UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
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)
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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 August 13, 1999, there were 23,446,847 shares of Class A Common Stock and
12,300,000 shares of Class B Common Stock 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
June 30, 1998 and June 30, 1999
Consolidated Statements of Income -
Six-month periods ended
June 30, 1998 and June 30, 1999
Consolidated Balance Sheets -
December 31, 1998 and June 30, 1999
Consolidated Statement of Stockholders' Equity -
Six-month period ended June 30, 1999
Consolidated Statements of Cash Flows -
Six-month periods ended June 30, 1998
and June 30, 1999
Notes to Unaudited Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 22
ITEM 4. Submission of Matters to a Vote of Security Holders 23
ITEM 6. Exhibits and Reports on Form 10-Q 24
SIGNATURES 25
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
JUNE 30,
1998 1999
-------------- ---------------
REVENUES:
Vehicle sales $ 339,531 $ 632,154
Parts, service and collision repair 39,175 74,401
Finance and insurance (Note 1) 7,426 16,975
-------------- ---------------
Total revenues 386,132 723,530
COST OF SALES (Note 1) 337,868 629,269
-------------- ---------------
GROSS PROFIT 48,264 94,261
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 34,475 67,429
DEPRECIATION AND AMORTIZATION 1,010 2,244
-------------- ---------------
OPERATING INCOME 12,779 24,588
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 3,679 4,926
Interest expense, other 1,677 3,748
Other income 7 316
-------------- ---------------
Total other expense 5,349 8,358
-------------- ---------------
INCOME BEFORE INCOME TAXES 7,430 16,230
PROVISION FOR INCOME TAXES 2,762 6,129
-------------- ---------------
NET INCOME $ 4,668 $ 10,101
============== ===============
BASIC EARNINGS PER SHARE (Note 6) $ 0.21 $ 0.34
============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 22,555 30,095
============== ===============
DILUTED EARNINGS PER SHARE (Note 6) $ 0.20 $ 0.30
============== ===============
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 23,717 34,088
============== ===============
See notes to unaudited consolidated financial statements.
3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1998 1999
-------------- ---------------
REVENUES:
Vehicle sales $ 569,110 $ 1,153,421
Parts, service and collision repair 68,311 134,026
Finance and insurance (Note 1) 12,690 29,535
-------------- ---------------
Total revenues 650,111 1,316,982
COST OF SALES (Note 1) 567,689 1,144,646
-------------- ---------------
GROSS PROFIT 82,422 172,336
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 60,392 124,643
DEPRECIATION AND AMORTIZATION 1,825 4,151
-------------- ---------------
OPERATING INCOME 20,205 43,542
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 6,555 9,397
Interest expense, other 2,761 7,391
Other income 15 324
-------------- ---------------
Total other expense 9,301 16,464
-------------- ---------------
INCOME BEFORE INCOME TAXES 10,904 27,078
PROVISION FOR INCOME TAXES 4,100 10,290
-------------- ---------------
NET INCOME $ 6,804 $ 16,788
============== ===============
BASIC EARNINGS PER SHARE (Note 6) $ 0.30 $ 0.62
============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 22,527 27,259
============== ===============
DILUTED EARNINGS PER SHARE (Note 6) $ 0.29 $ 0.54
============== ===============
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 23,274 31,044
============== ===============
See notes to unaudited consolidated financial statements.
4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
DECEMBER 31, 1999
1998 (UNAUDITED)
--------------- ---------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,834 $ 60,526
Receivables (net of allowance for doubtful accounts of $700,000
and $1,104,000 at December 31, 1998 and June 30, 1999,
respectively) 39,902 48,232
Inventories (Note 3) 264,971 368,197
Deferred income taxes 1,702 1,702
Due from affiliates (Note 5) 1,471 5,119
Other current assets 4,961 4,948
--------------- ---------------
Total current assets 364,841 488,724
PROPERTY AND EQUIPMENT, NET 26,250 36,019
GOODWILL, NET (Notes 1 and 2) 180,081 258,509
OTHER ASSETS 4,931 5,950
--------------- ---------------
TOTAL ASSETS $ 576,103 $ 789,202
=============== ===============
See notes to unaudited consolidated financial statements.
5
CONSOLIDATED BALANCE SHEETS
JUNE 30,
DECEMBER 31, 1999
1998 (UNAUDITED)
-------------- ---------------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 228,158 $ 303,965
Trade accounts payable 14,994 17,922
Accrued interest 7,058 7,702
Other accrued liabilities 27,763 30,048
Payable to affiliates (Note 5) 628 572
Payable for acquisitions 2,385 275
Current maturities of long-term debt 4,700 604
-------------- ---------------
Total current liabilities 285,686 361,088
LONG-TERM DEBT (Note 4) 131,337 123,437
PAYABLE FOR ACQUISITIONS 275 275
PAYABLE TO THE COMPANY'S CHAIRMAN (Note 5) 5,500 5,500
PAYABLE TO AFFILIATES (Note 5) 3,625 3,400
DEFERRED INCOME TAXES 4,066 5,660
INCOME TAX PAYABLE 3,185 3,104
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 6):
Preferred Stock, $.10 par, 3.0 million shares authorized;
300,000 shares designated as Class A Convertible Preferred
Stock, liquidation preference $1,000 per share, of which
22,179 shares are issued and outstanding at December 31, 1998
and 22,830 shares are issued and outstanding at June 30, 1999 20,431 20,991
Class A Common Stock, $.01 par, 100.0 million shares authorized;
11,959,274 shares issued and outstanding at December 31, 1998
and 21,565,585 shares issued and outstanding at June 30, 1999 120 216
Class B Common Stock, $.01 par (convertible into Class A Common Stock),
30.0 million shares authorized; 12,400,000 shares issued and
outstanding at December 31, 1998 and 12,300,000 shares issued
and outstanding at June 30, 1999 124 123
Paid-in capital 87,011 213,877
Retained earnings 34,743 51,531
-------------- ---------------
Total stockholders' equity 142,429 286,738
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 576,103 $ 789,202
============== ===============
See notes to unaudited consolidated financial statements.
6
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
(Unaudited)
PREFERRED CLASS A CLASS B
STOCK COMMON STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- --------------- ----------- ---------- ----------- ---------- -------------
BALANCE AT
DECEMBER 31, 1998 22 $ 20,431 11,959 $ 120 12,400 $ 124 $ 87,011
Issuance of Preferred
Stock (Note 2) 44 38,849 - - - - -
Issuance of Common
Stock (Note 2) - - 6,243 62 - - 87,474
Shares awarded under stock
compensation plans - - 161 2 - - 1,134
Conversion of Preferred
Stock (44) (38,289) 3,103 31 - - 38,258
Conversion of Class B
Common Stock - - 100 1 (100) (1) -
Net income - - - - - - -
BALANCE AT
---------- --------------- ----------- ---------- ----------- ---------- -------------
JUNE 30,1999 22 $ 20,991 21,566 $ 216 12,300 $ 123 $213,877
========== =============== =========== ========== =========== ========== =============
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
------------- ----------------
BALANCE AT
DECEMBER 31, 1998 $ 34,743 $ 142,429
Issuance of Preferred
Stock (Note 2) - 38,849
Issuance of Common
Stock (Note 2) - 87,536
Shares awarded under stock
compensation plans - 1,136
Conversion of Preferred
Stock - -
Conversion of Class B
Common Stock - -
Net income 16,788 16,788
BALANCE AT
------------- ----------------
JUNE 30,1999 $ 51,531 $ 286,738
============= ================
See notes to unaudited consolidated financial statements.
