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, 2000
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 56-2010790
(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, 2000, there were 30,074,938 shares of Class A Common Stock
and 12,250,000 shares of Class B Common Stock outstanding.
1
<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial
Statements (Unaudited) 3
Consolidated Statements of Income - Three-month periods ended
September 30, 1999 and September 30, 2000
Consolidated Statements of Income - Nine-month periods ended
September 30, 1999 and September 30, 2000
Consolidated Balance Sheets -
December 31, 1999 and September 30, 2000
Consolidated Statement of Stockholders'
Equity - Nine-month period ended September 30, 2000
Consolidated Statements of Cash Flows - Nine-month periods
ended September 30, 1999 and September 30, 2000
Notes to Unaudited Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
SONIC AUTOMOTIVE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 2000
------------ ------------
<S> <C> <C>
REVENUES:
New vehicles $ 508,066 $ 924,040
Used vehicles 173,592 335,638
Wholesale vehicles 69,523 112,256
------------ ------------
Total vehicles 751,181 1,371,934
Parts, service and collision repair 96,223 177,788
Finance & insurance and other 22,560 45,139
------------ ------------
Total revenues 869,964 1,594,861
COST OF SALES 753,310 1,366,120
------------ ------------
GROSS PROFIT 116,654 228,741
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 82,650 165,460
DEPRECIATION 776 1,769
GOODWILL AMORTIZATION 2,216 4,184
------------ ------------
OPERATING INCOME 31,012 57,328
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 5,721 11,607
Interest expense, other 4,786 10,637
Other income 38 35
------------ ------------
Total other expense 10,469 22,209
------------ ------------
INCOME BEFORE INCOME TAXES 20,543 35,119
PROVISION FOR INCOME TAXES 7,960 13,060
------------ ------------
NET INCOME $ 12,583 $ 22,059
============ ============
BASIC NET INCOME PER SHARE $ 0.36 $ 0.52
============ ============
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OUTSTANDING 35,208 42,693
============ ============
DILUTED NET INCOME PER SHARE $ 0.33 $ 0.51
============ ============
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 38,268 43,571
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
-------------- --------------
<S> <C> <C>
REVENUES:
New vehicles $ 1,275,882 $ 2,682,696
Used vehicles 458,797 962,392
Wholesale vehicles 169,923 323,231
-------------- --------------
Total vehicles 1,904,602 3,968,319
Parts, service and collision repair 230,249 513,920
Finance & insurance and other 52,095 125,362
-------------- --------------
Total revenues 2,186,946 4,607,601
COST OF SALES 1,897,956 3,951,528
-------------- --------------
GROSS PROFIT 288,990 656,073
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 207,293 473,745
DEPRECIATION 1,957 4,930
GOODWILL AMORTIZATION 5,186 12,414
-------------- --------------
OPERATING INCOME 74,554 164,984
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 15,118 34,012
Interest expense, other 12,177 31,200
Other income 362 109
-------------- --------------
Total other expense 26,933 65,103
-------------- --------------
INCOME BEFORE INCOME TAXES 47,621 99,881
PROVISION FOR INCOME TAXES 18,250 38,000
-------------- --------------
NET INCOME $ 29,371 $ 61,881
============== ==============
BASIC NET INCOME PER SHARE $ 0.98 $ 1.45
============== ==============
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OUTSTANDING 29,948 42,584
============== ==============
DILUTED NET INCOME PER SHARE $ 0.88 $ 1.40
============== ==============
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 33,489 44,257
============== ==============
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
December 31, 2000
1999 (Unaudited)
----------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 83,111 $ 89,813
Receivables (net of allowance for doubtful accounts of $1,506
at December 31, 1999 and $1,952 at September 30, 2000) 99,987 127,144
Inventories 630,857 661,175
Due from affiliates 4,188 92
Other current assets 17,424 55,077
----------------- ----------------
Total current assets 835,567 933,301
PROPERTY AND EQUIPMENT, NET 63,681 72,768
GOODWILL, NET 592,670 635,797
OTHER ASSETS 9,184 12,205
----------------- ----------------
TOTAL ASSETS $ 1,501,102 $ 1,654,071
================= ================
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
December 31, 2000
1999 (Unaudited)
----------------- ----------------
(dollars in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 517,575 $ 540,950
Trade accounts payable 48,405 55,239
Accrued interest 11,605 6,581
Other accrued liabilities 72,012 87,983
Payable for acquisitions 5,925 -
Current maturities of long-term debt 2,388 2,388
----------------- ----------------
Total current liabilities 657,910 693,141
LONG-TERM DEBT 417,283 491,063
OTHER LONG-TERM LIABILITIES 3,923 3,861
PAYABLE TO THE COMPANY'S CHAIRMAN 5,500 5,500
PAYABLE TO AFFILIATES 723 -
DEFERRED INCOME TAXES 8,476 13,946
INCOME TAX PAYABLE 4,714 3,256
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par, 3.0 million shares authorized;
300,000 shares designated as Class A Convertible Preferred 27,191 251
Stock, liquidation preference $1,000 per share, of which
28,159 shares are issued and outstanding at December 31, 1999
and 251 shares are issued and outstanding at September 30, 2000
Class A Common Stock, $.01 par, 100.0 million shares authorized;
29,075,437 shares issued at December 31, 1999
and 33,174,037 shares issued at September 30, 2000 291 332
Class B Common Stock, $.01 par (convertible into Class A Common Stock),
30.0 million shares authorized; 12,250,000 shares issued and 123 123
outstanding at December 31, 1999 and September 30, 2000
Paid-in capital 301,934 328,817
Retained earnings 79,392 141,273
Class A Treasury Stock, at cost (723,600 shares at December 31, 1999
and 2,853,653 at September 30, 2000) (6,358) (27,492)
----------------- ----------------
Total stockholders' equity 402,573 443,304
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,501,102 $ 1,654,071
================= ================
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Class A Class B
Stock Common Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Shares Amount Capital Earnings
--------- ----------- ------------ --------------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1999 28 $27,191 29,075 $291 12,250 $123 $301,934 $ 79,392
Issuance of Preferred
Stock 12 11,589 - - - - - -
Issuance of Common
Stock - - 809 8 - - (8) -
Cancellation of Common
Stock - - (21) - - - (198) -
Shares awarded under stock
compensation plans - - 344 3 - - 2,141 -
Conversion of Preferred
Stock (26) (25,947) 2,967 30 - - 25,917 -
Redemption of Preferred
Stock (14) (12,582) - - - - (969) -
Purchase of Class A
Treasury Stock - - - - - - - -
Net income - - - - - - - 61,881
BALANCE AT
--------- ----------- ------------ ------- ------------ ------- ------------ ------------
SEPTEMBER 30, 2000 - $ 251 33,174 $332 12,250 $123 $328,817 $141,273
========= =========== ============ ======= ============ ======= ============ ============
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
----------- ---------------
<S> <C> <C>
BALANCE AT
DECEMBER 31, 1999 $ (6,358) $ 402,573
Issuance of Preferred
Stock - 11,589
Issuance of Common
Stock - -
Cancellation of Common
Stock - (198)
Shares awarded under stock
compensation plans - 2,144
Conversion of Preferred
Stock - -
Redemption of Preferred
Stock - (13,551)
Purchase of Class A
Treasury Stock (21,134) (21,134)
Net income - 61,881
BALANCE AT
----------- ---------------
SEPTEMBER 30, 2000 $(27,492) $ 443,304
=========== ===============
</TABLE>
See notes to unaudited consolidated financial statements.
