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 March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13395
SONIC AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-201079
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5401 E Independence Blvd, Charlotte, North Carolina 28212
(Address of principal executive offices) (Zip Code)
(704) 532-3320
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of May 14, 1998, there were 5,027,452 shares of Class A Common Stock, par
value $.01 per share, and 6,250,000 shares of Class B Common Stock, par value
$.01 per share, outstanding.
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, 1997 and March 31, 1998
Consolidated Balance Sheets -
December 31, 1997 and March 31, 1998
Consolidated Statement of Stockholders'
Equity - Three-month period ended March 31, 1998
Consolidated Statements of Cash Flows -
Three-month periods ended March 31, 1997
and March 31, 1998
Notes to Unaudited Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 10-Q 14
SIGNATURES 15
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,
1997 1998
-------- --------
REVENUES:
Vehicle sales $ 85,605 $228,569
Parts, service and collision repair 10,979 28,965
Finance and insurance 2,201 6,247
-------- --------
Total revenues 98,785 263,781
COST OF SALES 87,557 228,600
-------- --------
GROSS PROFIT 11,228 35,181
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,748 26,640
DEPRECIATION AND AMORTIZATION 218 815
-------- --------
OPERATING INCOME 2,262 7,726
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 1,338 3,235
Interest expense, other 132 1,061
Other income 134 44
-------- --------
Total other expense 1,336 4,252
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 926 3,474
PROVISION FOR INCOME TAXES 339 1,338
-------- --------
INCOME BEFORE MINORITY INTEREST 587 2,136
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY 46 --
-------- --------
NET INCOME $ 541 $ 2,136
======== ========
BASIC NET INCOME PER SHARE $ 0.19
========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 11,250
========
DILUTED NET INCOME PER SHARE $ 0.19
========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 11,374
========
See notes to unaudited consolidated financial statements.
3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
December 31, 1998
1997 (Unaudited)
------------ -----------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,304 $ 23,391
Marketable equity securities 270 247
Receivables (net of allowance for doubtful
accounts of $523,000 and $554,000 at
December 31, 1997 and March 31, 1998,
respectively) 19,784 22,128
Inventories (Note 3) 156,514 150,819
Deferred income taxes 405 405
Due from affiliates 1,047 1,014
Other current assets 1,048 1,969
-------- --------
Total current assets 197,372 199,973
PROPERTY AND EQUIPMENT, NET 19,081 19,796
GOODWILL, NET (Note 2) 74,362 86,072
OTHER ASSETS 635 651
-------- --------
TOTAL ASSETS $291,450 $306,492
======== ========
See notes to unaudited consolidated financial statements.
4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
December 31, 1998
1997 (Unaudited)
------------ -----------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 133,236 $ 128,152
Trade accounts payable 6,612 7,554
Accrued interest 1,071 1,445
Other accrued liabilities 10,748 12,893
Payable to affiliates 445 445
Current maturities of long-term debt (Note 4) 584 584
--------- ---------
Total current liabilities 152,696 151,073
LONG-TERM DEBT (NOTE 4) 38,640 49,982
PAYABLE TO THE COMPANY'S CHAIRMAN 5,500 5,500
PAYABLE TO AFFILIATES 4,394 4,192
DEFERRED INCOME TAXES 1,079 1,079
INCOME TAX PAYABLE 4,776 4,822
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par, 3.0 million
shares authorized; 3,960 shares issued
and outstanding at March 31, 1998 -- 3,366
Class A Common Stock, $.01 par, 50.0 million
shares authorized; 5.0 million shares issued
and outstanding 50 50
Class B Common Stock, $.01 par, 15.0 million
shares authorized; 6.3 million shares
issued and outstanding 63 63
Paid-in capital 68,045 68,045
Retained earnings 16,186 18,322
Unrealized gain (loss) on marketable
equity securities 21 (2)
--------- ---------
Total stockholders' equity 84,365 89,844
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 291,450 $ 306,492
========= =========
See notes to unaudited consolidated financial statements.
