UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 2001
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) 566-2400
(Registrant's telephone number, including area code)
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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 May 10, 2001, there were 27,639,442 shares of Class A Common Stock and
12,250,000 shares of Class B Common Stock outstanding.
1
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial
Statements (Unaudited) 3
Consolidated Statements of Income - three-month periods ended
March 31, 2000 and March 31, 2001
Consolidated Balance Sheets -
December 31, 2000 and March 31, 2001
Consolidated Statement of Stockholders'
Equity - three-month period ended March 31, 2001
Consolidated Statements of Cash Flows - three-month periods
ended March 31, 2000 and March 31, 2001
Notes to Unaudited Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
Three Months Ended
March 31,
2000 2001
--------------- -------------
REVENUES:
New vehicles $ 854,034 $ 878,608
Used vehicles 305,431 314,347
Wholesale vehicles 101,012 116,853
--------------- -------------
Total vehicles 1,260,477 1,309,808
Parts, service and collision repair 165,587 189,361
Finance, insurance and other 38,337 41,036
--------------- -------------
Total revenues 1,464,401 1,540,205
COST OF SALES 1,256,367 1,318,266
--------------- -------------
GROSS PROFIT 208,034 221,939
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 153,466 171,467
DEPRECIATION 1,517 1,725
GOODWILL AMORTIZATION 4,050 4,451
--------------- -------------
OPERATING INCOME 49,001 44,296
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 10,357 12,242
Interest expense, other 10,266 10,005
Other income 38 59
--------------- -------------
Total other expense, net 20,585 22,188
--------------- -------------
INCOME BEFORE INCOME TAXES 28,416 22,108
PROVISION FOR INCOME TAXES 11,045 8,625
--------------- -------------
NET INCOME $ 17,371 $ 13,483
=============== =============
BASIC NET INCOME PER SHARE $ 0.41 $ 0.33
=============== =============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 42,088 41,271
=============== =============
DILUTED NET INCOME PER SHARE $ 0.39 $ 0.33
=============== =============
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 44,877 41,473
=============== =============
See notes to unaudited consolidated financial statements.
3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31,
December 31, 2001
2000 (Unaudited)
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 109,325 $ 103,699
Receivables, net 127,865 125,528
Inventories 773,785 741,978
Other current assets 26,428 22,618
-------------- -------------
Total current assets 1,037,403 993,823
PROPERTY AND EQUIPMENT, NET 72,966 84,009
GOODWILL, NET 668,782 685,808
OTHER ASSETS 10,097 10,904
-------------- -------------
TOTAL ASSETS $ 1,789,248 $ 1,774,544
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 684,718 $ 643,965
Trade accounts payable 50,274 49,742
A ccrued interest 10,279 5,784
Other accrued liabilities 70,453 79,283
Current maturities of long-term debt 2,597 2,597
-------------- -------------
Total current liabilities 818,321 781,371
LONG-TERM DEBT 485,212 504,315
OTHER LONG-TERM LIABILITIES 5,733 5,731
PAYABLE TO THE COMPANY'S CHAIRMAN 5,500 5,500
DEFERRED INCOME TAXES 21,093 22,887
INCOME TAX PAYABLE 2,467 2,923
STOCKHOLDERS' EQUITY:
Class A Convertible Preferred Stock 251 -
Class A Common Stock 333 333
Class B Common Stock 123 123
Paid-in capital 329,489 329,721
Retained earnings 153,564 167,047
Treasury Stock, at cost (32,838) (45,407)
-------------- -------------
Total stockholders' equity 450,922 451,817
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,789,248 $ 1,774,544
============== =============
See notes to unaudited consolidated financial statements.
4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
(Unaudited)
Preferred Class A Class B Total
Stock Common Stock Common Stock Paid-In Retained Treasury Stockholders'
Shares Amount Shares Amount Shares Amount Capital Earnings Stock Equity
-------- ------ ------ ------ ------ ------ --------- ---------- ---------- -------------
BALANCE AT
December 31, 2000 -- $ 251 33,292 $ 333 12,250 $ 123 $ 329,489 $ 153,564 $ (32,838) $ 450,922
Shares awarded under
stock compensation
plans 39 232 232
Redemption of
Preferred Stock (251) (251)
Purchase of
Treasury Stock (12,569) (12,569)
Net income 13,483 13,483
-------- ------ ------ ------ ------ ------ --------- ---------- ---------- -------------
BALANCE AT
March 31, 2001 - $ - 33,331 $ 333 12,250 $ 123 $ 329,721 $ 167,047 $ (45,407) $ 451,817
======== ====== ====== ====== ====== ====== ========= ========== ========== =============
See notes to unaudited consolidated financial statements.