7
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $29,371 $61,881
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,143 17,344
Loss on disposal of property and equipment 72 43
Changes in assets and liabilities that relate to operations:
Receivables (8,747) (26,563)
Inventories 30,739 16,590
Other assets (395) (5,388)
Notes payable - floor plan (40,714) (18,966)
Trade accounts payable and other liabilities 4,930 11,482
----------- -----------
Total adjustments (6,972) (5,458)
----------- -----------
Net cash provided by operating activities 22,399 56,423
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (164,306) (50,468)
Purchases of property and equipment (11,171) (57,993)
Proceeds from sales of property and equipment 10,594 15,199
----------- -----------
Net cash used in investing activities (164,883) (93,262)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 159,732 75,174
Payments on long-term debt (86,014) (2,464)
Public offering of common stock 85,069 -
Purchases of Class A Common Stock and redemptions of Preferred Stock - (34,685)
Issuance of shares under stock compensation plans 1,594 2,144
Repayments from affiliated companies 134 3,372
----------- -----------
Net cash provided by financing activities 160,515 43,541
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,031 6,702
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,834 83,111
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $69,865 $89,813
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued for acquisitions and contingent
consideration $53,150 $11,589
Common stock issued for acquisitions $22,250 $ -
Conversion of Preferred Stock $ - $25,947
</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 our other filings with
the Securities and Exchange Commission.
SONIC AUTOMOTIVE, INC.
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, 1999 and 2000 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 audited consolidated financial statements of Sonic Automotive, Inc.
("Sonic" or "the Company") for the year ended December 31, 1999.
Revenue Recognition -- Sonic records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
Sonic 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. Sonic also receives commissions from the
sale of credit life, accident, health and disability insurance contracts to
customers. Sonic may be assessed a chargeback fee in the event of early
cancellation of a loan or insurance 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.
Sonic also receives commissions from the sale of non-recourse third
party extended service contracts to customers. These contracts provide for no
recourse against Sonic, but instead provide that the applicable manufacturer or
third party warranty company is directly liable for all warranties provided
within the contract. Commission revenue from the sale of these third party
extended service contracts is recorded net of estimated chargebacks at the time
of sale.
Commissions expense related to finance and insurance commission revenue
is charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Commission expense charged to cost of sales was approximately $3.3
million and $6.7 million for the three months ended September 30, 1999 and 2000,
respectively, and approximately $8.5 million and $19.8 million for the nine
months ended September 30, 1999 and 2000, respectively.
Goodwill -- Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. The cumulative gross amount of goodwill at December 31, 1999
was $605.1 million and at September 30, 2000 was $660.6 million. As a percentage
of total assets and stockholders' equity, goodwill, net of accumulated
amortization, represented 39.5% and 147.2%, respectively, at December 31, 1999,
and 38.4% and 143.4%, respectively, at September 30, 2000. Generally accepted
accounting principles in the United States of America require that goodwill and
all other intangible assets be amortized over the period benefited. Sonic has
determined that the period benefited by the goodwill will be no less than 40
years. Accordingly, Sonic is amortizing goodwill over a 40 year period. Earnings
reported in periods immediately following an acquisition would be overstated if
Sonic attributed a 40 year benefit to an intangible asset that should have had a
shorter benefit period. In later years, Sonic would be burdened by a continuing
charge against earnings without the associated benefit to income valued by
management in arriving at the price 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. Sonic
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. Sonic 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.
Sonic will incur additional goodwill in future acquisitions.
9
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
The Financial Accounting Standards Board recently proposed new rules
relating to the accounting for business combinations and intangible assets. One
aspect of the proposal would not permit goodwill to be amortized over a period
in excess of 20 years; however, we cannot assure that such a rule will be
adopted and, if adopted, as to the final provisions of any such rules. If such a
rule is adopted, we have been advised that it would likely only affect the
period over which we amortize goodwill on our future acquisitions.
2. BUSINESS ACQUISITIONS
Pending Acquisitions
Sonic has signed definitive agreements to acquire five dealerships for
an estimated $50.3 million payable with a combination of cash , Class A
convertible preferred stock, and Class A common stock. The aggregate purchase
price is subject to adjustment based on the actual net book value of the assets
acquired. The cash portion of the purchase price will be paid with a combination
of borrowings under Sonic's $500 million revolving line of credit with Ford
Motor Credit Company ("Ford Motor Credit") and Chrysler Financial Corporation
("Chrysler Financial") (the "Revolving Facility") and with cash generated from
Sonic's existing operations. These acquisitions are expected to be consummated
in the fourth quarter of 2000 and first quarter of 2001.
Acquisitions Completed Subsequent to September 30, 2000 (through November 13,
2000):
Subsequent to September 30, 2000, Sonic acquired three dealerships for
approximately $13.2 million in cash financed with a combination of cash borrowed
under the Revolving Facility and cash generated from Sonic's existing
operations. The acquisitions were accounted for using the purchase method of
accounting.
Acquisitions Completed During the Nine months Ended September 30, 2000:
During the first nine months of 2000, Sonic acquired seven dealerships
for approximately $51.3 million in cash and 11,589 shares of Sonic's Class A
convertible preferred stock, Series II, having an estimated value at the time of
issuance of approximately $11.6 million. The cash portion of the purchase price
was financed with a combination of cash borrowed under the Revolving Facility
and cash generated from Sonic's existing operations. The acquisitions were
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 their respective acquisition dates. The
aggregate purchase price of these acquisitions has been allocated to the assets
and liabilities acquired based on their estimated fair market value at the
acquisition date as shown in the table below. We are still in the process of
obtaining data necessary to complete the allocation of the purchase price of
these acquisitions. As a result, the values of assets and liabilities included
in the table below reflect preliminary estimates where actual values have not
yet been determined, and may ultimately be different than amounts recorded once
actual values are determined. Any adjustment to the value of the assets and
liabilities will be recorded against goodwill.
Working capital $ 9,001
Property and equipment 2,396
Goodwill 52,408
Non-current liabilites assumed (943)
------------
Total purchase price $62,862
============
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the acquisition transactions
completed during 1999 and during the first nine months of 2000 had occurred as
of the beginning of the year in which the acquisitions were completed, and at
the beginning of the immediately preceding year, 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 Sonic or whose salaries have
been reduced pursuant to employment agreements with Sonic. 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 period presented. These
results are also not necessarily indicative of the results of future operations.
10
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. BUSINESS ACQUISITIONS - (Continued)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 1,545,589 $ 1,594,861 $ 4,470,914 $ 4,695,388
Gross profit $ 209,017 $ 228,741 $ 587,124 $ 664,824
Net income $ 11,694 $ 22,059 $ 42,535 $ 62,215
Diluted income per share $ 0.25 $ 0.51 $ 0.91 $ 1.40
</TABLE>
Sale of Dealership Subsidiaries:
During the first nine months of 2000, Sonic sold substantially all of
the assets of three of its dealership subsidiaries and one franchise from
another dealership for approximately $5.9 million. There were no material gains
or losses as a result of these sales. Sonic also intends to sell substantially
all of the assets at certain other subsidiaries within the next year. The
aggregate net book value of the assets held for sale total approximately $9.4
million have been included in other current assets on the accompanying unaudited
consolidated balance sheet as of September 30, 2000.