5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
(Unaudited)
Unrealized
Gain/(Loss) on
Preferred Class A Class B Marketable Total
Stock Common Stock Common Stock Paid-In Retained Equity Stockholders'
Shares Amount Shares Amount Shares Amount Capital Earnings Securities Equity
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE AT
DECEMBER 31, 1997 -- $ -- 5,000 $ 50 6,250 $ 63 $ 68,045 $ 16,186 $ 21 $ 84,365
Issuance of Preferred
Stock (Note 2) 3,960 3,366 -- -- -- -- -- -- -- 3,366
Net unrealized loss on
marketable equity
securities -- -- -- -- -- -- -- -- (23) (23)
Net income -- -- -- -- -- -- -- 2,136 -- 2,136
BALANCE AT
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
MARCH 31,1998 3,960 $ 3,366 5,000 $ 50 6,250 $ 63 $ 68,045 $ 18,322 $ (2) $ 89,844
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
See notes to unaudited consolidated financial statements.
6
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 541 $ 2,136
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 218 815
Minority interest 46 --
Gain on sale of marketable equity securities (134) --
Changes in assets and liabilities that
relate to operations:
Receivables 1,155 (1,203)
Inventories 10,956 14,910
Other assets 17 (665)
Notes payable - floor plan (10,211) (13,405)
Accounts payable and other current liabilities (534) 1,323
Income tax payable -- 46
-------- --------
Total adjustments 1,513 1,821
-------- --------
Net cash provided by operating activities 2,054 3,957
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (Note 2) -- (9,422)
Purchases of property and equipment (830) (622)
-------- --------
Net cash used in investing activities (830) (10,044)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 19,688
Payments of long-term debt (129) (8,346)
Receipts from (advances to) affiliate companies 389 (168)
-------- --------
Net cash provided by financing activities 260 11,174
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,484 5,087
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,679 18,304
======== ========
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,163 $ 23,391
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued pursuant to acquisition (Note 2) $ -- $ 3,366
See notes to unaudited consolidated financial statements.
7
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" or
"projected". 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.
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, 1997 and 1998 have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. All
significant intercompany accounts and transactions have been eliminated. These
unaudited consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and the results of
operations for the periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the entire fiscal year.
These interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1997.
New Accounting Standards -- In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This Standard establishes standards of
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company adopted the interim-period
reporting requirements of this standard for the three months ended March 31,
1998. Comprehensive income amounted to $656,000 and $2.1 million for the three
months ended March 31, 1997 and March 31, 1998, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Standard redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. This Statement
will be effective for the Company's fiscal year ending December 31, 1998, and
need not be applied to interim financial statements in the initial year of its
application. The Company has not yet completed its' analysis of which operating
segments it will disclose, if any.
Per Share Data - The calculation of diluted net income per share considers
the potential dilutive effect of options to purchase 798,000 shares of Class A
Common Stock at a price ranging from $12-$14.50 per share under both the Sonic
Automotive, Inc. Formula Stock Option Plan for Independent Directors and the
Sonic Automotive, Inc. 1997 Stock Option Plan. The calculation also considers
the potential dilutive effect of the Sonic Automotive, Inc. Employee Stock
Purchase Plan, a warrant to purchase 44,000 shares of common stock at $12 per
share and conversion of the 3,960 outstanding shares of Series III Preferred
Stock.
2. BUSINESS ACQUISITIONS
Pending Acquisitions
The Company has entered into agreements to acquire four dealerships and
two dealership groups. The estimated aggregate purchase price for these
acquisitions, $80.2 million, is payable in cash, Class A Convertible Preferred
Stock and warrants to purchase shares of Class A Common Stock. In addition, the
Company may be required to make additional payments contingent on the future
performance of the dealerships and the dealership groups.
Acquisitions Completed During the Three Months ended March 31, 1998
During the first three months of 1998, the Company completed its
previously announced acquisitions of Clearwater Toyota, Clearwater Mitsubishi
and Clearwater Collision Center (the "Clearwater Acquisition") located in
Clearwater, Florida for a total purchase price of $14.9 million. The acquisition
was financed with $11.5 million in cash borrowed under a revolving credit
facility (See Note 4) and $3.4 million in Series III Convertible Preferred
Stock. In addition, by April 30, 1999 the Company will be required to pay an
additional amount equal to 50% of the combined pre-tax earnings of the entities
acquired, such amount not to exceed $1.8 million. The amount paid will be
accounted for as goodwill.
