UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13395
SONIC AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-201079
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5401 E Independence Blvd, Charlotte, North Carolina 28212
(Address of principal executive offices) (Zip Code)
(704) 532-3320
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 13, 1998, there were 5,588,888 shares of Class A Common Stock,
par value $.01 per share, and 6,200,000 shares of Class B Common Stock, par
value $.01 per share, outstanding.
<PAGE>
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial
Statements (Unaudited) 3
Consolidated Statements of Income -
Three-month periods ended
September 30, 1997 and September 30, 1998
Consolidated Statements of Income -
Nine-month periods ended
September 30, 1997 and September 30, 1998
Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998
Consolidated Statement of Stockholders'
Equity - Nine-month period ended September 30, 1998
Consolidated Statements of Cash Flows -
Nine-month periods ended September 30, 1997
and September 30, 1998
Notes to Unaudited Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 22
ITEM 6. Exhibits and Reports on Form 10-Q 23
SIGNATURES 25
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
REVENUES: 1997 1998
----------- ----------
Vehicle sales $ 110,662 $ 447,722
Parts, service, and collision repair 13,410 50,897
Finance and insurance(Note 1) 3,283 11,046
----------- ----------
Total revenues 127,355 509,665
COST OF SALES 112,601 446,040
----------- ----------
GROSS PROFIT 14,754 63,625
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,910 45,863
DEPRECIATION AND AMORTIZATION 376 1,539
----------- ----------
OPERATING INCOME 3,468 16,223
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 1,987 4,534
Interest expense, other 112 2,822
Other income 157 9
----------- ----------
Total other expense 1,942 7,347
----------- ----------
INCOME BEFORE INCOME TAXES 1,526 8,876
PROVISION FOR INCOME TAXES 615 3,450
----------- ----------
NET INCOME $ 911 $ 5,426
=========== ==========
BASIC NET INCOME PER SHARE(Note 6) $ 0.48
==========
WEIGHTED AVERAGE NUMBER OF BASIC SHARES OUTSTANDING 11,365
==========
DILUTED NET INCOME PER SHARE(Note 6) $ 0.42
==========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 13.063
==========
See notes to unaudited consolidated financial statements.
3
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
REVENUES: 1997 1998
----------- ----------
Vehicle sales $ 295,878 1,015,001
Parts, service, and collision repair 36,317 118,917
Finance and insurance(Note 1) 8,046 24,587
----------- ----------
Total revenues 340,241 1,158,505
COST OF SALES 301,855 1,012,432
----------- ----------
GROSS PROFIT 38,386 146,073
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 28,442 105,511
DEPRECIATION AND AMORTIZATION 772 3,364
----------- ----------
OPERATING INCOME 9,172 37,198
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 5,005 11,875
Interest expense, other 430 5,567
Other income 292 24
----------- ----------
Total other expense 5,143 17,418
----------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST 4,029 19,780
PROVISION FOR INCOME TAXES 1,531 7,550
----------- ----------
INCOME BEFORE MINORITY INTEREST 2,498 12,230
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY 47 -
----------- ----------
NET INCOME $ 2,451 $ 12,230
=========== ==========
BASIC NET INCOME PER SHARE(Note 6) $ 1.08
==========
WEIGHTED AVERAGE NUMBER OF BASIC SHARES OUTSTANDING 11,298
==========
DILUTED NET INCOME PER SHARE(Note 6) $ 1.01
==========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 12.140
==========
See notes to unaudited consolidated financial statements.
4
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
------------ -------------
ASSETS (IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 18,304 $ 40,091
Receivables (net of allowance for doubtful
accounts of $523,000 and $522,000 at
December 31, 1997 and September 30, 1998,
respectively) 19,784 38,617
Inventories (Note 3) 156,514 210,947
Deferred income taxes 405 898
Due from affliates (Note 5) 1,047 1,215
Other current assets 1,318 4,220
------------ -------------
Total current assets 197,372 295,988
PROPERTY AND EQUIPMENT, NET 19,081 24,444
GOODWILL, NET (NOTES 1 & 2) 74,362 163,253
OTHER ASSETS 635 6,653
------------ -------------
TOTAL ASSETS $ 291,450 $ 490,338
============ =============
See notes to unaudited consolidated financial statements.
5
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (IN THOUSANDS)
CURRENT LIABILITIES:
Notes payable - floor plan $ 133,236 $ 173,977
Trade accounts payable 6,612 9,161
Accrued interest 1,071 3,513
Other accrued liabilities 10,748 20,690
Payable to affiliates (Note 5) 445 532
Payable for acquisitions (Note 2) - 275
Current maturities of long-term debt (Note 4) 584 788
------------ -------------
Total current liabilities 152,696 208,936
LONG-TERM DEBT (NOTE 4) 38,640 131,213
PAYABLE FOR ACQUISITIONS (NOTE 2) - 275
PAYABLE TO THE COMPANY'S CHAIRMAN (NOTE 5) 5,500 5,500
PAYABLE TO AFFILIATES (NOTE 5) 4,394 3,890
DEFERRED INCOME TAXES 1,079 1,079
INCOME TAXES PAYABLE 4,776 7,776
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (NOTE 6):
Preferred Stock, $.10 par, liquidation preference
$1,000 per share, 3.0 million shares authorized;
27,059 shares issued and outstanding at June 30, 1998 - 25,788
Class A Commmon Stock, $.01 par, 50.0 million shares
authorized; 5.0 million shares issued and
outstanding at December 31, 1997 and 5.5 million
million shares issued and outstanding at
September 30, 1998 50 55
Class B Common Stock, $.01 par, 15.0 million shares
authorized; 6.3 million shares issued and
outstanding 63 63
Paid-in capital 68,045 77,347
Retained earnings 16,186 28,416
Unrealized gain on marketable equity securities 21 -
------------ -------------
Total stockholders' equity 84,365 131,669
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 291,450 $ 490,338
============ =============
See notes to unaudited consolidated financial statements.
6
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Preferred Class A Class B Marketable Total
Stock Common Stock Common Stock Paid-In Retained Equity Stockholders'
Shares Amount Shares Amount Shares Amount Capital Earnings Securities Equity
------ ------ ------ ------ ------ ------ ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 -- $ -- 5,000 $ 50 6,250 $ 63 $68,045 $16,186 $ 21 $ 84,365
Issuance of Preferred
Stock (Note 2) 27 25,788 -- -- -- -- -- -- -- 25,788
Issuance of Common
Stock (Note 2) -- -- 485 5 -- -- 8,245 -- -- 8,250
Shares awarded under stock
compensation plans -- -- 41 -- -- -- 341 -- -- 341
Issuance of Warrants
(Note 2) -- -- -- -- -- -- 716 -- -- 716
Unrealized loss on
marketable equity securities -- -- -- -- -- -- -- -- (21) (21)
Net income -- -- -- -- -- -- -- 12,230 -- 12,230
------- ------ ------ ----- ----- ----- ------ ------ ------ ------
BALANCE AT
SEPTEMBER 30, 1998 27 $25,788 5,526 $ 55 6,250 $ 63 $77,347 $28,416 $ -- $131,669
======= ====== ====== ===== ====== ===== ====== ====== ====== =======
</TABLE>
See notes to unaudited consolidated financial statements
7
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Nine Months Ended
September 30,
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,451 $ 12,230
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 772 3,364
Minority interest 47 --
Gain on sale of marketable equity securities (292) --
Loss on disposal of fixed assets 31 141
Deferred income taxes (65) --
Changes in assets and liabilities that relate to operations:
Receivables 855 (3,978)
Inventories 8,307 44,026
Other assets 178 (3,736)
Notes payable - floor plan (3,607) (49,842)
Accounts payable and other current liabilities (611) 1,306
Income tax payable -- 696
------- --------
Total adjustments 5,615 (8,023)
------- --------
Net cash provided by operating activities 8,066 4,207
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (Note 2) (21,773) (66,883)
Purchases of marketable equity securities (250) --
Proceeds from sale of marketable equity securities 250 --
Proceeds from sale of property and equipment 35 --
Purchases of property and equipment (1,605) (2,614)
-------- --------
Net cash used in investing activities (23,343) (69,497)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 20,062 171,182
Payments of long-term debt (422) (83,897)
Issuance of shares under stock compensation plans -- 351
Capital contributions 1 --
Receipts from (advances to) affiliate companies 3,057 (559)
-------- --------
Net cash provided by financing activities 22,698 87,077
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,421 21,787
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,679 18,304
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,100 $ 40,091
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued pursuant to acquisitions (Notes
2 and 6) $ -- $ 25,788
Common Stock issued pursuant to acquisitions (Note 2) $ -- $ 8,250
Payable for acquisitions (Note 2) $ -- $ 550
Issuance of warrants (Notes 2 and 6) $ -- $ 716
</TABLE>
See notes to unaudited consolidated financial statements.
8
<PAGE>
The following Notes to Unaudited Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain estimates and forward-looking statements as indicated herein
by the use of such terms as "estimated", "expects", "approximate", "projected"
or similar terms. Such statements reflect management's current views, are based
on certain assumptions and are subject to risks and uncertainties. No assurance
can be given that actual results or events will not differ materially from those
projected, estimated, assumed, or anticipated in any such forward-looking
statements. Important factors that could cause actual results to differ from
those projected or estimated are discussed herein and in other filings with the
Securities and Exchange Commission.
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited financial information
for the three and nine months ended September 30, 1997 and 1998 has been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. All significant intercompany accounts and transactions have been
eliminated. These unaudited consolidated financial statements reflect, in the
opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state the financial position and the
results of operations for the periods presented. The results for interim periods
are not necessarily indicative of the results to be expected for the entire
fiscal year. These interim financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
December 31, 1997.
