, 1997, the Company issued 200,000 shares of its Class A
Common Stock to Steven Hallock for $200 pursuant to an agreement between the
Company and Mr. Hallock dated November, 1996 and based on a valuation of the
Company's Class A Common Stock on such date. This issuance of the Company's
securities was made in reliance on Section 4(2) of the Act.
On March 31, 1997, the Company issued 20,000 shares of its Class A
Common Stock to Matthew Travis for $20.00. This issuance of the Company's
securities was made in reliance on Section 4(2) of the Act.
On April 23, 1997, the Company issued 479,000 shares of its Class A
Common Stock to the Price Trust u/d/t 10/5/88 for $479.00 in cash. This issuance
was pursuant to an agreement with the Company to issue such shares dated
November, 1996 and based on a valuation of the Company's Class A Common Stock on
such date. This issuance of the Company's securities was made in reliance on
Section 4(2) of the Act.
On July 10, 1997, the Company issued warrants to purchase 303,200
shares of its Class A Common Stock to Brown, Gibbons & Lang in partial
consideration for consulting services performed for the Company. The exercise
price of such warrants is $0.92 per share. These warrants are exercisable at any
time prior to July 10, 2002. This issuance of the Company's securities was made
in reliance on Section 4(2) of the Act.
16
On July 10, 1997, the Company issued warrants to purchase 5,000 shares
of its Class A Common Stock to T.J. Hollerhoff in partial consideration for
services performed for the Company. The exercise price of such warrants is $0.92
per share. These warrants are exercisable at any time prior to July 10, 2002.
This issuance of the Company's securities was made in reliance on Section 4(2)
of the Act.
On July 10, 1997, the Company issued warrants to purchase 2,500 shares of
its Class A Common Stock to Carlanne Foushee in partial consideration for
services performed for the Company. The exercise price of such warrants is
$0.92 per share. These warrants are exercisable at any time prior to July 10,
2002. This issuance of the Company's securities was made in reliance on Section
4(2) of the Act.
On July 10, 1997, the Company issued warrants to purchase 1,000 shares of
its Class A Common Stock to Martha Walker in partial consideration for services
performed for the Company. The exercise price of such warrants is $0.92 per
share. These warrants are exercisable at any time prior to July 10, 2002. This
issuance of the Company's securities was made in reliance on Section 4(2) of the
Act.
In connection with the acquisition of the Mr. Thomas A. Price's interest in
the Price Dealerships by the Company on July 11, 1997, the Company issued
3,991,600 shares of its Class A 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. This issuance of the Company's securities was made in reliance on
Section 4(2) of the Act.
In connection with the acquisition of Mr. Donald V. Strough's interest in a
Honda dealership located in Concord, California ("Concord Honda") by the Company
on October 15, 1997, the Company issued 1,330,000 shares of its Class A Common
Stock to the Strough Revocable Trust. This issuance was pursuant to an
agreement with the Company to issue such shares dated July 11, 1997 and based on
a valuation of Company's Class A Common Stock on such date. This issuance of
the Company's securities was made in reliance on Section 4(2) of the Act.
In connection with the acquisition of Mr. T. Al Babbington's interest in
the Price Dealerships by the Company on July 11, 1997, the Company issued
626,000 shares of its Class A Common Stock to Mr. Babbington in exchange for
shares of common stock of the corporations comprising the Price Dealerships.
This issuance of the Company's securities was made in reliance on Section 4(2)
of the Act, which exempts from the registration requirements of Section 5 of the
Act those transactions not involving a public offering.
In connection with the acquisition of Mr. Fred Cziska's interest in the
Price Dealerships by the Company on July 11, 1997, the Company issued 704,400
shares of its Class A Common Stock to Mr. Cziska in exchange for shares of
common stock of the corporations comprising the Price Dealerships. This
issuance of the Company's securities was made in reliance on Section 4(2) of the
Act.
In connection with the acquisition of Mr. John Driebe's interest in the
Price Dealerships by the Company on July 11, 1997, the Company issued 204,000
shares of its Class A Common Stock to Mr. Driebe in exchange for shares of
common stock of the corporations comprising the Price Dealerships. This issuance
of the Company's securities was made in reliance on Section 4(2) of the Act.
In connection with the acquisition of Valley Auto Center by the Company on
July 11, 1997, the Company issued 290,000 shares of its Class A Common Stock to
Asian Pacific Industries, a Washington corporation. This issuance of the
Company's securities was made in reliance on Section 4(2) of the Act.
On September 26, 1997, the Company issued warrants to purchase up to 20,000
shares of its Class A Common Stock to Capman, Inc. as partial consideration for
certain assets acquired by the Company. The exercise price of such warrants is
$0.92 per share. These warrants are exercisable at any time prior to September
26, 2002. This issuance of the Company's securities was made in reliance on
Section 4(2) of the Act.
In connection with the Company's lending arrangements, on July 11, 1997,
the Company issued $24,000,000 in notes, 3,032,000 shares of its Class B Common
Stock for an aggregate consideration of $2,789,440,
17
a total of 3,500 shares of its 8% Cumulative Redeemable Preferred Stock due 2005
for an aggregate consideration of $3,500,000, and 500 shares of its Redeemable
Preferred Stock for an aggregate consideration of $500,000 to three affiliates
of the Trust Company of the West. These issuances of the Company's securities
were made in reliance on Section 4(2) of the Act. The Company's Preferred Stock
is not convertible into any other form of equity security. Each share of the
Class B Common Stock of the Company is convertible into one share of the Class A
Common Stock of the Company at either (i) the holder's option, or (ii)
automatically upon the closing of an initial public offering of any class of the
Company's common stock resulting in gross proceeds to the Company of $50,000,000
and a listing of that class on a nationally recognized stock exchange, including
Nasdaq.
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other financial information included elsewhere in this Form 10-
K. The following Selected Financial Data represents the historical financial
information of the Price Dealerships prior and subsequent to the Combination on
July 11, 1997, and the financial information of all other dealerships acquired
by the Company in 1997 from the date of acquisition through December 31, 1997.
Amounts are in thousands, except per share data.
Selected financial data for each of the five years ended December 31, 1997, is
as follows (in thousands, except per share data):
Twelve months ended December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------
Net Sales $ 474,048 $ 332,522 $ 248,185 $ 222,381 $ 183,684
Combination and related expenses(1) 2,268 - - - -
Operating income 5,072 3,919 4,475 614 (87)
Net income 64 1,693 1,391 1,709 540
Pro forma net income(2) - 1,027 836 1,025 324
Net loss per share(3),(4)
-basic and diluted (0.01) - - - -
Pro forma net income per share(4)
-basic and diluted - 0.19 0.15 0.19 0.06
Total assets 124,002 56,127 54,423 46,403 40,116
Long-term debt 21,938 - 112 686 1,136
Preferred stock 3,439 - - - -
Stockholders' equity (5) $ 6,563 $ 4,880 $ 6,644 $ 6,573 $ 6,806
(1) 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.
(2) The Company was an S Corporation until January 1, 1997, and accordingly was
not subject to federal income taxes prior to January 1, 1997. Pro forma
net income reflects federal and state income taxes as if the Company had
been a C Corporation, based on the effective tax rates that would have been
in effect during these periods.
(3) For 1997, net loss per share is calculated by reducing net income of
$64,000 by cumulative redeemable preference dividends of $128,000,
redeemable preferred stock liquidation preference accretion of $40,000, and
preferred stock discount amortization of $45,000. This net loss available
to common stockholders of $149,000 is then divided by the weighted average
shares outstanding. Diluted earnings per shares does not include dilutive
securities, such as options and warrants as their inclusion would be anti-
dilutive.
(4) Prior to 1997, net income per share is presented on a pro forma basis using
the 5,526,000 shares issued to the Price Dealerships stockholders in the
Combination.
18
(5) Stockholders' equity is presented net of advances to stockholders during
the years 1993-1996, accordingly, the change in stockholders' equity is
reflected net of stockholder's advances.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth selected condensed financial data for the Company
expressed as a percentage of total sales for the periods indicated below.
Year-Ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
New vehicles 61.2% 60.2% 59.3%
Used vehicles 23.5% 24.6% 24.6%
Service, parts and other 15.3% 15.2% 16.1%
Total sales 100.0% 100.0% 100.0%
Gross profit 14.1% 12.9% 14.1%
Income before income taxes 0.1% 0.5% 0.6%
Effective July 11, 1997, FirstAmerica Automotive, Inc., a public company with no
significant assets or operations, combined (the "Combination") with a group of
six 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 which shares
represent a controlling interest in the Company. During 1997, the Company
acquired a dealership from Donald V. Strough, the Company's Chairman, and an
additional seven dealerships from unrelated third parties. The Combination was
accounted for as the acquisition of FirstAmerica Automotive, Inc. by the Price
Dealerships, and accordingly, the financial information for periods before the
Combination represent financial information of the Price Dealerships. The
Company has accounted for all of its dealership acquisitions using the purchase
method of accounting, and, as a result, does not include in its financial
statements the results of operations of those dealerships prior to the date of
acquisition. FirstAmerica Automotive, Inc. and the Price Dealerships are
collectively referred to as "FirstAmerica" or the "Company".
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Sales. Sales for the Company increased $141.5 million, or 42.6% to $474.0
million for the year ended December 31, 1997 from $332.5 million in 1996. The
Company acquired eight dealerships in 1997, which for the periods following
their acquisition accounted for $133.2 million or 40.9% of the increase in 1997
revenues. Sales increased at the Company's dealerships owned throughout 1997
and 1996 by 1.7%, due primarily to increases in new vehicle revenues.
New Vehicles. The Company sells eleven domestic and imported brands
ranging from economy to luxury vehicles, as well as sport utility vehicles,
minivans and light trucks. In 1997 and 1996, the Company sold 13,835 and
9,450 new vehicles, respectively, generating revenues of $290.3 million and
$200.2 million, which constituted 61.2% and 60.2% of the Company's total
sales, respectively. The increase in revenues and units is due primarily
to the dealerships acquired in 1997. The Company purchases substantially
all of its new vehicle inventory directly from manufacturers that allocate
new vehicles to dealerships based on the amounts sold by the dealership and
by the dealership's market area. The Company will also exchange vehicles
with other dealers to accommodate customer demand and to balance inventory.
Average unit prices decreased 1.0% from $21,185 to $20,982 per vehicle due
to the lower prices in the product mix of dealerships acquired in 1997.
Used Vehicles. The Company sells a variety of makes and models of used
vehicles and light trucks of varying model years and prices. In 1997 and
1996, the Company sold 9,462 and 7,415 retail and wholesale used vehicles,
respectively, generating revenues of $111.6 million and $81.7 million,
which
20
constituted 23.5% and 24.6% of the Company's total revenue, respectively.
Average unit prices increased 7.1% from $11,019 to $11,796 per vehicle,
primarily due to the Company's ability to better distribute its used
vehicle inventories among dealerships with the introduction of AFI.
Service, parts and other revenues. Service, parts and other revenues
includes revenue from the sale of parts, accessories, maintenance and
repair services, and from fees earned on the sale of vehicle financing
notes and warranty service contracts. Finance fees are received for notes
sold to finance companies for customer vehicle financing. Warranty service
contract fees are earned on extended warranty service contracts that are
sold on behalf of insurance companies. Service, parts and other revenue
increased 42.5% in 1997 from $50.6 million in 1996 to $72.2 million, due to
a 7.1% increase in financing fees and a 35.4% increase in service
department maintenance and repairs, largely attributable to the dealerships
acquired. To a limited extent, revenues from the sale of parts,
maintenance and repair are counter-cyclical to new vehicle sales because
owners repair existing vehicles rather than buy new vehicles. The Company
believes this helps mitigate the effects of any downturns in the new
vehicle sales cycle.
GROSS PROFIT. The Company's overall gross profit margins increased from 12.9%
in 1996 to 14.1% in 1997, primarily due to increases in margins on sales, parts
and other, and to a lesser extent, increases in the used vehicle profit margins.