8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(All tables in thousands except per share amounts)
2. BUSINESS ACQUISITIONS -- Continued
The Clearwater Acquisition was accounted for using the purchase method of
accounting and the results of operations of the Clearwater Acquisition have been
included in the accompanying consolidated financial statements from January 1,
1998, the effective date of acquisition. The purchase price of the acquisition
has been allocated to the assets and liabilities acquired based on their
estimated fair market value at the acquisition date as follows:
Working capital $ 2,681
Property and equipment 364
Goodwill 11,808
---------
Total purchase price $ 14,853
=========
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the Clearwater Acquisition and the
dealership groups acquired in 1997 had occurred as of January 1, 1997 after
giving effect to certain adjustments, including amortization of goodwill,
interest expense on acquisition debt and related income tax effects. The pro
forma financial information does not give effect to adjustments relating to net
reductions in floor plan interest expense resulting from re-negotiated floor
plan financing agreements or to reductions in salaries and fringe benefits of
former owners or officers of acquired dealerships who have not been retained by
the Company or whose salaries have been reduced pursuant to employment
agreements with the Company. The pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations that would have occurred had the acquisitions been completed on
January 1, 1997. These results are also not necessarily indicative of the
results of future operations.
Three Months
Ending
March 31,
1997
------------
Total revenues $ 260,776
Gross profit $ 31,206
Net Income $ 2,067
Diluted net income per share $ 0.18
3. INVENTORIES
Inventories consist of the following:
December 31, March 31,
1997 1998
------------ ---------
New vehicles $118,751 $110,970
Used vehicles 27,990 29,216
Parts and accessories 9,085 10,019
Other 688 614
-------- --------
Total $156,514 $150,819
======== ========
4. LONG-TERM DEBT
The Company has a secured, revolving acquisition line of credit (the
"Revolving Facility") from Ford Motor Credit Company ("Ford Motor Credit") with
a maximum lending commitment of $75 million bearing interest at prime rate (8.5%
at March 31, 1998). The Revolving Facility will mature in two years, unless the
Company requests that such term be extended, at the option of Ford Motor Credit,
for a number of additional one year terms to be negotiated by the parties. As of
March 31, 1998, a total of $44.8 million was outstanding under the Revolving
Facility. The Revolving Facility currently contains certain negative covenants.
The Company did not meet the debt to tangible equity ratio at March 31, 1998 and
has obtained a waiver with regard to such requirement from Ford Motor Credit.
9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(All tables in thousands except per share amounts)
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings. Management believes
that the outcome of such proceedings will not have a materially adverse effect
on the Company's financial position or future results of operations and cash
flows.
10
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the results of operations and
financial condition should be read in conjunction with the Unaudited
Consolidated Financial Statements and the related notes thereto.
Results of Operations
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in the Company's
Consolidated Statements of Income.
Percentage of Total Revenues for
Three Months Ended
March 31,
1997 1998
------ ------
Revenues:
New vehicle sales ........................... 63.7% 58.3%
Used vehicle sales .......................... 23.0% 28.4%
Parts, service and collision repair ......... 11.1% 11.0%
Finance and insurance ....................... 2.2% 2.3%
----- -----
Total revenues .............................. 100.0% 100.0%
Cost of sales ............................... 88.6% 86.7%
----- -----
Gross profit ................................ 11.4% 13.3%
Selling, general and administrative ......... 9.1% 10.4%
----- -----
Operating income ............................ 2.3% 2.9%
Interest expense ............................ 1.5% 1.6%
----- -----
Income before income taxes .................. 0.9% 1.3%
===== =====
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues. Revenues grew in each of the Company's primary revenue areas for
the first three months of 1998 as compared with the first three months of 1997,
causing total revenues to increase 167.0% to $263.8 million. New vehicle sales
revenue increased 144.5% to $153.7 million in the first three months of 1998,
compared with $62.9 million in the first three months of 1997. The increase was
due primarily to an increase in new vehicle unit sales of 119.1% to 6,617, as
compared with 3,020 in the first three months of 1997 resulting principally from
additional unit sales contributed by the acquisitions of Jeff Boyd
Chrysler-Plymouth-Dodge in June 1997, Lake Norman Dodge and Affiliates in
September 1997, Ken Marks Ford in October 1997, Dyer Volvo and the Bowers
Dealerships and Affiliated Companies in November 1997, and Clearwater Toyota,
Clearwater Mitsubishi, and Clearwater Collision Center effective January 1998
(the "Acquisitions"). The remainder of the increase was due to a 11.6% increase
in the average selling price of new vehicles resulting principally from sales of
higher priced import vehicles contributed by the Acquisitions.
