- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment to Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): December 10, 1999
Sonic Automotive, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-13395 56-201079
(State or other jurisdiction of (Commission File Number) (I.R.S Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
5401 E. Independence Boulevard, Charlotte, NC 28212
(Address of principal executive offices) (Zip Code)
</TABLE>
(704) 532-3320
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
This Amendment to Current Report on Form 8-K/A amends Sonic's report on
Form 8-K filed with the Securities and Exchange Commission on December 22, 1999
(Date of Report: December 10, 1999).
ITEM 7: Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired. Beginning on page F-1 of this
amendment to Sonic's report on Form 8-K filed December 22, 1999 are the
financial statements of FirstAmerica Automotive, Inc. (including the
financial statement of the Lucas Dealership Group acquired by FirstAmerica
in September 1999), Freeland Automotive and the Manhattan Automotive Group
for the periods required pursuant to Rule 3-05 of Regulation S-X.
(b) Pro Forma Financial Information. Beginning on page P-1 of this amendment to
Sonic's report on Form 8-K filed December 22, 1999 are the unaudited pro
forma financial statements reflecting the business combination of Sonic,
FirstAmerica Automotive, Inc. (including dealership subsidiaries acquired by
FirstAmerica in 1998 and 1999), Freeland Automotive and the Manhattan
Automotive Group for the periods required pursuant to Article 11 of
Regulation S-X.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C>
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
99.1* Agreement and Plan of Merger and Reorganization dated as of October
31, 1999 by and among Sonic, FAA Acquisition Corp., FirstAmerica
Automotive, Inc., and certain stockholders of FirstAmerica
Automotive, Inc. listed on the signature page therein (incorporated
by reference to Exhibit 10.8 to Sonic's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
</TABLE>
* Filed Previously
2
<PAGE>
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.
SONIC AUTOMOTIVE, INC.
<TABLE>
<S> <C>
Date: January 27, 2000 By: /s/ THEODORE M. WRIGHT
------------------------------------
Theodore M. Wright
Vice President-Finance, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
</TABLE>
3
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
FirstAmerica Automotive, Inc.
Audited Financial Statements
Report of Independent Auditors ........................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 .......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and
1996 ................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996.............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996 ....................................................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7
Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and December
31, 1998 ............................................................................ F-21
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and 1998 ......................................................... F-22
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended
September 30, 1999 .................................................................. F-23
Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 1999 and 1998 ................................................................... F-24
Notes to Condensed Consolidated Financial Statements .................................. F-25
Lucas Dealership Group, Inc. and Subsidiaries
Independent Auditors' Report ............................................................ F-30
Combined Statements of Assets and Liabilities at December 31, 1998 and 1997, and
unaudited at June 30, 1999 ............................................................ F-31
Combined Statements of Sales, Cost of Sales and Direct Operating Expense for the years
ended December 31, 1998, 1997 and 1996 and unaudited for the six months ended June 30,
1999 and 1998 ......................................................................... F-32
Combined Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996
and unaudited for the six months ended June 30, 1999 and 1998 ......................... F-33
Notes to Combined Financial Statements .................................................. F-34
Freeland Automotive
Independent Auditors' Report ............................................................ F-40
Balance Sheets at December 31, 1998 and unaudited at September 30, 1999 ................. F-41
Statements of Income and Net Equity for the year ended December 31, 1998 and unaudited
for the nine months ended September 30, 1998 and 1999 ................................. F-42
Statements of Cash Flows for the year ended December 31, 1998 and unaudited for the nine
months ended September 30, 1998 and 1999 .............................................. F-43
Notes to Financial Statements ........................................................... F-44
Manhattan Automotive Group
Independent Auditors' Report ............................................................ F-49
Combined Balance Sheets at December 31, 1998 and unaudited at June 30, 1999 ............. F-50
Combined Statements of Income for the year ended December 31, 1998 and unaudited for the
six months ended June 30, 1998 and 1999 ............................................... F-51
Combined Statements of Equity for the year ended December 31, 1998 and unaudited for the
six months ended June 30, 1999 ........................................................ F-52
Combined Statements of Cash Flows for the year ended December 31, 1998 and unaudited for
the six months ended June 30, 1998 and 1999 ........................................... F-53
Notes to Combined Financial Statements .................................................. F-54
Unaudited Pro Forma Consolidated Financial Data .......................................... P-1
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
FIRSTAMERICA AUTOMOTIVE, INC.:
We have audited the accompanying consolidated balance sheets of
FirstAmerica Automotive, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstAmerica
Automotive, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG, LLP
San Francisco, California
March 19, 1998
F-2
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 2,191 $ 2,924
Contracts in transit .................................................................... 13,567 9,454
Accounts receivable ..................................................................... 18,460 11,061
Inventories ............................................................................. 90,947 78,607
Deferred income taxes ................................................................... 853 618
Deposits, prepaid expenses and other .................................................... 2,996 2,614
-------- --------
Total current assets .................................................................. 129,014 105,278
Property and equipment ................................................................... 9,879 6,348
Other assets:
Loan origination and other costs, net of amortization of $754 in 1998 and $195 in 1997... 3,107 3,407
Other noncurrent assets ................................................................. 2,457 2,629
Goodwill and other intangible assets .................................................... 33,995 6,340
-------- --------
Total assets .......................................................................... $178,452 $124,002
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Floor plan .............................................................................. $ 81,452 $ 67,401
Secured lines of credit ................................................................. 17,025 4,000
Notes payable and other ................................................................. 5,512 1,218
Accounts payable ........................................................................ 6,009 5,275
Accrued liabilities ..................................................................... 13,028 8,804
Deferred revenue ........................................................................ 2,054 2,034
-------- --------
Total current liabilities ............................................................. 125,080 88,732
Long-term liabilities:
Capital lease obligation and equipment loan ............................................. 1,386 --
Senior notes, net of discount of $2,839 in 1998 and $2,062 in 1997....................... 33,161 21,938
Deferred income taxes ................................................................... 1,055 269
Deferred revenue ........................................................................ 2,475 3,061
-------- --------
Total liabilities ..................................................................... 163,157 114,000
-------- --------
Commitments and contingencies (note 17)
Cumulative redeemable preferred stock, $.00001 par value; 3,500 shares issued and
outstanding in 1998 and 1997 (net of discount of $456 in 1998 and $526 in 1997,
liquidation preference of $3,500 in 1998 and 1997)........................................ 3,044 2,974
Redeemable preferred stock, $.00001 par value; 500 shares issued and outstanding in 1998
and 1997 (net of discount of $65 in 1998 and $75 in 1997, liquidation preference of
$600 in 1998 and $540 in 1997)............................................................ 535 465
Stockholders' equity:
Common stock, $0.00001 par value:
Class A, 30,000,000 shares authorized, 11,514,044 shares issued and outstanding in
1998 and 11,201,152 shares in 1997 ....................................................... -- --
Class B, 5,000,000 shares authorized, 3,532,000 shares issued and outstanding in 1998
and 3,032,000 shares in 1997 ............................................................. -- --
Class C, 30,000,000 shares authorized, 0 issued and outstanding ....................... -- --
Additional paid-in capital .............................................................. 8,320 6,544
Retained earnings ....................................................................... 3,396 19
-------- --------
Total stockholders' equity ........................................................... 11,716 6,563
-------- --------
$178,452 $124,002
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
New vehicle ............................................. $475,847 $290,281 $200,185
Used vehicle ............................................ 191,829 111,616 81,706
Service and parts ....................................... 91,134 58,707 42,416
Other dealership revenues, net .......................... 24,261 13,444 8,215
-------- -------- --------
Total sales ............................................ 783,071 474,048 332,522
Cost of sales:
New vehicle ............................................. 438,726 271,412 187,278
Used vehicle ............................................ 175,753 102,689 76,190
Service and parts ....................................... 49,423 32,195 25,450
-------- -------- --------
Total cost of sales .................................... 663,902 406,296 288,918
-------- -------- --------
Gross profit ........................................... 119,169 67,752 43,604
Operating expenses:
Selling, general and administrative ..................... 99,603 58,761 38,330
Depreciation and amortization ........................... 1,952 678 611
Combination and related expenses ........................ -- 2,268 --
-------- -------- --------
Operating income ....................................... 17,614 6,045 4,663
Other expense:
Interest expense, floor plan ............................ (5,521) (3,669) (2,922)
Interest expense, other ................................. (5,432) (1,866) --
-------- -------- --------
Income before income taxes ............................. 6,661 510 1,741
Income tax expense ........................................ 2,864 446 48
-------- -------- --------
Net income ............................................. $ 3,797 $ 64 $ 1,693
======== ======== ========
Pro forma net income (unaudited) .......................... $ 1,027
========
Net income (loss) per common share -- basic ............... $ 0.24 $ (0.01) $ 0.19
======== ========= ========
Weighted average common shares -- basic ................... 14,341 10,915 5,526
======== ========= ========
Net income (loss) per common share -- diluted ............. $ 0.23 $ (0.01) $ 0.19
======== ========= ========
Weighted average common shares outstanding -- diluted ..... 14,928 10,915 5,526
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
FirstAmerica Automotive,
Inc. Common Stock
-------------------------------------
Price Class A Class B
Dealerships' ------------------- ----------------- Paid-in Retained Total
Equity Shares Amount Shares Amount Capital Earnings Equity
-------------- ---------- -------- -------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 .................. $ 6,644 -- $ -- -- $ -- $ -- $ -- $ 6,644
Stock issuance ........................... 250 -- -- -- -- -- -- 250
Net income ............................... 1,693 -- -- -- -- -- -- 1,693
Distributions to S corporation
stockholders ........................... (3,707) -- -- -- -- -- -- (3,707)
-------- -- ---- -- ---- ------ ------ --------
Balance, December 31, 1996 ................ $ 4,880 -- $ -- -- $ -- $ -- $ -- $ 4,880
Distributions to S corporation
stockholders ........................... (4,000) -- -- -- -- -- -- (4,000)
Exchange of stock related to
Combination ............................ (880) 7,841 -- -- -- 880 -- --
Stock issuance for acquisitions .......... -- 1,620 -- -- -- 1,490 -- 1,490
Stock issuance relating to financing ..... -- -- -- 3,032 -- 2,789 -- 2,789
Stock issuance, net ...................... -- 1,740 -- -- -- 1,554 -- 1,554
Preferred dividend and liquidation
preference ............................. -- -- -- -- -- (169) -- (169)
Amortization of discount ................. -- -- -- -- -- -- (45) (45)
Net income ............................... -- -- -- -- -- -- 64 64
-------- ----- ---- ----- ---- ------ ------ --------
Balance, December 31, 1997 . .............. $ -- 11,201 $ -- 3,032 $ -- $6,544 $ 19 $ 6,563
Stock issuance for acquisitions .......... -- 335 -- -- -- 776 -- 776
Stock issuance relating to financing ..... -- -- -- 500 -- 1,000 -- 1,000
Stock redemptions ........................ -- (22) -- -- -- -- -- --
Preferred dividend and liquidation
preference ............................. -- -- -- -- -- -- (340) (340)
Amortization of discount ................. -- -- -- -- -- -- (80) (80)
Net income ............................... -- -- -- -- -- -- 3,797 3,797
-------- ------ ---- ----- ---- ------ ------ --------
Balance, December 31, 1998 ................ $ -- 11,514 $ -- 3,532 $ -- $8,320 $ 3,396 $ 11,716
======== ====== ==== ===== ==== ====== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................................ $ 3,797 $ 64 $ 1,693
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization .................................................... 1,952 678 611
Non-cash interest expense ........................................................ 782 195 --
Deferred income taxes ............................................................ (659) (349) --
Non-cash stock compensation ...................................................... -- 701 --
Amortization of deferred revenue ................................................. (457) (373) 1,048
Changes in operating assets and liabilities:
Receivables and contracts in transit ............................................ (8,606) (8,007) 718
Inventories ..................................................................... (4,391) (17,087) (567)
Other assets .................................................................... (500) (815) (192)
Floor plan notes payable ........................................................ 9,504 7,918 809
Accounts payable and accrued liabilities ........................................ 2,899 9,489 77
--------- --------- --------
Net cash provided by (used in) operating activities ........................... 4,321 (7,586) 4,197
--------- --------- --------
Cash flows from investing activities:
Capital expenditures .............................................................. (4,594) (1,090) (805)
Acquisitions, net of cash acquired ................................................ (28,980) (11,726) --
--------- --------- --------
Net cash used in investing activities ......................................... (33,574) (12,816) (805)
--------- --------- --------
Cash flows from financing activities:
Borrowings on secured lines of credit ............................................. 13,025 4,000 --
Proceeds from issuance of Senior Notes ............................................ 11,000 21,851 --
Proceeds from notes payable and other ............................................. 4,033 -- --
Repayments on notes payable and other ............................................. -- (1,632) 167
Loan origination costs ............................................................ (258) (3,602) --
Proceeds from issuance of common stock ............................................ 1,000 2,789 250
Proceeds from issuance of preferred stock ......................................... -- 3,360 --
Distributions to S Corporation stockholders ....................................... -- (4,000) (3,707)
Preference dividend paid .......................................................... (280) (108) --
--------- --------- --------
Net cash provided by (used in) financing activities ........................... 28,520 22,658 (3,290)
--------- --------- --------
Net increase/(decrease) in cash and equivalents ............................... (733) 2,256 102
Cash at beginning of period ......................................................... 2,924 668 566
--------- --------- --------
Cash at end of period ............................................................... $ 2,191 $ 2,924 $ 668
========= ========= ========
Cash paid during the period for:
Interest .......................................................................... $ 4,053 $ 5,311 $ 2,941
Income taxes ...................................................................... 3,803 885 16
Non-cash activity was as follows:
Common stock issued for acquisitions .............................................. 776 1,490 --
Common stock issued as compensation ............................................... -- 701 --
Capital lease obligation .......................................................... 703 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Combination
In July 1997, FirstAmerica Automotive, Inc., a public company with no
significant assets or operations, combined (the "Combination") with a group of
automobile dealership entities under common ownership and control (the "Price
Dealerships"). The stockholders of the Price Dealerships received 5,526,000
shares of FirstAmerica Automotive, Inc.'s common stock, which represented a
majority of the total outstanding shares of capital stock of FirstAmerica
Automotive, Inc. immediately following the Combination. The Combination was
accounted for as the acquisition of FirstAmerica Automotive, Inc. by the Price
Dealerships, and, accordingly, the financial statements for periods before the
Combination represent the financial statements of the Price Dealerships.
FirstAmerica Automotive, Inc. and the Price Dealerships are collectively
referred to as "FirstAmerica" or the "Company".
(b) Business
The Company is a leading automotive retailer and consolidator in the highly
fragmented automotive retailing industry. We currently operate in four major
metropolitan markets in California, and are focusing our consolidation strategy
in the western United States. Our source of revenues consists of all activities
typical of automotive dealerships. These consist of the sale and lease of new
and used vehicles, parts and service sales, collision repair service revenues,
financing fees, vehicle insurance commissions, document processing fees,
extended service warranty sales, and after-market product sales. As of December
31, 1998, we sold 12 domestic and foreign brands consisting of BMW, Buick,
Dodge, Honda, Isuzu, GMC, Lexus, Mitsubishi, Nissan, Pontiac, Toyota and
Volkswagen.
The Company's plan is to continue making opportunistic acquisitions in the
western United States. The Company currently operates in the following four
metropolitan markets:
<TABLE>
<S> <C>
o San Francisco Bay Area o San Jose/Silicon Valley
o San Diego o Los Angeles
</TABLE>
(c) Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
FirstAmerica Automotive, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in the consolidated financial
statements. Certain prior period amounts have been reclassified to conform with
the current financial statement presentation.
(d) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash balances consist of demand deposits.
(e) Inventories
Inventories are stated at the lower of cost or market value. Vehicle cost
is determined by using the specific identification method. Parts and accessories
cost is determined by using the first-in, first-out method (FIFO).
(f) Property and Equipment
Property and equipment, including improvements that significantly extend
useful lives, are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using a straight-line basis over the shorter of the
lease term or estimated useful lives of the assets.
F-7
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
The range of estimated useful lives is as follows:
<TABLE>
<S> <C>
Leasehold improvements .............. 5 to 20 years
Equipment ........................... 5 to 10 years
Furniture, signs and fixtures ....... 5 to 10 years
Company vehicles .................... 5 years
</TABLE>
The cost of maintenance, repairs and minor renewals is expensed as
incurred. 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.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred 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 and operating loss and tax credit carryforwards. Deferred 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 will not be
realized. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Prior to January 1, 1997, the Company was an S Corporation for federal and
state income tax reporting purposes. Federal and state income taxes on the
income of an S Corporation are payable by the individual stockholders rather
than the corporation. The Company terminated its S Corporation status effective
January 1, 1997.
(h) Financial Instruments
The carrying amount of current assets and current liabilities approximates
fair value because of the short-term nature of these instruments. The carrying
amount of long-term debt is not determinable because of the structure of the
transaction.
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, involve uncertainties and matters of significant judgment,
and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(i) Goodwill and Other Intangible Assets
Goodwill on acquired dealership operations, which represents the excess of
purchase price over the fair value of net assets acquired, is amortized on a
straight-line basis over 40 years. The Company evaluates the periods of
amortization continually to determine whether later events and circumstances
warrant revised estimates of useful lives.
Goodwill on software company and other intangible assets are primarily
acquired software and intellectual property. Other intangible assets are
amortized on a straight-line basis over 5 years.
Accumulated amortization of goodwill and other intangibles totaled
approximately $619,000 and $125,000 as of December 31, 1998 and 1997,
respectively. Amortization expense charged to operations totaled $494,000,
$102,000 and $23,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(j) Impairment of Long-Lived Assets
The carrying value of long-lived assets, including intangibles, is reviewed
if the facts and circumstances, such as significant declines in revenues,
earnings or cash flows or material adverse changes in the business climate,
suggest that it may be impaired. The Company performs its review by comparing
the book value of long-lived assets to the estimated undiscounted cash flows
relating to such assets. If any impairment in the value of the long-lived assets
is indicated, the carrying value of the long-lived assets is adjusted to reflect
such impairment calculated based on the discounted cash flows of the impaired
assets or the assets fair value, as appropriate.
F-8
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
(k) 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.
(l) Revenue Recognition
Vehicle sales revenue is recognized upon delivery. Service and parts
revenues are recognized at the time of product sale or completion of service.
Other dealership revenues include finance fees received for notes sold to
finance companies. Finance fees are recognized, net of anticipated chargebacks,
upon acceptance of the credit by the finance companies. These fees are included
in other dealership revenues in the consolidated statements of operations.
The Company recognizes fees from the sale of third party extended warranty
service contracts at the time of sale. Where the Company is the primary obligor
of the extended warranty service contract, the costs directly related to sales
of the contracts are deferred and charged to expense over the periods that the
revenues are recognized. Warranty service contract revenues are included in
other dealership revenues in the consolidated statements of operations.
(m) Advertising
Advertising costs are expensed in the period in which advertising occurs
and are included in selling, general and administrative expenses in the
consolidated statements of operations. Advertising expense totaled $9.1 million,
$5.9 million and $3.8 million for 1998, 1997 and 1996, respectively.
