UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
_________________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1999 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission File Number 2-97254-NY
_________________
FIRSTAMERICA AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 88-0206732
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
601 Brannan Street,
San Francisco, California 94107
(Address of principal executive offices) (Zip code)
(415) 284-0444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
__________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of October 31, 1999:
Class A Common Stock, $0.00001 par value 11,675,711
Class B Common Stock, $0.00001 par value 3,532,000
Class C Common Stock, $0.00001 par value 0
================================================================================
FIRSTAMERICA AUTOMOTIVE, INC.
INDEX TO FORM 10Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998....................................... 3
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 1999 and 1998........................ 5
Condensed Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 1999........................................... 6
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998.................................. 7
Notes to Condensed Consolidated Financial Statements............................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 25
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................... 25
Signatures............................................................................ 26
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTAMERICA AUTOMOTIVE, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, December 31,
Assets 1999 1998
- --------------------------------------------------------------------------------
Cash and cash equivalents......................... $ 14,295 $ 2,191
Contracts in transit.............................. 22,872 13,567
Accounts receivable, net.......................... 27,201 18,460
Inventories....................................... 147,070 90,947
Deferred income taxes............................. -- 853
Deposits, prepaid expenses and other.............. 5,976 2,996
Assets held for sale............................. 6,544 --
-------- --------
Total current assets............................ 223,958 129,014
Property and equipment, net....................... 16,096 9,879
Other assets:
Loan origination and other costs, net............ 3,414 3,107
Other noncurrent assets.......................... 2,996 2,457
Goodwill and other intangible assets, net........ 123,734 33,995
-------- --------
Total assets...................................... $370,198 $178,452
======== ========
See accompanying notes to condensed consolidated financial statements.
3
FIRSTAMERICA AUTOMOTIVE, INC.
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share data)
(Unaudited)
September 30, December 31,
Liabilities and Stockholders' Equity 1999 1998
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
Floor plan................................................................... $ 117,164 $ 81,452
Secured lines of credit...................................................... -- 17,025
Notes payable- Ford Motor Credit............................................. 135,292 --
Notes payable and other...................................................... 7,086 5,512
Accounts payable............................................................. 10,003 6,009
Accrued liabilities.......................................................... 39,607 13,028
Deferred income taxes........................................................ 886 --
Deferred revenue............................................................. 1,514 2,054
----------- -----------
Total current liabilities................................................. 311,552 125,080
Long-term liabilities:
Capital lease obligation and other long term notes........................... 4,033 1,386
Senior notes, net of (discount of $2,593 in 1999 and $2,839 in 1998)......... 33,407 33,161
Deferred income taxes........................................................ 1,056 1,055
Deferred revenue............................................................. 1,601 2,475
----------- -----------
Total liabilities......................................................... 351,649 163,157
----------- -----------
Cumulative redeemable preferred stock, $.00001 par value; 3,500
shares issued and outstanding in 1999 and 1998 (net of discount
of $403 in 1999 and $456 in 1998, liquidation preference of
$3,500 in 1999 and 1998)..................................................... 3,097 3,044
Redeemable preferred stock, $.00001 par value; 500 shares issued
and in 1999 and 1998 (net of discount of $58 in 1999 and
$65 in 1998, liquidation preference of $640 in 1999 and $600 in 1998)........ 572 535
Stockholders' equity:
Common stock, $0.00001 par value:
Class A, 30,000,000 shares authorized, 11,675,711 shares issued
and outstanding in 1999 and 11,514,044 issued and outstanding in 1998...... -- --
Class B, 5,000,000 shares authorized, 3,532,000 shares issued and
outstanding in 1999 and 1998............................................... -- --
Class C, 30,000,000 shares authorized, 0 shares issued and outstanding...... -- --
Additional paid-in capital................................................... 8,571 8,320
Retained earnings............................................................ 6,309 3,396
----------- -----------
Total stockholders' equity................................................ 14,880 11,716
----------- -----------
$ 370,198 $ 178,452
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
FIRSTAMERICA AUTOMOTIVE, INC.
Condensed Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Sales:
New vehicle................................................ $ 193,862 $ 141,870 $ 515,009 $ 341,488
Used vehicle............................................... 60,125 49,950 172,206 142,098
Service and parts.......................................... 34,433 24,867 90,142 65,917
Other dealership revenues, net............................. 8,212 6,799 24,979 17,651
----------- ----------- ----------- -----------
Total sales............................................. 296,632 223,486 802,336 567,154
Cost of sales:
New vehicle................................................ 178,455 130,801 475,233 314,975
Used vehicle............................................... 54,579 45,486 155,548 129,408
Service and parts.......................................... 18,031 13,460 47,894 35,703
----------- ----------- ----------- -----------
Total cost of sales..................................... 251,065 189,747 678,675 480,086
----------- ----------- ----------- -----------
Gross profit............................................ 45,567 33,739 123,661 87,068
Operating expenses:
Selling, general and administrative........................ 36,850 27,486 101,483 71,926
Depreciation and amortization.............................. 1,182 701 3,354 1,666
----------- ----------- ----------- -----------
Operating income.......................................... 7,535 5,552 18,824 13,476
Other income/(expense):
Interest expense, floor plan............................... (1,868) (1,483) (5,026) (4,172)
Interest expense, other.................................... (2,343) (1,257) (6,062) (3,300)
Written off IPO costs...................................... (2,564) -- (2,564) --
Gain on sale of dealership................................. -- -- 1,253 --
----------- ----------- ----------- -----------
Income before income taxes.............................. 760 2,812 6,425 6,004
Income tax expense............................................. 776 1,209 3,212 2,582
----------- ----------- ----------- -----------
Net income (loss)....................................... $ (16) $ 1,603 $ 3,213 $ 3,422
=========== =========== =========== ===========
Net income (loss) per common share-basic....................... $ (0.01) $ 0.11 $ 0.19 $ 0.22
=========== =========== =========== ===========
Weighted average common shares outstanding-basic............... 15,207,711 14,210,969 15,156,063 14,215,381
=========== =========== =========== ===========
Net income (loss) per common share-diluted..................... $ (0.01) $ 0.10 $ 0.19 $ 0.21
=========== =========== =========== ===========
Weighted average common shares outstanding-diluted............. 15,207,711 14,796,141 15,837,956 14,783,612
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
FIRSTAMERICA AUTOMOTIVE, INC.
Condensed Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1999
(In thousands)
(Unaudited)
FirstAmerica Automotive, Inc.