5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2000 2001
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,371 $ 13,483
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,567 6,176
Changes in assets and liabilities that relate to operations:
Receivables (11,679) 10,263
Inventories (22,880) 69,465
Other assets (1,712) 2,319
Notes payable - floor plan 16,551 (88,057)
Trade accounts payable and other liabilities 11,548 4,058
--------- ----------
Total adjustments (2,605) 4,224
--------- ----------
Net cash provided by operating activities 14,766 17,707
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of dealerships, net of cash acquired (47,152) (25,733)
Purchases of property and equipment (9,519) (11,323)
Proceeds from sales of property and equipment 1,168 865
Proceeds from sales of dealerships 550 7,042
--------- ----------
Net cash used in investing activities (54,953) (29,149)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit facilities 47,763 19,182
Payments on long-term debt (1,459) (575)
Purchases of Class A common stock (5,660) (12,569)
Redemptions of Preferred Stock (3,500) (251)
Issuance of shares under stock compensation plans 243 232
Advances to (repayments from) affiliated companies 2,084 (203)
--------- ----------
Net cash provided by financing activities 39,471 5,816
--------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (716) (5,626)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 83,111 109,325
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 82,395 $ 103,699
========= ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued for acquisitions and contingent $ 11,589 -
consideration
Conversion of Preferred Stock $ 21,904 -
See notes to unaudited consolidated financial statements.
6
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. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The accompanying unaudited financial
information for the three months ended March 31, 2000 and 2001 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, 2000.
Revenue Recognition -- Sonic records revenue when vehicles are
delivered to customers, when vehicle service work is performed and when parts
are delivered.
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. Under these contracts 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 $6.2
million and $6.3 million for the three months ended March 31, 2000 and 2001,
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, 2000
was $ 697.8 million and at March 31, 2001 was $719.2 million. As a percentage of
total assets and stockholders' equity, goodwill, net of accumulated
amortization, represented 37.4% and 148.3%, respectively, at December 31, 2000
and 38.6% and 151.8%, respectively, at March 31, 2001. 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.
7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
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 amortization of goodwill, but would
require the carrying amount of goodwill to be reduced only if it was found to be
impaired or was associated with assets to be sold or otherwise disposed. If the
proposed rules are adopted, goodwill arising from acquisitions completed prior
to the date of adoption would no longer be amortized, though reversal of
goodwill amortization recognized in prior periods would not be permitted.
Use of Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The accounts in the accompanying financial
statements which require the use of significant estimates are accounts
receivable, inventories, intangible assets, income taxes and certain accrued
expenses.
Segment Information -- Sonic's business is fundamentally managed based
on individual dealership operating performance. Each of Sonic's dealerships have
similar economic and operating characteristics. Each dealership sells similar
products and services (new and used vehicles, parts, service and collision
repair services), uses similar processes in selling its product and services,
and sell its products and services to similar classes of customers. As a result,
Sonic's dealerships are aggregated into a single operating segment for purposes
of reporting financial condition and results of operations.
2. BUSINESS ACQUISITIONS
Acquisitions Completed During the Three Months Ended March 31, 2001:
During the first three months of 2001, Sonic acquired three dealerships
for approximately $31.2 million in cash. 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 $ 8,167
Property and equipment 2,703
Goodwill 21,639
Non-current liabilites assumed (1,345)
--------------
Total purchase price $ 31,164
==============
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the acquisitions completed
during the three months ended March 31, 2000 and March 31, 2001 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 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.
8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. BUSINESS ACQUISITIONS - (Continued)
Three Months Ended March 31,
2000 2001
-------------- -------------
Total revenues $ 1,704,557 $ 1,548,321
Gross profit $ 231,000 $ 222,818
Net income $ 18,370 $ 12,984
Diluted income per share $ 0.41 $ 0.31
Sale of Dealership Subsidiaries:
In the ordinary course of business, we evaluate dealerships
for possible disposition based on various performance criteria. During the three
months ended March 31, 2001, we sold or otherwise disposed of assets from six of
our dealership franchises which contributed approximately $25.7 million in
revenues in 2001. Proceeds, net of disposal costs, from these dispositions were
approximately $7.0 million, and we have recognized no material gains or losses
on these dispositions.
3. INVENTORIES
Inventories consist of the following:
December 31, March 31,
2000 2001
------------- --------------
New vehicles $ 591,583 $ 547,997
Used vehicles 116,836 126,785
Parts and accessories 48,916 47,523
Other 16,450 19,673
------------- --------------
Total $ 773,785 $ 741,978
============= ==============
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
December 31, March 31,
2000 2001
------------- --------------
Land $ 53 $ 1,802
Building and improvements 25,771 26,064
Office equipment and fixtures 23,599 24,805
Parts and service equipment 20,132 20,204
Company vehicles 5,812 6,001
Construction in progress 12,244 21,349
------------- --------------
Total, at cost 87,611 100,225
Less accumulated depreciation (14,645) (16,216)
------------- --------------
Property and equipment, net $ 72,966 $ 84,009
============= ==============
In addition to the $21.3 million classified as construction in progress
at March 31, 2001, Sonic has incurred approximately $5.1 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 March 31, 2001. At December 31, 2000 Sonic had classified $5.2 million of
such construction costs in other current assets.
