UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____ to ____
Commission file number: 2-97254-NY
FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 88-0206732
(State or other jurisdiction of (I.R.S. Employer
incorporation Identification No.) or organization)
601 Brannan Street
San Francisco, California 94107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 284-0444
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 30, 1998.
Class A Common stock, $0.00001 par value 11,179,029
Class B Common stock, $0.00001 par value 3,032,000
FIRSTAMERICA AUTOMOTIVE, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Operations - Three and Six Months
Ended June 30, 1998 and 1997 4
Condensed Consolidated Statement of Stockholders' Equity - June 30, 1998
and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, 1998 December 31, 1997
--------------- ---------------------
ASSETS
------
Cash ............................................................ $ 2,187 $ 2,924
Contracts in transit ............................................ 14,163 9,454
Accounts receivable, net of allowance for doubtful accounts of
$408 in 1998 and $320 in 1997 .......................... 14,399 10,328
Inventories:
New vehicles ........................................... 68,023 58,344
Used vehicles .......................................... 16,021 14,027
Parts and accessories .................................. 5,732 5,223
-------- --------
Total inventories ............................... 89,776 77,594
Prepaid costs - extended warranty service contracts ............... 881 848
Deferred income taxes ........................................... 676 618
Deposits, prepaid expenses and other ............................ 4,101 2,779
-------- --------
Total current assets ............................ 126,183 104,545
Property and equipment, net of accumulated depreciation of $2,570
in 1998 and $2,133 in 1997 ............................. 9,672 7,081
Other assets:
Prepaid costs - extended warranty service contracts ...... 1,117 1,287
Loan origination and other costs, net of amortization of
$452 in 1998 and $195 in 1997 ................... 3,301 3,407
Other noncurrent assets ................................ 1,522 1,342
Goodwill, net of accumulated amortization of $287
in 1998 and $125 in 1997 ........................ 20,226 6,340
-------- --------
Total assets .................................... $162,021 $124,002
======== ========
See accompanying notes to condensed consolidated financial statements.
2
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(In thousands, except share data)
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ -------- --------
Current liabilities:
Accounts payable ......................................................... $ 6,523 $ 6,137
Accrued liabilities ...................................................... 11,936 8,804
Floor plan notes payable ................................................. 81,617 66,539
Secured lines of credit .................................................. 16,525 4,000
Other notes payable ...................................................... 6,552 1,218
Deferred revenue - extended warranty service contracts ..................... 2,115 2,034
-------- --------
Total current liabilities ................................... 125,268 88,732
Long-term liabilities:
Senior notes, net of unamortized discount of $1,963
in 1998 and $2,062 in 1997 ......................................... 22,037 21,938
Deferred income taxes .................................................... 327 269
Deferred revenue - extended warranty service contracts .................... 2,708 3,061
-------- --------
Total liabilities ........................................... 150,340 114,000
8% cumulative redeemable preferred stock, $0.00001 par value; 3,500 shares
issued and outstanding in 1998 and 1997 (net of discount of $491 and $526,
liquidation preference of $3,500) ........................................ 3,009 2,974
Redeemable preferred stock, $0.00001 par value; 500 shares issued and
outstanding in 1998 and 1997 (net of discount of $70 and $75, liquidation
preference of $580 and $540) ............................................. 510 465
Stockholders' Equity
Common stock, $0.00001 par value:
Class A, 30,000,000 shares authorized, 11,179,029 shares issued
and outstanding in 1998 and 11,201,152 in 1997 .............. -- --
Class B, 5,000,000 shares authorized, 3,032,000 shares issued
and outstanding in 1998 and 1997 ............................ -- --
Class C, 30,000,000 shares authorized, 0 issued and outstanding .... -- --
Additional paid-in capital ............................................... 6,544 6,544
Retained earnings ........................................................ 1,618 19
-------- --------
Total shareholders' equity .................................. 8,162 6,563
-------- --------
Total liabilities and shareholders' equity .................. $162,021 $124,002
======== ========
See accompanying notes to condensed consolidated financial statements.
