EXHIBIT 99.3
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
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 4
Statements of Shareholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstAmerica Automotive, Inc.
We have audited the accompanying balance sheet of Steven A. Hallock Enterprises,
Inc. (d.b.a. Concord Nissan) as of December 31, 1996, and the related statement
of operations, shareholders' 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 Steven A. Hallock Enterprises,
Inc. (d.b.a. Concord Nissan) 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.
September 19, 1997
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
BALANCE SHEETS
(IN THOUSANDS)
(Unaudited) December 31,
June 30, 1997 1996
------------- ------------
Assets
- ------
Cash (note 6) $ - $ -
Accounts receivable, net (note 2) 1,318 741
Inventories, net (note 3) 3,428 3,733
Deposits and prepaid expenses 56 20
Prepaid costs-extended warranty service contracts 173 123
Deferred income taxes 21 21
------------- ------------
Total current assets 4,996 4,638
Property and equipment, net (note 4) 125 130
Prepaid costs-extended warranty service contracts 260 244
Receivable from shareholder 36 201
Deferred income taxes 132 134
------------- ------------
Total assets $ 5,549 $ 5,347
============= ============
Liabilities and Shareholders' Equity
- ------------------------------------
Due to affiliate (note 6) $ 1,434 $ 85
Accounts payable and accrued liabilities 689 692
Note payable, related party (note 6) 812 1,100
Inventory floor plan notes payable (note 3) 2,147 2,693
Deferred revenue - extended warranty service contracts 260 237
------------- ------------
Total current liabilities 5,342 4,807
Deferred revenue - extended warranty service contracts 502 469
------------- ------------
Total liabilities 5,844 5,276
Commitments (note 6)
Shareholders' equity:
Common shares, no par value, authorized 7,500 shares;
issued and outstanding 1,200 shares in 1997
and 1996 - -
Additional paid-in capital 30 30
Advances to shareholders (454) -
Retained earnings 129 41
------------- ------------
Total shareholders' equity (295) 71
------------- ------------
$ 5,549 $ 5,347
============= ============
See accompanying notes to financial statements.
3
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(Unaudited)
Six months ended Year Ended
June 30, December 31,
1997 1996
--------------------- -------------------
Sales:
Vehicle $ 20,419 $ 35,488
Service, parts and other 2,344 5,551
--------------------- -------------------
Total sales 22,763 41,039
Cost of sales (19,705) (35,026)
--------------------- -------------------
Gross profit 3,058 6,013
Operating expenses:
Selling, general and administrative 2,599 5,446
Depreciation and amortization 15 26
--------------------- -------------------
Operating income 444 541
Other expense:
Interest expense (151) (334)
Other expense (147) (107)
--------------------- -------------------
Income before income taxes 146 100
Income tax expense 58 41
--------------------- -------------------
Net income $ 88 $ 59
===================== ===================
See accompanying notes to financial statements.
4
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
Retained
Common shares Advances earnings
---------------------------- Additional to (accumulated
Shares Amount paid-in capital Shareholders deficit) Total
------------- ------------- --------------- --------------- ---------------- ----------------
Balance, January 1, 1996 1,306 $ - $ 180 $ - $ (18) $ 162
Net income - - - - 59 59
Retirement of shares (106) - (150) - - (150)
------------- ------------- --------------- --------------- ---------------- ----------------
Balance, December 31, 1996 1,200 - 30 - 41 71
Net income (unaudited) - - - - 88 88
Advances to shareholder - - - (454) - (454)
------------- ------------- --------------- --------------- ---------------- ----------------
Balance, June 30, 1997 1,200 $ - $ 30 $ (454) $ 129 $ (295)
============= ============= =============== =============== ================ ================
See accompanying notes to financial statements.