9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. LONG-TERM DEBT
Revolving Facility
We currently have a revolving credit facility (the "Revolving
Facility") with Ford Motor Credit Company ("Ford Motor Credit") and Chrysler
Financial Corporation ("Chrysler Financial") with 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 borrowing base was approximately $433.0 million at March
31, 2001). Amounts outstanding under the Revolving Facility bear interest at
2.50% above LIBOR (LIBOR was 5.08% at March 31, 2001) and will mature on October
31, 2003 (but may be extended for a number of additional one year terms to be
negotiated with Ford Motor Credit and Chrysler Financial). The weighted average
interest rate on the Revolving Facility was 8.53% for the three months ended
March 31, 2001. Borrowings, net of repayments, under the Revolving Facility for
the three months ended March 31, 2001 were approximately $19.2 million and were
primarily used to finance acquisitions. The total outstanding balance as of
March 31, 2001 was approximately $373.0 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
as follows:
(bullet) current assets to current liabilities (at least 1.23:1),
(bullet) earnings before interest, taxes, depreciation and amortization
(EBITDA) and rent less capital expenditures to fixed charges
(at least 1.4:1),
(bullet) EBITDA to interest expense (at least 2:1) and
(bullet) total adjusted debt to EBITDA (no greater than 2.25:1).
In addition, the loss of voting control over Sonic by Bruton Smith,
Chairman and Chief Executive Officer, Scott Smith, President and Chief Operating
Officer, 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 March 31, 2001.
Mortgage Facility
We currently have 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, our
dealership development subsidiaries 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, bear interest at 2.25% above LIBOR and are secured by Sonic's guarantee
and a lien on all of the borrowing subsidiaries' real estate and other assets.
The total outstanding balance under the Construction Loan as of March 31, 2001
was approximately $4.6 million.
Under the Permanent Loan, we 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, bear interest at 2.00% above LIBOR and
are secured by the same collateral given under the Construction Loan. As of
March 31, 2001, no amounts were outstanding under the Permanent Loan.
The Mortgage Facility allows us to borrow up to $100 million in the
aggregate under the Construction Loan and the Permanent Loan. The Mortgage
Facility is not cross-collateralized with the Revolving Facility; however, a
default under one will cause a default under the other. Among other customary
covenants, the borrowing subsidiaries under the Mortgage Facility agreed not to
incur any other liens on their property (except for existing encumbrances on
property acquired) and not to transfer their property or more than 20% of their
ownership interests to any third party. In addition, the loss of voting control
by Bruton Smith, Scott Smith and their spouses or immediate family members, with
certain exceptions, will result in an event of default under the Mortgage
Facility. Sonic was in compliance with all restrictive covenants as of March 31,
2001.
10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. LONG-TERM DEBT - (Continued)
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.
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 of 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.
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% (prime rate was 8% at March 31,
2001) 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.
7. CAPITAL STRUCTURE AND PER SHARE DATA
Preferred Stock - Sonic has 3 million shares of "blank check" preferred
stock authorized with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. The Board of Directors
has designated 300,000 shares of preferred stock as Class A convertible
preferred stock, par value $0.10 per share (the "Preferred Stock") which is
divided into 100,000 shares of Series I Preferred Stock, 100,000 shares of
Series II Preferred Stock, and 100,000 shares of Series III Preferred Stock. As
of March 31, 2001 there were no shares issued and outstanding.
Common Stock - Sonic has two classes of common stock. Sonic has
authorized 100 million shares of Class A common stock at a per value of 0.01 per
share. Class A common stock entitles its holder to one vote per share. Sonic had
33,291,933 and 33,331,106 shares of Class A common stock issued at December 31,
2000 and March 31, 2001, respectively. Of these issued shares, there were
29,715,570 and 28,098,943 shares outstanding at December 31, 2000 and March 31,
2001, respectively. Sonic has also authorized 30 million shares of Class B
common stock at a per value of $.01 pre share. Class B common stock entitles its
holder to ten votes per share, except in certain circumstances. Each share of
Class B common stock is convertible into one share of Class A common stock
either upon voluntary conversion at the option of the holder, or automatically
upon the occurrence of certain events, as provided in Sonic's charter. Sonic
had issued and outstanding 12,250,000 shares of Class B common stock at
December 31, 2000 and March 31, 2001.
11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. CAPITAL STRUCTURE AND PER SHARE DATA - (Continued)
Treasury Stock/Share Repurchase Program - Our Board of Directors has
authorized us to expend up to $100 million to repurchase shares of our Class A
common stock or redeem securities convertible into Class A common stock. As of
March 31, 2001 we had repurchased 5,232,163 million shares of Class A common
stock for approximately $45.4 million and had also redeemed 13,801.50 shares of
Class A convertible preferred stock at a total cost of approximately $13.8
million. Through May 10, 2001, we have repurchased approximately 5,691,664
million shares of Class A common stock for approximately $49.1 million and have
redeemed 13,801.5 shares of Class A convertible preferred stock for
approximately $13.8 million. We 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.
For the three months ended For the three months ended
March 31, 2000 March 31, 2001
-------------------------- --------------------------
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 $ 17,371 42,088 $ 0.41 $ 13,483 41,271 $ 0.33
========= ==========
Effect of Dilutive Securities:
Stock compensation plans 384 161
Warrants 28 18
Convertible Preferred Stock 2,377 23
--------- ---------- -------- ----------
Diluted Net Income Per Share $ 17,371 44,877 $ 0.39 $ 13,483 41,473 $ 0.33
========= ========== ========= ======== ========== ==========
In addition to the stock options included in the table above, options to
purchase 4,351,124 shares of Class A common stock were outstanding during the
three months ended March 31, 2001 but were not included in the computation of
diluted net income per share because the options were antidilutive.