3
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Sales:
Vehicle ....................................................... $ 155,026 $ 81,588 $ 291,766 $ 160,533
Service, parts and other ...................................... 28,025 15,462 51,902 29,541
----------- ----------- ----------- -----------
Total sales ............................................. 183,051 97,050 343,668 190,074
Cost of sales:
Vehicle ....................................................... 142,149 76,317 268,096 150,393
Service, parts and other ...................................... 11,991 7,117 22,243 13,632
----------- ----------- ----------- -----------
Total cost of sales ..................................... 154,140 83,434 290,339 164,025
Gross profit ............................................ 28,911 13,616 53,329 26,049
Operating expenses:
Selling, general and administrative ........................... 23,782 12,344 44,440 22,876
Depreciation and amortization ................................. 566 206 965 330
Combination and related expenses .............................. -- 1,584 -- 2,268
----------- ----------- ----------- -----------
Operating income (loss) ................................. 4,563 (518) 7,924 575
Other expense:
Interest expense, floor plan .................................. (1,509) (790) (2,689) (1,612)
Interest expense, other ....................................... (1,152) (133) (2,043) (133)
----------- ----------- ----------- -----------
Income (loss) before income taxes ....................... 1,902 (1,441) 3,192 (1,170)
Income tax (benefit) expense ......................................... 818 (1,262) 1,373 (1,025)
----------- ----------- ----------- -----------
Net income (loss)........................................ $ 1,084 $ (179) $ 1,819 $ (145)
=========== =========== =========== ===========
Basic earnings (loss) per share of common stock ......... $ .07 $ (0.02) $ .11 $ (0.02)
Weighted average common shares outstanding .............. 14,211,067 7,841,092 14,218,400 7,841,092
Diluted earnings (loss) per share of common stock ....... $ .07 $ (0.02) $ .11 $ (0.02)
Weighted average common and common
equivalent shares outstanding ......................... 14,720,671 7,841,092 14,678,160 7,841,092
See accompanying notes to condensed consolidated financial statements
4
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Common Stock
---------------------------------------
Class A Class B
--------------------------------------- Paid-in Retained Total
Shares Amount Shares Amount Capital Earnings Equity
--------------------------------------------------------------------------
Balance, December 31, 1997 ................ 11,201 $ -- 3,032 $ -- $ 6,544 $ 19 $ 6,563
Preferred dividend, liquidation preference,
and discount amortization ............ (220) (220)
Retirement of shares ...................... (22)
Net income ................................ 1,819 1,819
--------------------------------------------------------------------------
Balance, June 30, 1998 .................... 11,179 $ -- 3,032 $ -- $ 6,544 $ 1,618 $ 8,162
==========================================================================
See accompanying notes to condensed consolidated financial statements.
5
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
-------------------------------------
1998 1997
-------------- -------------
Cash flows from operating activities:
Net income (loss) ...................................... $ 1,819 $ (145)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................ 965 330
Non-cash stock compensation .................. -- 701
Deferred income taxes ........................ -- (589)
Deferred warranty revenue amortization, net .. (135) (162)
Changes in operating assets and liabilities:
Receivables and contracts in transit .... (8,780) (1,110)
Inventories ............................. (8,146) (4,917)
Deposits, prepaids and other assets ..... (1,961) (169)
Floor plan notes payable ................ 12,600 (2,467)
Accounts payable and accrued liabilities 3,518 6,981
-------------- -------------
Net cash used in operating activities ... (120) (1,547)
Cash flows from investing activities:
Capital expenditures ................................... (2,704) (225)
Cash paid for acquisitions ............................. (15,481) (6,091)
-------------- -------------
Net cash used in investing activities ... (18,185) (6,316)
-------------- -------------
Cash flows from financing activities:
Borrowings on secured lines of credit .................. 12,525 --
Borrowings on notes payable ............................ 5,334 8,075
Loan origination costs ................................. (151) --
Distributions to shareholders, pre-Combination (Note 1) -- (468)
Preferred stock dividend ............................... (140) --
-------------- -------------
Net cash provided by financing activities 17,568 7,607
-------------- -------------
Net decrease in cash and cash equivalents (737) (256)
Cash at beginning of period .................................. $ 2,924 $ 668
-------------- -------------
Cash at end of period ........................................ $ 2,187 $ 412
============== =============
Cash paid during the period for:
Interest ............................................... $ 3,786 $ 1,545
Income taxes ........................................... $ 1,222 $ 261
Non-cash activity was as follows:
Common stock issued as compensation .......................... $ -- $ 701
See accompanying notes to consolidated financial statements.