Common Stock
---------------------------------------------
Class A Class B Paid-in Retained Total
---------------------------------------------
Shares Amount Shares Amount Capital Earnings Equity
-------- -------- -------- -------- ------- -------- --------
Balance, December 31, 1998...................... 11,514 $ -- 3,532 $ -- $ 8,320 $ 3,396 $ 11,716
Stock options exercised......................... 161 -- -- -- 251 -- 251
Preferred dividend and liquidation preference... (240) (240)
Amortization of discount........................ (60) (60)
Net income...................................... 3,213 3,213
-------- -------- -------- -------- ------- -------- --------
Balance, September 30, 1999..................... 11,675 $ -- 3,532 $ -- $ 8,571 $ 6,309 $ 14,880
======== ======== ======== ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
6
FIRSTAMERICA AUTOMOTIVE, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended September 30,
1999 1998
---------- ----------
Cash flows from operating activities:
Net income................................................. $ 3,213 $ 3,422
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................ 3,354 1,104
Noncash interest expense................................. 706 562
Deferred warranty revenue, net.......................... (755) (296)
Gain on sale of dealership............................... (1,253) --
Changes in operating assets and liabilities:
Receivables and contracts in transit..................... (4,977) (9,882)
Inventories.............................................. 2,913 6,980
Other assets............................................. (4,830) (4,849)
Floor plan notes payable................................. (9,253) (4,133)
Accounts payable and accrued liabilities................. 10,010 6,287
---------- ----------
Net cash used in operating activities................... (872) (805)
---------- ----------
Cash flows from investing activities:
Capital expenditures....................................... (3,527) (3,921)
Acquisitions, net of cash acquired......................... (100,109) (15,481)
Proceeds from sale of dealership........................... 1,900 --
Deposits on pending acquisitions........................... (1,197) --
---------- ----------
Net cash used in investing activities................... (102,933) (19,402)
---------- ----------
Cash flows from financing activities:
Borrowings on notes payable and other...................... 136,891 12,400
Repayments on notes payable and other...................... (732) --
Borrowings on secured lines of credit...................... -- 5,776
Repayments on secured lines of credit...................... (17,025) --
Written off IPO costs...................................... (2,564) --
Proceeds from issuance of common stock..................... 247 --
Loan origination costs..................................... (768) (155)
Preferred stock dividend................................... (140) (140)
---------- ----------
Net cash provided by financing activities............... 115,909 17,881
----------- ----------
Net increase (decrease) in cash and equivalents......... 12,104 (2,326)
Cash at beginning of period................................. 2,191 2,924
---------- ----------
Cash at end of period....................................... $ 14,295 $ 598
========== ==========
Cash paid during the period for:
Interest................................................... $ 10,518 $ 6,526
Income taxes............................................... 3,094 2,432
Non-cash activity was as follows:
Capital lease obligation................................... 503 --
Discount on senior notes................................... 246 --
Notes payable to sellers................................... (2,000) --
Dividends declared but not paid............................ 70 --
See accompanying notes to condensed consolidated financial statements.
7
FIRSTAMERICA AUTOMOTIVE, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Business
FirstAmerica Automotive, Inc. (the "Company") is a leading automotive
retailer and consolidator in the highly fragmented automotive retailing
industry. The Company currently operates in four major metropolitan markets in
California and one metropolitan market in Nevada, and is focusing its
consolidation strategy in the western United States. The Company generates
revenues primarily through the sale and lease of new and used vehicles, service
and parts sales, financing fees, extended service warranty sales, after-market
product sales and collision repair services. The Company sells a variety of
domestic and foreign brands, including Acura, BMW, Cadillac, Chevrolet,
Chrysler, Dodge, Ford, Honda, Isuzu, Jeep, Lexus, Mercedes, Mitsubishi, Nissan,
Oldsmobile, Plymouth, Toyota, Volkswagen, and Volvo.
The Company currently operates in the following five metropolitan markets:
* San Francisco Bay Area * San Jose/Silicon Valley
* San Diego * Los Angeles
* Las Vegas
As previously announced, the Company has entered into a definitive
agreement to be acquired by Sonic Automotive, Inc. ("Sonic")(see Note 10).
(b) Basis of Financial Statement Presentation
The financial information included herein for the three and nine month
periods ended September 30, 1999 and 1998 is unaudited; however, such
information reflects all adjustments consisting only of normal recurring
adjustments which
8
are, in the opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods.
The financial information as of December 31, 1998 is derived from
FirstAmerica Automotive, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999. The interim condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto
included in the Company's Form 10-K. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for the full year.
All significant intercompany transactions and balances have been eliminated
in the accompanying condensed consolidated financial statements. Certain prior
period amounts have been reclassified to conform with the current financial
statement presentation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
(d) Comprehensive Income
The Company has determined that net income and comprehensive income are the
same for the periods presented.
(2) Acquisitions and Disposition
Acquisitions and Disposition Completed During the Nine Months Ended September
30, 1999
In March 1999, the Company acquired substantially all of the operating
assets of Ritchey Fipp Chevrolet, a Chevrolet dealership located in Poway,
California. In April 1999, the Company acquired substantially all of the
operating assets of Marin Dodge, a Chrysler dealership located in San Rafael,
California. In June 1999, the Company acquired substantially all of the
operating assets of San Rafael Ford, a Ford dealership located in San Rafael,
California. In August 1999, the Company acquired substantially all of the
operating assets of South Bay Chrysler Plymouth Jeep, a Chrysler dealership
located in Torrance, California.
In September 1999, the Company acquired eight dealerships. The Company
acquired substantially all of the operating assets of Falconi's Tropicana Honda,
a Honda dealership located in Las Vegas, Nevada. The Company acquired all of
the outstanding capital stock of Kramer Honda-Volvo, which operates both a Honda
dealership and a Volvo dealership, both located in Santa Monica, California. In
addition, the Company acquired certain dealerships, assets, and liabilities of
the Lucas Dealership Group Inc., which operates six dealerships and one
collision repair center throughout the San Francisco Bay Area. These
dealerships include Autobahn Motors (Mercedes-Benz), Hayward Honda, St. Claire
Cadillac/Oldsmobile, Stevens Creek BMW Motorsport, Golden Gate Acura, and
Stevens Creek Honda.
The acquisitions were accounted for using the purchase method of accounting
and the operating results of these dealerships have been included in the
Company's results of operations since the date they were acquired. The purchase
prices have been allocated to assets acquired and liabilities assumed based on
the fair values on the acquisition date. Amounts recorded for these acquisitions
were as follows: current assets, net of cash acquired, of $79.9 million, fixed
assets of $4.2 million, goodwill and other intangibles of $88.7 million, notes
payable to the sellers of $2.0 million, and floor plan and other liabilities of
$70.7 million.
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the acquisitions completed during
9
the period from January 1, 1998 to September 30, 1999 (see list of acquisitions
below) had occurred as of January 1, 1998 after giving effect to certain
adjustments, including amortization of goodwill, interest expense on acquisition
debt, reductions in floor plan interest expense resulting from re-negotiated
floor plan financing agreements, change in accounting for inventories from last-
in, first-out method to the Company's specific identification method for
accounting for inventories, and related income tax effects. The pro forma
results have been prepared for comparative purposes only and are not necessarily
indicative of the results of future operations:
Nine months ended September 30,
1999 1998
--------------- --------------
Total sales $1,225,358 $1,099,943
Income before taxes 8,294 10,412
Net income 4,147 5,935
Net income per common share-diluted $ 0.24 $ 0.38
The acquisitions incorporated into the above unaudited pro forma financial
information include the following:
Acquisition Date
- ------------------------ ----------
Beverly Hills BMW April 1998
Serramonte Honda June 1998
Concord Toyota October 1998
Volkswagen of Woodland Hills November 1998
Auto Town December 1998
Poway Chevrolet March 1999
Marin Dodge April 1999
San Rafael Ford June 1999
South Bay Chrysler Plymouth Jeep August 1999
Falconi's Tropicana Honda September 1999
Kramer Honda-Volvo September 1999
Lucas Dealership Group, Inc. September 1999
In March 1999, the Company sold the operating assets of Serramonte
GMC/Pontiac/Buick to General Motors, Inc. and received proceeds of approximately
$1.9 million and recorded an after-tax gain of $0.7 million.
(3) Inventories
Inventories are comprised of the following (in thousands):
September 30, December 31,
1999 1998
-------------- --------------
New vehicles $ 95,590 $65,152
Used vehicles 33,489 20,049
Parts and accessories 17,991 5,746
-------------- --------------
Inventories $147,070 $90,947
============== ==============
(4) Assets Held For Sale
Assets held for sale include property and equipment related to the Kramer
Honda-Volvo and Lucas Dealership Group, Inc. acquisitions which are subject to
definitive agreements to be sold and are valued at their estimated net
realizable value. Accordingly, there will be no gain or loss on the
transactions.