GOODWILL - Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. The cumulative amount of goodwill at December 31, 1997 and
September 30, 1998 was $75.0 million and $166.6 million, respectively. As a
percentage of total assets and stockholders' equity, goodwill, net of
accumulated amortization, represented 25.5% and 88.1%, respectively, at December
31, 1997, and 33.3% and 124.4%, respectively, at September 30, 1998. Generally
accepted accounting principles require that goodwill and all other intangible
assets be amortized over the period benefited. The Company has determined that
the period benefited by the goodwill will be no less than 40 years and,
accordingly, is amortizing goodwill over a 40 year period. If the Company were
not to separately recognize a material intangible asset having a benefit period
of less than 40 years, or were not to give effect to shorter benefit periods of
factors giving rise to a material portion of the goodwill, earnings reported in
periods immediately following the acquisition would be overstated. In later
years, the Company would be burdened by a continuing charge against earnings
without the associated benefit to income valued by management in arriving at the
consideration paid for the businesses acquired. Earnings in later years also
could be significantly affected if management then determined that the remaining
balance of goodwill was impaired. The Company periodically compares the carrying
value of goodwill with the anticipated undiscounted future cash flows from
operations of the businesses acquired in order to evaluate the recoverability of
goodwill. The Company has concluded that the anticipated future cash flows
associated with intangible assets recognized in its acquisitions will continue
indefinitely, and there is no pervasive evidence that any material portion will
dissipate over a period shorter than 40 years.
FINANCE AND INSURANCE REVENUE RECOGNITION - The Company records revenue
when vehicles are delivered to customers and when vehicle service work is
performed.
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.
Commissions 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 $0.4 million and $1.8 million for the three months ended September
30, 1997 and September 30, 1998, respectively, and $1.2 million and $4.1 million
for the nine months ended September 30, 1997 and September 30, 1998,
respectively.
RECLASSIFICATION - Certain balances reported in prior periods have been
reclassified to conform with current period presentation.
COMPREHENSIVE INCOME - There were no material differences between net
income and comprehensive income in 1997 or 1998. Comprehensive income amounted
to $0.9 million and $5.4 million for the three months ended September 30, 1997
and September 30, 1998, respectively, and $2.5 million and $12.2 million for the
nine months ended September 30, 1997 and September 30, 1998, respectively.
NEW ACCOUNTING STANDARD - In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This Standard
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. This Statement will be effective for the Company's fiscal year ending
December 31, 1998, and need not be applied to interim financial statements in
the initial year of its application. The Company has not yet completed its'
analysis of which operating segments it will disclose, if any.
9
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
2. BUSINESS ACQUISITIONS
PENDING ACQUISITIONS
The Company has entered into definitive agreements to acquire one
dealership located in Chattanooga, Tennessee, one dealership located in
Charlotte, North Carolina, one dealership located in Tampa, Florida, two
dealerships located in Baytown, Texas, and a dealership group comprised of four
dealerships located in Birmingham, Alabama. The aggregate purchase price of
these acquisitions will be approximately $53.4 million plus the book value of
the certain assets acquired and the assumption of certain liabilities. The
aggregate purchase price will be payable with approximately $39.8 million in
cash to be obtained from borrowings under the Company's $75.0 million secured
revolving line of credit with Ford Motor Credit Company (the "Revolving
Facility") and from the Company's existing operations, with approximately
13,633 shares of Class A Convertible Preferred Stock, Series II, par value
$.10 per share (the "Series II Preferred Stock") with a liquidation preference
of approximately $1,000 per share and with the issuance of warrants to purchase
2,000 shares of Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"). In addition, in connection with the acquisition of the
dealership group located in Birmingham, Alabama, the Company may be required to
pay additional amounts based on the future pre tax earnings of the dealership
group. These acquisitions are expected to be consummated in the fourth quarter
of 1998.
ACQUISITIONS COMPLETED DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1998
On January 1, 1998, the Company began operation and obtained control of
Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center (the
"Clearwater Acquisition") located in Clearwater, Florida. On April 1, 1998, the
Company began operation and obtained control of Capitol Chevrolet and Imports
located in Montgomery, Alabama (the "Montgomery Acquisition"), Century BMW
located in Greenville, South Carolina (the "Century Acquisition") and Heritage
Lincoln-Mercury located in Greenville, South Carolina (the "Heritage
Acquisition"). On May 1, 1998, the Company began operation and obtained control
of Casa Ford of Houston, Inc. located in Houston, Texas (the "Casa Ford
Acquisition). On July 7, 1998, the Company closed its acquisition of the
Hatfield Automotive Group located in Columbus, Ohio (the "Hatfield
Acquisition"). On August 1, 1998, the Company began operation and obtained
control of the Higginbotham Automotive Group located in Daytona, Florida. The
aggregate purchase price for the Clearwater Acquisition, the Montgomery
Acquisition, the Century Acquisition, the Heritage Acquisition, the Casa Ford
Acquisition, the Hatfield Acquisition and the Higginbotham Acquisition
(collectively, the "1998 Acquisitions") was approximately $117.5 million, paid
(or payable) with $83.5 million in cash, with 485,294 shares of Class A Common
Stock having an estimated fair value of approximately $8.2 million, and with
27,058.8 shares of the Company's Class A Convertible Preferred Stock, par value
$.10 per share (the "Preferred Stock") (14,406.3 shares of Class A Convertible
Preferred Stock, Series I (the "Series I Preferred Stock"), 6,379.5 shares of
Series II Preferred Stock, and 6,273 shares of Class A Convertible Preferred
Stock, Series III (the "Series III Preferred Stock")) having an aggregate
liquidation preference of approximately $27.1 million and an estimated fair
value of approximately $25.8 million. Of the $83.5 million cash portion of the
aggregate purchase price, $38.9 million was financed with borrowings under the
Revolving Facility, which was subsequently repaid with a portion of the net
proceeds of the Company's private offering on July 31, 1998 (the "Notes
Offering") of $125 million in aggregate principal amount of its 11% Senior
Subordinated Notes due 2008 (the "Notes"), $42.2 million was financed with a
portion of the net proceeds from the Notes Offering, and $1.8 million was paid
with cash generated from the Company's existing operations. The remaining $0.6
million is payable to the seller of the Montgomery Acquisition on the first and
second anniversaries of the closing date of the Montgomery Acquisition. In
addition, the Company has issued to the seller of the Century Acquisition
warrants to purchase 75,000 shares of the Company's Class A Common Stock at a
purchase price equal to the market value of the Class A Common Stock on the date
of grant. The estimated fair value of these warrants is approximately $0.5
million. In accordance with terms of the Clearwater Acquisition and the
Montgomery Acquisition, the Company may be required to pay additional amounts up
to $5.1 million contingent on the future performance of the dealerships acquired
in such acquisitions. In addition, in accordance with the terms of the Casa Ford
Acquisition, the Company may be required to pay additional amounts to the seller
based on the dealership's pre-tax earnings for 1998 and 1999. Any additional
amounts paid will be accounted for as additional goodwill.
The 1998 Acquisitions have been accounted for using the purchase method of
accounting and the results of operations of such acquisitions have been included
in the accompanying unaudited consolidated financial statements from the date
the Company began operation and obtained control. The purchase price of the 1998
Acquisitions has been allocated as shown below to the assets and liabilities
acquired based on their estimated fair market value at the acquisition date. The
purchase price and corresponding goodwill may ultimately be different than
amounts recorded depending on the actual fair value of tangible net assets
acquired and changes in the estimated fair value of Preferred Stock (see Note
6).
Working capital $ 28,084
Property and equipment 4,008
Goodwill 89,667
Non-current liabilities
assumed (4,275)
--------
Total purchase price $117,484
========
10
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(All tables in thousands except per share amounts)
2. BUSINESS ACQUISITIONS -- Continued
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the Clearwater Acquisition,
Montgomery Acquisition, Century Acquisition, Heritage Acquisition, Casa Ford
Acquisition, the Hatfield Acquisition, the Higginbotham Acquisition and the
acquisition of dealership groups completed in 1997 had occurred at the beginning
of the period in which the acquisitions were completed and at the beginning of
the immediately preceding period after giving effect to certain adjustments,
including amortization of goodwill, interest expense on acquisition debt and
related income tax effects. The pro forma financial information does not give
effect to adjustments relating to net reductions in floor plan interest expense
resulting from re-negotiated floor plan financing agreements or to reductions in
salaries and fringe benefits of former owners or officers of acquired
dealerships who have not been retained by the Company or whose salaries have
been reduced pursuant to employment agreements with the Company. The pro forma
results have been prepared for comparative purposes only and are not necessarily
indicative of the results of operations that would have occurred had the
acquisitions been completed at the beginning of the periods presented. These
results are also not necessarily indicative of the results of future operations.
THREE MONTHS ENDING NINE MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
Total revenues $ 466,672 $ 519,516 $1,353,426 $1,459,505
Gross profit $ 52,803 $ 64,793 $ 154,708 $ 183,160
Net Income $ 2,590 $ 5,519 $ 8,233 $ 11,905
Diluted net income per share $ 0.19 $ 0.40 $ 0.59 $ 0.81
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
New vehicles $ 118,751 $ 150,594
Used vehicles 27,990 44,100
Parts and accessories 9,085 14,680
Other 688 1,573
------------ -------------
Total $ 156,514 $ 210,947
============ =============
4. LONG-TERM DEBT
In August 1997, the Company obtained a $20 million loan from NationsBank,
N.A. (the "NationsBank Facility"). The proceeds from the NationsBank Facility
were used in the consummation of the acquisition of three dealerships. The
NationsBank Facility was personally guaranteed by Mr. O. Bruton Smith, the
Company's Chairman and Chief Executive Officer, which guarantee was released in
February 1998. The NationsBank Facility matured in February 1998 and was repaid
with proceeds from the initial public offering of Class A Common Stock ("IPO")
and the Revolving Facility (as defined below).