6
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
(1) BASIS OF PRESENTATION
The financial information included herein for the three and six-month periods
ended June 30, 1998 and 1997 is unaudited and reflects, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and the results of
operations for the periods presented. The financial information as of December
31, 1997 is derived from FirstAmerica Automotive, Inc.'s Annual Report on Form
10-K filed with the Securities and Exchange Commission on May 14, 1998. These
interim condensed consolidated financial statements should be read in
conjunction with FirstAmerica Automotive, Inc.'s audited consolidated financial
statements and the notes thereto included in FirstAmerica Automotive, Inc.'s
Form 10-K. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
(a) Organization and Combination
Effective July 11, 1997, FirstAmerica Automotive, Inc. (the Company) combined
(the "Combination") with a group of automobile dealership entities under common
ownership and control (the "Price Dealerships"). The stockholders of the Price
Dealerships received 5,526,000 shares of FirstAmerica Automotive, Inc.'s common
stock, which represented a majority of the total outstanding shares of capital
stock of FirstAmerica Automotive, Inc. immediately following the Combination.
The Combination was accounted for as the acquisition of FirstAmerica Automotive,
Inc. by the Price Dealerships, and accordingly, the financial statements for
periods before the Combination represent the financial statements of the Price
Dealerships.
(b) Business
The Company's plan is to acquire and operate multiple automobile dealerships in
the highly fragmented automobile retailing industry. The Company operates 16
automobile dealerships in California, including 12 in Northern California and
four in Southern California. In June 1998 the Company also opened its
previously announced multi-brand service and repair facility in downtown San
Francisco, California. The Company sells new and used cars and light trucks,
sells replacement parts, provides vehicle maintenance, warranty and repair
services, and arranges related financing and insurance products ("F&I") for its
customers. The Company sells 12 domestic and foreign brands, which consist of
BMW, Buick, Dodge, GMC, Honda, Isuzu, Lexus, Mitsubishi, Nissan, Pontiac, Toyota
and Volkswagen.
(c) Principles of Consolidation
The condensed consolidated financial statements include the accounts of
FirstAmerica Automotive, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
(2) FLOOR PLAN NOTES PAYABLE AND SECURED LINES OF CREDIT
At the time of the Combination, the Company entered into a three year $175
million Loan and Security Agreement (the "Loan Agreement") with a financial
company, replacing an existing $37 million line of credit to the Company.
The Loan Agreement permits the Company to borrow up to a maximum of: (i) $115
million in floor plan notes payable to finance vehicle inventory; (ii) a $35
million revolver facility ("Revolver Advances"), limited by the used and parts
inventory borrowing base as defined in the loan agreement; and (iii) a $25
million discretionary facility ("Discretionary Advances"), which the financial
company makes at its absolute sole discretion upon request of the Company.
7
As of June 30, 1998, the Company had floor plan notes payable, Revolver
Advances, and Discretionary Advances outstanding of $81.6 million, $16.5
million, and $0, respectively.
Floor plan notes payables are due when vehicles are sold, leased, or delivered.
Revolver Advances are due whenever the used vehicle and parts borrowing base as
defined in the Loan Agreement is exceeded. The Loan Agreement grants a
collateral interest in substantially all of the Company's assets and contains
various financial covenants such as minimum interest coverage, minimum working
capital ratios, and maximum debt to equity ratios.
The availability of the Company to draw on the floor plan notes payable,
Revolver Advances, and Discretionary advances for the purpose of acquiring
automobile dealerships, is limited by the amount of vehicle and parts inventory
of the acquired dealership.
The Company also has $12.0 million available under its senior notes facility to
finance acquisitions.
(3) BUSINESS ACQUISITIONS
(a) Beverly Hills BW, Ltd.
In April 1998, the Company acquired substantially all of the operating assets of
Beverly Hills BW, Ltd., a BMW automobile dealership located in West Los Angeles,
California. The acquisition was accounted for using the purchase method of
accounting and the results of operations of Beverly Hills BW, Ltd. has been
included in the accompanying financial statements for the period beginning April
2, 1998, the effective date of acquisition. The $11.7 million purchase price was
financed using the Company's secured lines of credit. The purchase price was
allocated to the assets and liabilities acquired based on their estimated fair
market value at the acquisition date as follows (in thousands):
Inventory and other assets, net of floor plan financing $ 1,275
Property and equipment 194
Goodwill 10,250
-------
Total purchase price $11,719
=======
(b) Burgess British Cars, Inc.