3. INVENTORIES
Inventories consist of the following:
December 31, September 30,
1999 2000
------------ -------------
New vehicles $ 459,382 $ 465,907
Used vehicles 109,130 130,406
Parts and accessories 44,821 47,430
Other 17,524 17,432
----------------- -----------------
Total $ 630,857 $ 661,175
================= =================
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
December 31, September 30,
1999 2000
------------ -------------
Land $ 953 $ 53
Building and improvements 23,120 24,798
Office equipment and fixtures 22,616 24,696
Parts and service equipment 16,008 19,573
Company vehicles 4,664 5,628
Construction in progress 5,785 11,679
----------------- -----------------
Total, at cost 73,146 86,427
Less accumulated depreciation (9,465) (13,659)
----------------- -----------------
Property and equipment, net $ 63,681 $ 72,768
================= =================
In addition to the $11.7 million classified as construction in
progress, Sonic has incurred approximately $28.3 million in construction costs
on facilities which are expected to be completed and sold within one year in
sale-leaseback transactions. Accordingly, these costs have been classified in
other current assets on the accompanying unaudited consolidated balance sheet as
of September 30, 2000.
11
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. LONG-TERM DEBT
Revolving Facility
On August 10, 2000, Sonic entered into the Revolving Facility with Ford
Motor Credit and Chrysler Financial to replace its previous $350 million
acquisition line of credit with Ford Motor Credit. The Revolving Facility has a
borrowing limit of $500 million, subject to a borrowing base calculated on the
basis of our receivables, inventory and equipment and a pledge of certain
additional collateral by an affiliate of Sonic. Amounts outstanding under the
Revolving Facility bear interest at 2.50% above LIBOR (LIBOR was 6.62% at
September 30, 2000) and will mature on October 31, 2003. Borrowings, net of
repayments, under the Revolving Facility for the nine months ended September 30,
2000 were approximately $52.6 million and were primarily used to finance
acquisitions. The total outstanding balance as of September 30, 2000 was
approximately $341.6 million. Additional amounts to be drawn under the Revolving
Facility are to be used for the acquisition of additional dealerships and to
provide for the general working capital needs of Sonic and other general
corporate purposes.
We agreed under the Revolving Facility not to pledge any of our assets
to any third party (with the exception of currently encumbered assets of our
dealership subsidiaries that are subject to previous pledges or liens). In
addition, the Revolving Facility contains certain negative covenants, including
covenants restricting or prohibiting the payment of dividends, capital
expenditures and material dispositions of assets as well as other customary
covenants and default provisions. Financial covenants include specified ratios
of
o current assets to current liabilities (at least 1.23:1),
o earnings before interest, taxes, depreciation and amortization (EBITDA) and
rent less capital expenditures to fixed charges (at least 1.4:1),
o EBITDA to interest expense (at least 2:1) and
o total adjusted debt to EBITDA (no greater than 2.25:1).
In addition, the loss of voting control over Sonic by Bruton Smith,
Scott Smith and their spouses or immediate family members or the failure by
Sonic, 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. Sonic is in compliance with all
restrictive covenants as of September 30, 2000.
Mortgage Facility
In June 2000, Sonic entered into a revolving real estate acquisition
and construction line of credit (the "Construction Loan") and a related mortgage
refinancing facility (the "Permanent Loan" and collectively with the
Construction Loan, the "Mortgage Facility") with Ford Motor Credit. Under the
Construction Loan, Sonic can borrow up to $50.0 million to finance land
acquisition and dealership construction costs. Advances can be made under the
Construction Loan until December 2003. All advances will mature on June 22, 2005
and will bear interest at 2.25% above LIBOR. The total outstanding balance under
the Construction Loan as of September 30, 2000 was approximately $21.5 million.
Under the Permanent Loan, Sonic can refinance up to $100.0 million in
advances under the Construction Loan once the projects are completed. The
aggregate borrowing limit under the Mortgage Facility is $100 million. Advances
can be made under the Permanent Loan until June 2005. All advances under the
Permanent Loan mature on June 22, 2010 and bear interest at 2.00% above LIBOR.
As of September 30, 2000, no amounts were outstanding under the Permanent Loan.
Subsidiary Guarantees
Balances outstanding under Sonic's Revolving Facility and $125 million
senior subordinated notes are guaranteed by all of Sonic's operating
subsidiaries. These guarantees are full and unconditional and joint and several.
Sonic's parent company has no independent assets or operations, and subsidiaries
of the parent that are not subsidiary guarantors are minor.
12
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. RELATED PARTIES
Registration Rights Agreement
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill
Ford, Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic
signed a Registration Rights Agreement dated as of June 30, 1997 with Sonic
Financial Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan
(collectively, the "Class B Registration Rights Holders"). SFC currently owns
8,881,250 shares of Class B common stock; Bruton Smith, 2,071,250 shares; Scott
Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the "Egan
Group"), 341,250 shares, all of which are covered by the Registration Rights
Agreement. The Egan Group also owns certain shares of Class A common stock to
which the Registration Rights Agreement applies. If, among other things provided
in Sonic's charter, offers and sales of shares Class B common stock are
registered with the Securities and Exchange Commission, then such shares will
automatically convert into a like number of shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights permit
them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith, the Company's Chairman.
Payable to Company's Chairman
Sonic has a note payable to Mr. Smith in the amount of $5.5 million
(the "Subordinated Smith Loan"). The Subordinated Smith Loan bears interest at
Bank of America's announced prime rate plus 0.5% and has a stated maturity date
of November 30, 2000. Under the terms of certain subordination agreements
currently in effect, however, all amounts owed by Sonic to Mr. Smith under the
Subordinated Smith Loan are to be paid only after all amounts owed by Sonic
under the Revolving Facility, Sonic's floor plan financing facility with Ford
Motor Credit and Sonic's senior subordinated notes are fully paid in cash.
Accordingly, the Subordinated Smith Loan has been classified as non-current on
the accompanying consolidated balance sheets.
Other Related Party Transactions
o Sonic had amounts receivable from affiliates of $4.2 million at December
31, 1999 representing non-interest bearing amounts owed by SFC. Of this
balance, approximately $4.1 million was collected during the first nine
months of 2000. The remaining balance at September 30, 2000 was
approximately $0.1 million and is classified as current based on the
expected repayment dates.
o Town and Country Toyota had an amount payable to SFC and Bruton Smith of
approximately $0.7 million as of December 31, 1999. The balance of this
loan was paid in full as of June 30, 2000.
7. CAPITAL STRUCTURE AND PER SHARE DATA
Treasury Stock/Share Repurchase Program -- During 1999, Sonic's Board
of Directors authorized Sonic to expend up to $50 million to repurchase shares
of its Class A common stock or redeem securities convertible into Class A common
stock. As of September 30, 2000 Sonic had repurchased 2.9 million shares of
Class A common stock for approximately $27.5 million and had also redeemed
13,551 shares of Class A convertible preferred stock at a total cost of $13.6
million. Through November 13, 2000, Sonic has repurchased approximately 3.1
million shares of Class A common stock for approximately $29.7 million and has
redeemed 13,551 shares of Class A convertible preferred stock for approximately
$13.6 million. Sonic will continue to repurchase shares from time to time
subject to market conditions.