5
STEVEN A.HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Six months ended Year ended
June 30, December 31,
1997 1996
------------------------ ---------------------
Cash flows from operating activities:
Net income $ 88 $ 59
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Deferred income taxes 2 (29)
Depreciation and amortization 15 26
Amortization of deferred warranty revenue (10) 60
Changes in operating assets and liabilities:
Accounts receivable (577) 378
Inventories, net 305 (991)
Deposits and prepaid expenses (36) (19)
Other noncurrent assets 165 18
Floor plan notes payable (546) (59)
Accounts payable and accrued liabilities (3) (191)
------------------------------------------------
Net cash used in operating activities (597) (748)
------------------------ ---------------------
Cash flows from investing activities:
Capital expenditures (10) -
------------------------ ---------------------
Net cash used in investing activities (10) -
------------------------ ---------------------
Cash flows from financing activities:
Increase (decrease) in due to affiliate 1,349 (202)
Borrowings (repayments) on notes payable to shareholder (288) 1,100
Advances to shareholders (454) -
Retirement of common stock - (150)
Distributions to shareholders - -
------------------------ ---------------------
Net cash provided by financing activities 607 748
------------------------ ---------------------
Net change in cash - -
Cash at beginning of period - -
======================== =====================
Cash at end of period $ - $ -
======================== =====================
Supplemental cash flow information:
Cash paid during the year for interest $ 125 $ 319
======================== =====================
Cash paid during the year for taxes $ 45 $ 107
======================== =====================
See accompanying notes to financial statements.
6
STEVEN A. HALLOCK ENTERPRISES, INC.
D.B.A. CONCORD NISSAN
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Organization and Business
Steven A. Hallock Enterprises, Inc. d.b.a. Concord Nissan (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 Nissan vehicles as well as used
vehicles and light trucks, vehicle financing and insurance, and
replacement parts and service.
(b) Basis of Preparation
The accompanying financial statements reflect the historical financial
position, results of operations, and cash flows for the Company. In
July, 1997 substantially all of the operating assets of the Company
were sold to FirstAmerica Automotive, Inc. (note 9). The operations of
Concord Nissan represent the revenue and direct expenses of the
Company, do not include any allocation of costs from H.G. Automotive,
Inc., and may not be indicative of operations that would have resulted
on a stand-alone basis.
(c) Cash Concentration Account
H.G. Automotive, Inc., an affiliate and shareholder of the Company,
provides centralized cash management services to the Company. Amounts
due to H.G. Automotive, Inc. for disbursements made on behalf of the
Company are included in amounts due to affiliate in the accompanying
financial statements (note 6).
(d) Inventories
New vehicles are stated at the lower of cost or market. Cost is
determined by using the last-in, first-out (LIFO) method. Used vehicles
are stated at the lower of cost or market value. Cost is determined
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.
(e) Property and Equipment
Property and equipment are stated at cost and 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 25 years
Equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Company vehicles 5 years
7
Maintenance and repairs are expensed as incurred, while significant
renewals and betterments are capitalized. When an asset is retired or
otherwise disposed of, the related cost and accumulated depreciation
are removed from the account, and any gain or loss is credited or
charged to income.
(f) Income Taxes
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.
(g) Financial Instruments
The carrying amount of trade receivables, trade payables, accrued
liabilities and short term borrowings approximate fair value because of
the short-term nature of these instruments. Fair value estimates are
made at a specific point in time, based on relevant market information
about the financial instrument. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. The carrying
value of the note payable approximates fair value.
(h) Advertising
The Company expenses production and other costs of advertising.
Advertising expenses were approximately $245,000 for the six months
ended June 30, 1997 and $559,000 for 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 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.
8
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 consists of the following (in thousands):
(unaudited)
June 30, December 31,
1997 1996
------------------------------------
Contracts in transit and vehicle receivables $ 1,092 $ 581
Trade 154 207
Manufacturer and other 125 4
------------------------------------
Total accounts receivable 1,371 792
Less allowance for doubtful accounts (53) (51)
------------------------------------
Accounts receivable, net $ 1,318 $ 741
====================================
Contracts in transit receivables are due from financial institutions
and regional banks for funding of customer vehicle purchases and are
normally collected within 30 days. Trade receivables primarily consist
of commercial receivables for parts sales and finance receivables from
financial institutions for financing commissions. Manufacturer and
other receivables consist of amounts due from manufacturers for rebates
on vehicle purchases (holdbacks), manufacturer incentives and
reimbursable warranty coverage expenses.