(n) Major Suppliers and Dealer Agreements
The Company purchases substantially all of its new vehicles and inventory
from various manufacturers at the prevailing prices charged by the
manufacturers. A manufacturer's inability or unwillingness to supply the
dealerships with an adequate supply of popular models could affect the Company's
overall sales.
The Company enters into dealer sales and service agreements ("Dealer
Agreements") with each manufacturer. The Dealer Agreement generally limits the
location of the dealership and grants the manufacturer approval rights over
changes in dealership management and ownership. A manufacturer is also entitled
to cancel the Dealer Agreement if the dealership is in material breach of its
terms.
The Company's ability to acquire additional dealerships depends, in part,
on obtaining manufacturers' approval.
(o) Pro Forma 1996 Net Income and Per Share Amounts
Pro forma 1996 net income reflects income tax expense as if the Company had
terminated its S Corporation status on January 1, 1996, and had normal statutory
tax rates for 1996 (see Note 13). In addition, since the capital structure of
the Price Dealerships prior to the Combination is not comparable to the capital
structure subsequent to the Combination, pro forma net income per share for 1996
is presented based on the 5,526,000 shares issued to the Price Dealership
stockholders in the Combination.
(p) Stock-based Compensation
As allowed under the provisions of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", the Company recognizes compensation
expense using the intrinsic value-based method of valuing stock options
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations. Under the intrinsic
value-based method, compensation cost is measured as the amount by which the
quoted market price of the Company's stock at the date of grant exceeds the
stock option exercise price.
(q) Comprehensive Income
The Company has determined that net income and comprehensive income are the
same for the periods presented.
F-9
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) ACQUISITIONS
Acquisitions Completed During the Year Ended December 31, 1998
On April 1, 1998, the Company acquired substantially all of the operating
assets of Beverly Hills, BMW, Ltd., a BMW automobile dealership located in West
Los Angeles, California. On June 12, 1998, the Company acquired substantially
all of the operating assets of Starfire Body Shop located in San Jose,
California. On June 19, 1998, the Company acquired substantially all of the
operating assets of Burgess British Cars, Inc., a Honda automobile dealership
located in Daly City, California. On October 19, 1998, the Company acquired all
of the outstanding capital stock of an authorized Toyota automobile dealership
commonly known as Concord Toyota located in Concord, California. On November 19,
1998, the Company acquired substantially all of the operating assets of Woodland
Hills Volkswagen. On December 31, 1998, the Company completed the acquisition of
an automotive-related software company, DSW & Associates, Inc., commonly known
as Auto Town. The aggregate consideration paid for the acquisitions completed
during 1998 was $29.8 million, consisting of $29.0 million in cash and 0.3
million shares of Class A Common Stock.
All of the acquisitions were accounted for using the purchase method of
accounting and the operating results of these acquisitions 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 dates. Amounts recorded for these
acquisitions were as follows: current assets, net of cash acquired, of $10.4
million, fixed assets of $0.8 million, goodwill and other intangibles of $27.5
million, floor plan and other liabilities of $7.8 million, and recognition of
deferred tax liability of $1.1 million.
Acquisitions Completed During the Year Ended December 31, 1997
During 1997, the Company acquired substantially all of the operating assets
of eight automobile dealerships. The aggregate consideration paid for the
acquired dealerships during 1997 was $13.2 million, consisting of $11.7 million
in cash, 1.6 million shares of Class A Common Stock, and warrants to acquire up
to 20,000 shares of Class A Common Stock. Amounts recorded for these
acquisitions were as follows: current assets, net of cash acquired, of $25.9
million, fixed assets of $3.4 million, non-current assets of $0.1 million,
goodwill of $4.8 million and floor plan notes payable and current liabilities of
$21.0 million.
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the acquisitions completed in 1998
and 1997 had occurred as of January 1, 1997 after giving effect to certain
adjustments, including amortization of goodwill, interest expense on acquisition
debt, reductions in floorplan interest expense resulting from re-negotiated
floorplan financing agreements and related income tax effects. The pro forma
results have been prepared for comparative purposes only and are not necessarily
indicative of results of operations that would have occurred had the
acquisitions been completed on January 1, 1997. These results are also not
necessarily indicative of the results of future operations:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
(dollars in thousands
except per share data)
(unaudited)
<S> <C> <C>
Total sales ..................................... $ 874,223 $756,035
Income (loss) before taxes ...................... 4,521 (2,308)
Net income (loss) ............................... 2,577 (1,316)
Net income (loss) per common share--diluted ..... $ 0.15 $ (0.12)
</TABLE>
Acquisitions Closed After December 31, 1998 and Pending Acquisitions
We completed one dealership acquisition in March 1999 and currently have
one automobile dealership acquisition pending. The aggregated estimated purchase
price for the two acquisitions is approximately $8.0 million. We financed the
completed acquisition with $2.0 million of notes payable to sellers and a $1.0
million note payable to the CEO of the Company. We will finance the pending
acquisition utilizing our secured lines of credit.
F-10
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Accounts receivable ........................ $16,341 $10,648
Accounts receivable--related party (Note 15) 2,528 733
------- -------
Total accounts receivable .................. 18,869 11,381
Less allowance for doubtful accounts ....... 409 320
------- -------
Accounts receivable, net ................... $18,460 $11,061
======= =======
</TABLE>
(4) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
New vehicles .................. $65,152 $58,344
Used vehicles ................. 20,049 15,040
Parts and accessories ......... 5,746 5,223
------- -------
Inventories ................... $90,947 $78,607
======= =======
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Leasehold improvements ............... $ 3,255 $2,392
Equipment ............................ 3,413 2,924
Furniture, signs and fixtures ........ 5,576 2,333
Company vehicles ..................... 1,088 832
------- ------
Total property and equipment ......... 13,332 8,481
Less accumulated depreciation ........ 3,453 2,133
------- ------
Property and equipment, net .......... $ 9,879 $6,348
======= ======
</TABLE>
(6) FLOOR PLAN NOTES PAYABLE AND SECURED LINES OF CREDIT
In July 1997, the Company entered into a three year $175 million Loan and
Security Agreement with a financial company, replacing an existing $37 million
line of credit to the Company. The Loan and Security Agreement matures in July
2000.
The Loan and Security Agreement permits the Company to borrow up to $115
million in floor plan notes payable, restricted by new and certain used vehicle
inventory and provides an additional line of credit up to $35 million ("Revolver
Advances"), restricted by used vehicle and parts inventory. The Loan and
Security Agreement also provides a discretionary line up to $25 million
("Discretionary Advances") which the financial company makes at its absolute
discretion upon request of the Company.
Floor plan notes payable are due when vehicles are sold, leased, or
delivered. Revolver Advances are due whenever the used vehicle and parts
borrowing base as defined in the Loan and Security Agreement is exceeded. The
Loan and Security Agreement grants a collateral interest in substantially all of
the Company's assets.
F-11
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(6) FLOOR PLAN NOTES PAYABLE AND SECURED LINES OF CREDIT -- (Continued)
As of December 31, 1998 and 1997, the Company had floor plan notes payable
of $81.5 and $67.4 million, respectively, and outstanding Revolver Advances of
$17.0 and $4.0 million, respectively. Revolver Advances are classified as
secured lines of credit in the accompanying financial statements. There were no
Discretionary Advances outstanding as of December 31, 1998 and 1997. As of
December 31, 1998 and 1997, $5.0 million and zero of the Revolver Advances were
guaranteed by a Trust affiliated with the Chief Executive Officer.
The availability of the company to draw on the floor plan notes payable,
Revolver Advances, and Discretionary Advances, for the purpose of acquiring
automobile dealerships, is limited by the amount of vehicle and parts inventory
of the acquired dealership.
Interest rates on the floor plan notes and the Revolver Advances are
variable and change based on movements in the prime rate. The interest rates
equal the prime rate minus 35 to 75 basis points, which was 8.15% to 7.00% and
8.15% to 7.75% at December 31, 1998 and 1997. During 1998 and 1997, the average
monthly borrowing on the floor plan notes and Revolver Advances was $73.4 and
$44.0 million and $13.5 and $0.3 million, respectively, and the aggregate
average interest rate was 7.67% and 7.75%, respectively. Interest expense was
$6.7 and $3.8 million at December 31, 1998 and 1997.
The Loan and Security Agreement contains various financial covenants such
as minimum interest coverage, working capital, and maximum debt to equity
ratios.
(7) SENIOR NOTES
At the time of the Combination (see Note 1), the Company entered into a
Securities Purchase Agreement with a financial company to provide an aggregate
funding commitment of up to $40 million. In exchange for the $40 million, the
Company had the ability to issue on a pro-rata basis up to $36 million of
12.375% Senior Notes, $3.5 million of 8% Cumulative Redeemable Preferred Stock
("CRPS"), and $0.5 million Redeemable Preferred Stock ("RPS"), and up to 5
million shares of the Company's Class B Common Stock, par value $0.00001 per
share.
In 1997, the Company had received $28 million from the financial company.
In exchange, the Company issued notes with a principal amount of $24 million at
a discount of $2.2 million, 3,500 shares of CRPS at a discount of $0.6 million,
500 shares of RPS at a discount of $0.1 million and 3,032,000 shares of Class B
Common Stock at $0.92 per share. The notes and the preferred stock are due June
30, 2005 (see Note 8).
In 1998, the Company received an additional $12.0 million from the
financial company. In exchange, the Company issued 12.375% Senior Notes with a
principal amount of $12.0 million at a discount of $1.0 million, and issued 0.5
million shares of Class B Common Stock at $2.00 per share. The notes are due
June 30, 2005.
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 discount
amortization on the notes is included in interest expense, and the CRPS and RPS
discount amortization is recorded as a deduction from retained earnings. The
Company incurred $3.5 and $1.5 million in interest expense related to the notes
during 1998 and 1997, including $224,000 and $88,000, respectively, for the
non-cash amortization of discount.
The notes are unsecured and subordinated to all debts of the Company's
operating subsidiaries, rank pari passu to the Company's other existing and
future senior indebtedness, and are senior in right of payment to any future
subordinated debt of the Company. The CRPS and RPS shares will be subordinate to
all the debt of the Company and its subsidiaries and have priority over the
common stock of the Company.
On July 1, 2003 and July 1, 2004, the Company shall redeem the notes in the
aggregate principal amount equal to the lesser of (a) 30% of the aggregate
principal amount of notes issued or (b) the aggregate amount of issued and
outstanding notes on such date. On these dates, the Company shall redeem the
notes, at the applicable redemption price plus all accrued and unpaid interest
on the notes to the redemption date. On June 30, 2005, the Company shall redeem
all remaining issued and outstanding notes, including accrued and unpaid
interest.
The Company can redeem all the notes or any part thereof, at any time, upon
due notice to the holders of the notes. The redemption price for the period
beginning July 1, 1998 through June 30, 1999 is 108.75% of the principal balance
and
F-12
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(7) SENIOR NOTES -- (Continued)
decreases by 1.25% for each year on July 1, thereafter. The redemption price on
June 30, 2005 is equal to the CRPS and RPS liquidation preference of $1,000 and
$1,720 respectively. If the aggregate outstanding principal balance of the
notes, at any time, is less than $2 million, the Company is required to redeem
all outstanding notes. If the Company has a public offering of its stock, the
Company may within 45 days of consummation of public offering, redeem all the
outstanding notes. In such circumstances, the redemption price for the period
July 1, 1998 to June 30, 1999 is 104.375% of the principal balance and decreases
by 0.625% for each year on July 1, thereafter.
The Securities Purchase Agreement contains various financial covenants such
as minimum interest coverage, and non-financial covenants including limitations
on the Company's ability to pay dividends, retire or acquire debt, make capital
expenditures, and sell assets.
(8) REDEEMABLE PREFERRED STOCK
The Company has 10,000 shares of authorized Preferred Stock with par value
of $0.00001 per share. In connection with the Securities Purchase Agreement (see
Note 7), the Company issued 3,500 shares of CRPS, due June 30, 2005, with a par
value of $0.00001 per share, and 500 shares of RPS, due June 30, 2005, with a
par value of $0.00001 per share. As of December 31, 1998 and 1997, 3,500 CRPS
and 500 RPS were issued and outstanding.
CRPS
The holders of CRPS are entitled to receive a dividend at an annual rate of
8% of CRPS, payable, equally, on May 31, and November 30 of each year. Any
unpaid dividends accrue cumulatively at an annual rate of 14%. The Company is
required to redeem the CRPS on June 30, 2005, but CRPS may be redeemed, all or
in part, at any time prior to that date at the Company's election.
The liquidation preference for each share of CRPS is $1,000. The redemption
price per share (expressed as a percentage of the CRPS liquidation preference)
for the period beginning June 30, 1998 to June 29, 1999, is 108.75% of the CRPS
liquidation preference and decreases by 1.25% for each year on June 30,
thereafter. The redemption price per share on June 30, 2005, is equal to the
CRPS liquidation preference.
RPS
The holders of RPS are not entitled to receive any dividends. Each RPS
share has an initial liquidation preference of $1,080, which increases by $80
per share each year on June 30. The RPS liquidation preference will be $1,720 on
June 30, 2005. All the RPS, or any part thereof, may be redeemed for cash at the
Company's election. The redemption price per share (expressed as a percentage of
the RPS liquidation preference) for the period June 30, 1998 to June 29, 1999 is
108.75% of the RPS liquidation preference and decreases by 1.25% for each year
on June 30, thereafter. The redemption price per share on June 30, 2005, is
equal to the RPS liquidation preference.
The Preferred Stock has no voting rights except (a) as required by the law
of the State of Delaware, (b) to approve certain transactions that would
otherwise violate the terms of Agreement governing the sale of Preferred Stock
by the Company (see Note 7), and (c) to elect a director to the Board of
Directors to represent the CRPS stockholders if dividends on CRPS remain in
arrears and unpaid for two semiannual dividend periods, or, if the Company fails
to mandatorily redeem the Preferred Stock after June 30, 2005.
During 1998 and 1997, the Company recorded $280,000 and $128,000 as CRPS
preference dividend, $60,000 and $40,000 for the accretion of the RPS
liquidation preference with a corresponding charge to paid in capital, and
$80,200 and $45,000 for the non-cash amortization of the discount with a
corresponding charge to retained earnings.
F-13
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) COMMON STOCK
The Company has authorized Class A Common Stock of 30 million shares, Class
B Common Stock of 5 million shares, and Class C Common Stock of 30 million
shares, all with a par value of $0.00001 per share.
The Class A and Class B Common Stock have equal voting rights and the Class
C Common Stock is non-voting, except as otherwise required by Delaware law.
Class B Common Stockholders, voting as a separate class, are entitled to elect
one Director to the Board of Directors of the Company. Each share of Class B
Common Stock will be automatically converted into one share of Class A Common
Stock upon the closing of a firm commitment to register at least $50 million of
Common Stock under the Securities Act of 1933. Class C Common Stock will be
issued only under certain conditions as defined in the Certificate of
Incorporation.
The Company is prohibited from paying dividends on its common stock so long
as any shares of CRPS are outstanding. Under certain circumstances pursuant to
the terms of its financing agreements, the Company is prohibited from paying
dividends on its common stock.
(10) STOCK OPTIONS
The Company's Board of Directors has approved the 1997 Stock Option Plan,
as amended through October 27, 1998, (the "Option Plan"), pursuant to which an
aggregate of 1.5 million shares of Class A Common Stock were reserved for
issuance to key employees of the Company. The Option Plan permits awards of
either incentive or non-qualified stock options. The exercise price of the
options may not be less than the fair market value as determined by a committee
of the Board of Directors. As of December 31, 1998, the Company has granted
options to employees covering an aggregate of 1,450,000 shares of Class A common
stock. The options vest over a five year period, and expire if unexercised ten
years from the date of grant.
The following table summarizes the Company's outstanding stock options (in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997
------------------------- ------------------------
Number Weighted Number Weighted
of Average of Average
Shares Exercise Price Shares Exercise Price
-------- ---------------- -------- ---------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 942 $ 2.65 -- --
Granted ............................... 508 $ 3.61 942 $ 2.65
Exercised ............................. -- -- -- --
Forfeited ............................. 2 $ 4.00 -- --
--- ------ --- ------
Options outstanding, end of year ...... 1,448 $ 2.78 942 $ 2.65
===== ====== === ======
Options exercisable, end of year ...... 360 $ 2.20 103 $ 2.09
===== ====== === ======
</TABLE>
The Company has elected the disclosure requirements of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123") and continues to recognize compensation expense as prescribed
in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). Under this method of accounting for stock options,
compensation cost is measured as the amount by which the fair value of the
company's stock at the grant date exceeds the stock option exercise price. For
the years ended December 31, 1998 and 1997, compensation expense was $0 and
$701,000, respectively.
The weighted average remaining contractual life of options outstanding is
9.0 years. The weighted average fair value of options granted was $0.73 during
1998 and $0.25 during 1997. The fair value of each option grant is estimated
based on the date of grant using the Black-Scholes option valuation model with
the following assumptions used for grants made in 1998: expected common stock
price volatility of 50%, risk-free interest of 4.75%, and an expected option
life of 5.0 years. The following assumptions were used for grants made in 1997:
expected volatility of 42%, risk-free interest of 6.25%, and an expected option
life of 5.5 years.
F-14
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) STOCK OPTIONS -- (Continued)
Had compensation expense of the Company's stock-based compensation plan
been determined based on the fair value method prescribed by SFAS No. 123, the
Company's pro forma net income and diluted earnings per share for the years
ended December 31, 1998 and 1997 would have been (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net income
As reported ............................. $ 3,797 $ 64
Pro forma ............................... 3,679 18
Net income (loss) per common share--basic ..
As reported ............................. $ 0.24 $ (0.01)
Pro forma ............................... 0.23 (0.02)
Net income (loss) per common share--diluted
As reported ............................. $ 0.23 $ (0.01)
Pro forma ............................... 0.22 (0.02)
</TABLE>
(11) WARRANTS
During 1998 and 1997, the Company issued warrants to purchase approximately
40,000 and 332,000 shares of Class A Common Stock at an exercise price of $2.00
and $0.92 per share respectively. The warrants expire in 2002 and 2003 and were
issued in connection with obtaining financing of the senior notes.
(12) EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share for the
years ended December 31, 1998, 1997, and 1996 (in thousands, except per share
data):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income per income statement(a) ....................................... $ 3,797 $ 64 $ 1,027
Less:
Cumulative redeemable preference dividends .............................. 280 128 --
Redeemable preferred stock liquidation preference accretion ............. 60 40 --
Cumulative and redeemable preferred stock discount amortization ......... 80 45 --
-------- -------- -------
Net income applicable to common stockholders ............................. 3,377 (149) 1,027
Add:
Interest charges applicable to convertible debt ......................... 44 -- --
-------- -------- -------
Net income applicable to common stockholders and assumed conversions ..... $ 3,421 $ (149) $ 1,027
======== ======== =======
Basic Earnings Per Share:
Weighted average common shares outstanding--basic(b) ..................... 14,341 10,915 5,526
======== ======== =======
Net income (loss) per common share--basic ................................ $ 0.24 $ (0.01) $ 0.19
======== ========= =======
Diluted Earnings Per Share:
Weighted average common shares outstanding--basic(b) ..................... 14,341 10,915 5,526
Net effect of dilutive stock options ..................................... 282 -- --
Net effect of warrants ................................................... 205 -- --
Net effect of convertible notes .......................................... 100 -- --
-------- --------- -------
Total weighted average common shares outstanding--diluted(b) ............. 14,928 10,915 5,526
======== ========= =======
Net income (loss) per common share--diluted(c) ........................... $ 0.23 $ (0.01) $ 0.19
======== ========= =======
</TABLE>
F-15
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) EARNINGS PER SHARE -- (Continued)
- ---------
(a) Net income for 1996 is presented on a pro forma basis to reflect net income
that would have been reported if the Company had been a C Corporation
instead of an S Corporation for the year ended December 31, 1996. See Note
13 on Income Taxes.