The Company has a $75.0 million secured line of credit (the "Revolving
Facility") from Ford Motor Credit Company ("Ford Motor Credit"). The Revolving
Facility bears interest at a fluctuating per annum rate equal to the "prime" or
"base" rate announced by a majority (or if there is no majority, the median rate
announced by three) of the following banks: The Chase Manhattan Bank,
NationsBank, N.A., Citibank, N.A., Bank of America National Trust and Savings
Association and Morgan Guaranty Trust Company of New York (the "Revolving
Facility Prime Rate"). The Revolving Facility Prime Rate as of September 30,
1998 was 8.5%. The Revolving Facility will mature in October 1999, unless the
Company requests that the term be extended, at the option of Ford Motor Credit,
for a number of additional one year terms to be negotiated by the parties. No
assurance can be given that such extensions will be granted. On July 31, 1998,
all indebtedness outstanding under the Revolving Facility was repaid with a
portion of the net proceeds from the Notes Offering. As of September 30, 1998,
there were no amounts outstanding under the Revolving Facility. Future amounts
to be drawn under the Revolving Facility are to be used for the acquisition of
additional dealerships and to provide general working capital needs of the
Company not to exceed $10 million.
11
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(All tables in thousands except per share amounts)
4. LONG-TERM DEBT - Continued
The Company agreed under the Revolving Facility not to pledge any of its
assets to any third party (with the exception of currently encumbered real
estate and assets of the Company's dealership subsidiaries that are subject to
previous pledges or liens). The Revolving Facility also contains certain
negative covenants made by the Company, including covenants restricting or
prohibiting the payment of dividends, capital expenditures and material
dispositions of assets as well as other customary covenants. Additional negative
covenants include specified ratios of (i) total debt to tangible equity (as
defined in the Revolving Facility), (ii) current assets to current liabilities,
(iii) earnings before interest, taxes, depreciation and amortization (EBITDA) to
fixed charges, (iv) EBITDA to interest expense, (v) EBITDA to total debt and
(vi) the current lending commitment under the Revolving Facility to scaled
assets (as defined in the Revolving Facility). Moreover, the loss of voting
control over the Company by O. Bruton Smith, B. Scott Smith and their spouses or
immediate family members or the failure by the Company, with certain exceptions,
to own all the outstanding equity, membership or partnership interests in its
dealership subsidiaries will constitute an event of default under the Revolving
Facility. The Company did not meet the specified total debt to tangible equity
ratios required by the Revolving Facility at March 31, 1998 and at June 30, 1998
and obtained a waiver with regard to such requirement from Ford Motor Credit. In
connection with the Offering, the Company and Ford Motor Credit amended the
Revolving Facility to provide that the Company's 11% Senior Subordinated Notes
due 2008 (the "Notes"), which are subordinated to the Revolving Facility, will
be treated as equity capital for purposes of this ratio and, accordingly, the
Company is in compliance with this and all other restrictive covenants as of
September 30, 1998.
On July 31, 1998, the Company completed a private placement of the Notes
in the aggregate principal amount of $125,000,000. The Notes are unsecured,
mature on August 1, 2008, and are redeemable at the Company's option after
August 1, 2003. Interest payments are due semi-annually on February 1 and August
1, commencing February 1, 1999. The Notes are subordinated to all present and
future senior indebtedness of the Company, including the Revolving Facility.
Redemption prices during 12 month periods beginning August 1 are 105.500% in
2003, 103.667% in 2004, 101.833% in 2005 and 100% thereafter. Net proceeds after
commissions and discounts, including issuance discount of $937,500, amounted to
$120,625,000 and were used to finance certain of the 1998 Acquisitions and to
repay amounts outstanding under the Revolving Facility. The discount on the
Notes is included in other noncurrent assets and is being amortized using the
effective interest method over the term of the notes. On November 5, 1998, the
Company initiated an exchange offer to exchange the Notes for identical Notes
registered under the Securities Act of 1933 (the "Notes Exchange Offer"). The
Notes Exchange Offer will expire on December 7, 1998.
The Indenture governing the Notes contains certain specified restrictive
and required financial covenants. The Company has agreed not to pledge its
assets to any third party except under certain limited circumstances. The
Company also has agreed to certain other limitations or prohibitions concerning
the incurrence of other indebtedness, capital stock, guaranties, asset sales,
investments, cash dividends to shareholders, distributions and redemptions.
5. RELATED PARTIES
REGISTRATION RIGHTS AGREEMENT:
As part of the reorganization of the Company in connection with its
initial public offering (the "Reorganization"), the Company entered into a
Registration Rights Agreement dated as of June 30, 1997 (the "Registration
Rights Agreements") with Sonic Financial Corporation ("SFC"), Bruton Smith,
Scott Smith and Egan Group, LLC (the "Egan Group"). SFC, Bruton Smith, Scott
Smith and the Egan Group currently are the owners of record of 4,440,625,
1,035,625, 478,125 and 245,625 shares of Class B Common Stock, respectively.
Upon the registration of any of their shares or as otherwise provided in the
Company's Amended and Restated Certificate of Incorporation, such shares will
automatically be converted into a like number of shares of Class A Common Stock.
Subject to certain limitations, the Registration Rights Agreements provide SFC,
Bruton Smith, Scott Smith and the Egan Group with certain piggyback registration
rights that permit them to have their shares of Common Stock, as selling
security holders, included in any registration statement pertaining to the
registration of Class A Common Stock for issuance by the Company or for resale
by other selling security holders, with the exception of registration statements
on Forms S-4 and S-8 relating to exchange offers (and certain other
transactions) and employee stock compensation plans, respectively. These
registration rights will be limited or restricted to the extent an underwriter
of an offering, if an underwritten offering, or the Company's Board of
Directors, if not an underwritten offering, determines that the amount to be
registered by SFC, Bruton Smith, Scott Smith or the Egan Group would not permit
the sale of Class A Common Stock in the quantity and at the price originally
sought by the Company or the original selling security holders, as the case may
be. The Registration Rights Agreement expires on the November 17, 2007. SFC is
controlled by the Company's Chairman and Chief Executive Officer, Bruton Smith.
THE SMITH GUARANTIES, PLEDGES AND SUBORDINATED LOAN:
In connection with the Company obtaining the NationsBank Facility, Mr.
Bruton Smith guaranteed the obligations of the Company and secured his guarantee
with a pledge of common stock of Speedway Motorsports Inc. ("SMI") owned
directly by him. In February 1998, the Company repaid in full the amounts owed
under the NationsBank Facility and Mr. Smith's guarantee was released.
12
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
5. RELATED PARTIES - Continued
In connection with the Company obtaining the Revolving Facility and a
global floor plan line of credit for all its dealership subsidiaries ("the Floor
Plan Facility" and, together with the Revolving Facility, the "Ford Credit
Facilities"), Mr. Smith personally guaranteed the obligations of the Company
under the Ford Credit Facilities, and such obligations were further secured with
a pledge of shares of common stock of SMI owned directly by him or through SFC
and having an estimated value at December 31, 1997 of approximately $50.0
million (the "Revolving Pledge").
In December 1997, upon the increase of the borrowing limit under the
Revolving Facility to the maximum loan commitment of $75.0 million, the
Revolving Pledge remained in place, Mr. Smith's guarantee of the Revolving
Facility was released and Mr. Smith was required to lend $5.5 million (the
"Subordinated Smith Loan") to the Company to increase its capitalization. The
Subordinated Smith Loan was required by Ford Motor Credit as a condition to its
agreement to increase the borrowing limit under the Revolving Facility because
the net offering proceeds to the Company from its initial public offering of
Class A Common Stock (the "IPO") in November 1997 were significantly less than
expected by the Company and Ford Motor Credit. The Subordinated Smith Loan is
evidenced by the Company's Subordinated Promissory Note dated December 1, 1997
in favor of Mr. Smith, bears interest at prime plus 0.5% and matures on November
30, 2000. All amounts owed by the Company to Mr. Smith under (i) the
Subordinated Smith Loan are subordinate in right of payment to all amounts owed
by the Company under the Ford Credit Facilities pursuant to the terms of a
Subordination Agreement dated as of December 5, 1997 between Mr. Smith and Ford
Motor Credit, and (ii) the Notes, pursuant to the terms of a Subordination
Agreement dated as of July 31, 1998 between Mr. Smith and the trustee under the
indenture governing the Notes.
DEALERSHIP LEASES:
On July 9, 1998, the Company entered into, subject to the approval of the
Company's Board of Directors and the Company's independent directors, a
Strategic Alliance Agreement and Agreement for the Mutual Referral of
Acquisition Opportunities (the "Alliance Agreement") with an operating
partnership controlled by Mar Mar Realty Trust, a Maryland real estate
investment trust ("MMRT"). MMRT owns the real estate associated with various
automobile dealerships, automotive aftermarket retailers and other automotive
related businesses and leases such property to the business operators located
thereon. Mr. Bruton Smith, the Company's Chairman and Chief Executive Officer,
serves as the chairman of MMRT's board of trustees and is presently its
controlling shareholder.
Under the Alliance Agreement, the Company has agreed to refer real estate
acquisition opportunities that arise in connection with its dealership
acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership
acquisition opportunities to the Company and to provide to the Company, at the
Company's cost, certain real estate development, maintenance, survey, and
inspection services. Pursuant to the Alliance Agreement, the Company has entered
into contracts to sell the real estate associated with Town and Country Toyota
and Fort Mill Ford, two of the Company's dealerships, for an aggregate purchase
price of $10.3 million. In addition, the Alliance Agreement provides for an
agreed form of lease (the "Sonic Form Lease") pursuant to which MMRT would lease
real estate to the Company should MMRT acquire real estate associated with any
of the Company's operations. Presently, the Company leases or intends to lease
from MMRT 29 parcels of land associated with 21 of its dealerships, including
the real estate associated with Town and Country Toyota and Fort Mill Ford which
the Company will lease back from MMRT pursuant to leases substantially similar
to the Sonic Form Lease. The aggregate initial annual base rent to be paid by
the Company for all 29 properties under the leases with MMRT is approximately
$7.7 million.
