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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13395 SONIC AUTOMOTIVE, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-2010790 (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) 532-3320 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of November 13, 2000, there were 30,074,938 shares of Class A Common Stock and 12,250,000 shares of Class B Common Stock outstanding. 1 INDEX TO FORM 10-Q
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements (Unaudited) 3 Consolidated Statements of Income - Three-month periods ended September 30, 1999 and September 30, 2000 Consolidated Statements of Income - Nine-month periods ended September 30, 1999 and September 30, 2000 Consolidated Balance Sheets - December 31, 1999 and September 30, 2000 Consolidated Statement of Stockholders' Equity - Nine-month period ended September 30, 2000 Consolidated Statements of Cash Flows - Nine-month periods ended September 30, 1999 and September 30, 2000 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 20 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23
2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. SONIC AUTOMOTIVE, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars and shares in thousands except per share amounts) (Unaudited)
Three Months Ended September 30, 1999 2000 ------------ ------------ REVENUES: New vehicles $ 508,066 $ 924,040 Used vehicles 173,592 335,638 Wholesale vehicles 69,523 112,256 ------------ ------------ Total vehicles 751,181 1,371,934 Parts, service and collision repair 96,223 177,788 Finance & insurance and other 22,560 45,139 ------------ ------------ Total revenues 869,964 1,594,861 COST OF SALES 753,310 1,366,120 ------------ ------------ GROSS PROFIT 116,654 228,741 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 82,650 165,460 DEPRECIATION 776 1,769 GOODWILL AMORTIZATION 2,216 4,184 ------------ ------------ OPERATING INCOME 31,012 57,328 OTHER INCOME AND EXPENSE: Interest expense, floor plan 5,721 11,607 Interest expense, other 4,786 10,637 Other income 38 35 ------------ ------------ Total other expense 10,469 22,209 ------------ ------------ INCOME BEFORE INCOME TAXES 20,543 35,119 PROVISION FOR INCOME TAXES 7,960 13,060 ------------ ------------ NET INCOME $ 12,583 $ 22,059 ============ ============ BASIC NET INCOME PER SHARE $ 0.36 $ 0.52 ============ ============ WEIGHTED AVERAGE NUMBER OF BASIC SHARES OUTSTANDING 35,208 42,693 ============ ============ DILUTED NET INCOME PER SHARE $ 0.33 $ 0.51 ============ ============ WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 38,268 43,571 ============ ============
See notes to unaudited consolidated financial statements. 3 SONIC AUTOMOTIVE, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars and shares in thousands except per share amounts) (Unaudited)
Nine Months Ended September 30, 1999 2000 -------------- -------------- REVENUES: New vehicles $ 1,275,882 $ 2,682,696 Used vehicles 458,797 962,392 Wholesale vehicles 169,923 323,231 -------------- -------------- Total vehicles 1,904,602 3,968,319 Parts, service and collision repair 230,249 513,920 Finance & insurance and other 52,095 125,362 -------------- -------------- Total revenues 2,186,946 4,607,601 COST OF SALES 1,897,956 3,951,528 -------------- -------------- GROSS PROFIT 288,990 656,073 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 207,293 473,745 DEPRECIATION 1,957 4,930 GOODWILL AMORTIZATION 5,186 12,414 -------------- -------------- OPERATING INCOME 74,554 164,984 OTHER INCOME AND EXPENSE: Interest expense, floor plan 15,118 34,012 Interest expense, other 12,177 31,200 Other income 362 109 -------------- -------------- Total other expense 26,933 65,103 -------------- -------------- INCOME BEFORE INCOME TAXES 47,621 99,881 PROVISION FOR INCOME TAXES 18,250 38,000 -------------- -------------- NET INCOME $ 29,371 $ 61,881 ============== ============== BASIC NET INCOME PER SHARE $ 0.98 $ 1.45 ============== ============== WEIGHTED AVERAGE NUMBER OF BASIC SHARES OUTSTANDING 29,948 42,584 ============== ============== DILUTED NET INCOME PER SHARE $ 0.88 $ 1.40 ============== ============== WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 33,489 44,257 ============== ==============
See notes to unaudited consolidated financial statements. 4 SONIC AUTOMOTIVE, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, December 31, 2000 1999 (Unaudited) ----------------- ---------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 83,111 $ 89,813 Receivables (net of allowance for doubtful accounts of $1,506 at December 31, 1999 and $1,952 at September 30, 2000) 99,987 127,144 Inventories 630,857 661,175 Due from affiliates 4,188 92 Other current assets 17,424 55,077 ----------------- ---------------- Total current assets 835,567 933,301 PROPERTY AND EQUIPMENT, NET 63,681 72,768 GOODWILL, NET 592,670 635,797 OTHER ASSETS 9,184 12,205 ----------------- ---------------- TOTAL ASSETS $ 1,501,102 $ 1,654,071 ================= ================
See notes to unaudited consolidated financial statements. 5 SONIC AUTOMOTIVE, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2000 1999 (Unaudited) ----------------- ---------------- (dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable - floor plan $ 517,575 $ 540,950 Trade accounts payable 48,405 55,239 Accrued interest 11,605 6,581 Other accrued liabilities 72,012 87,983 Payable for acquisitions 5,925 - Current maturities of long-term debt 2,388 2,388 ----------------- ---------------- Total current liabilities 657,910 693,141 LONG-TERM DEBT 417,283 491,063 OTHER LONG-TERM LIABILITIES 3,923 3,861 PAYABLE TO THE COMPANY'S CHAIRMAN 5,500 5,500 PAYABLE TO AFFILIATES 723 - DEFERRED INCOME TAXES 8,476 13,946 INCOME TAX PAYABLE 4,714 3,256 STOCKHOLDERS' EQUITY: Preferred Stock, $.10 par, 3.0 million shares authorized; 300,000 shares designated as Class A Convertible Preferred 27,191 251 Stock, liquidation preference $1,000 per share, of which 28,159 shares are issued and outstanding at December 31, 1999 and 251 shares are issued and outstanding at September 30, 2000 Class A Common Stock, $.01 par, 100.0 million shares authorized; 29,075,437 shares issued at December 31, 1999 and 33,174,037 shares issued at September 30, 2000 291 332 Class B Common Stock, $.01 par (convertible into Class A Common Stock), 30.0 million shares authorized; 12,250,000 shares issued and 123 123 outstanding at December 31, 1999 and September 30, 2000 Paid-in capital 301,934 328,817 Retained earnings 79,392 141,273 Class A Treasury Stock, at cost (723,600 shares at December 31, 1999 and 2,853,653 at September 30, 2000) (6,358) (27,492) ----------------- ---------------- Total stockholders' equity 402,573 443,304 ----------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,501,102 $ 1,654,071 ================= ================
See notes to unaudited consolidated financial statements. 6 SONIC AUTOMOTIVE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars and shares in thousands) (Unaudited)