7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1998 1999
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,804 $ 16,788
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,851 4,151
Amortization of discount on senior notes - 127
Loss on disposal of property and equipment 104 52
Changes in assets and liabilities that relate to operations:
Receivables (8,493) (5,860)
Inventories 29,384 (13,588)
Other assets (1,245) (1,686)
Accounts payable and other current liabilities 458 (614)
---------------- ---------------
Total adjustments 22,059 (17,418)
---------------- ---------------
Net cash provided by (used in) operating activities 28,863 (630)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (7,808) (77,199)
Purchases of property and equipment (1,261) (8,813)
Proceeds from sales of property and equipment (Note 5) - 10,596
---------------- ---------------
Net cash used in investing activities (9,069) (75,416)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds of notes payable - floor plan (25,867) 16,451
Proceeds from long-term debt 23,688 71,138
Payments on long-term debt (8,645) (85,344)
Public offering of common stock - 85,286
Issuance of shares under stock compensation plans 224 1,136
Advances to affiliated companies (270) (3,929)
---------------- ---------------
Net cash (used in) provided by financing activities (10,870) 84,738
---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,924 8,692
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,304 51,834
---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,228 $ 60,526
================ ===============
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued for acquisitions (Note 2) $ 11,763 $ 34,961
Common Stock issued for acquisitions (Note 2) $ - $ 2,250
See notes to unaudited consolidated financial statements.
8
The following Notes to Unaudited Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain estimates and forward-looking statements as indicated herein
by the use of such terms as "estimated", "expects", "approximate", "projected"
or similar terms. Such statements reflect management's current views, are based
on certain assumptions and are subject to risks and uncertainties. No assurance
can be given that actual results or events will not differ materially from those
projected, estimated, assumed, or anticipated in any such forward-looking
statements. Important factors that could cause actual results to differ from
those projected or estimated are discussed herein and in other filings with the
Securities and Exchange Commission.
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited financial
information for the three and six months ended June 30, 1998 and 1999 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. and
its subsidiaries (collectively, "Sonic") for the year ended December 31, 1998.
REVENUE RECOGNITION - Sonic records revenue when vehicles are delivered
to customers, and when vehicle service work is performed.
Sonic arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. Sonic also receives commissions from the
sale of credit life, accident, health and disability insurance and extended
service contracts to customers. Sonic may be assessed a chargeback fee in the
event of early cancellation of a loan, insurance contract, or service contract
by the customer. Finance and insurance commission revenue is recorded net of
estimated chargebacks at the time the related contract is placed with the
financial institution.
Commissions expense related to finance and insurance commission revenue
is charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $1.3 million and $2.9 million for the three months ended June 30,
1998 and June 30, 1999, respectively, and approximately $2.2 million and $5.2
million for the six months ended June 30, 1998 and June 30, 1999, respectively.
RECLASSIFICATION - Certain balances reported in 1998 have been
reclassified to conform with current period presentation.
GOODWILL - Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. The cumulative gross goodwill balance at December 31, 1998 was
$182.5 million and at June 30, 1999 was $265.3 million. As a percentage of total
assets and stockholders' equity, goodwill, net of accumulated amortization,
represented 31.3% and 126.4%, respectively, at December 31, 1998, and 32.8% and
90.2%, respectively, at June 30, 1999. Generally accepted accounting principles
require that goodwill and all other intangible assets be amortized over the
period benefited. We have determined that the period benefited by the goodwill
will be no less than 40 years. Accordingly we are amortizing goodwill over a 40
year period. Earnings reported in periods immediately following an acquisition
would be overstated if we attributed a 40 year benefit to an intangible asset
that should have had a shorter benefit period. In later years, we would be
burdened by a continuing charge against earnings without the associated benefit
to income valued by management in arriving at the consideration paid for the
businesses acquired. Earnings in later years also could be significantly
affected if management then determined that the remaining balance of goodwill
was impaired. We periodically compare the carrying value of goodwill with the
anticipated undiscounted future cash flows from operations of the business we
have acquired in order to evaluate the recoverability of goodwill. We have
concluded that the anticipated future cash flows associated with intangible
assets recognized in our acquisitions will continue indefinitely, and there is
no pervasive evidence that any material portion will dissipate over a period
shorter than 40 years. We will incur additional goodwill in future acquisitions.
9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. BUSINESS ACQUISITIONS
PENDING ACQUISITIONS
Sonic has signed definitive agreements to acquire 13 dealerships for an
estimated $55.2 million in cash and approximately $11.2 million of Class A
common stock. The aggregate purchase price is subject to adjustment based on the
actual net book value of the assets acquired. The cash portion of the purchase
price will be paid with a combination of borrowings under Sonic's $150 million
acquisition line of credit with Ford Motor Credit Company (the "Revolving
Facility") and with cash generated from Sonic's existing operations.
ACQUISITIONS COMPLETED SUBSEQUENT TO JUNE 30, 1999 (THROUGH AUGUST 13, 1999):
Subsequent to June 30, 1999, Sonic acquired 9 dealerships for
approximately $65.8 million in cash, 11,683 shares of Sonic's Class A
Convertible preferred stock, Series III, having a liquidation value of $1,000
per share, and 1,398,902 shares of Sonic's Class A common stock having an
estimated fair value at the time of issuance of approximately $20.0 million. The
cash portion of the purchase price was financed with a combination of cash
borrowed under the Revolving Facility and cash generated from Sonic's existing
operations. The acquisitions were accounted for using the purchase method of
accounting.
ACQUISITIONS COMPLETED DURING THE SIX MONTHS ENDED JUNE 30, 1999:
During the first six months of 1999, Sonic acquired 17 dealerships for
approximately $84.5 million in cash, 6,282 shares of Sonic's Class A Convertible
preferred stock, Series II, having an estimated fair value at the time of
issuance of approximately $6.1 million, 34,100 shares of Sonic's Class A
Convertible preferred stock, Series III, having an estimated fair value at the
time of issuance of approximately $28.9 million, and 176,030 shares of Sonic's
Class A common stock having an estimated fair value at the time of issuance of
approximately $2.2 million. The cash portion of the purchase price was financed
with a combination of a portion of the net proceeds from Sonic's recent public
offering of Class A common stock, cash borrowed under the Revolving Facility and
cash generated from Sonic's existing operations. The acquisitions were accounted
for using the purchase method of accounting, and the results of operations of
such acquisitions have been included in the accompanying unaudited consolidated
financial statements from their respective acquisition dates. The aggregate
purchase price of these acquisitions has been allocated to the assets and
liabilities acquired based on their estimated fair market value at the
acquisition date as shown in the table below. The purchase price and
corresponding goodwill may ultimately be different than amounts recorded
depending on the actual fair value of tangible net assets acquired.
Working capital $ 33,678
Property and equipment 9,308
Goodwill 81,309
Non-current liabilites assumed (2,603)
---------------
Total purchase price $ 121,692
===============
In connection with the subsequent acquisition of a Honda dealership in
Chattanooga, Tennessee, Sonic sold substantially all of the assets of its
existing Honda dealership in Cleveland, Tennessee in March 1999 for
approximately $1.7 million, net of repayment of floor plan liabilities. There
was no material gain or loss as a result of the sale.
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the above acquisition
transactions had occurred as of the beginning of the period in which the
acquisitions were completed, and at the beginning of the immediately preceding
period, after giving effect to certain adjustments, including amortization of
goodwill, interest expense on acquisition debt and related income tax effects.
The pro forma financial information does not give effect to adjustments relating
to net reductions in floor plan interest expense resulting from re-negotiated
floor plan financing agreements or to reductions in salaries and fringe benefits
of former owners or officers of acquired dealerships who have not been retained
by Sonic or whose salaries have been reduced pursuant to employment agreements
with Sonic. The pro forma results have been prepared for comparative purposes
only and are not necessarily indicative of the results of operations that would
have occurred had the acquisitions been completed at the beginning of the period
presented. These results are also not necessarily indicative of the results of
future operations.
10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. BUSINESS ACQUISITIONS - CONTINUED
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------------
1998 1999 1998 1999
--------- --------- ----------- -----------
Total revenues $ 719,847 $ 753,933 $ 1,346,289 $ 1,436,399
Gross profit $ 89,654 $ 98,013 $ 166,369 $ 187,755
Net Income $ 6,679 $ 11,500 $ 9,351 $ 20,898
Diluted income per share $ 0.18 $ 0.31 $ 0.26 $ 0.55
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, JUNE 30,
1998 1999
-------------------- -------------------
New vehicles $ 190,139 $ 264,336
Used vehicles 47,033 65,346
Parts and accessories 16,012 27,026
Other 11,787 11,489
-------------------- -------------------
Total $ 264,971 $ 368,197
==================== ===================
4. LONG-TERM DEBT
MORTGAGES:
In January 1999, in connection with the sale of real estate at two of
its dealership subsidiaries to MMR Holdings, LLC, a limited liability company
owned by Bruton Smith, Sonic's Chairman and Chief Executive Officer, and Sonic
Financial Corporation ("SFC"), Sonic repaid all amounts outstanding under
mortgages encumbering such property.