(b) Since the capital structure of the Price Dealerships prior to the
combination is not comparable to the capital structure subsequent to the
combination, the number of weighted average shares, both basic and diluted,
for 1996 is presented based on the 5,526,000 shares issued to the Price
Dealership stockholders in the Combination.
(c) In 1997, diluted earnings per share does not include dilutive securities,
such as options and warrants, as their inclusion would be anti-dilutive for
1997.
(13) INCOME TAXES
On January 1, 1997, the Company terminated its S Corporation election and
elected C Corporation status. This change in tax status resulted in the
immediate recognition of $214,000 in net deferred tax assets. In connection with
the change in tax status, the Company changed its method of valuing inventories
from the last-in first-out ("LIFO") method to the specific identification
method. This change resulted in a tax liability of $1.4 million and is payable
equally over the next six years ("LIFO recapture").
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Current
Federal ................ $2,795 $ 625
State .................. 728 170
------ ------
Total Current .......... 3,523 795
Deferred
Federal ................ (523) (306)
State .................. (136) (43)
------ ------
Total Deferred ......... (659) (349)
------ ------
Total .................. $2,864 $ 446
====== ======
</TABLE>
The income tax rate on pre-tax income differed from the federal statutory
rate as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------------
1998 1997 1996
------ ----------- -----------
<S> <C> <C> <C>
Computed tax expense ................................. 34% 34% 34%
State taxes ........................................ 6% 25% --
Permanent difference ............................... 2% -- --
S Corporation status ............................... -- -- (31)%
Change in tax status to C corporation including LIFO
recapture ......................................... -- (42)% --
Non-deductible stock compensation .................. -- 56% --
Other .............................................. 1% 15% --
-- -------- ------
Total ............................................. 43% 88% 3%
== ======== ======
</TABLE>
F-16
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(13) INCOME TAXES -- (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, are presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Extended warranty service contracts ..... $ 1,001 $ 1,184
State taxes ............................. 217 58
Accrued bonuses and vacation ............ 624 204
Allowance for doubtful accounts ......... 210 132
Other accrued liabilities ............... 306 32
-------- --------
Total deferred tax assets ............. 2,358 1,610
Deferred tax liabilities:
Acquired tax basis difference ........... (1,210) --
LIFO recapture .......................... (988) (1,160)
Other ................................... (362) (101)
Total deferred tax liabilities ........ (2,560) (1,261)
-------- --------
Net deferred tax (liabilities) assets . $ (202) $ 349
======== ========
</TABLE>
Pro Forma Income Taxes
Prior to January 1, 1997, the Company was an S Corporation. The following
unaudited pro forma provision for income taxes reflects the components of income
tax expense that would have been reported if the Company had been a C
Corporation for the year ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Federal State Total
--------- ------- ------
<S> <C> <C> <C>
Year ended December 31, 1996 .......... $ 592 $122 $714
===== ==== ====
</TABLE>
(14) EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the Company are eligible to
participate in the FirstAmerica Automotive, Inc. Retirement Savings Plan ("the
Plan"), a defined contribution plan, after meeting minimum service requirements.
Employees of acquired companies are eligible to join the Plan if or when the
minimum service criteria has been met. Service completed at the time of
acquisition will apply towards the meeting of the criteria. The Company has
recorded matching contributions in the amount of approximately $440,000,
$334,000, and $196,000, in 1998, 1997 and 1996, respectively.
(15) RELATED PARTY TRANSACTIONS
Accounts Receivable
The Company had accounts receivable from related parties of $2.5 million at
December 31, 1998. Of this amount, $2.4 million relates to a receivable from the
Chief Executive Officer of the Company related to leasehold improvements paid by
the Company on a building the Company leases from the CEO. The Company was
subsequently reimbursed for the original cost of the leasehold improvements in
January 1999. The remaining $0.1 million relates to an advance to an executive.
Operating Leases
The Company leases facilities under various agreements from a Trust
affiliated with the Chief Executive Officer ("CEO") of the Company, and from
partnerships in which the Chairman of the Company and the CEO are partners.
During 1997, a partnership in which the Chairman of the Company is a partner
purchased a facility leased by the Company. As part of the acquisition, the
partnership reimbursed the Company $0.8 million for leasehold improvements.
F-17
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(15) RELATED PARTY TRANSACTIONS -- (Continued)
These leases have an initial term of 15 years and are renewable at the
option of the Company. Selling, general and administrative expense includes
related party rental expense of $4.6 million, $2.3 million, and $1.7 million in
1998, 1997, and 1996, respectively.
Acquisitions
On June 1998, the Company acquired substantially all of the operating
assets of a Honda automobile dealership located in Daly City, California. The
purchase price was partially financed by the proceeds of a $4.0 million loan
from the Chairman of the Company's Board of Directors to the Company. Pursuant
to the terms of a Letter of Agreement, the Chairman is entitled to a 3%
origination fee on the loan, and the Company will be responsible for interest
payments to the commercial bank that made a $4.0 million personal loan to the
Chairman. The principal amount is due at the earlier of June 1, 1999 or upon the
refinancing and/or equity offering of either preferred or common shares in the
Company. The Company believes the terms of the origination fee paid to the
Chairman are no less favorable to the Company than those arranged with other
parties. The $4.0 million loan outstanding at December 31, 1998 is included in
other notes payable in the accompanying condensed consolidated financial
statements. As of December 31, 1998 the origination fee in the amount of
$120,000 is outstanding and is included in accrued liabilities in the
accompanying financial statements.
On October 1, 1998, the Company completed the acquisition of an authorized
Toyota automobile dealership. Pursuant to a Stock Purchase Agreement dated July
17, 1998, the Company acquired all of the outstanding capital stock from the
Seller. The Seller's trustee is the father of an officer of the Company. The
Company believes it purchased the Corporation under terms no less favorable to
the Company than those arranged with other parties. In connection with the
acquisition, the Company issued options to purchase 100,000 shares of Class A
Common Stock at an exercise price of $2.00 per share to the officer of the
Company as a finders fee, in accordance with the terms of his employment
agreement with the Company.
During 1997, the Company issued 1.3 million shares of its Class A Common
Stock in exchange for substantially all the operating assets of a dealership
owned by the Chairman of the Company. The Chairman was indebted to the Company
in the amount of approximately $500,000 as a result of this transaction, which
was subsequently paid.
During 1997, the Company acquired substantially all the operating assets of
a dealership owned by an officer of the Company for $2.9 million.
The Company believes it purchased the dealerships acquired from related
parties under terms no less favorable than those arranged with other parties.
Management Services
In July 1997, a Company affiliated with the CEO provided management
services to the Company. Selling, general and administrative expense includes
approximately $0.8 million and $1.8 million for the years ended December 31,
1997 and 1996, respectively for data processing, executive compensation,
professional, and other services.
Legal Services
A law firm, in which one of the Directors of the Company is a partner,
provides legal services to the Company which amounted to approximately $0.4
million in both 1998 and 1997.
Notes Payable
The Company had $0.6 million of convertible notes payable due to
stockholder at December 31, 1998 and 1997, respectively. These notes are
convertible into Class A Common Stock at $4.00 per share.
(16) OPERATING SEGMENTS
The Company operates primarily in the automotive segment in California. The
Company sells new vehicles, used vehicles, light trucks, and replacement parts.
In addition, it provides vehicle maintenance and repair services, and arranges
related financing and warranty products for its automotive customers.
F-18
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(16) OPERATING SEGMENTS -- (Continued)
To supplement its core business, the Company acquired on December 31, 1998
a software company, Auto Town, that provides software products and services to
automobile dealerships. The acquisition was accounted for as a purchase, and the
results of operations were not included prior to December 31, 1998.
(17) COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
All of the Company's operations are conducted in leased facilities. The
Company leases certain facilities from certain officers of the Company (see Note
15). The minimum future rental payments by the Company as of December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
--------------------
Related Capital
Years ending December 31, Parties Other Leases
- -------------------------------------------------------- --------- ---------- --------
<S> <C> <C> <C>
1999 .............................................. $ 5,024 $ 5,964 $ 177
2000 .............................................. 5,125 5,617 177
2001 .............................................. 5,300 5,006 177
2002 .............................................. 5,124 4,540 177
2003 .............................................. 5,129 4,409 154
Thereafter ........................................ 33,371 19,616 --
------- ------- ------
Total minimum lease payments .................... $59,073 $45,152 862
======= =======
Less amount representing interest ............... (159)
------
Present value of net minimum lease payments ..... $ 703
======
</TABLE>
The current portion of capital lease payments of $122,000 is included in
notes payable and other in the accompanying consolidated financial statements.
The non-current portion of the capital leases of $581,000 and the
non-current portion of an equipment financing loan of $805,000, which bears
interest at 8.25% and amortizes monthly expiring in December 2002, are included
in capital lease obligation and equipment loan in the accompanying financial
statements.
Rental expense for operating leases was $9.0 million, $5.8 million, and
$2.8 million in 1998, 1997 and 1996, respectively.
Litigation
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position or the future results of operations and cash flows.
(18) COMBINATION AND RELATED EXPENSES
During 1997, the Company incurred $2.3 million in certain legal,
accounting, consulting and compensation expenses associated with the combination
and development of its organization and business plan. There were no combination
and related expenses in 1998.
(19) SUBSEQUENT EVENT
In March 1999, the Company sold the operating assets of Serramonte GMC to
the manufacturer and recorded net proceeds of approximately $1.7 million.
F-19
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(20) SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's results of operations as
presented in the Consolidated Statements of Income by quarter for 1998 and 1997
(in thousands, except per share data).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Total sales ............................... $ 160,617 $ 183,051 $ 223,486 $ 215,917
Gross profit .............................. 24,418 28,911 33,739 32,101
Operating income .......................... 3,361 4,563 5,552 4,138
Income before income taxes ................ 1,290 1,902 2,812 657
Net income ................................ 735 1,084 1,603 375
Net income per share--diluted ............. 0.04 0.07 0.10 0.02
Year Ended December 31, 1997
Total sales ............................... $ 93,024 $ 97,050 $ 139,172 $ 144,802
Gross profit .............................. 12,433 13,616 19,275 22,428
Operating income .......................... 1,093 (518) 2,131 3,339
Income before income taxes ................ 271 (1,441) 416 1,264
Net income (loss) ......................... 34 (179) 51 158
Net income (loss) per share--diluted ...... 0.01 (0.02) 0 0
</TABLE>
F-20
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- -------------
<S> <C> <C>
ASSETS
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
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
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
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FirstAmerica Automotive, Inc.
Common Stock
-----------------------------------
Class A Class B
----------------- ----------------- Paid-in Retained Total
Shares Amount Shares Amount Capital Earnings Equity
-------- -------- -------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== === ===== === ====== ====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
------------- -----------
<S> <C> <C>
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 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-24
<PAGE>
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:
o San Francisco Bay Area o San Jose/Silicon Valley
o San Diego o Los Angeles
o 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 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
F-25
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) ACQUISITIONS AND DISPOSITION -- (Continued)
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
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:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
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
</TABLE>
The acquisitions incorporated into the above unaudited pro forma financial
information include the following:
<TABLE>
<CAPTION>
Acquisition Date
- -------------------------------------------------- ---------------
<S> <C>
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
</TABLE>
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.
F-26
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- -------------
<S> <C> <C>
New vehicles .................. $ 95,590 $65,152
Used vehicles ................. 33,489 20,049
Parts and accessories ......... 17,991 5,746
-------- -------
Inventories ................... $147,070 $90,947
======== =======
</TABLE>
(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):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
======= ======== ======== ========
</TABLE>
- ---------
(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.
F-27
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(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).
F-28
<PAGE>
FIRSTAMERICA AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(8) OPERATING SEGMENTS -- (Continued)
Summarized financial information concerning the Company's two segments is
shown in the following table (in thousands):
<TABLE>
<CAPTION>
Automotive Technology Total Company
----------------------- ------------------ -----------------------
Three Months Ended September 30,
------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Automotive Technology Total Company
----------------------- ------------------ -----------------------
Nine Months Ended September 30,
------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
(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.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
LUCAS DEALERSHIP GROUP, INC.:
We have audited the accompanying combined statements of assets and
liabilities of Certain Dealerships, Assets and Liabilities of Lucas Dealership
Group, Inc. which are enumerated in Note 1 to the accompanying financial
statements, as of December 31, 1998 and 1997, and the related combined
statements of sales, cost of sales and direct operating expenses and of cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of Lucas Dealership Group, Inc.
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
The accompanying combined financial statements were prepared to present the
assets and liabilities of Certain Dealerships, Assets and Liabilities of Lucas
Dealership Group, Inc., and the related statements of sales, cost of sales and
direct operating expenses and cash flows, and are not intended to be a complete
presentation of Lucas Dealership Group, Inc.'s financial position, results of
operations and cash flows.
In our opinion, the combined financial statements referred to above,
present fairly, in all material respects, the assets and liabilities of Certain
Dealerships, Assets and Liabilities of Lucas Dealership Group, Inc. which are
enumerated in Note 1 to the accompanying financial statements, as of
December 31, 1998 and 1997, and the related sales, cost of sales, direct
operating expenses and cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
May 21, 1999
San Jose, California
F-30
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF
LUCAS DEALERSHIP GROUP, INC.
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
(In thousands)
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
1999 1998 1997
------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................................ $ 19,825 $12,286 $13,364
Receivables, net .................................... 11,994 12,032 12,548
Inventories ......................................... 25,187 27,647 22,546
Other current assets ................................ 798 1,556 1,270
-------- ------- -------
Total current assets ............................. 57,805 53,521 49,728
Rental vehicles, net ................................. 1,262 1,243 1,203
Property and equipment, net .......................... 2,947 3,299 3,900
Other assets ......................................... 581 713 996
-------- ------- -------
Total assets ......................................... $ 62,594 $58,776 $55,827
======== ======= =======
LIABILITIES
Current liabilities
Notes payable -- direct inventory financing ......... $ 23,424 $24,434 $19,487
Accounts payable .................................... 2,432 2,654 2,361
Accrued and other liabilities ....................... 5,935 6,182 5,822
-------- ------- -------
Total current liabilities ........................ 31,791 33,270 27,670
Deferred income taxes ................................ 12 477 430
-------- ------- -------
Total liabilities .................................... 31,803 33,747 28,100
-------- ------- -------
Net assets ........................................... $ 30,791 $25,029 $27,727
======== ======= =======
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF
LUCAS DEALERSHIP GROUP, INC.
COMBINED STATEMENTS OF SALES, COST OF SALES AND
DIRECT OPERATING EXPENSES
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
----------------------- -----------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales:
New and used vehicle sales ................................ $158,944 $146,057 $293,645 $258,989 $214,279
Parts and service ......................................... 24,660 23,444 46,265 42,146 38,995
Finance income ............................................ 1,568 1,339 3,398 3,146 2,288
-------- -------- -------- -------- --------
Total ................................................... 185,172 170,840 343,308 304,281 255,562
-------- -------- -------- -------- --------
Cost of sales:
New and used vehicles ..................................... 145,057 133,227 268,665 237,309 196,466
Parts and service ......................................... 12,289 11,866 22,633 20,499 19,490
-------- -------- -------- -------- --------
Total ................................................... 157,346 145,093 291,298 257,808 215,956
-------- -------- -------- -------- --------
Gross profit ............................................... 27,826 25,747 52,010 46,473 39,606
-------- -------- -------- -------- --------
Other operating income:
Interest income ........................................... 728 590 1,234 1,161 853
Other ..................................................... 1,542 916 2,287 2,697 1,687
-------- -------- -------- -------- --------
Total ................................................... 2,270 1,506 3,521 3,858 2,540
-------- -------- -------- -------- --------
Other operating expenses:
Selling and administrative ................................ 25,187 22,867 47,484 43,337 37,710
Interest .................................................. 357 669 1,359 1,218 1,402
-------- -------- -------- -------- --------
Total ................................................... 25,544 23,536 48,843 44,555 39,112
-------- -------- -------- -------- --------
Income before income taxes ................................. 4,552 3,717 6,688 5,776 3,034
Provision for income taxes ................................. 1,887 1,647 2,883 2,592 1,500
-------- -------- -------- -------- --------
Net income ................................................. 2,665 2,070 3,805 3,184 1,534
Net assets, beginning of period ............................ 25,029 27,727 27,727 23,968 21,406
Dividend distribution from unconsolidated subsidiaries ..... 801 600 1,113 400 900
Investment in unconsolidated subsidiary .................... -- (2,300) (3,270) -- --
Net change in shareholder receivable/payable ............... 2,296 1,900 (4,346) 175 128
-------- -------- -------- -------- --------
Net assets, end of period .................................. $ 30,791 $ 29,997 $ 25,029 $ 27,727 $ 23,968
======== ======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-32
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF
LUCAS DEALERSHIP GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
----------------------- -----------------------------------
1999 1998 1998 1997 1996
------------ ---------- ---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 2,665 $ 2,070 $ 3,805 $ 3,184 $ 1,534
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization ................................... 636 344 1,406 1,389 1,300
Deferred income taxes ........................................... 140 (54) (156) (146) (9)
(Gain) loss on dispositions of property and equipment and
rental and leased vehicles ..................................... (10) (86) 2 (300) 151
Changes in assets and liabilities:
Receivables .................................................... 38 1,090 516 (747) (1,143)
Inventories .................................................... 2,460 (1,730) (5,102) (1,737) (4,834)
Other current assets ........................................... 153 (762) 247 160 606
Notes payable--direct inventory financing ...................... (1,010) 1,760 4,947 230 2,151
Accounts payable ............................................... (222) 53 293 (153) 406
Accrued and other liabilities .................................. (247) 1,225 32 1,700 (714)
-------- -------- -------- -------- ---------
Net cash provided by (used for) operating activities .......... 4,603 3,910 5,990 3,580 (552)
-------- -------- -------- -------- ---------
Cash flows from investing activities:
Proceeds from dispositions of property and equipment and rental
and leased vehicles ............................................. 507 452 562 1,238 176
Purchases of property and equipment and rental and leased
vehicles ........................................................ (658) (900) (1,127) (2,473) (2,057)
Other assets ...................................................... (10) 263 -- -- (224)
-------- -------- -------- -------- ---------
Net cash used for investing activities ........................ (161) (185) (565) (1,235) (2,105)
-------- -------- -------- -------- ---------
Cash flows from financing activities:
Long-term debt borrowings ......................................... -- -- -- -- 139
Repayment of long-term debt and capital leases .................... -- -- -- (139) (9)
Net change in shareholder receivable/payable ...................... 2,296 1,900 (4,346) 175 128
Dividends from affiliates ......................................... 801 600 1,113 400 900
Investment in unconsolidated subsidiaries ......................... -- (2,300) -- -- --
Investment in affiliates .......................................... -- -- (3,270) -- --
-------- -------- -------- -------- ---------
Net cash provided by (used for) financing activities .......... 3,097 200 (6,503) 436 1,158
-------- -------- -------- -------- ---------
Net increase (decrease) in cash and equivalents .................... 7,539 3,925 (1,078) 2,781 (1,499)
Cash and equivalents at beginning of period ........................ 12,286 13,364 13,364 10,583 12,082
-------- -------- -------- -------- ---------
Cash and equivalents at end of period .............................. $ 19,825 $ 17,289 $ 12,286 $ 13,364 $10,583
======== ======== ======== ======== =========
Supplemental cash flows information --
Cash paid during the period for interest .......................... $ 483 $ 702 $ 1,018 $ 1,077 $ 1,263
======== ======== ======== ======== =========
</TABLE>
See notes to combined financial statements.