Preferred Class A Class B Stock Common Stock Common Stock Paid-In Retained Shares Amount Shares Amount Shares Amount Capital Earnings --------- ----------- ------------ --------------------- --------------------- ------------ BALANCE AT DECEMBER 31, 1999 28 $27,191 29,075 $291 12,250 $123 $301,934 $ 79,392 Issuance of Preferred Stock 12 11,589 - - - - - - Issuance of Common Stock - - 809 8 - - (8) - Cancellation of Common Stock - - (21) - - - (198) - Shares awarded under stock compensation plans - - 344 3 - - 2,141 - Conversion of Preferred Stock (26) (25,947) 2,967 30 - - 25,917 - Redemption of Preferred Stock (14) (12,582) - - - - (969) - Purchase of Class A Treasury Stock - - - - - - - - Net income - - - - - - - 61,881 BALANCE AT --------- ----------- ------------ ------- ------------ ------- ------------ ------------ SEPTEMBER 30, 2000 - $ 251 33,174 $332 12,250 $123 $328,817 $141,273 ========= =========== ============ ======= ============ ======= ============ ============ Total Treasury Stockholders' Stock Equity ----------- --------------- BALANCE AT DECEMBER 31, 1999 $ (6,358) $ 402,573 Issuance of Preferred Stock - 11,589 Issuance of Common Stock - - Cancellation of Common Stock - (198) Shares awarded under stock compensation plans - 2,144 Conversion of Preferred Stock - - Redemption of Preferred Stock - (13,551) Purchase of Class A Treasury Stock (21,134) (21,134) Net income - 61,881 BALANCE AT ----------- --------------- SEPTEMBER 30, 2000 $(27,492) $ 443,304 =========== ===============
See notes to unaudited consolidated financial statements. 7 SONIC AUTOMOTIVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Nine Months Ended September 30, 1999 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $29,371 $61,881 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,143 17,344 Loss on disposal of property and equipment 72 43 Changes in assets and liabilities that relate to operations: Receivables (8,747) (26,563) Inventories 30,739 16,590 Other assets (395) (5,388) Notes payable - floor plan (40,714) (18,966) Trade accounts payable and other liabilities 4,930 11,482 ----------- ----------- Total adjustments (6,972) (5,458) ----------- ----------- Net cash provided by operating activities 22,399 56,423 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired (164,306) (50,468) Purchases of property and equipment (11,171) (57,993) Proceeds from sales of property and equipment 10,594 15,199 ----------- ----------- Net cash used in investing activities (164,883) (93,262) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 159,732 75,174 Payments on long-term debt (86,014) (2,464) Public offering of common stock 85,069 - Purchases of Class A Common Stock and redemptions of Preferred Stock - (34,685) Issuance of shares under stock compensation plans 1,594 2,144 Repayments from affiliated companies 134 3,372 ----------- ----------- Net cash provided by financing activities 160,515 43,541 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 18,031 6,702 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,834 83,111 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $69,865 $89,813 =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Preferred Stock issued for acquisitions and contingent consideration $53,150 $11,589 Common stock issued for acquisitions $22,250 $ - Conversion of Preferred Stock $ - $25,947
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 our other filings with the Securities and Exchange Commission. SONIC AUTOMOTIVE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (All tables in thousands except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation -- The accompanying unaudited financial information for the three and nine months ended September 30, 1999 and 2000 has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of Sonic Automotive, Inc. ("Sonic" or "the Company") for the year ended December 31, 1999. Revenue Recognition -- Sonic records revenue when vehicles are delivered to customers, and when vehicle service work is performed. Sonic arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution. Sonic also receives commissions from the sale of credit life, accident, health and disability insurance contracts to customers. Sonic may be assessed a chargeback fee in the event of early cancellation of a loan or insurance contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution. Sonic also receives commissions from the sale of non-recourse third party extended service contracts to customers. These contracts provide for no recourse against Sonic, but instead provide that the applicable manufacturer or third party warranty company is directly liable for all warranties provided within the contract. Commission revenue from the sale of these third party extended service contracts is recorded net of estimated chargebacks at the time of sale. Commissions expense related to finance and insurance commission revenue is charged to cost of sales upon recognition of such revenue, net of estimated chargebacks. Commission expense charged to cost of sales was approximately $3.3 million and $6.7 million for the three months ended September 30, 1999 and 2000, respectively, and approximately $8.5 million and $19.8 million for the nine months ended September 30, 1999 and 2000, respectively. Goodwill -- Goodwill represents the excess purchase price over the estimated fair value of the tangible and separately measurable intangible net assets acquired. The cumulative gross amount of goodwill at December 31, 1999 was $605.1 million and at September 30, 2000 was $660.6 million. As a percentage of total assets and stockholders' equity, goodwill, net of accumulated amortization, represented 39.5% and 147.2%, respectively, at December 31, 1999, and 38.4% and 143.4%, respectively, at September 30, 2000. Generally accepted accounting principles in the United States of America require that goodwill and all other intangible assets be amortized over the period benefited. Sonic has determined that the period benefited by the goodwill will be no less than 40 years. Accordingly, Sonic is amortizing goodwill over a 40 year period. Earnings reported in periods immediately following an acquisition would be overstated if Sonic attributed a 40 year benefit to an intangible asset that should have had a shorter benefit period. In later years, Sonic would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the price paid for the businesses acquired. Earnings in later years also could be significantly affected if management then determined that the remaining balance of goodwill was impaired. Sonic periodically compares the carrying value of goodwill with the anticipated undiscounted future cash flows from operations of the businesses acquired in order to evaluate the recoverability of goodwill. Sonic has concluded that the anticipated future cash flows associated with intangible assets recognized in its acquisitions will continue indefinitely, and there is no pervasive evidence that any material portion will dissipate over a period shorter than 40 years. Sonic will incur additional goodwill in future acquisitions. 9 SONIC AUTOMOTIVE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) The Financial Accounting Standards Board recently proposed new rules relating to the accounting for business combinations and intangible assets. One aspect of the proposal would not permit goodwill to be amortized over a period in excess of 20 years; however, we cannot assure that such a rule will be adopted and, if adopted, as to the final provisions of any such rules. If such a rule is adopted, we have been advised that it would likely only affect the period over which we amortize goodwill on our future acquisitions. 