12
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.
Overview
We are the second largest automotive retailer in the United States, as
measured by total revenue, operating 165 dealership franchises and 30 collision
repair centers throughout the United States as of May 15, 2001. We own and
operate franchises for 31 different brands of cars and light trucks, providing
comprehensive services including sales of both new and used cars and light
trucks, replacement parts and vehicle maintenance, warranty, paint and repair
services. We also arrange extended warranty contracts and financing and
insurance for our automotive customers.
The following table depicts the breakdown of our new vehicle revenues
by brand for the first quarter of 2001 compared to the first quarter of 2000:
Percentage of New Vehicle Revenues for
the three months ended March 31,
2000 2001
------- -------
Brand
Ford................................................................ 14.5% 16.7%
Honda............................................................... 13.8% 13.6%
Toyota.............................................................. 8.3% 11.5%
BMW................................................................. 10.1% 11.1%
General Motors (1).................................................. 10.9% 11.0%
Chrysler (2)........................................................ 12.9% 9.6%
Nissan.............................................................. 6.6% 5.8%
Lexus............................................................... 4.7% 5.6%
Other (3)........................................................... 18.2% 15.1%
------- -------
Total............................................................... 100.0% 100.0%
======= =======
(1) Includes Buick, Cadillac, Chevrolet, GMC, Oldsmobile and Pontiac
(2) Includes Chrysler, Dodge, Jeep and Plymouth
(3) Includes Acura, Audi, Hyundai, Infiniti, Isuzu, KIA, Land Rover, Lincoln,
Mercedes, Mercury, Mitsubishi, Porsche, Subaru, Volkswagen and Volvo
New vehicle revenues include both the sale and lease of new vehicles.
Used vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include parts
and services revenues, fees and commissions for arranging financing and
insurance and sales of third party extended warranties for vehicles. In
connection with vehicle financing contracts, we receive a finance fee from the
lender for originating the loan. If, within 90 days of origination, the customer
pays off the loans through refinancing or selling/trading in the vehicle or
defaults on the loan, the finance company will assess a charge (a "chargeback")
for a portion of the original commission. The amount of the chargeback depends
on how long the related loan was outstanding. As a result, we have established
reserves based on our historical chargeback experience. We also sell warranties
provided by third-party vendors, and recognize a commission at the time of sale.
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
available credit. During the first quarter of 2001, we saw a significant decline
in vehicle sales of domestic manufacturer brands as compared to the same period
in the prior year as a result of these factors. On a same store basis, new
vehicle revenues declined by approximately 6.9% in the first quarter of 2001
compared to the same period last year, and used vehicle revenues declined by
approximately 7.3% compared to the same period last year. We expect this
slowdown in domestic vehicle sales to continue during 2001.
While the automotive retailing business is cyclical, we sell several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include our parts, service and collision
repair businesses, none of which are dependent upon near-term new vehicle sales
volume.
13
Our cost of sales and profitability are also affected by the
allocations of new vehicles which our dealerships receive from manufacturers.
When we do not receive allocations of new vehicle models adequate to meet
customer demand, we may purchase additional vehicles from other dealers at a
premium to the manufacturer's invoice, reducing the gross margin realized on the
sales of such vehicles. In addition, we follow a disciplined approach in selling
vehicles to other dealers and wholesalers when the vehicles have been in our
inventory longer than the guidelines set by us. Such sales are frequently at or
below cost and, therefore, reduce our overall gross margin on vehicle sales.
Salary expense, employee benefits costs, facility rent and advertising
expenses comprise the majority of our selling, general and administrative
expenses. Approximately 62.0% of our selling, general and administrative
expenses for the three months ended March 31, 2001 were variable. We are able to
adjust these expenses as the operating or economic environment impacting our
dealerships changes. We manage these variable expenses, such as advertising
(7.5% of selling, general and administrative expenses) and non-salaried sales
compensation (48.6%) expenses, so that they are generally related to vehicle
sales and can be adjusted in response to changes in vehicle sales volume. In
addition, management compensation is tied to individual dealership profitability
and stock price appreciation through stock options.
Interest expense fluctuates based primarily on the level of the
inventory of new vehicles held at our dealerships, substantially all of which is
financed through floor plan financing, as well as the amount of indebtedness
incurred for acquisitions. Our floor plan expenses are substantially offset by
amounts received from manufacturers, in the form of floor plan inventory
incentives. These payments are credited against our cost of sales. During the
three months ended March 31, 2000, we received approximately $8.1 million in
manufacturer inventory incentives which resulted in an effective borrowing rate
under our floor plan facilities of approximately 2.5%.
Our business is fundamentally managed based on individual dealership
operating performance. Each of our dealerships have similar economic and
operating characteristics. Each dealership sells similar products and services
(new and used vehicles, parts, service and collision repair services), uses
similar processes in selling its products and services, and sells its products
and services to similar classes of customers. As a result, we have aggregated
our dealerships into a single operating segment for purposes of reporting
financial condition and results of operations.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of these dealerships prior to the
date they were acquired. Our Unaudited Consolidated Financial Statements
discussed below reflect the results of operations, financial position and cash
flows of each of our dealerships acquired prior to March 31, 2001. As a result
of the effects of our acquisitions, the historical unaudited consolidated
financial information described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is not necessarily indicative of
the results of operations, financial position and cash flows which would have
resulted had such acquisitions occurred at the beginning of the periods
presented, nor is it indicative of future results of operations, financial
position and cash flows.
