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 June 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 56-201079
(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 August 10, 2000, there were 30,302,406 shares of Class A Common Stock and
12,250,000 shares of Class B Common Stock outstanding.
<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION ------
ITEM 1. Consolidated Financial
<S> <C>
Statements (Unaudited) 3
Consolidated Statements of Income -
Three-month periods ended
June 30, 1999 and June 30, 2000
Consolidated Statements of Income -
Six-month periods ended
June 30, 1999 and June 30, 2000
Consolidated Balance Sheets -
December 31, 1999 and June 30, 2000
Consolidated Statement of Stockholders'
Equity - Six-month period ended June 30, 2000
Consolidated Statements of Cash Flows -
Six-month periods
ended June 30, 1999 and June 30, 2000
Notes to Unaudited Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
<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
June 30,
1999 2000
------------- ------------
REVENUES:
<S> <C> <C>
New vehicles $ 420,823 $ 904,622
Used vehicles 155,346 321,323
Wholesale vehicles 55,984 109,963
------------- ------------
Total vehicles 632,153 1,335,908
Parts, service and collision repair 74,402 170,545
Finance & insurance and other 16,975 41,886
------------- ------------
Total revenues 723,530 1,548,339
COST OF SALES 629,269 1,329,041
------------- ------------
GROSS PROFIT 94,261 219,298
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 67,429 154,819
DEPRECIATION 655 1,644
GOODWILL AMORTIZATION 1,589 4,180
------------- ------------
OPERATING INCOME 24,588 58,655
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 4,926 12,048
Interest expense, other 3,748 10,296
Other income 316 36
------------- ------------
Total other expense 8,358 22,308
------------- ------------
INCOME BEFORE INCOME TAXES 16,230 36,347
PROVISION FOR INCOME TAXES 6,129 13,895
------------- ------------
NET INCOME $ 10,101 $ 22,452
============= ============
BASIC NET INCOME PER SHARE $ 0.34 $ 0.52
============= ============
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OUTSTANDING 30,095 42,969
============= ============
DILUTED NET INCOME PER SHARE $ 0.30 $ 0.51
============= ============
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 34,088 44,331
============= ============
</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>
Six Months Ended
June 30,
1999 2000
-------------- --------------
REVENUES:
<S> <C> <C>
New vehicles $ 767,816 $ 1,758,656
Used vehicles 285,205 626,754
Wholesale vehicles 100,400 210,975
-------------- --------------
Total vehicles 1,153,421 2,596,385
Parts, service and collision repair 134,026 336,132
Finance & insurance and other 29,535 80,223
-------------- --------------
Total revenues 1,316,982 3,012,740
COST OF SALES 1,144,646 2,585,408
-------------- --------------
GROSS PROFIT 172,336 427,332
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 124,643 308,285
DEPRECIATION 1,181 3,161
GOODWILL AMORTIZATION 2,970 8,230
-------------- --------------
OPERATING INCOME 43,542 107,656
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 9,397 22,405
Interest expense, other 7,391 20,562
Other income 324 74
-------------- --------------
Total other expense 16,464 42,893
-------------- --------------
INCOME BEFORE INCOME TAXES 27,078 64,763
PROVISION FOR INCOME TAXES 10,290 24,940
-------------- --------------
NET INCOME $ 16,788 $ 39,823
============== ==============
BASIC NET INCOME PER SHARE $ 0.62 $ 0.94
============== ==============
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OUTSTANDING 27,259 42,528