2. BUSINESS ACQUISITIONS Pending Acquisitions Sonic has signed definitive agreements to acquire five dealerships for an estimated $50.3 million payable with a combination of cash , Class A convertible preferred stock, and 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 $500 million revolving line of credit with Ford Motor Credit Company ("Ford Motor Credit") and Chrysler Financial Corporation ("Chrysler Financial") (the "Revolving Facility") and with cash generated from Sonic's existing operations. These acquisitions are expected to be consummated in the fourth quarter of 2000 and first quarter of 2001. Acquisitions Completed Subsequent to September 30, 2000 (through November 13, 2000): Subsequent to September 30, 2000, Sonic acquired three dealerships for approximately $13.2 million in cash 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 Nine months Ended September 30, 2000: During the first nine months of 2000, Sonic acquired seven dealerships for approximately $51.3 million in cash and 11,589 shares of Sonic's Class A convertible preferred stock, Series II, having an estimated value at the time of issuance of approximately $11.6 million. The cash portion of the purchase price was financed with a combination of cash borrowed under 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. We are still in the process of obtaining data necessary to complete the allocation of the purchase price of these acquisitions. As a result, the values of assets and liabilities included in the table below reflect preliminary estimates where actual values have not yet been determined, and may ultimately be different than amounts recorded once actual values are determined. Any adjustment to the value of the assets and liabilities will be recorded against goodwill. Working capital $ 9,001 Property and equipment 2,396 Goodwill 52,408 Non-current liabilites assumed (943) ------------ Total purchase price $62,862 ============ The following unaudited pro forma financial information presents a summary of consolidated results of operations as if the acquisition transactions completed during 1999 and during the first nine months of 2000 had occurred as of the beginning of the year in which the acquisitions were completed, and at the beginning of the immediately preceding year, after giving effect to certain adjustments, including amortization of goodwill, interest expense on acquisition debt and related income tax effects. The pro forma financial information does not give effect to adjustments relating to net reductions in floor plan interest expense resulting from re-negotiated floor plan financing agreements or to reductions in salaries and fringe benefits of former owners or officers of acquired dealerships who have not been retained by Sonic or whose salaries have been reduced pursuant to employment agreements with Sonic. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that would have occurred had the acquisitions been completed at the beginning of the period presented. These results are also not necessarily indicative of the results of future operations. 10 SONIC AUTOMOTIVE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. BUSINESS ACQUISITIONS - (Continued)
Three Months Ended September 30, Nine Months Ended September 30, 1999 2000 1999 2000 ----------- ----------- ----------- ----------- Total revenues $ 1,545,589 $ 1,594,861 $ 4,470,914 $ 4,695,388 Gross profit $ 209,017 $ 228,741 $ 587,124 $ 664,824 Net income $ 11,694 $ 22,059 $ 42,535 $ 62,215 Diluted income per share $ 0.25 $ 0.51 $ 0.91 $ 1.40
Sale of Dealership Subsidiaries: During the first nine months of 2000, Sonic sold substantially all of the assets of three of its dealership subsidiaries and one franchise from another dealership for approximately $5.9 million. There were no material gains or losses as a result of these sales. Sonic also intends to sell substantially all of the assets at certain other subsidiaries within the next year. The aggregate net book value of the assets held for sale total approximately $9.4 million have been included in other current assets on the accompanying unaudited consolidated balance sheet as of September 30, 2000. 3. INVENTORIES Inventories consist of the following: December 31, September 30, 1999 2000 ------------ ------------- New vehicles $ 459,382 $ 465,907 Used vehicles 109,130 130,406 Parts and accessories 44,821 47,430 Other 17,524 17,432 ----------------- ----------------- Total $ 630,857 $ 661,175 ================= ================= 4. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: December 31, September 30, 1999 2000 ------------ ------------- Land $ 953 $ 53 Building and improvements 23,120 24,798 Office equipment and fixtures 22,616 24,696 Parts and service equipment 16,008 19,573 Company vehicles 4,664 5,628 Construction in progress 5,785 11,679 ----------------- ----------------- Total, at cost 73,146 86,427 Less accumulated depreciation (9,465) (13,659) ----------------- ----------------- Property and equipment, net $ 63,681 $ 72,768 ================= ================= In addition to the $11.7 million classified as construction in progress, Sonic has incurred approximately $28.3 million in construction costs on facilities which are expected to be completed and sold within one year in sale-leaseback transactions. Accordingly, these costs have been classified in other current assets on the accompanying unaudited consolidated balance sheet as of September 30, 2000. 11 SONIC AUTOMOTIVE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. LONG-TERM DEBT Revolving Facility On August 10, 2000, Sonic entered into the Revolving Facility with Ford Motor Credit and Chrysler Financial to replace its previous $350 million acquisition line of credit with Ford Motor Credit. The Revolving Facility has a borrowing limit of $500 million, subject to a borrowing base calculated on the basis of our receivables, inventory and equipment and a pledge of certain additional collateral by an affiliate of Sonic. Amounts outstanding under the Revolving Facility bear interest at 2.50% above LIBOR (LIBOR was 6.62% at September 30, 2000) and will mature on October 31, 2003. Borrowings, net of repayments, under the Revolving Facility for the nine months ended September 30, 2000 were approximately $52.6 million and were primarily used to finance acquisitions. The total outstanding balance as of September 30, 2000 was approximately $341.6 million. Additional amounts to be drawn under the Revolving Facility are to be used for the acquisition of additional dealerships and to provide for the general working capital needs of Sonic and other general corporate purposes. We agreed under the Revolving Facility not to pledge any of our assets to any third party (with the exception of currently encumbered assets of our dealership subsidiaries that are subject to previous pledges or liens). In addition, the Revolving Facility contains certain negative covenants, including covenants restricting or prohibiting the payment of dividends, capital expenditures and material dispositions of assets as well as other customary covenants and default provisions. Financial covenants include specified ratios of o current assets to current liabilities (at least 1.23:1), o earnings before interest, taxes, depreciation and amortization (EBITDA) and rent less capital expenditures to fixed charges (at least 1.4:1), o EBITDA to interest expense (at least 2:1) and o total adjusted debt to EBITDA (no greater than 2.25:1). In addition, the loss of voting control over Sonic by Bruton Smith, Scott Smith and their spouses or immediate family members or the failure by Sonic, with certain exceptions, to own all the outstanding equity, membership