In June 1998, the Company acquired substantially all of the operating assets
of Burgess British Cars, Inc., a Honda automobile dealership located in Daly
City, California. The $3.8 million purchase price and $0.2 million of
additional working capital was financed by the proceeds of a $4.0 million loan
from the Chairman of the Company's Board of Directors, to the Company,
pursuant to the terms of a Letter Agreement between the Company and the
Chairman. Pursuant to the terms of the Letter Agreement, the Chairman will be
paid a 3% origination fee on the loan. The annual interest rate on the loan is
8.75%. The principal amount is due at the earlier of June 1, 1999 or upon the
refinancing and/or equity offering of either preferred or common shares in the
Company. The Company believes the origination fee to be paid to the Chairman
is equivalent to that which would be paid under an arm's-length transaction.
The loan is included in other notes payable in the accompanying condensed
consolidated financial statements.
The Burgess British Cars, Inc. acquisition was accounted for using the purchase
method of accounting and its results of operations have been included in the
accompanying financial statements for the period beginning June 19, 1998, the
effective date of the acquisition. The purchase price has been allocated to the
assets and liabilities acquired based on their estimated fair market value at
the acquisition date as follows (in thousands):
Inventory and other assets, net of floor plan financing $ 215
Property and equipment 130
Goodwill 3,417
------
Total purchase price $3,762
======
8
The following unaudited pro forma financial data is presented as if the
acquisitions had occurred on January 1, 1997, for the six months ended June 30
(in thousands):
1998 1997
--------- ----------
Total sales $371,000 $227,219
Net income (loss) 2,279 (110)
Net income (loss) per share:
Basic and diluted $ 0.16 $ (0.01)
(4) 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 the three and six
months ended June 30, 1998, net income of $1.1 million and $1.8 million is
reduced by cumulative redeemable preference dividends of $70,000 and $140,000,
redeemable preferred stock liquidation preference accretion of $20,000 and
$40,000 and cumulative redeemable preferred stock and redeemable preferred stock
discount amortization of $20,000 and $40,000, respectively. This net income
available to common stockholders of $1.0 million and $1.6 million is then
divided by the weighted average shares outstanding. Weighted average shares
outstanding used for basic earnings per share for the three and six months ended
June 30, 1998 was 14,211,067 and 14,218,400, respectively. To calculate diluted
earnings per share, net income is divided by the sum of the weighted average
shares outstanding for basic earnings per share, the dilutive effect of stock
options of 282,388 and 254,768 shares and the net effect of warrants of 227,216
and 204,992 shares, respectively.
(5) NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 130, "Reporting Comprehensive Income." This statement
establishes standards of reporting and presentation of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement is effective for the fiscal years beginning after December 15, 1997.
The Company has determined that net income and comprehensive income are the same
for the periods presented and therefore no separate disclosure for comprehensive
income is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company believes
that its automobile operations constitute its only operating segment and
therefore no separate disclosure under this statement is required.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting the Cost of Start-Up Activities", which provides guidance on
financial reporting for enterprise start-up costs. The SOP, which is effective
for fiscal years beginning after December 15, 1998, requires the costs of start-
up activities and related organization costs to be expensed as incurred. The
Company is currently evaluating this SOP and its impact on its financial
reporting and disclosure.
(6) SUBSEQUENT EVENTS
The Company has entered into a definitive agreement, subject to manufacturer
approval, to acquire an automobile dealership located in Northern California for
a cash purchase price of $12.0 million plus new vehicle inventory.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Quarterly Report and Management's Discussion and Analysis of Results of
Operations and Financial Condition include certain " forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this document, including statements regarding
potential acquisitions, expected cost savings, planned capital expenditures, the
Company's future financial position, business strategy and other plans and
objectives for future operations are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, such statements are based upon assumptions and
anticipated results that are subject to numerous uncertainties. Actual results
may vary significantly from those anticipated due to many factors, including
industry conditions, future demand for new and used vehicles, the ability to
obtain manufacturer consents to acquisitions, the availability of capital
resources and the willingness of acquisition candidates to accept the Company's
capital stock as currency. These important factors, risks and uncertainties
include, but are not limited to, the cyclical nature of automobile sales, the
intense competition in the automobile retail industry and the Company's ability
to obtain additional sources of capital, negotiate profitable acquisitions and
secure manufacturer approvals for such acquisitions. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by such factors.