============== ==============
DILUTED NET INCOME PER SHARE $ 0.54 $ 0.89
============== ==============
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 31,044 44,604
============== ==============
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
December 31, 2000
1999 (Unaudited)
------------- --------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 83,111 $ 87,083
Receivables (net of allowance for doubtful accounts of $1,506
at December 31, 1999 and $1,567 at June 30, 2000) 99,987 130,051
Inventories 630,857 713,768
Due from affiliates 4,188 93
Other current assets 17,424 51,065
------------- --------------
Total current assets 835,567 982,060
PROPERTY AND EQUIPMENT, NET 63,681 68,129
GOODWILL, NET 592,670 634,851
OTHER ASSETS 9,184 10,917
------------- --------------
TOTAL ASSETS $ 1,501,102 $ 1,695,957
============= ==============
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
December 31, 2000
1999 (Unaudited)
------------- --------------
(dollars in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 517,575 $ 604,061
Trade accounts payable 48,405 79,807
Accrued interest 11,605 9,966
Other accrued liabilities 72,012 78,280
Payable for acquisitions 5,925 275
Current maturities of long-term debt 2,388 2,388
------------- --------------
Total current liabilities 657,910 774,777
LONG-TERM DEBT 417,283 466,092
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 12,232
INCOME TAX PAYABLE 4,714 3,193
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par, 3.0 million shares authorized;
300,000 shares designated as Class A Convertible Preferred 27,191 4,558
Stock, liquidation preference $1,000 per share, of which
28,159 shares are issued and outstanding at December 31, 1999
and 4,702 shares are issued and outstanding at June 30, 2000
Class A Common Stock, $.01 par, 100.0 million shares authorized;
29,075,437 shares issued at December 31, 1999
and 33,048,819 shares issued at June 30, 2000 291 331
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 June 30, 2000
Paid-in capital 301,934 328,180
Retained earnings 79,392 119,215
Class A Treasury Stock, at cost (723,600 shares at December 31, 1999
and 2,337,257 at June 30, 2000) (6,358) (22,105)
------------- --------------
Total stockholders' equity 402,573 430,302
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,501,102 $ 1,695,957
============= ==============
</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
--------- ----------- ------------ --------- ------------ ---------- ----------- ------------
BALANCE AT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 - - 219 2 - - 1,360 -
Conversion of Preferred
Stock (26) (25,947) 2,967 30 - - 25,917 -
Redemption of Preferred
Stock (9) (8,275) - - - - (825) -
Conversion of Class B
Common Stock - - - - - - - -
Purchase of Class A
Treasury Stock - - - - - - - -
Net income - - - - - - - 39,823
BALANCE AT
------- ----------- ------------ ------- ------------ ------- ------------ ------------
JUNE 30, 2000 5 $ 4,558 33,049 $ 331 12,250 $ 123 $ 328,180 $ 119,215
======= =========== ============ ======= ============ ======= ============ ============
Total
Treasury Stockholders'
Stock Equity
------------------------
BALANCE AT
<S> <C> <C>
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 stoc
compensation plans - 1,362
Conversion of Preferred
Stock - -
Redemption of Preferred
Stock - (9,100)
Conversion of Class B
Common Stock - -
Purchase of Class A
Treasury Stock (15,747) (15,747)
Net income 39,823
BALANCE AT
------------------------
JUNE 30, 2000 $(22,105) $ 430,302
========================
</TABLE>
See notes to unaudited consolidated financial statements.