Results of Operations
The following table summarizes, for the periods presented, the
percentages of total revenues represented by certain items reflected in our
Unaudited Consolidated Statements of Income.
Percentage of total revenues for
the three months ended March 31,
2000 2001
------- -------
Revenues:
New vehicle ........................................................ 58.3% 57.0%
Used vehicle (including wholesale).................................. 27.8% 28.0%
Parts, service and collision repair................................. 11.3% 12.3%
Finance, insurance and other........................................ 2.6% 2.7%
------- -------
Total revenues.......................................................... 100.0% 100.0%
Cost of sales........................................................... 85.8% 85.6%
------- -------
Gross profit............................................................ 14.2% 14.4%
Selling, general and administrative expenses............................ 10.5% 11.1%
Depreciation............................................................ 0.1% 0.1%
Goodwill amortization................................................... 0.3% 0.3%
------- -------
Operating income........................................................ 3.3% 2.9%
Interest expense, floor plan............................................ 0.7% 0.8%
Interest expense, other................................................. 0.7% 0.7%
------- -------
Income before income taxes.............................................. 1.9% 1.4%
Income tax expense...................................................... 0.7% 0.5%
------- -------
Net Income.............................................................. 1.2% 0.9%
======= =======
14
Revenues
Revenues grew in each of our primary revenue areas in the first quarter
of 2001, causing total revenues to increase $75.8 million, or 5.2%, over the
same period in the previous year. The increase resulted from approximately
$141.9 million in revenues contributed by acquisitions completed in 2000 and
2001, net of $25.7 million in revenues associated with dealership dispositions,
which was offset by an approximate $66.1 million decline in revenues from
dealerships owned longer than one year.
New Vehicles: Revenues from the sale of new vehicles increased
approximately $24.6 million, or 2.9%, in the first quarter of 2001 compared to
the first quarter of 2000, representing a decrease in unit sales of
approximately 0.4% but an increase in the average selling price of approximately
3.3%. The overall decrease in unit sales resulted from a decrease of 3,389 units
from dealerships owned longer than one year offset by unit sales of 3,240
contributed by dealerships acquired, net of dealerships disposed, in 2000 and
2001. The decline in units from dealerships owned longer than one year was
primarily isolated to domestic brands which have experienced weaker demand under
deteriorating economic conditions.
The following charts depict the percentage of new vehicle units and
revenues contributed by domestic, import and luxury import brands in the first
quarter of 2001 compared to the first quarter of 2000:
[2 Graphs depicting Revenues and Units appears here]
Revenues Units
Q1 2000 Q1 2001 Q1 2000 Q1 2001
------- ------- ------- -------
Luxury Import 25.3% 25.5% 15.3% 15.5%
Import 34.7% 35.9% 42.5% 44.4%
Domestic 40.0% 38.6% 42.2% 40.1%
Used Vehicles: Revenues from retail sales of used vehicles increased
approximately 2.9% in the first quarter of 2001 compared to the first quarter of
2000, representing an increase in unit sales of approximately 0.6% and an
increase in the average selling price of approximately 2.3%. The increase in
unit sales resulted from sales of 2,120 units contributed by dealerships
acquired in 2000 and 2001, net of dealerships disposed, offset by a decrease of
2,004 units from dealerships owned longer than one year. The decline in unit
sales from dealerships owned longer than one year was isolated to dealerships
representing predominantly domestic franchises, in which used unit sales
declined approximately 26.5%, compared to dealerships representing predominantly
import franchises in which used unit sales declined only 0.2%.
Fixed Operations and Finance and Insurance: Revenues from parts,
service and collision repair increased approximately 14.4% in the first quarter
of 2001 compared to the same period last year, of which approximately 66.5%
resulted from acquisitions, net of dealerships disposed. Parts, service and
collision repair revenues from dealerships owned longer than one year increased
approximately 5.4% resulting from continuing emphasis on training and
development as well as implementation of best business practices. Finance and
insurance revenue increased approximately 7.0% in the first quarter of 2001
compared with the same period last year, the majority of which resulted from
acquisitions. Finance and insurance revenues per vehicle increased approximately
7.1% in the first quarter of 2001 compared to the first quarter of 2000. In
addition, despite a decrease in new vehicle revenues from dealerships owned
longer than one year of approximately 6.9% in the first quarter of 2001 compared
to the first quarter of 2000, finance and insurance revenues from those
dealerships declined only 0.4%, reflecting an increase in finance and insurance
revenues per vehicle of 12.2%. These increases result from management's
continued focus on improving training and development programs for finance and
insurance sales people.