CHARTOWN TRANSACTIONS
Chartown is a general partnership engaged in real estate development and
management. Before the Reorganization, Town & Country Ford maintained a 49%
partnership interest in Chartown with the remaining 51% held by SMDA Properties,
LLC, a North Carolina limited liability company ("SMDA"). Mr. Smith owns an 80%
direct membership interest in SMDA with the remaining 20% owned indirectly
through SFC. In addition, SFC also held a demand promissory note for
approximately $1.6 million issued by Chartown (the "Chartown Note"), which was
uncollectible due to insufficient funds. As part of the Reorganization, the
Chartown Note was canceled and Town & Country Ford transferred its partnership
interest in Chartown to SFC for nominal consideration. In connection with that
transfer, SFC agreed to indemnify Town & Country Ford for any and all
obligations and liabilities, whether known or unknown, relating to Chartown and
Town & Country Ford's ownership thereof.
THE BOWERS VOLVO NOTE
In connection with Volvo's approval of the Company's acquisition of a
Volvo franchise as part of the acquisition of the Bowers Dealerships and
Affiliated Companies Acquisition in 1997 (the "Bowers Acquisition"), Volvo,
among other things, conditioned its approval upon Nelson E. Bowers, II, the
Company's Executive Vice President and a Director, acquiring and maintaining a
20% interest in the Company's Sonic Automotive of Chattanooga, LLC ("Chattanooga
Volvo") subsidiary that will operate the Volvo franchise. Mr. Bowers financed
all of the purchase price for this 20% interest by issuing a promissory note
(the "Bowers Volvo Note") in favor of Sonic Automotive of Nevada, Inc. ("Sonic
Nevada"), the wholly-owned subsidiary of the Company that controls a majority
interest in Chattanooga Volvo. The Bowers Volvo Note is secured by Mr. Bowers'
interest in Chattanooga Volvo.
13
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
5. RELATED PARTIES - Continued
The Bowers Volvo Note is for a principal amount of $900,000 and bears
interest at the lowest applicable federal rate as published by the U.S. Treasury
Department in effect on November 17, 1997. Accrued interest is payable annually.
The operating agreement of Chattanooga Volvo provides that profits and
distributions are to be allocated first to Mr. Bowers to the extent of interest
to be paid on the Bowers Volvo Note and next to the other members of Chattanooga
Volvo according to their percentages of ownership. No other profits or any
losses of Chattanooga Volvo will be allocated to Mr. Bowers under this
arrangement. Mr. Bowers' interest in Chattanooga Volvo will be redeemed and the
Bowers Volvo Note will be due and payable in full when Volvo no longer requires
Mr. Bowers to maintain his interest in Chattanooga Volvo.
OTHER RELATED PARTY TRANSACTIONS
Prior to June 30, 1997, two dealership subsidiaries of the Company had
each made several non-interest bearing advances to SFC ($2.5 million at December
31, 1996). In preparation for the Reorganization, a demand promissory note by
SFC evidencing $2.1 million of these advances was canceled in June 1997 in
exchange for the redemption of certain shares of the capital stock of Town &
Country Ford held by SFC. In addition, a demand promissory note by SFC
evidencing $509,000 of these advances was canceled in June 1997 pursuant to a
dividend.
The Company had amounts receivable from affiliates of $1.0 million and
$1.2 million at December 31, 1997 and September 30, 1998, respectively. Of this
amount, $622,000 and $1.1 million relates to advances made by the Company to SFC
at December 31, 1997 and September 30, 1998, respectively. The remaining
$425,000 and $112,000 at December 31, 1997 and September 30, 1998, respectively,
primarily relates to receivables from executives of the Company who were former
owners of certain dealerships acquired in 1997. These receivables resulted from
differences in the negotiated and actual net book value of the dealerships at
the date of acquisitions. The amounts receivable from affiliates are
non-interest bearing and are classified as current based on the expected
repayment dates.
The Company had amounts payable to affiliates of $4.8 million and $4.4
million at December 31, 1997 and September 30, 1998, respectively. Amounts
payable to affiliates includes a note payable to Nelson E. Bowers, II, the
Company's Executive Vice-President and former owner of the Bowers Dealerships,
resulting from the acquisition of the Bowers Dealerships. The note is payable in
28 equal quarterly installments bearing interest at prime less 0.5%. The balance
outstanding under this note was $4.0 million and $3.6 million at December 31,
1997 and September 30, 1998, respectively. The current portion of this note
amounted to $445,000 at December 31, 1997 and September 30, 1998. The remaining
portion of the amount payable to affiliates consisted of other loans from
affiliates, the majority of which bear interest at 8.75%, and is classified as
noncurrent based upon the expected repayment dates.
6. CAPITAL STRUCTURE AND PER SHARE DATA
PREFERRED STOCK - In 1997, the Company authorized 3 million shares of
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. No preferred shares were
issued and outstanding as of December 31, 1997.
In March, 1998, the Board of Directors designated 300,000 shares of
preferred stock as Class A Convertible Preferred Stock, par value $.10 per
share, which was divided into 100,000 of Series I Convertible Preferred Stock,
par value $.10 per share (the "Series I Preferred Stock"), 100,000 shares of
Series II Convertible Preferred Stock, par value $.10 per share (the "Series II
Preferred Stock"), and 100,000 shares of Series III Convertible Preferred Stock,
par value $.10 per share (the "Series III Preferred Stock" and together with the
Series I Preferred Stock and the Series II Preferred Stock, collectively, the
"Preferred Stock").
The Preferred Stock has a liquidation preference of $1,000 per share. Each
share of Preferred Stock is convertible, at the option of the holder, into that
number of shares of Class A Common Stock as is determined by dividing $1,000 by
the average closing price for the Class A Common Stock on the NYSE for the 20
days preceding the date of issuance of the shares of Preferred Stock (the
"Market Price"). Conversion of Series II Preferred Stock and Series III
Preferred Stock is subject to certain adjustments which have the effect of
limiting increases and decreases in the value of the Class A Common Stock
receivable upon conversion by 10% of the original value of the shares of Series
II Preferred Stock or Series III Preferred Stock.
The Preferred Stock is redeemable at the Company's option at any time
after the date of issuance. The redemption price of the Series I Preferred Stock
is $1,000 per share. The redemption price for the Series II Preferred Stock and
Series III Preferred Stock is as follows: (i) prior to the second anniversary of
the date of issuance, the redemption price is the greater of $1,000 per share or
the aggregate Market Price of the Class A Common Stock into which it could be
converted at the time of redemption, and (ii) after the second anniversary of
the date of issuance, the redemption price is the aggregate Market Price of the
Class A Common Stock into which it could be converted at the time of redemption.
Each share of Preferred Stock entitles its holder to a number of votes
equal to that number of shares of Class A Common Stock into which it could be
converted as of the record date for the vote. Holders of Preferred Stock are
entitled to participate in dividends payable on the Class A Common Stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
14
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
6. CAPITAL STRUCTURE AND PER SHARE DATA - Continued
Preferred Stock reported in the accompanying Unaudited Consolidated
Balance Sheet as of September 30, 1998 consists of 14,406 shares of Series I
Preferred Stock, 6,380 shares of Series II Preferred Stock, and 6,273 shares of
Series III Preferred Stock issued in connection with the consummation of the
1998 Acquisitions (see Note 2). These shares of Preferred Stock were
preliminarily recorded at their estimated fair value pending completion of an
independent valuation.
WARRANTS - In connection with the acquisition of Dyer Volvo in November
1997, the Company issued on January 15, 1998, warrants to purchase 44,391 shares
of Class A Common Stock at $12 per share, which is currently exercisable and
expires on January 15, 2003. In addition, in connection with the Century
Acquisition, the Company issued on July 31, 1998 warrants to purchase 75,000
shares of the Company's Class A Common Stock at $21.19 per share, which is
currently exercisable and expires on July 31, 2003. The Company has recorded the
issuance of such warrants at an estimated fair value pending completion of an
independent valuation.
PER SHARE DATA - The calculation of diluted net income per share considers
the potential dilutive effect of options and shares under the Company's stock
compensation plans, Class A Common Stock purchase warrants, and the Preferred
Stock (which is convertible into Class A Common Stock). The following table
illustrates the dilutive effect of such items on EPS:
For the three months ended For the nine months ended
September 30, 1998 September 30, 1998
-------------------------- ----------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
BASIC EPS
Income available to
common share-
holders $ 5,426 11,365 $ 0.48 $ 12,230 11,298 $ 1.08
========= =========
EFFECT OF DILUTIVE
SECURITIES
Stock compensation
plans - 359 - 265
Warrants - 18 - 13
Convertible Preferred
Stock - 1,321 - 564
-------- ------- ------- ------
DILUTED EPS
Income available to
common shareholders
+ assumed conver-
sions $ 5,426 13,063 $ 0.42 $ 12,230 12,140 $ 1.01
======== ====== ========= ======== ====== ========
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings which are incidental
to its business. The Company is protecting its interest in all such matters and
management 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.
15
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the results of operations and
financial condition should be read in conjunction with the Unaudited
Consolidated Financial Statements and the related notes thereto.