or partnership interests in its dealership subsidiaries will constitute an event of default under the Revolving Facility. Sonic is in compliance with all restrictive covenants as of September 30, 2000. Mortgage Facility In June 2000, Sonic entered into a revolving real estate acquisition and construction line of credit (the "Construction Loan") and a related mortgage refinancing facility (the "Permanent Loan" and collectively with the Construction Loan, the "Mortgage Facility") with Ford Motor Credit. Under the Construction Loan, Sonic can borrow up to $50.0 million to finance land acquisition and dealership construction costs. Advances can be made under the Construction Loan until December 2003. All advances will mature on June 22, 2005 and will bear interest at 2.25% above LIBOR. The total outstanding balance under the Construction Loan as of September 30, 2000 was approximately $21.5 million. Under the Permanent Loan, Sonic can refinance up to $100.0 million in advances under the Construction Loan once the projects are completed. The aggregate borrowing limit under the Mortgage Facility is $100 million. Advances can be made under the Permanent Loan until June 2005. All advances under the Permanent Loan mature on June 22, 2010 and bear interest at 2.00% above LIBOR. As of September 30, 2000, no amounts were outstanding under the Permanent Loan. Subsidiary Guarantees Balances outstanding under Sonic's Revolving Facility and $125 million senior subordinated notes are guaranteed by all of Sonic's operating subsidiaries. These guarantees are full and unconditional and joint and several. Sonic's parent company has no independent assets or operations, and subsidiaries of the parent that are not subsidiary guarantors are minor. 12 SONIC AUTOMOTIVE, INC. 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 June 30, 1997 with Sonic Financial Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan (collectively, the "Class B Registration Rights Holders"). SFC currently owns 8,881,250 shares of Class B common stock; Bruton Smith, 2,071,250 shares; Scott Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the "Egan Group"), 341,250 shares, all of which are covered by the Registration Rights Agreement. The Egan Group also owns certain shares of Class A common stock to which the Registration Rights Agreement applies. If, among other things provided in Sonic's charter, offers and sales of shares Class B common stock are registered with the Securities and Exchange Commission, then such shares will automatically convert into a like number of shares of Class A common stock. The Class B Registration Rights Holders have certain limited piggyback registration rights under the Registration Rights Agreement. These rights permit them to have their shares of Sonic's common stock included in any Sonic registration statement registering Class A common stock, except for registrations on Form S-4, relating to exchange offers and certain other transactions, and Form S-8, relating to employee stock compensation plans. The Registration Rights Agreement expires in November 2007. SFC is controlled by Bruton Smith, the Company's Chairman. Payable to Company's Chairman Sonic has a note payable to Mr. Smith in the amount of $5.5 million (the "Subordinated Smith Loan"). The Subordinated Smith Loan bears interest at Bank of America's announced prime rate plus 0.5% and has a stated maturity date of November 30, 2000. Under the terms of certain subordination agreements currently in effect, however, all amounts owed by Sonic to Mr. Smith under the Subordinated Smith Loan are to be paid only after all amounts owed by Sonic under the Revolving Facility, Sonic's floor plan financing facility with Ford Motor Credit and Sonic's senior subordinated notes are fully paid in cash. Accordingly, the Subordinated Smith Loan has been classified as non-current on the accompanying consolidated balance sheets. Other Related Party Transactions o Sonic had amounts receivable from affiliates of $4.2 million at December 31, 1999 representing non-interest bearing amounts owed by SFC. Of this balance, approximately $4.1 million was collected during the first nine months of 2000. The remaining balance at September 30, 2000 was approximately $0.1 million and is classified as current based on the expected repayment dates. o Town and Country Toyota had an amount payable to SFC and Bruton Smith of approximately $0.7 million as of December 31, 1999. The balance of this loan was paid in full as of June 30, 2000. 7. CAPITAL STRUCTURE AND PER SHARE DATA Treasury Stock/Share Repurchase Program -- During 1999, Sonic's Board of Directors authorized Sonic to expend up to $50 million to repurchase shares of its Class A common stock or redeem securities convertible into Class A common stock. As of September 30, 2000 Sonic had repurchased 2.9 million shares of Class A common stock for approximately $27.5 million and had also redeemed 13,551 shares of Class A convertible preferred stock at a total cost of $13.6 million. Through November 13, 2000, Sonic has repurchased approximately 3.1 million shares of Class A common stock for approximately $29.7 million and has redeemed 13,551 shares of Class A convertible preferred stock for approximately $13.6 million. Sonic will continue to repurchase shares from time to time subject to market conditions. Per Share Data - The calculation of diluted net income per share considers the potential dilutive effect of options and shares under Sonic's stock compensation plans, Class A common stock purchase warrants, and Class A convertible preferred stock. The following table illustrates the dilutive effect of such items on net income per share. 13 SONIC AUTOMOTIVE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. CAPITAL STRUCTURE AND PER SHARE DATA - (Continued)
For the nine months ended For the nine months ended September 30, 1999 September 30, 2000 ----------------------------------- ---------------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount ---------- ----------- ---------- ---------- ----------- --------- (Dollars and Shares in thousands (Dollars and Shares in thousands except per share amounts) except per share amounts) Basic Net Income Per Share $ 29,371 29,948 $ 0.98 $ 61,881 42,584 $ 1.45 ========== ========= Effect of Dilutive Securities Stock compensation plans - 1,102 - 549 Warrants - 92 - 35 Convertible Preferred Stock - 2,347 - 1,089 ---------- ----------- ---------- ----------- Diluted Net Income Per Share $ 29,371 33,489 $ 0.88 $ 61,881 44,257 $ 1.40 ========== =========== ========== ========== =========== ========= For the three months ended For the three months ended September 30, 1999 September 30, 2000 ----------------------------------- ---------------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount ---------- ----------- ---------- ---------- ----------- --------- (Dollars and Shares in thousands (Dollars and Shares in thousands except per share amounts) except per share amounts) Basic Net Income Per Share $ 12,583 35,208 $ 0.36 $ 22,059 42,693 $ 0.52 ========== ========= Effect of Dilutive Securities Stock compensation plans - 736 - 644 Warrants - 76 - 39 Convertible Preferred Stock - 2,248 - 195 ---------- ----------- ---------- ----------- Diluted Net Income Per Share $ 12,583 38,268 $ 0.33 $ 22,059 43,571 $ 0.51 ========== =========== ========== ========== =========== =========
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 Consolidated Statements of Income.