Per Share Data - The calculation of diluted net income per share
considers the potential dilutive effect of options and shares under Sonic's
stock compensation plans, Class A common stock purchase warrants, and Class A
convertible preferred stock. The following table illustrates the dilutive effect
of such items on net income per share.
13
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. CAPITAL STRUCTURE AND PER SHARE DATA - (Continued)
<TABLE>
<CAPTION>
For the nine months ended For the nine months ended
September 30, 1999 September 30, 2000
----------------------------------- ----------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------- ----------- ---------- ---------- ----------- ---------
(Dollars and Shares in thousands (Dollars and Shares in thousands
except per share amounts) except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic Net Income Per Share $ 29,371 29,948 $ 0.98 $ 61,881 42,584 $ 1.45
========== =========
Effect of Dilutive Securities
Stock compensation plans - 1,102 - 549
Warrants - 92 - 35
Convertible Preferred Stock - 2,347 - 1,089
---------- ----------- ---------- -----------
Diluted Net Income Per Share $ 29,371 33,489 $ 0.88 $ 61,881 44,257 $ 1.40
========== =========== ========== ========== =========== =========
<CAPTION>
For the three months ended For the three months ended
September 30, 1999 September 30, 2000
----------------------------------- ----------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------- ----------- ---------- ---------- ----------- ---------
(Dollars and Shares in thousands (Dollars and Shares in thousands
except per share amounts) except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic Net Income Per Share $ 12,583 35,208 $ 0.36 $ 22,059 42,693 $ 0.52
========== =========
Effect of Dilutive Securities
Stock compensation plans - 736 - 644
Warrants - 76 - 39
Convertible Preferred Stock - 2,248 - 195
---------- ----------- ---------- -----------
Diluted Net Income Per Share $ 12,583 38,268 $ 0.33 $ 22,059 43,571 $ 0.51
========== =========== ========== ========== =========== =========
</TABLE>
14
<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 Sonic's
Consolidated Statements of Income.
<TABLE>
<CAPTION>
Percentage of Total Percentage of Total
Revenues for Revenues for
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
New vehicle sales.......................... 58.4% 57.9% 58.3% 58.2%
Used vehicle sales......................... 27.9% 28.1% 28.8% 27.9%
Parts, service and collision repair........ 11.1% 11.2% 10.5% 11.2%
Finance and insurance and other............ 2.6% 2.8% 2.4% 2.7%
---------- ---------- --------- ---------
Total revenues............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 86.6% 85.7% 86.8% 85.8%
---------- ---------- --------- ---------
Gross profit............................... 13.4% 14.3% 13.2% 14.2%
Selling, general and administrative........ 9.5% 10.3% 9.5% 10.2%
Depreciation .............................. 0.1% 0.1%. 0.1% 0.1%
Goodwill amortization...................... 0.2% 0.3% 0.2% 0.3%
---------- ---------- --------- ---------
Operating income........................... 3.6% 3.6% 3.4% 3.6%
Interest expense-floorplan................. 0.7% 0.7% 0.7% 0.7%
Interest expense, other.................... 0.5% 0.7% 0.5% 0.7%
---------- ---------- --------- ---------
Income before income taxes................. 2.4% 2.2% 2.2% 2.2%
========== ========== ========= =========
</TABLE>
Nine months Ended September 30, 2000 Compared to Nine months Ended September 30,
1999
Revenues. Revenues grew in each of our primary revenue areas for the
first nine months of 2000 as compared with the first nine months of 1999,
causing total revenues to increase 111% to $4.6 billion. New vehicle sales
revenue increased 110% to $2.7 billion in the first nine months of 2000,
compared with $1.3 billion in the first nine months of 1999. The increase was
due primarily to a 100% increase in new vehicle unit sales to 104,793 in the
first nine months of 2000 from 52,509 in the first nine months of 1999,
resulting primarily from acquisitions. The remainder of the increase in new
vehicle revenues was due to a 5.4% increase in the average selling price of new
vehicles, resulting primarily from an increase in revenues of higher priced
luxury brands contributed by acquisitions. The percentage of new vehicle
revenues comprised of luxury brands increased to 25.6% in the first nine months
of 2000 from 19.6% in the first nine months of 1999.
Used vehicle revenues from retail sales increased 110% to $962.4
million in the first nine months of 2000 from $458.8 million in the first nine
months of 1999. The increase was primarily due to a 90.7% increase in used
vehicle unit sales to 61,785 in the first nine months of 2000 from 32,392 in the
first nine months of 1999. Of this unit increase, approximately 92.3%, or 27,124
units, resulted from acquisitions and 7.7% resulted from stores owned longer
than one year. The remainder of the increase in used vehicle revenue was due to
a 10.0% increase in the average selling price of used vehicles, including a 6.2%
increase in the average selling price of used vehicles from stores owned for
longer than one year.
Parts, service and collision repair revenue increased 123% to $513.9
million in the first nine months of 2000 compared to $230.2 million in the first
nine months of 1999. Approximately 94.7% of the increase resulted from our
acquisitions. Finance and insurance revenue increased $73.3 million, or 141%,
principally due to vehicle sales and related financing contributed by our
acquisitions, as well as a 22.6% improvement in finance and insurance revenues
per vehicle resulting from management's continued focus on improving training
and development programs for finance and insurance sales people.
15
<PAGE>
Gross Profit. Gross profit increased 127% to $656.1 million in the
first nine months of 2000 from $289.0 million in the first nine months of 1999.
Approximately 94.7%, or $347.6 million, of the increase resulted from
acquisitions. Our overall gross profit percentage increased to 14.2% from 13.2%
due primarily to an increase in revenues contributed by parts, service,
collision repair services and finance and insurance products, which earn higher
margins than vehicles sales. Parts, service and collision repair revenues as a
percentage of total revenues increased to 11.2% in the first nine months of 2000
from 10.5% in the first nine months of 1999. Finance and insurance revenues as a
percentage of total revenues increased to 2.7% in the first nine months of 2000
from 2.4% in the first nine months of 1999. In addition, the gross profit
percentage earned on our parts, service, collision repair and finance and
insurance products in the first nine months of 2000 increased 6.0% compared to
the same period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased 129%
to $473.7 million in the first nine months of 2000 from $207.3 million in the
first nine months of 1999, resulting principally from acquisitions. Such
expenses as a percentage of revenues increased to 10.3% in the first nine months
of 2000 from 9.5% in the first nine months of 1999. Compensation programs, which
represent over 50% of a dealership's selling, general and administrative
expenses, are primarily based on gross profits. As a result, the improvement in
gross profit margins resulted in an increase in compensation expense as a
percentage of total revenues to 6.3% in the first nine months of 2000 from 5.9%
in the first nine months of 1999 (as a percentage of gross profits, compensation
expense decreased slightly to 44.3% in the first nine months of 2000 from 44.4%
in the first nine months of 1999). In addition, rent expense increased as a
percentage of total revenues to 0.9% in the first nine months of 2000 from 0.7%
in the first nine months of 1999 primarily due to acquisitions of dealerships
located in higher rent markets. As a percentage of gross profits, selling,
general and administrative expenses increased slightly to 72.2% in the first
nine months of 2000 from 71.7% in the first nine months of 1999.