Used vehicle revenues from retail sales increased 263.0% to $56.5 million
in the first three months of 1998 from $15.6 million in the first three months
of 1997. The increase was primarily due to an increase in used vehicle unit
sales of 241.5% to 4,333, as compared with 1,269 in the first three months of
1997, resulting from additional unit sales contributed by the Acquisitions.
The Company's parts, service and collision repair revenue increased 163.8%
to $29.0 million in the first three months of 1998 compared to $11.0 million in
the first three months of 1997, principally due to the Acquisitions. Finance and
insurance revenue increased $4.0 million, or 183.9%, principally due to
increased new vehicle sales and related financing.
Gross Profit. Gross profit increased 213.3% to $35.2 million in the first
three months of 1998 from $11.2 million in the first three months of 1997
principally due to increases in revenues contributed by dealerships acquired.
Gross profit as a percentage of sales increased to 13.3% from 11.4% due to
increases in new vehicle gross margins resulting from sales of higher margin
import vehicles contributed by acquired dealerships, as well as improved gross
margins of used vehicles resulting from efforts made to improve management of
used vehicle inventories.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased
206.2% to $27.5 million in the first three months of 1998 from $9.0 million in
the first three months of 1997. Such expenses as a percentage of revenues
increased to 10.4% from 9.1% principally due to expenses inherent with growth
and the Acquisitions.
11
Interest Expense. Interest expense increased 192.2% to $4.3 million from
$1.5 million. The increase was primarily due to a $1.9 million increase in floor
plan interest incurred by the Acquisitions. The remaining increase was due to
$0.9 million in interest incurred on acquisition related indebtedness.
Net Income. As a result of the factors noted above, the Company's net
income increased by $1.6 million in the first three months of 1998 compared to
the first three months of 1997.
Liquidity and Capital Resources :
The Company's principal needs for capital resources are to finance
acquisitions, service debt and fund working capital requirements. Historically,
the Company has relied primarily upon internally generated cash flows from
operations, borrowings under its various credit facilities, borrowings and
capital contributions from its stockholders, and proceeds generated from its
Initial Public Offering to finance its operations and expansion.
The Company currently has a global floor plan credit facility with Ford
Motor Credit Company ("Ford Motor Credit") for all its dealership subsidiaries
(the "Floor Plan Facility"). As of March 31, 1998, there was an aggregate of
$128.2 million outstanding under the Floor Plan Facility. The Floor Plan
Facility at March 31, 1998 had an effective rate of prime less 0.9%, subject to
certain incentives. Typically new vehicle floor plan indebtedness exceeds the
related inventory balances. The inventory balance is generally reduced by the
manufacturer's purchase discounts, and such reduction is not reflected in the
related floor plan liability. These manufacturer purchase discounts are standard
in the industry, typically occur on all new vehicle purchases, and are not used
to offset the related floor plan liability. These discounts are aggregated and
generally paid to the Company by the manufacturer on a quarterly basis.
The Company makes monthly interest payments on the amount financed under
the Floor Plan Facility but is not required to make loan principal repayments
prior to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other assets
of the Company. The Floor Plan Facility contains a number of covenants,
including among others, covenants restricting the Company with respect to the
creation of liens and changes in ownership, officers and key management
personnel.
During the first three months of 1998, the Company generated net cash of
$4.0 million from operating activities, compared to $2.1 million in the first
three months of 1997. The increase was attributable principally to a decrease in
inventory levels and increased net income.
Cash used for investing activities, excluding amounts paid in
acquisitions, was approximately $622,000 for the first three months of 1998 and
related primarily to acquisitions of property and equipment.