F-33
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information as of June 30, 1999 and for the six months ended
June 30, 1999 and 1998 is unaudited)
(1) BACKGROUND AND BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared for the
purpose of presenting Certain Dealerships, Assets and Liabilities of Lucas
Dealership Group, Inc. ("Lucas"). The combined financial statements represent
certain assets and liabilities of six dealerships, doing business as, Autobahn
Motors, Hayward Honda, Saint Claire Cadillac/Oldsmobile, Stevens Creek BMW
Motorsport, Stevens Creek Honda, and Golden Gate Cadillac/Acura as well as
certain other assets and liabilities of Lucas (collectively the "Certain
Dealerships"). The combined financial statements exclude the results of
businesses previously distributed to the Lucas shareholders or expected to be
distributed prior to the completion of the merger described in Note 2, including
Autocorp (a leasing and fleet sales business) and six Saturn dealerships. The
combined financial statements also exclude certain personal assets (shareholder
receivables and payables and certain nonbusiness assets).
The statement of sales, cost of sales and direct operating expenses, and
cash flows for the periods indicated exclude the effects of the changes in the
assets not included in these financial statements and include allocations of
certain corporate expenses to the Certain Dealerships based upon estimates of
actual corporate services performed on behalf of the Certain Dealerships. The
allocations effectively allocate all of the expenses of the corporate offices to
the dealerships. The amount of corporate expenses pertaining to the Certain
Dealerships (including salaries, bonuses, rent, professional services, and other
expenses) reflected in these financial statements is based primarily on a flat
fee which varies per dealership plus a percentage of the dealerships' net
income, which management of Lucas believes to be a reasonable allocation method.
The accompanying combined financial statements are derived from the
historical accounting records of Lucas. These historical financial statements
are not intended to be a complete presentation of the financial position,
results of operations and cash flows related to the Certain Dealerships, Assets
and Liabilities of Lucas Dealership Group, Inc. The historical operating results
may not be indicative of future results.
(2) PENDING ACQUISITION
On May 3, 1999 Lucas entered into an Agreement and Plan of Merger (the
"Agreement") with FirstAmerica Automotive, Inc. Under the terms of the
Agreement, Lucas will sell the six dealerships listed in Note 1 above, as well
as as certain other assets and liabilities and all of the stock of Lucas, for
consideration of approximately $65 million, subject to certain adjustments.
On May 4, 1999 Lucas sold the Cadillac franchise right which was owned by
Golden Gate Cadillac/Acura. Lucas continues to operate the related Acura
franchise. The cash purchase price was approximately $600,000 and Lucas recorded
a gain of $450,000 on this transaction, which is recorded in other operating
income (unaudited). The accompanying financial statements include the results of
the franchise sold for all periods presented, through the date of sale.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Credit Risk -- At December 31, 1998, substantially all of
the Certain Dealerships' business activities are located in Northern California.
The Certain Dealerships perform credit evaluations of their customers and
maintain reserves for potential credit losses.
The Certain Dealerships purchase substantially all of their new vehicles
and parts and accessories inventories from General Motors Corporation, American
Honda Motors Corporation, Mercedes Benz of North America Incorporated and BMW of
North America. There are receivables and payables in the normal course of
business with these companies.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses as of the dates and for the periods presented. Actual
results could differ from those estimates. Significant estimates include
depreciable lives, income taxes and accrued liabilities.
Cash and Equivalents include highly liquid debt investments with maturities
of three months or less when purchased.
F-34
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Inventories include new vehicles and demonstrators, used vehicles and parts
and accessories which are stated at cost, determined using the last-in,
first-out (LIFO) method, which is not in excess of market. Other inventories
consist primarily of gasoline, tires and oil and are stated at cost, on a
first-in, first-out (FIFO) basis, which is not in excess of market.
Rental Vehicles are stated at specifically identified cost. Rental vehicles
are used as short-term rentals for customers. They are depreciated straight-line
over 36 months but are typically sold during the model year.
Property and Equipment are stated at cost. Depreciation and amortization
are provided on a straight-line basis over the estimated useful lives of the
respective assets, principally three to seven years.
Intangible Assets relate to the purchase of two dealerships and are
included in other assets. The excess of costs over net tangible assets acquired
is amortized over periods ranging from five to ten years. At December 31, 1998,
1997 and 1996, the net book value of intangible assets was $713,000, $996,000
and $1,278,000, respectively (net of accumulated amortization of $2,110,000,
$1,827,000 and $1,545,000, respectively). Amortization expense was $283,000,
$282,000, and $281,000 in 1998, 1997 and 1996, respectively.
Income Taxes are accounted for using an asset and liability approach.
Deferred income taxes result from temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Such differences relate primarily to
accelerated depreciation for tax return purposes. Income tax amounts herein
represent allocations computed as if the Certain Dealerships had filed a tax
return on a combined basis.
Recently Issued Accounting Standard -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total, the change in net assets
during the period from nonowner sources. For the periods presented, net income
is equivalent to comprehensive income, as the Certain Dealerships had no items
of other comprehensive income.
Unaudited Financial Statements -- The accompanying unaudited combined
financial statements as of June 30, 1999 and for the six-month periods ended
June 30, 1999 and 1998 have been prepared by Lucas pursuant to the rules of the
Securities and Exchange Commission ("SEC") and, in the opinion of Lucas, include
all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the Certain Dealerships, Assets and Liabilities of Lucas
Dealership Group and the related sales, cost of sales and direct operating
expenses and cash flows. Certain information and footnote disclosure normally
included in combined financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules. Lucas believes that the disclosures made are adequate to keep the
information presented from being misleading. The results of operations for the
six months ended June 30, 1999, are not necessarily indicative of the results to
be expected for the full year.
(4) RECEIVABLES
Receivables at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Contracts in transit ................ $ 3,926 $ 4,008
Vehicles, service and parts ......... 3,828 4,405
Factory ............................. 1,518 1,182
Dealer trade ........................ 1,036 907
Other accounts receivable............ 1,109 1,429
Warranty claims ..................... 378 323
Due from finance companies .......... 250 307
------- -------
Total ............................... 12,045 12,561
Allowance for doubtful accounts ..... (13) (13)
------- -------
Net ................................. $12,032 $12,548
======= =======
</TABLE>
F-35
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
(5) INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
1999 1998 1997
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
New vehicles and demonstrators .... $15,982 $18,507 $14,149
Used vehicles ..................... 6,501 6,295 5,827
Parts and accessories ............. 2,431 2,549 2,328
Other ............................. 273 296 242
------- ------- -------
Total ............................. $25,187 $27,647 $22,546
======= ======= =======
</TABLE>
If the FIFO method of inventory accounting had been used to value all
inventories, inventories would have been $6,139,000, $6,092,000 and $5,880,000
higher than reported at June 30, 1999, December 31, 1998 and 1997, respectively.
For the six-month periods ended June 30, 1999 and 1998 and the years ended
December 31, 1998 and 1997, the LIFO valuation method had the effect of
(increasing) decreasing income before income taxes by approximately $47,000,
$(118,000), $212,000 and $100,000 and net income by approximately $28,000,
$(71,000), $127,000 and $60,000, respectively.
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Leasehold improvements ........................ $ 3,324 $ 3,393
Furniture and office equipment ................ 3,922 3,852
Machinery and equipment ....................... 2,603 2,647
Company vehicles .............................. 659 652
-------- --------
Total ......................................... 10,508 10,544
Accumulated depreciation and amortization ..... (7,209) (6,644)
-------- --------
Net ........................................... $ 3,299 $ 3,900
======== ========
</TABLE>
(7) NOTES PAYABLE -- DIRECT INVENTORY FINANCING
New vehicles, demonstrators and rental vehicles are financed under notes
payable bearing interest generally at the bank's reference rate (7.75% at
December 31, 1998). The notes are collateralized by such vehicles and are due
when the related vehicles are sold. The notes require each dealership to
maintain specific financial covenants. At December 31, 1998, the dealerships
were in compliance with these covenants.
F-36
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
(8) ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Sales and property taxes .............. $1,983 $1,892
Salaries, wages and commissions ....... 1,111 1,005
Vehicle deposits ...................... 583 742
Bonuses -- officers and employees ..... 756 509
Interest .............................. 175 141
Income taxes payable .................. 225 155
Other accrued liabilities ............. 1,349 1,378
------ ------
Total ................................. $6,182 $5,822
====== ======
</TABLE>
(9) INCOME TAXES
The provisions for income taxes (which represent allocations computed as if
the Certain Dealerships had filed a tax return on a combined basis) consist of
the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997 1996
--------- --------- ------------
<S> <C> <C> <C>
Current:
Federal ........................ $2,376 $2,186 $1,127
State .......................... 663 552 382
------ ------ ------
Total ........................... 3,039 2,738 1,509
------ ------ ------
Deferred:
Federal ........................ (124) (163) 9
State .......................... (32) 17 (18)
------ ------ ------
Total ........................... (156) (146) (9)
------ ------ ------
Total provision for income taxes $2,883 $2,592 $1,500
====== ====== ======
</TABLE>
The effective tax rate differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate ......................... 35.0% 35.0% 35.0%
State taxes, net of federal effect ..... 6.0 6.0 6.0
Non-deductible insurance premium ....... 2.0 1.2 4.3
Imputed interest expense ............... 0.5 1.4 2.2
Meals and entertainment ................ 0.3 1.2 2.0
Other .................................. (0.7) 0.1 (0.1)
---- ---- ----
Total .................................. 43.1% 44.9% 49.4%
==== ==== ====
</TABLE>
F-37
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
(9) INCOME TAXES -- (Continued)
The items giving rise to deferred taxes were as follows:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Deferred tax assets:
Reserves not recognized for tax purposes $508 $375
Capitalized inventory ................. 114 97
State taxes ........................... 225 187
Other ................................. 32 17
---- ----
Total deferred tax assets .............. 879 676
---- ----
Deferred tax liabilities:
Accelerated depreciation and amortization 448 398
Other ................................. 29 32
---- ----
Total deferred tax liabilities ......... 477 430
---- ----
$402 $246
==== ====
</TABLE>
(10) RETIREMENT PLAN
Lucas contributes to various union-sponsored pension plans (defined
contribution plans), covering all union mechanics and service personnel. The
related pension expense for the Certain Dealerships for these plans in 1998,
1997 and 1996 was $479,000, $387,000 and $343,000, respectively.
Nonunion employees may participate in the Lucas Dealership Group Savings
and Investment and Profit-Sharing Plan (the Plan). The Plan has two components.
The first is the 401(k) component, whereby employees may contribute up to 15% of
their annual compensation. Lucas matches one-half of the employee's
contribution, limited to $50 per employee per month, and may make additional
contributions at the discretion of the Board of Directors. Cash contributions
for the Certain Dealerships were $107,000, $103,000 and $89,000 for 1998, 1997
and 1996, respectively. All participating employees are 100% vested. Nonunion
employees are also eligible to participate in the second component of the Plan,
the profit-sharing component. Contributions are made at the discretion of the
Board of Directors and vest over a seven-year period, beginning after the third
year. Cash contributions were $242,000, $192,400 and $173,000 for 1998, 1997 and
1996, respectively.
(11) COMMITMENTS
The Certain Dealerships lease five facilities from Lucas' majority
shareholder under agreements which expire in 2005. The other facility lease,
leased from an unrelated party, expires in 2000. Future minimum rental payments
at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Related
Party Other Total
---------- ------- ---------
<S> <C> <C> <C>
1999 .................... $ 3,136 $264 $ 3,400
2000 .................... 3,136 -- 3,136
2001 .................... 3,136 -- 3,136
2002 .................... 3,136 -- 3,136
2003 .................... 3,136 -- 3,136
Thereafter .............. 6,272 -- 6,272
------- ---- -------
Total ................... $21,952 $264 $22,216
======= ==== =======
</TABLE>
Rental expense for 1998, 1997 and 1996 was $3,621,000, $3,367,000 and
$3,269,000, respectively.
F-38
<PAGE>
CERTAIN DEALERSHIPS, ASSETS AND LIABILITIES OF LUCAS DEALERSHIP GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
(12) RELATED PARTY
The Certain Dealerships' sales to, purchases from, and balances with their
unconsolidated subsidiaries are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Revenue from vehicle, parts, or service sales $221 $324 $123
Cost of vehicle, parts, or services purchased 219 306 120
Balance at year end:
Receivable .................................. 327 956
Payable ..................................... 10 36
</TABLE>
In addition, the Certain Dealerships paid fees for fixed asset purchases
from a related party in the amounts of $620,000, $222,000, and $55,000 in
December 31, 1998, 1997, and 1996, respectively.
(13) PENDING LITIGATION
The Company is involved in various legal proceedings. Management, after
reviewing these proceedings with legal counsel, believes the aggregate
liability, if any, will not materially affect the combined financial condition
or results of operations of the Certain Dealerships.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying balance sheet of Freeland Automotive, a
business unit of South Gate Motors, Inc., as of December 31, 1998, and the
related statements of income and net equity and of cash flows for the year then
ended. These financial statements are the responsibility of the management of
South Gate Motors, Inc. 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, such financial statements present fairly, in all material
respects, the financial position of Freeland Automotive, a business unit of
South Gate Motors, Inc., as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared from the separate
records of Freeland Automotive, a business unit of South Gate Motors, Inc., and
may not necessarily be indicative of the conditions that would have existed or
the results of operations that would have occurred had Freeland Automotive been
operated as an unaffiliated company.
/s/ Deloitte & Touche LLP
November 23, 1999
Charlotte, North Carolina
F-40
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
BALANCE SHEETS
December 31, 1998 and September 30, 1999
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) .................................... $ 2,408,605 $ 2,155,473
Accounts receivable (net of allowance of approximately $136,000 and
$81,000, respectively)............................................... 2,016,048 1,011,582
Inventories, net (Note 2) ............................................. 12,395,694 12,828,255
Other current assets .................................................. 402,123 469,205
----------- -----------
Total current assets ................................................ 17,222,470 16,464,515
PROPERTY AND EQUIPMENT, Net (Note 3) ................................... 8,075,243 8,214,373
RECEIVABLES FROM RELATED PARTIES (Note 5) .............................. 2,089,612 2,697,207
OTHER ASSETS ........................................................... 86,796 60,226
----------- -----------
TOTAL ASSETS ........................................................... $27,474,121 $27,436,321
=========== ===========
LIABILITIES AND NET EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 2) .................................. $13,453,935 $11,491,792
Notes payable -- related parties (Note 5) ............................. 378,333 378,333
Trade accounts payable ................................................ 1,278,206 1,683,023
Accrued payroll and bonuses (Note 5) .................................. 1,074,197 1,710,955
Liability for finance chargebacks ..................................... 460,000 460,000
Other accrued liabilities ............................................. 916,932 892,217
Current maturities -- long-term debt (Note 4) ......................... 361,592 341,095
Current maturities -- capital lease obligations (Note 4) .............. 128,492 130,000
----------- -----------
Total current liabilities ........................................... 18,051,687 17,087,415
----------- -----------
LONG-TERM DEBT (Note 4) ................................................ 6,865,789 6,615,068
----------- -----------
CAPITAL LEASE OBLIGATIONS (Note 4) ..................................... 223,023 212,779
----------- -----------
NOTES PAYABLE -- Stockholder (Note 5) .................................. 1,617,241 1,464,069
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)
NET EQUITY (Note 1) .................................................... 716,381 2,056,990
----------- -----------
TOTAL LIABILITIES AND NET EQUITY ....................................... $27,474,121 $27,436,321
=========== ===========
</TABLE>
See notes to financial statements.
F-41
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
STATEMENTS OF INCOME AND NET EQUITY
Year ended December 31, 1998 and nine months ended
September 30, 1998 and 1999
<TABLE>
<CAPTION>
September 30,
December 31, -----------------------------
1998 1998 1999
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUES (Note 1):
Vehicle sales ............................... $107,280,833 $79,092,477 $ 91,310,802
Parts and service ........................... 12,528,222 9,235,536 10,485,012
Finance and insurance ....................... 5,416,941 4,051,331 4,494,697
------------ ----------- ------------
Total revenues ............................. 125,225,996 92,379,344 106,290,511
COST OF SALES (Note 1) ....................... 108,740,505 79,851,509 92,160,535
------------ ----------- ------------
GROSS PROFIT ................................. 16,485,491 12,527,835 14,129,976
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . 13,952,790 10,565,230 11,118,273
DEPRECIATION AND AMORTIZATION ................ 330,151 225,248 265,808
------------ ----------- ------------
OPERATING INCOME ............................. 2,202,550 1,737,357 2,745,895
------------ ----------- ------------
OTHER (INCOME) EXPENSES:
Interest expense -- floor plan (Note 2) ..... 1,095,464 832,905 871,893
Interest expense, net (Note 5) .............. 820,339 635,701 591,943
Other expenses (income) ..................... 7,742 3,098 (58,550)
------------ ----------- ------------
Total other expense ........................ 1,923,545 1,471,704 1,405,286
------------ ----------- ------------
NET INCOME ................................... 279,005 265,653 1,340,609
NET EQUITY:
Beginning of period ......................... 437,376 437,376 716,381
------------ ----------- ------------
End of period ............................... $ 716,381 $ 703,029 $ 2,056,990
============ =========== ============
PRO FORMA PROVISION FOR INCOME TAXES
(Unaudited) (Note 1) ........................ $ 110,300 $ 105,000 $ 529,600
============ =========== ============
PRO FORMA NET INCOME
(Unaudited) (Note 1) ........................ $ 168,705 $ 160,653 $ 811,009
============ =========== ============
</TABLE>
See notes to financial statements.
