Exhibit 99.2
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
CONTENTS
PAGE
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INDEPENDENT AUDITOR'S REPORT 2
FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations and Owner's Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6
1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
FirstAmerica Automotive, Inc.
We have audited the accompanying balance sheet of California Carriage, Ltd.
(d.b.a. Concord Honda Pontiac) as of December 31, 1996, and the related
statement of operations and owner's equity and cash flows for the year then
ended. These financial statements are the responsibility of FirstAmerica
Automotive, Inc. management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of California Carriage, Ltd.
(d.b.a. Concord Honda Pontiac) as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
November 14, 1997
2
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
BALANCE SHEETS
(IN THOUSANDS)
(Unaudited)
September 30, December 31,
Assets 1997 1996
- ------ -------------------------- --------------------------
Cash $ 47 $ -
Accounts receivable, net (note 2) 1,268 944
Receivable from manufacturer (note 11) 174 -
Inventories, net (note 3) 2,680 4,307
Deposits and prepaid expenses 285 135
Deferred tax asset 104 -
Prepaid costs-extended warranty service contracts 89 54
-------------------------- --------------------------
Total current assets 4,647 5,440
Property and equipment, net (note 4) 624 505
Prepaid costs-extended warranty service contracts 141 87
Deferred tax asset 46 -
Other noncurrent assets - 8
Goodwill, net (note 1) 1,320 1,353
-------------------------- --------------------------
Total assets $ 6,778 $ 7,393
========================== ==========================
Liabilities and Shareholder's Equity
Bank overdraft $ - $ 104
Accounts payable and accrued liabilities 665 267
Notes payable to shareholder - 430
Due to affiliate (note 7) 482 462
Current maturities of long-term debt (note 6) 300 300
Inventory floor plan notes payable (note 3) 2,623 4,105
Deferred revenue - extended warranty service contracts 199 118
-------------------------- --------------------------
Total current liabilities 4,269 5,786
Deferred revenue - extended warranty service contracts 290 189
Long term debt (note 6) 543 768
-------------------------- --------------------------
Total liabilities 5,102 6,743
Commitments (note 9)
Total owner's equity 1,676 650
-------------------------- --------------------------
$ 6,778 $ 7,393
========================== ==========================
See accompanying notes to financial statements.
3
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
STATEMENTS OF OPERATIONS AND OWNER'S EQUITY
(IN THOUSANDS)
(Unaudited)
Nine months ended Year ended
September 30, December 31,
1997 1996
------------------------ --------------------
Sales:
Vehicle $ 27,539 $ 28,846
Service, parts and other 4,356 5,179
------------------------ --------------------
Total sales 31,895 34,025
Cost of sales 27,362 29,347
------------------------ --------------------
Gross profit 4,533 4,678
Operating expenses:
Selling, general and administrative 3,805 4,295
Depreciation and amortization 141 168
------------------------ --------------------
Operating income 587 215
Other income (expense):
Interest expense (220) (425)
Other income (expense) (13) 4
Gain on sale of dealership assets (note 11) 775 --
------------------------ --------------------
Income (loss) before income taxes 1,129 (206)
Income tax expense (103) (1)
------------------------ --------------------
Net income (loss) $ 1,026 $ (207)
Owner's equity, beginning of period 650 857
------------------------ --------------------
Owner's equity, end of period $ 1,676 $ 650
======================== ====================
See accompanying notes to financial statements.
4
CALIFORNIA CARRIAGE LTD
D.B.A. CONCORD HONDA PONTIAC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Nine months ended Year ended
September 30, December 31,
1997 1996
------------------- -------------------
Cash flows from operating activities:
Net income (loss) $ 1,026 $ (124)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Gain on sale of dealership (775) -
Deferred income taxes (150) (66)
Depreciation and amortization 141 168
Amortization of deferred warranty revenue 93 125
Changes in operating assets and liabilities:
Accounts receivable, net (324) 250
Inventories, net 853 961
Deposits and prepaid expenses (150) (52)
Other noncurrent assets 8 (8)
Floor plan notes payable (882) (1,253)
Accounts payable and accrued liabilities 418 (39)
------------------ ------------------
Net cash provided by (used in) operating activities 258 (38)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures (227) (28)
Receivable from manufacturer for sale of dealership (174) -
Proceeds from sale of dealership 949 -
------------------ ------------------
Net cash provided by (used in) investing activities 548 (28)
------------------ ------------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft (104) 104
Payments on long term debt (225) -
Payments on notes payable to shareholder (430) (45)
------------------ ------------------
Net cash provided by (used in) financing activites (759) 59
------------------ ------------------
Net increase (decrease) in cash 47 (7)
Cash at beginning of period - 7
------------------ ------------------
Cash at end of period $ 47 $ -
================== ==================
Supplemental cash flow information:
Cash paid during the year for interest $ 240 $ 412
================== ==================
Cash paid during the year for taxes $ 96 $ 1
================== ==================
See accompanying notes to financial statements.