Depreciation and Amortization Expense. Depreciation expense, excluding
goodwill amortization, increased 152% to $4.9 million in the first nine months
of 2000 from $2.0 million in the first nine months of 1999, resulting primarily
from acquisitions. As a percentage of total revenues, depreciation expense was
at 0.1% in both the first nine months of 2000 and the first nine months of 1999.
Goodwill amortization expense increased 139% to $12.4 million in the first nine
months of 2000 from $5.2 million in the first nine months of 1999, resulting
principally from additional acquisitions.
Interest Expense, floor plan. Interest expense, floor plan increased
125% to $34.0 million in the first nine months of 2000 from $15.1 million in the
first nine months of 1999, due primarily to floor plan interest expense incurred
by dealerships acquired. As a percentage of total revenues, floor plan interest
increased to 0.74% in the first nine months of 2000 from 0.69% in the first nine
months of 1999, primarily due to a 102 basis point increase in the average
floorplan interest rate.
Interest Expense, other. Interest expense, other increased to $31.2
million in the first nine months of 2000 from $12.2 million in the first nine
months of 1999 due to interest incurred on additional borrowings under our $500
million revolving line of credit with Ford Motor Credit Company ("Ford Motor
Credit") and Chrysler Financial Corporation ("Chrysler Financial")(the
"Revolving Facility").
Provision for Income Taxes. The effective tax rate for the first nine
months of 2000 was 38.05%, compared to an effective rate of 38.32% in the first
nine months of 1999. The decrease was primarily attributable to the realization
of the benefits of certain tax planning strategies, offset somewhat by
acquisitions we made in the latter part of 1999 which were either (1) companies
operating in states with higher income tax rates, or (2) stock purchases in
which the goodwill amortization is not deductible for income tax purposes.
Net Income. As a result of the factors noted above, our net income
increased by $32.5 million in the first nine months of 2000 compared to the
first nine months of 1999.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues. Revenues grew in each of our primary revenue areas for the
three months ended September 30, 2000 as compared with the three months ended
September 30, 1999, causing total revenues to increase 83.3% to $1.6 billion.
New vehicle sales revenue increased 81.9% to $924.0 million in the three months
ended September 30, 2000, compared with $508.1 million in the three months ended
September 30, 1999. The increase was due primarily to a 73.6% increase in new
vehicle unit sales to 36,071 in the three months ended September 30, 2000 from
20,778 in the three months ended September 30, 1999, resulting primarily from
acquisitions. The remainder of the increase in new vehicle revenues was due to a
4.8% increase in the average selling price of new vehicles, resulting primarily
from an increase in revenues of higher priced luxury brands contributed by
acquisitions. The percentage of new vehicle
16
<PAGE>
revenues comprised of luxury brands increased to 25.3% in the three months ended
September 30, 2000 from 20.2% in the three months ended September 30, 1999.
Used vehicle revenues from retail sales increased 93% to $335.6 million
in the three months ended September 30, 2000 from $173.6 million in the three
months ended September 30, 1999. The increase was primarily due to a 74.4%
increase in used vehicle unit sales to 21,096 in the three months ended
September 30, 2000 from 12,098 in the three months ended September 30, 1999. Of
this unit increase, approximately 90.3%, or 8,127 units, resulted from
acquisitions and 9.7% resulted from stores owned longer than one year. The
remainder of the increase in used vehicle revenue was due to a 10.9% increase in
the average selling price of used vehicles, including a 5.8% increase in the
average selling price of used vehicles from stores owned for longer than one
year.
Parts, service and collision repair revenue increased 84.8% to $177.8
million in the three months ended September 30, 2000 compared to $96.2 million
in the three months ended September 30, 1999. Approximately 93.7% of the
increase resulted from our acquisitions. Finance and insurance revenue increased
$22.6 million, or 100%, principally due to vehicle sales and related financing
contributed by our acquisitions, as well as a 15.1% improvement in finance and
insurance revenues per vehicle resulting from management's continued focus on
improving training and development programs for finance and insurance sales
people.
Gross Profit. Gross profit increased 96.1% to $228.7 million in the
three months ended September 30, 2000 from $116.7 million in the three months
ended September 30, 1999. Approximately 94.3%, or $105.7 million, of the
increase resulted from acquisitions. Our overall gross profit percentage
increased to 14.3% from 13.4% due primarily to an increase in revenues
contributed by used vehicle retail sales, parts, service and collision repair
services and finance and insurance products, which earn higher margins than new
vehicles. Used vehicle retail sales as a percentage of total revenues increased
to 21.0% in the three months ended September 30, 2000 from 20.0% in the three
months ended September 30, 1999. Parts, service and collision repair revenues as
a percentage of total revenues increased to 11.2% in the three months ended
September 30, 2000 from 11.1% in the three months ended September 30, 1999.
Finance and insurance revenues as a percentage of total revenues increased to
2.8% in the three months ended September 30, 2000 from 2.6% in the three months
ended September 30, 1999. In addition, the gross profit percentage earned on our
parts, service, collision repair and finance and insurance products in the first
three months of 2000 increased 7.4% compared to the same period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased 100%
to $165.5 million in the three months ended September 30, 2000 from $82.6
million in the three months ended September 30, 1999, resulting principally from
acquisitions. Such expenses as a percentage of revenues increased to 10.4% in
the three months ended September 30, 2000 from 9.5% in the three months ended
September 30, 1999. Compensation programs, which represent over 50% of a
dealership's selling, general and administrative expenses, are primarily based
on gross profits. As a result, the improvement in gross profit margins resulted
in an increase in compensation expense as a percentage of total revenues to 6.3%
in the three months ended September 30, 2000 from 5.8% in the three months ended
September 30, 1999 (as a percentage of gross profits, compensation expense
increased to 43.9% in the three months ended September 30, 2000 from 43.4% in
the three months ended September 30, 1999). In addition, rent expense increased
as a percentage of total revenues to 0.8% in the three months ended September
30, 2000 from 0.7% in the three months ended September 30, 1999 primarily due to
acquisitions of dealerships located in higher rent markets. As a percentage of
gross profits, selling, general and administrative expenses increased to 72.3%
in the three months ended September 30, 2000 from 70.9% in the three months
ended September 30, 1999.
Depreciation and Amortization Expense. Depreciation expense, excluding
goodwill amortization, increased 128% to $1.8 million in the three months ended
September 30, 2000 from $0.8 million in the three months ended September 30,
1999, resulting primarily from acquisitions. As a percentage of total revenues,
depreciation expense was at 0.1% in both the three months ended September 30,
2000 and the three months ended September 30, 1999. Goodwill amortization
expense increased 88.9% to $4.2 million in the three months ended September 30,
2000 from $2.2 million in the three months ended September 30, 1999, resulting
principally from acquisitions.
Interest Expense, floor plan. Interest expense, floor plan increased
103% to $11.6 million in the three months ended September 30, 2000 from $5.7
million in the three months ended September 30, 1999, due primarily to floor
plan interest expense incurred by dealerships acquired. As a percentage of total
revenues, floor plan interest increased to 0.73% in the three months ended
September 30, 2000 from 0.66% in the three months ended September 30, 1999,
primarily due to a 136 basis point increase in the average floorplan interest
rate.
Interest Expense, other. Interest expense, other increased to $10.6
million in the three months ended September 30, 2000 from $4.8 million in the
three months ended September 30, 1999 due to interest incurred on additional
borrowings under our $500 million Revolving Facility.