F-42
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and nine months ended
September 30, 1998 and 1999
<TABLE>
<CAPTION>
September 30,
December 31, -------------------------------
1998 1998 1999
-------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 279,005 $ 265,653 $ 1,340,609
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization .............................................. 330,151 225,248 265,808
Loss on disposal of property and equipment ................................. 20,154 20,154 --
Changes in assets and liabilities that relate to operations:
Decrease in accounts receivable ........................................... 236,562 1,452,483 878,292
Increase in inventories ................................................... (452,796) (590,762) (432,561)
(Increase) decrease in other current assets ............................... 11,010 9,143 (67,082)
(Increase) decrease in other assets ....................................... 20,299 (13,559) 1,178
Increase (decrease) in trade accounts payable and accrued liabilities ..... (846,427) (353,969) 1,143,034
------------ ------------ ------------
Total adjustments ........................................................ (681,047) 748,738 1,788,669
------------ ------------ ------------
Net cash provided by (used in) operating activities ...................... (402,042) 1,014,391 3,129,278
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (526,171) (350,683) (379,546)
Receivables from related parties ............................................. (523,197) (1,394,235) (607,595)
------------ ------------ ------------
Net cash used in investing activities .................................... (1,049,368) (1,744,918) (987,141)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable -- floor plan ........................... 857,274 (765,472) (1,962,143)
Proceeds from long-term debt ................................................. 300,000 300,000 --
Payments on long-term debt ................................................... (307,718) (245,714) (271,218)
Payments on capital lease obligations ........................................ (36,015) -- (8,736)
Payments received from (advanced to) stockholder of
South Gate Motors, Inc. .................................................... 98,816 257,656 (153,172)
------------ ------------ ------------
Net cash provided by (used in) financing activities ...................... 912,357 (453,530) (2,395,269)
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (539,053) (1,184,057) (253,132)
CASH AND CASH EQUIVALENTS:
Beginning of period .......................................................... 2,947,658 2,947,658 2,408,605
------------ ------------ ------------
End of period ................................................................ $ 2,408,605 $ 1,763,601 $ 2,155,473
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for interest ..................................... $ 1,982,457 $ 1,479,382 $ 1,440,238
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
INFORMATION -- Assets acquired under capital lease obligations ............... $ 387,530 $ -- $ --
============ ============ ============
</TABLE>
See notes to financial statements.
F-43
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Freeland Automotive ("Freeland") is a business
unit of South Gate Motors, Inc. Freeland operates five automobile franchises in
the Fort Myers, Florida area. Freeland sells new and used cars and light trucks,
sells replacement parts, provides maintenance, warranty services, and arranges
related financing and insurance. Freeland's five dealership franchises sells new
vehicles manufactured by Mercedes, BMW, Honda, Volkswagen and Nissan. The
accompanying financial statements include the historical cost basis assets and
related operations of the business unit. Accordingly, the balance sheets
contained with the financial statements presents the net equity of the business
unit.
The accompanying financial statements have been prepared from the separate
records of Freeland Automotive, a business unit of South Gate Motors, Inc., and
may not necessarily be indicative of the conditions that would have existed or
the results of operations that would have occurred had Freeland Automotive been
operated as an unaffiliated company.
Revenue Recognition -- Freeland records revenue when vehicles are delivered
to customers, and when vehicle service work is performed. Finance and insurance
commission revenue is recognized principally at the time the contract is placed
with the financial institution.
Freeland arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. Freeland also receives commissions from
the sale of credit life, accident, health and disability insurance and extended
service contracts to customers. Freeland may be assessed a chargeback fee in the
event of early cancellation of a loan, insurance contract or service contract by
the customer. Finance and insurance commission revenue is recorded net of
estimated chargebacks at the time the related contract is placed with the
financial institution.
Commission expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $614,000 for the year ended December 31, 1998.
Dealer Agreements -- Freeland purchases substantially all of its new
vehicles from the manufacturers at the prevailing prices charged by each
manufacturer to their franchised dealers. Freeland's sales could be unfavorably
impacted by each manufacturers' unwillingness or inability to supply the
dealerships with an adequate supply of new vehicle inventory.
Freeland operates under dealer agreements with each manufacturer.
Freeland's dealer agreements give it the exclusive right to sell each
manufacturers' product within a given geographic area. Freeland could be
materially adversely affected if each manufacturer awards franchises to others
in the same market where Freeland is operating. A similar adverse effect could
occur if existing competing franchised dealers increase their market share in
Freeland's market.
Cash and Cash Equivalents -- Freeland considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
Freeland from finance companies related to vehicle purchases and was
approximately $2,401,000 at December 31, 1998.
Inventories -- Inventories of new and used vehicles, including
demonstrators, and parts and accessories are valued at the lower of specific
cost or market. Cost is determined using the last-in, first-out method ("LIFO")
for new and used vehicles, and the first-in, first-out method ("FIFO") for parts
and accessories.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization is computed principally using the straight-line
method over the estimated useful lives of the assets. The range of estimated
useful lives (in years) is as follows:
<TABLE>
<CAPTION>
Useful Lives
-------------
<S> <C>
Buildings and improvements ............. 5-40
Leasehold improvements ................. 5-40
Office equipment and fixtures .......... 5-7
Parts and service equipment ............ 5-7
Service units .......................... 5
</TABLE>
F-44
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
Income Taxes -- South Gate Motors, Inc. is organized as an S Corporation
for federal and state income tax purposes. As such, South Gate Motors, Inc.'s
taxable income is included in the stockholder's personal income tax return.
Accordingly, no provision for federal or state income taxes has been included
in Freeland's statement of income and net equity.
The unaudited pro forma provision for income taxes and the unaudited
proforma net income for the year ended December 31, 1998 reflect amounts that
would have been recorded had Freeland's income been taxed for federal and state
purposes as if it was a C Corporation.
Advertising Costs -- Freeland expenses advertising costs in the period
incurred. Advertising expenses for the year ended December 31, 1998 were
approximately $2,382,000.
Concentrations of Credit Risk -- Financial instruments which potentially
subject Freeland to concentrations of credit risk consist principally of cash on
deposit with financial institutions and accounts receivable. At times, amounts
invested with financial institutions may exceed FDIC insurance limits.
Concentrations of credit risk with respect to receivables are limited primarily
to automobile manufacturers and financial institutions. Credit risk arising from
trade receivables from commercial customers is mitigated by the large number of
customers comprising the trade receivables balances. Trade receivables are
concentrated in Freeland's market area of Fort Myers, Florida.
Fair Value of Financial Instruments -- As of December 31, 1998 the fair
values of Freeland's financial instruments, including accounts receivable,
receivables from related parties, trade accounts payable, notes payable -- floor
plan, notes payable -- related parties, long-term debt, and notes payable --
stockholder, approximate their carrying values due to either their short terms
to maturity or the existence of interest rates that approximate prevailing
market rates.
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 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Financial Information -- The accompanying unaudited financial
statements as of September 30, 1999 and for the nine months ended September 30,
1999 and 1998 have been prepared by Freeland pursuant to the rules of the
Securities and Exchange Commission ("SEC") and, in the opinion of Freeland,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the financial position of Freeland and the results of its
operations and its cash flows. Certain information and footnote disclosure
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules. Freeland believes that the disclosures made are adequate to keep the
information presented from being misleading. The results of operations for the
nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31 September 30,
1998 1999
--------------- --------------
(Unaudited)
<S> <C> <C>
New and demonstrator vehicles ......... $ 10,254,720 $ 9,846,899
Used vehicles ......................... 3,444,780 4,212,418
Parts and accessories ................. 679,299 752,043
------------ ------------
14,378,799 14,811,360
LIFO reserve .......................... (1,983,105) (1,983,105)
------------ ------------
Inventories, net ...................... $ 12,395,694 $ 12,828,255
============ ============
</TABLE>
F-45
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- (Continued)
Had Freeland used the first-in, first-out method of valuing new and used
vehicles, net income would have been approximately $424,000 during the year
ended December 31, 1998.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $13,453,935 at December
31, 1998. The floor plan notes bear interest, payable monthly on the outstanding
balances at the prime rate (7.75% at December 31, 1998) plus 1%. Total floor
plan interest expense was $1,095,464 in 1998. The notes payable are due when the
related vehicle is sold. As such, these floor plan notes payable are shown as a
current liability in the accompanying balance sheets.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Land ............................................. $ 4,159,309 $ 4,159,309
Buildings and improvements ....................... 3,401,919 3,970,589
Leasehold improvements ........................... 187,572 187,572
Office equipment and fixtures .................... 1,169,965 1,234,830
Parts and service equipment ...................... 338,897 460,067
Service units .................................... 6,790 6,790
Construction in progress ......................... 387,280 --
------------ ------------
9,651,732 10,019,157
Less accumulated depreciation and amortization ... (1,576,489) (1,804,784)
------------ ------------
Property and equipment, net ...................... $ 8,075,243 $ 8,214,373
============ ============
</TABLE>
4. FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Note payable to PRIMUS Automotive Financial Services, Inc., payable in monthly
installments of $46,363 including interest at the prime rate (7.75 at December 31,
1998) plus .75%; with remaining principal plus accrued interest due November
2001, collateralized by substantially all assets. ..................................... $4,176,087 $4,042,630
Note payable to PRIMUS Automotive Financial Services, Inc., payable in monthly
installments of $29,923 including interest at the prime rate plus .75%; with
remaining principal plus accrued interest due February 2002, collateralized by
substantially all assets. ............................................................. 2,726,036 2,642,630
Construction note payable to PRIMUS Automotive Financial Services, Inc., payable in
monthly installments of $5,000 plus interest at prime rate plus 1.5%, due June 2003,
collateralized by accounts receivable, inventories, and property and equipment of
Freeland and the assets of a related entity. .......................................... 275,000 230,000
Other long-term debt ................................................................... 50,258 40,903
---------- ----------
7,227,381 6,956,163
Less current maturities ................................................................ (361,592) (341,095)
---------- ----------
Long-term debt ......................................................................... $6,865,789 $6,615,068
========== ==========
</TABLE>
F-46
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. FINANCING ARRANGEMENTS -- (Continued)
Future maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999 ................... $ 361,592
2000 ................... 390,669
2001 ................... 4,011,626
2002 ................... 2,428,494
2003 ................... 35,000
----------
Total .................. $7,227,381
==========
</TABLE>
Freeland leases certain office equipment under agreements accounted for as
capital leases. Assets under capital leases amounted to approximately $388,000
with accumulated depreciation of approximately $39,000 at December 31, 1998.
The future minimum lease payments under such capital leases at December 31,
1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999 ....................................... $ 139,492
2000 ....................................... 152,298
2001 ....................................... 79,261
2002 ....................................... 6,710
2003 ....................................... 2,092
----------
Total minimum lease payments ............... 379,853
Less amount representing interest .. (28,338)
----------
Present value of minimum lease payments .... 351,515
Less current maturities ............ (128,492)
----------
Total .............................. $ 223,023
==========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Receivables from related parties includes various notes due from other
entities related by common ownership. The notes are classified as noncurrent
based on the expected repayment date. The majority of the receivables due from
related parties are unsecured and consist of the following:
<TABLE>
<CAPTION>
December 31,
1998
-------------
<S> <C>
Moss Marine (a business unit of South Gate Motors, Inc.) $ 733,206
Freeland and Moore, Inc. d/b/a Harbor Nissan ............ 212,719
Rodgers Cars, Inc. d/b/a Mazda of Ft. Myers ............. 627,611
Other ................................................... 109,788
----------
Total ................................................... $1,683,324
==========
</TABLE>
In addition, receivables from related parties includes a secured note
receivable due from Omni Imports of Southwest Florida, Ltd. totaling $406,288 at
December 31, 1998. Interest is accrued monthly at 8.5%. Interest income on this
note amounted to approximately $28,000 for the year ended December 31, 1998.
Notes payable to related parties consists primarily of unsecured demand
notes payable to Trinity Insurance Company, Ltd. totaling $335,313 at December
31, 1998. Interest is accrued monthly at rates ranging from 6% - 7%. Interest
expense on this note amounted to approximately $25,000 for the year ended
December 31, 1998. In addition, notes payable to related parties includes a
demand note payable of $43,020. Interest is accrued monthly at the prime rate.
F-47
<PAGE>
FREELAND AUTOMOTIVE
(A BUSINESS UNIT OF SOUTH GATE MOTORS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. RELATED PARTY TRANSACTIONS -- (Continued)
Notes payable to the stockholder of $1,617,241 at December 31, 1998
represents secured loans payable with interest accrued at the prime rate. The
notes are due on demand, however, the notes are subordinate to the PRIMUS
Automotive Financial Services, Inc. ("PRIMUS") long-term debt (see Note 4) and
cannot be repaid while the debt to PRIMUS is outstanding. Interest expense
amounted to approximately $174,000 for the year ended December 31, 1998.
Included in accrued payroll and bonuses on the accompanying balance sheets
is an accrued bonus to the stockholder of $853,363 at December 31, 1998. The
bonus is subordinate to the PRIMUS debt and approval must be obtained prior to
payment. The bonus is classified as a current liability based on the expected
repayment date.
Freeland leases certain operating facilities directly from its stockholder
under an agreement accounted for as an operating lease. The lease expires in
October 2005. In addition, Freeland leases certain operating facilities on a
month-to-month basis from an entity related via common ownership.
Future minimum rental payments required under noncancelable operating
leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999 ................... $ 95,400
2000 ................... 95,400
2001 ................... 95,400
2002 ................... 95,400
2003 ................... 95,400
Thereafter ............. 174,900
--------
Total .................. $651,900
========
</TABLE>
Rent expense under the above operating leases was approximately $151,000
during the year ended December 31, 1998. In addition, Freeland paid real estate
taxes of approximately $104,000 on the above leases during the year ended
December 31, 1998.
6. EMPLOYEE BENEFIT PLAN
Freeland has a qualified 401(k) Profit Sharing Plan (the "Plan"), whereby
substantially all of the employees of Freeland meeting certain service
requirements are eligible to participate. Freeland's contributions to the Plan
were approximately $27,000 during the year ended December 31, 1998.
7. CONTINGENCIES
Freeland is exposed to unasserted claims encountered in the normal course
of business. In the opinion of management, on the advice of legal counsel, the
resolution of these matters will not have a materially adverse effect on
Freeland's financial position or future results of operations and cash flows.
8. SUBSEQUENT EVENT (UNAUDITED)
Effective November 4, 1999, South Gate Motors, Inc. sold substantially all
of the operating assets of Freeland to Sonic Automotive, Inc. for a total
purchase price of approximately $25 million, paid in cash, plus the assumption
of certain liabilities. No effects of the asset sale are reflected in the
accompanying financial statements.
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying combined balance sheet of Manhattan
Automotive Group (the "Company"), which is under common ownership and
management, as of December 31, 1998, and the related combined statements of
income, equity, and of cash flows for the year then ended. These financial
statements are the responsibility of the Company's 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, such financial statements present fairly, in all material
respects, the combined financial position of the Company as of December 31,
1998, and the combined results of its operations and its combined cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
August 13, 1999
Charlotte, North Carolina
F-49
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
COMBINED BALANCE SHEETS
December 31, 1998 and June 30, 1999
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ................ $ 7,987,140 $ 6,590,534
Accounts receivable ............................... 3,139,088 3,444,428
Inventories, net (Note 2) ......................... 11,454,990 11,886,336
Other current assets .............................. 552,101 58,687
----------- -----------
Total current assets ............................ 23,133,319 21,979,985
PROPERTY AND EQUIPMENT, Net (Note 3) ............... 661,792 657,197
NOTES RECEIVABLE FROM AFFILIATES (Note 5) .......... 2,131,204 2,131,011
OTHER ASSETS (Note 7) .............................. 880,765 890,765
----------- -----------
TOTAL ASSETS ....................................... $26,807,080 $25,658,958
=========== ===========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 2) .............. $ 8,923,882 $ 7,642,106
Notes payable to related parties (Note 5) ......... 378,975 28,090
Trade accounts payable ............................ 1,531,810 739,481
Accrued payroll and bonuses ....................... 1,207,205 167,299
Dividends payable ................................. -- 3,400,000
Liability for finance chargebacks ................. 203,400 203,400
Other accrued liabilities ......................... 373,577 935,084
----------- -----------
Total current liabilities ....................... 12,618,849 13,115,460
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
EQUITY (Note 4):
Net assets of business unit ....................... 566,847 872,254
Common stock of combined companies ................ 33,560 33,560
Paid-in capital ................................... 1,720,264 1,720,264
Retained earnings ................................. 11,867,560 9,917,421
----------- -----------
Total equity .................................... 14,188,231 12,543,498
----------- -----------
TOTAL LIABILITIES AND EQUITY ....................... $26,807,080 $25,658,958
=========== ===========
</TABLE>
See notes to combined financial statements.
F-50
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
COMBINED STATEMENTS OF INCOME
Year ended December 31, 1998 and six months ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
June 30,
December 31, -----------------------------
1998 1998 1999
--------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUES (Note 1):
Vehicle sales .................................... $135,037,497 $62,107,706 $74,334,313
Parts, service and collision repair .............. 18,793,794 9,193,264 9,575,791
Finance and insurance ............................ 989,792 600,323 635,992
------------ ----------- -----------
Total revenues ................................. 154,821,083 71,901,293 84,546,096
COST OF SALES (Note 1) ............................ 133,975,188 62,050,946 73,948,994
------------ ----------- -----------
GROSS PROFIT ...................................... 20,845,895 9,850,347 10,597,102
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...... 14,530,114 7,354,280 6,402,117
DEPRECIATION AND AMORTIZATION ..................... 174,835 79,448 78,006
------------ ----------- -----------
OPERATING INCOME .................................. 6,140,946 2,416,619 4,116,979
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense -- floor plan (Note 2) .......... (513,786) (247,968) (315,593)
Interest income, net (Note 5) .................... 236,820 104,981 67,367
Other income, net ................................ 119,301 26,175 67,814
------------ ----------- -----------
Total other expense ............................ (157,665) (116,812) (180,412)
------------ ----------- -----------
INCOME BEFORE INCOME TAXES ........................ 5,983,281 2,299,807 3,936,567
PROVISION FOR INCOME TAXES (Notes 1 and 7) ........ 527,000 53,800 604,300
------------ ----------- -----------
NET INCOME ........................................ $ 5,456,281 $ 2,246,007 $ 3,332,267
============ =========== ===========
PRO FORMA PROVISION FOR ADDITIONAL INCOME TAXES
(Unaudited) (Note 1) ............................. $ 1,819,000 $ 848,000 $ 939,300
============ =========== ===========
PRO FORMA NET INCOME (Unaudited) (Note 1) ......... $ 3,637,281 $ 1,398,007 $ 2,392,967
============ =========== ===========
</TABLE>
See notes to combined financial statements.
F-51
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
COMBINED STATEMENTS OF EQUITY (NOTE 4)
Year ended December 31, 1998 and six months ended June 30, 1999
<TABLE>
<CAPTION>
Common
Net Assets Stock of Additional
of Business Combined Paid-in Retained Total
Unit Companies Capital Earnings Equity
------------- ----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 ............... $117,981 $33,560 $1,720,264 $ 7,649,145 $ 9,520,950
Dividends declared ...................... -- -- -- (789,000) (789,000)
Net income .............................. 448,866 -- -- 5,007,415 5,456,281
-------- ------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1998 ............. 566,847 33,560 1,720,264 11,867,560 14,188,231
Dividends declared (unaudited) .......... -- -- -- (4,977,000) (4,977,000)
Net income (unaudited) .................. 305,407 -- -- 3,026,860 3,332,267
-------- ------- ---------- ------------ ------------
BALANCE AT JUNE 30, 1999 (unaudited) ..... $872,254 $33,560 $1,720,264 $ 9,917,421 $ 12,543,498
======== ======= ========== ============ ============
</TABLE>
See notes to combined financial statements.