5
CALIFORNIA CARRIAGE, LTD.
D.B.A. CONCORD HONDA PONTIAC
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
(a) Organization and Business
California Carriage, Ltd. (d.b.a. Concord Honda Pontiac) (the "Company") is
an automobile dealership that serves customers located principally in
northern California. The company offers a broad range of products and
services that include new Honda and Pontiac vehicles as well as used
vehicles and light trucks, vehicle financing and insurance, and replacement
parts and service. The company sold its Pontiac operations to the
manufacturer in September, 1997 (note 11). In October, 1997 the Company
was acquired by FirstAmerica Automotive, Inc. (note 12).
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations, and cash flows for the Company.
(c) Inventories
New and used vehicles are stated at the lower of cost or market; cost is
determined by using the specific identification method. Parts and
accessories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method which approximates market value.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment are
being depreciated over the estimated useful life of the assets. Leasehold
improvements are amortized over the shorter of the lease term or estimated
useful life of the asset. The range of estimated useful lives and
depreciation methods are as follows:
Leasehold improvements 15 years
Equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Company vehicles 5 years
Maintenance and repairs are expensed as incurred, while significant
renewals and betterments are capitalized. When an asset is retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the account, and any gain or loss is credited or charged to
income.
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(e) Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standard (SFAS) No. 109,
"Accounting for Income Taxes". Under SFAS 109, deferred income tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance reduces
deferred tax assets when it is more likely than not that some or all of the
deferred tax assets would not be realized. The effect on deferred income
tax assets and liabilities of changes in tax rates is recognized in income
in the period that includes the enactment date.
(f) Financial Instruments
The carrying amount of trade receivables, trade payables, accrued
liabilities and short term borrowings approximate fair value because of the
short-term nature of these instruments. Fair value estimates are made at a
specific point in time, based on relevant market information about the
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates. The carrying amount of the note payable approximates
fair value.
(g) Goodwill
Goodwill represents the excess of purchase price over the fair value of net
assets acquired and is being amortized on a straight-line basis over 40
years. The Company periodically assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The assessment of
the recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
The Company recorded goodwill in connection with the acquisition of its
Honda dealership operations in 1995. Goodwill is shown net of accumulated
amortization of approximately $77,000 and $44,000 at September 30, 1997 and
December 31, 1996, respectively.
(h) Advertising
The Company expenses production and other costs of advertising. Advertising
expenses were approximately $339,000 for the nine months ended September
30, 1997 and $446,000 for the year ended December 31, 1996.
(i) Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer
base.
(j) Use of Estimates
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
7
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(k) Revenue Recognition
Vehicle sales revenue is recognized upon delivery. Notes received from
buyers are generally sold to finance companies. Finance fees are received
for notes sold to finance companies and are recognized, net of anticipated
charge backs, upon acceptance of the credit by the finance companies. These
fees are included in service, parts, and other revenues in the statements
of operations. Parts and service revenues are recognized at the time of
sale or service.
The Company recognizes fees from the sale of separately priced extended
warranty service contracts at the time of sale. For extended warranty
service contracts where the Company is the primary obligor of the contract,
the costs directly related to sales of the contracts are deferred and
charged to expense proportionately as the revenues are recognized. Warranty
service contract revenues are included in service, parts, and other
revenues in the statements of operations.
(l) Major Supplier and Dealer Agreement
The Company purchases substantially all of its new vehicles and inventory
from one manufacturer at the prevailing prices charged by the manufacturer.
The Company's overall sales could be impacted by the manufacturer's
inability or unwillingness to supply the dealership with an adequate supply
of popular models.
(2) Accounts Receivable
Accounts receivable consist of the following (in thousands):
(unaudited)
September 30, December 31,
1997 1996
-------------------------------------
Contracts in transit and vehicle receivables $1,121 $ 880
Trade 247 214
Manufacturer and other 80 13
-------------------------------------
Total accounts receivable 1,448 1,107
Less allowance for doubtful accounts (180) (163)
-------------------------------------
Accounts receivable, net $1,268 $ 944
=====================================
Contracts in transit receivables are due from financial institutions and
regional banks for funding of customer vehicle purchases and are normally
collected within 30 days. Trade receivables primarily consist of commercial
receivables for parts sales and finance receivables from financial
institutions for financing commissions. Manufacturer and other receivables
consist of amounts due from manufacturers for rebates on vehicle purchases
(holdbacks), manufacturer incentives and reimbursable warranty coverage
expenses.