Results of Operations
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in the Company's
statement of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES FOR
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1998 1997 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
New vehicle sales ............................... 63.4% 61.0% 64.1% 60.3%
Used vehicle sales .............................. 23.5% 26.9% 22.9% 27.3%
Parts, service and collision repair ............. 10.5% 10.0% 10.7% 10.3%
Finance and insurance ........................... 2.6% 2.1% 2.3% 2.1%
Total revenues .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................... 88.4% 87.5% 88.7% 87.4%
Gross profit .................................... 11.6% 12.5% 11.3% 12.6%
Selling, general and administrative ............. 8.9% 9.3% 8.6% 9.4%
Operating income ................................ 2.7% 3.2% 2.7% 3.2%
Interest expense ................................ 1.6% 1.4% 1.6% 1.5%
Income before taxes ............................. 1.2% 1.7% 1.2% 1.7%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES. Revenues grew in each of the Company's primary revenue areas for
the first nine months of 1998 as compared with the first nine months of 1997,
causing total revenues to increase 240.5% to $1,158.5 million. New vehicle sales
revenue increased 220.3% to $698.2 million in the first nine months of 1998,
compared with $218.0 million in the first nine months of 1997. The increase was
due primarily to an increase in new vehicle unit sales of 182.8% to 29,262, as
compared with 10,348 in the first nine months of 1997 resulting principally from
additional unit sales contributed by the acquisitions of Jeff Boyd
Chrysler-Plymouth-Dodge in June 1997; Lake Norman Dodge and Affiliates in
September 1997; Ken Marks Ford in October 1997; Dyer Volvo and the Bowers
Dealerships and Affiliated Companies in November 1997; Clearwater Toyota,
Clearwater Mitsubishi, and Clearwater Collision Center in January 1998; Century
BMW, Heritage Lincoln Mercury, and Capitol Chevrolet and Imports in April 1998;
Casa Ford of Houston in May 1998; Hatfield Automotive Group in July 1998 and
Higginbotham Automotive Group in August 1998 (collectively, the "Closed
Acquisitions"). The remainder of the increase was due to a 13.3% increase in the
average selling price of new vehicles resulting principally from sales of higher
priced import vehicles contributed by the Closed Acquisitions.
Used vehicle revenues from retail sales increased 340.0% to $232.1 million
in the first nine months of 1998 from $52.7 million in the first nine months of
1997. The increase was due primarily to an increase in used vehicle unit sales
of 305.4% to 17,211, as compared with 4,245 in the first nine months of 1997,
resulting from additional unit sales contributed by the Closed Acquisitions. The
remainder of the increase was due to a 8.5% increase in the average selling
price of used vehicles resulting principally from sales of higher priced luxury
and import vehicles contributed by the Closed Acquisitions along with an
increase in used vehicle revenues of 15.4% in the first nine months of 1998
compared to the first nine months of 1997 from used vehicle revenues from stores
owned for longer than one year.
The Company's parts, service and collision repair revenue increased 227.4%
to $118.9 million in the first nine months of 1998 compared to $36.3 million in
the first nine months of 1997, due principally to the Closed Acquisitions.
Finance and insurance revenue increased $16.5 million, or 205.6%, due
principally to increased new vehicle sales and related financing.
GROSS PROFIT. Gross profit increased 280.5% to $146.1 million in the first
nine months of 1998 from $38.4 million in the first nine months of 1997 due
principally to increases in revenues contributed by the Closed Acquisitions.
Gross profit as a percentage of sales increased to 12.6% from 11.3% due to
increases in new vehicle gross margins from 6.8% to 7.7% resulting from sales of
higher margin import vehicles contributed by acquired dealerships, as well as
improved gross margins of used vehicles from 8.2% to 10.0% resulting from
efforts made to improve management of used vehicle inventories. In addition,
because gross margins from used vehicle revenues are higher than gross margins
from new vehicle revenues, an increase in used vehicle revenues as a percentage
of total revenues from 15.5% in the first nine months of 1997 to 20.0% in the
first nine months of 1998, and a decrease in new vehicle revenues as a
percentage of total revenues from 64.1% in the first nine months of 1997 to
60.3% in the first nine months of 1998, also contributed to the overall increase
in gross profits as a percentage of total revenues.
16
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased
272.7% to $108.9 million in the first nine months of 1998 from $29.2 million in
the first nine months of 1997. Such expenses as a percentage of revenues
increased to 9.4% from 8.6% due principally to expenses inherent with the
initial growth and formation of the Company. In addition, the increase in used
vehicle revenues as a percentage of total revenues which resulted in the
increase in gross profits and gross profit margins also resulted in increased
expenses related to employee commissions.
INTEREST EXPENSE, FLOORPLAN. Interest expense, floorplan increased 137.3%
to $11.9 million from $5.0 million, due primarily to floorplan interest incurred
by the Closed Acquisitions. As a percentage of total revenues, floor plan
interest decreased from 1.5% to 1.0% primarily due to decreased interest rates
under the Company's floor plan financing arrangements, as well as improvement in
turnover rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $5.6 million
from $0.4 million, due primarily to interest incurred on the Notes and on
acquisition-related indebtedness.
NET INCOME. As a result of the factors noted above, the Company's net
income increased by $9.8 million in the first nine months of 1998 compared to
the first nine months of 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Revenues grew in each of the Company's primary revenue areas for
the three months ended September 30, 1998 as compared with the three months
ended September 30, 1997, causing total revenues to increase 300.2% to $509.7
million. New vehicle sales revenue increased 284.8% to $310.7 million for the
three months ended September 30, 1998, compared with $80.8 million for the three
months ended September 30, 1997. The increase was due primarily to an increase
in new vehicle unit sales of 233.6% to 12,661, as compared with 3,795 for the
three months ended September 30, 1997 resulting principally from additional unit
sales contributed by the Closed Acquisitions. The remainder of the increase was
due to a 15.3% increase in the average selling price of new vehicles resulting
principally from sales of higher priced import vehicles contributed by the
Closed Acquisitions.
Used vehicle revenues from retail sales increased 395.8% to $99.6 million
for the three months ended September 30, 1998 from $20.1 million for the
comparable period of 1997. The increase was due primarily to an increase in used
vehicle unit sales of 366.2% to 7,492 as compared with 1,607 for the three
months ended September 30, 1997, resulting from additional unit sales
contributed by the Closed Acquisitions. The remainder of the increase was due to
a 6.4% increase in the average selling price of used vehicles resulting
principally from sales of higher priced luxury and import vehicles contributed
by the Closed Acquisitions along with an increase in used vehicle revenues of
12.1% for the three months ended September 30, 1998 compared to the three months
ended September 30, 1997 from used vehicle revenues on a same store basis
The Company's parts, service and collision repair revenue increased 279.5%
to $50.9 million for the three months ended September 30, 1998 compared to $13.4
million for the same period of the prior year, due principally to the Closed
Acquisitions. Finance and insurance revenue increased $7.8 million, or 236.5%,
due principally to increased new vehicle sales and related financing.
GROSS PROFIT. Gross profit increased 331.2% to $63.6 million for the three
months ended September 30, 1998 from $14.8 million for the three months ended
September 30, 1997 due principally to increases in revenues contributed by the
Closed Acquisitions. Gross profit as a percentage of sales increased to 12.5%
from 11.6% due to increases in new vehicle gross margins from 7.3% to 7.6%
resulting from sales of higher margin import vehicles contributed by acquired
dealerships, as well as improved gross margins of used vehicles from 7.7% to
10.2% resulting from efforts made to improve management of used vehicle
inventories. In addition, because gross margins from used vehicle revenues
are higher than gross margins from new vehicle revenues, an increase in used
vehicle revenues as a percentage of total revenues from 15.8% in the third
quarter of 1997 to 19.5% in the third quarter of 1998, and a decrease in new
vehicle revenues as a percentage of total revenues from 63.4% in the third
quarter of 1997 to 61.0% in the third quarter of 1998, also contributed to the
overall increase in gross profits as a percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased
320.0% to $47.4 million for the three months ended September 30, 1998 from $11.3
million for the same period in the prior year. Such expenses as a percentage of
revenues increased to 9.3% from 8.9% due principally to expenses inherent with
the initial growth and formation of the Company. In addition, the increase in
used vehicle revenues as a percentage of total revenues which resulted in the
increase in gross profits and gross profit margins also resulted in increased
expenses related to employee commissions.
INTEREST EXPENSE, FLOORPLAN. Interest expense, floorplan increased 128.2%
to $4.5 million from $2.0 million, due primarily to floorplan interest incurred
by the Closed Acquisitions. As a percentage of total revenues, floor plan
interest decreased from 1.6% to 0.9% primarily due to decreased interest rates
under the Company's floor plan financing arrangements, as well as improvement in
inventory turnover rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $2.8 million
from $0.1 million, due primarily to interest incurred on the Notes and on
acquisition-related indebtedness.
17
<PAGE>
NET INCOME. As a Result of the Factors Noted Above, the Company's Net
income increased by $4.5 million for the three months ended September 30, 1998
compared to comparable period of 1997.
LIQUIDITY AND CAPITAL RESOURCES :
The Company's principal needs for capital resources are to finance
acquisitions and fund debt service and working capital requirements.
Historically, the Company has relied primarily upon internally generated cash
flows from operations, borrowings under its various credit facilities, and
borrowings and capital contributions from its stockholders to finance its
operations and expansion. On November 10, 1997, the Company completed its
initial public offering of its Class A Common Stock, par value $.01 per share,
providing approximately $53.7 million of additional capital resources for the
consummation of certain of the Closed Acquisitions. In addition, on July 31,
1998, the Company completed its private placement of $125 million of its 11%
Senior Subordinated Notes due 2008 (the "Notes") which provided an additional
$120.6 million of capital resources for the consummation of certain of the
Closed Acquisitions and for future acquisitions (the "Notes Offering").
The Company currently has a standardized floor plan credit facility with
Ford Motor Credit for each of the Company's dealership subsidiaries (the "Floor
Plan Facility"). As of September 30, 1998, there was an aggregate of $174.0
million outstanding under the Floor Plan Facility. The Floor Plan Facility at
September 30, 1998 had an effective rate of prime less .9%, subject to certain
incentives. Typically new vehicle floor plan indebtedness exceeds the
related inventory balances. The inventory balance is generally reduced by the
applicable automobile manufacturer's (the "Manufacturer's") purchase discounts,
and such reduction is not reflected in the related floor plan liability. These
Manufacturer purchase discounts are standard in the industry, typically occur on
all new vehicle purchases, and are not used to offset the related floor plan
liability. These discounts are aggregated and generally paid to the Company by
the Manufacturer on a quarterly basis. The related floor plan liability becomes
due as vehicles are sold.
