Pro Forma Combined Statement of Operations
Year Ended December 31, 1997
(Unaudited)
(In Thousands except per share amounts)
Historical
----------------------------------------
Sonic Clearwater Pro Forma
Automotive, Inc. Dealerships Adjustments Pro Forma
----------------- ------------ ----------- ------------
REVENUES:
Vehicle Sales $ 467,858 $ 108,812 $ - $ 576,670
Parts, service and collision repair 57,537 10,500 - 68,037
Finance and insurance 10,606 2,587 - 13,193
----------- ------------- ----------- ------------
Total revenues 536,001 121,899 - 657,900
COST OF SALES 471,253 105,786 (41) 576,998
----------- ------------- ----------- ------------
GROSS PROFIT 64,748 16,113 41 80,902
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 48,520 12,226 864 (1) 60,729
(688) (2)
(118) (3)
(75) (4)
DEPRECIATION AND AMORTIZATION 1,322 390 (143) (1) 1,768
(133) (5)
332 (6)
----------- ------------- ----------- ------------
OPERATING INCOME 14,906 3,497 2 18,405
OTHER INCOME AND EXPENSE:
Interest expense, floorplan 8,007 779 (83) (7) 8,703
Interest expense, other 1,199 721 (557) (1) 2,407
(164) (8)
1,208 (9)
Gain on sale of marketable equity securities 298 - - 298
Other income - 194 - 194
----------- ------------- ----------- ------------
Total other expense 8,908 1,306 404 10,618
----------- ------------- ----------- ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 5,998 2,191 (402) 7,787
INCOME TAX PROVISION (BENEFIT) 2,249 - 854 (11) 2,613
(490) (12)
----------- ------------- ----------- ------------
INCOME BEFORE MINORITY INTEREST 3,749 2,191 (766) 5,174
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY 47 - - 47
=========== ============= =========== ============
NET INCOME (LOSS) $ 3,702 $ 2,191 $ (766) $ 5,127
=========== ============= =========== ============
BASIC NET INCOME PER SHARE $ 0.53 $ 0.74
=========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING 6,949 6,949
=========== ============
DILUTED NET INCOME PER SHARE $ 0.51 $ 0.71
=========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,204 7,204
=========== ============
See notes to proforma financial statements
5
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
ADJUSTMENT
(1) Reflects the Company's estimate of the increase in rent expense
related to lease agreements entered into with the seller of the
Clearwater Dealerships for the dealerships' real property that
will not be acquired by the Company, and decreases in
depreciation expense (based on useful lives ranging from 31.5
to 39 years) and interest expense related to mortgage
indebtedness encumbering such property. The related mortgage
indebtedness was approximately $5.9 million with interest
charged at rates ranging from 9.0% to 9.5% annually.
(2) The decrease in selling, general and administrative expenses
reflects the elimination of salaries paid to the owner and
employees of the dealerships acquired in the acquisition whose
position and salary will be eliminated in conjunction with the
acquisition of the Clearwater Dealerships'.
(3) Reflects the net decrease in selling, general and
administrative expenses related to the net reduction in
salaries and fringe benefits of owners and employees of the
acquired dealerships who will become employees of the Company,
consistent with reduced salaries pursuant to certain employees'
employment agreements with the Company.
(4) Reflects the decrease in selling, general and administrative
expenses resulting from the conversion of the Clearwater
Dealerships workers compensation policy to the Company's
workers compensation policy.
(5) Reflects the elimination of amortization expense related to
goodwill that arose in the acquisition of the Clearwater
Dealerships by the previous owner, assuming that the
acquisition giving rise to goodwill was consummated on January
1, 1997.
(6) Reflects the amortization over an amortization period of 40
years of approximately $13.3 million in goodwill resulting from
the acquisition of the Clearwater Dealerships which was assumed
to have occurred on January 1, 1997. Subject to the
Agreement, the Company will be required to make an additional
payment, not to exceed $1.75 million, equal to 50% of the
pre-tax earnings of the Clearwater Dealerships for fiscal year
ended December 31, 1998. Goodwill was calculated based on a
$1.67 million earnout payment based on the estimated 1998
pre-tax earnings of the Clearwater Dealerships. The amount of
the earnout payment actually recorded may be different from the
amount estimated here, depending on the actual fiscal year 1998
pre-tax earnings of the Clearwater Dealerships.
(7) Reflects the decrease in floor plan interest expense resulting
from the refinancing of the floor plan notes payable
arrangements of the Clearwater Dealerships to the Company's
master floor plan agreement. The average interest rate under
the master agreement with Ford Motor Credit Company is
approximately 7.60% compared to 8.50% interest rate for the
Clearwater Dealerships.
(8) Reflects the decrease in other interest expense resulting from
the Company not assuming the Clearwater Dealerships notes
payable to affiliates and other long-term obligations.
(9) Reflects the increase in interest expense associated with the
borrowings made under the Company's credit arrangement with
Ford Motor Credit Company to provide the funds necessary for
the acquisition of the Clearwater Dealerships.
(10) Reflects the decrease in Cost of Sales resulting from a parts
inventory adjustment.