(5) Earnings Per Share
The following table reconciles basic and diluted earnings per share (in
thousands, except per share data):
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
--------------- --------------- -------------- --------------
Net income (loss) per income statement $ (16) $ 1,603 $ 3,213 $ 3,422
Less:
Cumulative redeemable preference dividends 70 70 210 210
Redeemable preferred stock liquidation
preference accretion 10 10 30 50
Cumulative and redeemable preferred stock
discount amortization 20 20 60 60
------- ------- ------- -------
Net income (loss) applicable to common stockholders (116) 1,503 2,913 3,102
Add:
Interest charges applicable to convertible debt 6 7 17 20
------- ------- ------- -------
Net income (loss) applicable to common stockholders
and assumed conversions $ (110) $ 1,510 $ 2,930 $ 3,122
======= ======= ======= =======
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
------- ------- ------- -------
Diluted Earnings Per Share:
Weighted average common shares outstanding-basic 15,208 14,211 15,156 14,215
Net effect of dilutive stock options -- 268 344 259
Net effect of warrants -- 217 238 209
Net effect of convertible notes -- 100 100 100
------- ------- ------- -------
Total weighted average common shares
outstanding-diluted 15,208 14,796 15,838 14,783
======= ======= ======= =======
Net income (loss) per common share-diluted (a) $(0.01) $0.10 $0.19 $0.21
======= ======= ======= =======
(a) In the third quarter of 1999, diluted earnings per share does not include
dilutive securities such as options and warrants, as their inclusion would
be anti-dilutive.
10
(6) Floor Plan Notes Payable and Secured Lines of Credit
In September 1999, the Company obtained a new $138.0 million floor plan
facility and a $138.5 million revolving line of credit facility from Ford Motor
Credit Company, replacing the Company's previous $115 million floor plan
facility and its $60 million line of credit with General Electric Capital
Corporation. The new line of credit was obtained primarily to provide up to
$107.0 million of funding to acquire certain specific dealerships, to retire up
to $26.5 million in certain existing indebtedness of the Company, and to provide
up to $5.0 million in used vehicle floor plan financing to certain dealership
subsidiaries.
The acquisition line of credit is guaranteed by a $107.0 million commitment
from Sonic Automotive Inc.'s Chairman and Chief Executive Officer, O. Bruton
Smith. As previously announced, the Company has entered into a definitive
agreement to be acquired by Sonic Automotive, Inc. If the merger is not
completed, the Company is required either to obtain a release of the loan
guarantee, or to sell South Bay Chrysler Plymouth Jeep, Falconi's Tropicana
Honda, Kramer Honda-Volvo, and the Lucas Dealership Group, Inc. to Sonic for the
same price that the Company paid for these acquisitions. In order for the
Company to release the loan guarantee, the Company would likely be required to
refinance the line of credit which would probably require an equity infusion.
As of September 30, 1999, the Company had $135.3 on its line of credit. The
interest rate on the Ford revolving line of credit is based on the one month
commercial paper rate plus 275 basis points. Prior to September 1999, the
interest rate on the previous revolver advances was prime minus 35 basis points
and the interest rate on the over advances was prime plus 200 basis points.
According to the terms of the new revolving line of credit agreement, a loan
origination fee of $0.5 million is due to Ford Motor Credit Company. In
addition, a fee of $0.3 million for the collateral guarantee is payable to
Sonic's Chairman and Chief Executive Officer, O. Bruton Smith.
At September 30, 1999, the Company had approximately $117.2 million
outstanding under the new floor plan facility from Ford Motor Credit Company,
which has an initial term of three years. The new credit facility has an
estimated effective rate of prime minus 125 basis points subject to certain
incentives and other adjustments. Prior to September 1999, the interest rate for
the previous floor plan facility was prime minus 75 basis points.
Floor plan notes payable are due when vehicles are sold, leased, or
delivered. Floor plan notes payable are classified as a current liability and
the revolving line of credit is classified as notes payable in the accompanying
financial statements.
(7) Senior Notes
The Company is out of compliance with a financial covenant related to its
Senior Notes. The Company obtained a waiver for non-compliance.
(8) Operating Segments
The Company operates primarily in the automotive segment. The Company
sells new vehicles, used vehicles, light trucks, after-market automotive
products and replacement parts. In addition, it provides vehicle maintenance
and repair services, and arranges related financing and warranty products for
its automotive customers.
On December 31, 1998, the Company acquired Auto Town, a software company
that provides software products and internet services to automobile dealerships.
In connection with the transaction with Sonic, the Company is required to
sell or liquidate its subsidiary, Auto Town (See Note 10).
Summarized financial information concerning the Company's two segments is
shown in the following table (in thousands):
Automotive Technology Total Company
Three months ended September 30,
--------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---------- --------- ----------- ----- --------- --------
Total revenues $296,430 $223,486 $ 202 $ -- $296,632 $223,486
Income (loss) before taxes 1,788 2,812 (1,028) -- 760 2,812
Total assets (period end) 367,234 149,667 2,964 -- 370,198 149,667
Automotive Technology Total Company
Nine months ended September 30,
1999 1998 1999 1998 1999 1998
-------- -------- ------- ----- -------- --------
Total revenues $801,685 $567,154 $ 651 $ -- $802,336 $567,154
Income (loss) before taxes 8,734 6,004 (2,309) -- 6,425 6,004
Total assets (period end) 367,234 149,667 2,964 -- 370,198 149,667
11
(9) Related Party Transactions
In March 1999, the Company acquired substantially all of the operating
assets of Ritchey Fipp Chevrolet. The $3.7 million purchase price was partly
financed from the proceeds of a $1.0 million loan from the Chief Executive
Officer of the Company and $1.0 million in notes to each of the two selling
parties, one of whom became an employee of the Company after the acquisition.
The annual interest rate on the loan from the Chief Executive Officer is 7.4%
and there is no stated maturity date on the note. The annual interest rate on
each of the $1.0 million notes payable to the sellers is 10.5%, and the
principal amount on each note is due in March 2003. The seller notes and Chief
Executive Officer's note are included in other long-term notes in the
accompanying condensed consolidated financial statements.
(10) Subsequent Events
Pending Merger
The Company has entered into an Agreement and Plan of Merger and
Reorganization dated as of October 31, 1999 by and among Sonic Automotive, Inc.
("Sonic"), FAA Acquisition Corp., a wholly owned subsidiary of Sonic, the
Company and certain of the stockholders of the Company (the "Reorganization
Agreement"). Pursuant to the Reorganization Agreement, stockholders of the
Company holding approximately 95% of the outstanding shares of the Company's
common stock have agreed to sell their shares to Sonic (the "Acquisition") in
exchange for up to an aggregate of approximately 5 million shares of Sonic Class
A Common Stock ("Sonic Common Stock") at an exchange rate of approximately
.31246 shares (the "Conversion Number") of Sonic Common Stock for each share of
Company Common Stock. The purchase of the FAA Common Stock will be pursuant to
an exemption from registration under federal securities laws, and Sonic has
agreed to register the re-sale of the Sonic Common Stock by the selling
stockholders. The Sonic Common Stock exchanged for the Company's common stock
will be subject to certain restrictions described in the Reorganization
Agreement. Subsequent to the closing of the Acquisition, Sonic will effect a
merger of the Company with FAA Acquisition Corp. in which the remaining
stockholders of the Company will be entitled to receive cash for their shares of
Company common stock in an amount equal to the greater of (a) the average
closing price per share of Sonic Common Stock as reported on the composite tape
for the NYSE for the twenty consecutive trading days ending on and including the
trading day immediately preceding the day upon which the merger occurs or (b)
$13.72, in either case multiplied by the Conversion Number.