F-52
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
COMBINED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and six months ended June 30, 1998 and 1999
<TABLE>
<CAPTION>
June 30,
December 31, -------------------------------
1998 1998 1999
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 5,456,281 $ 2,246,007 $ 3,332,267
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .............................................. 174,835 79,448 78,006
Deferred income taxes ...................................................... (10,000) (10,000) (10,000)
Changes in assets and liabilities that relate to operations:
Increase in accounts receivable ........................................... (1,018,388) (770,788) (305,340)
Increase (decrease) in inventories ........................................ (640,714) 977,490 (431,346)
Increase (decrease) in other current assets ............................... (351,447) (196,173) 493,414
Increase (decrease) in trade accounts payable and accrued liabilities ..... 922,866 850,559 (1,270,728)
------------ ------------ ------------
Total adjustments ........................................................ (922,848) 930,536 (1,445,994)
------------ ------------ ------------
Net cash provided by operating activities ................................ 4,533,433 3,176,543 1,886,273
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (196,663) (76,470) (73,411)
Notes receivable from affiliates, net ........................................ (1,704,695) (982,796) 193
------------ ------------ ------------
Net cash used in investing activities .................................... (1,901,358) (1,059,266) (73,218)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable -- floor plan ........................... 2,507,260 (809,129) (1,281,776)
Payments on notes payable to related parties ................................. (215,231) (18,486) (350,885)
Dividends to stockholders .................................................... (789,000) (456,000) (1,577,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities ...................... 1,503,029 (1,283,615) (3,209,661)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................................... 4,135,104 833,662 (1,396,606)
CASH AND CASH EQUIVALENTS:
Beginning of period .......................................................... 3,852,036 3,852,036 7,987,140
------------ ------------ ------------
End of period ................................................................ $ 7,987,140 $ 4,685,698 $ 6,590,534
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................................... $ 533,860 $ 260,474 $ 317,659
============ ============ ============
Income taxes ............................................................... $ 886,000 $ 258,000 $ 515,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
INFORMATION:
Dividends declared ........................................................... $ -- $ -- $ 3,400,000
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-53
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Manhattan Automotive Group (the "Company")
operates four automobile dealerships in the Washington, D.C. area. The Company
sells new and used cars and light trucks, sells replacement parts, provides
maintenance, warranty services, paint and repair services and arranges related
financing and insurance. The Company's four vehicle dealership locations sell
new vehicles manufactured by Lexus, BMW, Porche, Audi, Nissan and Jeep. The
accompanying combined financial statements include the accounts of the following
businesses:
<TABLE>
<CAPTION>
Name Location Structure Year End
- ------------------------------------------------------------ --------------- --------------- ------------
<S> <C> <C> <C>
L.O.R., Inc (DBA: Lexus of Rockville) ...................... Rockville, MD S Corporation December 31
Rockville Porsche/Audi (A business unit of
Manhattan Imported Cars, Inc.) ............................ Rockville, MD N/A December 31
Manhattan Auto, Inc. (DBA: BMW of Fairfax) ................. Fairfax, VA C Corporation November 30
Waldorf Automotive, Inc. (DBA: Nissan-Jeep of Waldorf) ..... Waldorf, MD S Corporation December 31
</TABLE>
The combined financial statements have been prepared in connection with the
acquisition of the above businesses by Sonic Automotive, Inc. (see Note 9). The
accompanying combined financial statements reflect the financial position,
results of operations, and cash flows of each of the above listed businesses.
The combination of these businesses has been accounted for at historical cost in
a manner similar to a pooling-of-interests because the businesses are under
common management and control. Rockville Porsche/Audi is not organized as a
separate legal entity. Accordingly, the accompanying combined balance sheet
present only the net equity of the business unit. All material intercompany
transactions have been eliminated.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance contract
or service contract by the customer. Finance and insurance commission revenue is
recorded net of estimated chargebacks at the time the related contract is placed
with the financial institution.
Commission expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $477,000 for the year ended December 31, 1998.
Dealer Agreements -- The Company purchases substantially all of its new
vehicles from the manufacturers at the prevailing prices charged by each
manufacturer to their franchised dealers. The Company's sales could be
unfavorably impacted by each manufacturers' unwillingness or inability to supply
the dealerships with an adequate supply of new vehicle inventory.
The Company operates under dealer agreements with each manufacturer. The
Company's dealer agreements give it the exclusive right to sell each
manufacturers' product within a given geographic area. The Company could be
materially adversely affected if other manufacturers award franchises to dealers
in the same market where the Company is operating. A similar adverse effect
could occur if existing competing franchised dealers increase their market share
in the Company's market.
Cash and Cash Equivalents -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases and was
approximately $1,150,000 at December 31, 1998.
Inventories -- Inventories of new and used vehicles, including
demonstrators, and parts and accessories are valued at the lower of cost or
market. Cost is determined using the last-in, first-out method ("LIFO") for new
vehicles, the specific identification method for used vehicles, and the
first-in, first-out method ("FIFO") for all other inventories.
F-54
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization is computed principally using the straight-line
method over the estimated useful lives of the assets. The range of estimated
useful lives (in years) is as follows:
<TABLE>
<CAPTION>
Useful Lives
-------------
<S> <C>
Buildings and improvements ............. 20-40
Office equipment and fixtures .......... 7-10
Parts and service equipment ............ 7-15
Company vehicles ....................... 3-5
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
Income Taxes -- Manhattan Auto, Inc. is organized as a C Corporation
subject to both federal and state income taxes. Rockville Porsche/Audi is
included in the federal and state income tax returns of Manhattan Imported Cars,
Inc. Current income taxes are allocated to Rockville Porshe/Audi based on the
business unit's taxable income to the total taxable income of Manhattan Imported
Cars, Inc. L.O.R., Inc. and Waldorf Automotive, Inc. are organized as S
Corporations for federal and state income tax purposes. As such, the provision
for income taxes in the accompanying combined financial statements only includes
federal and state income taxes for Manhattan Auto, Inc. and Rockville
Porsche/Audi.
Deferred taxes are determined using an asset and liability approach. This
method gives consideration to the future tax consequences associated with
differences between financial accounting and tax basis of assets and
liabilities. This method gives immediate effect to changes in income tax laws
upon enactment. A valuation allowance is established when necessary to reduce
deferred tax assets to amounts that are expected to be realized.
The unaudited pro forma provision for additional income taxes and the
unaudited pro forma net income for the year ended December 31, 1998 reflect
estimated amounts that would have been recorded had L.O.R., Inc. and Waldorf
Automotive, Inc.'s income been taxed for federal and state purposes as if they
were C Corporations.
Advertising Costs -- The Company expenses advertising costs in the period
incurred. Advertising expenses for the year ended December 31, 1998 were
approximately $573,000.
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
on deposit with financial institutions and accounts receivable. At times,
amounts invested with financial institutions may exceed FDIC insurance limits.
Concentrations of credit risk with respect to receivables are limited primarily
to automobile manufacturers and financial institutions. Credit risk arising from
trade receivables from commercial customers is mitigated by the large number of
customers comprising the trade receivables balances. Trade receivables are
concentrated in the Company's market areas in Northern Virginia and Maryland.
Fair Value of Financial Instruments -- As of December 31, 1998 the fair
values of the Company's financial instruments including accounts receivable,
notes receivable from affiliates, notes payable -- floor plan, trade accounts
payable and notes payable to related parties, approximate their carrying values
due to either their short-term maturity or the existence of interest rates that
approximate prevailing market rates.
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 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Financial Information -- The accompanying unaudited combined
financial statements as of June 30, 1999 and for the six months ended June 30,
1999 and 1998 have been prepared by the Company pursuant to the rules of the
Securities and Exchange Commission ("SEC") and, in the opinion of the Company,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the financial position of the Company and the results of
its operations and its cash flows. Certain information and footnote disclosure
normally included in combined financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such SEC rules.
F-55
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
The Company believes that the disclosures made are adequate to keep the
information presented from being misleading. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the results to
be expected for the full year.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
-------------- ---------------
(Unaudited)
<S> <C> <C>
New and demonstrator vehicles ......... $ 8,774,340 $ 9,120,343
Used vehicles ......................... 3,026,537 3,360,588
Parts and accessories ................. 1,778,300 1,529,592
------------ ------------
13,579,177 14,010,523
LIFO reserve .......................... (2,124,187) (2,124,187)
------------ ------------
Inventories, net ...................... $ 11,454,990 $ 11,886,336
============ ============
</TABLE>
During the year ended December 31, 1998, new vehicle inventory quantities
were reduced, resulting in a liquidation of LIFO inventory values. The
liquidation increased pre-tax income by approximately $239,000. Had the Company
used the first-in, first-out method of valuing new vehicles and certain parts
and accessories, pretax income would have been approximately $5,744,000 in 1998.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions totaling $8,923,882 at December 31,
1998. The floor plan notes bear interest, payable monthly on the outstanding
balances at rates ranging from prime minus .25% to LIBOR plus 2% (prime rate was
7.75% at December 31, 1998 and LIBOR was 5.62% at December 31, 1998). Total
floor plan interest expense was $513,786 in 1998. The notes payable are due when
the related vehicle is sold. As such, these floor plan notes payable are shown
as a current liability in the accompanying combined balance sheets.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
-------------- ---------------
(Unaudited)
<S> <C> <C>
Buildings and improvements ....................... $ 630,209 $ 669,327
Office equipment and fixtures .................... 340,607 346,253
Parts and service equipment ...................... 660,322 664,267
Company vehicles ................................. 386,108 414,108
Construction in process .......................... 13,647 13,647
------------ ------------
2,030,893 2,107,602
Less accumulated depreciation and amortization ... (1,369,101) (1,450,405)
------------ ------------
Property and equipment, net ...................... $ 661,792 $ 657,197
============ ============
</TABLE>
F-56
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
4. COMBINED EQUITY
The capital structure of the businesses included in the combined financial
statements of the Company at December 31, 1998 and June 30 1999 is as follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------
Common Stock
---------------------------------------------
Shares Additional
Par Shares Issued and Paid-in Retained
Value Authorized Outstanding Amount Capital Earnings
------- ------------ ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
L.O.R., Inc. ........................ $ 1 1,000 1,000 $ 1,000 $ 599,000 $ 4,997,310
Manhattan Auto, Inc. ................ 100 500 316 31,560 122,264 5,423,892
Waldorf Automotive, Inc. ............ 1 1,000 1,000 1,000 999,000 1,446,358
Rockville Porsche/Audi (Note 1) ..... -- -- -- -- -- --
------- ---------- -----------
Total ............................... $33,560 $1,720,264 $11,867,560
======= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 (Unaudited)
------------------------------------------------------------------------
Common Stock
---------------------------------------------
Shares Additional Retained
Par Shares Issued and Paid-in Earnings
Value Authorized Outstanding Amount Capital (Deficit)
------- ------------ ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
L.O.R., Inc. ........................ $ 1 1,000 1,000 $ 1,000 $ 599,000 $3,669,066
Manhattan Auto, Inc. ................ 100 500 316 31,560 122,264 6,360,681
Waldorf Automotive, Inc. ............ 1 1,000 1,000 1,000 999,000 (112,326)
Rockville Porsche/Audi (Note 1) ..... -- -- -- -- -- --
------- ---------- ----------
Total ............................... $33,560 $1,720,264 $9,917,421
======= ========== ==========
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company has notes receivable from various affiliated entities amounting
to $2,131,204 at December 31, 1998. The notes bear interest at rates ranging
from 6%-7%. The notes are uncollateralized and are classified as noncurrent
based on the expected repayment date. Interest income from these notes was
approximately $125,000 for the year ended December 31, 1998.
In addition, the Company has notes payable to related parties of $378,975
at December 31, 1998. The notes bear interest at 7%. The notes are unsecured and
are classified as noncurrent based on the expected repayment date. Interest
expense on these notes was approximately $25,000 for the year ended December 31,
1998.
The Company leases certain operating facilities directly from stockholders
of the combining companies or from entities which are owned by those
stockholders. The leases expire at various dates through August 2002. Rent
expense under these related party leases was approximately $575,000 during the
year ended December 31, 1998.
F-57
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
5. RELATED PARTY TRANSACTIONS -- (Continued)
In addition, the Company has other facilities and equipment with leases
expiring at various dates through September 2003. Future minimum rental payments
required under noncancelable operating leases at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Related
Party Other Total
------------- ------------- -------------
<S> <C> <C> <C>
Year ending December 31:
1999 ....................... $ 758,988 $ 590,466 $1,349,454
2000 ....................... 758,998 620,466 1,379,464
2001 ....................... 661,992 429,359 1,091,351
2002 ....................... 252,000 7,022 259,022
2003 ....................... -- 5,266 5,266
---------- ---------- ----------
Total .................. $2,431,978 $1,652,579 $4,084,557
========== ========== ==========
</TABLE>
Rent expense under all operating leases was approximately $1,300,000 during
the year ended December 31, 1998.
6. EMPLOYEE BENEFIT PLAN
The combining companies each have a qualified 401(k) Profit Sharing Plan
(the "Plan"), whereby substantially all of the employees meeting certain service
requirements are eligible to participate. The combined contributions to the
plans were approximately $148,000 during the year ended December 31, 1998.
7. INCOME TAXES
The provision for income taxes consists of the following components for the
year ended December 31, 1998:
<TABLE>
<S> <C>
Current:
Federal .............. $ 451,000
State ................ 86,000
---------
537,000
Deferred:
Federal .............. (8,800)
State ................ (1,200)
---------
(10,000)
---------
Total ................ $ 527,000
=========
</TABLE>
The reconciliation of the statutory federal income tax rate with the
Company's federal and state overall effective income tax rate is as follows for
the year ending December 31, 1998:
<TABLE>
<S> <C>
Statutory federal rate ............ 34.00%
State income taxes ................ 3.41
Miscellaneous ..................... 1.77
-----
Effective income tax rate ......... 39.18%
=====
</TABLE>
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.
A net deferred income tax asset totaling $70,000, included in "other
assets" on the accompanying balance sheet at December 31, 1998, relates
primarily to depreciation and deferred extended warranty costs.
F-58
<PAGE>
MANHATTAN AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
8. CONTINGENCIES
The Company is involved in various legal proceedings incurred in the normal
course of business. Management, on the advice of legal counsel, believes that
the outcome of such proceedings will not have a materially adverse effect on the
Company's financial position or future results of operations and cash flows.
9. SALE AGREEMENTS (UNAUDITED)
Effective August 3, 1999, Sonic Automotive, Inc. ("Sonic") purchased
substantially all of the operating assets of L.O.R., Inc., Rockville
Porsche/Audi (a business unit of Manhattan Imported Cars, Inc.), and Waldorf
Automotive, Inc. for a total combined purchase price of $23.7 million, payable
in cash and common stock, plus the assumption of certain liabilities.
In addition, Sonic purchased the outstanding common stock of Manhattan
Auto, Inc. for $10.5 million plus the net book value of the purchased assets and
assumed liabilities. The total purchase price is payable in common stock with an
aggregate market price of $18 million at the date of closing.
F-59
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statements of income for the
year ended December 31, 1998 and the nine months ended September 30, 1999
reflect the historical accounts of Sonic and FirstAmerica Automotive, Inc. for
those periods, adjusted giving effect to the following events as if those events
had occurred on January 1, 1998:
o the following acquisitions completed by Sonic:
<TABLE>
<CAPTION>
Acquisition Date
- -------------------------------------- --------------
<S> <C>
Casa Ford of Houston, Inc. ......... May 1998
Hatfield Automotive Group .......... July 1998
Higginbotham Automotive Group ...... August 1998
Williams Automotive Group .......... January 1999
Global Imports ..................... February 1999
Economy Honda Cars ................. February 1999
Lloyd Automotive Group ............. May 1999
Newsome Automotive Group ........... May 1999
Lute Riley Motors, Inc. ............ July 1999
Manhattan Automotive Group ......... August 1999
Freeland Automotive ................ November 1999
</TABLE>
o Sonic's sale of its senior subordinated notes in July 1998 and the
application of the net sale proceeds;
o Sonic's offering of Class A common stock in May 1999 and the application
of the net offering proceeds;
o the acquisition of FirstAmerica via merger with a subsidiary of Sonic in
December 1999, including the following acquisitions completed by
FirstAmerica as if those acquisitions had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Acquisition Date
- ---------------------------------------- ---------------
<S> <C>
Beverly Hills BMW .................... April 1998
Honda of Serramonte .................. June 1998
Concord Toyota ....................... October 1998
Poway Chevrolet ...................... March 1999
First Dodge-Marin .................... April 1999
South Bay Chrysler Plymouth Jeep ..... August 1999
Falconi's Tropicana Honda ............ September 1999
Kramer Honda-Volvo ................... September 1999
Lucas Dealership Group ............... September 1999
</TABLE>
The results of Ford of San Rafael have not been included as such results
are not material.
The following unaudited pro forma consolidated balance sheet as of
September 30, 1999 reflects the historical accounts of Sonic as of that date as
adjusted to give pro forma effect to the following events, as if those events
had occurred on September 30, 1999:
o the acquisition of Freeland Automotive in November 1999;
o the acquisition of FirstAmerica via merger with a subsidiary of Sonic in
December 1999.
P-1
<PAGE>
The unaudited pro forma consolidated financial data and accompanying notes
should be read in conjunction with the consolidated financial statements of the
Manhattan Automotive Group, Freeland Automotive, FirstAmerica and the Lucas
Dealership Group, Inc., which are included in this filing, as well as the
consolidated financial statements of Sonic, Casa Ford of Houston, Inc., Hatfield
Automotive Group, Higginbotham Automotive Group, Williams Automotive Group,
Economy Honda Cars, Inc., Global Imports, Inc., Newsome Automotive Group, Lloyd
Automotive Group, Lute Riley Motors, Inc., all of which have been included in
previous filings by Sonic. The unaudited pro forma consolidated financial data
and accompanying notes do not give effect to the sale of Cleveland Village
Honda, nor the following completed acquisitions, or the financing of those
acquisitions, because these transactions are not required to be presented in
accordance with Securities and Exchange Commission rules:
<TABLE>
<CAPTION>
Acquisition Date
- ----------------------------------------------- --------------
<S> <C>
Century BMW ................................. April 1998
Heritage Lincoln-Mercury .................... April 1998
Capitol Chevrolet and Imports, Inc. ......... April 1998
Ron Craft Chevrolet-Cadillac-Oldsmobile ..... November 1998
Ron Craft Chrysler Plymouth Jeep ............ November 1998
Tampa Volvo ................................. December 1998
Infiniti of Charlotte ....................... January 1999
Rally Mitsubishi ............................ February 1999
Bondesen Chevrolet Oldsmobile Cadillac ...... April 1999
Sam White Motor City ........................ April 1999
Fitzgerald Chevrolet ........................ May 1999
Superior Oldsmobile-Cadillac-GMC ............ June 1999
Classic Dodge ............................... July 1999
Southlake Volvo ............................. July 1999
Ben Reading Buick ........................... August 1999
Charleston Lincoln-Mercury .................. August 1999
Shottenkirk Honda ........................... August 1999
Altman Dodge ................................ October 1999
Joe Camp Ford ............................... October 1999
Integrity Dodge ............................. October 1999
Village Volvo ............................... November 1999
</TABLE>
Sonic believes that the assumptions used in the following statements
provide a reasonable basis on which to present the unaudited pro forma financial
data. The unaudited pro forma consolidated financial data are provided for
informational purposes only and should not be construed to be indicative of
Sonic's financial condition, results of operations or covenant compliance had
the transactions and events described above been consummated on the dates
assumed, and are not intended to project Sonic's financial condition on any
future date or its results of operation for any future period.