17
<PAGE>
Provision for Income Taxes. The effective tax rate for the three months
ended September 30, 2000 was 37.19%, compared to an effective rate of 38.75% in
the three months ended September 30, 1999. The decrease was primarily
attributable to the realization of benefits of certain tax planning strategies.
Net Income. As a result of the factors noted above, our net income
increased by $9.5 million in the three months ended September 30, 2000 compared
to the three months ended September 30, 1999.
Liquidity and Capital Resources
Our principal needs for capital resources are to finance acquisitions
and fund debt service and working capital requirements. Historically, we have
relied on internally generated cash flows from operations, borrowings under our
various credit facilities, and borrowings and capital contributions from our
stockholders to finance our operations and expansion.
During the first nine months of 2000, net cash provided by operating
activities was approximately $56.4 million. During the first nine months of
1999, net cash provided by operating activities was approximately $22.4 million.
The increase was attributable principally to increases in net income.
Cash used for investing activities in the first nine months of 2000 was
approximately $93.3 million, including $50.5 million paid for acquisitions, net
of cash received, and $58.0 million in capital expenditures. Cash used for
investing activities in the first nine months of 1999 was approximately $164.9
million, including $164.3 million paid for acquisitions, net of cash received,
and $11.2 million in capital expenditures. Our principal capital expenditures
typically include building improvements and equipment for use in our
dealerships. Of the capital expenditures in the first nine months of 2000,
approximately $44.1 million related to the construction of new dealerships and
collision repair centers. Total construction in process as of September 30, 2000
was approximately $40.0 million, of which approximately $28.3 million
represented construction costs on facilities which are expected to be completed
and sold within one year in sale-leaseback transactions. Accordingly, these
costs have been classified in other current assets on the accompanying unaudited
consolidated balance sheet as of September 30, 2000.
In June 2000, Sonic entered into a revolving real estate acquisition
and construction line of credit (the "Construction Loan") and a related mortgage
refinancing facility (the "Permanent Loan") with Ford Motor Credit. Under the
Construction Loan, Sonic can borrow up to $50.0 million to finance land
acquisition and dealership construction costs. Advances can be made under the
Construction Loan until December 2003. All advances will mature on June 22, 2005
and will bear interest at 2.25% above LIBOR. The total outstanding balance under
the Construction Loan as of September 30, 2000 was approximately $21.5 million.
Under the Permanent Loan, Sonic can refinance up to $50.0 million in
advances under the Construction Loan once the projects are completed. Advances
can be made under the Permanent Loan until June 2005. All advances under the
Permanent Loan mature on June 22, 2010 and bear interest at 2.00% above LIBOR.
As of September 30, 2000, no amounts were outstanding under the Permanent Loan.
During the first nine months of 2000, we acquired seven dealerships for
approximately $51.3 million in cash and 11,589 shares of Sonic's Class A
convertible preferred stock, Series II, recorded at an estimated value of
approximately $11.6 million. The cash portion of the purchase price was financed
with a combination of cash borrowed under our Revolving Facility and cash
generated from our existing operations. The acquisitions were accounted for
using the purchase method of accounting, and the results of operations of such
acquisitions have been included in our consolidated financial statements from
their respective acquisition dates.
Subsequent to September 30, 2000, Sonic acquired three dealerships for
approximately $13.2 million in cash financed with a combination of cash borrowed
under the Revolving Facility and cash generated from Sonic's existing
operations. The acquisitions were accounted for using the purchase method of
accounting.
Sonic has signed definitive agreements to acquire five dealerships for
an estimated $50.3 million payable with a combination of cash, Class A
convertible preferred stock, and Class A common stock. The aggregate purchase
price is subject to adjustment based on the actual net book value of the assets
acquired. The cash portion of the purchase price will be paid with a combination
of borrowings under the Revolving Facility and with cash generated from Sonic's
existing operations. These acquisitions are expected to be consummated in the
fourth quarter of 2000 and first quarter of 2001.
As of November 13, 2000, Sonic has sold three dealerships and one
franchise from another dealership for approximately $5.9 million. No material
gains or losses have been realized or are expected from these sales.
18
<PAGE>
On August 10, 2000, Sonic entered into the Revolving Facility with Ford
Motor Credit and Chrysler Financial to replace its previous $350 million
acquisition line of credit with Ford Motor Credit. The Revolving Facility has a
borrowing limit of $500 million, subject to a borrowing base calculated on the
basis of our receivables, inventory and equipment and a pledge of certain
additional collateral by an affiliate of Sonic. Amounts outstanding under the
Revolving Facility bear interest at 2.50% above LIBOR (LIBOR was 6.62% at
September 30, 2000) and will mature on October 31, 2003. Borrowings, net of
repayments, under the Revolving Facility for the nine months ended September 30,
2000 were approximately $52.6 million and were primarily used to finance
acquisitions. The total outstanding balance as of September 30, 2000 was
approximately $341.6 million. Additional amounts to be drawn under the Revolving
Facility are to be used for the acquisition of additional dealerships and to
provide for the general working capital needs of Sonic and other general
corporate purposes.
We agreed under the Revolving Facility not to pledge any of our assets
to any third party (with the exception of currently encumbered assets of our
dealership subsidiaries that are subject to previous pledges or liens). In
addition, the Revolving Facility contains certain negative covenants, including
covenants restricting or prohibiting the payment of dividends, capital
expenditures and material dispositions of assets as well as other customary
covenants and default provisions. Financial covenants include specified ratios
of
o current assets to current liabilities (at least 1.23:1),
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent less capital expenditures to fixed charges (at least 1.4:1),
o EBITDA to interest expense (at least 2:1) and
o total adjusted debt to EBITDA (no greater than 2.25:1).
In addition, the loss of voting control over Sonic by Bruton Smith,
Scott Smith and their spouses or immediate family members or the failure by
Sonic, 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. Sonic is in compliance with all
restrictive covenants as of September 30, 2000.
We currently have an aggregate principal balance of $125 million in
senior subordinated notes which mature on August 1, 2008 and bear interest at a
stated rate of 11.0%. The notes are unsecured and are redeemable at our option
after August 1, 2003. Interest payments are due semi-annually on August 1 and
February 1 and commenced February 1, 1999. The notes are subordinated to all of
our present and future senior indebtedness, 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.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited circumstances
(for example, floor plan indebtedness). We have also 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. Sonic is in compliance with all
restrictive covenants as of September 30, 2000.
We currently have standardized floor plan credit facilities with
Chrysler Financial, General Motors Acceptance Corporation ("GMAC") and Ford
Motor Credit. The floor plan credit facility with Chrysler Financial provides up
to $750 million for the purchase of vehicles at our Chrysler dealerships. The
floor plan credit facility with GMAC provides up to $33.6 million for the
purchase of vehicles at four of our General Motors dealerships. We added two
more of our General Motors dealerships to this facility effective October 2,,
2000. The floor plan facility with Ford Motor Credit provides up to $550 million
for the purchase of vehicles at all of our other dealerships. As of September
30, 2000, there was an aggregate of approximately $131.4 million outstanding
under the Chrysler Financial floorplan facility, $384.5 million outstanding
under the Ford Motor Credit floor plan facility and $25.1 million outstanding
under the GMAC floor plan facility.