In connection with the transaction with Sonic, the Company withdrew its
registration statement on Form S-1 to sell shares of its common stock as
previously filed with the Securities and Exchange Commission. As a result of the
withdrawn offering, the Company took a charge of $2.6 million in the third
quarter of 1999 of costs associated with the offering.
In connection with the transaction with Sonic, the Company is required to
sell or liquidate its subsidiary, Auto Town. The Company is attempting to sell
Auto Town prior to the close of the transaction with Sonic. The Company is
currently unable to estimate the gain or loss on disposal. There can be no
assurances that the Company can succeed in its effort to sell Auto Town. In the
event the Company is unsuccessful and is required to liquidate Auto Town, the
Company would be required to write off its investment of $4.8 million at
September 30, 1999. The Company is currently in negotiations to sell Auto Town.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements. These statements are
necessarily subject to risk and uncertainty. Actual results could differ
materially from those projected in these forward looking statements as a result
of certain risks including those set forth in the Company's 1998 Annual Report
on Form 10-K as filed with the Securities and Exchange Commission. These risk
factors include, but are not limited to, the cyclical nature of automobile
sales, the intense competition in the automobile retail industry, and the
Company's ability to obtain additional sources of capital through debt or
equity, negotiate profitable acquisitions, and secure manufacturer approvals for
such acquisitions.
Overview
We are a leading automotive retailer in the highly fragmented automotive
retailing industry. We currently operate in four major metropolitan markets in
California and one metropolitan market in Nevada, and are focusing our
consolidation strategy in the western United States. We generate revenues
through the sale and lease of new and used vehicles, service and parts sales,
financing fees, vehicle insurance commissions, extended service warranty sales,
after-market product sales and collision repair service revenues. We currently
sell the following domestic and foreign brands: Acura, BMW, Cadillac, Chevrolet,
Chrysler, Dodge, Ford, Honda, Isuzu, Jeep, Lexus, Mercedes, Mitsubishi, Nissan,
Oldsmobile, Plymouth, Toyota, Volkswagen, and Volvo.
New vehicle revenues include the sale and lease of new cars and light
trucks. Used vehicle revenues include retail and wholesale sales of used cars
and light trucks. Service and parts revenues include vehicle servicing revenues,
warranty repairs, collision repairs and sales of parts to retail and wholesale
customers. Other dealership revenues include financing fees, document processing
fees, vehicle insurance commissions, extended service warranty contract sales
and after-market product sales.
Our gross margin varies based on the mix between new vehicle sales, used
13
vehicle sales, service and parts sales and other dealership revenues. Gross
margins on new vehicle sales can be affected by the availability of popular
model types as well as manufacturer promotions, because popular models tend to
have higher margins and manufacturer promotions may include dealer incentives,
which increase margins. Factors such as seasonality, weather and cyclicality may
also impact our product mix and influence our gross margins. Used vehicle gross
margins are primarily impacted by supply and the price of new vehicles. Service
and parts gross margins are primarily impacted by the productivity and wage rate
of service personnel.
Sales commissions, salaries, advertising and rent constitute the largest
components of selling, general and administrative expenses. Interest expense
primarily consists of interest charges on debt incurred for floor plan financing
and interest on debt incurred for dealership acquisitions.
Vehicle sales are cyclical and can be impacted by consumer confidence,
levels of consumers' disposable income, inflation, interest rates, credit
availability and other economic conditions. A significant portion of the costs
associated with vehicle sales are variable costs and can be adjusted during
periods of depressed sales. Sales of parts and service can offset reductions in
vehicle sales to the extent customers repair and service vehicles rather than
replace them.
We have accounted for all of our acquisitions using the purchase method of
accounting and, as a result, we do not include in our financial statements the
results of operations of acquisitions prior to the date they were acquired by
us.
Pending Merger
The Company has entered into an Agreement and Plan of Merger and
Reorganization dated as of October 31, 1999 by and among Sonic Automotive, Inc.
("Sonic"), FAA Acquisition Corp., a wholly owned subsidiary of Sonic, the
Company and certain of the stockholders of the Company (the "Reorganization
Agreement"). Pursuant to the Reorganization Agreement, stockholders of the
Company holding approximately 95% of the outstanding shares of the Company's
common stock have agreed to sell their shares to Sonic (the "Acquisition") in
exchange for up to an aggregate of approximately 5 million shares of Sonic Class
A Common Stock ("Sonic Common Stock") at an exchange rate of approximately
.31246 shares (the "Conversion Number") of Sonic Common Stock for each share of
Company Common Stock. The purchase of the FAA Common Stock will be pursuant to
an exemption from registration under federal securities laws, and Sonic has
agreed to register the re-sale of the Sonic Common Stock by the selling
stockholders. The Sonic Common Stock exchanged for the Company's common stock
will be subject to certain restrictions described in the Reorganization
Agreement. Subsequent to the closing of the Acquisition, Sonic will effect a
merger of the Company with FAA Acquisition Corp. in which the remaining
stockholders of the Company will be entitled to receive cash for their shares of
Company common stock in an amount equal to the greater of (a) the average
closing price per share of Sonic Common Stock as reported on the composite tape
for the NYSE for the twenty consecutive trading days ending on and including the
trading day immediately preceding the day upon which the merger occurs or (b)
$13.72, in either case multiplied by the Conversion Number.
In connection with the transaction with Sonic, we withdrew our registration
statement on Form S-1 to sell shares of our common stock as previously filed
with the Securities and Exchange Commission. As a result of the withdrawn
offering, we took a non-recurring charge of $2.6 million in the third quarter
of 1999 of costs associated with the offering.
Results of Operations
The following tables summarize, for the periods presented, the information
relating to specific items reflected in our statement of operations.
Percentages of total revenue:
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
---------------- ---------------- --------------- --------------
Sales
New vehicles........................ 65.4% 63.4% 64.2% 60.2%
Used vehicles....................... 20.3% 22.4% 21.5% 25.1%
Service and parts................... 11.6% 11.2% 11.2% 11.7%
Other dealership revenues, net...... 2.7% 3.0% 3.1% 3.0%
-------- ------- ------- --------
Total sales....................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 84.6% 84.9% 84.6% 84.6%
-------- ------- ------- --------
Gross profit...................... 15.4% 15.1% 15.4% 15.4%
Selling, general and administrative
expenses........................... 12.4% 12.3% 12.6% 12.7%
Depreciation and amortization........ 0.4% 0.3% 0.4% 0.3%
-------- ------- ------- --------
Operating Income.................. 2.6% 2.5% 2.4% 2.4%
New vehicle sales statistics:
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
Units................................................ 8,073 6,141 21,539 14,918
Sales (in thousands)................................. $193,862 $141,870 $515,009 $341,488
Gross profit (in thousands).......................... $ 15,407 $ 11,069 $ 39,776 $ 26,513
Gross margin......................................... 7.9% 7.8% 7.7% 7.8%
Gross profit per unit................................ $ 1,908 $ 1,802 $ 1,847 $ 1,777
Used vehicle retail sales statistics, excluding wholesale sales and units:
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
---------- -------- --------- ---------
Units................................................ 2,874 2,574 8,334 7,723
Sales (in thousands)................................. $ 45,499 $ 36,788 $131,188 $107,838
Gross profit (in thousands).......................... $ 4,767 $ 3,706 $ 14,129 $ 10,648
Gross margin......................................... 10.5% 10.1% 10.8% 9.9%
Gross profit per unit................................ $ 1,659 $ 1,440 $ 1,695 $ 1,379
Service and parts statistics:
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
----------- --------- --------- ---------
Sales (in thousands)................................. $ 34,433 $ 24,867 $ 90,142 $ 65,917
Gross profit (in thousands).......................... $ 16,402 $ 11,407 $ 42,248 $ 30,214
Gross margin......................................... 47.6% 45.8% 46.9% 45.8%
14
Three Months Ended September 30,1999 Compared to Three Months Ended September
30, 1998
Sales. Our sales increased $73.1 million, or 32.7%, to $296.6 million for
the three months ended September 30, 1999 from $223.5 million in 1998. We
acquired no dealerships in the third quarter of 1998 and eleven dealerships in
the third quarter of 1999, which for the periods following their acquisition
accounted for $58.0 million of the increase in 1999 sales. The remaining
increase of $15.1 million is due to increased sales at dealerships owned for
longer than one year.