7
<PAGE>
SONIC AUTOMOTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $16,788 $39,823
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,151 11,391
Loss on disposal of property and equipment 52 65
Changes in assets and liabilities that relate to operations:
Receivables (5,860) (29,043)
Inventories (13,588) (45,500)
Other assets (1,559) (6,847)
Notes payable - floor plan 16,451 55,554
Trade accounts payable and other liabilities (614) 29,133
----------- -----------
Total adjustments (967) 14,753
----------- -----------
Net cash provided by operating activities 15,821 54,576
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (77,199) (46,802)
Purchases of property and equipment (8,813) (34,955)
Proceeds from sales of property and equipment 10,596 3,383
----------- -----------
Net cash used in investing activities (75,416) (78,374)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 71,138 49,863
Payments on long-term debt (85,344) (1,979)
Public offering of common stock 85,286 -
Purchases of Class A Common Stock and redemptions of Preferred Stock - (24,847)
Issuance of shares under stock compensation plans 1,136 1,362
(Advances to) repayments from affiliated companies (3,929) 3,371
----------- -----------
Net cash provided by financing activities 68,287 27,770
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,692 3,972
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,834 83,111
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $60,526 $87,083
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued for acquisitions and contingent
consideration $34,961 $11,589
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 six months ended June 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") 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 $2.9
million and $6.8 million for the three months ended June 30, 1999 and 2000,
respectively, and approximately $5.2 million and $13.1 million for the six
months ended June 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 June 30, 2000 was $655.5 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 37.4% and 147.5%, respectively, at June 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
Acquisitions Completed During the Six Months Ended June 30, 2000:
During the first six months of 2000, Sonic acquired 6 dealerships for
approximately $47.6 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 Sonic's $350 million
acquisition line of credit with Ford Motor Credit Company (the "Current
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 $ 8,907
Property and equipment 1,954
Goodwill 49,231
Non-current liabilites assumed (943)
------------
Total purchase price $ 59,149
============
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 six 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.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues $ 1,494,875 $ 1,548,339 $ 2,871,433 $ 3,058,873
Gross profits $ 198,322 $ 219,298 $ 384,577 $ 432,493
Net income $ 13,642 $ 22,452 $ 30,177 $ 39,372
Diluted income per share $ 0.29 $ 0.51 $ 0.65 $ 0.89
</TABLE>
10
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. BUSINESS ACQUISITIONS - (Continued)
Sale of Dealership Subsidiaries:
During the first six months of 2000, Sonic sold substantially all of
the assets of three of its dealership subsidiaries for approximately $4.8
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
totaling approximately $7.3 million has been included in other current assets on
the accompanying unaudited consolidated balance sheet as of June 30, 2000.
3. INVENTORIES
Inventories consist of the following:
December 31, June 30,
1999 2000
----------- ---------
New vehicles $ 459,382 $ 528,970
Used vehicles 109,130 122,269
Parts and accessories 44,821 46,942
Other 17,524 15,587
----------- ---------
Total $ 630,857 $ 713,768
=========== =========
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
December 31, June 30,
1999 2000
----------- -----------
Land $ 953 $ 53
Building and improvements 23,120 23,745
Office equipment and fixtures 22,616 24,660
Parts and service equipment 16,008 16,575
Company vehicles 4,664 5,183
Construction in progress 5,785 10,053
----------- -----------
Total, at cost 73,146 80,269
Less accumulated depreciation (9,465) (12,146)
----------- -----------
Property and equipment, net $ 63,681 $ 68,123
=========== ===========
During the first six months of 2000, Sonic has incurred approximately
$23.9 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 June 30, 2000.
5. LONG-TERM DEBT
Revolving Facility
Borrowings, net of repayments, under Sonic's $350 million Current
Revolving Facility for the six months ended June 30, 2000 were approximately
$33.9 million and were primarily used to finance acquisitions. The total
outstanding balance under the Current Revolving Facility as of June 30, 2000 was
approximately $322.9 million.
On August 10, 2000, Sonic entered into a revolving credit agreement
with Ford Motor Credit Company ("Ford Motor Credit") and Chrysler Financial
Corporation ("Chrysler Financial") (the "New Revolving Facility") to replace the
Current Revolving Facility. The New 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. The New Revolving Facility bears interest
at 2.50% above LIBOR and will mature on October 31, 2003. Additional amounts to
be drawn under the New Revolving
11
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. LONG-TERM DEBT - (Continued)
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.
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 June 30, 2000 was approximately $14.6 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 June 30, 2000, no amounts were outstanding under the Permanent Loan.