Gross profit increased 56.3% during 1997 and totaled $67.0 million, compared
with $42.9 million for 1996, because of the increase in new and used vehicle
unit sales as well as service, parts and other operating revenues contributed
from the dealerships acquired in 1997. The gross profit margin on new vehicle
sales during 1997 and 1996 was relatively consistent at 6.2% and 6.1%
respectively. The gross profit margin on used vehicle sales was 8.0% in 1997
and 6.8% in 1996. This increase is primarily due to the Company's emphasis on
improving the used vehicle reconditioning process and implementation of best
practices. Gross profit margins on service, parts and other operating revenue
increased from 49.7% of revenues in 1996 to 55.4% in 1997, primarily due to
higher profitability in service, parts and maintenance activities due to
increased emphasis on its service operations and profitability.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's selling, general and
administrative expense increased $20.7 million, or 53.1%, to $59.6 million for
1997 compared to $38.9 million for 1996. Selling, general and administrative
expense as a percentage of sales increased to 12.6% for 1997 from 11.7% for
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 the Company's acquisition strategies.
COMBINATION AND RELATED EXPENSES. The Company incurred $2.3 million in certain
legal, accounting, consulting and compensation expenses associated with the
Combination and the development of the Company's organization and business plan.
INTEREST EXPENSE. Floor plan interest expense increased $0.7 million or 25.6%
to $3.7 million for the year ended December 31, 1997 compared to $2.9 million
for 1996 primarily as a result of increased floor plan debt in 1997 from the
acquired dealerships. Interest expense other than floor plan increased due to
debt incurred for the combination and acquisition of additional dealerships
during 1997.
INCOME TAX EXPENSE. Income tax expense increased to $0.4 million in 1997 from
$48,000 in 1996 due to the Company's change in status from an S Corporation to a
C Corporation on January 1, 1997. The Company's effective tax rate for 1997 was
87.5% compared to 2.8% for 1996 due to certain non-deductible stock compensation
expenses incurred in 1997 and the Company's change in tax status from 1996. On
January 1, 1997, the Company's 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 LIFO inventory change recapture. In addition,
the Company incurred $0.3 million in nondeductible stock issuance expenses
associated with the Combination. The Company's effective tax rate in the future
may be affected by certain nondeductible expenses incurred as a result of the
acquisitions of additional dealerships.
21
NET INCOME. Net income decreased from $1.7 million in 1996 to $64,000 in 1997,
primarily due to one-time Combination and related expenses discussed above.
1996 COMPARED TO 1995
The following discussion relates only to the results of operations of the Price
Dealerships and therefore is not directly comparable to the Company's results of
operations for the year ended December 31, 1997 which include the results of
operations of eight additional dealerships acquired by the Company in 1997 from
the date of their acquisition.
Sales. Sales increased $84.3 million, or 34.0% from $248.2 million for 1995, to
$332.5 million for the year ended December 31, 1996. The increase in sales was
primarily due to the acquisition of an additional dealership in the fourth
quarter of 1995, which resulted in increased vehicles sales, and service, parts
and other revenues.
New Vehicles. In 1996 and 1995, the Company sold 9,450 and 7,116 new
vehicles, respectively, generating revenues of $200.2 million and $147.1
million, which constituted 60.2% and 59.3%, respectively, of the Company's
total revenues. The average new vehicle unit price increased 2.5% from
$20,672 in 1995 to $21,184 in 1996 due to manufacturers' price increases.
Used Vehicles. In 1996 and 1995, the Company sold 7,415 and 6,460 used
vehicles, respectively, generating revenues of $81.7 million and $61.0
million, constituting 24.6% and 24.6%, respectively, of the Company's total
revenues. Average unit prices increased 16.8% from $9,438 to $11,019 per
vehicle due to increased sales of used luxury vehicles.
Service, parts and other. Service, parts and other revenue includes
revenue from the sale of parts, accessories, maintenance, and repair
services, and from fees earned on the sale of vehicle financing notes and
warranty service contracts. Revenues increased $10.5 million or 26.2%,
from $40.1 million in 1995 to $50.6 million in 1996, primarily due to
increased parts and service revenues.
GROSS PROFIT. Gross profit margins overall decreased from 14.1% to 12.9% of
sales, primarily due to an increased percentage of new vehicle sales which have
lower profit margins than used vehicles, service, parts and other. Gross profit
increased $7.9 million or 22.8% during 1996 to $42.9 million, compared with
$34.9 million for 1995, primarily due to the additional dealership acquired in
the fourth quarter of 1995. The gross profit margin on new vehicle sales during
1996 and 1995 was 6.1% and 6.8%, respectively. The decrease is primarily due to
changes in manufacturer incentive programs in 1996, as well as a Company effort
to increase new vehicle sales volume. The Company's gross profit margin on used
vehicle sales was 6.8% in 1996 and 6.5% in 1995, and margins on service, parts
and other revenue decreased from 52.4% in 1995 to 49.7% in 1996, due to a
decrease in parts and service margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $8.5 million, or 27.9%, to $38.9 million for
1996 compared to $30.4 million for 1995, primarily due to a dealership acquired
in late 1995. Selling, general and administrative expense as a percentage of
sales decreased to 11.7% for 1996 from 12.3% for 1995, primarily due to
streamlining of operations and increased synergies between the operating
subsidiaries.
INTEREST EXPENSE. Floor plan interest expense decreased $0.2 million, or 6.5%
from $3.1 million to $2.9 million due to lower inventory levels and lower
average interest rates.
OTHER INCOME, NET. Other income, net, increased $0.6 million from $0.1 million
in 1995 to $0.7 million in 1996, primarily due to the sale of assets, as well as
other non-dealer services income.
INCOME TAX EXPENSE. Income tax expense increased from $26,000 to $48,000 from
1995 to 1996, for increases in minimum state income taxes. For 1996 and 1995,
the Company elected S corporation status and as a result the
22
Company was not subject to federal income taxes. Income tax expense, presented
on a pro forma basis had the Company been a Corporation, would have been $0.7
million and $0.6 million, for 1996 and 1995, respectively.
NET INCOME. Net income was $1.7 million (0.5% of sales) for the year ended
December 31, 1996, compared to $1.4 million (0.6% of sales), for 1995, as a
result of the individual items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and liquidity requirements are primarily for acquiring new
dealerships, working capital, and expanding existing facilities. Historically,
the Company has relied primarily upon cash flows from operations, floor plan,
financing, and other borrowings under its credit facility to finance its
operations, and the proceeds from its private debt placements with finance
companies to finance its expansion. At December 31, 1997, the Company had
working capital of $15.8 million including $2.9 million in cash.
During 1997, operating activities resulted in net cash used in operations of
$7.6 million compared to $4.4 million provided by operations in 1996, a net use
of $24.8 million, primarily due to increases in inventories and receivables
resulting primarily from dealerships acquired during 1997. This increase was
largely offset by a $7.7 million increase in flooring notes payable and a $9.7
million increase in accounts payable and accrued liabilities.
In 1997, the net cash used in investing activities totaled $12.8 million, which
consisted of $11.7 million used for acquisitions and $1.1 million for expansion
and improvement of existing facilities. This compared to $0.8 million used in
1996 for expansion and improvement of facilities.
Net cash provided by financing activities totaled $22.7 million, which consisted
of $21.9 million resulting from the issuance of senior notes, $4.0 million
borrowed on secured lines of credit and $6.1 million from the issuance of common
and preferred stock. Proceeds were used to distribute $4.0 million to the
stockholders of the Price Dealerships as part of the Combination, repay $1.6
million in notes payable and $3.6 million in certain investment banking and loan
origination costs associated with the private placement of senior notes and
preferred stock discussed below.
Flooring Notes Payable and Secured Lines of Credit
At the time of the Combination, the Company entered into a three year $175
million Loan and Security Agreement (the "Loan Agreement") with a financial
company, replacing the Company's existing $37 million line of credit.
The Loan Agreement permits the Company to borrow up to $115 million in flooring
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 Agreement also provides a
discretionary line up to $25 million ("Discretionary Advances"), under which the
financial company will make advances in its absolute discretion upon request of
the Company.
As of December 31, 1997, the Company had flooring notes payable, Revolver
Advances, and Discretionary Advances outstanding of $66.5 million, $4.0 million,
and $0, respectively.
Flooring notes payable are due when vehicles are sold, leased, or delivered.
Revolver Advances are due whenever the borrowing base as defined in the Loan
Agreement is exceeded and are included in secured lines of credit in the
accompanying financial statements. The Loan Agreement grants a collateral
interest in substantially all of the Company's assets.
Interest rates on the flooring notes and the Revolver Advances are variable and
change based on movements in the prime rate. The interest rates equal the prime
rate minus 75 to 35 basis points; 7.75% to 8.15% at December 31, 1997,
respectively. During 1997, the average monthly borrowing on the flooring notes
and Revolver Advances was $44.0 million and $0.3 million, respectively, and the
aggregate average interest rate was 7.75%.
23
The Loan Agreement contains various financial covenants such as minimum interest
coverage, working capital, and maximum debt to equity ratios.
Senior Notes
At the time of the Combination, the Company entered into a Securities Purchase
Agreement (the "Agreement") with a financial company to provide an aggregate
funding commitment of up to $40 million. In exchange for the $40 million, the
Company may issue on a pro-rata basis up to $36 million of 12.375% Senior Notes
(Notes), $3.5 million 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.
At the time of the Combination, the Company 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, 3.5 million shares of CRPS
at a discount of $0.6 million, 0.5 million shares of RPS at a discount of $0.1
million and 3 million shares of Class B Common Stock at $0.92 per share. The
Notes, CRPS and RPS 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 Notes discount
amortization is included in interest expense and the CRPS and RPS discount
amortization is recorded as a deduction from retained earnings.
The Notes are unsecured and subordinated to all debts of the 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 are subordinate to all the debt of the
Company and its subsidiaries and have priority over the common stock of the
Company. 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, 1997 to June 30, 1998 is 110% of the principal balance
and decreases by 1.25% for each year beginning July 1, thereafter. If the
aggregate outstanding principal balance, at any time, is less than $2 million,
the Company is required to redeem all outstanding Notes.
On July 1, 2003 and July 1, 2004, the Company must redeem Notes in the aggregate
principal amount equal to the lesser of (a) 30% of the aggregate principal
amount of Notes issued and (b) the aggregate amount of issued and outstanding
Notes on such date, at the applicable redemption price plus all accrued and
unpaid interest on the Notes to the redemption date. On June 30, 2005, the
Company must redeem all remaining issued and outstanding Notes, paying all
outstanding principal and accrued and unpaid interest.
If the Company has a public offering of its stock, the Company may within 45
days of the consummation thereof, redeem all the outstanding Notes. In such
circumstances, the redemption price for the period beginning July 1, 1997 to
June 30, 1998 is 105% of the principal balance and decreases by 0.75% for each
year beginning July 1, thereafter.
The 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.
The Company incurred $1.5 million in interest expense related to the Notes
during 1997, including $88,000 for the non-cash amortization of discount.
The Company's principal source of growth has been from acquisitions and this is
expected to continue. The Company believes that its existing capital resources
will be sufficient to fund its current acquisition commitments. In 1998, the
Company completed the acquisition of one dealership for $11.9 million, and
currently has two automobile dealership acquisitions pending for an aggregated
estimated purchase price of $7.0 million. To the extent the Company pursues
additional significant acquisitions, it will need to raise additional capital
through the public or private issuance of equity or debt securities or through
additional borrowings from financial institutions.
24
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales have been 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, financial performance for the Company is
generally lower during the first and fourth quarters than during the other
quarters of each fiscal year. However, this did not hold true for the fourth
quarters of 1997 and 1996. Management believes 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 Statement of
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 will be effective for the fiscal years ending after December 15,
1998, and the Company does not intend to adopt this statement prior to the
effective date.
In June 1997, the Financial Accounting Standards Board also issued Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information." This statement provides revised disclosure
guidelines for segments of an enterprise based on management's approach to
defining operating segments. This statement is effective for fiscal years
ending after December 15, 1998. The management of the Company believes that it
currently operates in only one industry segment and analyzes operations on a
Company-wide basis, therefore the statement is not expected to impact the
Company.