REVOLVING FACILITY:
Sonic's Revolving Facility currently has a borrowing limit of $150
million. Amounts outstanding under the Revolving Facility bear interest at a
fluctuating per annum rate equal to 2.75% above the 1 month commercial finance
paper rate as reported by the Federal Reserve Board (7.56% at June 30, 1999).
The Revolving Facility will mature in March 2001, unless Sonic 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. On May 5, 1999, in
connection with the public offering by Sonic of 6,067,230 shares of Class A
common stock, all amounts outstanding under the Revolving Facility were repaid.
As of June 30, 1999, there was no outstanding balance under the Revolving
Facility. Future amounts to be drawn under the Revolving Facility are to be used
for the acquisition of additional dealerships and to provide general working
capital needs of Sonic not to exceed $10 million.
5. RELATED PARTIES
THE SMITH GUARANTIES, PLEDGES AND SUBORDINATED LOAN:
In December 1997, Mr. Smith was required by Ford Motor Credit Company
("Ford Motor Credit") to lend $5.5 million (the "Subordinated Smith Loan") to
Sonic to increase Sonic's capitalization. Ford Motor Credit required the
Subordinated Smith Loan as a condition to increasing the Revolving Facility
borrowing limit because the net offering proceeds from Sonic's November 1997
initial public offering were significantly less than expected by Sonic and Ford
Motor Credit. The Subordinated Smith Loan bears interest at Bank of America's
announced prime rate plus 0.5% and matures on November 30, 2000. All amounts
owed by Sonic to Mr. Smith under the Subordinated Smith Loan are to be paid
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 paid.
11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
5. RELATED PARTIES - CONTINUED
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 (the
"Registration Rights Agreements") 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"), 391,250 shares, all
of which are covered by the Registration Rights Agreement. The Egan Group also
owns 32,000 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 on November 17, 2007. SFC is controlled by
Bruton Smith.
THE BOWERS VOLVO NOTE:
In connection with Volvo's approval of Sonic's acquisition of a Volvo
franchise from Nelson Bowers in 1997, Volvo, among other things, conditioned its
approval upon Nelson Bowers acquiring and maintaining a 20% interest in Sonic's
Chattanooga Volvo subsidiary operating the Volvo franchise. Mr. Bowers financed
all of the purchase price for this 20% interest by issuing a promissory note
(the "Bowers Volvo Note") in favor of Sonic Automotive of Nevada, Inc., the
wholly-owned subsidiary of Sonic that controls a majority interest in
Chattanooga Volvo. The Bowers Volvo Note is secured by Mr. Bowers' interest in
Chattanooga Volvo.
The Bowers Volvo Note is for a principal amount of $900,000 and bears
interest at the lowest applicable federal rate as published by the U.S. Treasury
Department in effect on November 17, 1997. Accrued interest is payable annually.
The operating agreement of Chattanooga Volvo provides that profits and
distributions are to be allocated first to Mr. Bowers to the extent of interest
to be paid on the Bowers Volvo Note and next to the other members of Chattanooga
Volvo according to their percentages of ownership. No other profits or any
losses of Chattanooga Volvo will be allocated to Mr. Bowers under this
arrangement. Volvo has removed its requirement that Mr. Bowers maintain his
interest in Chattanooga Volvo. Sonic and Mr. Bowers are in the process of
redeeming his interest in Chattanooga Volvo and satisfying the Bowers Volvo
Note. This transaction is not expected to have a material impact on Sonic's
future results of operations or cash flows.
DEALERSHIP LEASES:
In January 1999, Sonic sold to MMR Holdings, L.L.C., a limited
liability company currently owned by Bruton Smith and SFC, the real estate at
two of its dealership subsidiaries for an aggregate purchase price of
approximately $10.6 million and entered into an agreement with MMR Holdings,
L.L.C. to lease back the real estate over a term of ten years. Sonic realized a
gain on the sale of approximately $3.8 million which was deferred and is
currently being amortized against the rent expense over the term of the lease.
On August 13, 1999, CAR MMR L.L.C., an affiliate of Capital Automotive
REIT which is not affiliated with Sonic, acquired all of the ownership interests
of MMR Holdings, L.L.C., and two of its affiliates, MMR Viking Investment
Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR Group). As of
that date, Sonic leased 48 properties for 38 of its dealerships from the MMR
Group under "triple net leases" which required Sonic to pay all costs of
operating the properties, as well as all taxes, utilities, insurance, repairs,
maintenance and other property related expenses. Sonic has entered into new
leases with CAR MMR L.L.C. with terms similar to those under Sonic's former
leases with the MMR Group. These leases generally provide Sonic with options to
renew the lease for two additional five year terms after the expiration of the
initial lease term. Sonic has agreed to renew approximately 75% of its lease
rental stream for an additional five year period after the expiration of the
initial lease terms. In connection with the acquisition, Sonic, MMR Holdings and
Mar Mar Realty Trust, an affiliate of the MMR Group, terminated the strategic
alliance agreement whereby Mar Mar Realty Trust had provided Sonic with real
estate financing, acquisition referral and related services.
In connection with the above transaction, CAR MMR L.L.C. has agreed to
provide Sonic with up to $75 million in real estate financing through December
31, 1999.
12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
5. RELATED PARTIES - CONTINUED
OTHER RELATED PARTY TRANSACTIONS:
o Sonic had amounts receivable from affiliates of $1.5 million and
$5.1 million at December 31, 1998 and June 30, 1999, respectively.
Of the $5.1 million balance at June 30, 1999, approximately $3.5
million represents cash paid for real estate purchased in
connection with one of its dealership acquisitions. The real
estate was subsequently sold for the same amount to MMR Holdings
prior to the acquisition of MMR Holdings by CAR MMR L.L.C. and is
currently being leased from CAR MMR L.L.C. The remaining balances
at December 31, 1998 and June 30, 1999 primarily represent
advances made by Sonic to SFC and Mar Mar Realty Trust. The
amounts receivable from affiliates are non-interest bearing and
are classified as current based on the expected repayment dates.
o As part of the purchase price in connection with Sonic's
acquisition of the Bowers Automotive Group in November 1997, Sonic
issued its promissory note in the principal amount of $4.0 million
in favor of Nelson Bowers (the "Bowers Acquisition Note"). The
Bowers Acquisition Note is payable in 28 equal quarterly
installments and bears interest at the prime rate less 0.5%. The
balance outstanding under this note at June 30, 1999 was $3.1
million, the current portion of which was $572,000.
o Town and Country Toyota has an amount payable to Bruton Smith in
the amount of $0.7 million at December 31, 1998 and June 30, 1999.
This loan bears interest at 8.75% per annum and is classified as
non-current based on the expected repayment date.
6. CAPITAL STRUCTURE AND PER SHARE DATA
PUBLIC OFFERING OF COMMON STOCK - Sonic completed a public offering of
8,500,000 shares of its Class A common stock on May 5, 1999 at a price of
$14.9375 per share. Of the 8,500,000 shares sold in the offering, 6,067,230
shares were sold by Sonic and 2,432,770 shares were sold by certain stockholders
of Sonic. Of the $86.1 million in net proceeds to Sonic from the public
offering, approximately $75.5 million was used to repay the outstanding balance
under the Revolving Facility. The remaining net proceeds were used to finance
acquisitions which closed in the second quarter of 1999.
INCREASE TO AUTHORIZED SHARES OF COMMON STOCK - At the annual meeting
of stockholders held on June 8, 1999, Sonic's stockholders approved an amendment
to Sonic's Amended and Restated Certificate of Incorporation to increase the
number of shares of Class A common stock authorized to be issued thereunder from
50 million to 100 million, and to increase the number of shares of Class B
common stock authorized to be issued thereunder from 15 million to 30 million.
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 EPS.