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 New 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 six months of 2000. The remaining balance at June 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,
which payable totaled approximately $0.7 million as of December 31,
1999. The balance of this loan was paid in full as of June 30, 2000.
12
<PAGE>
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 June 30, 2000 Sonic had repurchased 2.3 million shares of Class A
common stock for approximately $22.1 million and had also redeemed 9,100 shares
of Class A convertible preferred stock at a total cost of $9.1million.
Through August 10, 2000, Sonic has repurchased approximately 2.9million shares
of Class A common stock for approximately $27.5 million and hasredeemed
10,401 shares of Class A convertible preferred stock for approximately
$10.4 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.
<TABLE>
<CAPTION>
For the six months ended For the six months ended
June 30, 1999 June 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 $ 16,788 27,259 $ 0.62 $ 39,823 42,528 $ 0.94
=========== =========
Effect of Dilutive Securities
Stock compensation plans - 1,289 - 503
Warrants - 100 - 33
Convertible Preferred Stock - 2,396 - 1,540
---------- ----------- ----------- ----------
Diluted Net Income Per Share $ 16,788 31,044 $ 0.54 $ 39,823 44,604 $ 0.89
========== =========== =========== =========== ========== =========
For the three months ended For the three months ended
June 30, 1999 June 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)
Basic Net Income Per Share $ 10,101 30,095 $ 0.34 $ 22,452 42,969 $ 0.52
=========== =========
Effect of Dilutive Securities
Stock compensation plans - 1,120 - 622
Warrants - 90 - 38
Convertible Preferred Stock - 2,783 - 702
---------- ----------- ----------- ----------
Diluted Net Income Per Share $ 10,101 34,088 $ 0.30 $ 22,452 44,331 $ 0.51
========== =========== =========== =========== ========== =========
</TABLE>
13
<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 Six Months Ended
June 30, June 30,
1999 2000 1999 2000
---------- --------- ---------- ----------
Revenues:
<S> <C> <C> <C> <C>
New vehicle sales................................ 58.2% 58.4% 58.3% 58.3%
Used vehicle sales............................... 29.2% 27.9% 29.3% 27.8%
Parts, service and collision repair.............. 10.3% 11.0% 10.2% 11.2%
Finance and insurance and other.................. 2.3% 2.7% 2.2% 2.7%
---------- --------- ---------- ----------
Total revenues................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 87.0% 85.8% 86.9% 85.8%
---------- --------- ---------- ----------
Gross profit..................................... 13.0% 14.2% 13.1% 14.2%
Selling, general and administrative.............. 9.3% 10.0% 9.5% 10.3%
Depreciation .................................... 0.1% 0.1% 0.1% 0.1%
Goodwill amortization............................ 0.2% 0.3% 0.2% 0.3%
---------- --------- ---------- ----------
Operating income................................. 3.4% 3.8% 3.3% 3.5%
Interest expense-floorplan....................... 0.7% 0.8% 0.7% 0.7%
Interest expense, other.......................... 0.5% 0.7% 0.6% 0.7%
---------- --------- ---------- ----------
Income before income taxes....................... 2.2% 2.3% 2.0% 2.1%
========== ========= ========== ==========
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues. Revenues grew in each of our primary revenue areas for the
first six months of 2000 as compared with the first six months of 1999, causing
total revenues to increase 129% to $3.0 billion. New vehicle sales revenue
increased 129% to $1.8 billion in the first six months of 2000, compared with
$767.8 million in the first six months of 1999. The increase was due primarily
to a 117% increase in new vehicle unit sales to 68,722 in the first six months
of 2000 from 31,731 in the first six months of 1999, resulting primarily from
acquisitions. The remainder of the increase in new vehicle revenues was due to a
5.8% 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 revenues comprised of luxury brands
increased to 24.8% in the first six months of 2000 from 19.2% in the first six
months of 1999.