Gross profit and gross margins
Gross profit increased 6.7% in the first quarter of 2001 compared to
the same period last year. The increase resulted primarily from the additional
revenues from acquisitions net of dealership dispositions, offset by a slight
decline in gross profit from dealerships owned longer than one year of
approximately 1.0%. Our overall gross margin percentage increased to 14.4% in
the first quarter of 2001 from 14.2% in the first quarter of 2000, due primarily
to an increase in the percentage of 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 12.3% in the first quarter of 2001
from 11.3% in the first quarter of 2000. Finance and insurance revenues as a
percentage of total revenues increased to 2.7% in the first quarter of 2001 from
2.6% in the first quarter of 2000. In addition, the gross margins earned on our
parts, service, collision repair and finance and insurance products increased to
52.3% in the first quarter
15
of 2001 from 51.6% in the first quarter of 2000 reflecting management's
increasing emphasis on training and development and the implementation of best
business practices, including variable pricing structures, expense controls and
compensation controls.
The following graph depicts our mix of revenue and gross profit for the
first quarter of 2001 compared to the first quarter of 2000:
[2 Graphs appear here for Revenue and Gross Profit]
Q1 2000 Q1 2001
------- -------
Revenue Gross Profit Revenue Gross Profit
------- ------------ ------- ------------
New vehicles 58.3% 33.4% 57.0% 30.9%
Used vehicles 27.8% 16.1% 28.0% 14.8%
Parts, service and collision repair 11.3% 35.1% 12.3% 38.7%
Finance and insurance 2.6% 15.4% 2.7% 15.6%
Selling, general and administrative expenses
Selling, general and administrative expenses increased 11.7% in the
first quarter of 2001 compared to the first quarter of 2000, of which
approximately 76.5% resulted from acquisitions, net of dealerships disposed. In
the first quarter of 2001, approximately 62.0% of selling, general, and
administrative expenses were variable, compared to 64.2% in the first quarter of
2000, and approximately 38.0% were fixed, compared to 35.8% in the first quarter
of 2000. As a percentage of total revenues, total selling, general and
administrative expenses increased to 11.1% in the first quarter of 2001 from
10.5% in the first quarter of 2000. These increases resulted from declines in
revenues from dealerships owned longer than one year, which resulted in fewer
revenues available to cover fixed expenses, as well as increases in compensation
expense and rent and related expenses. Compensation programs, which represent
over 50% of total 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 revenues to
6.6% in the first quarter of 2001 from 6.4% in the first quarter of 2000. Rent
and related expenses increased approximately 26.3% in the first quarter of 2001
compared to the first quarter of 2000 due primarily to the completion of new
facility projects which were sold in sale-leaseback transactions.
Depreciation and amortization
Depreciation expense, excluding goodwill amortization, increased
approximately 13.7% in the first quarter of 2001 compared to the same period
last year. The balance of gross property and equipment, excluding land and
construction in process, increased approximately $1.7 million in the first
quarter 2001, resulting from approximately $1.0 million in property and
equipment acquired through dealership acquisitions, approximately $2.0 million
in capital expenditures, offset by approximately $1.3 million in disposals and
other adjustments. As a percentage of total revenues, depreciation expense was
0.1% in both the first quarter of 2001 and 2000. Goodwill amortization expense
increased 9.9% in the first quarter of 2001 compared to the same period last
year as a result of additional acquisitions. Goodwill arising from acquisitions
was approximately $21.6 million in the first quarter of 2001.
Interest Expense, floor plan
Interest expense, floor plan increased 18.2% in the first quarter of
2001 compared to the same period last year, approximately 71.9% of which
resulted from acquisitions and 28.1% of which was contributed by stores owned
longer than one year. As a percentage of total revenues, floor plan interest
increased to 0.8% in the first quarter of 2001 from 0.7% in the first quarter of
2000. The increase in interest expense from stores owned longer than one year,
as well as the increase in interest expense as a percentage of revenues, was due
to primarily to an increase in our average days supply of new vehicles in
inventory to approximately 63.5 days in the first quarter of 2001 from
approximately 62.4 days in the first quarter of 2000 which resulted in larger
inventory and floor plan balances.
16
Interest Expense, other
Interest expense, other decreased $0.3 million in the first quarter of
2001 compared to the same period last year. The decrease results primarily from
an increase in the amount of interest capitalized on construction projects to
$0.8 million in the first quarter of 2001 compared to $0.2 million in the first
quarter of 2000 as well as a slight decrease in the weighted average interest
rate incurred under our $500 million revolving credit agreement (the "Revolving
Facility") with Ford Motor Credit Company ("Ford Motor Credit") and Chrysler
Financial Company, LLC ("Chrysler Financial") to approximately 8.5% in the first
quarter of 2001 from approximately 8.7% in the first quarter of 2000. These
decreases were offset by an increase in the balance outstanding under our
Revolving Facility to $373.0 million as of March 31, 2001 from $336.7 million as
of March 31, 2000.
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 offerings of debt and equity securities to finance
our operations and expansion.
Cash from operations:
During the three months ended March 31, 2001, net cash provided by
operating activities was approximately $17.7 million compared to $14.8 million
in 2000. The increase was primarily due to decreases in receivables.