For the six months ended
June 30, 1998
------------------------------------------------
Per-Share
Income Shares Amount
-------------- --------------- ---------------
(DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
BASIC EPS $ 6,804 22,527 $ 0.30
===============
EFFECT OF DILUTIVE SECURITIES
Stock compensation plans - 404
Warrants - 19
Convertible Preferred Stock - 324
-------------- ---------------
DILUTED EPS $ 6,804 23,274 $ 0.29
============== =============== ===============
For the six months ended
June 30, 1999
-----------------------------------------------
Per-Share
Income Shares Amount
--------------- --------------- ------------
(DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
BASIC EPS $ 16,788 27,259 $ 0.62
============
EFFECT OF DILUTIVE SECURITIES
Stock compensation plans - 1,289
Warrants - 100
Convertible Preferred Stock - 2,396
--------------- ---------------
DILUTED EPS $ 16,788 31,044 $ 0.54
=============== =============== ============
13
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
6. CAPITAL STRUCTURE AND PER SHARE DATA - CONTINUED
For the three months ended
June 30, 1998
------------------------------------------------
Per-Share
Income Shares Amount
-------------- --------------- ---------------
(DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
BASIC EPS $ 4,668 22,555 $ 0.21
===============
EFFECT OF DILUTIVE SECURITIES
Stock compensation plans - 546
Warrants - 26
Convertible Preferred Stock - 590
-------------- ---------------
DILUTED EPS $ 4,668 23,717 $ 0.20
============== =============== ===============
For the three months ended
June 30, 1999
-----------------------------------------------
Per-Share
Income Shares Amount
--------------- --------------- ------------
(DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
BASIC EPS $ 10,101 30,095 $ 0.34
============
EFFECT OF DILUTIVE SECURITIES
Stock compensation plans - 1,120
Warrants - 90
Convertible Preferred Stock - 2,783
--------------- ---------------
DILUTED EPS $ 10,101 34,088 $ 0.30
=============== =============== ============
7. COMMITMENTS AND CONTINGENCIES
Sonic is involved in various legal proceedings. Management believes
that the outcome of such proceedings will not have a materially adverse effect
on Sonic's financial position or future results of operations and cash flows.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the results of operations and
financial condition should be read in conjunction with the Unaudited
Consolidated Financial Statements and the related notes thereto.
RESULTS OF OPERATIONS
The following table summarizes, for the periods presented, the
percentages of total revenues represented by certain items reflected in Sonic's
statements of income.
Percentage of Total Revenues for Percentage of Total Revenues for
Three Months Ended Six Months Ended
June 30, June 30,
1998 1999 1998 1999
------ ------ ------ ------
Revenues:
New vehicle sales .................. 60.4% 58.2% 59.4% 58.3%
Used vehicle sales ................. 27.6% 29.2% 28.1% 29.3%
Parts, service, and collision repair 10.1% 10.3% 10.5% 10.2%
Finance and insurance .............. 1.9% 2.3% 2.0% 2.2%
------ ------ ------ ------
Total revenues ..................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ...................... 87.5% 87.0% 87.3% 86.9%
------ ------ ------ ------
Gross profit ....................... 12.5% 13.0% 12.7% 13.1%
Selling, general, and administrative 9.2% 9.6% 9.6% 9.8%
------ ------ ------ ------
Operating income ................... 3.3% 3.4% 3.1% 3.3%
Interest expense ................... 1.4% 1.2% 1.4% 1.3%
------ ------ ------ ------
Income before income taxes ......... 1.9% 2.2% 1.7% 2.0%
====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues grew in each of our primary revenue areas for the
first six months of 1999 as compared with the first six months of 1998, causing
total revenues to increase 103% to $1.3 billion. New vehicle sales revenue
increased 99% to $767.8 million in the first six months of 1999, compared with
$386.2 million in the first six months of 1998. The increase was due primarily
to an increase in new vehicle unit sales of 91% to 31,731, as compared with
16,601 in the first six months of 1998 resulting from 13,753 additional units
contributed by acquisitions. The remainder of the increase was due to a 4.0%
increase in the average selling price of new vehicles as well as an increase in
new vehicle revenues from stores owned for longer than one year of 16.5% in the
first six months of 1999 over the first six months of 1998.
Used vehicle revenues from retail sales increased 112% to $285.2
million in the first six months of 1999 from $134.7 million in the first six
months of 1998. The increase was primarily due to an increase in used vehicle
unit sales of 109% to 20,294, as compared with 9,719 in the first six months of
1998, resulting from additional unit sales contributed by acquisitions. The
remainder of the increase was due to a 1.4% increase in the average selling
price of used vehicles as well as an increase in used vehicle revenues from
stores owned for longer than one year of 16.4% in the first six months of 1999
over the first six months of 1998.
Parts, service and collision repair revenue increased 96% to $134.0
million in the first six months of 1999 compared to $68.3 million in the first
six months of 1998, principally due to our acquisitions. Finance and insurance
revenue increased $16.8 million, or 133%, principally due to vehicle sales and
related financing contributed by our acquisitions, as well as a 17.7%
improvement in finance and insurance revenues per vehicle resulting from newly
implemented programs designed to improve training and development of finance and
insurance sales people.
GROSS PROFIT. Gross profit increased 109% to $172.3 million in the
first six months of 1999 from $82.4 million in the first six months of 1998
principally due to increases in revenues contributed by dealerships acquired.
Gross profit as a percentage of sales increased to 13.1% from 12.7% due
primarily to an increase in revenues of higher margin used vehicles and finance
and insurance products. Used vehicle revenues as a percentage of total revenues
increased from 28.1% in the first six months of 1998 to 29.3% in the first six
months of 1999. Finance and insurance revenues as a percentage of total revenues
increased from 2.0% in the first six months of 1998 to 2.2% in the first six
months of 1999. In addition, gross margins of used vehicles improved from 10.3%
to 11.1% resulting from efforts made to improve management and marketing of used
vehicle inventories.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding depreciation and amortization, increased 106%
to $124.6 million in the first six months of 1999 from $60.4 million in the
first six months of 1998 resulting principally from acquisitions. Such expenses
as a percentage of revenues increased to 9.5% from 9.3% resulting from two
primary factors. First, because compensation programs, which represent over 50%
of a dealership's selling, general and administrative expenses, are primarily
based on gross profits, the improvement in gross profit margins resulted in an
increase in compensation expense as a percentage of total revenues from 5.7% in
the first six months of 1998 to 5.9% in the first six months of 1999. Second, an
adjustment in monthly lease rates to fair market rates at certain dealerships
acquired during the period resulted in an increase in rent expense as a
percentage of total revenues from 0.6% in the first six months of 1998 to 0.8%
in the first six months of 1999.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 127% to $4.2 million in the first six months of 1999 from $1.8
million in the first six months of 1998, resulting principally from additional
goodwill amortization expense associated with our acquisitions.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased
43% to $9.4 million in the first six months of 1999 from $6.6 million in the
first six months of 1998, due primarily to floor plan interest expense incurred
by dealerships acquired. As a percentage of total revenues, floor plan interest
decreased from 1.0% in the first six months of 1998 to 0.7% in the first six
months of 1999 due to decreased interest rates under our floor plan financing
arrangement, as well as improvement in inventory turnover rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $7.4
million in the first six months of 1999 from $2.8 million in the first six
months of 1998 due primarily to interest incurred on our senior subordinated
notes issued on July 31, 1998.
NET INCOME. As a result of the factors noted above, our net income
increased by $10.0 million in the first six months of 1999 compared to the first
six months of 1998.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues grew in each of our primary revenue areas for the
second quarter of 1999 as compared with the second quarter of 1998, causing
total revenues to increase 87% to $723.5 million. New vehicle sales revenue
increased 80% to $420.8 million in the second quarter of 1999, compared with
$233.1 million in the second quarter of 1998. The increase was due primarily to
an increase in new vehicle unit sales of 75% to 17,449, as compared with 9,984
in the second quarter of 1998 resulting from 7,536 additional units contributed
by acquisitions. The remainder of the increase was due to a 3.3% increase in the
average selling price of new vehicles as well as an increase in new vehicle
revenues from stores owned for longer than one year of 8.2% in the second
quarter of 1999 over the second quarter of 1998.