The Company makes monthly interest payments on the amount financed under
the Floor Plan Facility but is not required to make loan principal repayments
prior to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other assets
of the relevant dealership subsidiary. The Floor Plan Facility contains a number
of covenants, including among others, covenants restricting the Company with
respect to the creation of liens and changes in ownership, officers and key
management personnel.
During the first nine months of 1998, the Company generated net cash of
$4.2 million from operating activities, compared to $8.1 million in the first
nine months of 1997. The decrease was attributable principally to repayments on
notes payable - floorplan as well as increases in receivables and other assets
due to additional acquisitions and revenue growth.
Cash used in investing activities for the first nine months of 1998,
excluding amounts paid in acquisitions, was approximately $2.6 million, all of
which represented capital expenditures. For the first nine months of 1997, cash
used in investing activities, excluding amounts paid in acquisitions, was
approximately $1.6 million, all of which represented capital expenditures. The
Company's principal capital expenditures typically include building improvements
and equipment for use in the Company's dealerships.
Cash provided by financing activities for the nine months of 1998 of $87.1
million primarily reflects net proceeds received from the issuance of the Notes
as well as amounts borrowed under the Company's revolving credit facility to
finance acquisitions.
In August 1997, the Company obtained a $20 million loan from NationsBank,
N.A. (the "NationsBank Facility"). The proceeds from the NationsBank Facility
were used in the consummation of the acquisition of the two Lake Norman
dealerships and of Fort Mill Chrysler-Plymouth-Dodge. The NationsBank Facility
was guaranteed by Mr. O. Bruton Smith personally, which guarantee was released
in February 1998. The NationsBank Facility matured in February 1998 and was
repaid with proceeds from the IPO and the Revolving Facility (as defined below).
The Company has a $75 million secured revolving line of credit (the
"Revolving Facility") from Ford Motor Credit. The Revolving Facility bears
interest at a fluctuating per annum rate equal to the "prime" or "base" rate
announced by a majority (or if there is no majority, the median rate announced
by the three) of the following banks: The Chase Manhattan Bank, NationsBank,
N.A., Citibank, N.A., Bank of America National Trust and Savings Association and
Morgan Guaranty Trust Company of New York (the "Revolving Facility Prime Rate").
The Revolving Facility Prime Rate as of September 30, 1998 was 8.5%. The
Revolving Facility will mature in October 1999, unless the Company requests that
the term be extended, at the option of Ford Motor Credit, for a number of
additional one year terms to be negotiated by the parties. No assurance can be
given that such extensions will be granted. On July 31, 1998, all indebtedness
outstanding under the Revolving Facility was repaid with a portion of the net
proceeds from the Notes Offering. As of September 30, 1998, there were no
amounts outstanding under the Revolving Facility. Future amounts to be drawn
under the Revolving Facility will be used for the acquisition of additional
dealerships and to provide general working capital needs of the Company not to
exceed $10 million.
The Company agreed under the Revolving Facility not to pledge any of its
assets to any third party (with the exception of currently encumbered real
estate and assets of the Company's dealership subsidiaries that are subject to
previous pledges or liens). The Revolving Facility also contains certain
negative covenants made by the Company, including covenants restricting or
prohibiting the payment of dividends, capital expenditures and material
dispositions of assets as well as other customary covenants. Additional negative
covenants include specified ratios of (i) total debt to tangible equity (as
defined in the Revolving Facility), (ii) current assets to current liabilities,
(iii) earnings before interest, taxes, depreciation and amortization (EBITDA) to
fixed charges, (iv) EBITDA to interest expense, (v) EBITDA to total debt and
(vi) the current lending commitment under the Revolving Facility to scaled
assets (as defined in the Revolving Facility). Moreover, the loss of voting
control over the Company by O. Bruton Smith, B. Scott Smith and their spouses or
immediate family members or the failure by the Company, with
18
<PAGE>
certain exceptions, to own all the outstanding equity, membership or partnership
interests in its dealership subsidiaries will constitute an event of default
under the Revolving Facility. The Company did not meet the specified total debt
to tangible equity ratios required by the Revolving Facility at March 31, 1998
and at June 30, 1998 and obtained a waiver with regard to such requirement from
Ford Motor Credit. In connection with the Offering, the Company and Ford Motor
Credit amended the Revolving Facility to provide that the Notes (which are
subordinated to the Revolving Facility) will be treated as equity capital for
purposes of this ratio and, accordingly, the Company is in compliance with this
and all other restrictive covenants as of September 30, 1998.
On July 31, 1998, the Company completed its private placement of the Notes
in the aggregate principal amount of $125,000,000. The Notes are unsecured,
mature on August 1, 2008, and are redeemable at the Company's option after
August 1, 2003. Interest payments are due semi-annually on February 1 and August
1, commencing February 1, 1999. The Notes are subordinated to all present and
future senior indebtedness of the Company, including the Revolving Facility.
Redemption prices during 12 month periods beginning August 1 are 105.500% in
2003, 103.667% in 2004, 101.833% in 2005 and 100% thereafter. Net proceeds after
commissions and discounts, including issuance discount of $937,500, amounted to
$120,625,000 and were used to finance certain of the 1998 Acquisitions and to
repay amounts outstanding under the Revolving Facility. On November 5, 1998, the
Company initiated an exchange offer to exchange the Notes for identical Notes
registered under the Securities Act of 1933 (the "Notes Exchange Offer"). The
Notes Exchange Offer will expire on December 7, 1998.
The Indenture governing the Notes contains certain specified restrictive
and required financial covenants. The Company has agreed not to pledge its
assets to any third party except under certain limited circumstances. The
Company also has agreed to certain other limitations or prohibitions concerning
the incurrence of other indebtedness, capital stock, guaranties, asset sales,
investments, cash dividends to shareholders, distributions and redemptions.
In 1997, the Company authorized 3 million shares of preferred stock with
such designations, rights and preferences as may be determined from time to time
by the Board of Directors. In March, 1998, the Board of Directors designated
300,000 shares of preferred stock as Class A Convertible Preferred Stock, par
value $.10 per share, which was divided into 100,000 of Series I Convertible
Preferred Stock, par value $.10 per share (the "Series I Preferred Stock"),
100,000 shares of Series II Convertible Preferred Stock, par value $.10 per
share (the "Series II Preferred Stock"), and 100,000 shares of Series III
Convertible Preferred Stock, par value $.10 per share (the "Series III Preferred
Stock" and together with the Series I Preferred Stock and the Series II
Preferred Stock, collectively, the "Preferred Stock").
The Preferred Stock has a liquidation preference of $1,000 per share. Each
share of Preferred Stock is convertible, at the option of the holder, into that
number of shares of Class A Common Stock as is determined by dividing $1,000 by
the average closing price for the Class A Common Stock on the NYSE for the 20
days preceding the date of issuance of the shares of Preferred Stock (the
"Market Price"). Conversion of Series II Preferred Stock and Series III
Preferred Stock is subject to certain adjustments which have the effect of
limiting increases and decreases in the value of the Class A Common Stock
receivable upon conversion by 10% of the original value of the shares of Series
II Preferred Stock or Series III Preferred Stock.
The Preferred Stock is redeemable at the Company's option at any time
after the date of issuance. The redemption price of the Series I Preferred Stock
is $1,000 per share. The redemption price for the Series II Preferred Stock and
Series III Preferred Stock is as follows: (i) prior to the second anniversary of
the date of issuance, the redemption price is the greater of $1,000 per share or
the aggregate Market Price of the Class A Common Stock into which it could be
converted at the time of redemption, and (ii) after the second anniversary of
the date of issuance, the redemption price is the aggregate Market Price of the
Class A Common Stock into which it could be converted at the time of redemption.
Each share of Preferred Stock entitles its holder to a number of votes
equal to that number of shares of Class A Common Stock into which it could be
converted as of the record date for the vote. Holders of Preferred Stock are
entitled to participate in dividends payable on the Class A Common Stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
On January 1, 1998, the Company began operation and obtained control of
Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center (the
"Clearwater Acquisition") located in Clearwater, Florida. On April 1, 1998, the
Company began operation and obtained control of Capitol Chevrolet and Imports
located in Montgomery, Alabama (the "Montgomery Acquisition"), Century BMW
located in Greenville, South Carolina (the "Century Acquisition") and Heritage
Lincoln-Mercury located in Greenville, South Carolina (the "Heritage
Acquisition"). On May 1, 1998, the Company began operation and obtained control
of Casa Ford of Houston, Inc. located in Houston, Texas (the "Casa Ford
Acquisition). On July 7, 1998, the Company closed its acquisition of the
Hatfield Automotive Group located in Columbus, Ohio (the "Hatfield
Acquisition"). On August 1, 1998, the Company began operation and obtained
control of the Higginbotham Automotive Group located in Daytona, Florida. The
aggregate purchase price for the Clearwater Acquisition, the Montgomery
Acquisition, the Century Acquisition, the Heritage Acquisition, the Casa Ford
Acquisition, the Hatfield Acquisition and the Higginbotham Acquisition
(collectively, the "1998 Acquisitions") was approximately $117.5 million, paid
(or payable) with $83.5 million in cash, with 485,294 shares of Class A Common
Stock having an estimated fair value of approximately $8.2 million, and with
27,058.8 shares of Preferred Stock (14,406.3 shares of Series I Preferred Stock,
6,379.5 shares of Series II Preferred Stock, and 6,273 shares of Series III
Preferred Stock) having an aggregate liquidation preference of approximately
$27.1 million and an estimated fair value of approximately $25.8 million. Of the
$83.5 million cash portion of the aggregate purchase price, $38.9 million was
financed with borrowings under the Revolving Facility, which was subsequently
repaid with a portion of the net proceeds from the Notes Offering, $42.2 million
was financed with a portion of the net proceeds from the Notes Offering, and
$1.8 million was paid with cash generated from the Company's existing
operations. The remaining $0.6 million is payable to the seller of the
Montgomery Acquisition on the first and second anniversaries of the closing date
of the Montgomery Acquisition. In addition, the Company has issued to the seller
of the Century Acquisition warrants to purchase 75,000 shares of the Company's
Class A Common Stock at a purchase price equal to the market value of the Class
A Common Stock on the date of grant. The estimated fair value of these warrants
is approximately $0.5 million. In
19
<PAGE>
accordance with terms of the Clearwater Acquisition and the Montgomery
Acquisition, the Company may be required to pay additional amounts up to $5.1
million contingent on the future performance of the dealerships acquired in such
acquisitions. In addition, in accordance with the terms of the Casa Ford
Acquisition, the Company may be required to pay additional amounts to the seller
based on the dealership's pre-tax earnings for 1998 and 1999. Any additional
amounts paid will be accounted for as additional goodwill.