6
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
ADJUSTMENT
(11) The Clearwater Dealerships were not subject to federal and
state income taxes because they were organized as S
corporations during the period indicated. This adjustment
reflects an increase in the federal and state income tax
provision as if the Clearwater Dealerships had been taxable at
the combined statutory income tax rate of 39%. Upon completion
of the Acquisition, this entity that has historically not been
subject to corporate income tax will thereafter be subject to
federal and state income tax as a C corporation.
(12) Reflects the net decrease in the provision for income taxes
resulting from adjustments (1) through (11) above, computed
using an effective income tax rate of 39%.
7
Pro Forma Balance Sheet
December 31, 1997
(Unaudited)
(In Thousands except per share amounts)
Historical
---------------------------------
Sonic Clearwater Pro Forma
Automotive, Inc. Dealerships Adjustments Pro Forma
----------------- --------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,304 $ 2,065 $ - $ 20,369
Marketable Equity Securities 270 - - 270
Receivables 19,784 1,138 - 20,922
Inventories 156,514 9,215 - 165,729
Deferred income taxes 405 - - 405
Other current assets 1,048 282 - 1,330
------------ ----------- ------------- --------------
Total current assets 196,325 12,700 - 209,025
PROPERTY AND EQUIPMENT, NET 19,081 7,829 (7,550) (2) 19,360
GOODWILL, NET 74,362 1,736 13,271 (1) 87,633
(1,736) (3)
DUE FROM AFFILIATES 1,047 - - 1,047
OTHER ASSETS 635 - - 635
============ =========== ============= ==============
TOTAL ASSETS $ 291,450 $ 22,265 $ 3,985 $ 317,700
============ =========== ============= ==============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 133,236 $ 8,321 $ - $ 141,557
Trade accounts payable 6,612 789 - 7,401
Accrued interest 1,071 - - 1,071
Other accrued liabilities 10,280 466 - 10,746
Payable to affiliates 445 500 (500) (4) 445
Current maturities of long term debt 584 1,090 (1,090)(2) (6) 584
------------ ----------- ------------- --------------
Total current liabilities 152,228 11,166 (1,590) 161,804
LONG-TERM DEBT 38,640 6,117 (6,117)(2) (6) 51,354
12,714 (5)
PAYABLE TO COMPANY'S CHAIRMAN 5,500 - - 5,500
PAYABLE TO AFFILIATES 4,394 - - 4,394
DEFERRED INCOME TAXES 1,547 - - 1,547
INCOME TAX PAYABLE 4,776 - - 4,776
STOCKHOLDERS' EQUITY
Preferred stock - - 3,960 (1) 3,960
Class A Common Stock 50 - - 50
Class B Common Stock 63 - - 63
Common Stock of Acquired Entity - 1,202 (1,202) (1) -
Paid in capital 68,045 1,210 (1,210) (1) 68,045
Retained earnings 16,186 2,570 (2,570) (1) 16,186
Unrealized gain on marketable equity securities 21 - - 21
------------ ----------- ------------- --------------
Total stockholders' equity 84,365 4,982 (1,022) 88,325
============ =========== ============= ==============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 291,450 $ 22,265 $ 3,985 $ 317,700
============ =========== ============= ==============
See notes to pro forma statements
8
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
ADJUSTMENT
(1) Reflects the preliminary allocation of the aggregate purchase
price of the Clearwater Dealerships based on the estimated
fair value of the net assets acquired. Because the carrying
amount of the net assets acquired, which primarily consist of
accounts receivable, inventory, equipment, and floor plan
indebtedness, approximates their fair value, management
believes the application of purchase accounting will not
result in an adjustment to the carrying amount of those net
assets. The amount of goodwill and corresponding amortization
expense actually recorded may ultimately be different from the
amounts estimated here, depending upon the actual fair value
of tangible net assets acquired at closing. The estimated
purchase price allocation consists of the following:
Estimated total consideration:
Cash $ 11,044,000
Preferred stock 3,960,000
Earnout payment (7) 1,670,000
-------------
16,674,000
Less tangible net assets acquired 3,403,000
-------------
Excess of purchase price over fair value
of net tangible assets acquired $ 13,271,000
=============
(2) Reflects the real property of the Clearwater Dealerships,
which is not being acquired in the Acquisition and the related
mortgage indebtedness in the amount of $5.9 million.
(3) Reflects the elimination of goodwill that arose in the
acquisition of the Clearwater Dealerships by the previous
owner.
(4) Reflects the Payable to a Clearwater Dealership stockholder
that will not be assumed by the Company.
(5) Reflects borrowings made under the Company's credit
arrangement to provide a portion of the funds necessary for
acquisition of the Clearwater Dealerships.
(6) Reflects capital loans of the Clearwater Dealerships which
will not be assumed by the Company.
(7) Subject to the Agreement, the Company will be required to make
an additional payment, not to exceed $1.75 million, equal to
50% of the pre-tax earnings of the Clearwater Dealerships for
fiscal year ended December 31, 1998. The amount of the earnout
payment actually recorded may be different from the amount
estimated here, depending on the actual fiscal year 1998
pre-tax earnings of the Clearwater Dealerships.
9