Amounts outstanding under the Chrysler Financial floor plan facility
bear interest at 1.25% above LIBOR. Amounts outstanding under the Ford Motor
Credit floor plan facility bear interest at the prime rate (prime was 9.50% at
September 30, 2000), subject to certain incentives and other adjustments.
Amounts outstanding under the GMAC floor plan facility bear interest at the
prime rate, subject to certain incentives and other adjustments. Typically new
vehicle floor plan indebtedness exceeds the related inventory balances. The
inventory balances are generally reduced by the manufacturer's purchase
discounts, which are not reflected in the related floor plan liability. These
manufacturer purchase discounts are standard in the industry, typically occur on
all new vehicle purchases,
19
<PAGE>
and are not used to offset the related floor plan liability. These discounts are
aggregated and generally paid to us by the manufacturers on a quarterly basis.
We make monthly interest payments on the amount financed under the
floor plan facilities but are 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 facilities contain a
number of covenants, including among others, covenants restricting us with
respect to the creation of liens and changes in ownership, officers and key
management personnel. Sonic is in compliance with all restrictive covenants as
of September 30, 2000.
Sonic's Board of Directors recently authorized Sonic to expend up to
$50 million to repurchase shares of its Class A common stock or redeem
securities convertible into Class A common stock. As of September 30, 2000 Sonic
had repurchased 2.9 million shares of Class A common stock for approximately
$27.5 million and had also redeemed 13,551 shares of Class A convertible
preferred stock at a total cost of $13.6 million. Through November 13, 2000,
Sonic has repurchased approximately 3.1 million shares of Class A common stock
for approximately $29.7 million and has redeemed 13,551 shares of Class A
convertible preferred stock for approximately $13.6 million. Sonic will continue
to repurchase shares from time to time subject to market conditions.
We believe that funds generated through future operations and
availability of borrowings under our floor plan financing (or any replacements
thereof) and other credit arrangements will be sufficient to fund our debt
service and working capital requirements and any seasonal operating
requirements, including our currently anticipated internal growth for our
existing businesses, for the foreseeable future. We expect to fund any future
acquisitions from future cash flow from operations, additional debt financing
(including the Revolving Facility) or the issuance of Class A common stock,
preferred stock or other convertible instruments.
Seasonality
Our operations are subject to seasonal variations. The first quarter
generally contributes less revenue and operating profits than the second, third
and fourth quarters. Seasonality is principally caused by weather conditions and
the timing of manufacturer incentive programs and model changeovers.
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 gross goodwill balance at December 31, 1999 was approximately
$605.1 million and at September 30, 2000 was approximately $660.6 million. As a
percentage of total assets and stockholders' equity, goodwill, net of
accumulated amortization, represented 39.5% and 147.2%, respectively, at
December 31, 1999, and 38.4% and 143.4%, respectively, at September 30, 2000.
Generally accepted accounting principles in the United States of America require
that goodwill and all other intangible assets be amortized over the period
benefited. We have determined that the period benefited by the goodwill will be
no less than 40 years. Accordingly, we are amortizing goodwill over a 40 year
period. Earnings reported in periods immediately following an acquisition would
be overstated if we attributed a 40 year benefit to an intangible asset that
should have had a shorter benefit period. In later years, we would be burdened
by a continuing charge against earnings without the associated benefit to income
valued by 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.
We periodically compare the carrying value of goodwill with the anticipated
undiscounted future cash flows from operations of the business we have acquired
in order to evaluate the recoverability of goodwill. We have concluded that the
anticipated future cash flows associated with intangible assets recognized in
our acquisitions will continue indefinitely, and there is no pervasive evidence
that any material portion will dissipate over a period shorter than 40 years. We
will incur additional goodwill in future acquisitions.
The Financial Accounting Standards Board recently proposed new rules
relating to the accounting for business combinations and intangible assets. One
aspect of the proposal would not permit goodwill to be amortized over a period
in excess of 20 years; however, we cannot assure you that such a rule will be
adopted and, if adopted, as to the final provisions of any such rules. If such a
rule is adopted, we have been advised that it would likely only affect the
period over which we amortize goodwill in our future acquisitions.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Sonic's only financial instruments with market risk
exposure are variable rate floor plan notes payable, Revolving Facility
borrowings and other variable rate notes. The total outstanding balance of such
instruments was approximately
20
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$377.7 million at September 30, 1999 and $918.2 million at September 30, 2000. A
change of one percent in the interest rate would have caused a change in
interest expense of approximately $2.7 million for the nine months ended
September 30, 1999 and approximately $7.0 million for the nine months ended
September 30, 2000. Of the total change in interest expense, approximately $2.3
million for the nine months ended September 30, 1999 and approximately $4.4
million for the nine months ended September 30, 2000 would have resulted from
floor plan notes payable.
Sonic's exposure with respect to floor plan notes payable is mitigated
by floor plan incentives received from manufacturers which are generally based
on rates similar to those incurred under Sonic's floor plan financing
arrangements. Our floor plan interest expense for the nine months ended
September 30, 2000 exceeded the amounts we received from these manufacturer
floor plan incentives by approximately $7.0 million. As a result, the effective
rate incurred under our floor plan financing arrangements was reduced to an
annualized rate of approximately 1.6% after considering these incentives.
21
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PART II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits:
3.1* Amended and Restated Certificate of Incorporation of Sonic
(incorporated by reference to Exhibit 3.1 to Sonic's Registration
Statement on Form S-1 (Reg. No. 333-33295) (the "Form S-1")).
3.2* Certificate of Amendment to Sonic's Amended and Restated Certificate of
Incorporation effective June 18, 1999 (incorporated by reference to
Exhibit 3.2 to Sonic's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999 Form 10-K")).
3.3* Certificate of Designation, Preferences and Rights of Class A
Convertible Preferred Stock (incorporated by reference to Exhibit 4.1
to Sonic's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998).
3.4* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form
S-1).
4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated
by reference to Exhibit 4.3 to the Registration Statement on Form S-4
(Reg. Nos. 333-64397 and 333-64397-001 through 333-64397-044) of Sonic
(the "Form S-4")).
4.2* Indenture dated as of July 1, 1998 among Sonic, as issuer, the
subsidiaries of Sonic named therein, as guarantors, and U.S. Bank Trust
National Association, as trustee (the "Trustee"), relating to the 11%
Senior Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4.2 to the Form S-4).
4.3* First Supplemental Indenture dated as of December 31, 1999 among Sonic,
as issuer, the subsidiaries of Sonic named therein, as guarantors and
additional guarantors, and the Trustee, relating to the 11% Senior
Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2a
to the 1999 Form 10-K).
4.4 Second Supplemental Indenture dated as of September 15, 2000 among
Sonic, as issuer, the subsidiaries of Sonic named therein, as
guarantors and additional guarantors, and the Trustee, relating to the
11% Senior Subordinated Notes due 2008.
4.5* Registration Rights Agreement dated as of June 30, 1997 among Sonic, O.
Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial
Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1).
10.1 Credit Agreement dated as of August 10, 2000 (the "Credit Agreement")
between Sonic, as Borrower, Ford Motor Credit Company ("Ford Credit"),
as Agent and Lender, and Chrysler Financial Company, L.L.C. ("Chrysler
Financial"), as Lender.
10.2 Promissory Note dated August 10, 2000 executed by Sonic in favor of
Ford Credit pursuant to the Credit Agreement.
10.3 Promissory Note dated August 10, 2000 executed by Sonic in favor of
Chrysler Financial pursuant to the Credit Agreement.