New vehicles. We sold a variety of domestic and imported vehicle
brands ranging from economy to luxury vehicles, as well as sport utility
vehicles, minivans and light trucks. In the three months ended September
30, 1999 we sold 8,073 new vehicles, generating revenues of $193.9 million,
which constituted 65.4% of our total sales. In the three months ended
September 30, 1998 we sold 6,141 new vehicles, generating revenues of
$141.9 million, which constituted 63.4% of our total sales. The increase in
revenues and units was due primarily to the nine dealerships acquired
between July 1, 1998 and September 30, 1999 and a very strong new vehicle
market. Of this increase $39.2 million, or 75.4%, was due to dealerships
acquired between January 1, 1998 and September 30, 1999, and the remaining
$12.8 million, or 24.6%, was due to increased sales at dealerships owned
for longer than one year. Average unit prices increased 3.9% to $24,014 in
1999 from $23,102 in 1998 per vehicle due to the higher mix of luxury
vehicles, high-demand trucks, and sport utility vehicles we sold in 1999.
We anticipate an increase in the number of luxury vehicles we sell as we
acquire additional dealerships that sell these vehicles.
Used vehicles. We sold a variety of makes and models of used vehicles
and light trucks of varying model years and prices. In the three months
ended September 30, 1999, we sold 2,874 retail used vehicles and 2,212
wholesale used vehicles. In the three months ended September 30, 1998, we
sold 2,574 retail used vehicles and 2,160 wholesale used vehicles. Total
revenues from used vehicle sales increased 20.4%, to $60.1 million in the
three months ended September 30, 1999 from $50.0 million in the three
months ended September 30, 1998. The increase in revenues was due to
dealerships acquired between January 1, 1998 and September 30, 1999. Retail
and wholesale used vehicle sales comprised 20.3% of our total sales in the
three months ended September 30, 1999 compared to 22.4% of our total sales
in the three months ended September 30, 1998. The decrease in used vehicle
sales as a percentage of total sales is primarily attributable to the
change in product mix related to a strong demand for new vehicles over the
prior period. Our average price per used vehicle unit increased 12.0% to
$11,822 in 1999 from $10,551 in 1998 per vehicle.
Service and parts. Service and parts includes revenue from the sale of
parts, accessories, maintenance and repair services. Service and parts
revenue increased 38.5% to $34.4 million in the three months ended
September 30, 1999 from $24.9 million in the three months ended September
30, 1998. Of the increase in revenues, $7.2 million, or 76.1%, was due to
dealerships acquired between January 1, 1998 and September 30, 1999, and
the remaining $2.3 million, or 23.9%, was due to increased sales at
dealerships owned for longer than one year.
Other dealership revenues, net. Other dealership revenues primarily include
fees earned on the sale of vehicle financing notes and
15
warranty service contracts. Finance fees are received for notes sold to
finance companies for customer vehicle financing. Warranty service contract
fees are earned on extended warranty service contracts that are sold on
behalf of insurance companies and manufacturers. Fees from the sale of
vehicle financing notes and warranty service contracts are recorded at the
time of the sale of the vehicles net of a reserve for future chargebacks.
The reserve for future chargebacks is estimated based on historical
operating results and the termination provisions of the applicable
contracts. Other dealership revenues increased 20.8% to $8.2 million in the
three months ended September 30, 1999 from $6.8 million in the three months
ended September 30, 1998. Of the increase in revenues, $1.2 million, or
85.6%, was due to dealerships acquired between January 1, 1998 and
September 30, 1999, and the remaining $0.2 million, or 14.4%, was due to
increased sales at dealerships owned for longer than one year.
Gross profit. Gross profit increased 35.1% to $45.6 million in the three
months ended September 30, 1999 from $33.7 million in the three months ended
September 30, 1998. Our overall gross margins increased to 15.4% in the three
months ended September 30, 1999, from 15.1% in the three months ended September
30, 1998. The gross margin on new vehicle sales increased to 7.9% in the three
months ended September 30, 1999, from 7.8% in the three months ended September
30, 1998. The gross margin on retail and wholesale used vehicle sales increased
to 9.2% in the three months ended September 30, 1999 from 8.9% in the three
months ended September 30, 1998. Gross margins on service and parts increased to
47.6% in the three months ended September 30, 1999 from 45.8% in the three
months ended September 30, 1998, primarily due to increased emphasis on service
operations and profitability.
Selling, general and administrative expense. Our selling, general and
administrative expense increased $9.4 million, or 34.1%, to $36.9 million in the
three months ended September 30, 1999 from $27.5 million in the three months
ended September 30, 1998. Selling, general and administrative expense as a
percentage of sales were 12.4% in the three months ended September 30, 1999
compared to 12.3% in the three months ended September 30, 1998. The increase
included selling, general and administrative costs of $1.3 million related to
Auto Town, which we acquired on December 31, 1998.
Depreciation and amortization. Depreciation and amortization expense
increased $0.5 million, or 68.5%, to $1.2 million in the three months ended
September 30, 1999 from $0.7 million in the three months ended September 30,
1998. The increase was due to additional depreciation and goodwill amortization
from acquired dealerships and the acquisition of Auto Town. Of the increase,
$0.2 million related to Auto Town.
Interest expense. Floor plan interest expense increased $0.4 million, or
26.0%, to $1.9 million in the three months ended September 30, 1999 from $1.5
million in the three months ended September 30, 1998 primarily as a result of
increased floor plan debt in 1999 from the acquired dealerships. Interest
expense other than floor plan increased $1.0 million, or 86.4%, to $2.3 million
in the first three months of 1999 from $1.3 million in the three months ended
September 30, 1998. The increase was due to debt incurred in financing
dealerships we acquired.
16
Income tax expense. Income tax expense decreased to $0.8 million in the
three months ended September 30, 1999 from $1.2 million in the three months
ended September 30, 1998 due to lower income before taxes primarily as a result
of written off IPO costs in the third quarter of 1999. Our effective income tax
rate was 102% and 43% for the three months ended September 30, 1999 and 1998,
respectively. Our effective tax rate increased as a result of non-deductible
expenses such as goodwill associated with certain types of acquisitions and
lower projected pre-tax income.
Net income. As a result of the items discussed above, including the write
off of IPO costs of $2.6 million in the third quarter and the increase in the
tax rate to 102% from 43%, we incurred a net loss of $(16,000) in the three
months ended September 30, 1999 compared to $1.6 million in the three months
ended September 30, 1998.
Nine Months Ended September 30,1999 Compared to Nine Months Ended September 30,
1998
Sales. Our sales increased $235.1 million, or 41.5%, to $802.3 million for
the nine months ended September 30, 1999 from $567.2 million in the nine month
period ended September 30, 1998. We acquired four dealerships in the nine month
period ended September 30, 1998 and twelve dealerships for the same period
in 1999, which for the periods following their acquisition accounted for
$167.0 million of the increase in 1999 sales. The remaining increase of $68.1
million is due to increased sales at dealerships owned for longer than one
year.
