UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13395
SONIC AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-2010790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5401 E. Independence Blvd., Charlotte, North Carolina 28212
(Address of principal executive offices) (Zip Code)
(704) 566-2400
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
As of November 13, 2001, there were 28,308,039 shares of Class A Common Stock
and 12,029,375 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
September 30, 2000 and September 30, 2001
Consolidated Statements of Income -
Nine-month periods ended
September 30, 2000 and September 30, 2001
Consolidated Balance Sheets -
December 31, 2000 and September 30, 2001
Consolidated Statement of Stockholders'
Equity - Nine-month period ended September 30, 2001
Consolidated Statements of Cash Flows -
Nine-month periods ended September 30, 2000
and September 30, 2001
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 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
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
September 30,
2000 2001
---------- ----------
REVENUES:
New vehicles $ 924,040 $ 919,868
Used vehicles 335,638 302,401
Wholesale vehicles 112,256 99,497
---------- ----------
Total vehicles 1,371,934 1,321,766
Parts, service and collision repair 177,788 197,001
Finance, insurance and other 45,139 48,073
---------- ----------
Total revenues 1,594,861 1,566,840
COST OF SALES 1,366,120 1,331,993
---------- ----------
GROSS PROFIT 228,741 234,847
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 165,460 176,163
DEPRECIATION 1,769 1,864
GOODWILL AMORTIZATION 4,184 4,615
OPERATING INCOME 57,328 52,205
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 11,607 7,496
Interest expense, other 10,637 8,476
Other income 35 45
---------- ----------
Total other expense, net 22,209 15,927
---------- ----------
INCOME BEFORE INCOME TAXES 35,119 36,278
PROVISION FOR INCOME TAXES 13,060 14,160
---------- ----------
NET INCOME $ 22,059 $ 22,118
========== ==========
BASIC NET INCOME PER SHARE $ 0.52 $ 0.55
========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 42,693 40,449
========== ==========
DILUTED NET INCOME PER SHARE $ 0.51 $ 0.53
========== ==========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING 43,571 41,994
========== ==========
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)
Nine Months Ended
September 30,
2000 2001
----------- -----------
REVENUES:
New vehicles $ 2,682,696 $ 2,770,064
Used vehicles 962,392 936,990
Wholesale vehicles 323,231 319,416
----------- -----------
Total vehicles 3,968,319 4,026,470
Parts, service and collision repair 513,920 581,153
Finance, insurance and other 125,362 139,802
----------- -----------
Total revenues 4,607,601 4,747,425
COST OF SALES 3,951,528 4,048,753
GROSS PROFIT 656,073 698,672
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 473,745 527,009
DEPRECIATION 4,930 5,663
GOODWILL AMORTIZATION 12,414 13,721
----------- -----------
OPERATING INCOME 164,984 152,279
OTHER INCOME AND EXPENSE:
Interest expense, floor plan 34,012 30,188
Interest expense, other 31,200 26,989
Other income 109 120
----------- -----------
Total other expense, net 65,103 57,057
----------- -----------
INCOME BEFORE INCOME TAXES 99,881 95,222
PROVISION FOR INCOME TAXES 38,000 37,135
----------- -----------
NET INCOME $ 61,881 $ 58,087
=========== ===========
BASIC NET INCOME PER SHARE $ 1.45 $ 1.43
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 42,584 40,591
=========== ===========
DILUTED NET INCOME PER SHARE $ 1.40 $ 1.40
=========== ===========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 44,257 41,511
=========== ===========
See notes to unaudited consolidated financial statements.
4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30,
December 31, 2001
2000 (Unaudited)
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 109,325 $ 103,431
Receivables, net 127,865 114,992
Inventories 773,785 654,762
Other current assets 26,428 29,596
------------ -------------
Total current assets 1,037,403 902,781
PROPERTY AND EQUIPMENT, NET 72,966 85,329
GOODWILL, NET 668,782 689,200
OTHER ASSETS 10,097 12,004
------------ -------------
TOTAL ASSETS $ 1,789,248 $ 1,689,314
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 684,718 $ 557,301
Trade accounts payable 50,274 44,669
Accrued interest 10,279 4,757
Other accrued liabilities 70,453 101,041
Current maturities of long-term debt 2,597 2,597
------------ -------------
Total current liabilities 818,321 710,365
LONG-TERM DEBT 485,212 448,935
OTHER LONG-TERM LIABILITIES 8,200 8,318
PAYABLE TO THE COMPANY'S CHAIRMAN 5,500 5,500
DEFERRED INCOME TAXES 21,093 26,277
STOCKHOLDERS' EQUITY:
Class A convertible preferred stock 251 -
Class A common stock 333 345
Class B common stock 123 121
Paid-in capital 329,489 337,160
Retained earnings 153,564 211,651
Treasury stock, at cost (32,838) (59,358)
------------ -------------
Total stockholders' equity 450,922 489,919
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,789,248 $ 1,689,314
============ =============
See notes to unaudited consolidated financial statements.
5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
(Unaudited)
Total
Class A Class B Stock-
Preferred Stock Common Stock Common Stock Paid-In Retained Treasury holders'
Shares Amount Shares Amount Shares Amount Capital Earnings Stock Equity
------ ------- ------ ------ ------ ------ --------- -------- -------- --------
BALANCE AT December 31, 2000 - $ 251 33,292 $ 333 12,250 $ 123 $ 329,489 $153,564 $(32,838) $450,922
Shares awarded under stock
compensation plan 942 9 7,672 7,681
Repurchase of Class A Common Stock (26,520) (26,520)
Conversion of Class B Common Stock 221 2 (221) (2) -
Redemption of Preferred Stock - (251) (251)
Exercise of warrants 81 1 (1) -
Net income 58,087 58,087
------ ------- ------ ------ ------ ------ --------- -------- -------- --------
BALANCE AT September 30, 2001 - $ - 34,535 $ 345 12,029 $ 121 $ 337,160 $211,651 $(59,358) $489,919
====== ======= ====== ====== ====== ====== ========= ======== ======== ========
See notes to unauited consolidated financial statements.
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2000 2001
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61,881 $ 58,087
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,344 19,384
Gain/loss on disposal of dealership assets 43 (794)
Changes in assets and liabilities that relate to operations:
Receivables (26,563) 21,617
Inventories 16,590 172,587
Other assets (5,388) (2,737)
Notes payable - floor plan (18,966) (184,342)
Trade accounts payable and other liabilities 11,482 19,508
--------- -----------
Total adjustments (5,458) 45,223
--------- -----------
Net cash provided by operating activities 56,423 103,310
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of dealerships, net of cash acquired (54,918) (46,703)
Purchases of property and equipment (57,993) (30,909)
Proceeds from sales of property and equipment 15,199 13,974
Proceeds from sales of dealerships 4,450 10,394
--------- -----------
Net cash used in investing activities (93,262) (53,244)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings/(repayments) on revolving credit facilities 74,191 (35,208)
Payments on long-term debt (2,405) (1,850)
Proceeds from long-term debt 924 188
Purchases of Class A common stock (34,685) (26,520)
Redemptions of Preferred Stock - (251)
Issuance of shares under stock compensation plans 2,144 7,681
Advances to affiliated companies 3,372 -
--------- -----------
Net cash provided by/(used in) financing activities 43,541 (55,960)
--------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 6,702 (5,894)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 83,111 109,325
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 89,813 $ 103,431
========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued for acquisitions and contingent
consideration $ 11,589 $ -
Conversion of Preferred Stock $ 25,947 $ -
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", "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, including without limitation,
Exhibit 99.1 hereto, and in our other filings with the Securities and Exchange
Commission.
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation -- The accompanying unaudited financial information
for the three and nine months ended September 30, 2000 and 2001 has been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. All significant intercompany accounts and transactions have been
eliminated. These unaudited consolidated financial statements reflect, in the
opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state the financial position and the
results of operations for the periods presented. The results for interim
periods are not necessarily indicative of the results to be expected for the
entire fiscal year. These interim financial statements should be read in
conjunction with the audited consolidated financial statements of Sonic
Automotive, Inc. ("Sonic") for the year ended December 31, 2000.
Revenue Recognition -- Sonic records revenue when vehicles are delivered to
customers, when vehicle service work is performed and when parts are delivered.
Sonic arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. Sonic also receives commissions from the
sale of credit life, accident, health and disability insurance contracts to
customers. Sonic may be assessed a chargeback fee in the event of early
cancellation of a loan or insurance contract by the customer. Finance and
insurance commission revenue is recorded net of estimated chargebacks at the
time the related contract is placed with the financial institution.