10.4 Guaranty dated August 10, 2000 by the subsidiaries of Sonic named
therein, as Guarantors, in favor of Ford Credit, as Agent for the
Lenders under the Credit Agreement.
10.5 Security Agreement dated August 10, 2000 by Sonic in favor of Ford
Credit, as Agent for the Lenders under the Credit Agreement.
10.6 Security Agreement dated August 10, 2000 by the subsidiaries of Sonic
named therein in favor of Ford Credit, as Agent for the Lenders under
the Credit Agreement.
10.7 Master Construction Loan Agreement dated as of June 23, 2000 (the
"Construction Loan Agreement") between the subsidiaries of Sonic named
therein, as borrowers, and Ford Credit, as lender.
10.8 Permanent Loan Agreement dated as of June 23, 2000 (the "Permanent Loan
Agreement") between the subsidiaries of Sonic named therein, as
borrowers, and Ford Credit, as lender.
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10.9 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named
therein, as borrowers, in favor of Ford Credit, as lender, pursuant to
the Construction Loan Agreement.
10.10 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named
therein, as borrowers, in favor of Ford Credit, as lender, pursuant to
the Permanent Loan Agreement.
10.11 Guaranty dated June 23, 2000 by Sonic in favor of Ford Credit
guaranteeing the obligations of the subsidiaries of Sonic under the
Construction Loan Agreement and the Permanent Loan Agreement.
10.12 Security Agreement dated June 23, 2000 by Sonic in favor of Ford Credit
pursuant to the Construction Loan Agreement and the Permanent Loan
Agreement.
10.13* Sonic Automotive, Inc. 1997 Stock Option Plan, Amended and Restated as
of June 5, 2000 (incorporated by reference to Exhibit 4.1 to Sonic's
Registration Statement on Form S-8 (Reg. No. 333-46272)).
10.14* Sonic Automotive, Inc. Employee Stock Purchase Plan, Amended and
Restated as of June 5, 2000 (incorporated by reference to Exhibit 4.1
to Sonic's Registration Statement on Form S-8 (Reg. No. 333-46274)).
27 Financial data schedule for the nine month period ended September 30,
2000 (filed electronically).
* Filed Previously
(b) Reports on Form 8-K.
Sonic filed a report on Form 8-K on September 15, 2000, reporting,
under Item 5 of such report, that on September 13, 2000, Sonic had announced in
a press release that it intended to offer approximately $125 million of its
Senior Subordinated Notes due 2008. No financial statements were included in the
filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONIC AUTOMOTIVE, INC.
Date: November 14, 2000 By: /s/ O. Bruton Smith
----------------- ------------------------------------
O. Bruton Smith
Chairman and Chief Executive Officer
Date: November 14, 2000 By: /s/ Theodore M. Wright
----------------- ------------------------------------
Theodore M. Wright
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
24
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INDEX TO EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q FOR
SONIC AUTOMOTIVE, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1* Amended and Restated Certificate of Incorporation of Sonic
(incorporated by reference to Exhibit 3.1 to Sonic's Registration
Statement on Form S-1 (Reg. No. 333-33295) (the "Form S-1")).
3.2* Certificate of Amendment to Sonic's Amended and Restated Certificate of
Incorporation effective June 18, 1999 (incorporated by reference to
Exhibit 3.2 to Sonic's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999 Form 10-K")).
3.3* Certificate of Designation, Preferences and Rights of Class A
Convertible Preferred Stock (incorporated by reference to Exhibit 4.1
to Sonic's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998).
3.4* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form
S-1).
4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated
by reference to Exhibit 4.3 to the Registration Statement on Form S-4
(Reg. Nos. 333-64397 and 333-64397-001 through 333-64397-044) of Sonic
(the "Form S-4")).
4.2* Indenture dated as of July 1, 1998 among Sonic, as issuer, the
subsidiaries of Sonic named therein, as guarantors, and U.S. Bank Trust
National Association, as trustee (the "Trustee"), relating to the 11%
Senior Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4.2 to the Form S-4).
4.3* First Supplemental Indenture dated as of December 31, 1999 among Sonic,
as issuer, the subsidiaries of Sonic named therein, as guarantors and
additional guarantors, and the Trustee, relating to the 11% Senior
Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2a
to the 1999 Form 10-K).
4.4 Second Supplemental Indenture dated as of September 15, 2000 among
Sonic, as issuer, the subsidiaries of Sonic named therein, as
guarantors and additional guarantors, and the Trustee, relating to the
11% Senior Subordinated Notes due 2008.
4.5* Registration Rights Agreement dated as of June 30, 1997 among Sonic, O.
Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial
Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1).
10.1 Credit Agreement dated as of August 10, 2000 (the "Credit Agreement")
between Sonic, as Borrower, Ford Motor Credit Company ("Ford Credit"),
as Agent and Lender, and Chrysler Financial Company, L.L.C. ("Chrysler
Financial"), as Lender.
10.2 Promissory Note dated August 10, 2000 executed by Sonic in favor of
Ford Credit pursuant to the Credit Agreement.
10.3 Promissory Note dated August 10, 2000 executed by Sonic in favor of
Chrysler Financial pursuant to the Credit Agreement.
10.4 Guaranty dated August 10, 2000 by the subsidiaries of Sonic named
therein, as Guarantors, in favor of Ford Credit, as Agent for the
Lenders under the Credit Agreement.
10.5 Security Agreement dated August 10, 2000 by Sonic in favor of Ford
Credit, as Agent for the Lenders under the Credit Agreement.
10.6 Security Agreement dated August 10, 2000 by the subsidiaries of Sonic
named therein in favor of Ford Credit, as Agent for the Lenders under
the Credit Agreement.
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10.7 Master Construction Loan Agreement dated as of June 23, 2000 (the
"Construction Loan Agreement") between the subsidiaries of Sonic named
therein, as borrowers, and Ford Credit, as lender.
10.8 Permanent Loan Agreement dated as of June 23, 2000 (the "Permanent Loan
Agreement") between the subsidiaries of Sonic named therein, as
borrowers, and Ford Credit, as lender.
10.9 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named
therein, as borrowers, in favor of Ford Credit, as lender, pursuant to
the Construction Loan Agreement.
10.10 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named
therein, as borrowers, in favor of Ford Credit, as lender, pursuant to
the Permanent Loan Agreement.
10.11 Guaranty dated June 23, 2000 by Sonic in favor of Ford Credit
guaranteeing the obligations of the subsidiaries of Sonic under the
Construction Loan Agreement and the Permanent Loan Agreement.
10.12 Security Agreement dated June 23, 2000 by Sonic in favor of Ford Credit
pursuant to the Construction Loan Agreement and the Permanent Loan
Agreement.
10.13* Sonic Automotive, Inc. 1997 Stock Option Plan, Amended and Restated as
of June 5, 2000 (incorporated by reference to Exhibit 4.1 to Sonic's
Registration Statement on Form S-8 (Reg. No. 333-46272)).
10.14* Sonic Automotive, Inc. Employee Stock Purchase Plan, Amended and
Restated as of June 5, 2000 (incorporated by reference to Exhibit 4.1
to Sonic's Registration Statement on Form S-8 (Reg. No. 333-46274)).
27 Financial data schedule for the nine month period ended September 30,
2000 (filed electronically).
* Filed Previously
26