Percentage of Total Percentage of Total Revenues for Revenues for Three Months Ended Nine Months Ended September 30, September 30, 1999 2000 1999 2000 ---------- ---------- --------- --------- Revenues: New vehicle sales.......................... 58.4% 57.9% 58.3% 58.2% Used vehicle sales......................... 27.9% 28.1% 28.8% 27.9% Parts, service and collision repair........ 11.1% 11.2% 10.5% 11.2% Finance and insurance and other............ 2.6% 2.8% 2.4% 2.7% ---------- ---------- --------- --------- Total revenues............................. 100.0% 100.0% 100.0% 100.0% Cost of sales.............................. 86.6% 85.7% 86.8% 85.8% ---------- ---------- --------- --------- Gross profit............................... 13.4% 14.3% 13.2% 14.2% Selling, general and administrative........ 9.5% 10.3% 9.5% 10.2% Depreciation .............................. 0.1% 0.1%. 0.1% 0.1% Goodwill amortization...................... 0.2% 0.3% 0.2% 0.3% ---------- ---------- --------- --------- Operating income........................... 3.6% 3.6% 3.4% 3.6% Interest expense-floorplan................. 0.7% 0.7% 0.7% 0.7% Interest expense, other.................... 0.5% 0.7% 0.5% 0.7% ---------- ---------- --------- --------- Income before income taxes................. 2.4% 2.2% 2.2% 2.2% ========== ========== ========= =========
Nine months Ended September 30, 2000 Compared to Nine months Ended September 30, 1999 Revenues. Revenues grew in each of our primary revenue areas for the first nine months of 2000 as compared with the first nine months of 1999, causing total revenues to increase 111% to $4.6 billion. New vehicle sales revenue increased 110% to $2.7 billion in the first nine months of 2000, compared with $1.3 billion in the first nine months of 1999. The increase was due primarily to a 100% increase in new vehicle unit sales to 104,793 in the first nine months of 2000 from 52,509 in the first nine months of 1999, resulting primarily from acquisitions. The remainder of the increase in new vehicle revenues was due to a 5.4% increase in the average selling price of new vehicles, resulting primarily from an increase in revenues of higher priced luxury brands contributed by acquisitions. The percentage of new vehicle revenues comprised of luxury brands increased to 25.6% in the first nine months of 2000 from 19.6% in the first nine months of 1999. Used vehicle revenues from retail sales increased 110% to $962.4 million in the first nine months of 2000 from $458.8 million in the first nine months of 1999. The increase was primarily due to a 90.7% increase in used vehicle unit sales to 61,785 in the first nine months of 2000 from 32,392 in the first nine months of 1999. Of this unit increase, approximately 92.3%, or 27,124 units, resulted from acquisitions and 7.7% resulted from stores owned longer than one year. The remainder of the increase in used vehicle revenue was due to a 10.0% increase in the average selling price of used vehicles, including a 6.2% increase in the average selling price of used vehicles from stores owned for longer than one year. Parts, service and collision repair revenue increased 123% to $513.9 million in the first nine months of 2000 compared to $230.2 million in the first nine months of 1999. Approximately 94.7% of the increase resulted from our acquisitions. Finance and insurance revenue increased $73.3 million, or 141%, principally due to vehicle sales and related financing contributed by our acquisitions, as well as a 22.6% improvement in finance and insurance revenues per vehicle resulting from management's continued focus on improving training and development programs for finance and insurance sales people. 15 Gross Profit. Gross profit increased 127% to $656.1 million in the first nine months of 2000 from $289.0 million in the first nine months of 1999. Approximately 94.7%, or $347.6 million, of the increase resulted from acquisitions. Our overall gross profit percentage increased to 14.2% from 13.2% due primarily to an increase in revenues contributed by parts, service, collision repair services and finance and insurance products, which earn higher margins than vehicles sales. Parts, service and collision repair revenues as a percentage of total revenues increased to 11.2% in the first nine months of 2000 from 10.5% in the first nine months of 1999. Finance and insurance revenues as a percentage of total revenues increased to 2.7% in the first nine months of 2000 from 2.4% in the first nine months of 1999. In addition, the gross profit percentage earned on our parts, service, collision repair and finance and insurance products in the first nine months of 2000 increased 6.0% compared to the same period in 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses, excluding depreciation and amortization, increased 129% to $473.7 million in the first nine months of 2000 from $207.3 million in the first nine months of 1999, resulting principally from acquisitions. Such expenses as a percentage of revenues increased to 10.3% in the first nine months of 2000 from 9.5% in the first nine months of 1999. Compensation programs, which represent over 50% of a dealership's selling, general and administrative expenses, are primarily based on gross profits. As a result, the improvement in gross profit margins resulted in an increase in compensation expense as a percentage of total revenues to 6.3% in the first nine months of 2000 from 5.9% in the first nine months of 1999 (as a percentage of gross profits, compensation expense decreased slightly to 44.3% in the first nine months of 2000 from 44.4% in the first nine months of 1999). In addition, rent expense increased as a percentage of total revenues to 0.9% in the first nine months of 2000 from 0.7% in the first nine months of 1999 primarily due to acquisitions of dealerships located in higher rent markets. As a percentage of gross profits, selling, general and administrative expenses increased slightly to 72.2% in the first nine months of 2000 from 71.7% in the first nine months of 1999. Depreciation and Amortization Expense. Depreciation expense, excluding goodwill amortization, increased 152% to $4.9 million in the first nine months of 2000 from $2.0 million in the first nine months of 1999, resulting primarily from acquisitions. As a percentage of total revenues, depreciation expense was at 0.1% in both the first nine months of 2000 and the first nine months of 1999. Goodwill amortization expense increased 139% to $12.4 million in the first nine months of 2000 from $5.2 million in the first nine months of 1999, resulting principally from additional acquisitions. Interest Expense, floor plan. Interest expense, floor plan increased 125% to $34.0 million in the first nine months of 2000 from $15.1 million in the first nine months of 1999, due primarily to floor plan interest expense incurred by dealerships acquired. As a percentage of total revenues, floor plan interest increased to 0.74% in the first nine months of 2000 from 0.69% in the first nine months of 1999, primarily due to a 102 basis point increase in the average floorplan interest rate. Interest Expense, other. Interest expense, other increased to $31.2 million in the first nine months of 2000 from $12.2 million in the first nine months of 1999 due to interest incurred on additional borrowings under our $500 million revolving line of credit with Ford Motor Credit Company ("Ford Motor Credit") and Chrysler Financial Corporation ("Chrysler Financial")(the "Revolving Facility"). Provision for Income Taxes. The effective tax rate for the first nine months of 2000 was 38.05%, compared to an effective rate of 38.32% in the first nine months of 1999. The decrease was primarily attributable to the realization of the benefits of certain tax planning strategies, offset somewhat by acquisitions we made in the latter part of 1999 which were either (1) companies operating in states with higher income tax rates, or (2) stock purchases in which the goodwill amortization is not deductible for income tax purposes. Net Income. As a result of the factors noted above, our net income increased by $32.5 million in the first nine months of 2000 compared to the first nine months of 1999. Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Revenues. Revenues grew in each of our primary revenue areas for the three months ended September 30, 2000 as compared with the three months ended September 30, 1999, causing total revenues to increase 83.3% to $1.6 billion. New vehicle sales revenue increased 81.9% to $924.0 million in the three months ended September 30, 2000, compared with $508.1 million in the three months ended September 30, 1999. The increase was due primarily to a 73.6% increase in new vehicle unit sales to 36,071 in the three months ended September 30, 2000 from 20,778 in the three months ended September 30, 1999, resulting primarily from acquisitions. The remainder of the increase in new vehicle revenues was due to a 4.8% increase in the average selling price of new vehicles, resulting primarily from an increase in revenues of higher priced luxury brands contributed by acquisitions. The percentage of new vehicle 16 revenues comprised of luxury brands increased to 25.3% in the three months ended September 30, 2000 from 20.2% in the three months ended September 30, 1999. Used vehicle revenues from retail sales increased 93% to $335.6 million in the three months ended September 30, 2000 from $173.6 million in the three months ended September 30, 1999. The increase was primarily due to a 74.4% increase in used vehicle unit sales to 21,096 in the three months ended September 30, 2000 from 12,098 in the three months ended September 30, 1999. Of this unit increase, approximately 90.3%, or 8,127 units, resulted from acquisitions and 9.7% resulted from stores owned longer than one year. The remainder of the increase in used vehicle revenue was due to a 10.9% increase in the average selling price of used vehicles, including a 5.8% increase in the average selling price of used vehicles from stores owned for longer than one year. Parts, service and collision repair revenue increased 84.8% to $177.8 million in the three months ended September 30, 2000 compared to $96.2 million in the three months ended September 30, 1999. Approximately 93.7% of the increase resulted from our acquisitions. Finance and insurance revenue increased $22.6 million, or 100%, principally due to vehicle sales and related financing contributed by our acquisitions, as well as a 15.1% improvement in finance and insurance revenues per vehicle resulting from management's continued focus on improving training and development programs for finance and insurance sales people. Gross Profit. Gross profit increased 96.1% to $228.7 million in the three months ended September 30, 2000 from $116.7 million in the three months ended September 30, 1999. Approximately 94.3%, or $105.7 million, of the increase resulted from acquisitions. Our overall gross profit percentage increased to 14.3% from 13.4% due primarily to an increase in revenues contributed by used vehicle retail sales, parts, service and collision repair services and finance and insurance products, which earn higher margins than new vehicles. Used vehicle retail sales as a percentage of total revenues increased to 21.0% in the three months ended September 30, 2000 from 20.0% in the three months ended September 30, 1999. Parts, service and collision repair revenues as a percentage of total revenues increased to 11.2% in the three months ended September 30, 2000 from 11.1% in the three months ended September 30, 1999. Finance and insurance revenues as a percentage of total revenues increased to 2.8% in the three months ended September 30, 2000 from 2.6% in the three months ended September 30, 1999. In addition, the gross profit percentage earned on our parts, service, collision repair and finance and insurance products in the first three months of 2000 increased 7.4% compared to the same period in 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses, excluding depreciation and amortization, increased 100% to $165.5 million in the three months ended September 30, 2000 from $82.6 million in the three months ended September 30, 1999, resulting principally from acquisitions. Such expenses as a percentage of revenues increased to 10.4% in the three months ended September 30, 2000 from 9.5% in the three months ended September 30, 1999. Compensation programs, which represent over 50% of a dealership's selling, general and administrative expenses, are primarily based on gross profits. As a result, the improvement in gross profit margins resulted in an increase in compensation expense as a percentage of total revenues to 6.3% in the three months ended September 30, 2000 from 5.8% in the three months ended September 30, 1999 (as a percentage of gross profits, compensation expense increased to 43.9% in the three months ended September 30, 2000 from 43.4% in the three months ended September 30, 1999). In addition, rent expense increased as a percentage of total revenues to 0.8% in the three months ended September 30, 2000 from 0.7% in the three months ended September 30, 1999 primarily due to acquisitions of dealerships located in higher rent markets. As a percentage of gross profits, selling, general and administrative expenses increased to 72.3% in the three months ended September 30, 2000 from 70.9% in the three months ended September 30, 1999. Depreciation and Amortization Expense. Depreciation expense, excluding goodwill amortization, increased 128% to $1.8 million in the three months ended September 30, 2000 from $0.8 million in the three months ended September 30, 1999, resulting primarily from acquisitions. As a percentage of total revenues, depreciation expense was at 0.1% in both the three months ended September 30, 2000 and the three months ended September 30, 1999. Goodwill amortization expense increased 88.9% to $4.2 million in the three months ended September 30, 2000 from $2.2 million in the three months ended September 30, 1999, resulting principally from acquisitions. Interest Expense, floor plan. Interest expense, floor plan increased 103% to $11.6 million in the three months ended September 30, 2000 from $5.7 million in the three months ended September 30, 1999, due primarily to floor plan interest expense incurred by dealerships acquired. As a percentage of total revenues, floor plan interest increased to 0.73% in the three months ended September 30, 2000 from 0.66% in the three months ended September 30, 1999, primarily due to a 136 basis point increase in the average floorplan interest rate. Interest Expense, other. Interest expense, other increased to $10.6 million in the three months ended September 30, 2000 from $4.8 million in the three months ended September 30, 1999 due to interest incurred on additional borrowings under our $500 million Revolving Facility. 17 Provision for Income Taxes. The effective tax rate for the three months ended September 30, 2000 was 37.19%, compared to an effective rate of 38.75% in the three months ended September 30, 1999. The decrease was primarily attributable to the realization of benefits of certain tax planning strategies. Net Income. As a result of the factors noted above, our net income increased by $9.5 million in the three months ended September 30, 2000 compared to the three months ended September 30, 1999. Liquidity and Capital Resources Our principal needs for capital resources are to finance acquisitions and fund debt service and working capital requirements. Historically, we have relied on internally generated cash flows from operations, borrowings under our various credit facilities, and borrowings and capital contributions from our stockholders to finance our operations and expansion. During the first nine months of 2000, net cash provided by operating activities was approximately $56.4 million. During the first nine months of 1999, net cash provided by operating activities was approximately $22.4 million. The increase was attributable principally to increases in net income. Cash used for investing activities in the first nine months of 2000 was approximately $93.3 million, including $50.5 million paid for acquisitions, net of cash received, and $58.0 million in capital expenditures. Cash used for investing activities in the first nine months of 1999 was approximately $164.9 million, including $164.3 million paid for acquisitions, net of cash received, and $11.2 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 nine months of 2000, approximately $44.1 million related to the construction of new dealerships and collision repair centers. Total construction in process as of September 30, 2000 was approximately $40.0 million, of which approximately $28.3 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, 2000. In June 2000, Sonic entered into a revolving real estate acquisition and construction line of credit (the "Construction Loan") and a related mortgage refinancing facility (the "Permanent Loan") with Ford Motor Credit. Under the Construction Loan, Sonic can borrow up to $50.0 million to finance land acquisition and dealership construction costs. Advances can be made under the Construction Loan until December 2003. All advances will mature on June 22, 2005 and will bear interest at 2.25% above LIBOR. The total outstanding balance under the Construction Loan as of September 30, 2000 was approximately $21.5 million. Under the Permanent Loan, Sonic can refinance up to $50.0 million in advances under the Construction Loan once the projects are completed. Advances can be made under the Permanent Loan until June 2005. All advances under the Permanent Loan mature on June 22, 2010 and bear interest at 2.00% above LIBOR. As of September 30, 2000, no amounts were outstanding under the Permanent Loan. During the first nine months of 2000, we acquired seven dealerships for approximately $51.3 million in cash and 11,589 shares of Sonic's Class A convertible preferred stock, Series II, recorded at an estimated value of approximately $11.6 million. The cash portion of the purchase price was financed with a combination of cash borrowed under our Revolving Facility and cash generated from our existing operations. The acquisitions were accounted for using the purchase method of accounting, and the results of operations of such acquisitions have been included in our consolidated financial statements from their respective acquisition dates. Subsequent to September 30, 2000, Sonic acquired three dealerships for approximately $13.2 million in cash 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. Sonic has signed definitive agreements to acquire five dealerships for an estimated $50.3 million payable with a combination of cash, Class A convertible preferred stock, and 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 the Revolving Facility and with cash generated from Sonic's existing operations. These acquisitions are expected to be consummated in the fourth quarter of 2000 and first quarter of 2001. As of November 13, 2000, Sonic has sold three dealerships and one franchise from another dealership for approximately $5.9 million. No material gains or losses have been realized or are expected from these sales. 