8
(3) Inventories and Floor Plan Notes Payable
Inventories and related floor plan notes payable are as follows (in
thousands):
Inventory Cost Floor Plan Notes Payable
-------------------------------------------------------------------------
(unaudited) (unaudited)
September 30, December 31, September 30, December 31,
1997 1996 1997 1996
-------------------------------------------------------------------------
New vehicles $1,970 $2,886 $2,623 $4,105
Used vehicles 443 1,024
Parts and accessories 267 397
-------------------------------------------------------------------------
Total $2,680 $4,307 $2,623 $4,105
=========================================================================
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at 8.5% and are secured by new vehicles and
vehicle receivables. The borrowing agreement permits the Company to borrow
an aggregate of $5,400,000, restricted by vehicle inventory levels. As of
September 30, 1997 and December 31, 1996, approximately $0 and $700,000 in
notes payable were out of trust. In October, 1997 the Company was acquired
by First America Automotive, Inc. (note 12) and all floor plan notes
payable were paid.
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
(unaudited)
September 30, December 31,
1997 1996
-------------------------------------
Equipment $ 323 $ 322
Company vehicles 304 113
Leasehold improvements 19 -
Furniture and fixtures 247 231
-------------------------------------
893 666
Less accumulated depreciation (269) (161)
-------------------------------------
Property and equipment, net $ 624 $ 505
=====================================
9
(5) Income Taxes
Income tax expense consists of the following (in thousands):
(unaudited)
September 30, December 31,
1997 1996
---------------------------------
Current:
Federal $ 215 $ -
State 38 1
---------------------------------
253 1
Deferred:
Federal (128) -
State (22) -
---------------------------------
Income tax expense $ 103 $ 1
=================================
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets as of September 30, 1997 and
December 31, 1996, are presented below (in thousands):
(unaudited)
September 30, December 31,
1997 1996
-----------------------------------
Deferred tax assets:
Allowance and accruals $ 104 $ 97
Extended warranty service contracts 104 76
Net operating loss carryover - 233
Valuation allowance - (355)
-----------------------------------
Deferred tax assets 208 51
Deferred tax liabilities:
Property and equipment 22 22
Goodwill 36 29
-----------------------------------
Deferred tax liabilities 58 51
===================================
Net deferred tax assets $ 150 $ -
===================================
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:
(unaudited)
September 30, December 31,
1997 1996
-------------------------------------
Expected pro forma income tax expense 34% 34%
State income tax expense, net of federal tax effect 6 -
Change in valuation allowance (31) (34)
-------------------------------------
9% - %
=====================================
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(6) Long Term Debt
Long term debt consists of a note payable due the sole shareholder for
amounts borrowed in connection with the acquisition of the Honda and
Pontiac dealerships in 1995. Principal is payable at $25,000 per month and
the interest rate varies from 9 to 9.5%. The note matures on October 11,
2000. Amounts due as of September 30, 1997 and December 31, 1996 were
$843,000 and $1,068,000, respectively. Maturities of long term debt for the
five years subsequent to September 30, 1997 are as follows (in thousands):
Three months ending December 31, 1997 $ 75
Years ending December 31, 1998 300
1999 300
2000 168
Thereafter -
----
$843
====
(7) Due to Affiliate
Amounts due to an affiliate totaled approximately $482,000 and $462,000 as
of September 30, 1997 and December 31, 1996, respectively, including
accrued interest. The amount due is unsecured, principal and interest is
due on demand, and accrues interest at 5.8% per year.
(8) Shareholder Notes Payable
In 1996, the Company borrowed $430,000 from the sole shareholder at
interest rates varying from 9 to 9.5%. The note was repaid in 1997.
(9) Commitments
(a) Operating Leases
The future minimum rental commitments under operating leases after
September 30, 1997 were as follows (in thousands):
Three months ended December 31, 1997 $ 128
Years ending December 31:
1998 510
1999 510
2000 510
2001 510
Thereafter 5,355
------
$7,523
======
Rental expense for all operating leases was approximately $334,000 for nine
months ended September 30, 1997 and $409,000 for 1996.
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(10) Employee Benefits
The Company provides a 401(k) Plan and Trust Agreement (the Plan). The Plan
covers substantially all employees of the Company. The annual contribution
to the plan is at the discretion of the Board of Directors. There were no
contributions to the Plan for the nine months ended September 30, 1997 or
the year ended December 31, 1996.
(11) Sale of Pontiac Dealership
In September 1997, the Company sold its Pontiac franchise and related
dealership inventories assets to the manufacturer at a gain of
approximately $775,000, which is included in other income in the
accompanying financial statements. Assets sold consisted of the following
(in thousands):
New vehicle inventories, net of
floor-plan liability $ 87
Parts and accessories 87
Gain on sale 775
----
Proceeds $949
====
As of September 30, 1997, the manufacturer owed the Company approximately
$174,000 in connection with the sale. Revenues related to the Pontiac
dealership were $3.9 million and $5.6 million for the nine months ended
September 30, 1997 and the year ended December 31, 1996, respectively.
(12) Subsequent Event
In October of 1997, substantially all of the operating assets of the
Company were acquired by First America Automotive, Inc. No adjustments
related to the acquisition are reflected in the accompanying historical
financial statements.
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