INFLATION
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's revenues or
profitability. In the past, the Company has been able to maintain its profit
margins during inflationary periods.
YEAR 2000 CONVERSION
The Company has assessed the ability of its software and other computer systems
to properly utilize dates beyond December 31, 1999 (the "Year 2000 Conversion").
Management believes that the costs of the modifications and conversions required
will not be material.
Although management believes it will not have material Year 2000 Conversion
issues, its future operations are dependent upon the ability of its vendors and
suppliers to successfully address the Year 2000 Conversion issues. There can be
no assurance that the computer systems of other companies upon which the
Company's own computer system relies or upon which its business is dependent,
will be timely converted, or that failure of another company to convert will not
adversely affect the Company.
25
FACTORS THAT MAY AFFECT FUTURE RESULTS
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
- --------------------------------------
Each of the Company's dealerships operates pursuant to a Dealer Agreement
between the applicable Manufacturer and the subsidiary of the Company that
operates such dealership. The Company is dependent to a significant extent on
its relationship with such Manufacturers.
Nissan, Toyota, Chrysler and Honda accounted for approximately 38.2%,
17.2%, 15.3%, and 10.8%, respectively of the Company's 1997 pro forma new
vehicle revenues. No other Manufacturer accounted for more than 10% of the new
vehicle revenues of the Company during 1997. See "Business -- New Vehicle
Sales," and " - Relationships with Manufacturers." Accordingly, a significant
decline in the popularity of Nissan, Toyota, Honda, and Chrysler new vehicles
could have a material adverse effect on the Company. Manufacturers exercise a
great degree of control over the operations of the Company's dealerships. Each
of the Dealer Agreements provides for termination or non-renewal for a variety
of causes, including any unapproved change of ownership or management and other
material breaches of the Dealer Agreement. The Company believes that it is in
compliance in all material respects with all its Dealer Agreements. The Company
has no reason to believe that it will not be able to renew all of its Dealer
Agreements upon expiration particularly given the applicable law which
substantially restricts the ability of a Manufacturer to decline to renew a
Dealer Agreement, but there can be no absolute assurance that such Dealer
Agreements will be renewed or that the terms and conditions of such renewals
will be favorable to the Company. In the unlikely event that a Manufacturer
declines to renew one or more of the Company's significant Dealer Agreements,
such action could have a material adverse effect on the Company and its
business. Actions taken by Manufacturers to exploit their superior bargaining
position in negotiating the terms of such renewals or otherwise could also have
a material adverse effect on the Company. See "Business -- Relationships with
Manufacturers."
The Company also depends on the Manufacturers to provide it with a
desirable mix of popular new vehicles that produce the highest profit margins
and which may be the most difficult to obtain from the Manufacturers. If the
Company is unable to obtain a sufficient allocation of the most popular
vehicles, its profitability may be materially adversely affected. In some
instances, in order to obtain additional allocations of these vehicles, the
Company purchases a larger number of less desirable models than it would
otherwise purchase and its profitability may be materially adversely affected
thereby. The Company's dealerships depend on the Manufacturers for certain
sales incentives and other programs that are intended to promote dealership
sales or support dealership profitability. Manufacturers have historically made
many changes to their incentive programs during each year. A reduction or
discontinuation of a Manufacturer's incentive programs may materially adversely
affect the results of operations of the Company.
The success of each of the Company's dealerships depends to a great extent
on the financial condition, marketing, vehicle design, production capabilities
and management of the Manufacturers which the Company represents. Events such
as strikes and other labor actions by unions, or negative publicity concerning a
particular Manufacturer or vehicle model, may materially and adversely affect
the Company. Similarly, the delivery of vehicles from Manufacturers later than
scheduled, which may occur particularly during periods when new products are
being introduced, can lead to reduced sales. Although, the Company has
attempted to lessen its dependence on any one Manufacturer by establishing
dealer relationships with a number of different domestic and foreign automobile
Manufacturers, adverse conditions affecting Nissan, Toyota, Honda, and Chrysler
in particular, could have a material adverse affect on the Company. In the
event that the Company is unable to obtain a satisfactory number or mix of
vehicle types from a Manufacturer, the Company may need to purchase inventory
from other automobile dealers at prices higher than it would be required to pay
to the Manufacturers in order to carry an adequate level and mix of inventory.
Consequently, such events could materially adversely affect the financial
results of the Company. See "Business -- New Vehicle Sales" and " --
Relationship with Manufacturers."
26
Many Manufacturers attempt to measure customers' satisfaction with their
sales and warranty service experiences through systems which vary from
Manufacturer to Manufacturer but which are generally known as "CSI". These
Manufacturers may use a dealership's CSI scores as a factor in evaluating
applications for additional dealership acquisitions and other matters such as
vehicle inventory allocations. The components of CSI have been modified from
time to time in the past, and there is no assurance that such components will
not be further modified or replaced by different systems in the future. To
date, the Company has not been adversely affected by these standards and has not
been denied approval of any acquisition based on low CSI scores. However, there
can be no assurance that the Company will be able to comply with such standards
in the future. Failure of the Company's dealerships to comply with the
standards imposed by Manufacturers at any given time may have a material adverse
effect on the Company.
The Company must also obtain approvals by the applicable Manufacturer for
any of its acquisitions. See " -- Risks Associated with Acquisitions."
COMPETITION
- -----------
Automobile retailing is a highly competitive business with over 22,000
Manufacturer authorized automobile dealerships existing in the United States at
the beginning of 1997. The Company's competition includes authorized automobile
dealerships selling the same or similar makes of new and used vehicles offered
by the Company in the same markets as the Company and sometimes at lower prices
than those of the Company. These dealer competitors may be larger and have
greater financial and marketing resources than the Company. Other competitors
include other dealers, private market buyers and sellers of used vehicles, used
vehicle dealers, service center chains and independent service and repair shops.
Gross profit margins on sales of new vehicles have been declining for some time.
The Company could experience margin pressure on its used vehicle sales. The
used vehicle market faces increasing competition from non-traditional outlets
such as used-car "superstores," which use sales techniques such as one price
selling, and sales via the Internet. Several groups have begun to establish
nationwide networks of used vehicle superstores. In addition, certain
Manufacturers, such as Ford, have publicly announced that they may directly
enter the retail market in the future, which could have a material adverse
effect on the Company. The increased popularity of short-term vehicle leasing
also has resulted, as these leases expire, in a large increase in the number of
late model vehicles available in the market, which puts added pressure on
margins for new vehicle sales. As the Company seeks to acquire dealerships in
new markets and thus gain market share, it may face increasingly significant
competition including from other large dealer groups including dealer groups
that have publicly-traded equity.
The Company's Dealer Agreements do not give the Company the exclusive right
to sell a Manufacturer's product within a given geographic area. The Company
could be materially adversely affected if any of its Manufacturers award
dealerships to others in the same markets where the Company is operating,
although applicable law significantly limits the ability of a Manufacturer to
establish another dealership within close proximity to an existing dealer. A
similar adverse affect could occur if existing competing dealers increase their
market share in the Company's market area. Further, the Company's gross margins
may decline over time as it expands into markets where it does not have a
leading position. These and other competitive pressures could materially
adversely affect the Company's results of operations. See "Business --
Competition."
OPERATING CONDITION OF ACQUIRED BUSINESSES
- ------------------------------------------
Although the Company believes that as a matter of course it conducts a
prudent level of investigation regarding the operating condition of the
dealerships to be purchased in light of the circumstances of each transaction,
certain unavoidable levels of risk remain regarding the actual operating
condition of the dealerships being acquired. Until the Company actually assumes
operating control of any acquired assets, it may not be able to ascertain their
actual value and, therefore, may be unable to ascertain whether the price paid
for such assets represents a fair valuation.
27
RISKS OF CONSOLIDATING OPERATIONS AS A RESULT OF THE ACQUISITIONS
- -----------------------------------------------------------------
Each dealership or group to be acquired by the Company will have been
operated and managed as a separate independent entity prior to its acquisition,
and the Company's future operating results will depend on its ability to
integrate the operations of these businesses and manage the combined enterprise.
There can be no assurance that the management group of the Company will be able
to effectively and profitably integrate in a timely manner each of its
dealership acquisitions, or to manage the combined entity without substantial
costs, delays or other operational or financial problems. The inability of the
Company to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS
- ----------------------------------
The retail automobile industry is considered a mature industry in which
minimal growth is expected in unit sales of new vehicles. Accordingly, the
Company's future growth will depend in large part on its ability to acquire
additional dealerships as well as on its ability to manage expansion, control
costs in its operations and consolidate dealership acquisitions into existing
operations. In pursuing a strategy of acquiring other dealerships, the Company
faces risks commonly encountered with growth through acquisitions. These risks
include, but are not limited to, incurring significantly higher capital
expenditures and operating expenses, failing to assimilate the operations and
personnel of the acquired dealerships, disrupting the Company's ongoing
business, dissipating the Company's limited management resources, failing to
maintain uniform standards, controls and policies, impairing relationships with
employees and customers as a result of changes in management and causing
increased expenses for accounting and computer systems, as well as integration
difficulties. The Company expects that it will take approximately one year to
fully integrate an acquired dealership into the Company's operations and realize
the full benefit of the Company's operating strategies and systems. There can
be no assurance that the Company will be successful in overcoming these risks or
any other problems encountered with such acquisitions. Acquisitions may also
result in significant goodwill and other intangible assets that are amortized in
future years and reduce future stated earnings. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business --
Growth Strategy."
Although there are many potential acquisition candidates that fit the
Company's acquisition criteria, there can be no assurance that the Company will
be able to consummate any such transactions in the future or identify those
candidates that would result in the most successful combinations, or that future
acquisitions will be able to be consummated at acceptable prices and terms. In
addition, increased competition for acquisition candidates could result in fewer
acquisition opportunities for the Company and higher acquisition prices. The
magnitude, timing and nature of future acquisitions will depend upon various
factors, including the availability of suitable acquisition candidates,
competition with other dealer groups for suitable acquisitions, the negotiation
of acceptable terms, the Company's financial capabilities, the availability of
skilled employees to manage the acquired companies and general economic and
business conditions.
In addition, the Company's future growth as a result of its acquisition of
automobile dealerships will depend on its ability to obtain the requisite
Manufacturer approvals. There can be no assurance that it will be able to
obtain such consents in the future. See " -- Manufacturers' Restrictions on
Acquisitions" and "Business -- Relationships with Manufacturers."
In certain cases, the Company may be required to file applications and
obtain clearances under applicable federal antitrust laws before consummation of
an acquisition. These regulatory requirements may restrict or delay the
Company's acquisitions, and may increase the cost of completing such
transactions.
LIMITATIONS ON FINANCIAL RESOURCES AVAILABLE FOR ACQUISITIONS; POSSIBLE
- -----------------------------------------------------------------------
INABILITY TO REFINANCE EXISTING DEBT
- ------------------------------------
The Company intends to finance acquisitions with cash on hand, through
issuances of equity or debt securities and through borrowings under existing
credit arrangements. The Company anticipates the borrowing limit under its
long-term credit arrangements will be increased, although no assurance can be
given that any such increase will occur or that such increase will adequately
meet the Company's future financing needs. Similarly,
28
there is no assurance that the Company will be able to obtain additional debt or
equity securities financing. Using cash to complete acquisitions could
substantially limit the Company's operating or financial flexibility. Using
stock to consummate acquisitions may result in significant dilution of
stockholders' percentage interest in the Company, which dilution may be
prohibited by the Company's Dealer Agreements with Manufacturers. See " -- Stock
Ownership/Issuance Limits." If the Company is unable to obtain financing on
acceptable terms, the Company may be required to reduce significantly the scope
of its presently anticipated expansion, which could materially adversely affect
the Company's business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources" and
"Business -- Growth Strategy."
In addition, the Company is dependent to a significant extent on its
ability to finance the purchase of inventory, which in the automotive retail
industry involves significant sums of money in the form of floor plan financing.
As of December 31, 1997, the Company had approximately $92.5 million of
indebtedness, which included $66.5 million of floor plan financing.