18 On August 10, 2000, Sonic entered into the Revolving Facility with Ford Motor Credit and Chrysler Financial to replace its previous $350 million acquisition line of credit with Ford Motor Credit. The Revolving Facility has a borrowing limit of $500 million, subject to a borrowing base calculated on the basis of our receivables, inventory and equipment and a pledge of certain additional collateral by an affiliate of Sonic. Amounts outstanding under the Revolving Facility bear interest at 2.50% above LIBOR (LIBOR was 6.62% at September 30, 2000) and will mature on October 31, 2003. Borrowings, net of repayments, under the Revolving Facility for the nine months ended September 30, 2000 were approximately $52.6 million and were primarily used to finance acquisitions. The total outstanding balance as of September 30, 2000 was approximately $341.6 million. Additional amounts to be drawn under the Revolving Facility are to be used for the acquisition of additional dealerships and to provide for the general working capital needs of Sonic and other general corporate purposes. We agreed under the Revolving Facility not to pledge any of our assets to any third party (with the exception of currently encumbered assets of our dealership subsidiaries that are subject to previous pledges or liens). In addition, the Revolving Facility contains certain negative covenants, including covenants restricting or prohibiting the payment of dividends, capital expenditures and material dispositions of assets as well as other customary covenants and default provisions. Financial covenants include specified ratios of o current assets to current liabilities (at least 1.23:1), o earnings before interest, taxes, depreciation and amortization (EBITDA) and rent less capital expenditures to fixed charges (at least 1.4:1), o EBITDA to interest expense (at least 2:1) and o total adjusted debt to EBITDA (no greater than 2.25:1). In addition, the loss of voting control over Sonic by Bruton Smith, Scott Smith and their spouses or immediate family members or the failure by Sonic, with certain exceptions, to own all the outstanding equity, membership or partnership interests in its dealership subsidiaries will constitute an event of default under the Revolving Facility. Sonic is in compliance with all restrictive covenants as of September 30, 2000. We currently have an aggregate principal balance of $125 million in senior subordinated notes which mature on August 1, 2008 and bear interest at a stated rate of 11.0%. The notes are unsecured and are redeemable at our option after August 1, 2003. Interest payments are due semi-annually on August 1 and February 1 and commenced February 1, 1999. The notes are subordinated to all of our present and future senior indebtedness, including the 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 September 30, 2000. We currently have standardized floor plan credit facilities with Chrysler Financial, General Motors Acceptance Corporation ("GMAC") and Ford Motor Credit. The floor plan credit facility with Chrysler Financial provides up to $750 million for the purchase of vehicles at our Chrysler dealerships. The floor plan credit facility with GMAC provides up to $33.6 million for the purchase of vehicles at four of our General Motors dealerships. We added two more of our General Motors dealerships to this facility effective October 2,, 2000. The floor plan facility with Ford Motor Credit provides up to $550 million for the purchase of vehicles at all of our other dealerships. As of September 30, 2000, there was an aggregate of approximately $131.4 million outstanding under the Chrysler Financial floorplan facility, $384.5 million outstanding under the Ford Motor Credit floor plan facility and $25.1 million outstanding under the GMAC floor plan facility. Amounts outstanding under the Chrysler Financial floor plan facility bear interest at 1.25% above LIBOR. Amounts outstanding under the Ford Motor Credit floor plan facility bear interest at the prime rate (prime was 9.50% at September 30, 2000), subject to certain incentives and other adjustments. Amounts outstanding under the GMAC floor plan facility bear interest at the prime rate, subject to certain incentives and other adjustments. Typically new vehicle floor plan indebtedness exceeds the related inventory balances. The inventory balances are generally reduced by the manufacturer's purchase discounts, which are not reflected in the related floor plan liability. These manufacturer purchase discounts are standard in the industry, typically occur on all new vehicle purchases, 19 and are not used to offset the related floor plan liability. These discounts are aggregated and generally paid to us by the manufacturers on a quarterly basis. We make monthly interest payments on the amount financed under the floor plan facilities but are not required to make loan principal repayments prior to the sale of the vehicles. The underlying notes are due when the related vehicles are sold and are collateralized by vehicle inventories and other assets of the relevant dealership subsidiary. The floor plan facilities contain a number of covenants, including among others, covenants restricting us with respect to the creation of liens and changes in ownership, officers and key management personnel. Sonic is in compliance with all restrictive covenants as of September 30, 2000. Sonic's Board of Directors recently authorized Sonic to expend up to $50 million to repurchase shares of its Class A common stock or redeem securities convertible into Class A common stock. As of September 30, 2000 Sonic had repurchased 2.9 million shares of Class A common stock for approximately $27.5 million and had also redeemed 13,551 shares of Class A convertible preferred stock at a total cost of $13.6 million. Through November 13, 2000, Sonic has repurchased approximately 3.1 million shares of Class A common stock for approximately $29.7 million and has redeemed 13,551 shares of Class A convertible preferred stock for approximately $13.6 million. Sonic will continue to repurchase shares from time to time subject to market conditions. We believe that funds generated through future operations and availability of borrowings under our floor plan financing (or any replacements thereof) and other credit arrangements will be sufficient to fund our debt service and working capital requirements and any seasonal operating requirements, including our currently anticipated internal growth for our existing businesses, for the foreseeable future. We expect to fund any future acquisitions from future cash flow from operations, additional debt financing (including the Revolving Facility) or the issuance of Class A common stock, preferred stock or other convertible instruments. Seasonality Our operations are subject to seasonal variations. The first quarter generally contributes less revenue and operating profits than the second, third and fourth quarters. Seasonality is principally caused by weather conditions and the timing of manufacturer incentive programs and model changeovers. Significant Materiality of Goodwill Goodwill represents the excess purchase price over the estimated fair value of the tangible and separately measurable intangible net assets acquired. The cumulative gross goodwill balance at December 31, 1999 was approximately $605.1 million and at September 30, 2000 was approximately $660.6 million. As a percentage of total assets and stockholders' equity, goodwill, net of accumulated amortization, represented 39.5% and 147.2%, respectively, at December 31, 1999, and 38.4% and 143.4%, respectively, at September 30, 2000. Generally accepted accounting principles in the United States of America require that goodwill and all other intangible assets be amortized over the period benefited. We have determined that the period benefited by the goodwill will be no less than 40 years. Accordingly, we are amortizing goodwill over a 40 year period. Earnings reported in periods immediately following an acquisition would be overstated if we attributed a 40 year benefit to an intangible asset that should have had a shorter benefit period. In later years, we would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the businesses acquired. Earnings in