P-2
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Manhattan
Sonic Sonic Automotive Freeland
Historical (a) Acquisitions (b) Group Automotive
---------------- ------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales ................................. $ 1,407,030 $792,024 $135,037 $106,629
Parts, service, and collision repair .......... 162,660 119,369 18,794 12,270
Finance and insurance ......................... 34,011 19,399 990 5,402
----------- -------- -------- --------
Total Revenues ............................... 1,603,701 930,792 154,821 124,301
Cost of sales .................................. 1,396,259 810,481 133,975 107,991
----------- -------- -------- --------
Gross profit ................................... 207,442 120,311 20,846 16,310
Selling, general & administrative expenses ..... 150,130 91,819 14,530 13,760
Management bonus ............................... -- 3,181 -- --
Depreciation and amortization .................. 4,607 3,579 175 297
----------- -------- -------- --------
Operating income ............................... 52,705 21,732 6,141 2,253
Interest expense, floorplan .................... 14,096 5,927 514 1,073
Interest expense, other ........................ 9,395 797 (237) 820
Other income ................................... 426 602 119 6
----------- -------- -------- --------
Income before income taxes ..................... 29,640 15,610 5,983 366
Provision for income taxes ..................... 11,083 1,508 527 --
----------- -------- -------- --------
Net income ..................................... $ 18,557 $ 14,102 $ 5,456 $ 366
=========== ======== ======== ========
Basic net income per share ..................... $ 0.81
===========
Weighted average common shares
outstanding -- basic (s) ...................... 22,852
===========
Diluted net income per share ................... $ 0.74
===========
Weighted average common shares
outstanding -- diluted (s)(t) ................. 24,970
===========
<CAPTION>
Pro Forma
Adjustments for
Sonic's Pro Forma
Acquisitions and Adjustments for
FirstAmerica the Notes the FirstAmerica Combined
Pro Forma (c) Offering Acquisition Pro Forma
--------------- ------------------ ------------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales ................................. $1,188,934 $ -- $ -- $ 3,629,654
Parts, service, and collision repair .......... 188,410 -- -- 501,503
Finance and insurance ......................... 36,018 (240)(e) -- 95,604
24 (f)
---------- ---------- ---------- -----------
Total Revenues ............................... 1,413,362 (216) -- 4,226,761
Cost of sales .................................. 1,192,786 (382)(g) 5,638 (q) 3,646,748
---------- ---------- ----------- -----------
Gross profit ................................... 220,576 166 (5,638) 580,013
Selling, general & administrative expenses ..... 174,664 (82)(e) (5,638)(q) 433,750
(8,923)(h) (1,410)(h)
4,900 (i)
Management bonus ............................... -- (3,181)(h) -- --
Depreciation and amortization .................. 6,223 (1,173)(i) (3,016)(j) 20,153
(139)(j) 4,249 (k)
5,351 (k)
---------- ---------- ---------- ----------
Operating income ............................... 39,689 3,413 177 126,110
Interest expense, floorplan .................... 9,036 (994)(l) (448)(l) 29,204
Interest expense, other ........................ 16,969 (981)(i) (2,191)(n) 37,491
(967)(m)
13,886 (n)
Other income ................................... 215 -- -- 1,368
---------- ---------- ----------- -----------
Income before income taxes ..................... 13,899 (7,531) 2,816 60,783
Provision for income taxes ..................... 6,659 (3,072)(o) 1,889 (o) 24,893
6,299 (p)
---------- ---------- ----------- -----------
Net income ..................................... $ 7,240 $ (10,758) $ 927 $ 35,890
========== ========== =========== ===========
Basic net income per share ..................... $ 0.97
===========
Weighted average common shares
outstanding -- basic (s) ...................... 37,095
===========
Diluted net income per share ................... $ 0.82
===========
Weighted average common shares
outstanding -- diluted (s)(t) ................. 43,668
===========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Income)
P-3
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Manhattan
Sonic Sonic Automotive Freeland
Historical (a) Acquisitions (b) Group Automotive
---------------- ------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales ................................. $ 1,904,602 $152,670 $ 90,121 $ 91,311
Parts, service, and collision repair .......... 230,249 28,333 11,532 10,485
Finance and insurance ......................... 52,095 5,691 748 4,495
----------- -------- -------- --------
Total Revenues ............................... 2,186,946 186,694 102,401 106,291
Cost of sales .................................. 1,897,956 161,370 89,664 92,161
----------- -------- -------- --------
Gross profit ................................... 288,990 25,324 12,737 14,130
Selling, general & administrative expenses ..... 207,293 18,052 13,079 11,118
Depreciation and amortization .................. 7,143 803 92 266
----------- -------- -------- --------
Operating income (loss) ........................ 74,554 6,469 (434) 2,746
Interest expense, floorplan .................... 15,118 828 349 872
Interest expense, other ........................ 12,177 229 (147) 592
Written off IPO costs ..........................
Other income ................................... 362 2,838 71 59
----------- -------- -------- --------
Income (loss) before income taxes .............. 47,621 8,250 (565) 1,341
Provision for income taxes ..................... 18,250 1,111 (1,091) --
----------- -------- -------- --------
Net income ..................................... $ 29,371 $ 7,139 $ 526 $ 1,341
=========== ======== ======== ========
Basic net income per share ..................... $ 0.98
===========
Weighted average common shares
outstanding -- basic (s) ...................... 29,948
===========
Diluted net income per share ................... $ 0.88
===========
Weighted average common shares
outstanding -- diluted (s)(t) ................. 33,489
===========
<CAPTION>
Pro Forma
Pro Forma Adjustments
Adjustments for the
FirstAmerica for Sonic's FirstAmerica Combined
Pro Forma (c) Acquisitions Acquisition Pro Forma
----------------- ----------------- ---------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales ................................. $1,023,482 $ -- $ -- $ 3,262,186
Parts, service, and collision repair .......... 147,914 -- -- 428,513
Finance and insurance ......................... 31,881 (291)(e) -- 94,619
---------- ---------- ---------- -----------
Total Revenues ............................... 1,203,277 (291) -- 3,785,318
Cost of sales .................................. 1,015,450 -- 5,277 (q) 3,261,878
---------- ---------- ---------- -----------
Gross profit ................................... 187,827 (291) (5,277) 523,440
Selling, general & administrative expenses ..... 148,315 (142)(e) (5,277)(q) 380,752
(8,529)(h) (2,156)(h)
1,960 (i) (2,961)(r)
Depreciation and amortization .................. 5,707 (297)(i) (2,453)(j) 15,901
3,187 (k)
1,937 (k) (484)(r)
---------- ---------- ---------- -----------
Operating income (loss) ........................ 33,805 4,780 4,867 126,787
Interest expense, floorplan .................... 6,995 (417)(l) (366)(l) 23,379
Interest expense, other ........................ 11,752 (546)(i) (2,008)(n) 25,001
(292)(m)
3,244 (n)
Written off IPO costs .......................... 2,564 (d) -- 2,564
Other income ................................... 1,780 (d) (2,658)(h) (412)(r) 2,040
---------- ---------- ---------- -----------
Income (loss) before income taxes .............. 14,274 133 6,829 77,883
Provision for income taxes ..................... 6,623 43 (o) 3,251 (o) 31,570
3,383 (p)
---------- ---------- ---------- -----------
Net income ..................................... $ 7,651 $ (3,293) $ 3,578 $ 46,313
========== ========== ========== ===========
Basic net income per share ..................... $ 1.16
===========
Weighted average common shares
outstanding -- basic (s) ...................... 39,823
===========
Diluted net income per share ................... $ 1.03
===========
Weighted average common shares
outstanding -- diluted (s)(t) ................. 44,848
===========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Income)
P-4
<PAGE>
(a) The historical consolidated statement of income data for Sonic for the year
ended December 31, 1998 includes the results of operations of the following
dealerships and dealership groups acquired during the year ended December
31, 1998 from their respective dates of acquisition:
<TABLE>
<CAPTION>
Acquisition Date
- ----------------------------------------------- -----------------
<S> <C>
Casa Ford of Houston, Inc. .................. May 1, 1998
Capitol Chevrolet and Imports, Inc. ......... April 1, 1998
Century BMW ................................. April 1, 1998
Heritage Lincoln-Mercury .................... April 1, 1998
Hatfield Automotive Group ................... July 1, 1998
Higginbotham Automotive Group ............... August 1, 1998
Ron Craft Chevrolet-Cadillac-Oldsmobile ..... November 1, 1998
Ron Craft Chrysler Plymouth Jeep ............ November 1, 1998
Tampa Volvo ................................. December 1, 1998
</TABLE>
(b) Reflects the results of operations of the following acquisitions completed
during 1998 and 1999 through their respective dates of acquisition:
<TABLE>
<CAPTION>
Acquisition Date
- ----------------------------------------- --------------
<S> <C>
Casa Ford of Houston, Inc. ............ May 1998
Hatfield Automotive Group ............. July 1998
Higginbotham Automotive Group ......... August 1998
Williams Automotive Group ............. January 1999
Global Imports, Inc. .................. February 1999
Economy Honda Cars, Inc. .............. February 1999
Lloyd Automotive Group ................ May 1999
Newsome Automotive Group .............. May 1999
Lute Riley Motors, Inc. ............... July 1999
</TABLE>
(c) Reflects the results of operations of FirstAmerica on a pro forma basis to
include the following acquisitions completed by FirstAmerica during 1998 and
1999 (see separate unaudited pro forma combined statements of income for
FirstAmerica for the year ended December 31, 1998 and the nine months ended
September 30, 1999 beginning on page P-11):
<TABLE>
<CAPTION>
Acquisition Date
- -------------------------------------- ---------------
<S> <C>
Beverly Hills BMW .................. April 1998
Honda of Serramonte ................ June 1998
Concord Toyota ..................... October 1998
Poway Chevrolet .................... March 1999
First Dodge-Marin .................. April 1999
South Bay Chrysler Plymouth Jeep ... August 1999
Falconi's Tropicana Honda .......... September 1999
Kramer Honda-Volvo ................. September 1999
Lucas Dealership Group ............. September 1999
</TABLE>
(d) The pro forma consolidated statement of income of FirstAmerica for the nine
months ended September 30, 1999 includes expenses of approximately $2.6
million representing costs incurred in connection with FirstAmerica's failed
initial public offering, and includes other income of approximately $1.7
million representing one-time gains recorded on the sale of dealership
subsidiaries. Although no pro forma adjustment to eliminate these items has
been included in the accompanying Pro Forma Consolidated Statement of
Income, Sonic believes disclosure and consideration of these items is
appropriate to understand the continuing impact of the acquisition of
FirstAmerica on Sonic's results of operations.
(e) Reflects the decrease in finance and insurance revenues and selling, general
and administrative expenses included in the results of operations of Newsome
Automotive Group resulting from transactions with affiliates of Newsome not
acquired by Sonic.
P-5
<PAGE>
(f) Reflects finance and insurance revenues generated by the Higginbotham
Automotive Group for the year ended December 31, 1998, that was paid
directly to the dealership owner and excluded from revenue in the historical
financial statements of the acquired dealerships. No adjustment has been
made to reflect such amounts for the other acquisitions included within
these pro forma statements, as the amounts could not be reasonably
ascertained.
(g) Reflects the conversion from the "last-in, first-out" method of inventory
accounting to the specific identification method of inventory accounting for
Sonic's acquisitions to conform to Sonic's method of accounting for vehicle
inventories.
(h) Reflects the net decrease in selling, general and administrative expenses
related to the net reduction in salaries and bonuses of owners and officers
of the acquired dealerships who have become or will become employees,
consistent with reduced salaries pursuant to employment agreements with
Sonic, or whose positions have been or will be eliminated as part of Sonic's
acquisitions which are included in these pro forma financial statements.
(i) Reflects the increase in rent expense related to lease agreements entered
into with the sellers of certain acquired dealerships for the dealerships'
real property that will not be acquired by Sonic, and the decreases in
depreciation expense and interest expense related to mortgage indebtedness
encumbering such property. Reduction of interest expense for the year ended
December 31, 1998 is calculated based on average mortgage indebtedness of
approximately $11.6 million at interest rates ranging from 7.00% to 9.11%.
Reduction of interest expense for the nine months ended September 30, 1999
is calculated based on average mortgage indebtedness of approximately $9.8
million at interest rates ranging from 7.75% to 8.62%. Additional adjustment
for the nine months ended September 30, 1999 reflects the elimination of
approximately $2.7 million of other income at one of the acquired
dealerships representing a gain on sale of real estate immediately prior to
the consummation of the acquisition.
(j) Reflects the elimination of amortization expense related to goodwill that
arose in previous acquisitions in certain of the acquired dealerships from
the effective date of the acquisitions.
(k) Reflects the amortization over an assumed useful life of 40 years of
goodwill resulting from Sonic's acquisitions which are included in these pro
forma financial statements, which were assumed to occur on January 1, 1998.
Certain of these acquisitions have purchase agreements which require Sonic
to pay additional amounts in cash or preferred stock based on future
operating results. Amount does not include amortization of the additional
goodwill associated with the contingent purchase prices related to such
acquisitions. The maximum amount of estimated additional amortization would
not exceed $100,000.
(l) Reflects the net decrease in interest expense, floor plan resulting from the
refinancing of the notes payable, floor plan of the dealerships being
acquired under Sonic's floor plan facility with Ford Motor Credit Company
(the "Floor Plan Facility") as if such refinancing had occurred at the
beginning of the period presented. The average outstanding balance of notes
payable, floor plan arrangements of the dealerships being acquired excluding
FirstAmerica was $116.5 million for the year ended December 31, 1998 and
$45.9 million for the nine months ended September 30, 1999. The average
outstanding balance of notes payable, floor plan arrangements of the
FirstAmerica dealerships being acquired was $127.5 million for the year
ended December 31, 1998 and $94.6 million for the nine months ended
September 30, 1999. The average interest rate under the Floor Plan Facility
for the year ended December 31, 1998 was approximately 7.06% compared to
historical interest rates ranging from 7.13% to 9.50%. The average interest
rate under the Floor Plan Facility for the nine months ended September 30,
1999 was approximately 6.57% compared to historical interest rates ranging
from 6.58% to 8.87%.
(m) Reflects the decrease in interest expense related to debt, other than
mortgage indebtedness, which has not or will not be assumed. Reduction of
interest expense for the year ended December 31, 1998 is calculated based on
average indebtedness of approximately $12.9 million at interest rates
ranging from 5.43% to 10.20%. Reduction of interest expense for the nine
months ended September 30, 1999 is calculated based on average indebtedness
of approximately $6.5 million at interest rates ranging from 5.43% to 8.75%.
(n) Adjustment for Sonic's acquisitions, excluding FirstAmerica, reflects the
incremental increase in interest expense, other resulting from (1) the
issuance of $125 million in senior subordinated notes in July 1998 (the
"Notes Offering") used to finance acquisitions, (2) borrowings under Sonic's
revolving credit facility with Ford Motor Credit Company (the "Revolving
Facility") in the amount of $98.4 million used to finance acquisitions, and
(3) the repayment of amounts previously borrowed under the Revolving
Facility with proceeds received from the Notes Offering and with proceeds
received from the issuance of 6,067,230 shares of Class A common stock on
May 5, 1999. Amounts borrowed under the Revolving Facility which were repaid
had an average balance of $27.8 million for the year ended December 31, 1998
and $28.2 million for the nine months ended September 30, 1999.
P-6
<PAGE>
Adjustment for FirstAmerica acquisition reflects the net reduction in
interest expense, other resulting from the refinancing of debt incurred by
FirstAmerica with borrowings under Sonic's Revolving Facility. The net
interest reduction for the year ended December 31, 1998 is calculated based
on average indebtedness of approximately $162.5 million at Sonic's average
interest rate under its Revolving Facility of 8.2%, compared to historical
interest rates of FirstAmerica ranging from 7.4% to 14.4%. Interest
reduction for the nine months ended September 30, 1999 is calculated based
on average indebtedness of $164.3 million at Sonic's average interest rate
under its Revolving Facility of 7.6% compared to historical interest rates
of FirstAmerica ranging from 7.4% to 14.4%.
(o) Reflects the net change in provision for income taxes resulting from pro
forma adjustments, computed using statutory income tax rates ranging from
35.0% to 40.8%.
(p) Certain of the acquired dealerships were not subject to federal and state
income taxes because they were either S corporations, partnerships, or
limited liability companies during the period indicated. Upon completion of
these acquisitions, these dealerships became subject to federal and state
income tax as C corporations. This adjustment reflects the resulting
increase in the federal and state income tax provision as if these entities
had been taxable at statutory income tax rates ranging from 35.0% to 40.7%.
(q) Reflects the reclassification of commission expense related to finance and
insurance commission revenue recorded in the pro forma consolidated
statements of income of FirstAmerica from selling, general and
administrative expenses to cost of sales to conform to Sonic's presentation.
(r) Reflects the elimination of the results of operations of AutoTown, a
subsidiary of FirstAmerica, which was not acquired by Sonic.
(s) All earnings per share information reflects Sonic's 2-for-1 common stock
split effective January 25, 1999. Pro forma basic and diluted net income per
share and the related weighted average shares outstanding for the year ended
December 31, 1998 and the nine months ended September 30, 1999 have been
adjusted to reflect the following transactions as if such transactions had
occurred on January 1, 1998:
1. The issuance of 970,588 shares of Class A common stock on September 18,
1999 in connection with the acquisition of Higginbotham Automotive Group;
2. The issuance of 6,067,230 shares of Class A common stock on May 5, 1999 in
connection with Sonic's equity offering;
3. The issuance of 176,030 shares of Class A common stock on May 17, 1999 in
connection with the acquisition of Newsome Automotive Group;
4. The issuance of 1,398,902 shares of Class A common stock on August 3, 1999
in connection with the acquisition of Manhattan Automotive Group plus an
anticipated issuance of an estimated 698,167 shares of Class A Common
Stock in connection with market price protection provided to the
stockholders of the Manhattan Automotive Group, which is required to be
made by no later than February 3, 2000; and
5. The issuance of 5,209,415 shares of Class A common stock on December 10,
1999 in connection with the acquisition of FirstAmerica Automotive, Inc.