Used vehicle revenues from retail sales increased 102% to $155.3
million in the second quarter of 1999 from $76.9 million in the second quarter
of 1998. The increase was primarily due to an increase in used vehicle unit
sales of 102% to 10,886, as compared with 5,386 in the second quarter of 1998,
resulting from additional unit sales contributed by acquisitions. The remainder
of the increase was due to an increase in used vehicle revenues from stores
owned for longer than one year of 17.9% in the second quarter of 1999 over the
second quarter of 1998.
Parts, service and collision repair revenue increased 90% to $74.4
million in the second quarter of 1999 compared to $39.2 million in the second
quarter of 1998, principally due to our acquisitions. Finance and insurance
revenue increased $9.5 million, or 129%, principally due to vehicle sales and
related financing contributed by our acquisitions, as well as a 24.0%
improvement in finance and insurance revenues per vehicle resulting from newly
implemented programs designed to improve training and development of finance and
insurance sales people.
GROSS PROFIT. Gross profit increased 95% to $94.3 million in the second
quarter of 1999 from $48.3 million in the second quarter of 1998 principally due
to increases in revenues contributed by dealerships acquired. Gross profit as a
percentage of sales increased to 13.0% from 12.5% due primarily to an increase
in revenues of higher margin used vehicles and finance and insurance products.
Used vehicle revenues as a percentage of total revenues increased from 27.6% in
the second quarter of 1998 to 29.2% in the second quarter of 1999. Finance and
insurance revenues increased from 1.9% in the second quarter of 1998 to 2.3% in
the second quarter of 1999. In addition, gross margins of used vehicles improved
from 10.5% to 11.3% resulting from efforts made to improve management and
marketing of used vehicle inventories.
16
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding depreciation and amortization, increased 96%
to $67.4 million in the second quarter of 1999 from $34.5 million in the second
quarter of 1998 resulting principally from the expenses of dealerships acquired.
Such expenses as a percentage of revenues increased to 9.3% from 8.9% resulting
from two primary factors. First, because compensation programs, which represent
over 50% of a dealership's selling, general and administrative expenses, are
primarily based on gross profits, the improvement in gross profit margins
resulted in an increase in compensation expense as a percentage of total
revenues from 5.6% in the second quarter of 1998 to 5.8% in the second quarter
of 1999. Second, an adjustment in monthly lease rates to fair market rates at
certain dealerships acquired during the period resulted in an increase in rent
expense as a percentage of total revenues from 0.6% in the second quarter of
1998 to 0.8% in the second quarter of 1999.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 122% to $2.2 million in the second quarter of 1999 from $1.0
million in the second quarter of 1998, resulting principally from additional
goodwill amortization expense associated with our acquisitions.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased
34% to $4.9 million in the second quarter of 1999 from $3.7 million in the
second quarter of 1998, due primarily to floor plan interest expense incurred by
dealerships acquired. As a percentage of total revenues, floor plan interest
decreased from 1.0% in the second quarter of 1998 to 0.7% in the second quarter
of 1999 due to decreased interest rates under our floor plan financing
arrangement, as well as improvement in inventory turnover rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $3.7
million in the second quarter of 1999 from $1.7 million in the second quarter of
1998 due primarily to interest incurred on our senior subordinated notes.
NET INCOME. As a result of the factors noted above, our net income
increased by $5.4 million in the second quarter of 1999 compared to the second
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Our principal needs for capital resources are to finance acquisitions
and fund debt service and working capital requirements. Historically, we have
relied on internally generated cash flows from operations, borrowings under our
various credit facilities, and borrowings and capital contributions from our
stockholders to finance our operations and expansion. On May 5, 1999, we
completed a public offering of Class A common stock which provided approximately
$86.1 million of additional capital resources for the consummation of
acquisitions and repayment of borrowings under our $150 million acquisition line
of credit with Ford Motor Credit Company (the "Revolving Facility").
During the first six months of 1999, net cash used in operating
activities was approximately $0.6 million. During the first six months of 1998,
net cash provided by operating activities was approximately $28.9 million. The
decrease was attributable principally to an increase in inventory levels.
Cash used for investing activities in the first six months of 1999 was
approximately $75.4 million, including $77.2 million paid for acquisitions, net
of cash received, and $8.8 million in capital expenditures. Cash used for
investing activities in the first six months of 1999 was offset by proceeds
received from the sale of real estate at Town and Country Toyota and Fort Mill
Ford of approximately $10.6 million. Cash used for investing activities in the
first six months of 1998 was approximately $9.1 million, including $7.8 million
paid for acquisitions, net of cash received, and $1.3 million in capital
expenditures. Our principal capital expenditures typically include building
improvements and equipment for use in our dealerships. Of the capital
expenditures in the first six months of 1999, approximately $3.0 million related
to the construction of new dealerships and a body shop, which were subsequently
sold to MMR Holdings, LLC, a limited liability company owned by Bruton Smith and
Sonic Financial Corporation ("SFC"), prior to the acquisition of MMR Holdings by
CAR MMR L.L.C., an affiliate of Capital Automotive REIT which is not affiliated
with Sonic. There was no gain or loss on the sale.
On August 13, 1999, CAR MMR L.L.C. acquired all of the ownership
interests of MMR Holdings, L.L.C., and two of its affiliates, MMR Viking
Investment Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR
Group). As of that date, Sonic leased 48 properties for 38 of its dealerships
from the MMR Group under "triple net leases" which required Sonic to pay all
costs of operating the properties, as well as all taxes, utilities, insurance,
repairs, maintenance and other property related expenses. Sonic has entered into
new leases with CAR MMR L.L.C. with terms similar to those under Sonic's former
leases with the MMR Group. These leases generally provide Sonic with options to
renew the lease for two additional five year terms after the expiration of the
initial lease term. Sonic has agreed to renew approximately 75% of its lease
rental stream for an additional five year period after the expiration of the
initial lease terms. In connection with the acquisition, Sonic, MMR Holdings and
Mar Mar Realty Trust, an affiliate of the MMR Group, terminated the strategic
alliance agreement whereby Mar Mar Realty Trust had provided Sonic with real
estate financing, acquisition referral and related services.
In connection with the above transaction, CAR MMR L.L.C. has agreed to
provide Sonic with up to $75 million in real estate financing through December
31, 1999.
17
During the first six months of 1999, we acquired 17 dealerships for
approximately $84.5 million in cash, 6,282 shares of Sonic's Class A Convertible
preferred stock, Series II, having an estimated fair value at the time of
issuance of approximately $6.1 million, 34,100 shares of Sonic's Class A
Convertible preferred stock, Series III, having an estimated fair value at the
time of issuance of approximately $28.9 million, and 176,030 shares of Sonic's
Class A common stock having an estimated fair value at the time of issuance of
approximately $2.2 million. The cash portion of the purchase price was financed
with a combination of a portion of the proceeds from our recent public offering
of Class A common stock, cash borrowed under our Revolving Facility and cash
generated from our existing operations. The acquisitions were accounted for
using the purchase method of accounting, and the results of operations of such
acquisitions have been included in the accompanying unaudited consolidated
financial statements from their respective acquisition dates.
Subsequent to June 30, 1999, we acquired 9 dealerships for
approximately $65.8 million in cash, 11,683 shares of Sonic's Class A
Convertible preferred stock, Series III, having a liquidation value of $1,000
per share, and 1,398,902 shares of Sonic's Class A common stock having an
estimated fair value at the time of issuance of approximately $20.0 million. The
cash portion of the purchase price was financed with a combination of cash
borrowed under the Revolving Facility and cash generated from Sonic's existing
operations. The acquisitions were accounted for using the purchase method of
accounting.
We have signed definitive agreements to acquire 13 dealerships for an
estimated $55.2 million in cash and approximately $11.2 million of Class A
common stock. The aggregate purchase price is subject to adjustment based on the
actual net book value of the assets acquired. The cash portion of the purchase
price will be paid with a combination of borrowings under Sonic's $150 million
acquisition line of credit with Ford Motor Credit Company (the "Revolving
Facility") and with cash generated from Sonic's existing operations. These
acquisitions are expected to be consummated in the third and fourth quarters of
1999.