OVERVIEW
FirstAmerica Automotive, Inc. (the "Company") is one of the largest automobile
retailers in Northern California. As of June 30, 1998, the Company operated 12
automobile dealerships and one multi-brand vehicle repair and service center in
Northern California, 3 dealerships in San Diego County and one in Beverly Hills,
California. The Company sells new and used cars and light trucks, sells
replacement parts, provides vehicle maintenance, warranty and repair services
and arranges related financing and insurance products ("F&I") for its customers.
At its sixteen dealership locations, certain of which represent multiple new
vehicle dealerships, the Company sells 12 domestic and foreign brands, which
consist of BMW, Buick, Dodge, GMC, Honda, Isuzu, Lexus, Mitsubishi, Nissan,
Pontiac, Toyota and Volkswagen.
In addition to its traditional dealership operations, the Company has (i) in
June 1998 opened a multi-brand, full service vehicle maintenance and repair
center in the downtown San Francisco area, (ii) developed a "Used Car Auto
Factory" concept to centralize procurement, reconditioning and wholesale
disposal of used cars, (iii) developed a "Dealer Services" concept to centralize
the procurement of extended warranty service contracts and custom accessories
such as alarms, stereos and chemical treatments, and (iv) 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.
10
The following table sets forth selected condensed financial data for the Company
expressed as a percentage of total sales for the periods indicated below.
FIRSTAMERICA AUTOMOTIVE, INC.
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------------------------
JUNE 30, JUNE 30,
---------------------------------------------------------
1998 1997 1998 1997
------------ ----------------- ------------ -----------
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles 57.2% 59.4% 58.1% 60.3%
Used vehicles 27.5% 24.6% 26.8% 24.1%
Service, parts and other 15.3% 16.0% 15.1% 15.6%
------------ ----------------- ------------ -----------
Total sales 100.0% 100.0% 100.0% 100.0%
Gross profit 15.8% 14.0% 15.5% 13.7%
Selling, general and administrative 13.3% 12.9% 13.2% 12.2%
Combination and related expenses 0% 1.6% 0% 1.2%
------------ ----------------- ------------ -----------
Operating income (loss) 2.5% (0.5)% 2.3% 0.3%
Income (loss) before taxes 1.0% (1.5)% 0.9% (0.6)%
------------ ----------------- ------------ -----------
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
SALES. Sales increased by $86.0 million, or 88.6%, to $183.1 million for the
three months ended June 30, 1998 from $97.1 million for the comparable period of
1997, primarily due to sales contributed by dealerships that the Company has
acquired since June 1997. The Company expects sales growth to continue as the
Company executes its acquisition strategy.
New Vehicles. The Company sells twelve domestic and imported brands
ranging from economy to luxury vehicles, as well as sport utility vehicles,
minivans and light trucks. The Company sold 4,441 and 2,704 new vehicles
in the three months ended June 30, 1998 and 1997, respectively, generating
revenues of $104.7 million and $57.9 million, which constituted 57.2% and
59.4% of the Company's total sales, respectively. New vehicle sales
increased by $46.8 million, or 80.8%, due to an increase in unit sales
attributable to dealerships acquired by the Company as well as price
increases which were consistent with manufacturers' price increases.
Used Vehicles. The Company sells a variety of makes and models of used
vehicles and light trucks of varying model years and prices. The Company
sold 4,146 and 2,051 retail and wholesale used vehicles in the three months
ended June 30, 1998 and 1997, respectively, generating revenues of $50.4
million and $23.9 million, which constituted 27.5% and 24.6% of the
Company's total sales, respectively. The $26.5 million or 110.9% increase
in used vehicle revenues is primarily due to a corresponding increase in
used vehicle unit sales from dealerships acquired during 1997 as well as an
increase in used vehicle revenues in existing stores due to the
implementation of the Company's "Used Car Auto Factory."