Cash provided by financing activities for the first three months of 1998
of $11.2 primarily reflects amounts borrowed under the Revolving Facility to
finance the purchase of the Clearwater Dealerships.
The Company has a secured, revolving acquisition line of credit (the
"Revolving Facility") from Ford Motor Credit with a maximum lending commitment
of $75 million bearing interest at prime rate. The Revolving Facility will
mature in two years, unless the Company requests that such term be extended, at
the option of Ford Motor Credit, for a number of additional one year terms to be
negotiated by the parties. Amounts to be drawn under the Revolving Facility are
to be used for the acquisition of additional dealerships and to provide general
working capital needs of the Company not to exceed $10 million. As of March 31,
1998, a total of $44.8 million was outstanding under the Revolving Facility. The
Revolving Facility currently contains certain negative covenants. The Company
did not meet the specified debt to tangible equity ratio at March 31, 1998 and
has obtained a waiver with regard to such requirement from Ford Motor Credit.
Capital expenditures, excluding amounts paid in acquisitions, were $0.8
million and $0.6 million for the three months ended March 31, 1997 and 1998,
respectively. The Company's principal capital expenditures typically include
building improvements and equipment for use in the Company's dealerships. During
the first three months of 1998, the Company completed its previously announced
acquisitions of Clearwater Toyota, Clearwater Mitsubishi, and Clearwater
Collision Center located in Clearwater, Florida for a total purchase price of
$14.9 million. The acquisition was financed with $11.5 million in cash borrowed
under a revolving credit facility and $3.4 million in convertible preferred
stock. In addition, by April 30, 1999 the Company will be required to pay an
additional amount equal to 50% of the combined pre-tax earnings of the entities
acquired, such amount not to exceed $1.8 million.
The Company has entered into agreements to acquire four dealerships and
two dealership groups. The estimated aggregate purchase price for these
acquisitions, $80.2 million, is payable in cash, Class A Convertible Preferred
Stock and warrants to purchase
12
shares of Class A Common Stock. In addition, the Company may be required to make
additional payments contingent on the future performance of the dealerships and
the dealership groups.
The Company believes that funds generated through future operations and
availability of borrowings under its floor plan financing (or any replacements
thereof) and its other credit arrangements will be sufficient to fund its debt
service and working capital requirements and any seasonal operating
requirements, including its currently anticipated internal growth, for the
foreseeable future. The Company incurred a tax liability of approximately $7.0
million in connection with the change in its tax basis of accounting for
inventory from LIFO to FIFO, which is payable over a six-year period beginning
in January 1998. As of March 31, 1998, the remaining balance of this liability
was $5.8 million. The Company expects to be pay such obligation with cash
provided by operations. The Company expects to fund any future acquisitions from
its future cash flow from operations, additional debt financing (including the
Revolving Facility) or the issuance of Class A Common Stock or issuance of other
convertible instruments.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
standard establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. The
Company adopted the interim-period reporting requirements of this standard for
the three months ended March 31, 1998. Comprehensive income amounted to $656,000
and $2.1 million for the three months ended March 31, 1997 and March 31, 1998,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures and Segments of an
Enterprise and Related Information". This Standard redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. This Statement
will be effective for the Company's fiscal year ending December 31, 1998, and
need not be applied to interim financial statements in the initial year of its
application. The Company has not yet completed its analysis of which operating
segments it will disclose, if any.
13
PART II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits:
4.1 Certificate of Designation, Preferences and Rights of Class A Convertible
Preferred Stock.
10.1* Asset Purchase Agreement dated December 30, 1997 between Sonic Automotive,
Inc., as buyer, and M&S Resources, Inc. .Clearwater Auto Resources, Inc.
and Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael
Cohen, Jeffrey Schuman, and Timothy McCabe as shareholders of the sellers
(incorporated by reference to Exhibit 99.1 to the Company's Current Report
of Form 8-K dated March 30, 1998 (the "March 1998 Form 8-K")).
10.2* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as of
March 24, 1998 between Sonic Automotive, Inc., as buyer, and M&S
Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater Collision
Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schuman,
and Timothy McCabe as shareholders of the sellers (incorporated by
reference to Exhibit 99.2 to the March 1998 Form 8-K).