Substantially all the assets of the Company's dealerships are pledged to secure
such indebtedness, which may impede the Company's ability to borrow from other
sources. In addition, the Company must obtain new floor plan financing or
obtain consents to assume such financing in connection with its acquisition of
dealerships.
STOCK OWNERSHIP/ISSUANCE LIMITS; LIMITATION ON ABILITY TO ISSUE ADDITIONAL
- --------------------------------------------------------------------------
EQUITY
- ------
Standard automobile Dealer Agreements prohibit transfers of any ownership
interests of a dealership and its parent, such as the Company, and, therefore,
often do not by their terms accommodate public trading of the capital stock of a
dealership or its parent. The Company has obtained the consent of all the
appropriate Manufacturers in connection with its dealerships and has obtained
such consent on the basis of the Company being an entity having publicly listed
securities. Notwithstanding the approval of the Company by its various
Manufacturers (including American Honda) as an entity having publicly listed
securities, the Honda Agreement provides that prior to any public offering by
the Company of its securities the consent of American Honda will be required.
Although, it is anticipated that such consent will be obtained so long as
certain designated existing shareholders of the Company retain more than fifty
percent of the aggregate voting rights, there can be no assurance that such
consent will be obtained. In addition, the financial institution which provides
floor plan financing to the Company and certain other financing requires that
certain existing shareholders maintain at least twenty percent of the
outstanding capital stock of the Company which limitation may in some instances
limit the ability of the Company to make its public offerings of the Company's
securities. See "Business -- Relationships with Manufacturers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Moreover, these issuance
limitations may impede the Company's ability to raise capital through equity
offerings or to issue Common Stock as consideration for, and therefore, to
consummate, future acquisitions. Such restrictions also may prevent or deter
prospective acquirers from acquiring control of the Company and, therefore, may
adversely impact the Company's equity value. See " -- Limitations on Financial
Resources Available for Acquisitions; Possible Inability to Refinance Existing
Debt."
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS
- -------------------------------------------
The Company is required to obtain the consent of the applicable
Manufacturer prior to the acquisition of any additional dealership. There can
be no assurance that Manufacturers will grant such approvals. Obtaining the
consent of the Manufacturers for acquisitions of dealerships could also take a
significant amount of time. Although no assurances can be given, the Company
believes that Manufacturer approvals of subsequent acquisitions from
Manufacturers with which the Company has previously completed applications and
agreements may take less time. The Company has received the approval of all of
the applicable Manufacturers in connection with its current dealerships. If the
Company experiences delays in obtaining, or fails to obtain, approvals of the
Manufacturers for acquisitions of dealerships, the Company's growth strategy
could be materially adversely affected. In determining whether to approve an
acquisition, the Manufacturers may consider many factors, including the moral
character, business experience, financial condition, ownership structure and CSI
scores of the Company and its management. Specifically the Manufacturer must
approve (i) the experience and past performance of the proposed general manager,
(ii) the proposed location as to size, condition and geographic location, (iii)
the financial structure of the dealership and the Company and (iv) the CSI
scores and sales
29
penetration of the Company. In addition, under an applicable Dealership
Agreement or under state law a Manufacturer may have a right of first refusal to
acquire a dealership in the event the Company seeks to acquire a dealership.
In addition, a Manufacturer may limit the number of such Manufacturers'
dealerships that may be owned by the Company or the number that may be owned in
a particular geographic area. For example, Toyota Motor Sales limits the number
of Toyota dealerships which the Company may acquire to: (a) 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 certain
geographic areas as defined by Toyota); (b) the lesser of five dealerships or
five percent of the Toyota dealerships within a Toyota Region ("Toyota Region"
refers to regional geographic areas as designated by Toyota); and (c) seven
Toyota dealerships nationally. Toyota in addition limits the number of Lexus
dealerships which may be owned and operated by the Company and American Honda
limits the number of Honda and Acura dealerships which may be owned and operated
by the Company. See "Relationships with Manufacturers."
POTENTIAL CONFLICTS OF INTEREST
- -------------------------------
The Company has in the past and will likely in the future enter into
transactions with entities controlled by either Thomas Price, Donald Strough or
other affiliates of the Company. The Company believes that all of these
existing arrangements are favorable to the Company and were entered into on
terms that, taken as a whole, reflect arms'-length negotiations. Since no
independent appraisals evaluating these business transactions were obtained,
there can be no assurance that such transactions are on terms no less favorable
than could have been obtained from unaffiliated third parties. Potential
conflicts of interest could also arise in the future between the Company and
these affiliated parties in connection with the enforcement, amendment or
termination of these arrangements. See "Relationships and Related
Transactions." The Company anticipates renegotiating its leases with all
related parties at lease expiration at fair market rentals, which may be higher
than current rents. For further discussion of these related party leases, see
"Certain Relationships and Related Transactions -- Certain Dealership Leases."
LACK OF INDEPENDENT DIRECTORS
- -----------------------------
As of the date hereof, all of the members of the Company's Board of
Directors are employees and/or principal stockholders of the Company or
affiliates thereof. Although the Company intends to appoint at least two
independent directors, such directors will not constitute a majority of the
Board, and the Company's Board may not have a majority of independent directors
in the future. In the absence of a majority of independent directors, the
Company's executive officers, who also are principal stockholders and directors,
could establish policies and enter into transactions without independent review
and approval thereof, subject to certain restrictions required by Delaware law.
In addition, although the Company intends to establish audit and compensation
committees which will consist entirely of outside directors, until those
committees are established, audit and compensation policies could be approved
without independent review. These and other transactions could present the
potential for a conflict of interest between the Company and its stockholders
generally and the controlling officers, stockholders or directors.
DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES
- --------------------------------------------------------------------------
The Company's success depends to a significant degree upon the continued
contributions of its management team (particularly its senior management) and
service and sales personnel. Additionally, Dealer Agreements require the prior
approval of the applicable Manufacturer before any change is made in a
dealership's general manager. The Company has entered into employment
agreements with members of its management team. In addition, as the Company
expands it may need to hire additional managers and may be dependent on the
senior management of any businesses acquired. The market for qualified
employees in the automotive retailing industry and in the region in which the
Company operates, particularly for general managers and sales and service
personnel, is highly competitive and may subject the Company to increased labor
costs. The loss of the services of key employees or the inability to attract
additional qualified managers could have a material adverse effect on the
30
Company. In addition, the lack of qualified management or employees employed by
the Company's potential acquisition candidates may limit the Company's ability
to consummate future acquisitions. The Company maintains key man insurance on
Thomas Price, the Company's President and Chief Executive Officer. See
"Business -- Growth Strategy," and "Business -- Competition."
MATURE INDUSTRY; CYCLICAL AND LOCAL NATURE OF AUTOMOBILE SALES
- --------------------------------------------------------------
The United States automobile retailing industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See " --
Risks Associated with Acquisitions" and "Business -- Growth Strategy."
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
credit availability. For the year ended December 31, 1997, industry retail
sales were down from calendar 1996. There can be no assurance that the industry
will not experience periods of decline in vehicle sales, both new and used, in
the future. Any such decline may have a material adverse effect on the
Company's business.
Local economic, competitive and other conditions also affect the
performance of dealerships. All of the Company's dealerships are located in
California. While the Company intends to pursue acquisitions outside of this
market, the Company expects that the majority of its operations will continue to
be concentrated in this area for the foreseeable future. As a result, the
Company's results of operations will depend substantially on general economic
conditions and consumer spending habits in California, as well as various other
factors, such as tax rates and state and local regulations, specific to
California. There can be no assurance that the Company will be able to expand
geographically, or that any such expansion will adequately insulate it from the
adverse effects of local or regional economic conditions. See "Business --
Growth Strategy."
SEASONALITY
- -----------
The automobile retailing industry is subject to seasonal variations in
revenues with higher revenues occurring in the second and third quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IMPORTED PRODUCT RESTRICTIONS AND FOREIGN TRADE RISKS
- -----------------------------------------------------
Certain vehicles sold by the Company, as well as certain major components
of vehicles sold by the Company, are manufactured outside the United States.
Accordingly, the Company is 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 United States or the countries
from which the Company's products originate may, from time to time, adjust
existing or impose new quotas, tariffs, duties or other restrictions which could
affect the Company's operations and its ability to purchase imported vehicles
and/or parts.
ADVERSE EFFECT OF GOVERNMENTAL REGULATION; ENVIRONMENTAL REGULATION COMPLIANCE
- ------------------------------------------------------------------------------
COSTS
- -----
The Company is subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, and consumer protection laws.
The violation of these laws and regulations can result in civil and criminal
penalties being levied against the Company or in a cease and desist order
against Company operations that are not in compliance. Future acquisitions by
the Company may also be subject to regulation, including antitrust reviews. The
Company believes that it complies in all material respects with all laws and
regulations applicable to its business, but future regulations may be more
stringent and require the Company to incur significant additional costs.
31
The Company's 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 the remediation of contamination associated with such disposal. Certain of
these laws and regulations may impose joint and several liability on certain
statutory classes of persons for the costs of investigation or remediation of
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.
Past and present business operations of the Company subject to such laws
and regulations include the use, storage handling and contracting for recycling
or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as 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.
The Company is subject to other laws and regulations as a result of the past or
present existence of underground storage tanks at many of the Company's
properties. The Company, like many of its competitors, has incurred, and will
continue to incur, capital and operating expenditures and other costs in
complying with such laws and regulations.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, have been amended so as to require compliance with
new or more stringent standards as of future dates. The Company cannot predict
what other environmental legislation or regulations will be enacted in the
future, 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 additional expenditures by the Company, some of which may
be material. See "Business -- Governmental Regulations and Environmental
Matters."
CONCENTRATION OF VOTING POWER
- -----------------------------
As of March 31, 1998, the directors, executive officers and their
affiliates of the Company beneficially owned or controlled approximately
11,757,233 shares of the Company's Class A Common Stock and Class B Common
Stock, or an aggregate of approximately 83% of the issued and outstanding shares
of Common Stock, on a fully-diluted basis. Acting together, such directors and
officers are able to control the election of the Company's directors and the
outcome of corporate actions requiring stockholder approval.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No disclosure is required for this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplemental Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of January 1, 1998, the Company's directors and executive officers were
as follows:
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
- -------------------------- ----- ---------------------------------------- ------------------
Thomas A. Price 54 Chief Executive Officer, President and 1996
Director
Donald V. Strough 60 Chairman of the Board of Directors 1995
W. Bruce Bercovich 47 Secretary and Director 1995
Jean-Marc Chapus 39 Director 1997
Steven S. Hallock 42 Chief Operating Officer 1997
Debra Smithart 43 Chief Financial Officer 1997
Thomas A. Price has been President, Chief Executive Officer and a director of
the Company since September, 1996. From March 1976 to June 1997, Mr. Price
owned and operated the Price Dealerships, which, when combined with the Company,
comprised six automotive dealerships and eleven new car franchises. 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
Chairman of the Lexus National Dealer Advisory Board and he is a charter member
of the J.D. Power Superdealer Roundtable. Mr. Price is the Chairman of the
Board of Directors of AutoChoice, Inc., a used car retailer.
Donald V. Strough has been a director and Chairman of the Board of Directors of
the Company since October, 1995. From 1963 to May 1990, Mr. Strough owned and
operated the Val Strough Dealership Group, which, upon its sale in 1990,
consisted of 12 separate automotive dealerships and 19 franchises. Mr. Strough
is a former President of the Northern California Chevrolet Dealers Association.
W. Bruce Bercovich has served as a director and secretary of the Company since
October, 1995. Mr. Bercovich has also served as 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 included in the
acquisition or sale of over 100 dealerships. His law firm currently provides
legal services to many of the largest dealership groups in Northern California.
Jean-Marc Chapus has served as a director of the Company 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 Corp. Mr. Chapus has extensive experience in the
management and placement of public bonds, private debt, and equity securities.
Mr. Chapus serves as a director of Home Asset Management Company and is a
trustee of Starwood Hotels & Resorts Trust.
Steven S. Hallock. Mr. Hallock has served as Chief Operating Officer of the
company since March 1997. Mr. Hallock was for the last 15 years CEO of the HG
Dealership Group which consisted of 5 dealerships in the Concord, California
area.