Sonic also receives commissions from the sale of non-recourse third party
extended service contracts to customers. Under these contracts the applicable
manufacturer or third party warranty company is directly liable for all
warranties provided within the contract. Commission revenue from the sale of
these third party extended service contracts is recorded net of estimated
chargebacks at the time of sale.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Commission expense charged to cost of sales was approximately $6.7
million and $7.0 million for the three months ended September 30, 2000 and 2001,
respectively, and approximately $19.8 million and $20.6 million for the nine
months ended September 30, 2000 and 2001, respectively.
Recent Accounting Pronouncements -- In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141: Business Combinations. SFAS 141 prohibits the pooling-of-
interests method of accounting and requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001. In
addition, SFAS 141 provides additional guidance regarding the measurement and
recognition of goodwill and other acquired intangible assets. The provisions of
this standard became effective beginning July 1, 2001. For acquisitions after
this date, we will be required to classify certain intangible assets, such as
franchise rights granted from automobile manufacturers, as intangible assets
apart from goodwill.
In July 2001, the FASB also issued SFAS No. 142: Goodwill and Other
Intangible Assets. Among other things, SFAS 142 no longer permits the
amortization of goodwill, but requires that the carrying amount of goodwill be
reviewed and reduced against operations if it is found to be impaired. This
review must be performed on at least an annual basis, but must also be performed
upon the occurrence of an event or circumstance that indicates a possible
reduction in value. SFAS 142 does require the amortization of intangible assets
other than goodwill over their useful economic lives, unless the useful economic
life is determined to be indefinite. These intangible assets are required to be
reviewed for impairment in accordance with SFAS 144: Accounting for Impairment
or Disposal of Long-Lived Assets. Intangible assets that are determined to have
an indefinite economic life may not be amortized and must be reviewed for
impairment in accordance with the terms of SFAS 142. The provisions of SFAS 142
become effective for us beginning January 1, 2002; however, goodwill and other
intangible assets determined to have an indefinite useful life acquired in
business combinations completed after June 30, 2001 will not be amortized.
Early adoption and retroactive application is not permitted. While we are
currently evaluating the provisions of SFAS 142, we have not yet determined its
full impact on our consolidated financial statements. As of December 31, 2000,
the carrying amount of goodwill was $668.8 million and represented 37.4% of
total assets and 148.3% of total stockholders' equity. As of September 30,
2001, the carrying amount of goodwill was $689.2 million and represented 40.8%
of total assets and 140.7% of total stockholders' equity.
8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. Summary of Significant Accounting Policies - (Continued)
In August 2001, the FASB issued SFAS No. 144: Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 establishes a single accounting model
for assets to be disposed of by sale whether previously held and used or newly
acquired. SFAS 144 is effective for fiscal years beginning after December 15,
2001. We are currently evaluating the provisions of SFAS 144 and have not yet
determined the impact on our consolidated financial statements.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The accounts in the accompanying financial statements that
require the use of significant estimates are accounts receivable, inventories,
intangible assets, income taxes and certain accrued expenses.
Segment Information -- Sonic's business is fundamentally managed based on
individual dealership operating performance. Each of Sonic's dealerships has
similar economic and operating characteristics. Each dealership sells similar
products and services (new and used vehicles, parts, service and collision
repair services), uses similar processes in selling its product and services,
and sells its products and services to similar classes of customers. As a
result, Sonic's dealerships are aggregated into a single operating segment for
purposes of reporting financial condition and results of operations.
2. Business Acquisitions
Acquisitions Completed Subsequent to September 30, 2001 (through November 12,
2001):
Subsequent to September 30, 2001, Sonic acquired five dealerships for
approximately $74.7 million in cash financed with a combination of cash borrowed
under our $600 million revolving credit facility and cash generated from
operations.
Acquisitions Completed During the Nine months ended September 30, 2001:
During the first nine months of 2001, Sonic acquired five dealerships for
approximately $51.9 million in cash. The acquisitions were accounted for using
the purchase method of accounting, and the results of operations of such
acquisitions have been included in the accompanying unaudited consolidated
financial statements from their respective acquisition dates. The aggregate
purchase price of these acquisitions has been allocated to the assets and
liabilities acquired based on their estimated fair market value at the
acquisition date as shown in the table below. We are still in the process of
obtaining data necessary to complete the allocation of the purchase price of
certain of these acquisitions. As a result, the values of assets and liabilities
included in the table below reflect preliminary estimates where actual values
have not yet been determined, and may ultimately be different than amounts
recorded once actual values are determined. Any adjustment to the value of the
assets and liabilities will be recorded against goodwill.
Working capital $ 10,179
Property and equipment 9,704
Goodwill 33,795
Non-current liabilites assumed (1,784)
-----------
Total purchase price $ 51,894
===========
9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Business Acquisitions - (Continued)
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the acquisitions completed
during the three and nine months ended September 30, 2000 and September 30, 2001
had occurred as of the beginning of the year in which the acquisitions were
completed, and at the beginning of the immediately preceding year, after giving
effect to certain adjustments, including amortization of goodwill, interest
expense on acquisition debt and related income tax effects. The pro forma
financial information does not give effect to adjustments relating to net
reductions in floor plan interest expense resulting from floor plan financing
agreements or to reductions in salaries and fringe benefits of former owners or
officers of acquired dealerships who have not been retained by Sonic or whose
salaries have been reduced pursuant to employment agreements with Sonic. The pro
forma results have been prepared for comparative purposes only and are not
necessarily indicative of the results of operations that would have occurred had
the acquisitions been completed at the beginning of the period presented. These
results are also not necessarily indicative of the results of future operations.
Three Months Ended September 30, Nine Months Ended September 30,
2000 2001 2000 2001
------------ ----------- ---------- -----------
Total revenues $ 1,780,047 $ 1,571,783 $ 5,244,343 $ 4,792,975
Gross profit $ 278,023 $ 235,420 $ 724,060 $ 705,271
Net income $ 22,705 $ 21,947 $ 63,081 $ 56,618
Diluted net income per share $ 0.52 $ 0.52 $ 1.43 $ 1.36
Sale of Dealership Subsidiaries:
In the ordinary course of business, we evaluate dealerships for
possible disposition based on various performance criteria. During the nine
months ended September 30, 2001, we sold or otherwise disposed of assets from
ten of our dealership franchises which contributed approximately $41.7 million
in revenues in the first nine months of 2001. Proceeds, net of disposal costs,
from these dispositions were approximately $10.4 million, resulting in a gain of
approximately $0.8 million which has been included within selling, general and
administrative expenses on the accompanying unaudited consolidated statements of
income for the nine months ended September 30, 2001.
3. Inventories
Inventories consist of the following:
December 31, September 30,
2000 2001
------------ -------------
New vehicles $ 591,583 $ 466,107
Used vehicles 116,836 118,531
Parts and accessories 48,916 46,287
Other 16,450 23,837
---------- ------------
Total $ 773,785 $ 654,762
========== ============
10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Property and Equipment
Property and equipment is comprised of the following:
December 31, September 30,
2000 2001
------------ -------------
Land $ 53 $ 7,392
Building and improvements 25,771 30,313
Office equipment and fixtures 23,599 25,962
Parts and service equipment 20,132 20,773
Company vehicles 5,812 6,678
Construction in progress 12,244 13,772
---------- ----------
Total, at cost 87,611 104,890
Less accumulated depreciation (14,645) (19,561)
---------- ----------
Property and equipment, net $ 72,966 $ 85,329
========== ==========
In addition to the $13.8 million classified as construction in progress at
September 30, 2001, Sonic has incurred approximately $13.0 million in
construction costs during the first nine months of 2001 on facilities which are
expected to be completed and sold within one year in sale-leaseback
transactions. Accordingly, these costs have been classified in other current
assets on the accompanying unaudited consolidated balance sheet as of September
30, 2001. At December 31, 2000 Sonic had classified $5.2 million of such
construction costs in other current assets. We sold approximately $9.0 million
of completed construction projects in sale-leaseback transactions during the
nine months ended September 30, 2001. There were no material gains or losses on
these sales.