Used vehicle revenues from retail sales increased 120% to $626.8
million in the first six months of 2000 from $285.2 million in the first six
months of 1999. The increase was primarily due to a 100% increase in used
vehicle unit sales to 40,689 in the first six months of 2000 from 20,294 in the
first six months of 1999. Of this increase, approximately 93.1%, or 18,997
units, resulted from acquisitions and 6.9% resulted from stores owned longer
than one year. The remainder of the increase was due to a 9.6% increase in the
average selling price of used vehicles, including a 6.4% increase in the average
selling price of used vehicles from stores owned for longer than one year.
Parts, service and collision repair revenue increased 151% to $336.1
million in the first six months of 2000 compared to $134.0 million in the first
six months of 1999. Approximately 95.5% of the increase resulted from our
acquisitions. Finance and insurance revenue increased $50.7 million, or 172%,
principally due to vehicle sales and related financing contributed by our
acquisitions, as well as a 29.2% 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 148% to $427.3 million in the
first six months of 2000 from $172.3 million in the first six months of 1999.
Approximately 94.8%, or $241.9 million, of the increase resulted from
acquisitions. Gross profit as a percentage of
14
<PAGE>
sales increased to 14.2% from 13.1% due primarily to an increase in revenues
contributed by parts, service and 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 six months of 2000 from 10.2% in the first six
months of 1999. Finance and insurance revenues as a percentage of total revenues
increased to 2.7% in the first six months of 2000 from 2.2% in the first six
months of 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased 147%
to $308.3 million in the first six months of 2000 from $124.6 million in the
first six months of 1999, resulting principally from acquisitions. Such expenses
as a percentage of revenues increased to 10.3% in the first six months of 2000
from 9.5% in the first six 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 six months of 2000 from 5.9%
in the first six months of 1999 (as a percentage of gross profits, compensation
expense decreased slightly to 44.6% in the first six months of 2000 from 45.0%
in the first six months of 1999). In addition, rent expense increased as a
percentage of total revenues to 0.9% in the first six months of 2000 from 0.7%
in the first six 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 decreased slightly to 72.1% in the first six
months of 2000 from 72.3% in the first six months of 1999.
Depreciation and Amortization Expense. Depreciation expense, excluding
goodwill amortization, increased 168% to $3.2 million in the first six months of
2000 from $1.2 million in the first six months of 1999, resulting primarily from
acquisitions. As a percentage of total revenues, depreciation expense was at
0.1% in both the first six months of 2000 and the first six months of 1999.
Goodwill amortization expense increased 177% to $8.2 million in the first six
months of 2000 from $3.0 million in the first six months of 1999, resulting
principally from additional acquisitions.
Interest Expense, floor plan. Interest expense, floor plan increased
138% to $22.4 million in the first six months of 2000 from $9.4 million in the
first six 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 six months of 2000 from 0.71% in the first six
months of 1999, primarily due to a 95 basis point increase in the average
floorplan interest rate.
Interest Expense, other. Interest expense, other increased to $20.6
million in the first six months of 2000 from $7.4 million in the first six
months of 1999 due to interest incurred on additional borrowings under our $350
million acquisition line of credit with Ford Motor Credit Company (the "Current
Revolving Facility").
Provision for Income Taxes. The effective tax rate for the first six
months of 2000 was 38.51%, compared to an effective rate of 38.00% in the first
six months of 1999. The increase was primarily attributable to acquisitions we
made during the year 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 $23.0 million in the first six months of 2000 compared to the first
six months of 1999.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues. Revenues grew in each of our primary revenue areas for the
three months ended June 30, 2000 as compared with the three months ended June
30, 1999, causing total revenues to increase 114% to $1.5 billion. New vehicle
sales revenue increased 115% to $904.6 million in the three months ended June
30, 2000, compared with $420.8 million in the three months ended June 30, 1999.
The increase was due primarily to a 102% increase in new vehicle unit sales to
35,332 in the three months ended June 30, 2000 from 17,449 in the three months
ended June 30, 1999, resulting primarily from acquisitions. The remainder of the
increase in new vehicle revenues was due to a 6.16% 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 26.1% in the three
months ended June 30, 2000 from 19.7% in the three months ended June 30, 1999.