33
Debra Smithart. Ms. Smithart joined the Company as its Chief Financial Officer
in October 1997. From June 1985 to October 1997, Ms. Smithart served as
Executive Vice President and Chief Financial Officer of Brinker International, a
major restaurant operator and franchisor with over 800 locations and annual
sales of approximately $1.8 billion. Ms. Smithart earned a Bachelor of Science
degree in Accounting from the University of Texas and a Masters degree in
Business Administration from Southern Methodist University. Ms. Smithart is a
licensed Certified Public Accountant in the State of Texas.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of the
Chief Executive Officer of the Company and its other executive officers of the
Company as of December 31, 1997, for services in all capacities to the Company,
during the fiscal year ended December 31,1997:
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------- ----------------
AWARDS
----------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR(1) SALARY ($) BONUS($) COMPENSATION($)(2) OPTIONS (#)
- --------------------- --------- ------------ --------- ------------------- ----------------
Thomas A. Price, 1997 470,500(5) -- $9,885 --
President and
Chief Executive
Officer
Donald V. Strough, 1997 108,000 -- -- --
Chairman of the
Board
Steven S. Hallock, 1997 333,000 620,000(3) 5,000 280,000
Chief Operating
Officer
Debra L. Smithart, 1997 50,000 18,750(4) 1,100 200,000
Chief Financial
Officer
- -------------------
(1) In the fiscal years ended December 31, 1996 and 1995, the Company did not
have material operations and no compensation was paid to Messrs. Price and
Strough. Amounts paid to Mr. Price by the Price Dealerships prior to the
Combination are not presented as they would not provide comparable or
meaningful information. Mr. Hallock joined the Company in March 1997 and
Ms. Smithart joined the Company in October 1997.
(2) Consists of car allowances.
(3) Includes a one time sign-on bonus of $500,000 and accrued guaranteed bonus
payments unpaid as of December 31, 1997.
(4) Consists of $18,750 of accrued guaranteed bonus payments unpaid as of
December 31, 1997.
(5) Includes $230,500 paid to Mr. Price prior to the Combination.
34
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during 1997 to the executive
officers named in the Summary Compensation Table:
OPTION GRANTS IN 1997*
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS GRANTED EXERCISE ANNUAL RATES OF STOCK
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION PRICE APPRECIATION FOR
NAME (SHARES)/(2)/ FISCAL YEAR/(3)/ ($/SH)/(2)/ DATE/(4)/ OPTION TERM/(1)/
- ----------------- ------------- -------------------- ------------- --------------- ------------------------
5%($) 10%($)
----- ------
Steven S. Hallock 280,000/(5)//(6)/ 29.7% 0.92 7/10/07 162,000 410,548
Debra L. Smithart 200,000/(5)/ 21.2% 4.00 10/27/07 - /(7)/ - /(7)/
- -----------------------
(*) No stock appreciation rights were granted to executive officers for the
fiscal year ended December 31, 1997.
(1) 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
Securities and Exchange Commission and do not represent the Company's
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.
(2) All options granted in 1997 were granted under the Company's 1997 Stock
Option Plan (the "Option Plan"). Under such Option Plan, the Board of
Directors retains discretion to modify the terms, including the price, of
outstanding options. All options were granted at fair market value or
greater as determined by the Board of Directors of the Company on the date
of grant. See also "Management -- Termination and Change of Control
Arrangements."
(3) The Company granted options to purchase in aggregate of 942,000 shares of
Class A Common Stock for the fiscal year ended December 31, 1997.
(4) 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.
(5) The options vest ratably over 60 months from the date of grant.
(6) In the event Mr. Hallock resigns for good reason following an acquisition
or change of control of the Company, the vesting of all options will be
accelerated and shall be exercisable in full.
(7) The exercise price of Ms. Smithart's options exceeded the fair market
value of the Class A Common Stock and therefore, at the assumed
appreciation rates, there is no potential positive realizable value of the
options.
35
The following table provides the specified information concerning potential
positive realizable value of exercises of options to purchase the the Company's
Common Stock in 1997, and unexercised options held as of December 31, 1997, by
the executive officers named in the Summary Compensation Table:
AGGREGATE OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT 12/31/97 MONEY OPTIONS AT 12/31/97/(1)//($)/
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE/(2)/ UNEXERCISABLE
- ------------------------ ------------- ------------ ------------- --------------- ------------------ --------------
Steven S. Hallock 0 0 46,795 233,205 41,180 205,221
Debra L. Smithart 0 0 7,123 192,877 -- --
- ---------------------------------
(1) Based on a fair market value as determined by the Board of Directors of the
Company of $1.80 per share, as of December 31, 1997, minus the exercise
price.
(2) Options will become exercisable upon the filing by the Company of a
registration statement on Form S-8 with respect to shares of Class A Common
Stock which may be issued upon exercise of options granted under the
Company's 1997 Stock Option Plan.
EMPLOYMENT CONTRACTS TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
In July 1997, the Company entered into an employment agreement with Thomas
Price pursuant to which the Company will employ Mr. Price as its President and
Chief Executive Officer through July 1, 2002, which term may be extended upon
the mutual agreement of the parties. In accordance with the terms of the
agreement, Mr. Price will receive a base annual salary of $480,000 and an annual
performance bonus of up to 50% of base salary. The agreement also entitles Mr.
Price to a monthly car allowance of $1,200 and all standard benefits provided to
senior management of the Company. The salary, bonus and benefits provided under
the agreement are guaranteed unless he is terminated for cause, voluntarily
terminates his employment, dies or becomes disabled.
In July 1997, the Company entered into an employment agreement with Donald
Strough pursuant to which the Company will employ Mr. Strough as its Chairman of
the Board of Directors through July 1, 2002, which term may be extended upon the
mutual agreement of the parties. In accordance with the terms of the agreement,
Mr. Strough will receive a base annual salary of $250,000 and an annual
performance bonus of up to 50% of base salary. The agreement also entitles Mr.
Strough to a monthly car allowance of $600 and all standard benefits provided to
senior management of the Company. The salary, bonus and benefits provided under
the agreement are guaranteed unless he is terminated for cause, voluntarily
terminates his employment, dies or becomes disabled.
In March 1997, the Company entered into an at-will employment agreement
with Steven S. Hallock pursuant to which the Company will employ Mr. Hallock as
its Chief Operating Officer. In accordance with the terms of the agreement, Mr.
Hallock will receive a base annual salary of $400,000 and an annual performance
bonus of up to 90% of base salary. The agreement also entitles Mr. Hallock to a
monthly car allowance of $500 and all standard benefits provided to senior
management of the Company.
Mr. Hallock was granted options to purchase 280,000 shares of the Company's
Class A Common Stock at a price of $.92 per share under the Company's 1997 Stock
Option Plan. Such options vest monthly from the date of grant over a 60 month
period. In the event that Mr. Hallock terminates his employment agreement for
good
36
reason following a change of control of the Company, his options shall become
immediately vested. In addition, Mr. Hallock will be entitled to receive fully
vested options to acquire up to 200,000 shares of Class A Common Stock upon the
acquisition by the Company of certain automobile dealerships. The exercise price
of such additional options shall be determined as of the date of grant.
In the event Mr. Hallock terminates his employment with the Company for
good reason following a change of control of the Company, he shall be entitled
to receive continued salary payments for a period of one year plus an amount
equal to the average of his previous performance bonuses, which amount shall be
paid in twelve equal monthly installments.
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
expenses in attending Board and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company 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 Company's Board of Directors. Thomas Price,
the Company's President and Chief Executive Officer and a director of the
Company, participated in deliberations concerning executive compensation.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 1998, with
respect to the beneficial ownership of the Company's capital stock by (i) all
persons known by the Company to be the beneficial owners of more than 5% of any
class of the outstanding capital stock of the Company, (ii) each director of the
Company, (iii) each executive officer of the Company named in the Summary
Compensation Table and (iv) all executive officers and directors of the Company
as a group:
NAME AND ADDRESS OF CLASS A COMMON STOCK CLASS B COMMON STOCK
BENEFICIAL OWNERS (#) SHARES OWNED (1) SHARES OWNED (1)
- ------------------------- ----------------------------------------------- -----------------------------------------
DIRECTORS AND EXECUTIVE PERCENTAGE OF
OFFICERS NUMBER OF SHARES CLASS (2) NUMBER OF SHARES PERCENTAGE OF CLASS(2)
- ------------------------- -------------------- ----------------- ---------------- ---------------------
W. Bruce Bercovich (3) 1,055,000 9.4%
Jean-Marc Chapus (4) 3,032,000 100.0%
Steven S. Hallock (5) 269,962 2.4%
Thomas A. Price (6) 5,921,600 52.9%
Debra Smithart (7) 23,671 *
Donald V. Strough (8) 1,455,000 13.1%
Executive officers and
directors as a group (six 8,725,233 77.4% 3,032,000 100%
persons) (9)
OTHER 5% STOCKHOLDERS
Bert Wollen (10) 590,000 5.3%
Al Babbington (11) 634,877 5.7%
Fred Cziska (12) 713,277 6.4%
Trust Company of the West (4) 3,032,000 100.0%
--------------------------------
#Unless otherwise provided,
the address for each
Beneficial Owner is
c/o Kay & Merkle
100 The Embarcadero
Penthouse Suite
San Francisco, CA
94105-1217.
* Less than 1%
(1) 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.
(2) For the Company's Class A Common Stock ("Class A Common") and Class B
Common Stock ("Class B Common"), the percentages listed were calculated on
the basis of 11,179,029 shares and 3,032,000 shares outstanding,
respectively. Shares of Class A Common underlying options exercisable
within 60 days of March 31, 1998 are deemed to be outstanding for purposes
of calculating the beneficial ownership of securities of the holders of
such options or of shares of Class A Common.
38
(3) Includes 590,000 shares of Class A Common held by Embarcadero Automotive,
L.L.C., 340,000 shares of Class A Common held by BB Investments, and
125,000 shares of Class A Common held by Geary Plaza Irrevocable Trust.
Mr. Bercovich is a Managing Member of Embarcadero Automotive, LLC, a
General Partner of BB Investments, and a trustee of Geary Plaza Irrevocable
Trust, and as such may be deemed to be a beneficial owner of such shares.
Mr. Bercovich disclaims beneficial ownership of all shares of Geary Plaza
Irrevocable Trust. Alexandra Strough, daughter of Donald V. Strough,
Chairman of the Company's Board of Directors, is the sole beneficiary of
the Geary Plaza Irrevocable Trust.
(4) Number of shares which may be deemed beneficially owned includes shares
held by various funds, trusts and investment partnerships related to or
managed by Trust Company of the West, of which Mr. Chapus is a Managing
Director. The address of Trust Company of the West is 11100 Santa Monica
Blvd., Suite 2000, Los Angeles, CA 94025.
(5) Mr. Hallock is the Company's Chief Operating Officer. Includes 69,962
shares purchasable pursuant to outstanding options exercisable on or before
May 30, 1998.
(6) Includes 5,921,600 shares of Class A Common held by the Price Trust u/t/d
10/5/88. Mr. Price is a trustee of this trust and as such may be deemed to
be a beneficial owner of such shares.
(7) Ms. Smithart is the Company's Chief Financial Officer. Includes 23,671
shares purchasable pursuant to outstanding options exercisable on or before
May 30, 1998.
(8) Mr. Strough is the Chairman of the Company's Board of Directors. Includes
1,455,000 shares owned by the Strough Revocable Trust of 1983, as amended.
Mr. Strough and his wife are co-trustees of this trust.
(9) See footnotes (3) through (8). Includes 93,633 shares purchasable pursuant
to outstanding options exercisable on or before May 30, 1998.
(10) Includes 590,000 shares of Class A Common held by Raintree Capital. Mr.
Wollen is a member of Raintree Capital, L.L.C., and as such may be deemed
to be a beneficial owner of such shares.
39
(11) Mr. Babbington is the Vice President of Marketing and Strategic Planning
for the Company. Includes 8,877 shares purchasable pursuant to outstanding
options exercisable on or before May 30, 1998.