Cash flows from operations include the effect of vehicle purchases and
related floor plan financing. 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 for the
purchase of vehicles at ten of our General Motors dealerships. 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 March 31, 2001, there was an
aggregate of approximately $110.2 million outstanding under the Chrysler
Financial floor plan facility, $52.1 million outstanding under the GMAC floor
plan facility and $481.7 million outstanding under the Ford Motor Credit floor
plan facility. Balances outstanding under new vehicle floor plan indebtedness
generally exceed the related inventory balances, which are generally reduced by
purchase discounts from manufacturers that are not reflected in the related
floor plan liability. These manufacturer purchase discounts are standard in the
automotive retail 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.
Amounts outstanding under the Chrysler Financial floor plan facility
bear interest at 1.25% above LIBOR (LIBOR was 5.08% at March 31, 2001). Amounts
outstanding under the Ford Motor Credit and GMAC floor plan facilities bear
interest at the prime rate (prime was 8.0% at March 31, 2001), subject to
certain incentives and other adjustments. Interest payments under each of our
floor plan facilities are due monthly, but we are not required to make 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, excluding franchise agreements, 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. We are in
compliance with all restrictive covenants as of March 31, 2001.
Investing activities:
Cash used for investing activities in the three months ended March 31,
2001 was approximately $29.1 million, compared to $55.0 million in the same
period of 2000. Our principal investing activities include capital expenditures,
dealership acquisitions, and dispositions.
Capital Expenditures: Other than construction of new dealerships and
collision repair centers, our capital expenditures generally include building
improvements and equipment for use in our dealerships. Capital expenditures in
the three months ended March 31, 2001 were approximately $11.3 million, compared
to $9.5 million in 2000. The year over year increases primarily represent
expenditures for the construction and renovation of dealerships and collision
repair centers. Of the capital expenditures in 2001, approximately $ 9.3 million
related to the construction of new dealerships and collision repair centers
compared to $5.7 million for similar expenditures in 2000. Once completed, these
new dealerships and collision repair centers are generally sold to third parties
in sale-leaseback transactions. As of March 31, 2001, total construction in
progress was approximately $26.4 million, of which approximately $5.1 million
represented construction costs on facilities which are expected to be completed
and sold within one year
17
in sale-leaseback transactions. Accordingly, these costs have been classified in
other current assets on the accompanying Consolidated Balance Sheet as of March
31, 2001. We do not expect any significant gains or losses from these sales.
Dealership acquisitions and dispositions: During the three months ended
March 31, 2001, we acquired three dealerships for approximately $31.2 million in
cash. The purchases were financed with a combination of cash borrowed under our
Revolving Facility and cash generated from our existing operations.
In the ordinary course of business, we evaluate dealerships for
possible disposition based on various performance criteria. During the three
months ended March 31, 2001, we sold or otherwise disposed of assets from six of
our dealership franchises which contributed approximately $25.7 million in
revenues in 2001. Proceeds, net of disposal costs, from these dispositions were
approximately $7.0 million, and we have recognized no material gains or losses
on these dispositions.
Financing activities:
Cash flows from financing activities were approximately $5.8 million in
the first three months of 2001 compared to $39.5 million in 2000 and primarily
related to net borrowings under our Revolving Facility of approximately $19.2
million offset by repurchases of stock under our stock repurchase program of
approximately $12.6 million.
The Revolving Facility: 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 one of our affiliated companies (the borrowing base was
approximately $433.0 million at March 31, 2001). Amounts outstanding under the
Revolving Facility bear interest at 2.50% above LIBOR (LIBOR was 5.08% at March
31, 2001) and will mature on October 31, 2003. The maturity date may be extended
for a number of additional one year terms to be negotiated with Ford Motor
Credit and Chrysler Financial. Borrowings, net of repayments, under the
Revolving Facility for the quarter ended March 31, 2001 were approximately $19.2
million and were primarily used to finance acquisitions. The total outstanding
balance as of March 31, 2001 was approximately $373.0 million. Additional
amounts to be drawn under the Revolving Facility are to be used for the
acquisition of additional dealerships and to provide for general working capital
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
(bullet) current assets to current liabilities (at least 1.23:1),
(bullet) earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent, less capital expenditures, to fixed charges (at least 1.4:1),
(bullet) EBITDA to interest expense (at least 2:1) and
(bullet) total adjusted debt to EBITDA (no greater than 2.25:1).
In addition, the loss of voting control over Sonic by Bruton Smith,
Chairman and Chief Executive Office, Scott Smith, President and Chief Operating
Officer, and their spouses or immediate family members or our failure, with
certain exceptions, to own all the outstanding equity, membership or partnership
interests in our dealership subsidiaries will constitute an event of default
under the Revolving Facility. We are in compliance with all restrictive
covenants as of March 31, 2001.
The Mortgage Facility: We currently have 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, our dealership development subsidiaries 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, bear interest at 2.25% above LIBOR and
are secured by Sonic's guarantee and a lien on all of the borrowing
subsidiaries' real estate and other assets. The total outstanding balance under
the Construction Loan as of March 31, 2001 was approximately $4.6 million.
Under the Permanent Loan, we 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, bear interest at 2.00% above LIBOR and
are secured by the same collateral given under the Construction Loan. As of
March 31, 2001, no amounts were outstanding under the Permanent Loan.