In addition to the items above, pro forma diluted net income per share and the
related weighted average shares outstanding for the year ended December 31,
1998 and the nine months ended September 30, 1999 have been adjusted to
include the dilutive effect of the following:
1. The issuance of 16,338 shares of preferred stock in connection with the
1998 acquisitions and 50,533 shares of preferred stock in connection with
the 1999 acquisitions; and
2. Options granted to employees, officers and directors of FirstAmerica to
purchase an aggregate of 2,559,015 shares of FirstAmerica's Class A common
stock which were converted to options to purchase an aggregate of 824,822
shares of Class A common stock of Sonic in connection with the
consummation of the acquisition of FirstAmerica.
P-7
<PAGE>
The following is a reconciliation of the pro forma weighted average shares for
the year ended December 31, 1998 and the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, 1998 September 30, 1999
------------------- -------------------
<S> <C> <C>
Weighted Average Shares -- Basic (actual) ................................ 22,852 29,948
Issuance of Common Stock in connection with Sonic's equity offering ...... 6,067 2,778
Issuance of Common Stock in connection with the following acquisitions:
Higginbotham Automotive Group ........................................... 694 --
Newsome Automotive Group ................................................ 176 88
Manhattan Automotive Group .............................................. 2,097 1,800
FirstAmerica Automotive, Inc. ........................................... 5,209 5,209
------ ------
Weighted Average Shares -- Basic (pro forma) ............................. 37,095 39,823
====== ======
Weighted Average Shares -- Diluted (actual) .............................. 24,970 33,489
Issuance of Common Stock in connection with Sonic's equity offering ...... 6,067 2,778
Issuance of Common Stock in connection with the following acquisitions:
Higginbotham Automotive Group ........................................... 694 --
Newsome Automotive Group ................................................ 176 88
Manhattan Automotive Group .............................................. 2,097 1,800
FirstAmerica Automotive, Inc. ........................................... 5,209 5,209
Class A Convertible Preferred Stock ...................................... 4,368 1,379
Options to former option holders of FirstAmerica Automotive, Inc. ........ 87 105
------ ------
Weighted Average Shares -- Diluted (pro forma) ........................... 43,668 44,848
====== ======
</TABLE>
(t) For purposes of computing the dilutive effect of convertible preferred stock
issued in connection with the acquisitions to include in the pro forma
diluted weighted average shares outstanding, the actual number of Class A
common shares issued upon conversion were used for convertible preferred
stock that has already been converted. For all other convertible preferred
stock issued in connection with the acquisitions, a Class A common stock
price of $12.09 per share was assumed as the conversion price (the average
of the daily closing prices for the Class A common stock on the NYSE for the
20 consecutive trading days ending September 30, 1999). Certain of the
shares of convertible preferred stock are subject to conversion adjustments
limiting increases and decreases in the number of shares of Class A common
stock received upon conversion. A 10% increase or decrease in the price per
share used in the conversion of these convertible preferred shares would not
result in a material change (less than $0.01) in the diluted net income per
share for either the twelve months ended December 31, 1998 or the nine
months ended September 30, 1999.
P-8
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet -- As of September 30, 1999
<TABLE>
<CAPTION>
FirstAmerica
Sonic Freeland Automotive Pro Forma
Historical (a) Automotive Historical Adjustments Pro Forma
---------------- ------------ ------------- -------------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ..................... $ 69,865 $ 2,155 $ 37,167 $ (8,360)(b) $ 101,485
658 (c)
Assets held for sale .......................... -- -- 6,544 -- 6,544
Receivables ................................... 54,831 1,012 27,201 (1,038)(c) 82,006
Inventories ................................... 362,645 12,829 147,070 (2,699)(c) 521,828
1,983 (d)
Deferred income taxes ......................... 1,762 -- -- -- 1,762
Due from affiliates ........................... 4,932 -- -- -- 4,932
Other current assets .......................... 5,894 469 5,976 (515)(c) 11,824
-------- ------- -------- ----------- ----------
Total current assets ......................... 499,929 16,465 223,958 (9,971) 730,381
Property and equipment, net .................... 42,315 8,214 16,096 (109)(c) 59,033
(7,483)(e)
Due from affiliates ............................ -- 2,697 -- (2,697)(c) --
Goodwill, net .................................. 360,421 -- 123,734 193,217 (b) 553,638
(123,734)(f)
Other assets ................................... 7,485 60 6,410 (119)(c) 13,836
-------- ------- -------- ----------- ----------
Total assets ................................. $910,150 $27,436 $370,198 $ 49,104 $1,356,888
======== ======= ======== =========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable -- floor plan ................... $276,915 $11,492 $117,164 $ (1,277)(c) $ 404,294
Notes payable -- FMCC ......................... -- -- 135,292 (135,292)(b) --
Notes payable -- other ........................ -- 378 6,008 (6,000)(b) 8
(378)(c)
Trade accounts payable ........................ 22,215 1,683 10,003 (1,849)(c) 32,052
Accrued interest .............................. 4,469 141 -- (141)(c) 4,469
Other accrued liabilities ..................... 39,900 2,922 42,007 (3,944)(c) 80,885
Payable for acquisitions ...................... 275 -- -- -- 275
Current maturities of long-term debt .......... 1,176 471 1,078 (130)(c) 2,254
(341)(e)
-------- ------- -------- ----------- ----------
Total current liabilities .................... 344,950 17,087 311,552 (149,352) 524,237
Long-term debt ................................. 214,235 6,828 4,033 200,608 (b) 418,876
(258)(c)
(6,570)(e)
Notes payable -- TCW ........................... -- -- 33,407 (33,407)(b) --
Payable for acquisitions ....................... 275 -- -- -- 275
Payable to the Company's Chairman .............. 5,500 -- -- -- 5,500
Payable to affiliates .......................... 766 -- -- -- 766
Deferred income taxes .......................... 6,653 -- 1,056 -- 7,709
Income tax payable ............................. 3,906 -- -- -- 3,906
Other liabilities .............................. -- 1,464 -- (1,464)(c) --
Deferred revenue ............................... -- -- 1,601 -- 1,601
Cumulative redeemable preferred stock .......... -- -- 3,097 (3,097)(b) --
Redeemable preferred stock ..................... -- -- 572 (572)(b) --
Stockholders' equity:
Preferred Stock ............................... 27,254 -- -- -- 27,254
Class A Common Stock .......................... 237 -- -- 52 (b) 289
Class B Common Stock .......................... 123 -- -- -- 123
Paid-in capital ............................... 242,137 30 8,571 51,500 (b) 302,238
Retained earnings ............................. 64,114 2,027 6,309 111,065 (b) 64,114
2,922 (c)
1,983 (d)
(572)(e)
(123,734)(f)
-------- ------- -------- ----------- ----------
Total stockholders' equity ................... 333,865 2,057 14,880 43,216 394,018
-------- ------- -------- ----------- ----------
Total liabilities and stockholders' equity ..... $910,150 $27,436 $370,198 $ 49,104 $1,356,888
======== ======= ======== =========== ==========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet)
P-9
<PAGE>
- ---------
(a) The balance sheet accounts of Manhattan Automotive Group as of September 30,
1999 are included in the historical accounts of Sonic as of that date since
the acquisition of Manhattan Automotive Group was completed in August 1999.
(b) Reflects the preliminary allocation of the aggregate purchase price of the
acquisitions of Freeland Automotive and FirstAmerica, including the
assumption of debt of FirstAmerica totaling approximately $175.7 million,
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 a significant adjustment to the
carrying amount of those net assets. The amount of goodwill and the
corresponding amortization actually recorded may ultimately be different
from amounts estimated here, depending on the actual fair value of tangible
net assets acquired at closing. The estimated purchase price allocation
consists of the following:
<TABLE>
<CAPTION>
Estimated total consideration (in thousands):
Total FirstAmerica Freeland
------------ -------------- -----------
<S> <C> <C> <C>
Cash .......................................... $ 8,360 $ 8,360 $ --
Debt .......................................... 201,608 175,699 25,909
Class A common stock .......................... 60,153 60,153 --
--------- --------- --------
Total ......................................... 270,121 244,212 25,909
Less: Estimated fair value of tangible net
assets acquired ............................... (76,904) (74,245) (2,659)
--------- --------- --------
Excess of purchase price over fair value of
net tangible assets acquired .................. $ 193,217 $ 169,967 $ 23,250
========= ========= ========
</TABLE>
(c) Reflects the elimination of certain assets and liabilities other than real
property and goodwill that will not be acquired.
(d) Reflects the conversion from the "last-in, first-out" method of inventory
accounting to the specific identification method of inventory accounting at
Freeland Automotive acquisition.
(e) Reflects the elimination of the real property and the related mortgage
indebtedness encumbering such property that will not be acquired.
(f) Reflects the elimination of goodwill that arose in previous acquisitions of
FirstAmerica.
P-10
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income of FirstAmerica
Year Ended December 31, 1998
<TABLE>
<CAPTION>
1998 1999
Historical Acquisitions Acquisitions
------------ -------------- --------------
<S> <C> <C> <C>
Revenues:
Vehicle sales ................................. $667,676 $67,875 $166,802
Parts, service, and collision repair .......... 91,134 9,240 41,771
Finance and insurance ......................... 24,261 1,628 3,363
-------- ------- --------
Total Revenues .............................. 783,071 78,743 211,936
Cost of Sales .................................. 663,902 68,085 175,916
-------- ------- --------
Gross Profit ................................... 119,169 10,658 36,020
Selling, general & administrative expenses ..... 99,603 8,356 28,412
Depreciation and amortization .................. 1,952 163 496
-------- ------- --------
Operating income ............................... 17,614 2,139 7,112
Interest expense, floorplan .................... 5,521 514 2,155
Interest expense, other ........................ 5,432 106 506
Other income ................................... -- 15 642
-------- ------- --------
Income before income taxes ..................... 6,661 1,534 5,093
Provision for income taxes ..................... 2,864 10 81
-------- ------- --------
Net Income ..................................... $ 3,797 $ 1,524 $ 5,012
======== ======= ========
<CAPTION>
Lucas
Dealership Pro Forma
Group Adjustments (a) Pro Forma
------------ ----------------- -------------
<S> <C> <C> <C>
Revenues:
Vehicle sales ................................. $286,581 $ -- $1,188,934
Parts, service, and collision repair .......... 46,265 -- 188,410
Finance and insurance ......................... 6,766 -- 36,018
-------- ---------- ----------
Total Revenues .............................. 339,612 -- 1,413,362
Cost of Sales .................................. 285,121 -- 1,192,786
(238)(b)
-------- ---------- ----------
Gross Profit ................................... 54,491 238 220,576
Selling, general & administrative expenses ..... 47,723 (8,704)(c) 174,664
(726)(d)
Depreciation and amortization .................. 1,406 (316)(e) 6,223
2,522 (f)
-------- ---------- ----------
Operating income ............................... 5,362 7,462 39,689
Interest expense, floorplan .................... 1,688 (842)(g) 9,036
Interest expense, other ........................ -- 10,157 (h) 16,969
768 (i)
Other income ................................... 3,014 (3,456)(j) 215
-------- ---------- ----------
Income before income taxes ..................... 6,688 (6,077) 13,899
Provision for income taxes ..................... 2,883 (2,202)(k) 6,659
3,023 (l)
-------- ---------- ----------
Net Income ..................................... $ 3,805 $ (6,898) $ 7,240
======== ========== ==========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of Income
of FirstAmerica)
P-11
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income of FirstAmerica
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Lucas
1999 Dealership Pro Forma
Historical Acquisitions Group Adjustments (a) Pro Forma
------------ -------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Vehicle sales ................................. $687,215 $ 99,656 $236,611 $ -- $1,023,482
Parts, service, and collision repair .......... 90,142 21,145 36,627 -- 147,914
Finance and insurance ......................... 24,979 1,833 5,069 -- 31,881
-------- -------- -------- --------- ----------
Total Revenues .............................. 802,336 122,634 278,307 -- 1,203,277
Cost of Sales .................................. 678,675 102,605 233,856 -- 1,015,450
314 (b)
-------- -------- -------- --------- ---------
Gross Profit ................................... 123,661 20,029 44,451 (314) 187,827
Selling, general & administrative expenses ..... 101,483 15,425 37,832 (6,369)(c) 148,315
(56)(d)
Depreciation and amortization .................. 3,354 217 832 (212)(e) 5,707
1,516 (f)
-------- -------- -------- --------- ---------
Operating income ............................... 18,824 4,387 5,787 4,807 33,805
Interest expense, floorplan .................... 5,026 1,219 1,231 (481)(g) 6,995
Interest expense, other ........................ 6,062 2 -- 5,688(h) 11,752
Written off IPO Costs .......................... 2,564 -- 2,564
Other income ................................... 1,253 331 1,854 (1,658)(j) 1,780
-------- -------- -------- --------- ----------
Income before income taxes ..................... 6,425 3,497 6,410 (2,058) 14,274
Provision for income taxes ..................... 3,212 2 2,699 (955)(k) 6,623
1,665 (l)
-------- -------- -------- --------- ----------
Net Income ..................................... $ 3,213 $ 3,495 $ 3,711 $ (2,768) $ 7,651
======== ======== ======== ========= ==========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Statement of Income of
FirstAmerica)
P-12
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statements of Income of FirstAmerica
(a) The historical results of operations of the Lucas Dealership Group includes
other income of approximately $0.5 million representing a one-time gain on
the sale of a dealership subsidiary. Although no pro forma adjustment to
eliminate this gain has been included in the accompanying Pro Forma
Consolidated Statement of Income of FirstAmerica, FirstAmerica believes
disclosure and consideration of this one-time gain is appropriate to
understand the continuing impact of the acquisition of Lucas on
FirstAmerica's results of operations.
(b) Reflects the change in accounting for inventories from the last-in,
first-out method to specific identification method.
(c) Reflects the decrease in selling, general, and administrative expenses
related to the reduction in salaries, fringe benefits, and related expenses
of owners, officers, and employees of the acquired dealerships who did not
become employees of FirstAmerica pursuant to the acquisition and were not
replaced, and contractual adjustments to compensation for those employees
who were retained.
(d) Reflects the elimination of selling, general, and administrative expenses in
the amount of $0.6 million for the year ended December 31, 1998 relating to
operations of the Lucas Dealership Group that have not been acquired. The
remaining adjustment reflects the net decreases in rent and related expenses
relating to facilities not acquired or leased.
(e) Reflects the elimination of amortization expense related to goodwill that
arose in previous acquisitions in certain of the acquired dealerships from
the effective date of the acquisitions.
(f) Reflects the amortization of intangible assets, primarily goodwill,
resulting from acquired dealerships as if the acquisitions occurred as of
January 1, 1998.
(g) The adjustment reflects an average reduction of approximately 150 basis
points in the historical annual floor plan interest rate applied to the
acquired dealerships average outstanding debt of $55.0 million as of
December 31, 1998 and $45.8 million as of September 30, 1999 as if the
refinancings occurred on January 1, 1998.
(h) Reflects additional interest incurred during the year ended December 31,
1998 to finance acquisitions at various average interest rates ranging from
7.4% to 14.3% applied to average outstanding debt of approximately $122.7
million, and reflects additional interest incurred during the nine months
ended September 30, 1999 to finance acquisitions at various average interest
rates ranging from 7.7% to 10.5% applied to average outstanding debt of
approximately $76.7 million.
(i) The adjustment for the year ended December 31, 1998 also reflects the
amortization of $0.8 million in fees incurred in obtaining FirstAmerica's
credit facility with Ford Motor Credit.
(j) Reflects the elimination of pre-acquisition interest income earned by
acquired dealerships on investments of cash and cash equivalents not
purchased as part of the acquisitions.
(k) Reflects the net increase in the provision for income taxes resulting from
pro forma adjustments above, computed using a combined effective income tax
rate of 47.0% for the year ended December 31, 1998 and 46.4% for the nine
months ended September 30, 1999.
(l) Certain of the acquired dealerships were not subject to federal and state
income taxes because they were S corporations during the period indicated.
Upon completion of these acquisitions, these dealerships will be subject to
federal and state income tax as C corporations. This adjustment reflects the
resulting increase in the federal and state income tax provision as if these
entities had been taxable at the combined effective income tax rate of
approximately of 47.0% for the year ended December 31, 1998 and 46.4% for
the nine months ended September 30, 1999.
P-13
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Sonic Automotive, Inc.:
We consent to the incorporation by reference in the following Registration
Statements of Sonic Automotive, Inc.
o Registration Statement No. 333-82615 on Form S-3;
o Registration Statement No. 333-81059 on Form S-8;
o Registration Statement No. 333-81053 on Form S-8;
o Registration Statement No. 333-71803 on Form S-3;
o Registration Statement No. 333-69907 on Form S-8;
o Registration Statement No. 333-69901 on Form S-8;
o Registration Statement No. 333-69899 on Form S-8;
o Registration Statement No. 333-68183 on Form S-3;
o Registration Statement No. 333-65447 on Form S-8;
o Registration Statement No. 333-49113 on Form S-8,
of our report dated November 23, 1999 on the financial statements of Freeland
Automotive, a business unit of South Gate Motors, Inc., as of and for the year
ended December 31, 1998, our report dated August 13, 1999 on the combined
financial statements of Manhattan Automotive Group as of and for the year ended
December 31, 1998, and our report dated May 21, 1999 on the combined financial
statements of Certain Dealerships, Assets and Liabilities of Lucas Dealership
Group, Inc. as of December 31, 1998 and 1997 and for each of the three years in
the period ended December 31, 1998, all appearing in this Amendment No. 1 to the
Current Report on Form 8-K of Sonic Automotive, Inc.
/s/ Deloitte & Touche LLP
January 27, 2000
Charlotte, North Carolina
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
FirstAmerica Automotive, Inc.
We consent to the incorporation by reference in the registration statements
listed below of Sonic Automotive, Inc. of our report dated March 19, 1999, with
respect to the consolidated balance sheets of FirstAmerica Automotive, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the Form 8-K/A of Sonic Automotive dated January 27, 2000:
o Form S-3 Registration Statement (File #333-82615) -- first filed in July
1999 (relating to 1999 Resale Shelf).
o Form S-8 Registration Statement (File #333-81059) -- first filed in June
1999 (relating to Employee Stock Purchase Plan, amended and restated as of
June 8, 1999).
o Form S-8 Registration Statement (File #333-81053) -- first filed in June
1999 (relating to 1997 Stock Option Plan, amended and related as of June 8,
1999).
o Form S-3 Registration Statement (File #333-71803) -- first filed in
February 1999 (relating to 1999 Underwritten Public Offering of Class A
Common Stock).
o Form S-8 Registration Statement (File #333-69907) -- first filed in
December 1998 (relating to Employee Stock Purchase Plan, amended and
restated as of December 3, 1998).
o Form S-8 Registration Statement (File #333-69901) -- first filed in
December 1998 (relating to Formula Stock Option Plan for Independent
Directors).
o Form S-8 Registration Statement (File #333-69899) -- first filed in
December 1998 (relating to Nonqualified Employee Stock Purchase Plan).
o Form S-3 Registration Statement (File #333-68183) -- first filed in
December 1998 (relating to 1998 Resale Shelf).
o Form S-8 Registration Statement (File #333-65447) -- first filed in October
1998 (relating to 1997 Stock Option Plan).
o Form S-8 Registration Statement (File #333-49113) -- first filed in April
1998 (relating to Employee Stock Purchase Plan).
/s/ KPMG LLP
January 27, 2000
San Francisco, California