(12) Mr. Cziska is the Vice President of Parts, Service and Purchasing for the
Company. Includes 8,877 shares purchasable pursuant to outstanding options
exercisable on or before May 30, 1998.
40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Thomas A. Price, the President, Chief Executive Officer and a director of
the Company, transferred to the Company his holdings in the Price Dealerships on
July 11, 1997. Mr. Price received 3,991,600 shares of the Company's Class A
Common Stock and $4,424,023 in cash in connection with this transaction.
T. Al Babbington, Vice President of Marketing and Strategic Planning for
the Company, sold his interest in the Price Dealerships to the Company on July
11, 1997. Mr. Babbington received 626,000 shares of the Company's Class A
Common Stock and $165,000 in cash in connection with this transaction.
Fred Cziska, Vice President of Parts, Service and Purchasing for the
Company, sold his interest in the Price Dealerships to the Company on July 11,
1997. Mr. Cziska received 704,400 shares of the Company's Class A Common Stock
and $674,823 in cash in connection with this transaction.
Donald V. Strough, Chairman of the Company's Board of Directors, sold his
interest in a Honda dealership located in Concord, California to the Company on
July 11, 1997. Mr. Strough received 1,330,000 shares of the Company's Class A
Common Stock. In connection with this transaction, the Company recorded a
receivable in the amount of $470,000, which was subsequently repaid.
Steven A. Hallock, Cheif Operating Officer for the Company, sold his
interest in a Nissan dealership located in Concord, California to the Company on
July 11, 1997. Mr. Hallock received $2.9 million in cash in connection with this
transaction.
On April 23, 1997, the Company sold 457,000 shares of its Class A Common
Stock to the Price Trust u/t/d 10/5/88 to Thomas A. Price for $457, or a price
of $0.001 per share. Mr. Price is a trustee of this trust.
On March 31, 1997, the Company sold 200,000 shares of its Class A Common
Stock to Steven Hallock, the Company's Chief Operating Officer, for $200, or a
price of $0.001 per share.
The Tom Price Dealership Group, a company firm affiliated with Thomas A.
Price was compensated for these services provided to the Company prior to the
Combination. The Company paid approximately $800,000 for these services
performed during fiscal 1997. Mr. Price is the President of the Tom Price
Dealership Group.
During 1997, Rosewood Village Associates, a partnership in which Donald V.
Strough serves as general partner and holds an 85% equity interest, acquired
from a third party, certain real property which was being leased to the Company.
In addition, Rosewood Village Associates acquired approximately $0.8 million of
certain leasehold improvements from the Company. Rosewood Village Associates
leases this property, the leasehold improvements, and one other property to the
Company. Annual obligations on these leases total approximately $900,000.
W. Bruce Bercovich, Secretary and a director of the Company, is a partner
in the San Francisco, California law firm of Kay & Merkle. Kay & Merkle
received from the Company, as compensation for legal services performed during
fiscal 1997, approximately $360,000.
The Company leases two facilities under agreements from The Price Trust
u/t/d 10/5/88. Annual obligations on these leases total approximately
$1,680,000. Mr. Price and his spouse are the sole beneficiaries of this trust.
The Company leases one facility from Bay Automotive Properties LLC ("Bay
Automotive"). Annual obligations on this lease total approximately $576,000.
Thomas A. Price and Donald V. Strough are both members of Bay Automotive, with
interests therein of 50% and 50%, respectively.
The Price Trust owns the real property at 601 Brannan Street, San
Francisco, California, the site of the Company's executive offices and planned
service and repair center in downtown San Francisco. The Company has made or
intends to make leasehold improvements with an approximate value of $1,000,000
to this property. It is anticipated that these leasehold improvements will be
sold to Mr. Price at the cost to the Company, then leased back to the Company
with a ground lease. Mr. Price and his spouse are the sole beneficiaries of the
Price Trust.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statements: Page Number
-----------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets -
As of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations -
For the Three Years Ended December 31, 1997 F-3
Consolidated Statements of Stockholders' Equity
For the Three Years Ended December 31, 1997 F-4
Consolidated Statements of Cash Flows -
For the Three Years Ended December 31, 1997 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules
All schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits:
EXHIBIT
- -------
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
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.
3.1 Amended and Restated Certificate of Incorporation, as amended, filed
July 8, 1997.
3.2 By-Laws.
4.1 Stockholders' Agreement dated July 11, 1997 by and among the Company and
its stockholders, Thomas Price, Donald Strough, Steven Hallock, Fred
Cziska, Al Babbington, John Driebe, Embarcadero Automotive, LLC,
Raintree Capital LLC, BB Investments and certain affiliates of Trust
Company of the West.
4.1.1 Securities Purchase Agreement dated as of July 11, 1997 by and among the
Company, certain of its wholly-owned subsidiaries and Trust Company of
the West and certain of its affiliates, as Purchasers.
4.1.2 Amendment No. 1 to Securities Purchase Agreement dated as of January 9,
1998 by and among each of FAA Capitol N, Inc., FAA Auto Factory, Inc.
and each of the parties to the Securities Purchase Agreement dated as
of July 11, 1997.
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.
10.3 Nissan Dealer Agreement Sales and Service Agreement Standard Provisions,
dated as of July 16, 1997 by and between Nissan Division, Nissan
Motor Corporation in U.S.A. and the Company.
10.3.1 Nissan Dealer Term Sales and Service Agreement dated June 30, 1997 by
and between Nissan Motor Corporation in U.S.A. and FAA Serramonte,
Inc.
10.3.2 Nissan Contiguous Market Ownership Holding Company Agreement dated June
30, 1997 by and among Nissan Motor Corporation in U.S.A., the Company,
FAA Concord N, Inc., and FAA Dublin N, Inc.
10.3.3 Nissan Dealer Term Sales and Service Agreement dated as of July 16, 1997
by and between Nissan Motor Corporation in U.S.A. and FAA Dublin N,
Inc.
10.3.4 Nissan Contiguous Market Ownership Addendum dated July 16, 1997 by and
among Nissan Motor Corporation in U.S.A., Thomas A. Price, FAA Dublin
N, Inc. and the Company.
10.3.5 Nissan Contiguous Market Ownership Areas Formation and Linkage Agreement
dated June 30, 1997 by and between Nissan Motor Corporation in U.S.A.
and the Company (FAA Dublin N, Inc.).
10.3.6 Nissan Dealer Term Sales and Service Agreement dated June 30, 1997 by
and between Nissan Motor Corporation in U.S.A. and Smart Nissan, Inc.
10.3.7 Nissan Contiguous Market Ownership Addendum dated June 30, 1997 by and
among Nissan Motor Corporation in U.S.A., Thomas A. Price, Smart
Nissan, Inc. and the Company.
10.3.8 Nissan Contiguous Market Holding Company Agreement dated June 30, 1997
by and between Nissan Motor Corporation in U.S.A. and the Company
(Smart Nissan, Inc.; FAA Serramonte, Inc.).
10.3.9 Nissan Contiguous Market Ownership Areas Formation and Linkage Agreement
dated June 30, 1997 by and between Nissan Motor Corporation in U.S.A.
and the Company (Smart Nissan, Inc.).
10.3.11 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.
10.3.12 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.).
10.3.13 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.
10.3.14 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.
10.3.15 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.).
10.3.16 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.
10.3.17 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.
10.3.18 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.).
10.3.19 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.
10.3.20 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.
10.3.22 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.
10.5 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.
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.
10.11 FirstAmerica Automotive, Inc. 1997 Stock Option Plan, as amended.
21.1 Subsidiaries of the Company.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: May 11, 1998 FIRSTAMERICA AUTOMOTIVE, INC.
By: /s/ Thomas A. Price
-------------------------------
President and Chief Executive officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on May 11, 1998.
Signature Title
- --------- -----
/s/ Thomas A. Price President, Chief Executive Officer and
- ------------------- Director (Principal Executive Officer)
Thomas A. Price
/s/ Debra Smithart Chief Financial Officer
- ------------------ (Principal Financial and Accounting Officer)
Debra Smithart
/s/ Donald V. Strough* Chairman of the Board of Directors
- ----------------------
Donald V. Strough
/s/ W. Bruce Bercovich* Director
- -----------------------
W. Bruce Bercovich
/s/ Jean Marc Chapus* Director
- ---------------------
Jean-Marc Chapus
*By: /s/ Debra Smithart
-------------------
Debra-Smithart
(Attorney-in-fact)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(a) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Registrant has not provided an annual report to stockholders covering its
Fiscal year ended December 31, 1997 nor has it sent a proxy statement to its
stockholders with respect to any annual or special meeting of stockholders.
43
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
F-1
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, 1997 and 1996, and the
related statements of operations, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. In connection
with our audits of the consolidated financial statements, we also have audited
the related consolidated financial statement schedule listed in the Index at
Item 14(a)(2). 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick, LLP
San Francisco, California
April 27, 1998
F-2
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Balance Sheets
As of December 31,
(In thousands)
Assets 1997 1996
------ -------- --------
Cash and cash equivalents .......................................................................... $ 2,924 $ 668
Contracts in transit ............................................................................... 9,454 4,908
Accounts receivable, net of allowance for doubtful accounts of $320 in 1997 and
$182 in 1996 .................................................................................. 10,328 3,955
Inventories:
New vehicles .................................................................................. 58,344 28,342
Used vehicles ................................................................................. 14,027 7,698
Parts and accessories ......................................................................... 5,223 2,692
-------- --------
Total inventories .............................................................. 77,594 38,732
Prepaid costs-extended warranty service contracts .................................................. 848 855
Deferred income taxes .............................................................................. 618 --
Deposits, prepaid expenses and other ............................................................... 2,779 1,563
-------- --------
Total current assets ........................................................... 104,545 50,681
Property and equipment, net of accumulated depreciation of $2,133 in 1997 and
$1,804 in 1996 ................................................................................ 7,081 2,990
Other assets:
Prepaid costs-extended warranty service contracts ............................................. 1,287 1,394
Loan origination and other costs, net of amortization of $195 in 1997 and $0 in 1996 .......... 3,407 --
Other noncurrent assets ....................................................................... 1,342 385
Goodwill, net of accumulated amortization of $125 in 1997 and $23 in 1996 ..................... 6,340 677
-------- --------
Total assets ................................................................... $124,002 $ 56,127
======== ========
(continued)
See accompanying notes to consolidated financial statements.
F-3
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Balance Sheets, Continued
As of December 31,
(In thousands, except share data)
Liabilities and Stockholders' Equity 1997 1996
------------------------------------ -------- --------
Current liabilities:
Accounts payable .................................................................... $ 6,137 $ 2,301
Accrued liabilities ................................................................. 8,804 3,881
Flooring notes payable .............................................................. 66,539 38,321
Secured lines of credit ............................................................. 4,000 --
Other notes payable ................................................................. 1,218 840
Deferred revenue-extended warranty service contracts ................................ 2,034 2,098
-------- --------
Total current liabilities ............................................ 88,732 47,441
Long-term liabilities:
Senior notes, net of discount of $2,062 in 1997 and
$0 in 1996 ....................................................................... 21,938 --
Deferred income taxes ............................................................... 269 --
Deferred revenue-extended warranty service contracts ................................ 3,061 3,484
Other ............................................................................... -- 322
-------- --------
Total liabilities .................................................... 114,000 51,247
-------- --------
Commitments and contingencies (Note 12)
8% cumulative redeemable preferred stock, $.00001 par value; 3,500 shares issued
and outstanding in 1997 and 0 in 1996 (net of discount of $526, liquidation
preference of $3,500) ............................................................... 2,974 --
Redeemable preferred stock, $.00001 par value; 500 shares issued and outstanding
in 1997 and 0 in 1996 (net of discount of $75, liquidation preference of $540) ...... 465 --
Stockholders' equity:
Common stock, $0.00001 par value:
Class A, 30,000,000 shares authorized, 11,201,152 shares issued and
outstanding in 1997 and 0 in 1996 ............................................... -- --
Class B, 5,000,000 shares authorized, 3,032,000 shares issued and
outstanding in 1997 and 0 in 1996 ............................................... -- --
Class C, 30,000,000 shares authorized, 0 issued and outstanding .................. -- --
Price Dealerships' equity (Note 1) .................................................. -- 4,880
Additional paid-in capital .......................................................... 6,544 --
Retained earnings ................................................................... 19 --
-------- --------
Total stockholders' equity ................................... 6,563 4,880
-------- --------
$124,002 $ 56,127
======== ========
See accompanying notes to consolidated financial statements.