The Mortgage Facility allows us to borrow up to $100 million in the
aggregate under the Construction Loan and the Permanent Loan. The Mortgage
Facility is not cross-collateralized with the Revolving Facility; however, a
default under one will cause a default
18
under the other. Among other customary covenants, the borrowing
subsidiaries under the Mortgage Facility agreed not to incur any other liens on
their property (except for existing encumbrances on property acquired) and not
to transfer their property or more than 20% of their ownership interests to any
third party. In addition, the loss of voting control by Bruton Smith, Scott
Smith and their spouses or immediate family members, with certain exceptions,
will result in an event of default under the Mortgage Facility. Sonic was in
compliance with all restrictive covenants as of March 31, 2001.
The Senior Subordinated Notes: We currently have an aggregate principal
balance of $125 million in senior subordinated notes outstanding 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. 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. We are in compliance with all
restrictive covenants as of March 31, 2001.
Stock Repurchase Program: Our Board of Directors has authorized us to
expend up to $100 million to repurchase shares of our Class A common stock or
redeem securities convertible into Class A common stock. As of March 31, 2001 we
had repurchased 5,232,163 million shares of Class A common stock for
approximately $45.4 million and had also redeemed 13,801.5 shares of Class A
convertible preferred stock at a total cost of approximately $13.8 million.
Through May 10, 2001, we have repurchased approximately 5,691,664 million shares
of Class A common stock for approximately $49.1 million and have redeemed
13,801.5 shares of Class A convertible preferred stock for approximately $13.8
million. We 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 and fourth
quarter generally contributes less revenue and operating profits than the second
and third 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 amount of goodwill at December 31, 2000 was $ 697.8 million
and at March 31, 2001 was $719.2 million. As a percentage of total assets and
stockholders' equity, goodwill, net of accumulated amortization, represented
37.4% and 148.3%, respectively, at December 31, 2000 and 38.6% and 151.8%,
respectively, at March 31, 2001. 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.
19
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 amortization of goodwill, but would
require the carrying amount of goodwill to be reduced only if it was found to be
impaired or was associated with assets to be sold or otherwise disposed. If the
proposed rules are adopted, goodwill arising from acquisitions completed prior
to the date of adoption would no longer be amortized, though reversal of
goodwill amortization recognized in prior periods would not be permitted.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our variable rate floor plan notes payable,
revolving credit facility borrowings and other variable rate notes expose us to
risks caused by fluctuations in the underlying interest rates. The total
outstanding balance of such instruments was approximately $1.0 billion at March
31, 2001 and approximately $931.1 million at March 31, 2000. A change of one
percent in the interest rate would have caused a change in interest expense of
approximately $2.6 million in the first quarter of 2001 and approximately $2.4
million in the first quarter of 2000. Of the total change in interest expense,
approximately $1.7 million in the first quarter of 2001 and approximately $1.4
million in the first quarter of 2000 would have resulted from floor plan notes
payable.
Our 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 our floor plan financing arrangements. Our
floor plan interest expense in the first quarter of 2001 exceeded the amounts we
received from these manufacturer floor plan incentives by only approximately
$4.1 million. As a result, the effective rate incurred under our floor plan
financing arrangements was reduced to an annualized rate of approximately 2.5%
after considering these incentives.
20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(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* Specimen Certificate representing Class A Common Stock (incorporated by reference to Exhibit
4.1 to the Form S-1).
4.2* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit
4.3 to Sonic's Registration Statement on Form S-4 (Reg. Nos. 333-64397 and 333-64397-001
through 333-64397-044) (the "Form S-4")).
4.3* 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).
4.4* 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).
4.5* 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 (incorporated by reference to Exhibit 4.4 to Sonic's
Quarterly Report on Form 10-Q for the quarter ended September
30, 2000 (the "September 30, 2000 Form 10-Q")).
4.6* 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).
99.1 Risk Factors.
(b) Reports on Form 8-K:
Sonic filed a report on Form 8-K on January 17, 2001 reporting, under
Item 5 of such report, that Sonic had announced in a press release preliminary
earnings results for the fourth quarter of 2000 and management's targeted
earnings for the first quarter of 2001 and the 2001 calendar year.
* Filed previously.
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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: May 15, 2001 By: /s/ O. Bruton Smith
------------ ----------------------------
O. Bruton Smith
Chairman and Chief Executive Officer
Date: May 15, 2001 By: /s/ Theodore M. Wright
------------ ----------------------------
Theodore M. Wright
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
22
INDEX TO EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q FOR
SONIC AUTOMOTIVE, INC.
FOR THE THREE MONTHS ENDED MARCH 31, 2001
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* Specimen Certificate representing Class A Common Stock (incorporated by reference to Exhibit
4.1 to the Form S-1).
4.2* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit
4.3 to Sonic's Registration Statement on Form S-4 (Reg. Nos. 333-64397 and 333-64397-001
through 333-64397-044) (the "Form S-4")).
4.3* 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).
4.4* 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).
4.5* 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 (incorporated by reference to Exhibit 4.4 to Sonic's
Quarterly Report on Form 10-Q for the quarter ended September
30, 2000 (the "September 30, 2000 Form 10-Q")).
4.6* 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).
99.1 Risk Factors.
* Filed previously.
23