Used vehicle revenues from retail sales increased 107% to $321.3
million in the three months ended June 30, 2000 from $155.3 million in the three
months ended June 30, 1999. The increase was primarily due to a 88.8% increase
in used vehicle unit sales to 20,557 in the three months ended June 30, 2000
from 10,886 in the three months ended June 30, 1999. Of this increase,
approximately 96.5%, or 9,334 units, resulted from acquisitions and 3.5%
resulted from stores owned longer than one year. The remainder of the increase
was due to a 9.5% increase in the average selling price of used vehicles,
including a 6.4% increase in the average selling price of used vehicles from
stores owned for longer than one year.
15
<PAGE>
Parts, service and collision repair revenue increased 129% to $170.5
million in the three months ended June 30, 2000 compared to $74.4 million in the
three months ended June 30, 1999. Approximately 95.8% of the increase resulted
from our acquisitions. Finance and insurance revenue increased $24.9 million, or
147%, principally due to vehicle sales and related financing contributed by our
acquisitions, as well as a 25.1% 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 133% to $219.3 million in the
three months ended June 30, 2000 from $94.3 million in the three months ended
June 30, 1999. Approximately 95.9%, or $119.9 million, of the increase resulted
from acquisitions. Gross profit as a percentage of sales increased to 14.2% from
13.0% due primarily to an increase in revenues contributed by parts, service and
collision repair services and finance and insurance products, which earn higher
margins than new vehicles. Parts, service and collision repair revenues as a
percentage of total revenues increased to 11.0% in the three months ended June
30, 2000 from 10.3% in the three months ended June 30, 1999. Finance and
insurance revenues as a percentage of total revenues increased to 2.7% in the
three months ended June 30, 2000 from 2.3% in the three months ended June 30,
1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased 130%
to $154.8 million in the three months ended June 30, 2000 from $67.4 million in
the three months ended June 30, 1999, resulting principally from acquisitions.
Such expenses as a percentage of revenues increased to 10.0% in the three months
ended June 30, 2000 from 9.3% in the three months ended June 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 6.2% in the three
months ended June 30, 2000 from 5.8% in the three months ended June 30, 1999 (as
a percentage of gross profits, compensation expense decreased to 43.7% in the
three months ended June 30, 2000 from 44.8% in the three months ended June 30,
1999). In addition, rent expense increased as a percentage of total revenues to
0.9% in the three months ended June 30, 2000 from 0.7% in the three months ended
June 30, 1999 primarily due to acquisitions of dealerships located in higher
rent markets. As a percentage of gross profits, selling, general and
administrative expenses decreased slightly to 70.6% in the three months ended
June 30, 2000 from 71.5% in the three months ended June 30, 1999.
Depreciation and Amortization Expense. Depreciation expense, excluding
goodwill amortization, increased 151% to $1.6 million in the three months ended
June 30, 2000 from $0.7 million in the three months ended June 30, 1999,
resulting primarily from acquisitions. As a percentage of total revenues,
depreciation expense was at 0.1% in both the three months ended June 30, 2000
and the three months ended June 30, 1999. Goodwill amortization expense
increased 163% to $4.2 million in the three months ended June 30, 2000 from $1.6
million in the three months ended June 30, 1999, resulting principally from
acquisitions.
Interest Expense, floor plan. Interest expense, floor plan increased
145% to $12.0 million in the three months ended June 30, 2000 from $4.9 million
in the three months ended June 30, 1999, due primarily to floor plan interest
expense incurred by dealerships acquired. As a percentage of total revenues,
floor plan interest increased to 0.78% in the three months ended June 30, 2000
from 0.68% in the three months ended June 30, 1999, primarily due to a 122 basis
point increase in the average floorplan interest rate.