F-4
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Operations
Years ended December 31,
(In thousands, except per share data)
1997 1996 1995
--------- --------- ---------
Sales:
Vehicle ................................................................... $ 401,896 $ 281,891 $ 208,055
Service, parts and other .................................................. 72,152 50,631 40,130
--------- --------- ---------
Total sales .................................................. 474,048 332,522 248,185
Cost of sales:
Vehicle ................................................................... 374,878 264,212 194,155
Service, parts and other .................................................. 32,196 25,450 19,115
--------- --------- ---------
Total cost of sales .......................................... 407,074 289,662 213,270
--------- --------- ---------
Gross profit ................................................. 66,974 42,860 34,915
Operating expenses:
Selling, general and administrative ....................................... 59,634 38,941 30,440
Combination and related expenses .......................................... 2,268 -- --
--------- --------- ---------
Operating income ............................................. 5,072 3,919 4,475
Other income (expense):
Interest expense, floor plan .............................................. (3,669) (2,922) (3,125)
Interest expense, other ................................................... (1,671) -- --
Other income, net ......................................................... 778 744 67
--------- --------- ---------
Income before income taxes ................................... 510 1,741 1,417
Income tax expense ............................................................. 446 48 26
--------- --------- ---------
Net income ................................................... $ 64 $ 1,693 $ 1,391
========= ========= =========
Pro forma net income (unaudited):
Income before income taxes, as reported ................................... $ 1,741 $ 1,417
Pro forma income tax expense .............................................. 714 581
--------- ---------
Pro forma net income ........................................................... $ 1,027 $ 836
========= =========
Pro forma (unaudited)
---------------------
Net income (loss) per share:
Basic and diluted (Note 1) ................................................ $ (0.01) $ 0.19 $ 0.15
Weighted average outstanding shares ....................................... 10,915 5,526 5,526
See accompanying notes to consolidated financial statements.
F-5
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
(In thousands)
FirstAmerica Automotive, Inc. common stock
------------------------------------------
Price Class A Class B
Dealerships' ------------------------------------------ Paid-in Retained Total
equity Shares Amount Shares Amount capital earnings equity
------------ -------- -------- -------- -------- --------- -------- -------
Balance, January 1, 1995 ............... $ 4,384 -- $ -- -- $ -- $ -- $ -- $ 4,384
Stock issuance ......................... 2,480 -- -- -- -- -- -- 2,480
Net income ............................. 1,391 -- -- -- -- -- -- 1,391
Distributions to stockholders .......... (1,611) -- -- -- -- -- -- (1,611)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995 ............. 6,644 -- -- -- -- -- -- 6,644
Stock issuance ......................... 250 -- -- -- -- -- -- 250
Distributions to stockholders .......... (3,707) -- -- -- -- -- -- (3,707)
Net income ............................. 1,693 -- -- -- -- -- -- 1,693
-------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 ............. 4,880 -- -- -- -- -- -- 4,880
Distributions to 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
Other 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
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
FIRSTAMERICA AUTOMOTIVE, INC.
Consolidated Statements of Cash Flows
Years ended December 31,
(In thousands, except per share data)
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income .............................................................. $ 64 $ 1,693 $ 1,391
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................................... 873 611 381
Deferred income taxes ............................................. (349) -- --
Non-cash stock compensation ....................................... 701 -- --
Amortization of deferred warranty revenue ......................... (373) 1,048 2,219
Changes in operating assets and liabilities:
Receivables and contracts in transit .......................... (8,007) 550 (754)
Inventories ................................................... (16,782) (733) (6,677)
Other assets .................................................. (1,120) (26) (534)
Due from affiliates ........................................... -- 168 --
Flooring notes payable ........................................ 7,709 1,011 7,597
Accounts payable .............................................. 2,843 62 (3,407)
Accrued liabilities ........................................... 6,855 15 1,788
-------- -------- --------
Net cash provided by (used in)
operating activities .................................. (7,586) 4,399 2,004
-------- -------- --------
Cash flows from investing activities:
Capital expenditures .................................................... (1,090) (805)
(325)
Acquisitions, net of cash acquired ...................................... (11,726) -- (1,720)
-------- -------- --------
Net cash used in investing activities ................... (12,816) (805) (2,045)
-------- -------- --------
Cash flows from financing activities:
Borrowings on secured lines of credit ................................... 4,000 -- --
Proceeds from issuance of Senior Notes .................................. 21,851 -- --
Repayments on notes payable ............................................. (1,632) (35) (313)
Loan origination costs .................................................. (3,602) -- --
Proceeds from issuance of common stock .................................. 2,789 250 2,480
Proceeds from issuance of preferred stock ............................... 3,360 -- --
Distributions to shareholders ........................................... (4,000) (3,707) (1,611)
Preference dividend paid ................................................ (108) -- --
-------- -------- --------
Net cash provided by (used in)
financing activities .................................. 22,658 (3,492) 556
-------- -------- --------
Net increase in cash and equivalents .................... 2,256 102 515
Cash at beginning of period .................................................. $ 668 $ 566 $ 51
-------- -------- --------
Cash at end of period ........................................................ $ 2,924 $ 668 $ 566
======== ======== ========
Cash paid during the period for:
Interest ................................................................ $ 5,311 $ 2,941 $ 3,103
Income taxes ............................................................ $ 885 $ 16 $ 26
Non-cash activity was as follows:
Common stock issued at the time of acquisition .......................... $ 1,490 $ -- $ --
Common stock issued as compensation ..................................... $ 701 $ -- $ --
See accompanying notes to consolidated financial statements.
F-7
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Organization and Combination
Effective July 11, 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 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's plan is to acquire and operate numerous automotive
dealerships in the highly fragmented automotive retailing industry. The
Company operates 14 dealerships in California, of which, 11 are in
Northern California. The Company sells new vehicles, used vehicles,
light trucks, replacement parts, provides vehicle maintenance and repair
services, and arranges related financing and warranty products for its
automotive customers. The Company offers, collectively, eleven makes of
domestic and foreign vehicles including Buick, Dodge, GMC, Honda, Isuzu,
Lexus, Mitsubishi, Nissan, Pontiac, Toyota, and Volkswagen.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of
FirstAmerica and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
(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. Vehicle cost is
determined by using the specific identification method. Parts and
accessories cost is determined by using the first-in, first-out method
(FIFO).
F-8
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies (continued)
(f) Property and Equipment
Property and equipment, including improvements that significantly extend
useful lives, are stated at cost and are depreciated 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 are as follows:
Leasehold improvements 5 to 20 years
Equipment 5 to 10 years
Furniture, signs and fixtures 5 to 10 years
Company vehicles 5 years
The cost of maintenance, repairs and minor renewals is expensed as
incurred, 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.
(g) Income Taxes
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.
Income taxes for 1997 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.
(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 fair value of long-term debt was undeterminable.
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.
F-9
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies (continued)
(i) Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over 40
years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The assessment of the
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved. The amount of goodwill
impairment, if any, is measured based on the fair value of the asset.
(j) Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are
limited due to the Company's large 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 chargebacks, upon acceptance of the credit by the finance
companies. These fees are included in service, parts, and other revenues
in the consolidated 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 consolidated statements of operations.
(m) Advertising
Advertising costs are expensed in the period in which advertising occurs
and is included in selling, general and administrative expenses in the
consolidated statements of operations.
F-10
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies (continued)
(n) Major Suppliers and Dealer Agreements
The Company purchases substantially all of its new vehicles and
inventory from various manufacturers at the prevailing prices charged by
the manufacturers. A manufacturer's inability or unwillingness to supply
the dealerships with an adequate supply of popular models could affect
the Company's overall sales.
The Company enters into dealer sales and service agreements (Dealer
Agreements) with each manufacturer. The Dealer Agreement generally
limits the location of the dealership and grants the manufacturer
approval rights over changes in dealership management and ownership. A
manufacturer is also entitled to cancel the Dealer Agreement if the
dealership is in material breach of its terms.
The Company's ability to acquire additional dealerships depends, in
part, on obtaining manufacturers' approval.
(o) Computation of Per Share Amounts
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS No. 128) which is effective for fiscal years ending after December
15, 1997. The Company has adopted SFAS No. 128 in the accompanying
financial statements.
For purposes of calculating basic earnings per share for 1997, net
income of $64,000 is reduced by cumulative redeemable preference
dividends of $128,000, redeemable preferred stock liquidation preference
accretion of $40,000, and preferred stock discount amortization of
$45,000. This net loss available to common stockholders of $149,000 is
then divided by the weighted average shares outstanding. Diluted
earnings per share does not include dilutive securities, such as options
and warrants, as their inclusion would be anti-dilutive for 1997.
(p) Pro Forma 1996 and 1995 Net Income and Per Share Amounts
Pro forma 1996 and 1995 net income reflects income tax expense as if the
Company had terminated its S Corporation status on January 1, 1995, and
had normal statutory tax rates for 1996 and 1995 (see Note 6). 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 and 1995 is
presented based on the 5,526,000 shares issued to the Price Dealership
stockholders in the Combination.
F-11
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies (continued)
(q) New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of 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 will be effective
for the fiscal years ending after December 15, 1998, and the Company
does not intend to adopt this statement prior to the effective date.
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standard No. 131 "Disclosures about
Segments of an Enterprise and Related Information." This statement
provides revised disclosure guidelines for segments of an enterprise
based on management's approach to defining operating segments. This
statement is effective for fiscal years ending after December 15, 1998.
The management of the Company believes that it currently operates in
only one industry segment and analyzes operations on a Company-wide
basis, therefore the statement is not expected to impact the Company.
(r) Reclassifications
Certain prior year amounts have been reclassified to conform with 1997
presentation.
(2) Senior Notes
At the time of the Combination (see Note 1), the Company entered into a
Securities Purchase Agreement (the "Agreement") with a financial company
to provide an aggregate funding commitment of up to $40 million. In
exchange for the $40 million, the Company may issue on a pro-rata basis
up to $36 million of 12.375% Senior Notes (Notes), $3.5 million 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.
At the time of the Combination, 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, 3.5
million shares of CRPS at a discount of $0.6 million, 0.5 million shares
of RPS at a discount of $0.1 million and 3 million shares of Class B
Common Stock at $0.92 per share. The Notes, CRPS and RPS are due June
30, 2005 (see Note 7).
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 Notes discount amortization is included in interest expense
and the CRPS and RPS discount amortization is recorded as a deduction
from retained earnings.
F-12
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(2) Senior Notes (continued)
The Notes are unsecured and subordinated to all debts of the 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. 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, 1997 to June 30, 1998 is 110% of the principal balance and decreases
by 1.25% for each year beginning July 1, thereafter. If the aggregate
outstanding principal balance, at any time, is less than $2 million, the
Company is required to redeem all outstanding Notes.
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 and (b) the aggregate amount
of issued and outstanding Notes on such date, 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.
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 beginning July 1, 1997 to June 30, 1998 is 105% of the principal
balance and decreases by 0.75% for each year beginning July 1,
thereafter.
The 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.
The Company incurred $1.5 million in interest expense related to the
Notes during 1997, including $88,000 for the non-cash amortization of
discount.
(3) Flooring Notes Payable and Secured Lines of Credit
At the time of the Combination, the Company entered into a three year
$175 million Loan and Security Agreement (the "Loan Agreement") with a
financial company, replacing an existing $37 million line of credit to
the Company.
The Loan Agreement permits the Company to borrow up to $115 million in
flooring 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 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.
As of December 31, 1997, the Company had flooring notes payable,
Revolving Advances, and Discretionary Advances outstanding of $66.5
million, $4.0 million, and $0, respectively.