5. LONG-TERM DEBT
Revolving Facility
On June 20, 2001 we entered into a new revolving credit facility (the
"Revolving Facility") with Ford Motor Credit Company ("Ford Motor Credit"),
Chrysler Financial Company, L.L.C ("Chrysler Financial") and Toyota Motor Credit
Corporation ("Toyota Credit") with a borrowing limit of $600 million, subject to
a borrowing base calculated on the basis of our receivables, inventory and
equipment and a pledge of certain additional collateral by an affiliate of Sonic
(the borrowing base was approximately $541.6 million at September 30, 2001). The
Revolving Facility replaced our prior revolving credit facility with Ford Motor
Credit and Chrysler Financial, as lenders, which had a borrowing limit of $500
million, subject to a similar borrowing base. Of the amounts outstanding under
the Revolving Facility, $75 million bears interest at a fixed rate of 7.23%
while remaining amounts outstanding bear interest at 2.50% above LIBOR (LIBOR
was 2.63% at September 30, 2001) and will mature on October 1, 2004 (but may be
extended for a number of additional one year terms to be negotiated with Ford
Motor Credit, Chrysler Financial and Toyota Credit). The weighted average
interest rate on the Revolving Facility was 6.37% and 7.33% for the three and
nine months ended September 30, 2001, respectively. Repayments, net of
borrowings, under the Revolving Facility for the nine months ended September 30,
2001 were approximately $41.4 million. The total outstanding balance was
approximately $312.4 million as of September 30, 2001 and approximately $353.8
million as of December 31, 2000. The outstanding balance as of November 9, 2001
was approximately $333.5 million, reflecting borrowings made to finance
acquisitions completed after September 30, 2001. Additional amounts to be drawn
under the Revolving Facility are to be used for the acquisition of additional
dealerships and to provide for the general working capital needs of Sonic and
other general corporate purposes.
We agreed under the Revolving Facility not to pledge any of our assets to
any third party (with the exception of currently encumbered assets of our
dealership subsidiaries that are subject to previous pledges or liens). In
addition, the Revolving Facility contains certain negative covenants, including
covenants restricting or prohibiting the payment of dividends, capital
expenditures and material dispositions of assets as well as other customary
covenants and default provisions. Financial covenants include specified ratios
as follows:
. current assets to current liabilities (at least 1.23:1),
. earnings before interest, taxes, depreciation and amortization ("EBITDA")
and rent less capital expenditures to fixed charges (at least 1.4:1),
. EBITDA to interest expense (at least 2:1) and
. total adjusted debt to EBITDA (no greater than 2.25:1).
11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. LONG-TERM DEBT - (Continued)
In addition, the loss of voting control over Sonic by Bruton Smith,
Chairman and Chief Executive Officer, Scott Smith, President and Chief Operating
Officer, and their spouses or immediate family members or the failure by Sonic,
with certain exceptions, to own all the outstanding equity, membership or
partnership interests in its dealership subsidiaries will constitute an event of
default under the Revolving Facility. Sonic is in compliance with all
restrictive covenants as of September 30, 2001.
Mortgage Facility
We currently have a revolving real estate acquisition and construction
line of credit (the "Construction Loan") and a related mortgage refinancing
facility (the "Permanent Loan" and collectively with the Construction Loan, the
"Mortgage Facility") with Ford Motor Credit. Under the Construction Loan, our
dealership development subsidiaries can borrow up to $50.0 million to finance
land acquisition and dealership construction costs. Advances can be made under
the Construction Loan until December 2003. All advances will mature on June 22,
2005, bear interest at 2.25% above LIBOR and are secured by Sonic's guarantee
and a lien on all of the borrowing subsidiaries' real estate and other assets.
Borrowings, net of repayments, under the Construction Loan for the nine months
ended September 30, 2001 were approximately $1.4 million and were primarily used
in construction of dealership facilities. The total outstanding balance under
the Construction Loan was approximately $5.9 million as of September 30, 2001
and approximately $4.6 million as of December 31, 2000.
Under the Permanent Loan, we can refinance up to $50.0 million in
advances under the Construction Loan once the projects are completed and can
finance real estate acquisition costs to the extent these costs were not
previously financed under the Construction Loan. Advances can be made under the
Permanent Loan until June 2005. All advances under the Permanent Loan mature on
June 22, 2010, bear interest at 2.00% above LIBOR and are secured by the same
collateral given under the Construction Loan. Borrowings under the Permanent
Loan for the nine months ended September 30, 2001 were approximately $4.8
million and were used to finance the acquisition of real estate. The total
outstanding balance as of September 30, 2001 was approximately $4.8 million. No
balances were outstanding as of December 31, 2000.
The Mortgage Facility allows us to borrow up to $100 million in the
aggregate under the Construction Loan and the Permanent Loan. The Mortgage
Facility is not cross-collateralized with the Revolving Facility; however, a
default under one will cause a default under the other. Among other customary
covenants, the borrowing subsidiaries under the Mortgage Facility agreed not to
incur any other liens on their property (except for existing encumbrances on
property acquired) and not to transfer their property or more than 20% of their
ownership interests to any third party. In addition, the loss of voting control
by Bruton Smith, Scott Smith and their spouses or immediate family members, with
certain exceptions, will result in an event of default under the Mortgage
Facility. Sonic was in compliance with all restrictive covenants as of September
30, 2001.
The Senior Subordinated Notes
We currently have an aggregate principal balance of $125 million in
senior subordinated notes outstanding which mature on August 1, 2008 and bear
interest at a stated rate of 11.0%. The notes are unsecured and are redeemable
at our option after August 1, 2003. Interest payments are due semi-annually on
August 1 and February 1. The notes are subordinated to all of our present and
future senior indebtedness, including the Revolving Facility. Redemption prices
during the 12 month periods beginning August 1 are 105.500% in 2003, 103.667% in
2004, 101.833% in 2005 and 100% thereafter.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited circumstances
(for example, floor plan indebtedness). We have also agreed to certain other
limitations or prohibitions concerning the incurrence of other indebtedness,
capital stock, guaranties, asset sales, investments, cash dividends to
shareholders, distributions and redemptions. We are in compliance with all
restrictive covenants as of September 30, 2001.
On November 8, 2001, we priced $75 million aggregate principal amount
of 11% senior subordinated notes due in 2008. Upon closing, we expect to use the
net proceeds from the offering to refinance a portion of our Revolving Facility.
These amounts may be subsequently borrowed and utilized to finance acquisitions
and other general corporate purposes.
Subsidiary Guarantees
Balances outstanding under Sonic's Revolving Facility and $125 million
senior subordinated notes are guaranteed by all of Sonic's operating
subsidiaries. These guarantees are full and unconditional and joint and several.
The parent company has no independent assets or operations, and subsidiaries of
the parent that are not subsidiary guarantors are minor.
12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. RELATED PARTIES
Registration Rights Agreement
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford,
Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a
Registration Rights Agreement dated as of September 30, 1997 with Sonic
Financial Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan
(collectively, the "Class B Registration Rights Holders"). SFC currently owns
8,881,250 shares of Class B common stock; Bruton Smith, 2,171,250 shares; Scott
Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the "Egan
Group"), 20,625 shares, all of which are covered by the Registration Rights
Agreement. The Egan Group also owns certain shares of Class A common stock to
which the Registration Rights Agreement applies. If, among other things provided
in Sonic's charter, offers and sales of shares of Class B common stock are
registered with the Securities and Exchange Commission, then such shares will
automatically convert into a like number of shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights permit
them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith.
Payable to Company's Chairman
Sonic has a note payable to Mr. Smith in the amount of $5.5 million (the
"Subordinated Smith Loan"). The Subordinated Smith Loan bears interest at Bank
of America's announced prime rate plus 0.5% (prime rate was 6.0% at September
30, 2001) and has a stated maturity date of November 30, 2000. Under the terms
of certain subordination agreements currently in effect, however, all amounts
owed by Sonic to Mr. Smith under the Subordinated Smith Loan are to be paid only
after all amounts owed by Sonic to Ford Motor Credit under the Revolving
Facility, Sonic's floor plan financing facility with Ford Motor Credit and
Sonic's senior subordinated notes are fully paid in cash. Accordingly, the
Subordinated Smith Loan has been classified as non-current on the accompanying
consolidated balance sheets.
7. Capital Structure and Per Share Data
Preferred Stock - Sonic has 3 million shares of preferred stock authorized
with such designations, rights and preferences as may be determined from time to
time by the Board of Directors. The Board of Directors has designated 300,000
shares of preferred stock as Class A convertible preferred stock, par value
$0.10 per share (the "Preferred Stock") which is divided into 100,000 shares of
Series I Preferred Stock, 100,000 shares of Series II Preferred Stock, and
100,000 shares of Series III Preferred Stock. As of September 30, 2001 there
were no shares issued and outstanding.
Common Stock - Sonic has two classes of common stock. Sonic has authorized
100 million shares of Class A common stock at a par value of 0.01 per share.