Cash provided by financing activities of approximately $84.7 million in
the first six months of 1999 primarily reflects net proceeds received from our
public offering of common stock completed on May 5, 1999.
The Revolving Facility currently has a borrowing limit of $150 million.
Amounts outstanding under the Revolving Facility bear interest at a fluctuating
per annum rate equal to 2.75% above the 1 month commercial finance paper rate as
reported by the Federal Reserve Board (7.56% at June 30, 1999). The Revolving
Facility will mature in March 2001, unless we request that such term be
extended, at the option of Ford Motor Credit Company ("Ford Motor Credit"), for
a number of additional one year terms to be negotiated by us and Ford Motor
Credit. On May 5, 1999, in connection with the public offering by Sonic of
6,067,230 shares of Class A common stock, all amounts outstanding under the
Revolving Facility were repaid. As of June 30, 1999 there was no outstanding
balance under the Revolving Facility. Future amounts to be drawn under the
Revolving Facility are to be used for the acquisition of additional dealerships
and to provide general working capital needs not to exceed $10 million.
We agreed under the Revolving Facility not to pledge any of our assets
to any third party (with the exception of currently encumbered real estate and
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. Additional negative covenants include specified ratios of
o total debt to tangible base capital (as defined in the Revolving
Facility),
o current assets to current liabilities,
o earnings before interest, taxes, depreciation and amortization
(EBITDA) and rent less capital expenditures to fixed charges,
o EBITDA to interest expense,
o EBITDA to total debt and
o the current lending commitment under the Revolving Facility to
scaled assets (as defined in the Revolving Facility).
In addition, the loss of voting control over Sonic by Bruton Smith,
Scott Smith and their spouses or immediate family members or the failure by
Sonic, with certain exceptions, to own all the outstanding equity, membership or
partnership interests in its dealership subsidiaries will constitute an event of
default under the Revolving Facility. Sonic is in compliance with all
restrictive covenants as of June 30, 1999.
18
We currently have an aggregate principal balance of $125 million in our
senior subordinated notes which mature on August 1, 2008 and bear interest at a
stated rate of 11.0%. The notes are unsecured and are redeemable at our option
after August 1, 2003. Interest payments are due semi-annually on August 1 and
February 1 and commenced February 1, 1999. The notes are subordinated to all of
our present and future senior indebtedness, including the Revolving Facility.
Redemption prices during 12 month periods beginning August 1 are 105.500% in
2003, 103.667% in 2004, 101.833% in 2005 and 100% thereafter.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited circumstances
(for example, floor plan indebtedness). We have also agreed to certain other
limitations or prohibitions concerning the incurrence of other indebtedness,
capital stock, guaranties, asset sales, investments, cash dividends to
shareholders, distributions and redemptions. Sonic is in compliance with all
restrictive covenants as of June 30, 1999.
We currently have a standardized floor plan credit facility with Ford
Motor Credit for all our dealership subsidiaries (the "Floor Plan Facility"). As
of June 30, 1999, there was an aggregate of $304.0 million outstanding under the
Floor Plan Facility. The Floor Plan Facility at June 30, 1999 had an effective
interest rate of prime less 1.1% (6.65% at June 30, 1999), subject to certain
incentives and other adjustments. Typically new vehicle floor plan indebtedness
exceeds the related inventory balances. The inventory balances are generally
reduced by the manufacturer's purchase discounts, which are not reflected in the
related floor plan liability. These manufacturer purchase discounts are standard
in the industry, typically occur on all new vehicle purchases, and are not used
to offset the related floor plan liability. These discounts are aggregated and
generally paid to us by the manufacturers on a quarterly basis.
The Floor Plan Facility includes an available credit line for the
purchase of used vehicle inventory. Our general policy is to utilize used
vehicle floor plan indebtedness only when purchasing large quantities of used
vehicles in bulk. As of June 30, 1999, there was approximately $29.1 million
available under our used vehicle credit line, of which approximately $26.3
million was unused.
We make monthly interest payments on the amount financed under the
Floor Plan Facility but are not required to make loan principal repayments prior
to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other assets
of the relevant dealership subsidiary. The Floor Plan Facility contains 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.
As a result of the change in our tax basis of accounting for inventory
from the "last-in, first-out" method of inventory accounting (LIFO) to the
"first-in, first-out" method of inventory accounting (FIFO) at certain of our
dealerships, we incurred additional income tax liabilities. As of June 30, 1999
the aggregate balance of such income tax liabilities was approximately $5.1
million, which is payable in quarterly installments through the year 2002, as
follows:
Year ending December 31,
1999................................................... $ 901
2000................................................... 1,843
2001................................................... 1,597
2002................................................... 711
-------
Total.................................................. $ 5,052
=======
We expect to pay such obligations with cash provided by operations.
We believe that funds generated from our recent offering of Class A
common stock, together with funds generated through future operations and
availability of borrowings under our floor plan financing (or any replacements
thereof) and other credit arrangements will be sufficient to fund our debt
service and working capital requirements and any seasonal operating
requirements, including our currently anticipated internal growth for our
existing businesses, for the foreseeable future. We expect to fund any future
acquisitions from future cash flow from operations, additional debt financing
(including the Revolving Facility) or the issuance of Class A common stock,
preferred stock or other convertible instruments.
SEASONALITY
Our operations are subject to seasonal variations. The first quarter
generally contributes less revenue and operating profits than the second, third
and fourth quarters. Seasonality is principally caused by weather conditions and
the timing of manufacturer incentive programs and model changeovers.
19
YEAR 2000 COMPLIANCE
GENERAL
Due to the limited memory capacity of older computers, many computer
systems and software applications in early years were programmed to store dates
using six digit formats (e.g. mm/dd/yy) versus eight digit formats (e.g.
mm/dd/yyyy). Under the six digit format, most computer systems and software
applications are limited to recognizing dates within the 20th century only,
causing computers to interpret the year "00" as the year "1900" rather than the
year "2000." As we approach the beginning of year 2000, there is widespread
concern that the inability of computer systems to recognize dates beyond the
year 1999 will result in software errors and system failures that could be
disruptive to ordinary business operations.
We recognize the need to ensure that our operations will not be
disrupted by Year 2000 system failures either within our own computer systems or
within the computer systems of our primary lenders and suppliers. Each of our
dealerships has appointed a team comprised primarily of department managers
that, using guides developed by the National Automobile Dealers Association
(NADA), is responsible for assessing and resolving potential Year 2000 problems,
and developing contingency plans to mitigate the impact of future problems on
operations.
STATE OF READINESS
INTERNAL DEALERSHIP SYSTEMS: Internal systems supporting the
dealership's daily operations are comprised of four primary systems: (i) the
Dealer Management System ("DMS") which supports the critical operations of the
dealership including all vehicle sales, vehicle inventory, financing and
insurance operations, service and parts operations, and accounting functions;
(ii) the Dealer Communication System ("DCS") which provides on-line
communication with manufacturers necessary for ordering vehicles and parts
inventory, submitting warranty claims, submitting dealership financial
statements, receiving delivery reports, and receiving technical information used
in service department operations; (iii) personal computer systems ("PC systems")
used in providing information to and communicating with the parent company; and
(iv) "embedded systems" which use an electric processor or computer chip to
control, monitor, or assist with the operation of equipment, machinery, and
building management (e.g. building access, security and fire alarms, automotive
diagnostic equipment).
DEALER MANAGEMENT SYSTEM: The DMS systems used by our dealerships are
obtained from one of four primary vendors, Reynolds & Reynolds, Infiniti Net,
ADP, and UCS. Each of these vendors has developed upgrades to correct Year 2000
problems within the DMS systems, and we have completed the process of installing
such upgrades to our systems. In addition, we have received written verification
from each of these vendors that the DMS systems operating within dealerships
currently owned by Sonic are Year 2000 certified. With respect to dealerships
being acquired, dealerships using DMS systems which are not Year 2000 certified
are being transferred to existing systems which are Year 2000 certified.