The Company has entered into definitive agreements to acquire one
dealership located in Chattanooga, Tennessee, one dealership located in
Charlotte, North Carolina, one dealership located in Tampa, Florida, two
dealerships located in Baytown, Texas, and a dealership group comprised of four
dealerships located in Birmingham, Alabama. The aggregate purchase price of
these acquisitions will be approximately $53.4 million plus the book value of
the certain assets acquired and the assumption of certain liabilities. The
aggregate purchase price will be payable with approximately $39.8 million in
cash to be obtained from borrowings under the Revolving Facility and from the
Company's existing operations, with approximately 13,633 shares of Series II
Preferred Stock with a liquidation preference of approximately $1,000 per share
and with the issuance of warrants to purchase 2,000 shares of Class A Common
Stock. In addition, in connection with the acquisition of the dealership group
located in Birmingham, Alabama, the Company may be required to pay additional
amounts based on the future pre tax earnings of the dealership group. These
acquisitions are expected to be consummated in the fourth quarter of 1998.
The Company incurred a tax liability of approximately $7.1 million in
connection with the change in its tax basis of accounting for inventory from
LIFO to FIFO, which is payable over a six-year period beginning in January 1998.
In addition, in connection with the Montgomery Acquisition and the Casa Ford
Acquisition, the Company incurred an additional tax liability in the amount of
approximately $2.2 million as a result of the change in accounting for the
inventory from LIFO to FIFO, which will be a payable over a six year period. As
of September 30, 1998, the remaining cumulative balance of the LIFO tax
liability was $7.1 million. The Company expects to be pay such obligation with
cash provided by operations.
The Company believes that funds generated through future operations and
availability of borrowings under its floor plan financing (or any replacements
thereof) and its other credit arrangements will be sufficient to fund its debt
service and working capital requirements and any seasonal operating
requirements, including its currently anticipated internal growth, for the
foreseeable future. The Company expects to fund any future acquisitions from its
future cash flow from operations, additional debt financing (including the
Revolving Facility) or the issuance of Class A Common Stock or issuance of other
convertible instruments.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures and its has completed an
assessment of its own operations in this regard. The Company has determined that
its systems are currently Year 2000 compliant and the costs associated with
making its systems Year 2000 compliant were immaterial. However, many of the
Company's lenders and suppliers, including suppliers that provide finance and
insurance products, may be impacted by Year 2000 complications.
The Company is in the process of making inquiries to its lenders and
suppliers regarding their Year 2000 compliance efforts, and it is reviewing the
Year 2000 disclosures in documents filed with the Commission for those lenders
and suppliers that are publicly-held companies. The Company does not believe
that failure of the Company's lenders or suppliers to ensure that their computer
systems are Year 2000 compliant will have a material adverse impact on the
Company's business, results of operations, and financial condition, although no
assurances can be given in this regard. Furthermore, there can be no assurances
that Year 2000 deficiencies on the part of dealerships to be acquired by the
Company would not have a material adverse impact on the Company's business,
results of operations, and financial condition.
The Company has not yet established a contingency plan in the event that
its expectations regarding Year 2000 problems are incorrect, but the Company
intends to create such a contingency plan within the next six months. At this
time, it is impossible to state with certainty whether Year 2000 computer
software or equipment failures on the part of the Company or third parties
involved with the Company will have a material adverse impact on the Company's
results of operations, liquidity and financial condition. However, based on the
Company's assessment of its own operations, the Company believes it is
adequately prepared to deal with Year 2000 problems which may arise.
SIGNIFICANT MATERIALITY OF GOODWILL
Goodwill represents the excess purchase price over the estimated fair
value of the tangible and separately measurable intangible net assets acquired.
The cumulative amount of goodwill at December 31, 1997 and September 30, 1998
was $75.0 million and $166.1 million, respectively. As a percentage of total
assets and stockholders' equity, goodwill, net of accumulated amortization,
represented 25.5% and 88.1%, respectively, at December 31, 1997, and 33.2% and
124.0%, respectively, at September 30, 1998. Generally accepted accounting
principles require that goodwill and all other intangible assets be amortized
over the period benefited. The Company has determined that the period benefited
by the goodwill will be no less than 40 years and, accordingly, is amortizing
goodwill over a 40 year period. If the Company were not to separately recognize
a material intangible asset having a benefit period of less than 40 years, or
were not to give effect to shorter benefit periods of factors giving rise to a
material portion of the goodwill, earnings reported in periods immediately
following the acquisition would be overstated. In later years, the Company would
be burdened by a continuing charge against earnings without the associated
benefit to income valued by management in arriving at the consideration paid for
the businesses acquired. Earnings in later years also could be significantly
affected if management then determined that the remaining balance of goodwill
was impaired. The Company periodically compares the carrying value of goodwill
with the anticipated undiscounted future cash flows from operations of the
businesses acquired in order to evaluate the recoverability of goodwill. The
Company has concluded that the anticipated future cash flows associated with
intangible assets recognized in its acquisitions will continue indefinitely, and
these is no pervasive evidence that any material portion will dissipate over a
period shorter than 40 years.
20
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures and Segments of an
Enterprise and Related Information". This Standard redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. This Statement
will be effective for the Company's fiscal year ending December 31, 1998, and
the Company does not intend to adopt this statement prior to the effective date.
The Company has not yet completed its analysis of which operating segments it
will report on, if any.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following sets forth certain information as to all equity securities
sold by the Company during the periods discussed that were not registered under
the Securities Act of 1933, as amended (the "Securities Act"). As to all such
transactions, an exemption was claimed under Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder ("Regulation D") as
transactions not involving a public offering in view of sophistication of the
purchasers, their access to material information about the Company, the
disclosures actually made to them by the Company, the absence of any general
solicitation or advertising, the status of the purchasers as "accredited
investors" as that term is defined in Rule 501 (a) of Regulation D and the
filing by the Company of the appropriate forms in connection therewith. All such
private sales of the Company's equity securities were made to the owners of
assets associated with, or the capital stock of, automobile dealerships acquired
by the Company as a part of the Company's dealership acquisition strategy.
The Company has privately issued its Class A Common Stock, par value $.01
per share (the "Class A Common Stock") in the following dealership acquisition
transactions:
On September 18, 1998, the Company issued 485,294 shares of its Class A
Common Stock to acquire the assets of HMC Finance Corporation, Inc., Halifax
Ford-Mercury, Inc., Higginbotham Automobiles, Inc., Higginbotham
Chevrolet-Oldsmobile, Inc., and Sunrise Auto World, Inc. with a value of
approximately $8.2 million.
The Company has also privately issued its Class A Convertible Preferred
Stock, par value $.10 per share (the "Preferred Stock") in dealership
acquisition transactions. The Preferred Stock is divided into three series: the
Series I Convertible Preferred Stock ("Series I Preferred Stock"), the Series II
Convertible Preferred Stock ("Series II Preferred Stock") and the Series III
Convertible Preferred Stock ("Series III Preferred Stock"). Each share of
Preferred Stock is convertible into shares of Class A Common Stock at the
holder's option at specified conversion rates. After the second anniversary of
the date of issuance, any shares of Preferred Stock which have not yet been
converted are subject to mandatory conversion to Class A Common Stock at the
option of the Company. No fractional shares of Class A Common Stock will be
issued upon conversion of any shares of Preferred Stock. Instead, the Company
will pay cash equal to the value of such fractional shares.
Generally, each share of Preferred Stock is convertible into that number
of shares of Class A Common Stock that has an aggregate Market Price at the time
of conversion equal to $1,000 (with certain adjustments for Series II and Series
III Preferred Stock). "Market Price" is defined generally as the average closing
price per share of the Class A Common Stock on the New York Stock Exchange for
twenty trading days immediately preceding the date of conversion. Before the
first anniversary of the date of issuance of the Preferred Stock, each holder of
Preferred Stock is unable to convert without first giving the Company ten
business days' notice and an opportunity to redeem such Preferred Stock at the
then applicable redemption price.
The Company has privately issued Convertible Preferred Stock in the
following dealership acquisition transactions:
On March 24, 1998, the Company issued 3,960 shares of its Series III
Preferred Stock to acquire the assets of M&S Auto Resources, Inc. (d/b/a
Clearwater Toyota), Clearwater Auto Resources, Inc. (d/b/a Clearwater
Mitsubishi) and Clearwater Collision Center, Inc. with a value of approximately
$3.4 million.
On July 8, 1998, the Company issued 14,025 shares of its Series I
Preferred Stock to acquire the assets of Hatfield Jeep Eagle, Inc., Hatfield
Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota West, Inc., and
Hatfield Hyundai, Inc. with a value of approximately $14.0 million.
On July 14, 1998, the Company issued 400 shares of Series II Preferred
Stock to acquire the assets of Fairway Management Company d/b/a Heritage
Lincoln-Mercury with a value of approximately $0.4 million.
On July 31, 1998, the Company issued 2,166.5 shares of Series II Preferred
Stock to acquire the assets of Century Auto Sales, Inc. d/b/a Century BMW with a
value of approximately $1.9 million.