F-13
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(3) Flooring Notes Payable and Secured Lines of Credit (continued)
Flooring notes payable are due when vehicles are sold, leased, or
delivered. Revolver Advances are due whenever the borrowing base as
defined in the Loan Agreement is exceeded and are included in secured
lines of credit in the accompanying financial statements. The Loan
Agreement grants a collateral interest in substantially all of the
Company's assets.
Interest rates on the flooring 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; 8.15% to 7.75%
at December 31, 1997. During 1997, the average monthly borrowing on the
flooring notes and Revolver Advances was $44.0 million and $0.3 million,
respectively, and the aggregate average interest rate was 7.75%.
The Loan Agreement contains various financial covenants such as minimum
interest coverage, working capital, and maximum debt to equity ratios.
(4) Acquisitions
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 $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.
All of 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 dates.
Amounts recorded for these acquisitions were as follows: current assets,
net of cash, of $25.9 million, fixed assets of $3.4 million, non-current
assets of $0.1 million, flooring notes payable and current liabilities
of $21.0 million. Goodwill of $4.8 million was recorded and is being
amortized on a straight-line basis over 40 years. Amortization expense
for goodwill was approximately $101,000; $18,000 and $5,000 in 1997,
1996 and 1995, respectively.
The following unaudited pro forma financial data is presented as if the
acquisitions had occurred on January 1, 1996, for the year ended:
(Unaudited)
(dollars in thousands except per share data)
1997 1996
---- ----
Total sales $ 604,980 $ 571,976
Operating (loss) income (493) 2,476
Net income (loss) (296) 1,486
Net income (loss) per share:
Basic and diluted $ (0.03) $ 0.27
F-14
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(4) Acquisitions (continued)
The pro forma information presented above is for informational purposes
only and is not indicative of operating results that would have occurred
had the acquisitions been in effect for the entire periods presented,
nor are they necessarily indicative of future operating results and do
not reflect any synergies that might be achieved from the combined
operations.
(5) Combination and Related Expenses
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.
(6) 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"). The current portion of the LIFO liability is included in
accrued liabilities and the remainder is included in deferred income
taxes in the accompanying financial statements.
Income tax expense (benefit) consists of the following (in thousands):
Current Deferred Total
--------------- --------------- ---------------
Year ended December 31, 1997:
Federal $ 625 $ (306) $ 319
State 170 (43) 127
--------------- --------------- ---------------
$ 795 $ (349) $ 446
=============== =============== ===============
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):
Computed tax expense $ 173
Increase (reduction) in income taxes resulting from:
Change in tax status to C Corporation (including LIFO
recapture) (214)
State income taxes 127
Non-deductible stock compensation 287
Other, net 73
-----------------
$ 446
=================
F-15
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(6) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997, are presented below (in thousands):
Deferred tax assets:
Extended warranty service contracts $ 1,184
Other 426
-------
Total deferred tax assets 1,610
-------
Deferred tax liabilities:
LIFO recapture (1,160)
Other (101)
-------
Total deferred liabilities (1,261)
-------
Total deferred tax asset, net $ 349
=======
Pro Forma Income Taxes
Prior to January 1, 1997, the Company was a 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 years ended December 31, 1996 and 1995,
respectively (in thousands):
Federal State Total
Year ended December 31, 1996 $ 592 $ 122 $ 714
===== ====== ======
Year ended December 31, 1995 $ 482 $ 99 $ 581
===== ====== ======
F-16
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(7) 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 2), the Company issued 3,500 shares of Cumulative
Redeemable Preferred Stock ("CRPS"), due June 30, 2005, with a par value
of $0.00001 per share, and 500 shares of Redeemable Preferred Stock
("RPS"), due June 30, 2005, with a par value of $0.00001 per share. As
of December 31, 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
("Dividend Payment Date"). Any unpaid dividends accrue cumulatively at
an annual rate of 14%. The Company is required to redeem the CRPS on
June 30, 2005, but 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 ("CRPS
Liquidation Preference"). The redemption price per share (expressed as a
percentage of the CRPS Liquidation Preference) for the period beginning
June 30, 1997 to June 29, 1998, is 110% of the CRPS Liquidation
Preference and decreases by 1.25% for each year beginning 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 ("RPS Liquidation
Preference"), which increases by $80 per share each year beginning June
30, 1998. 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 beginning
June 30, 1997 to June 29, 1998 is 110% of the RPS Liquidation Preference
and decreases by 1.25% for each year beginning 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 2), 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.
F-17
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(7) Preferred Stock (continued)
During 1997, the Company recorded $128,000 as CRPS preference dividend,
$40,000 for the accretion of the RPS Liquidation Preference with a
corresponding charge to paid in capital, and $45,000 for the non-cash
amortization of the discount with a corresponding charge to retained
earnings.
(8) 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.
(9) Stock Options and Warrants
The Company's Board of Directors has approved the 1997 Stock Option Plan
(the "Option Plan") pursuant to which an aggregate of 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, 1997, the Company granted options to
employees covering an aggregate of 942,000 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.
During 1997, the Company issued warrants to purchase approximately
331,000 shares of Class A Common Stock at an exercise price of $0.92 per
share. The warrants expire in 2002 and were issued in connection with
obtaining financing (see Notes 2 and 6) and one of the acquisitions made
during 1997. The Company has elected the disclosure requirements of
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123") and applies Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") in accounting for its Option Plan.
F-18
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(9) Stock Options and Warrants (continued)
The fair value of each option grant is estimated based on the date of
grant using the Black-Scholes option valuation model with expected
volatility of 42%, risk-free interest of 6.25%, dividend yield of 0%,
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 loss and basic and diluted earnings per
share for the year ended December 31, 1997 would have been (in thousands
except per share amounts):
As reported Pro forma
----------- ---------
Net income: $64 Net income: $18
Net loss per share: $0.01 Net loss per share: $0.02
At December 31, 1997, 103,000 options were vested and 558,000 options
were available for future grant under the Option Plan. The weighted
average contractual life of options outstanding at December 31, 1997,
was 4.5 years. The weighted average exercise price of options granted
during the year ended December 31, 1997, was $2.65.
(10) Property and Equipment
Property and equipment is comprised of the following (in thousands):
December 31,
-------------------------------------
1997 1996
--------------- ---------------
Leasehold improvements $ 3,125 $ 2,095
Equipment 2,924 1,301
Furniture, signs and fixtures 2,333 1,002
Company vehicles 832 396
--------------- ---------------
Total property and equipment 9,214 4,794
Less accumulated depreciation 2,133 1,804
--------------- ---------------
Property and equipment, net $ 7,081 $ 2,990
=============== ===============
(11) 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 $334,000, $196,000, and $191,000, in 1997, 1996
and 1995, respectively.
F-19
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(12) Commitments and Contingencies
Operating 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 13). The minimum future rental payments by the Company as of
December 31, 1997 are as follows (in thousands):
Year ending December 31, Related Parties Other Total
------------------------ --------------- ----- -----
1998 $ 2,766 $ 4,946 $ 7,712
1999 2,766 4,586 7,352
2000 2,805 4,117 6,922
2001 2,862 3,527 6,389
2002 2,622 3,105 5,727
Thereafter through 2014 22,770 16,463 39,233
Rental expense for operating leases was $5.8 million, $2.8 million, and
$2.4 million in 1997, 1996 and 1995, 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.
(13) Related Party Transactions
Operating Leases
The Company leases facilities under various agreements from a Trust
affiliated with the Chief Executive Officer ("CEO") of the Company (the
"Trust"), 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 $2.3 million, $1.7 million, and
$1.5 million in 1997, 1996, and 1995, respectively.
F-20
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Consolidated Financial Statements, Continued
(13) Related Party Transactions (continued)
Acquisitions
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. As a result of this
transaction, the Chairman of the Company owed $0.5 million, as of
December 31, 1997, which was subsequently paid.
During 1997, the Company acquired substantially all the operating assets
of a dealership owned by the Chief Operating Officer of the Company for
$2.9 million.
Management Services
Prior to the Combination, a Company affiliated with the CEO provided
management services to the Company. Selling, general and administrative
expense includes approximately $0.8 million, $1.8 million and $1.6
million, for the years ended December 31, 1997, 1996 and 1995,
respectively for data processing, executive compensation, professional,
and other services.
Legal Services
The 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 1997.
Notes Payable
The Company had $0.6 million of notes payable due to a stockholder at
December 31, 1997.
(14) Subsequent Events
In April 1998, the Company acquired substantially all of the operating
assets of Beverly Hills BMW, Ltd. The purchase price of $11.9 million
includes goodwill and other operating assets, and was financed by the
Company's available lines of credit. The unaudited revenues for the year
ended December 31, 1997 were approximately $54 million. In addition, the
Company has entered into definitive agreements, subject to manufacturer
approval, to acquire two automobile dealerships for an aggregated
estimated purchase price of $7.0 million plus new vehicle inventory.
F-21
EXHIBIT INDEX
-------------
EXHIBIT
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NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
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.
1
3.1 Amended and Restated Certificate of Incorporation, as amended, filed
July 8, 1997.
3.2 By-Laws.
4.1 Stockholders' Agreement dated July 11, 1997 by and among the Company and
its stockholders, Thomas Price, Donald Strough, Steven Hallock, Fred
Cziska, Al Babbington, John Driebe, Embarcadero Automotive, LLC,
Raintree Capital LLC, BB Investments and certain affiliates of Trust
Company of the West.
4.1.1 Securities Purchase Agreement dated as of July 11, 1997 by and among the
Company, certain of its wholly-owned subsidiaries and Trust Company of
the West and certain of its affiliates, as Purchasers.
4.1.2 Amendment No. 1 to Securities Purchase Agreement dated as of January 9,
1998 by and among each of FAA Capitol N, Inc., FAA Auto Factory, Inc.
and each of the parties to the Securities Purchase Agreement dated as
of July 11, 1997.
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.
10.3 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.
2
10.3.2 Nissan Contiguous Market Ownership Holding Company Agreement dated June
30, 1997 by and among Nissan Motor Corporation in U.S.A., the Company,
FAA Concord N, Inc., and FAA Dublin N, Inc.
10.3.3 Nissan Dealer Term Sales and Service Agreement dated as of July 16, 1997
by and between Nissan Motor Corporation in U.S.A. and FAA Dublin N,
Inc.
10.3.4 Nissan Contiguous Market Ownership Addendum dated July 16, 1997 by and
among Nissan Motor Corporation in U.S.A., Thomas A. Price, FAA Dublin
N, Inc. and the Company.
10.3.5 Nissan Contiguous Market Ownership Areas Formation and Linkage Agreement
dated June 30, 1997 by and between Nissan Motor Corporation in U.S.A.
and the Company (FAA Dublin N, Inc.).
10.3.6 Nissan Dealer Term Sales and Service Agreement dated June 30, 1997 by
and between Nissan Motor Corporation in U.S.A. and Smart Nissan, Inc.
10.3.7 Nissan Contiguous Market Ownership Addendum dated June 30, 1997 by and
among Nissan Motor Corporation in U.S.A., Thomas A. Price, Smart
Nissan, Inc. and the Company.
10.3.8 Nissan Contiguous Market Holding Company Agreement dated June 30, 1997
by and between Nissan Motor Corporation in U.S.A. and the Company
(Smart Nissan, Inc.; FAA Serramonte, Inc.).
10.3.9 Nissan Contiguous Market Ownership Areas Formation and Linkage Agreement
dated June 30, 1997 by and between Nissan Motor Corporation in U.S.A.
and the Company (Smart Nissan, Inc.).
10.3.11 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.
10.3.12 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.).
10.3.13 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.
3
10.3.14 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.
10.3.15 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.).
10.3.16 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.
10.3.17 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.
10.3.18 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.).
10.3.19 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.
10.3.20 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.
10.3.22 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.
10.5 Dealer Sales and Service Agreement dated as of June 13, 1997 by and
between Mitsubishi Motor Sales of America, Inc. and FAA Serramonte,
Inc.
4
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.
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.
5
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.
10.11 FirstAmerica Automotive, Inc. 1997 Stock Option Plan, as amended.
21.1 Subsidiaries of the Company.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
6