New vehicles. We sold a variety of domestic and imported vehicle
brands ranging from economy to luxury vehicles, as well as sport utility
vehicles, minivans and light trucks. In the first nine months of 1999 we
sold 21,539 new vehicles, generating revenues of $515.0 million, which
constituted 64.2% of our total sales. In the first nine months of 1998 we
sold 14,918 new vehicles, generating revenues of $341.5 million, which
constituted 60.2% of our total sales. The increase in revenues and units
was due primarily to the sixteen dealerships acquired between January 1,
1998 and September 30, 1999 and a very strong new vehicle market. Of the
increase in revenues, $113.2 million, or 65.2%, of the increase in revenues
was due to dealerships acquired between January 1, 1998 and September 30,
1999, and the remaining $60.3 million, or 34.8%, was due to increased sales
at dealerships owned for longer than one year. Average unit prices
increased 4.5% to $23,911 in 1999 from $22,891 in 1998 per vehicle due to
the higher mix of luxury vehicles, high-demand trucks, and sport utility
vehicles we sold in 1999. We anticipate an increase in the number of luxury
vehicles we sell as we acquire additional dealerships that sell these
vehicles.
Used vehicles. We sold a variety of makes and models of used vehicles
and light trucks of varying model years and prices. In the first nine
months of 1999, we sold 8,334 retail used vehicles and 6,193 wholesale used
vehicles. In the first nine months of 1998, we sold 7,723 retail used
vehicles and 5,096 wholesale used vehicles. Total revenues from used
vehicle sales increased 21.2%, to $172.2 million in the first nine months
of 1999 from $142.1 million in the first nine months of 1998. The increase
in revenues was due to dealerships acquired between January 1, 1998 and
September 30, 1999. Retail and wholesale used vehicle sales comprised 21.5%
of our total sales in the first nine months of 1999 compared to 25.1% of
our total sales in the first nine months of 1998. The decrease in used
vehicle sales as a percentage of total sales is primarily attributable to
the change in product mix related to a strong demand for new vehicles over
the prior period. Our average price per used vehicle unit increased 6.9% to
$11,854 in 1999 from $11,085 in 1998 per vehicle.
Service and parts. Service and parts includes revenue from the sale of
parts, accessories, maintenance and repair services. Service and parts
17
revenue increased 36.7% to $90.1 million in the first nine months of 1999
from $65.9 million in the first nine months of 1998. Of the increase in
revenues, $19.4 million, or 80.1%, was due to dealerships acquired between
January 1, 1998 and September 30, 1999, and the remaining $4.8 million, or
19.9%, was due to increased sales at dealerships owned for longer than one
year.
Other dealership revenues, net. Other dealership revenues primarily
include fees earned on the sale of vehicle financing notes and warranty
service contracts. Finance fees are received for notes sold to finance
companies for customer vehicle financing. Warranty service contract fees
are earned on extended warranty service contracts that are sold on behalf
of insurance companies and manufacturers. Fees from the sale of vehicle
financing notes and warranty service contracts are recorded at the time of
the sale of the vehicles net of a reserve for future chargebacks. The
reserve for future chargebacks is estimated based on historical operating
results and the termination provisions of the applicable contracts. Other
dealership revenues increased 41.5% to $25.0 million in the first nine
months of 1999 from $17.7 million in the first nine months of 1998. Of the
increase in revenues, $3.6 million, or 49.1% was due to dealerships
acquired between January 1, 1998 and September 30, 1999, and the remaining
$3.7 million, or 50.9% was due to increased sales at dealerships owned for
longer than one year.
Gross profit. Gross profit increased 42.0% to $123.7 million in the first
nine months of 1999 from $87.1 million in the first nine months of 1998. Our
overall gross margins were 15.4% in the first nine months of 1999, and 15.4% in
the first nine months of 1998. The gross margin on new vehicle sales decreased
to 7.7% in the first nine months of 1999, from 7.8% in the first nine months of
1998 primarily due to an emphasis on higher unit volume. The gross margin on
used vehicle sales increased to 9.7% in the first nine months of 1999 from 8.9%
in the first nine months of 1998 due to an emphasis on purchasing more desirable
used vehicles and increasing inventory turnover. Gross margins on service and
parts increased to 46.9% in the first nine months of 1999 from 45.8% in the
first nine months of 1998, primarily due to increased emphasis on service
operations and profitability.
Selling, general and administrative expense. Our selling, general and
administrative expense increased $29.6 million, or 41.1%, to $101.5 million in
the first nine months of 1999 from $71.9 million in the first nine months of
1998. Selling, general and administrative expense as a percentage of sales
decreased to 12.6% in the first nine months of 1999 from 12.7% in the first nine
months of 1998. The decrease was due primarily to leveraging the costs of our
infrastructure, partially offset by increased selling, general and
administrative costs of $3.0 million related to Auto Town, which we acquired on
December 31, 1998.
Depreciation and amortization. Depreciation and amortization expense
increased $1.7 million, or 101.2%, to $3.4 million in the first nine months of
1999 from $1.7 million in the first nine months of 1998. The increase was due
18
to additional depreciation and goodwill amortization from acquired dealerships
and the acquisition of Auto Town. Of the increase, $0.5 million related to Auto
Town.
Interest expense. Floor plan interest expense increased $0.8 million, or
20.5%, to $5.0 million in the first nine months of 1999 from $4.2 million in
the first nine months of 1998 primarily as a result of increased floor plan
debt in 1999 from the acquired dealerships. Interest expense other than floor
plan increased $2.8 million, or 83.7%, to $6.1 million in the first nine months
of 1999 from $3.3 million in the first nine months of 1998. The increase was
due to debt incurred in financing dealerships we acquired.
Income tax expense. Income tax expense increased to $3.2 million in the
first nine months of 1999 from $2.6 million in the first nine months of 1998 due
to higher pretax income in 1999 and a higher projected effective tax rate. Our
effective income tax rate was 50% and 43% for the first nine months of 1999 and
1998. Our effective tax rate increased as a result of non-deductible expenses
such as goodwill associated with certain types of acquisitions and lower
projected pre-tax income.
Net income. As a result of the items discussed above and the sale of a
dealership in the first quarter with an after-tax gain of $0.7 million, the
write off of IPO costs of $2.6 million in the third quarter and the increase in
the tax rate to 50% from 43%, net income decreased to $3.2 million in the first
nine months of 1999 from $3.4 million in the first nine months of 1998.
Liquidity and Capital Resources
Our cash and liquidity requirements are primarily for acquiring new
dealerships, working capital, information systems and expanding existing
facilities. Historically, we have relied primarily upon cash flows from
operations, floor plan financing, and other borrowings under our credit facility
to finance our operations, and the proceeds from our private placements to
finance our acquisitions. At September 30,1999, we had a working capital deficit
of $87.6 million including $14.3 million in cash.
In the first nine months of 1999, operating activities resulted in net cash
used in operations of $0.9 million compared to $0.8 million used in operations
in the first nine months of 1998. The increase was attributable to a decrease in
receivables, contracts in transit, inventories and floor plan notes payable,
offset by an increase in accounts payable and accrued liabilities
compared to the prior year period.
In the first nine months of 1999, the net cash used in investing activities
totaled $102.9 million, which consisted of $100.1 million used for acquisitions,
$3.5 million of capital expenditures for information systems and improvements to
existing facilities, and $1.2 million for deposits on pending acquisitions,
offset by proceeds from a sale of a dealership of $1.9 million. This compared to
$19.4 million in the first nine months of 1998 which consisted of acquisitions
of $15.5 million and $3.9 million for capital expenditures for information
systems and improvements to existing facilities.