Class A common stock entitles its holder to one vote per share. Sonic had
33,291,933 and 34,535,196 shares of Class A common stock issued at December 31,
2000 and September 30, 2001, respectively. Of these issued shares, there were
29,715,570 and 28,204,932 shares outstanding at December 31, 2000 and September
30, 2001, respectively. Sonic has also authorized 30 million shares of Class B
common stock at a par value of $.01 per share. Class B common stock entitles its
holder to ten votes per share, except in certain circumstances. Each share of
Class B common stock is convertible into one share of Class A common stock
either upon voluntary conversion at the option of the holder, or automatically
upon the occurrence of certain events, as provided in Sonic's charter. Sonic had
12,250,000 and 12,029,375 shares of Class B common stock issued and outstanding
at December 31, 2000 and September 30, 2001, respectively.
Treasury Stock/Share Repurchase Program - The Board of Directors has
authorized Sonic to expend up to $100 million to repurchase shares of Class A
common stock or redeem securities convertible into Class A common stock. As of
September 30, 2001 Sonic had repurchased a total of 6,330,264 shares of Class A
common stock for approximately $59.4 million and had also redeemed 13,801.5
shares of Class A convertible preferred stock at a total cost of approximately
$13.8 million.
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 tables illustrate the dilutive effect
of such items on net income per share.
13
For the nine months ended For the nine months ended
September 30, 2000 September 30, 2001
----------------------------------- ---------------------------------
Per-share Per-share
Income Shares amount Income Shares amount
-------- ---------- ----------- -------- ---------- -----------
(Dollars and Shares in thousands (Dollars and Shares in thousands
except per share amounts) except per share amounts
Basic Net Income Per Share $ 61,881 42,584 $ 1.45 $ 58,087 40,591 $ 1.43
==== ====
Effect of Dilutive Securities:
Stock compensation plans - 549 - 894
Warrants - 35 - 18
Convertible Preferred Stock - 1,089 - 8
----------- ------- --------- --------
Diluted Net Income Per Share $ 61,881 44,257 $ 1.40 $ 58,087 41,511 $ 1.40
=========== ======= ======== ========= ======== =========
For the three months ended For the three months ended
September 30, 2000 September 30, 2001
----------------------------------- ---------------------------------
Per-share Per-share
Income Shares amount Income Shares amount
-------- ---------- ----------- -------- ---------- -----------
(Dollars and Shares in thousands (Dollars and Shares in thousands
except per share amounts) except per share amounts
Basic Net Income Per Share $ 22,059 42,693 $ 0.52 $ 22,118 40,449 $ 0.55
==== ====
Effect of Dilutive Securities
Stock compensation plans - 644 - 1,544
Warrants - 39 - 1
Convertible Preferred Stock - 195 - -
-------- -------- --------- --------
Diluted Net Income Per Share $ 22,059 43,571 $ 0.51 $ 22,118 41,994 $ 0.53
======== ======== ========= ========= ======== ====
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.
Overview
We are the second largest automotive retailer in the United States, as
measured by total revenue, operating 155 dealership franchises and 29 collision
repair centers throughout the United States as of November 12, 2001. We own and
operate franchises for 29 different brands of cars and light trucks, providing
comprehensive services including sales of both new and used cars and light
trucks, replacement parts and vehicle maintenance, warranty, paint and repair
services. We also arrange extended warranty contracts and financing and
insurance for our automotive customers.
The following table depicts the breakdown of our new vehicle revenues by
brand for the three and nine months ended September 30, 2001 compared to the
three and nine months ended September 30, 2000:
Percentage of New Percentage of New
Vehicle Revenues for the Vehicle Revenues for the
Three Months Ended Nine Months Ended
September 30 September 30,
2000 2001 2000 2001
------ ------ ------ ------
Brand
Ford................. 12.8% 18.9% 13.8% 18.8%
Honda................ 15.3% 13.0% 14.6% 13.1%
Toyota............... 8.6% 12.1% 8.5% 11.1%
BMW.................. 10.1% 10.5% 10.1% 11.1%
General Motors (1)... 10.8% 10.8% 10.9% 10.8%
Chrysler (2)......... 12.6% 8.2% 12.3% 8.6%
Nissan............... 6.6% 5.2% 6.4% 5.3%
Lexus................ 5.5% 5.1% 5.0% 5.3%
Other (3)............ 17.7% 16.2% 18.4% 15.9%
----- ----- ----- -----
Total................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
(1) Includes Buick, Cadillac, Chevrolet, GMC, Oldsmobile and Pontiac
(2) Includes Chrysler, Dodge, Jeep and Plymouth
(3) Includes Acura, Audi, Hyundai, Infiniti, Isuzu, KIA, Land Rover,
Lincoln, Mercedes, Mercury, Mitsubishi, Porsche, Subaru,
Volkswagen and Volvo
New vehicle revenues include both the sale and lease of new vehicles. Used
vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include parts
and services revenues, fees and commissions for arranging financing and
insurance and sales of third party extended warranties for vehicles. In
connection with vehicle financing contracts, we receive a finance fee from the
lender for originating the loan. If, within 90 days of origination, the customer
pays off the loans through refinancing or selling/trading in the vehicle or
defaults on the loan, the finance company will assess a charge (a "chargeback")
for a portion of the original commission. The amount of the chargeback depends
on how long the related loan was outstanding. As a result, we have established
reserves based on our historical chargeback experience. We also sell warranties
provided by third-party vendors, and recognize a commission at the time of sale.
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
available credit. These factors contributed to a significant decline in vehicle
sales, primarily of domestic brands during the first nine months of 2001 as
compared to the same period last year. On a same store basis, new vehicle
revenues declined by approximately 8.0% in the first nine months of 2001
compared to the same period last year, and used vehicle revenues declined by
approximately 11.2% compared to the same period last year. New and used
vehicle sales substantially slowed immediately following the terrorist attacks
of September 11, 2001. In response, certain manufacturers, especially of
domestic brands, have introduced incentive programs, which have contributed to a
significant increase in the pace of new vehicle sales in October. In addition,
we have seen an increase in used vehicle sales in October as well as an increase
in sales of brands of new vehicles whose manufacturers have not offered similar
incentive programs. We are not able to determine how long the manufacturers
will continue to offer these aggressive incentive programs or how long the
overall increase in demand will continue, but expect that, absent these
incentive programs, vehicle sales may begin to slow again in November and
December and continue slowing into 2002.
While the automotive retailing business is cyclical, we sell several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include our parts, service and collision
repair businesses, none of which are dependent upon near-term new vehicle sales
volume.
Our cost of sales and profitability are also affected by the allocations of
new vehicles that our dealerships receive from manufacturers. When we do not
receive allocations of new vehicle models adequate to meet customer demand, we
may purchase additional vehicles from other dealers at a premium to the
manufacturer's invoice, reducing the gross margin realized on the sales of such
vehicles. In addition, we follow a
15
disciplined approach in selling vehicles to other dealers and wholesalers when
the vehicles have been in our inventory longer than the guidelines set by us.
Such sales are frequently at or below cost and, therefore, reduce our overall
gross margin on vehicle sales.
Salary expense, employee benefits costs, facility rent and advertising
expenses comprise the majority of our selling, general and administrative
expenses. Approximately 61.8% of our selling, general and administrative
expenses for the nine months ended September 30, 2001 were variable. We are able
to adjust these expenses as the operating or economic environment impacting our
dealerships changes. We manage these variable expenses, such as advertising
(approximately 7.3% of selling, general and administrative expenses) and non-
salaried sales compensation (approximately 48.4%), so that they are generally
related to vehicle sales and can be adjusted in response to changes in vehicle
sales volume. In addition, management compensation is tied to individual
dealership profitability and stock price appreciation through stock options.
Interest expense fluctuates based primarily on the level of the inventory
of new vehicles held at our dealerships, substantially all of which is financed
through floor plan financing, as well as the amount of indebtedness incurred for
acquisitions. Our floor plan expenses are substantially offset by amounts
received from manufacturers, in the form of floor plan inventory incentives.
These payments are credited against our cost of sales. We received approximately
$24.9 million in these manufacturer inventory incentives during the nine months
ended September 30, 2001 and approximately $8.5 million during the quarter ended
September 30, 2001. Netting these incentives against floorplan interest expense
would have resulted in an effective borrowing rate under our floor plan
facilities of approximately 1.1% for the nine months ended September 30, 2001
and an effective rate of zero for the quarter ended September 30, 2001.