Service, parts and other revenues. Service, parts and other revenues
includes revenue from the sale of parts, accessories, maintenance and
repair services, and from fees earned on the sale of vehicle financing
notes and warranty service contracts. Finance fees are received for notes
sold to finance companies for customer vehicle financing. Warranty service
contract fees are earned on extended warranty service contracts that are
sold on
11
behalf of vehicle manufacturers or insurance companies. Service,
parts and other revenue increased 80.6% or $12.5 million, from $15.5
million for the three months ended June 30, 1997 to $28.0 million for the
comparable period in 1998, primarily due to dealerships acquired subsequent
to June 1997.
GROSS PROFIT. Gross profit increased by $15.3 million, or 112.3%, to $28.9
million for the three months ended June 30, 1998 versus the comparable period in
1997. Gross profit margins on new vehicles increased from 6.9% to 8.1%,
primarily due to a higher percentage of luxury vehicle sales. Gross profit
margins on used vehicle retail sales increased from 7.8% to 10.1% for the three
months ended June 30, 1997 and 1998, respectively, primarily due to a higher
percentage of luxury vehicle sales and the Company's emphasis on purchasing for
resale high demand used vehicles through its "Used Car Auto Factory". Service,
parts and other gross profit increased from 44.4% to 46.0% for the three months
ended June 30, 1997 and 1998, respectively, primarily due to higher margins at
dealerships acquired since June 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 93.5%, or $11.5 million, from $12.3 million to
$23.8 million for the three months ended June 30, 1997 and 1998, respectively.
As a percentage of sales, selling, general and administrative expense increased
from 12.9% to 13.3% for the three months ended June 30, 1997 and 1998,
respectively. The increase was due primarily to expenses incurred for the
establishment of a management structure for executing the Company's acquisition
strategy.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $0.4
million, from $0.2 million to $0.6 million for the three months ended June 30,
1997 and 1998, respectively, primarily due to additional depreciation and
goodwill amortization related to dealerships acquired since June 1997.
COMBINATION AND RELATED EXPENSES. During the three months ended June 30, 1997,
the Company incurred $1.6 million in certain legal, accounting, consulting and
compensation expenses associated with the combination with the Price Dealerships
and the development of the Company's organization and business plan. The
expenses relating to the Combination were incurred during both the three and six
months ended June 30, 1997. There were no comparable expenses incurred in the
three months ended June 30, 1998.
INTEREST EXPENSE. Floor plan interest expense increased $0.7 million to $1.5
million for the three months ended June 30, 1998 versus the comparable period in
1997. The increase was due to increased floor plan debt in 1998 from the
inventory associated with the acquired dealerships. Interest expense other than
floor plan increased $1.1 million from $0.1 million to $1.2 million for the
three months ended June 30, 1997 and 1998, respectively, primarily due to debt
incurred for the acquisition of additional dealerships.
INCOME TAX EXPENSE. Income tax expense increased to $0.8 million from a tax
benefit of $1.3 million for the three months ended June 30, 1998 versus the
comparable period in the previous year. The Company's effective tax rate for
the first three months of 1998 was 43.0% compared to 87.5% for 1997; the higher
effective rate in the prior year is primarily due to certain non-deductible
stock compensation expenses incurred in 1997.
NET INCOME. Net income increased from a $0.2 million loss to a $1.1 million
profit for the three months ended June 30, 1997 and 1998, respectively,
primarily as a result of the overall increase in gross profit and other items
discussed above, and the non-recurrence in 1998 of $1.6 million in Combination
related expenses offset by the increase in income tax expense.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Sales. Sales increased by $153.6 million, or 80.8%, to $343.7 million for the
six months ended June 30, 1998 from $190.1 million for the comparable period of
1997, primarily due to sales contributed by dealerships that the Company has
acquired since June 1997. The Company expects sales growth to continue as the
Company executes its acquisition strategy.
New Vehicles. The Company sold 8,777 and 5,590 new vehicles in the six
months ended June 30, 1998 and 1997, respectively, generating revenues of
$199.6 million and $114.6 million, which constituted 58.1% and 60.3% of the
Company's total sales, respectively. New vehicle sales increased by $85.0
million, or 74.2%,
12
primarily due to an increase in unit sales attributable to dealerships
acquired by the Company as well as increases in average unit prices which
were consistent with manufacturers' price increases.