(3) Inventories and Floor Plan Notes Payable
Inventory and related floor plan notes payable were as follows (in
thousands):
Inventory Cost Floor Plan Notes Payable
-----------------------------------------------------------------------
(unaudited) December 31, (unaudited) December 31,
June 30, 1997 1996 June 30, 1997 1996
-----------------------------------------------------------------------
New vehicles $2,297 $2,870 $2,147 $2,693
Used vehicles 1,248 1,105 - -
Parts and accessories 212 179 - -
LIFO reserve, net (329) (421)
-----------------------------------------------------------------------
Inventories, net $3,428 $3,733 $2,147 $2,693
=======================================================================
9
If the specific identification method of inventory accounting were used
by the Company, net income would have decreased by $92,000 for the six
months ended June 30, 1997 and increased by $21,000 for the year ended
December 31, 1996.
Inventory floor plan notes payable consist of notes from a financing
institution that bear interest at 8.375% for both the six months ended
June 30,1997 and year ended December 31, 1996, and are secured by new
vehicles and vehicle receivables. The floor plan agreement permits the
Company to borrow up to $3,500,000. Borrowings are limited by new
vehicle levels.
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
(unaudited)
June 30, December 31,
1997 1996
------------------------------------
Leasehold improvements $ 119 $ 109
Equipment 253 253
Company vehicles 42 44
Furniture and fixtures 55 54
469 460
Less accumulated depreciation (344) (330)
----- -----
Property and equipment, net $ 125 $ 130
===== =====
(5) Income Taxes
Income tax expense consists of the following (in thousands):
(unaudited)
June 30, December 31,
1997 1996
------------------- --------------------
Current:
Federal $ 48 $ 35
State 8 6
------------------- --------------------
56 41
Deferred:
Federal 2 -
State - -
------------------- --------------------
Income tax expense $ 58 $ 41
=================== ====================
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets as of June 30, 1997 and
December 31, 1996, are presented below (in thousands):
10
(unaudited)
June 30, December 31,
1997 1996
-----------------------------------
Deferred tax assets:
Allowance and accruals $ 21 $ 21
Extended warranty service contracts 132 134
----------------- -----------------
Total deferred tax assets $153 $ 155
================= =================
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)
June 30, December 31,
1997 1996
-------------------------------------
Expected pro forma income tax expense 34% 34%
State income tax expense, net of federal tax effect 6 6
Other, net - 1
------------------- -----------------
40% 41%
=====================================
(6) Related Party Transactions
(a) Lease
The Company conducts its operations from facilities leased from an
affiliate, under a 25 year noncancellable operating lease expiring
2014. The lease payment is a fixed amount of $35,000 per month.
The future minimum rental commitments under operating leases are as
follows (in thousands):
Six months ending December 31, 1997: $ 210
Years ending December 31, 1998 420
1999 420
2000 420
2001 420
Thereafter 5,250
-----------
$ 7,140
===========
Rental expense for all operating leases was approximately $300,000 and
$536,000 for six months ended June 30, 1997 and year ended December 31,
1996, respectively.
(b) Note Payable to Related Party
On April 1, 1996, the Company issued a $1,100,000 note payable to
Steven A. Hallock, President and shareholder. The note is callable upon
30 days notice. Interest accrued at 9.5% per annum. As of June 30, 1997
and December 31, 1996, the unpaid balance was $812,000 and $1,100,000,
respectively.
(c) Due to Affiliate
H.G. Automotive, Inc., an affiliate and shareholder of the Company,
provides centralized cash management services to the Company. Amounts
due for disbursements made on behalf of the Company were $1,434,000 and
$85,000 at June 30, 1997 and December 31, 1996, respectively.
11
(7) Employee Benefits
The Company provides a 401(k) Plan and Trust Agreement (the Plan) that
covers substantially all employees of the Company and is managed by
H.G. Automotive, Inc. The annual contribution to the Plan is at the
discretion of the Board of Directors. Contributions to the Plan were
approximately $15,000 and $21,000 for the six months ended June 30,
1997 and the year ended December 31, 1996, respectively.
(8) Repurchased and Retired Shares
In 1996 the Company repurchased and retired 106 outstanding shares of
common stock from H.G. Automotive, Inc., at a cost of $150,000.
(9) Subsequent Events
In July 1997, substantially all of the operating assets of the Company
were acquired by FirstAmerica Automotive, Inc. No adjustments related
to the acquisition are reflected in the accompanying historical
financial statements.
12