10.3 Asset Purchase Agreement dated as of February 4, 1998 between Sonic
Automotive, Inc., as buyer, and Hatfield Jeep Eagle, Inc., Hatfield
Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota West,
Inc., and Hatfield Hyundai Inc., as sellers and Bud C. Hatfield, Dan E.
Hatfield and Dan E. Hatfield, as Trustee of the Bud C. Hatfield, Sr.
Special Irrevocable Trust as shareholders of the sellers.
10.4 Agreement and Plan of Merger dated as of February 10, 1998 between Sonic
Automotive, Inc., as buyer, and Capitol Chevrolet, Inc., Capitol Imports,
LTD., and Frank E. McGough, Jr., as sellers.
10.5 Stock Purchase Agreement dated as of March 16, 1998 between Sonic
Automotive, Inc., as buyer, and Freeman Smith, as stockholder and the
other stockholders named therein.
10.6* Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors
(incorporated by reference to Exhibit 10.69 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
27 Financial data schedule for the three month period ended March 31, 1998
(filed electronically).
(b) Reports on Form 8-K.
On March 30, 1998, the Company filed a Current Report on Form 8-K,
dated March 24, 1998, pursuant to Item 2 of such form, reporting the
Clearwater Acquisition and containing Unaudited Pro Forma Financial
Statements Reflecting the Business Combination of Sonic Automotive,
Inc. and Clearwater Dealerships.
* Filed Previously
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONIC AUTOMOTIVE, INC.
(Registrant)
Date: May 14, 1998 By: /s/ O. Bruton Smith
------------ ---------------------------------
O. Bruton Smith
Chairman and Chief Executive Officer
Date: May 14, 1998 By: /s/ Theodore M. Wright
------------ --------------------------------
Theodore M. Wright
Vice President-Finance, Chief Financial
Officer, Treasurer, Secretary and Director
15
INDEX TO EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q FOR
SONIC AUTOMOTIVE, INC.
FOR THE QUARTER ENDED March 31, 1998
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
4.1 Certificate of Designation, Preferences and Rights of Class A
Convertible Preferred Stock.
10.1* Asset Purchase Agreement dated December 30, 1997 between Sonic
Automotive, Inc., as buyer, and M&S Resources, Inc. .Clearwater Auto
Resources, Inc. and Clearwater Collision Center, Inc., as sellers
and Scott Fink, Michael Cohen, Jeffrey Schuman, and Timothy McCabe
as shareholders of the sellers (incorporated by reference to Exhibit
99.1 to the Company's Current Report of Form 8-K dated March 30,
1998 (the "March 1998 Form 8-K")).
10.2* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as
of March 24, 1998 between Sonic Automotive, Inc., as buyer, and M&S
Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater
Collision Center, Inc., as sellers and Scott Fink, Michael Cohen,
Jeffrey Schuman, and Timothy McCabe as shareholders of the sellers
(incorporated by reference to Exhibit 99.2 to the March 1998 Form
8-K).
10.3 Asset Purchase Agreement dated as of February 4, 1998 between Sonic
Automotive, Inc., as buyer, and Hatfield Jeep Eagle, Inc., Hatfield
Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota
West, Inc., and Hatfield Hyundai Inc., as sellers and Bud C.
Hatfield, Dan E. Hatfield and Dan E. Hatfield, as Trustee of the Bud
C. Hatfield, Sr. Special Irrevocable Trust as shareholders of the
sellers.
10.4 Agreement and Plan of Merger dated as of February 10, 1998 between
Sonic Automotive, Inc., as buyer, and Capitol Chevrolet, Inc.,
Capitol Imports, LTD., and Frank E. McGough, Jr., as sellers.
10.5 Stock Purchase Agreement dated as of March 16, 1998 between Sonic
Automotive, Inc., as buyer, and Freeman Smith, as stockholder and
the other stockholders named therein.
10.6* Sonic Automotive, Inc. Formula Stock Option Plan for Independent
Directors (incorporated by reference to Exhibit 10.69 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997).
27 Financial data schedule for the three month period ended March 31,
1998 (filed electronically).
* Filed Previously
16