Used Vehicles. The Company sold 8,096 and 3,834 retail and wholesale used
vehicles in the six months ended June 30, 1998 and 1997, respectively,
generating revenues of $92.1 million and $45.9 million, which constituted
26.8% and 24.1% of the Company's total sales, respectively. The $46.2
million or 100.7% increase in used vehicle revenues is primarily due to a
corresponding increase in used vehicle unit sales from dealerships acquired
subsequent to June 1997.
Service, parts and other. Service, parts and other revenue increased 75.9%
or $22.4 million, from $29.5 million for the first six months of 1997 to
$51.9 million for the comparable period in 1998, primarily due to
dealerships acquired since June 1997.
GROSS PROFIT. Gross profit increased by $27.3 million, or 105.0%, to $53.3
million for the six months ended June 30, 1998 compared to the same period in
1997. Dealerships acquired since June 1997, contributed $22.8 million to the
increase in gross profit, $2.6 million was contributed by the Used Car Auto
Factory and Dealer Services groups in 1998, both concepts started by the Company
in late 1997 and the remainder was primarily due to higher average gross margins
at dealerships owned during both six month periods ended June 30, 1998 and 1997.
Gross profit margins on new vehicles increased from 6.8% to 7.7%, primarily due
to a higher percentage of luxury vehicle sales. Gross profit margins on used
vehicle retail sales increased from 7.2% to 9.8% for the six months ended June
30, 1998 compared to the same period in 1997, primarily due to higher
percentages of luxury vehicle sales as well as the Company's emphasis on
acquiring for resale high demand used vehicles through its "Used Car Auto
Factory". Service, parts and other gross profit increased from 52.6% to 57.1%
for the first six months of 1997 and 1998, respectively, primarily due to higher
margins at dealerships acquired since June 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. During the six months ended June
30, 1998, selling, general and administrative expense increased $21.5 million,
or 94.3%, to $44.4 million, from $22.9 million in the same period in 1997.
Selling, general and administrative expense as a percent of sales increased to
12.9% from 12.0% in the six months ended June 30, 1998 compared to the same
period in the prior year. The increase was due primarily to expenses incurred
for the establishment of a management structure for executing the Company's
acquisition strategy.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $0.6
million, from $0.3 million to $0.9 million for the six months ended June 30,
1997 and 1998, respectively, primarily due to additional depreciation and
goodwill amortization related to dealerships acquired.
COMBINATION AND RELATED EXPENSES. During the six months ended June 30, 1997,
the Company incurred $2.3 million in certain legal, accounting, consulting and
compensation expenses associated with the combination with the Price Dealerships
and the development of the Company's organization and business plan. The
expenses relating to the Combination were incurred during the six months ended
June 30, 1997. There were no comparable expenses incurred in the six months
ended June 30, 1998.
INTEREST EXPENSE. Floor plan interest expense increased $1.1 million or 66.8%
to $2.7 million for the six months ended June 30, 1998 versus the comparable
period in 1997. The increase was due to increased floor plan debt in 1998 from
the inventory associated with the acquired dealerships. Interest expense other
than floor plan increased $1.9 million due to debt incurred for the acquisition
of dealerships.
INCOME TAX EXPENSE. The income tax benefit of $1.0 million for the first six
months of 1997 versus the $1.4 million expense for the comparable period in 1998
represents a $2.4 million increase. The income tax benefit in the six months
ended June 30, 1997 was due to the loss before income taxes of $1.2 million,
which was incurred due to combination and related expenses of $2.3 million
incurred during the period. The Company's effective tax rate for the first six
months of 1998 was 43.0% compared to 87.5% for 1997; the higher effective rate
in 1997 was primarily due to certain non-deductible stock compensation expenses
incurred in 1997.