Interest Expense, other. Interest expense, other increased to $10.3
million in the three months ended June 30, 2000 from $3.7 million in the three
months ended June 30, 1999 due to interest incurred on additional borrowings
under our $350 million Current Revolving Facility.
Provision for Income Taxes. The effective tax rate for the three months
ended June 30, 2000 was 38.23%, compared to an effective rate of 37.76% in the
three months ended June 30, 1999. The increase was primarily attributable to
acquisitions we made during the year 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 $12.4 million in the three months ended June 30, 2000 compared to
the three months ended June 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 six months of 2000, net cash provided by operating
activities was approximately $54.6 million. During the first six months of 1999,
net cash provided by operating activities was approximately $15.8 million. The
increase was attributable principally to increases in net income and notes
payable, floorplan and accounts payable and other liabilities, offset by
increases in inventories and accounts receivable.
16
<PAGE>
Cash used for investing activities in the first six months of 2000 was
approximately $78.4 million, including $46.8 million paid for acquisitions, net
of cash received, and $35.0 million in capital expenditures. Cash used for
investing activities in the first six months of 1999 was approximately $75.4
million, including $77.2 million paid for acquisitions, net of cash received,
and $8.8 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 six months of 2000,
approximately $26.0 million related to the construction of new dealerships and
collision repair centers. Total construction in process as of June 30, 2000 was
approximately $10.1 million. During the first six months of 2000, Sonic has
incurred approximately $23.9 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 sheets as of June 30,
2000.
In June 2000, Sonic entered into revolving real estate acquisition and
construction line of credit (the "Construction Loan") and a related mortage
refinancing facility (the "Permanent Loan") with Ford Motor Credit. Under the
Construction Loan, Sonic can borrow up to $50.0 million to finance land
acquistion 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 June 30, 2000 was approximately $14.6 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 2005. All advances under the
Permanent Loan mature on June 22, 2010 and bear interest at 2.00% above LIBOR.
As of June 30, 2000, no amounts were outstanding under the Permanent Loan.
During the first six months of 2000, we acquired 6 dealerships for
approximately $47.6 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 acquistions 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.
As of August 4, 2000, Sonic has sold three dealerships for approximately
$4.8 million. No material gains or losses have been realized or are expected
from these sales.
Borrowings, net of repayments, under the Current Revolving Facility for
the first six months of 2000 were approximately $33.9 million and were used to
finance acquisitions. As of June 30, 2000, the total outstanding balance under
the Current Revolving Facility was approximately $322.9 million.
On August 10, 2000, Sonic entered into a revolving credit agreement
with Ford Motor Credit Company ("Ford MotorCredit") and Chrysler Financial
Corporation ("Chrysler Financial") (the "NewRevolving Facility") to replace the
Current Revolving Facility. The New Revolving Facility has a borrowing limit of
$500 million, subject to a borrowingbase calculated on the basis of our
receivables, inventory and equipment and apledge of certain additional
collateral by an affiliate of Sonic. The New Revolving Facility bears interest
at 2.50% above LIBOR (LIBOR was 6.64% at June 30, 2000) and will mature on
October 31, 2003. Additional amounts to be drawn under the New 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 New 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 Current 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 New Revolving Facility. Sonic is in compliance with all
restrictive covenants as of June 30, 2000.