Our business is fundamentally managed based on individual dealership
operating performance. Each of our dealerships has similar economic and
operating characteristics. Each dealership sells similar products and services
(new and used vehicles, parts, service and collision repair services), uses
similar processes in selling its products and services, and sells its products
and services to similar classes of customers. As a result, we have aggregated
our dealerships into a single operating segment for purposes of reporting
financial condition and results of operations.
We have accounted for all of our dealership acquisitions using the purchase
method of accounting and, as a result, we do not include in our financial
statements the results of operations of these dealerships prior to the date they
were acquired. Our Unaudited Consolidated Financial Statements discussed below
reflect the results of operations, financial position and cash flows of each of
our dealerships acquired prior to September 30, 2001. As a result of the effects
of our acquisitions, the historical unaudited consolidated financial information
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is not necessarily indicative of the results of
operations, financial position and cash flows which would have resulted had such
acquisitions occurred at the beginning of the periods presented, nor is it
indicative of future results of operations, financial position and cash flows.
Results of Operations
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in our Unaudited
Consolidated Statements of Income.
Percentage of Percentage of
Total Revenues for the Total Revenues for the
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
------ ------ ------ ------
Revenues:
New vehicle revenues....................... 57.9% 58.7% 58.2% 58.3%
Used vehicle revenues (retail)............. 21.1% 19.3% 20.9% 19.7%
Wholesale vehicle revenues................. 7.0% 6.3% 7.0% 6.7%
Parts, service and collision repair........ 11.2% 12.7% 11.2% 12.3%
Finance, insurance and other............... 2.8% 3.0% 2.7% 3.0%
----- ----- ----- -----
Total revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 85.7% 85.0% 85.8% 85.3%
----- ----- ----- -----
Gross profit.................................. 14.3% 15.0% 14.2% 14.7%
Selling, general and administrative expenses.. 10.3% 11.3% 10.2% 11.1%
Depreciation.................................. 0.1% 0.1% 0.1% 0.1%
Goodwill amortization......................... 0.3% 0.3% 0.3% 0.3%
----- ----- ----- -----
Operating income.............................. 3.6% 3.3% 3.6% 3.2%
Interest expense, floorplan................... 0.7% 0.5% 0.7% 0.6%
Interest expense, other....................... 0.7% 0.5% 0.7% 0.6%
----- ----- ----- -----
Income before income taxes.................... 2.2% 2.3% 2.2% 2.0%
Income tax expense............................ 0.8% 0.9% 0.9% 0.8%
----- ----- ----- -----
Net Income.................................... 1.4% 1.4% 1.3% 1.2%
===== ===== ===== =====
Revenues
In the third quarter of 2001, total revenues decreased $28.0 million, or
1.8%, over the same period last year, reflecting decreases in revenues from the
sale of new and used vehicles, which were partially offset by increases in
revenues from parts, service, collision repair and finance
16
and insurance. Revenues grew in most of these areas in the first nine months of
2001, causing total revenues to increase $139.8 million, or 3.0%, over the same
period last year. Dealerships acquired in 2000 and 2001, net of dealerships
disposed, accounted for approximately $123.0 million of increased revenues in
the third quarter and approximately $451.2 million of the increases in the first
nine months of 2001. These increases were offset by declines in revenues from
dealerships owned longer than one year of approximately $151.0 million in the
third quarter of 2001 compared to the same period last year, and $311.3 million
in the first nine months of 2001 compared to the same period last year.
New Vehicles: Revenues from the sale of new vehicles decreased
approximately $4.2 million, or 0.5%, in the third quarter of 2001 compared to
the same period last year, but increased approximately $87.4 million, or 3.3%,
in the first nine months of 2001 compared to the same period last year. The
average selling price of new vehicles increased 3.4% in both the third quarter
and first nine months of 2001, primarily as a result of a shift in mix to higher
priced import brands.
The increase in average selling price in the third quarter was offset by a
decline in unit sales of 3.7%, or 1,342 units, reflecting an increase of 3,551
units from dealership acquired, net of dealerships disposed, but a decrease of
4,893 units from dealerships owned longer than one year. Of this decrease,
approximately 53% occurred within the month of September 2001, compared with the
same period last year. The decrease was also largely caused by decreased sales
of domestic brands, which accounted for approximately 58% of the decrease, as
well as weak economic conditions in our Northern California markets, which
accounted for approximately 41% of the decrease.
Unit sales in the first nine months of 2001 declined only 0.1% compared to
the first nine months of 2000. Dealerships acquired contributed 12,129 units,
net of dealership disposed, in the first nine months of 2001, which was offset
by a decline of 12,228 units from dealerships owned longer than one year. This
decline was primarily isolated to sales of domestic brands, which are generally
more sensitive to weaker economic conditions than import brands. Sales of
domestic brands accounted for approximately 74% of the total decline in units
from stores owned longer than one year. The decline was also largely impacted
by weak economic conditions in Northern California, where revenues declined
approximately 14% over the same period last year.
Used Vehicles: Revenues from retail sales of used vehicles decreased
approximately 9.9% in the third quarter of 2001 compared to the same period last
year, and approximately 2.6% in the first nine months of 2001 compared to the
same period last year. The decreases reflect decreases in both unit sales, which
decreased 6.4% in the third quarter of 2001 and 2.0% in the first nine months of
2001, compared to the same periods last year, and decreases in average selling
price, which decreased approximately 3.7% in the third quarter of 2001 and 0.7%
in the first nine months of 2001, compared to the same periods last year. The
decrease in unit sales in both the third quarter and first nine months of 2001
resulted from dealerships owned longer than one year, which decreased by 2,485
units in the third quarter of 2001, and 6,704 units in the first nine months of
2001, compared to the same periods last year. This was offset by increases in
unit sales from dealerships acquired, which contributed 1,134 units in the third
quarter and 5,499 units in the first nine months, net of dealerships disposed,
compared to the same periods last year. The decline in unit sales from
dealerships owned longer than one year was experienced primarily by dealerships
in our Northern California market in which used unit sales declined
approximately 20.7% in the third quarter of 2001. Slow used vehicle revenues
sales in September comprised approximately 45.0% of the decline in third quarter
revenues from dealerships owned longer than one year.
Wholesale Vehicles: Wholesale revenues decreased 11.4% in the third
quarter and 1.2% in the first nine months of 2001 compared to the same periods
last year. The majority of these decreases resulted from decreases in average
price per unit of approximately 12.5% in the quarter and 2.0% in the first nine
months, compared to the same periods last year, primarily caused by the declines
in wholesale values of used units in the overall wholesale market that were more
rapid than last year. The decreases in average price per unit were partially
offset by increases in unit sales of approximately 1.3% in the third quarter and
0.9% in the first nine months compared to the same periods last year.
Dealerships acquired contributed 2,461 units, net of dealerships disposed, in
the third quarter of 2001, and 5,450 units, net of dealerships disposed, in the
first nine months of 2001. These increases were offset by declines in wholesale
units from dealerships owned longer than one year of 2,212 in the third quarter
of 2001 and 4,994 in the first nine months of 2001, compared to the same periods
last year.
Fixed Operations: Revenues from parts, service and collision repair
increased approximately 10.8% in the third quarter of 2001, and approximately
13.1% in the first nine months of 2001, compared to the same periods last year.
The majority of these increases resulted from dealership acquisitions, net of
dealership dispositions, which accounted for approximately 69.8% of the increase
in the third quarter of 2001 and approximately 69.5% in the first nine months of
2001. Parts, service and collision repair revenues from dealerships owned
longer than one year increased approximately 3.5% in the third quarter of 2001
over the same period last year, and approximately 4.3% in the first nine months
of 2001 over the same period last year, resulting in part from investments in
real estate and construction projects which allowed us to increase our overall
service and parts capacity.
Finance and Insurance: Finance and insurance revenue increased
approximately 9.9% in the third quarter of 2001 compared with the same period
last year, and approximately 12.8% in the first nine months of 2001 compared
with the same period last year. Approximately 129.2% of the increase in the
third quarter and approximately 82.6% of the increase in the first nine months
resulted from dealership acquisitions, net of dealership dispositions. Finance
and insurance revenues per vehicle increased approximately 11.8% in the third
quarter of 2001 and approximately 12.4% in the first nine months of 2001,
compared to the same periods last year. In addition, despite decreases in new
vehicle revenues from dealerships owned longer than one year of approximately
10.2% in the third quarter and approximately 8.0% in the first nine months of
2001, compared to the same periods last year, finance and insurance revenues
from those dealerships decreased only 2.0% in the third quarter and increased
2.1% in the first nine months, reflecting increases in finance and insurance
revenues per vehicle of 13.6% in the third quarter and 16.2% in the first nine
months. Excluding our Northern California market from dealerships owned longer
than one year, finance and insurance revenues increased by 2.3% for the third
quarter 2001 over last year. These increases results from management's
continued focus on improving training and development programs for finance and
insurance sales people.