NET INCOME. Net income increased from a $0.1 million loss to a $1.8 million
profit for the six months ended June 30, 1997 and 1998, respectively, primarily
as a result of the overall increase in gross profit and other items discussed
13
above, and the non-recurrence in 1998 of $2.3 million in Combination-related
expenses, offset by increased income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
The cash and liquidity requirements of the Company are primarily to finance
acquisitions of new automobile dealerships, service debt and fund working
capital. Historically the Company has relied primarily upon cash flows from
operations, floor plan financing, and other borrowings under its various credit
facilities to finance its operations and the proceeds from its private debt
placement with finance companies to finance its expansion. The availability of
the Company to draw on the floor plan notes payable, Revolver Advances, and
Discretionary advances for the purpose of acquiring automobile dealerships, is
limited by the amount of vehicle and parts inventory of the acquired dealership.
The Company also has $12.0 million available under its senior notes facility to
finance acquisitions. In order to continue to execute the Company's acquisition
strategy, the Company will need to obtain additional financing or capital. The
Company is currently evaluating proposals from several investment banking groups
to assist the Company in raising the additional financing or capital necessary
to finance the Company's planned acquisition strategy.
For the six months ended June 30, 1998, operating activities resulted in net
cash used in operations of $0.1 million, primarily due to net income of $1.8
million, an increase in accounts receivable and contracts in transit of $8.8
million and increase in inventories of $8.1 million, partially offset by
increases in floor plan notes payable, accounts payable and accrued liabilities
of $16.1 million. For the six months ended June 30, 1997, cash used in
operations totaled $1.5 million, primarily due to increases in inventories of
$4.9 million, increases in accounts receivable and contracts in transit of $1.1
million, and decreases in floor plan notes payable of $2.5 million, partially
offset by increases in accounts payable and accrued liabilities of $7.0 million.
Net cash used in investing activities totaled $18.2 million and $6.3 million for
the six months ended June 30, 1998 and 1997, respectively. Investing activities
for the six months ended June 30, 1998 consisted of the acquisition of the
Burgess British Cars, Inc. and Beverly Hills BMW automobile dealerships for a
purchase price totaling $15.5 million, and $2.7 million in capital expenditures
primarily for the build out and renovation of the Company's multi-brand service
and repair center in San Francisco, as well as the improvement of existing
facilities. For the six months ended June 30, 1997, net cash used in investing
activities was $6.3 million, of which $6.1 million was used for the acquisition
of three automobile dealerships in San Diego County and $0.2 million for
improvement of equipment.
Cash provided by financing activities in the six months ended June 30, 1998
totaled $17.6 million, which primarily consisted of borrowings on secured lines
of credit and notes payable which were used to finance acquisitions. Net
financing activities for the six months ended June 30, 1997 totaled $7.6
million, which was primarily used to finance acquisitions.
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 vehicle
manufacturers, vendors and suppliers to successfully address the Year 2000
Conversion issue. 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.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales have been lower in the first and fourth
quarters of each calendar year largely due to consumer purchasing patterns
during the holiday season, inclement weather during the winter months, and the
reduced number of business days during the holiday season. As a result,
financial performance for the Company is generally lower during the first and
fourth quarters than during the other quarters of each calendar year.
Management believes that interest rates, variations in automobile manufacturers
incentive plans, levels of consumer debt, consumer buying patterns and
confidence, as well as general economic conditions also contribute to
fluctuations in sales and operating results. The timing of acquisitions may also
cause substantial fluctuations of operating results from quarter to quarter.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required by Registrant.
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as a part of this report are listed below.
Exhibit No.
-----------
2.1 Asset Purchase Agreement by and among the Company, Beverly Hills
BW, Ltd., and Ross Gilbert.
2.2 Asset Purchase Agreement by and among the Company, Golden Sierra
Auto Group and Capman.
3.1(1) Amended and Restated Certificate of Incorporation, as amended.
3.2(2) By-Laws
11 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
(1) Incorporated by reference to Exhibit 3.1 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, filed on May 14,
1998.
(2) Incorporated by refence to Exhibit 3.2 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, filed on May 14,
1998.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K under Item 2., Acquisition or
Disposition of Assets, dated June 19, 1998 and filed with the Securities and
Exchange Commission on July 2, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998 FIRSTAMERICA AUTOMOTIVE, INC.
By /s/ THOMAS A. PRICE
-------------------
Thomas A. Price
President, Chief Executive
Officer and Director
(Principal Executive Officer)
By /s/ DEBRA SMITHART
-------------------
Debra Smithart
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17