In the first nine months of 1999, net cash provided by financing activities
totaled $115.9, which consisted of borrowings and repayments on secured lines of
credit and notes payable and prepaid financing costs. Included in net cash
provided by financing activities are proceeds of a $1.0 million loan from the
Chief Executive Officer of the Company related to the financing of the Ritchey
Fipp Chevrolet acquisition. Additionally, we financed this acquisition with
19
$2.0 million in notes to the selling parties. In the first nine months of 1998,
net cash provided by financing activities totaled $17.9 million which consisted
of borrowings on secured lines of credit and notes payable.
Floor Plan Notes Payable and Secured Lines of Credit
In September 1999, we obtained a new $138.0 million floor plan facility and
a $138.5 million revolving line of credit facility from Ford Motor Credit
Company, replacing our previous $115 million floor plan facility and our $60
million line of credit with General Electric Capital Corporation. The new line
of credit was obtained primarily to provide up to $107.0 million of funding to
acquire certain specific dealerships, to retire up to $26.5 million in certain
existing indebtedness of the Company, and to provide up to $5.0 million in used
vehicle floor plan financing to certain dealership subsidiaries.
The acquisition line of credit is guaranteed by a $107.0 million commitment
from Sonic Automotive Inc.'s Chairman and Chief Executive Officer, O. Bruton
Smith. As previously announced, we have entered into a definitive agreement to
be acquired by Sonic Automotive, Inc. If the merger is not completed, we are
required either to obtain a release of the loan guarantee, or to sell South Bay
Chrysler Plymouth Jeep, Falconi's Tropicana Honda, Kramer Honda-Volvo, and the
Lucas Dealership Group, Inc. to Sonic for the same price that we paid for these
acquisitions. In order for us to release the loan guarantee, we would likely be
required to refinance the line of credit which would probably require an equity
infusion.
As of September 30, 1999, we had $135.3 outstanding on our line of credit.
The interest rate on the Ford revolving line of credit is based on the one month
commercial paper rate plus 275 basis points. Prior to September 1999, the
interest rate on the previous revolver advances was prime minus 35 basis points
and the interest rate on the over advances was prime plus 200 basis points.
According to the terms of the new revolving line of credit agreement, a loan
origination fee of $0.5 million is due to Ford Motor Credit Company. In
addition, a fee of $0.3 million for the collateral guarantee will be payable to
Sonic's Chairman and Chief Executive Officer, O. Bruton Smith.
At September 30, 1999, we had approximately $117.2 million outstanding
under the new floor plan facility from Ford Motor Credit Company, which has an
initial term of three years. The new credit facility has an estimated effective
rate of prime minus 125 basis points subject to certain incentives and other
adjustments. Prior to September 1999, the interest rate for the previous floor
plan facility was prime minus 75 basis points.
Floor plan notes payable are due when vehicles are sold, leased, or
delivered. Floor plan notes payable are classified as a current liability and
the revolving line of credit is classified as secured lines of credit in the
accompanying financial statements.
We have approximately $2.0 million available under existing lines of
credit for acquisitions. However, we do not intend to consummate any
additional acquisitions prior to the closing of our pending transaction with
Sonic.
Senior Notes and Preferred Stock
In July 1997, we entered into a securities purchase agreement with an
institutional lender to provide an aggregate funding commitment of up to $40
million. The commitment consisted of $36 million of 12.375% senior notes, $3.5
million of 8% Cumulative Redeemable Preferred Stock and $0.5 million of
Redeemable Preferred Stock and up to 5 million shares of our Class B common
stock .
During 1997, we received $28 million of the $40 million commitment from the
institutional lender. In exchange, we issued senior notes with a principal
20
amount of $24 million at a discount of $2.2 million, 3,500 shares of Cumulative
Redeemable Preferred Stock at a discount of $0.6 million, 500 shares of
Redeemable Preferred Stock at a discount of $0.1 million and 3,032,000 shares of
Class B common stock at $0.92 per share. The senior notes, Cumulative Redeemable
Preferred Stock and Redeemable Preferred Stock are due June 30, 2005. We used
these proceeds primarily to acquire dealerships.
During 1998, we received the remaining $12 million of the $40 million
commitment from the institutional lender. In exchange, we issued senior notes
with a principal amount of $12 million at a discount of $1 million and 500,000
shares of common stock at $2.00 per share. The senior notes are due June 30,
2005. We used the proceeds to acquire a dealership.
The senior notes are unsecured and rank behind all debts of our operating
subsidiaries, rank equal to our other existing and future senior indebtedness,
and are senior in right of payment to any additional subordinated debt. The
CRPS and RPS shares rank behind all of our debt and the debt of our subsidiaries
and have priority over our common stock. We can redeem all the senior notes in
whole or in part, at any time, upon notice to the holders of the senior notes.
The redemption price for the period July 1, 1999 to June 30, 2000 is 107.5% of
the principal balance and decreases 1.25% on July 1 of each year thereafter.
The redemption price per share on June 30, 2005 is equal to the Cumulative
Redeemable Preferred Stock liquidation preference of $1,000 and the Redeemable
Preferred Stock liquidation preference of $1,720. If the aggregate outstanding
principal balance of the senior notes is less than $2 million at any time, we
are required to redeem all outstanding senior notes. We intend to redeem the
senior notes and the preferred stock in connection with our public offering of
common stock and anticipated new credit facility.
On July 1, 2003 and July 1, 2004, we must redeem senior notes in the
aggregate principal amount equal to the lesser of (a) 30% of the aggregate
principal amount of senior notes issued or (b) the aggregate amount of issued
and outstanding senior notes on such date, at the applicable redemption price
plus all accrued and unpaid interest on the senior notes to the redemption date.
On June 30, 2005, we must redeem all remaining issued and outstanding senior
notes, paying all outstanding principal and accrued and unpaid interest.
For financial reporting purposes, the difference between the issue price
and the face value of each security is recorded as a discount and is amortized
over the life of each security using the effective interest method. The senior
notes discount amortization is included in interest expense and the Cumulative
Redeemable Preferred Stock and redeemable Preferred Stock discount amortization
is recorded as a deduction from retained earnings. For financial reporting
purposes, the redemption premium, the remaining unamortized discount and the
remaining portion of the loan origination costs will be an extraordinary charge
to earnings at the time of redemption.
At September 30, 1999, we were out of compliance with a financial covenant
related to our Senior Notes, however, we have obtained a waiver for non-
compliance.
21
Seasonality and Quarterly Fluctuations
Our sales are usually lower in the first and fourth quarters of each year
largely due to consumer purchasing patterns during the holiday season, inclement
weather and the reduced number of business days during the holiday season. As a
result, our financial performance is generally lower during the first and fourth
quarters than during the other quarters of each fiscal year. We believe that
interest rates, levels of consumer debt, consumer buying patterns and
confidence, as well as general economic conditions also contribute to
fluctuations in sales and operating results. The timing of acquisitions of new
dealerships may also cause substantial fluctuations of operating results from
quarter to quarter.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This Statement of Position
requires the capitalization of eligible costs of specialized activities related
to computer software developed or obtained for internal use. The adoption of
this Statement of Position did not have a material effect on our financial
position or results of operations. The Statement is effective for fiscal years
beginning after December 15, 1998. We adopted this Statement of Position on
January 1, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting the Cost of Start Up Activities,"
which requires costs related to start-up activities to be expensed as incurred.
The Statement requires that initial application be reported as a cumulative
effect of a change in accounting principle. The Statement is effective for
fiscal years beginning after December 15, 1998. We adopted this Statement of
Position on January 1, 1999. The adoption of this statement did not have a
material impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instrument and Hedging Activities." This Standard establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and hedging activities. In June 1999, the FASB
issued Statement No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." The
Statement will become effective for us beginning on January 1, 2001. The
implementation of the provisions of this Statement does not have an impact on
our financial statements for the nine months ended September 30, 1999.