17
Gross profit and gross margins
Gross profit increased 2.7% in the third quarter of 2001 compared to the
same period last year, and approximately 6.5% in the first nine months of 2001
compared to the same period last year. The increases resulted primarily from
the additional revenues contributed by dealership acquisitions, net of
dealership dispositions, offset by declines in gross profit from dealerships
owned longer than one year of approximately 4.4% in the third quarter of 2001
and 2.0% in the first nine months of 2001. Gross profits as a percentage of
revenues ("gross margins") increased to 15.0% in the third quarter of 2001 and
14.7% in the first nine months of 2001, from 14.3% in the third quarter of 2000
and 14.2% in the first nine months of 2000, despite declines in gross margins
from retail vehicle sales resulting from weaker economic conditions. The
increases in overall gross margins were primarily driven by increases in the
percentage of revenues contributed by parts, service, collision repair services
and finance and insurance products, which earn higher margins than vehicles
sales, as well as increases in gross margins earned on those products. Parts,
service and collision repair revenues as a percentage of total revenues
increased to 12.6% in the third quarter of 2001, from 11.1% in the third quarter
of 2000, and to 12.2% in the first nine months of 2001 compared to 11.2% in the
first nine months of 2000, reflecting investments in real estate and
construction projects which allowed us to increase our overall service and parts
capacity. Gross margins earned on parts, service, collision repair and finance
and insurance products increased to 53.8% in the third quarter of 2001 from
52.9% in the third quarter of 2000, and to 53.6% in the first nine months of
2001 from 52.3% in the first nine months of 2000, reflecting management's
increasing emphasis on training and development and the implementation of best
business practices, including variable pricing structures and expense controls.
The following graph depicts our mix of revenue and gross profit for the
third quarter of 2001 compared to the third quarter of 2000 and for the first
nine months of 2001 compared to the first nine months of 2000:
Part Service Finance
New Used and and
Vehicles Vehicles Collision Repair Insurance
Revenue 58.0% 28.0% 11.2% 2.8% Q3 2000
Gross Profit 33.3% 15.1% 34.8% 16.8%
Revenue 58.7% 25.7% 12.5% 3.1% Q3 2001
Gross Profit 31.0% 12.8% 38.7% 17.5%
Revenue 58.2% 27.9% 11.2% 2.7% YTD 2000
Gross Profit 33.6% 15.4% 34.9% 16.1%
Revenue 58.3% 26.5% 12.3% 2.9% YTD 2001
Gross Profit 31.0% 13.7% 38.2% 17.1%
Selling, general and administrative expenses
Selling, general and administrative expenses increased 6.5% in the third
quarter of 2001 and 11.2% in the first nine months of 2001, compared to the same
periods in the prior year. Approximately 94.6% of the increase in the third
quarter, and approximately 82.1% of the increase in the first nine months,
resulted from dealership acquisitions, net of dealerships dispositions. As a
percentage of gross profits, selling, general and administrative expenses
increased to 75.0% in the third quarter of 2001 from 72.3% in the third quarter
of 2000, and to 75.4% in the first nine months of 2001 from 72.2% in the first
nine months of 2000. The majority of these increases are attributable to fixed
expenses, which increased to 28.6% in the third quarter of 2001 from 26.0% in
the third quarter of 2000 and to 28.8% in the first nine months of 2001 from
25.8% in the first nine months of 2000, as compared to variable expenses which
increased only slightly to 46.4% in the third quarter of 2001 from 46.3% in the
third quarter of 2000 and to 46.7% in the first nine months of 2001 from 46.4%
in the first nine months of 2000. Fixed expenses increased largely as a result
of investments in real estate and completed construction projects sold in sale-
leaseback transactions which resulted in increases in rent expense of 16.9% in
the third quarter and 21.7% in the first nine months, and as a result of
increases in health care costs, which more than doubled in both the third
quarter and first nine months of 2001 as compared to the same periods last year.
18
Depreciation and amortization
Depreciation expense, excluding goodwill amortization, increased
approximately 5.4% in the third quarter of 2001 and 14.9% in the first nine
months of 2001, compared to the same periods in the prior year. The balance of
gross property and equipment, excluding land and construction in process,
increased approximately $2.0 million in the third quarter 2001 and $8.5 million
in the first nine months of the 2001. The third quarter increase primarily
resulted from $2.8 million in capital expenditures partially offset by $0.8
million in property and equipment acquired through dealership acquisitions, net
of disposals and other adjustments. The increase in the first nine months of the
year primarily resulted from $7.3 million in capital expenditures and $1.2
million in property and equipment acquired through dealership acquisitions, net
of disposals and other adjustments. As a percentage of total revenues,
depreciation expense was 0.1% in both the third quarter and first nine months of
2001 and 2000. Goodwill amortization expense increased 10.3% in the third
quarter of 2001 and 10.5% in the first nine months of 2001, compared to the same
periods in the prior year, as a result of $62.9 million in goodwill acquired
since the third quarter of 2000, excluding $2.2 million acquired subsequent to
July 1, 2001 which is not amortizable in accordance with SFAS No. 142: Goodwill
and Other Intangible Assets.
Interest expense, floor plan
Interest expense, floor plan decreased by $4.1 million, or 35.4%, in the
third quarter of 2001 and $3.8 million, or 11.2%, in the first nine months of
2001, compared to the same periods last year. The changes in interest expense
floor plan reflected decreases from stores owned longer than one year of
approximately $4.2 million, or 40.0%, in the third quarter of 2001, and
approximately $6.5 million, or 21.2%, in the first nine months of 2001 compared
with the same periods last year. As a percentage of total revenues, floor plan
interest decreased to 0.5% in the third quarter of 2001 from 0.7% in the third
quarter of 2000, and decreased to 0.6% in the first nine months of 2001 from
0.7% in the first nine months of 2000. The decreases in floor plan interest
expense during the third quarter resulted primarily from decreases in interest
rates from the same period last year. Of the $4.2 million decrease in interest
expense from stores owned longer than one year during the third quarter of 2001,
an estimated $3.4 million resulted from decreases in interest rates. The
remainder of the decrease was due to a decrease in average floor plan balances
to approximately $460.9 million in the third quarter 2001 from approximately
$521.7 million in the third quarter 2000 and $497.8 million in the first nine
months of 2001 from approximately $508.3 million in the first nine months of
2000.
Interest expense, other
Interest expense, other decreased $2.2 million in the third quarter of 2001
compared to the same period last year, and $4.2 million in the first nine months
of 2001 compared to the same period last year. These decreases primarily
resulted from decreases of approximately $2.5 million in the third quarter and
approximately $4.0 million in the first nine months resulting from declines in
the weighted average interest rate incurred under our $600 million revolving
credit to approximately 6.4% in the third quarter of 2001 and approximately 7.3%
in the first nine months of 2001 from approximately 9.2% in the third quarter of
2000 and approximately 9.0% in first nine months of 2000.
Liquidity and Capital Resources
Our principal needs for capital resources are to finance acquisitions and
fund debt service and working capital requirements. Historically, we have relied
on internally generated cash flows from operations, borrowings under our various
credit facilities and offerings of debt and equity securities to finance our
operations and expansion.
Cash from operations:
During the first nine months of 2001, net cash provided by operating
activities was approximately $103.3 million compared to $56.4 million in 2000.
The increase was primarily due to a decrease in receivables of approximately
$21.6 million in the first nine months of 2001 compared to an increase of
approximately $26.6 million in the first nine months of 2000.