On July 31, 1998, the Company issued 381.3 shares of Series I Preferred
Stock and 3,813 shares of Series II Preferred Stock to acquire the outstanding
capital stock of Capitol Chevrolet and Imports, Inc. with a value of
approximately $3.8 million.
On July 31, 1998, the Company issued 2,313 shares of Series III Preferred
Stock to acquire the outstanding capital stock of Casa Ford of Houston, Inc.
("Casa Ford") with a value of approximately $2.3 million.
In addition, the Company has privately issued warrants to purchase Class A
Common Stock in the following dealership acquisition transactions:
On January 15, 1998, the Company issued warrants to purchase 44,391 shares
of the Company's Class A Common Stock at an exercise price of $12 per share,
which warrants are currently exercisable at the option of the holder and expire
on January 15, 2003. These warrants were issued as consideration paid by the
Company to acquire the assets of Dyer Volvo having an aggregate value of
approximately $266,346.
22
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - CONTINUED
On July 31, 1998, the Company issued warrants to purchase 75,000 shares of
the Company's Class A Common Stock at an exercise price of $21.19 per share,
which warrants are currently exercisable at the option of the holder and expire
on July 21, 2003. These warrants were issued as consideration paid by the
Company to acquire the assets of Century Auto Sales, Inc. d/b/a Century BMW
having an aggregate value of approximately $450,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NO.
4.1* Registration Rights Agreement dated as of July 31, 1998 among the Company,
the Guarantors named therein and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated, NationsBanc Montgomery Securities
LLC and BancAmerica Robertson Stephens (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-4 (File No. 333-64397)
of the Company (the "Form S-4")).
4.2* Indenture dated as of July 1, 1998 between the Company and U.S. Bank Trust
National Association (incorporated by reference to Exhibit 4.2 to the Form
S-4).
4.3* Form of 11% Senior Subordinated Note Due 2008, Series B (incorporated by
reference to Exhibit 4.3 to the Form S-4).
10.1* Asset Purchase Agreement dated as of July 7, 1998 by and among the
Company, HMC Finance Corporation, Inc., Halifax Ford-Mercury, Inc.,
Higginbotham Automobiles, Inc., Higginbotham Chevrolet-Oldsmobile, Inc.,
Sunrise Auto World, Inc. and Dennis D. Higginbotham (the "Higginbotham
Purchase Agreement") (incorporated by reference to Exhibit 99.14 to the
Company's Current Report on Form 8-K filed July 9, 1998).
10.2* Amendment No. 1 and Supplement to the Higginbotham Purchase Agreement
(incorporated by reference to Exhibit 10.85a to the Form S-4).
10.3* Amendment No. 2 and Supplement to Asset Purchase Agreement dated as of
July 8, 1998 between the Company, Hatfield Jeep Eagle, Inc., Hatfield
Lincoln Mercury, Inc., Hatfield Hyundai, Inc., Bud C. Hatfield, Dan E.
Hatfield, and Dan E. Hatfield, as trustee of The Bud C. Hatfield Sr.
Special Irrevocable Trust (incorporated by reference to Exhibit 99.3 to
the Company's Current Report on Form 8-K filed July 24, 1998 (the "July
24, 1998 Form 8-K")).
10.4* Strategic Alliance Agreement and Agreement for the Mutual Referral of
Acquisition Opportunities dated July 9, 1998 between the Company and Mar
Mar Realty, L.P. (incorporated by reference to Exhibit 99.7 to the July
24, 1998 Form 8-K).
10.5* Purchase Agreement dated as of July 28, 1998 among the Company, the
Guarantors named therein and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, NationsBanc Montgomery Securities LLC and
BancAmerica Robertson Stephens (incorporated by reference to Exhibit 10.88
to the Form S-4).
10.6* Subordination Agreement dated as of July 31, 1998 between O. Bruton Smith
and U.S. Bank Trust National Association (incorporated by reference to
Exhibit 10.89 to the Form S-4).
10.7* Employment Agreement between the Company and Dennis D. Higginbotham
(incorporated by reference to Exhibit 10.90 to the Form S-4).
27 Financial data schedule for the nine months ended September 30, 1998
(filed electronically).
* Filed Previously
23
<PAGE>
(b) Reports on Form 8-K.
On July 9, 1998, the Company filed a Current Report on Form 8-K, dated
July 9, 1998, pursuant to Item 5 of such form, announcing the Company's proposed
private placement of its $125 million Senior Subordinated Notes due 2008 and
announcing the execution of definitive agreements to acquire Economy Cars, Inc.,
the Hatfield Acquisition, the Montgomery Acquisition, the Century Acquisition,
the Heritage Acquisition, the Casa Ford Acquisition, and the Higginbotham
Acquisition.
On July 24, 1998, the Company filed a Current Report on Form 8-K, dated
July 9, 1998, pursuant to Item 2 of such form, reporting the Hatfield
Acquisition and containing Financial Statements of the Business Acquired and
Unaudited Pro Forma Financial Statements Reflecting the Business Combination of
Sonic Automotive, Inc. and Hatfield Dealerships.
On July 24, 1998, the Company filed an Amended Current Report on Form
8-K/A, dated March 24, 1998, relating to its Current Report on Form 8-K filed on
March 30, 1998 and containing Unaudited Pro Forma Financial Statements
Reflecting the Business Combination of Sonic Automotive, Inc. and Clearwater
Dealerships.
On August 20, 1998, the Company filed an Amended Current Report on Form
8-K/A, dated July 9, 1998, relating to its Current Report on Form 8-K filed on
July 24, 1998 and containing Financial Statements of the Business Acquired and
Unaudited Pro Forma Financial Statements Reflecting the Business Combination of
Sonic Automotive, Inc. and Hatfield Dealerships.
24
<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.
(Registrant)
Date: November 13, 1998 By: /s/ O. Bruton Smith
----------------- -----------------
O. Bruton Smith
Chairman and Chief Executive Officer
Date: November 13, 1998 By: /s/ Theodore M Wright
----------------- ------------------------
Theodore M. Wright
Vice President-Finance, Chief Financial
Officer, Treasurer, Secretary
and Director
25
<PAGE>
INDEX TO EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q FOR
SONIC AUTOMOTIVE, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
4.1* Registration Rights Agreement dated as of July 31, 1998 among the
Company, the Guarantors named therein and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith, Incorporated, NationsBanc
Montgomery Securities LLC and BancAmerica Robertson Stephens
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 (File No. 333-64397) of the Company (the "Form
S-4")).
4.2* Indenture dated as of July 1, 1998 between the Company and U.S. Bank
Trust National Association (incorporated by reference to Exhibit 4.2
to the Form S-4).
4.3* Form of 11% Senior Subordinated Note Due 2008, Series B
(incorporated by reference to Exhibit 4.3 to the Form S-4).
10.1* Asset Purchase Agreement dated as of July 7, 1998 by and among the
Company, HMC Finance Corporation, Inc., Halifax Ford-Mercury, Inc.,
Higginbotham Automobiles, Inc., Higginbotham Chevrolet-Oldsmobile,
Inc., Sunrise Auto World, Inc. and Dennis D. Higginbotham (the
"Higginbotham Purchase Agreement") (incorporated by reference to
Exhibit 99.14 to the Company's Current Report on Form 8-K filed July
9, 1998).
10.2* Amendment No. 1 and Supplement to the Higginbotham Purchase
Agreement (incorporated by reference to Exhibit 10.85a to the Form
S-4).
10.3* Amendment No. 2 and Supplement to Asset Purchase Agreement dated as
of July 8, 1998 between the Company, Hatfield Jeep Eagle, Inc.,
Hatfield Lincoln Mercury, Inc., Hatfield Hyundai, Inc., Bud C.
Hatfield, Dan E. Hatfield, and Dan E. Hatfield, as trustee of The
Bud C. Hatfield Sr. Special Irrevocable Trust (incorporated by
reference to Exhibit 99.3 to the Company's Current Report on Form
8-K filed July 24, 1998 (the "July 24, 1998 Form 8-K")).
10.4* Strategic Alliance Agreement and Agreement for the Mutual Referral
of Acquisition Opportunities dated July 9, 1998 between the Company
and Mar Mar Realty, L.P. (incorporated by reference to Exhibit 99.7
to the July 24, 1998 Form 8-K).
10.5* Purchase Agreement dated as of July 28, 1998 among the Company, the
Guarantors named therein and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated, NationsBanc Montgomery
Securities LLC and BancAmerica Robertson Stephens (incorporated by
reference to Exhibit 10.88 to the Form S-4).
10.6* Subordination Agreement dated as of July 31, 1998 between O. Bruton
Smith and U.S. Bank Trust National Association (incorporated by
reference to Exhibit 10.89 to the Form S-4).
10.7* Employment Agreement between the Company and Dennis D. Higginbotham
(incorporated by reference to Exhibit 10.90 to the Form S-4).
27 Financial data schedule for the nine months ended September 30, 1998
(filed electronically).
* Filed Previously
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED
STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE QUARTER
ENDING SEPTEMBER 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 40,091
<SECURITIES> 0
<RECEIVABLES> 38,617
<ALLOWANCES> 522
<INVENTORY> 210,947
<CURRENT-ASSETS> 295,988
<PP&E> 24,444
<DEPRECIATION> 0
<TOTAL-ASSETS> 490,338
<CURRENT-LIABILITIES> 208,936
<BONDS> 131,213
0
25,788
<COMMON> 113
<OTHER-SE> 105,763
<TOTAL-LIABILITY-AND-EQUITY> 490,338
<SALES> 1,015,001
<TOTAL-REVENUES> 1,158,505
<CGS> 1,012,432
<TOTAL-COSTS> 1,012,432
<OTHER-EXPENSES> 108,875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,442
<INCOME-PRETAX> 19,780
<INCOME-TAX> 7,550
<INCOME-CONTINUING> 12,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,230
<EPS-PRIMARY> 1.08<F1>
<EPS-DILUTED> 1.01
<FN>
<F1> EPS-BASIC
</FN>
</TABLE>