17
<PAGE>
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 Current and New
Revolving Facilities. 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 June 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 $20.5 million for the
purchase of vehicles at two of our General Motors dealerships. We added two more
of our General Motors dealerships to this facility effective August 1, 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 June 30, 2000, there
was an aggregate of approximately $141.7 million outstanding under the Chrysler
Financial floorplan facility, $448.2 million outstanding under the Ford Motor
Credit floor plan facility and $14.2 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
June 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, 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 June 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. Through August 10, 2000, Sonic has
repurchased approximately 2.9 million shares of Class A common stock for
approximately $27.5 million and has redeemed 10,401 shares of Class A
convertible preferred stock for approximately $10.4 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 New 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
18
<PAGE>
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 June 30, 2000 was approximately $655.5 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 37.4% and 147.5%, respectively, at June 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 $316.6 million at June 30, 1999 and $957.8 million
at June 30, 2000. A change of one percent in the interest rate would have caused
a change in interest expense of approximately $1.6 million for the six months
ended June 30, 1999 and approximately $4.7 million for the six months ended June
30, 2000. Of the total change in interest expense, approximately $1.4 million
for the six months ended June 30, 1999 and approximately $2.9 million for the
six months ended June 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 six months ended June 30,
2000 exceeded the amounts we received from these manufacturer floor plan
incentives by approximately $4.2 million. As a result, the effective rate
incurred under our floor plan financing arrangements was reduced to an
annualized rate of approximately 1.4% after considering these incentives.
Item 4: Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on June 5, 2000, O. Bruton
Smith, Jeffrey C. Rachor and William R. Brooks were elected directors by Sonic's
stockholders. Directors whose terms of office continued after the meeting were
Thomas A. Price, B. Scott Smith, Theodore M. Wright, William P. Benton, William
I. Belk and H. Robert Heller. In addition to the election of three directors,
the stockholders approved the following:
1. An amendment and restatement of the Sonic Automotive, Inc. 1997 Stock
Option Plan (the "Stock Option Plan"), which effected the following
changes to the Stock Option Plan:
o an increase in the number of options to purchase shares of Class
A Common Stock that may be granted under the Stock Option Plan
from 4,500,000 to 6,000,000;
o a limitation on the number of options that may be issued under
the Stock Option Plan to any individual in any calendar year of
options to purchase 500,000 shares of Class A Common Stock; and
o a requirement that all options issued under the Stock Option
Plan have an exercise price of no less than the fair market
value per share of Class A Common Stock on the date of the
option grant.
19
<PAGE>
2. An amendment to the Sonic Automotive, Inc. Employee Stock Purchase
Plan (the "Employee Plan") to increase the number of options to
purchase shares of Class A Common Stock that may be granted under the
Employee Plan from 1,200,000 to 1,800,000.
3. The appointment of Deloitte & Touche LLP as Sonic's independent
public auditors for the fiscal year ending December 31, 2000.
<TABLE>
<CAPTION>
Votes For Votes Withheld Broker Non-Votes
--------- -------------- ----------------
<S> <C> <C> <C>
Election of O. Bruton Smith 142,876,977 1,048,323 0
Election of Jeffrey C. Rachor 142,878,522 1,046,778 0
Election of William R. Brooks 142,877,127 1,048,173 0
</TABLE>
<TABLE>
<CAPTION>
Votes Broker
Votes For Votes Against Abstained Non-Votes
--------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Approval of Amendment and
Restatement of Stock Option Plan 129,117,331 8,155,343 1,828,352 4,824,274
Approval of Amendment to
Employee Plan 136,656,400 1,035,069 1,409,557 4,824,274
Ratification of Deloitte & Touche
as independent public auditors 142,517,594 29,353 1,378,353 0
</TABLE>
20
<PAGE>
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* 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).
27 Financial data schedule for the three month period ended June 30, 2000
(filed electronically).
* Filed Previously
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter ended June 30,
2000.
21
<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.
Date: August 14, 2000 By: /s/ O. Bruton Smith
----------------------------------
O. Bruton Smith
Chairman and Chief Executive Officer
Date: August 14, 2000 By: /s/ Theodore M. Wright
-----------------------------------------
Theodore M. Wright
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
22
<PAGE>
INDEX TO EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q FOR
SONIC AUTOMOTIVE, INC.
FOR THE SIX MONTHS ENDED JUNE 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* 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).
27 Financial data schedule for the six month period ended June 30, 2000
(filed electronically).
* Filed Previously
23