Cash flows from operations include the effect of vehicle purchases and
related floor plan financing. We currently have standardized floor plan credit
facilities with Chrysler Financial Company, LLC ("Chrysler Financial"), General
Motors Acceptance Corporation ("GMAC"), Ford Motor Credit Company ("Ford Motor
Credit") and Toyota Motor Credit Corporation ("Toyota Credit"). In general, the
floor plan facility with Chrysler Financial provides up to $750 million in floor
plan financing to dealerships with franchises issued by DaimlerChrysler AG or
any of its affiliates ("Chrysler"), the floor plan facility with GMAC provides
floor plan financing to dealerships with franchises issued by General Motors
Corporation or any of its affiliates ("GM"), the floor plan facility with Ford
Motor Credit provides up to $650 million in floor plan financing to dealerships
with franchises issued by Ford Motor Company or any of its affiliates ("Ford"),
and the floor plan facility with Toyota Credit provides up to $100 million in
floor plan financing to dealerships with franchises issued by Toyota Motor
Corporation or any of its affiliates ("Toyota"). Prior to an agreement dated
June 20, 2001 between us, Ford Motor Credit, Chrysler Financial and Toyota
Credit (the "Wholesale Agreement"), floor plan financing to dealerships with
franchises other than those issued by Chrysler, GM, Ford or Toyota had been
provided by Ford Motor Credit. In accordance with the Wholesale Agreement, we
agreed that, beginning June 20, 2001, floor plan financing to these dealerships
would be provided 41.67% by Ford Motor Credit, 41.67% by Chrysler Financial and
16.67% by Toyota Credit, subject to the borrowing limits discussed above. As of
September 30, 2001, there was an aggregate of approximately $115.6 million
outstanding under the Chrysler Financial floor plan facility, $61.8 million
outstanding under the GMAC floor plan facility, $368.4 million outstanding under
the Ford Motor Credit floor plan facility, and $11.5 million outstanding under
the Toyota Credit floor plan facility. Balances outstanding under new vehicle
floor plan indebtedness generally exceed the related inventory balances, which
are generally reduced by purchase discounts from manufacturers that are not
reflected in the related floor plan liability. These manufacturer purchase
discounts are standard in the automotive retail industry, typically occur on all
new vehicle purchases and are not used to offset the related floor plan
liability. These discounts are aggregated and generally paid to us by the
manufacturers on a quarterly basis.
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Amounts outstanding under the Chrysler Financial and Toyota Credit floor
plan facilities bear interest at 1.25% above LIBOR (LIBOR was 2.63% at September
30, 2001). Amounts outstanding under the Ford Motor Credit and GMAC floor plan
facilities bear interest at the prime rate (prime was 6.0% at September 30,
2001), subject to certain incentives and other adjustments. Interest payments
under each of our floor plan facilities are due monthly, but we are not required
to make principal repayments prior to the sale of the vehicles. The underlying
notes are due when the related vehicles are sold and are collateralized by
vehicle inventories and other assets, excluding franchise agreements, of the
relevant dealership subsidiary. The floor plan facilities contain a number of
covenants, including among others, covenants restricting us with respect to the
creation of liens and changes in ownership, officers and key management
personnel. We are in compliance with all restrictive covenants as of September
30, 2001.
Investing activities:
Cash used for investing activities in the nine months ended September 30,
2001 was approximately $53.2 million, compared to $93.3 million in the same
period of 2000. Our principal investing activities include capital
expenditures, dealership acquisitions and dispositions.
Capital Expenditures: Other than construction of new dealerships and
collision repair centers, our capital expenditures generally include building
improvements and equipment for use in our dealerships. Capital expenditures in
the nine months ended September 30, 2001 were approximately $30.9 million,
compared to $58.0 million in 2000. The year over year decrease primarily
represents a decrease in expenditures for the construction and renovation of
dealerships and collision repair centers. Of the capital expenditures in 2001,
approximately $23.6 million related to the construction of new dealerships and
collision repair centers compared to $44.1 million for similar expenditures in
2000. Once completed, these new dealerships and collision repair centers are
generally sold to third parties in sale-leaseback transactions. We sold
approximately $9.0 million of completed construction projects in sale leaseback
transactions during the nine months ended September 30, 2001 There were no
material gains or losses on these sales. As of September 30, 2001, total
construction in progress was approximately $26.8 million, of which approximately
$13.0 million represented construction costs on facilities which are expected to
be completed and sold within one year in sale-leaseback transactions.
Accordingly, these costs have been classified in other current assets on the
accompanying Unaudited Consolidated Balance Sheet as of September 30, 2001. We
do not expect any significant gains or losses from these sales.
Dealership acquisitions and dispositions: During the nine months ended
September 30, 2001, we acquired five dealerships for approximately $51.9 million
in cash. The purchases were financed with a combination of cash borrowed under
our Revolving Facility and cash generated from our existing operations.
In the ordinary course of business, we evaluate dealerships for possible
disposition based on various performance criteria. During the nine months ended
September 30, 2001, we sold or otherwise disposed of assets from ten of our
dealership franchises which contributed approximately $41.7 million in revenues
in 2001. Proceeds, net of disposal costs, were approximately $10.4 million,
resulting in a gain of approximately $0.8 million for the nine months ended
September 30, 2001.
In connection with General Motor's decision to discontinue the Oldsmobile
brand, we have entered into termination agreements with General Motors to
terminate all of our existing Oldsmobile franchises. As of September 30, 2001,
we had terminated one of our Oldsmobile franchises and have terminated two
additional Oldsmobile franchises subsequent to September 30, 2001. In
accordance with the termination agreements, we may terminate our remaining
Oldsmobile franchises with 30 days notice any time between now and 2005.
In connection with DaimlerChrysler's decision to discontinue the Plymouth
brand, we have entered into termination agreements with DaimlerChrysler to
terminate all our existing Plymouth franchises effective October 1, 2001.
Financing activities:
Cash used for financing activities was approximately $56.0 million in the
first nine months of 2001 compared to cash provided by financing activities of
$43.5 million in 2000. Cash used for financing activities in the first nine
months of 2001 primarily related to net payments on our revolving credit
facilities of $35.2 million and repurchases of stock under our stock repurchase
program of approximately $26.5 million offset by issuances of stock under stock
compensation plans of approximately $7.7 million. Cash provided by financing
activities in the first nine months of 2000 primarily related to net borrowings
under our Revolving Facility of approximately $74.2 million, offset by
repurchases of stock under our stock repurchase program of approximately $34.7
million.
The Revolving Facility: On June 20, 2001 we entered into a new revolving
credit facility (the "Revolving Facility") with Ford Motor Credit Chrysler
Financial and Toyota Credit with a borrowing limit of $600 million, subject to a
borrowing base calculated on the basis of our receivables, inventory and
equipment and a pledge of certain additional collateral by an affiliate of Sonic
(the borrowing base was approximately $541.6 million at September 30, 2001). The
Revolving Facility replaced our prior revolving credit facility with Ford Motor
Credit and Chrysler Financial, as lenders, which had a borrowing limit of $500
million, subject to a similar borrowing base. Of the amounts outstanding under
the Revolving Facility, $75 million bears interest at a fixed rate of 7.23%
while remaining amounts outstanding bear interest at 2.50% above LIBOR (LIBOR
was 2.63% at September 28, 2001) and will mature on October 1, 2004 (but may be
extended for a number of additional one year terms to be negotiated with Ford
Motor Credit, Chrysler Financial and Toyota Credit). The weighted average
interest rate on the Revolving Facility was 6.37% and 7.33% for the three and
nine months ended September 30, 2001, respectively. Repayments, net of
borrowings, under the Revolving Facility for the nine months ended September 30,
2001 were approximately $41.4 million. The total outstanding balance was
approximately $312.4 million as of September 30, 2001 and approximately $333.5
million as of November 9, 2001, reflecting borrowings made to finance
acquisitions completed after September 30, 2001. Additional amounts to be drawn
under the Revolving Facility are to be used for the acquisition of additional
dealerships and to provide for the general working capital needs of Sonic and
other general corporate purposes.
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We agreed under the Revolving Facility not to pledge any of our assets to
any third party (with the exception of currently encumbered assets of our
dealership subsidiaries that are subject to previous pledges or liens). In
addition, the Revolving Facility contains certain negative covenants, including
covenants restricting or prohibiting the payment of dividends, capital
expenditures and material dispositions of assets as well as other customary
covenants and default provisions. Financial covenants include specified ratios
of
. current assets to current liabilities (at least 1.23:1),
. earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent, less capital expenditures, to fixed charges (at least 1.4:1),
. EBITDA to interest expense (at least 2:1) and
. total adjusted debt to EBITDA (no greater than 2.25:1).
In addition, the loss of voting control over Sonic by Bruton Smith,
Chairman and Chief Executive Office, Scott Smith, President and Chief Operating
Officer, and their spouses or immediate family members or our failure, with
certain exceptions, to own all the outstanding equity, membership or partnership
interests in our dealership subsidiaries will constitute an event of default
under the Revolving Facility. We are in compliance with all restrictive
covenants as of September 30, 2001.
The Mortgage Facility: We currently have a revolving real estate
acquisition and construction line of credit (the "Construction Loan") and a
related mortgage refinancing facility (the "Permanent Loan" and collectively
with the Construction Loan, the "Mortgage Facility") with Ford Motor Credit.