DEALER COMMUNICATION SYSTEM: The DCS systems used in our dealerships
are provided by the respective manufacturers with whom the dealerships
communicate. As a result, the manufacturers have assumed responsibility for
upgrading DCS systems to Year 2000 compliant systems. To date, approximately
half of our dealerships have received written verification from their respective
manufacturer that their DCS system is Year 2000 compliant. In addition, we have
requested from each manufacturer that status reports be provided to both the
dealership and parent company to inform us of remediation efforts at those
dealerships that are not yet Year 2000 compliant, and when such remediation
efforts are expected to be completed.
PERSONAL COMPUTER SYSTEMS: Most PC systems currently operating in our
dealerships were installed within the past year and were determined to be Year
2000 compliant at the time of installation. PC systems and local and wide area
networks used to communicate with our dealerships were also recently installed
and were Year 2000 certified upon purchase. As a precautionary measure, we have
provided all dealerships with diskettes containing programs designed to test PC
systems for Year 2000 capability. All PC systems not currently Year 2000
compliant will either be upgraded or replaced with systems that are Year 2000
compliant.
EMBEDDED SYSTEMS: Embedded systems refer to systems that use some sort
of electronic process or computer chip to track time and date information used
in the operation of that system. For example, security systems, or heating,
ventilation, and air-conditioning systems (HVAC) may be programmed to
automatically be activated or deactivated at a certain time. If a security
system is programmed to lock up a dealership on weekends, then some dealerships
may be locked out on Thursday, January 6, 2000 because the computer interprets
the date as Saturday, January 6, 1900. The dealerships are conducting an
inventory of such systems, and are contacting the manufacturers or suppliers to
test such systems and obtain verification of Year 2000 certification. This
process has not yet been completed, though these systems are not considered
critical and a disruption in these systems is not expected to significantly
affect dealerships' daily operations.
20
EXTERNAL SYSTEMS: A dealership's operations may be adversely affected
if the lenders, suppliers, or other third parties with whom it regularly
conducts business are affected by Year 2000 problems within their systems. Other
than automobile manufacturers, we are primarily concerned about Year 2000
failures with banks and other financial service providers, companies providing
financing and insurance to our customers, and utilities providing electricity
and water. We have received verification from our primary banks and lenders that
their systems are Year 2000 compliant and that service is not expected to be
interrupted by Year 2000 problems. We have contacted other key vendors and
suppliers and are awaiting their responses concerning their Year 2000
remediation efforts.
COSTS
The costs associated with converting our internal systems to Year 2000
compliant systems have not been, and are not expected to be, material to our
financial position or results of operations. Costs associated with upgrading and
converting the DMS and DCS systems to Year 2000 compliant systems were covered
by monthly maintenance contracts with the respective suppliers and were expensed
as incurred. Costs associated with upgrading or replacing PC and embedded
systems have not been material and were expensed or capitalized in accordance
with our capitalization policy.
CONTINGENCY PLANS
We cannot state with certainty whether Year 2000 system failures either
within our own internal systems or within the systems of third-parties with whom
we are involved will have a material adverse impact on our results of
operations. In order to mitigate the potential impact of any future Year 2000
problems, each of our dealerships is in the process of developing contingency
plans which include the following:
1. Use of pre-printed and pre-numbered forms and checks (including
repair orders and parts counter tickets) and manual journals and
ledger books to assist in bookkeeping and accounting functions;
2. Use of hand held, battery operated finance computers in order to
continue providing finance services to our customers;
3. Establishing emergency reserves of supplies in the event that
service from third party lenders and suppliers is disrupted due to
Year 2000 problems within their systems; and
4. Training of employees to manually perform functions that are
currently performed on computers.
While we believe that we are taking appropriate steps to ensure we are
adequately prepared to deal with Year 2000 problems as they arise, we cannot
make assurances that Year 2000 problems will not have a material adverse affect
on our results of operations or financial condition. In a most reasonably likely
worst case scenario, Year 2000 problems may delay our ability to sell vehicles,
provide financing and insurance to our customers, provide parts and repair
service to our customers, complete acquisitions, or meet third-party obligations
until Year 2000 problems can be resolved in the affected systems.
SIGNIFICANT MATERIALITY OF GOODWILL
Goodwill represents the excess purchase price over the estimated fair
value of the tangible and separately measurable intangible net assets acquired.
The cumulative gross goodwill balance at December 31, 1998 was $182.5 million
and at June 30, 1999 was $265.3 million. As a percentage of total assets and
stockholders' equity, goodwill, net of accumulated amortization, represented
31.3% and 126.4%, respectively, at December 31, 1998, and 32.8% and 90.2%,
respectively, at June 30, 1999. Generally accepted accounting principles require
that goodwill and all other intangible assets be amortized over the period
benefited. We have determined that the period benefited by the goodwill will be
no less than 40 years. Accordingly we are amortizing goodwill over a 40 year
period. Earnings reported in periods immediately following an acquisition would
be overstated if we attributed a 40 year benefit to an intangible asset that
should have had a shorter benefit period. In later years, we would be burdened
by a continuing charge against earnings without the associated benefit to income
valued by management in arriving at the consideration paid for the businesses
acquired. Earnings in later years also could be significantly affected if
management then determined that the remaining balance of goodwill was impaired.
We periodically compare the carrying value of goodwill with the anticipated
undiscounted future cash flows from operations of the business we have acquired
in order to evaluate the recoverability of goodwill. We have concluded that the
anticipated future cash flows associated with intangible assets recognized in
our acquisitions will continue indefinitely, and there is no pervasive evidence
that any material portion will dissipate over a period shorter than 40 years. We
will incur additional goodwill in future acquisitions.
21
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Sonic's only financial instruments with market risk
exposure are variable rate floor plan notes payable, Revolving Facility
borrowings and other variable rate notes. As of June 30, 1999, the total
outstanding balance of such instruments was approximately $316.6 million. A
change of one percent in the interest rate would have caused a change in
interest expense for the six months ended June 30, 1999 of approximately $1.6
million. In addition, a decrease or increase in interest rates would cause a
respective increase or decrease in the present value of Sonic's fixed rate
senior subordinated notes, which have a carrying value of $120.9 million at June
30, 1999.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following sets forth certain information as to all equity
securities sold by Sonic during the periods discussed that were not registered
under the Securities Act of 1933, as amended (the "Securities Act"). As to all
such transactions, an exemption was claimed under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder ("Regulation D") as
transactions not involving a public offering in view of sophistication of the
purchasers, their access to material information about Sonic, the disclosures
actually made to them by Sonic, the absence of any general solicitation or
advertising, the status of the purchasers as "accredited investors" as that term
is defined in Rule 501(a) of Regulation D and the filing by Sonic of the
appropriate forms in connection therewith. All such private sales of Sonic's
equity securities were made to the owners of assets associated with, or the
capital stock of, automobile dealerships acquired by Sonic as a part of Sonic's
dealership acquisition strategy.
Sonic has privately issued its Class A common stock in the following
dealership acquisition transactions:
On May 17, 1999, Sonic issued 176,030 shares of its Class A common
stock to John H. Newsome, Jr. to acquire via merger with a subsidiary of Sonic
the outstanding capital stock of Newsome Chevrolet, Inc. with a value of
approximately $2.2 million.
Sonic has also privately issued its Class A convertible preferred stock
(the "Preferred Stock") in dealership acquisition transactions. The Preferred
Stock is divided into three series: the Series I Preferred Stock, the Series II
Preferred Stock and the Series III Preferred Stock. Each share of Preferred
Stock is convertible into shares of Class A common stock at the holder's option
at specified conversion rates. After the second anniversary of the date of
issuance, any shares of Preferred Stock which have not yet been converted are
subject to mandatory conversion to Class A common stock at the option of Sonic.
No fractional shares of Class A common stock will be issued upon conversion of
any shares of Preferred Stock. Instead, Sonic will pay cash equal to the value
of such fractional shares.
Generally each share of Preferred Stock is convertible into that number
of shares of Class A common stock that has an aggregate Market Price at the time
of conversion equal to $1,000 (with certain adjustments for Series II and Series
III Preferred Stock). "Market Price" is defined generally as the average closing
price per share of the Class A common stock on the New York Stock Exchange for
twenty trading days immediately preceding the date of determination. Before the
first anniversary of the date of issuance of Preferred Stock, each holder of
Preferred Stock is unable to convert without first giving Sonic ten business
days' notice and an opportunity to redeem such Preferred Stock at the then
applicable redemption price.