Amortization of Goodwill
Goodwill as of September 30, 1999 was $123.7 million, or 33.4% of our total
assets. Goodwill represents the excess purchase price over the estimated fair
value of the tangible and measurable intangible assets purchased in an
acquisition. Generally accepted accounting principles require that goodwill be
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amortized over the period benefited, not to exceed 40 years. We have determined
that the period benefited by most of our goodwill is over forty years and
therefore we are amortizing this goodwill over a 40-year period. Earnings
reported in periods immediately following an acquisition would be overstated if
we attributed a forty-year benefit period to intangible assets that should have
had a shorter benefit period. In later years, we would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by our management in arriving at the price paid for businesses acquired.
Earnings in later years also could be significantly affected if our management
then determined that the remaining balance of goodwill was impaired. We
periodically compare the carrying value of goodwill to the anticipated
undiscounted future cash flows from operations of the businesses we have
acquired to evaluate the recoverability of goodwill.
Inflation
We believe that the relatively moderate rate of inflation over the past few
years has not had a significant impact on our revenues or profitability.
Interest rates have been relatively stable during this period.
Year 2000 Project
We are in the process of addressing and mitigating the impact on our
operations of computer programs that are unable to distinguish between the year
1900 and the
year 2000.
Year 2000 Readiness Preparation
Our year 2000 program is comprised of several individual projects which
address primarily the following broad areas: data processing systems, embedded
technology in equipment and facilities, vendor and supplier risk, and
contingency planning. We have created a year 2000 task force that has assigned
a priority to all projects and broadly classified projects into critical and
non-critical categories indicating the importance of the function to our
continuing operations.
We continue the process of updating our data processing systems. We have
converted 95% and will complete conversion of all of our non-compliant software
and computer systems for our existing operations to compliant systems by
December 1, 1999. The most critical data processing systems are the
dealership management systems in our dealerships. As a result of an unrelated
project to integrate computing systems across the company, these dealer
management systems have been replaced or upgraded with year 2000 compliant
software and hardware platforms. This conversion project is fully complete.
Although we are converting to year 2000 compliant systems, management
recognizes that it could potentially acquire a dealership that does not have
year 2000 compliant systems. As part of our dealership acquisition due
diligence process, acquired dealership systems are evaluated for year 2000
compliance and scheduled for upgrade or replacement as acquired dealerships are
assimilated into our company. We intend to convert any noncompliant acquired
dealerships systems before December 31, 1999. All recently acquired acquisitions
and pending acquisitions have compliant dealer management systems. The dealer
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management system is the only system within a dealership capable of preventing a
store from conducting business.
We continue to assess the readiness preparations of our suppliers.
Manufacturers of vehicles and parts have been identified as our most critical
suppliers. In addition, we have communicated by writing, telephone and
electronic mail with our suppliers of dealer management systems,
telecommunications equipment, service equipment and transportation services to
respond to inquiries regarding their year 2000 readiness plans and status. We
have also reviewed year 2000 information available on suppliers' websites. All
critical suppliers have responded that they are year 2000 compliant. Some non-
critical suppliers who are identified as non-compliant will be replaced. In
addition, financial institutions that have been identified as critical suppliers
of inventory financing and customer financing have indicated that they are fully
year 2000 compliant. Our primary financial vendor has indicated full year 2000
compliance. Any major failure of our primary financial vendor would cause delays
of deposits, payables, payroll, flooring payments, credit card transactions and
electronic fund transfers, and would otherwise impact our ability to do
business. No non-primary financial vendors have been identified as critical.
Non-critical vendors identified as non-compliant will be replaced as necessary.
We also recognize that there may be embedded technology in our equipment
and facilities that could be impacted by the year 2000 issue. We have completed
our evaluation of service and miscellaneous equipment. Service equipment,
telephones and voicemail systems have been upgraded or replaced as necessary.
All other equipment identified as not being year 2000 compliant will be replaced
by December 31,1999 or removed from service.
Year 2000 Risks
The principal risk and most likely worst case scenario associated with the
year 2000 program is the risk of disrupting our operations due to operational
failure of third-party suppliers, primarily vehicle manufacturers. Such
failures could materially and adversely affect our ability to obtain vehicles
and parts for sale. We believe that significant disruptions among our suppliers
are not likely. We believe that, with the completion of the year 2000 project
as scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Year 2000 Costs
The conversion of our data processing systems has been incorporated into
our planned replacement or upgrade of its software and other computer systems
and therefore we have not experienced any significant incremental costs that are
specifically related to year 2000 compliance issues. Total year 2000 project
costs for replacing or upgrading our non-compliant equipment and facilities are
estimated to be approximately $1 million. In addition, 20 employees have been
assigned on a part-time basis to complete the year 2000 project, and one
employee has been assigned on a full-time basis to the project. Estimated total
project costs could change in the future as analysis continues.
Year 2000 Contingency Planning
We are have developed business contingency plans that address the actions
that will be taken if critical business operations are disrupted due to system
or supplier failure. Contingency planning has identified areas of concern where
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we can execute an effective backup plan relying on completely manual, paper
based processes and alternate suppliers of required services.
Year 2000 Forward-looking Statements
This discussion of the implications of the year 2000 for us contains
numerous forward-looking statements based on inherently uncertain information.
Statements about the cost of the project and the date on which we plan to
complete the internal year 2000 modifications are based on management's best
estimates, which were derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, we may not achieve these
estimates or there may be a delay in, or increased costs associated with, the
implementation of the year 2000 program. In addition, we place a high degree of
reliance on computer systems of third parties, such as vendors, suppliers, and
financial institutions. Although we are assessing the readiness of these third
parties and will prepare contingency plans, the failure of these third parties
to modify their systems in advance of December 31, 1999 could have a material
adverse effect on our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Our primary market risk exposure is interest rate risk. A change in the
U.S. prime interest rate would affect the rate at which we could borrow funds
under our floor plan and secured line of credit borrowing facilities. We
estimate that a one percent increase or decrease in our variable rate debt would
result in an increase or decrease, respectively, in interest expense of $2.5
million for the year ended September 30, 2000. We estimate that a two percent
increase or decrease in our variable rate debt would result in an increase or
decrease, respectively, in interest expense of $5.0 million for the year ended
September 30, 2000. Our senior notes are at fixed rates. Our remaining financial
instrument liabilities are immaterial.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports and Form 8-K
(a) Exhibits
The exhibits filed as a part of this report are listed below.
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
2.2 Agreement and Plan of Merger and Reorganization dated as of
October 31, 1999, among Sonic Automotive, Inc., FAA
Acquisition Corp., FirstAmerica Automotive, Inc., and
Certain of the Stockholders of FirstAmerica Automotive, Inc.
10.1.2 Credit Agreement by and between Ford Motor Credit Company and
the Company dated September 13, 1999.
10.10.1 Executive Employment Agreement dated as of August 1, 1999 by
and between the Company and Tom Price.
10.10.4 Executive Employment Agreement dated as of August 1, 1999 by
and between the Company and Debra Smithart.
10.10.5 Executive Employment Agreement dated as of August 1, 1999 by
and between the Company and Charles Ogelsby.
10.10.6 Executive Employment Agreement dated as of August 12, 1999 by
and between the Company and David Moeller.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended September 30,
1999.
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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.
FIRSTAMERICA AUTOMOTIVE, INC.
Dated: November 15, 1999 By: /s/ THOMAS A. PRICE
----------------------------------------------
Thomas A. Price
President, Chief Executive Officer, and
Director
(Principal Executive Officer)
By: /s/ DAVID J. MOELLER
----------------------------------------------
David J. Moeller
Vice President of Finance
(Acting Principal Financial and Accounting
Officer)
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