Under the Construction Loan, our dealership development subsidiaries can borrow
up to $50.0 million to finance land acquisition and dealership construction
costs. Advances can be made under the Construction Loan until December 2003.
All advances will mature on September 22, 2005, bear interest at 2.25% above
LIBOR and are secured by Sonic's guarantee and a lien on all of the borrowing
subsidiaries' real estate and other assets. Borrowings, net of repayments,
under the Construction Loan for the nine months ended September 30, 2001 were
approximately $1.4 million and were primarily used in construction of dealership
facilities. The total outstanding balance under the Construction Loan as of
September 30, 2001 was approximately $5.9 million.
Under the Permanent Loan, we can refinance up to $50.0 million in advances
under the Construction Loan once the projects are completed and can finance real
estate acquisition costs to the extent these costs were not previously financed
under the Construction Loan. Advances can be made under the Permanent Loan
until June 2005. All advances under the Permanent Loan mature on June 22, 2010,
bear interest at 2.00% above LIBOR and are secured by the same collateral given
under the Construction Loan. Borrowings under the Permanent Loan for the nine
months ended September 30, 2001 were approximately $4.8 million and were used to
finance the acquisition of real estate. The total outstanding balance as of
September 30, 2001 was approximately $4.8 million.
The Mortgage Facility allows us to borrow up to $100 million in the aggregate
under the Construction Loan and the Permanent Loan. The Mortgage Facility is
not cross-collateralized with the Revolving Facility; however, a default under
one will cause a default under the other. Among other customary covenants, the
borrowing subsidiaries under the Mortgage Facility agreed not to incur any other
liens on their property (except for existing encumbrances on property acquired)
and not to transfer their property or more than 20% of their ownership interests
to any third party. In addition, the loss of voting control by Bruton Smith,
Scott Smith and their spouses or immediate family members, with certain
exceptions, will result in an event of default under the Mortgage Facility.
Sonic was in compliance with all restrictive covenants as of September 30, 2001.
The Senior Subordinated Notes: We currently have an aggregate principal
balance of $125 million in senior subordinated notes outstanding which mature on
August 1, 2008 and bear interest at a stated rate of 11.0%. The notes are
unsecured and are redeemable at our option after August 1, 2003. Interest
payments are due semi-annually on August 1 and February 1. The notes are
subordinated to all of our present and future senior indebtedness, including the
Revolving Facility. Redemption prices during the 12 month periods beginning
August 1 are 105.500% in 2003, 103.667% in 2004, 101.833% in 2005 and 100%
thereafter.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited circumstances
(for example, floor plan indebtedness). We have also agreed to certain other
limitations or prohibitions concerning the incurrence of other indebtedness,
capital stock, guaranties, asset sales, investments, cash dividends to
shareholders, distributions and redemptions. We are in compliance with all
restrictive covenants as of September 30, 2001.
On November 8, 2001, we priced $75 million aggregate principal amount of
11% senior subordinated notes due in 2008. Upon closing, we expect to use the
net proceeds from the offering to refinance a portion of our Revolving Facility.
These amounts may be subsequently borrowed and utilized to finance acquisitions
and other general corporate purposes.
Stock Repurchase Program: Our Board of Directors has authorized us to
expend up to $100 million to repurchase shares of our Class A common stock or
redeem securities convertible into Class A common stock. As of September 30,
2001 we had repurchased a total of 6,330,264 shares of Class A common stock for
approximately $59.4 million and had also redeemed 13,801.5 shares of Class A
convertible preferred stock at a total cost of approximately $13.8 million.
Future Outlook: We believe that funds generated through future operations
and availability of borrowings under our floor plan financing (or any
replacements thereof) and other credit arrangements will be sufficient to fund
our debt service and working capital requirements and any seasonal operating
requirements, including our currently anticipated internal growth for our
existing businesses, for the foreseeable future. We expect to fund any future
acquisitions from future cash flow from operations, additional debt financing
(including the Revolving Facility) or the issuance of Class A common stock,
preferred stock or other convertible instruments.
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Acquisitions Completed Subsequent to September 30, 2001 (through November
12, 2001): Subsequent to September 30, 2001, Sonic acquired five dealerships for
approximately $74.7 million in cash financed with a combination of cash borrowed
under the Revolving Facility and cash generated from Sonic's existing
operations.
Seasonality
Our operations are subject to seasonal variations. The first and fourth
quarter generally contributes less revenue and operating profits than the second
and third quarters. Seasonality is principally caused by weather conditions and
the timing of manufacturer incentive programs and model changeovers.
Effect of New Accounting Pronouncements:
Recent Accounting Pronouncements: In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141: Business Combinations. SFAS No.
141 prohibits the pooling-of-interests method of accounting and requires the use
of the purchase method of accounting for all business combinations initiated
after June 30, 2001. In addition, SFAS 141 provides additional guidance
regarding the measurement and recognition of goodwill and other acquired
intangible assets. The provisions of this standard became effective beginning
July 1, 2001. For acquisitions after this date, we will be required to classify
certain intangible assets, such as franchise rights granted from automobile
manufacturers, as intangible assets apart from goodwill.
In July 2001, the FASB also issued SFAS No. 142: Goodwill and Other
Intangible Assets. Among other things, SFAS 142 no longer permits the
amortization of goodwill, but requires that the carrying amount of goodwill be
reviewed and reduced against operations if it is found to be impaired. This
review must be performed on at least an annual basis, but must also be performed
upon the occurrence of an event or circumstance that indicates a possible
reduction in value. SFAS 142 does require the amortization of intangible assets
other than goodwill over their useful economic lives, unless the useful economic
life is determined to be indefinite. These intangible assets are required to be
reviewed for impairment in accordance with SFAS 144: Accounting for Impairment
or Disposal of Long-Lived Assets. Intangible assets that are determined to have
an indefinite economic life may not be amortized and must be reviewed for
impairment in accordance with the terms of SFAS 142. The provisions of SFAS 142
become effective for us beginning January 1, 2002; however, goodwill and other
intangible assets determined to have an indefinite useful life acquired in
business combinations completed after June 30, 2001 will not be amortized. Early
adoption and retroactive application is not permitted. While we are currently
evaluating the provisions of SFAS 142, we have not yet determined its full
impact on our consolidated financial statements. As of December 31, 2000, the
carrying amount of goodwill was $668.8 million and represented 37.4% of total
assets and 148.3% of total stockholders' equity. As of September 30, 2001, the
carrying amount of goodwill was $689.2 million and represented 40.8% of total
assets and 140.7% of total stockholders' equity.
In August 2001, the FASB issued SFAS 144: Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 establishes a single accounting model
for assets to be disposed of by sale whether previously held and used or newly
acquired. SFAS 144 is effective for fiscal years beginning after December 15,
2001. We are currently evaluating the provisions of SFAS 144 and have not yet
determined the impact on our consolidated financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our variable rate floor plan notes facilities,
Revolving Facility borrowings and other variable rate notes expose us to risks
caused by fluctuations in the underlying interest rates. The total outstanding
balance of such instruments was approximately $1.0 billion at September 30, 2001
and approximately $918.2 million at September 30, 2000. A change of one percent
in the interest rate would have caused a change in interest expense of
approximately $7.3 million in the first nine months of 2001 and approximately
$7.0 million in the first nine months of 2000. Of the total change in interest
expense, approximately $4.6 million in the first nine months of 2001 and
approximately $4.4 million in the nine months of 2000 would have resulted from
floor plan notes payable.
Our exposure with respect to floor plan notes facilities is mitigated by
floor plan incentives received from manufacturers, which are generally based on
rates similar to those incurred under our floor plan financing arrangements. Our
floor plan interest expense in the first nine months of 2001 exceeded the
amounts we received from these manufacturer floor plan incentives by only
approximately $5.3 million. As a result, the effective rate incurred under our
floor plan financing arrangements was reduced to an annualized rate of
approximately 1.1% after considering these incentives.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
3.1 Bylaws of Sonic (as amended August 8, 2001).
10.1 Amendment to Credit Agreement and Reaffirmation of Guaranty dated
August 15, 2001 between Sonic, as Borrower, the subsidiaries of Sonic
named therein, as Guarantors, Ford Motor Credit Company ("Ford
Credit"), as Agent and Lender, Chrysler Financial Company, L.L.C., as
Lender, and Toyota Motor Credit Corporation, as Lender.
10.2 Amended and Restated Promissory Note dated August 15, 2001 executed by
Sonic in favor of Ford Credit pursuant to the Credit Agreement.
99.1 Risk Factors.
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