Sonic has privately issued Preferred Stock in the following dealership
acquisition transactions:
On April 2, 1999, Sonic issued 1,532 shares of its Series II Preferred
Stock to Fred Bondesen Chevrolet, Oldsmobile, Cadillac, Inc. to acquire the
assets of this corporation with a value of approximately $1.4 million.
On May 4, 1999, Sonic issued 500 shares of its Series II Preferred
Stock each to Lloyd Pontiac-Cadillac, Inc. and Lloyd Nissan, Inc. to acquire the
assets of these corporations with a value of approximately $1.0 million.
In two separate issuances occurring on April 1, 1999 and May 4, 1999,
Sonic issued 4,055.1825 shares of its Series III Preferred Stock with a value of
approximately $3.9 million to Aldo B. Paret as additional consideration for the
acquisition of the outstanding capital stock of Casa Ford of Houston, Inc. which
closed in May of 1998.
On May 17, 1999, Sonic issued 3,750 shares of its Series II Preferred
Stock to John H. Newsome, Jr. to acquire via merger with a subsidiary of Sonic
the outstanding capital stock of Newsome Chevrolet, Inc. with a value of
approximately $3.6 million.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on June 8, 1999, Theodore M.
Wright and Dennis D. Higginbotham were elected directors by Sonic's
stockholders. Directors whose terms of office continued after the meeting were
O. Bruton Smith, Bryan Scott Smith, William R. Brooks, William P. Benton, and
William I. Belk. In addition to the election of two directors, the stockholders
approved the following:
1. An amendment to Sonic's Amended and Restated Certificate of
Incorporation to increase the number of shares of Class A common
stock issuable thereunder from 50,000,000 to 100,000,000, and to
increase the number of shares of Class B common stock issuable
thereunder from 15,000,000 to 30,000,000.
2. An amendment to increase the number of options to purchase shares
of Class A common stock that may be granted under Sonic's Restated
1997 Stock Option Plan from 2,250,000 to 4,500,000.
3. An amendment to increase the number of options to purchase shares
of Class A common stock that may be granted under Sonic's Employee
Stock Purchase Plan from 600,000 to 1,200,000.
4. The appointment of Deloitte & Touche LLP as the Sonic's independent
public accountant for the fiscal year ending December 31, 1999.
VOTES
VOTES FOR VOTES AGAINST ABSTAINED
-------------- -------------- --------------
Election of Theodore M. Wright 128,999,478 4,033,000
Election of Dennis D. Higginbotham 128,999,478 4,033,000
Approval of amendment to Sonic's Amended and Restated Certificate of
Incorporation 128,536,365 4,496,113
Approval of amendment to Sonic's Restated 1997 Stock Option Plan 129,354,270 2,130,498 5,122
Approval of amendment to Sonic's Employee Stock Purchase Plan 130,653,174 832,114 4,602
Appointment of Deloitte & Touche LLP 133,032,478
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ITEM 6. EXHIBITS
(a) Exhibits:
3.1* Amended and Restated Certificate of Incorporation of Sonic
(incorporated by reference to Exhibit 3.1 to the Registration Statement
on Form S-1 (Registration No. 333-33295) of Sonic (the "Form S-1")).
3.2* 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).
3.3* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the
Form S-1).
4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated
by reference to Exhibit 4.3 to the Registration Statement on Form S-4
(Registration Nos. 333-64397 and 333-64397-001 through 333-64397-044)
of Sonic (the "Form S-4")).
4.2* Indenture dated as of July 1, 1998 between Sonic, as issuer, the
subsidiaries of Sonic named therein, as guarantors, and U.S. Bank Trust
National Association, as trustee, relating to the 11% Senior
Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2
to the Form S-4).
4.3* Registration Rights Agreement dated as of June 30, 1998 among Sonic, O.
Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial
Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1).
10.1* Agreement and Plan of Merger dated as of April 6, 1999 by and among
Sonic, Manhattan Auto, Inc., Joseph Herson, Mollye Mills, John Jaffe
and Richard Mills (the "Manhattan Merger Agreement") (incorporated by
reference to Exhibit 4.10 to Sonic's Registration Statement on Form S-3
(Registration No. 333-82615) (the "August 1999 Form S-3")).
10.2* Letter Agreement dated as of August 3, 1999 regarding amendment to the
Manhattan Merger Agreement (incorporated by reference to Exhibit 4.11
to the August 1999 Form S-3).
10.3 Asset Purchase Agreement dated April 6, 1999 by and among Sonic,
L.O.R., Inc., Waldorf Automotive, Inc., Manhattan Imported Cars, Inc.
and the stockholders of L.O.R., Waldorf Automotive and Manhattan
Imported Cars.
10.4 Sonic Agreement dated as of June 30, 1999 by and among Sonic, the
subsidiaries of Sonic listed on Schedule A thereto and CAR MMR L.L.C
(the "Sonic Agreement") (confidential portions omitted and filed
separately with the SEC).
10.5 Agreement dated as of August 5, 1999 by and among Sonic, O. Bruton
Smith and Sonic Financial Corporation relating to transactions
contemplated by the Sonic Agreement.
27 Financial data schedule for the six month period ended June 30, 1999
(filed electronically).
(b) Reports on Form 8-K.
We have not filed any reports on Form 8-K during the quarter for which
this report is filed.
* Filed Previously
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONIC AUTOMOTIVE, INC.
Date: August 15, 1999 By: /s/ O. Bruton Smith
--------------- --------------------------------------------------
O. Bruton Smith
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: August 15, 1999 By: /s/ Theodore M. Wright
--------------- --------------------------------------------------
Theodore M. Wright
VICE PRESIDENT-FINANCE, CHIEF FINANCIAL
OFFICER, TREASURER AND SECRETARY
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
25
INDEX TO EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q FOR
SONIC AUTOMOTIVE, INC.
FOR THE QUARTER ENDED June 30, 1999
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-1 (Registration No. 333-33295) of Sonic
(the "Form S-1")).
3.2* 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).
3.3* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1).
4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit
4.3 to the Registration Statement on Form S-4 (Registration Nos. 333-64397 and 333-64397-001
through 333-64397-044) of Sonic (the "Form S-4")).
4.2* Indenture dated as of July 1, 1998 between Sonic, as issuer, the subsidiaries of Sonic named
therein, as guarantors, and U.S. Bank Trust National Association, as trustee, relating to the
11% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2 to the Form
S-4).
4.3* Registration Rights Agreement dated as of June 30, 1998 among Sonic, O. Bruton Smith, Bryan
Scott Smith, William S. Egan and Sonic Financial Corporation (incorporated by reference to
Exhibit 4.2 to the Form S-1).
10.1* Agreement and Plan of Merger dated as of April 6, 1999 by and among Sonic, Manhattan Auto,
Inc., Joseph Herson, Mollye Mills, John Jaffe and Richard Mills (the "Manhattan Merger
Agreement") (incorporated by reference to Exhibit 4.10 to Sonic's Registration Statement on Form
S-3 (Registration No. 333-82615) (the "August 1999 Form S-3")).
10.2* Letter Agreement dated as of August 3, 1999 regarding
amendment to the Manhattan Merger Agreement (incorporated by
reference to Exhibit 4.11 to the August 1999 Form S-3).
10.3 Asset Purchase Agreement dated April 6, 1999 by and among Sonic, L.O.R., Inc., Waldorf
Automotive, Inc., Manhattan Imported Cars, Inc. and the stockholders of L.O.R., Waldorf
Automotive and Manhattan Imported Cars.
10.4 Sonic Agreement dated as of June 30, 1999 by and among Sonic, the subsidiaries of Sonic listed
on Schedule A thereto and CAR MMR L.L.C (the "Sonic Agreement") (confidential portions omitted
and filed separately with the SEC).
10.5 Agreement dated as of August 5, 1999 by and among Sonic, O. Bruton Smith and Sonic Financial
Corporation relating to transactions contemplated by the Sonic Agreement.
27 Financial data schedule for the six month period ended June 30, 1999 (filed electronically).
* Filed Previously
26