later years also could be significantly affected if management then determined that the remaining balance of goodwill was impaired. We periodically compare the carrying value of goodwill with the anticipated undiscounted future cash flows from operations of the business we have acquired in order to evaluate the recoverability of goodwill. We have concluded that the anticipated future cash flows associated with intangible assets recognized in our acquisitions will continue indefinitely, and there is no pervasive evidence that any material portion will dissipate over a period shorter than 40 years. We will incur additional goodwill in future acquisitions. The Financial Accounting Standards Board recently proposed new rules relating to the accounting for business combinations and intangible assets. One aspect of the proposal would not permit goodwill to be amortized over a period in excess of 20 years; however, we cannot assure you that such a rule will be adopted and, if adopted, as to the final provisions of any such rules. If such a rule is adopted, we have been advised that it would likely only affect the period over which we amortize goodwill in our future acquisitions. Item 3: Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk. Sonic's only financial instruments with market risk exposure are variable rate floor plan notes payable, Revolving Facility borrowings and other variable rate notes. The total outstanding balance of such instruments was approximately 20 $377.7 million at September 30, 1999 and $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 $2.7 million for the nine months ended September 30, 1999 and approximately $7.0 million for the nine months ended September 30, 2000. Of the total change in interest expense, approximately $2.3 million for the nine months ended September 30, 1999 and approximately $4.4 million for the nine months ended September 30, 2000 would have resulted from floor plan notes payable. Sonic's exposure with respect to floor plan notes payable is mitigated by floor plan incentives received from manufacturers which are generally based on rates similar to those incurred under Sonic's floor plan financing arrangements. Our floor plan interest expense for the nine months ended September 30, 2000 exceeded the amounts we received from these manufacturer floor plan incentives by approximately $7.0 million. As a result, the effective rate incurred under our floor plan financing arrangements was reduced to an annualized rate of approximately 1.6% after considering these incentives. 21 PART II - OTHER INFORMATION Item 6. Exhibits (a) Exhibits: 3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by reference to Exhibit 3.1 to Sonic's Registration Statement on Form S-1 (Reg. No. 333-33295) (the "Form S-1")). 3.2* Certificate of Amendment to Sonic's Amended and Restated Certificate of Incorporation effective June 18, 1999 (incorporated by reference to Exhibit 3.2 to Sonic's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K")). 3.3* Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 3.4* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1). 4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (Reg. Nos. 333-64397 and 333-64397-001 through 333-64397-044) of Sonic (the "Form S-4")). 4.2* Indenture dated as of July 1, 1998 among Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors, and U.S. Bank Trust National Association, as trustee (the "Trustee"), relating to the 11% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2 to the Form S-4). 4.3* First Supplemental Indenture dated as of December 31, 1999 among Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors and additional guarantors, and the Trustee, relating to the 11% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2a to the 1999 Form 10-K). 4.4 Second Supplemental Indenture dated as of September 15, 2000 among Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors and additional guarantors, and the Trustee, relating to the 11% Senior Subordinated Notes due 2008. 4.5* Registration Rights Agreement dated as of June 30, 1997 among Sonic, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1). 10.1 Credit Agreement dated as of August 10, 2000 (the "Credit Agreement") between Sonic, as Borrower, Ford Motor Credit Company ("Ford Credit"), as Agent and Lender, and Chrysler Financial Company, L.L.C. ("Chrysler Financial"), as Lender. 10.2 Promissory Note dated August 10, 2000 executed by Sonic in favor of Ford Credit pursuant to the Credit Agreement. 10.3 Promissory Note dated August 10, 2000 executed by Sonic in favor of Chrysler Financial pursuant to the Credit Agreement. 10.4 Guaranty dated August 10, 2000 by the subsidiaries of Sonic named therein, as Guarantors, in favor of Ford Credit, as Agent for the Lenders under the Credit Agreement. 10.5 Security Agreement dated August 10, 2000 by Sonic in favor of Ford Credit, as Agent for the Lenders under the Credit Agreement. 10.6 Security Agreement dated August 10, 2000 by the subsidiaries of Sonic named therein in favor of Ford Credit, as Agent for the Lenders under the Credit Agreement. 10.7 Master Construction Loan Agreement dated as of June 23, 2000 (the "Construction Loan Agreement") between the subsidiaries of Sonic named therein, as borrowers, and Ford Credit, as lender. 10.8 Permanent Loan Agreement dated as of June 23, 2000 (the "Permanent Loan Agreement") between the subsidiaries of Sonic named therein, as borrowers, and Ford Credit, as lender. 22 10.9 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named therein, as borrowers, in favor of Ford Credit, as lender, pursuant to the Construction Loan Agreement. 10.10 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named therein, as borrowers, in favor of Ford Credit, as lender, pursuant to the Permanent Loan Agreement. 10.11 Guaranty dated June 23, 2000 by Sonic in favor of Ford Credit guaranteeing the obligations of the subsidiaries of Sonic under the Construction Loan Agreement and the Permanent Loan Agreement. 10.12 Security Agreement dated June 23, 2000 by Sonic in favor of Ford Credit pursuant to the Construction Loan Agreement and the Permanent Loan Agreement. 10.13* Sonic Automotive, Inc. 1997 Stock Option Plan, Amended and Restated as of June 5, 2000 (incorporated by reference to Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg. No. 333-46272)). 10.14* Sonic Automotive, Inc. Employee Stock Purchase Plan, Amended and Restated as of June 5, 2000 (incorporated by reference to Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg. No. 333-46274)). 27 Financial data schedule for the nine month period ended September 30, 2000 (filed electronically). * Filed Previously (b) Reports on Form 8-K. Sonic filed a report on Form 8-K on September 15, 2000, reporting, under Item 5 of such report, that on September 13, 2000, Sonic had announced in a press release that it intended to offer approximately $125 million of its Senior Subordinated Notes due 2008. No financial statements were included in the filing. 23 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: November 14, 2000 By: /s/ O. Bruton Smith ----------------- ------------------------------------ O. Bruton Smith Chairman and Chief Executive Officer Date: November 14, 2000 By: /s/ Theodore M. Wright ----------------- ------------------------------------ Theodore M. Wright Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 24 INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR SONIC AUTOMOTIVE, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS 3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by reference to Exhibit 3.1 to Sonic's Registration Statement on Form S-1 (Reg. No. 333-33295) (the "Form S-1")). 3.2* Certificate of Amendment to Sonic's Amended and Restated Certificate of Incorporation effective June 18, 1999 (incorporated by reference to Exhibit 3.2 to Sonic's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K")). 3.3* Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 3.4* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1). 4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (Reg. Nos. 333-64397 and 333-64397-001 through 333-64397-044) of Sonic (the "Form S-4")). 4.2* Indenture dated as of July 1, 1998 among Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors, and U.S. Bank Trust National Association, as trustee (the "Trustee"), relating to the 11% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2 to the Form S-4). 4.3* First Supplemental Indenture dated as of December 31, 1999 among Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors and additional guarantors, and the Trustee, relating to the 11% Senior Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2a to the 1999 Form 10-K). 4.4 Second Supplemental Indenture dated as of September 15, 2000 among Sonic, as issuer, the subsidiaries of Sonic named therein, as guarantors and additional guarantors, and the Trustee, relating to the 11% Senior Subordinated Notes due 2008. 4.5* Registration Rights Agreement dated as of June 30, 1997 among Sonic, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1). 10.1 Credit Agreement dated as of August 10, 2000 (the "Credit Agreement") between Sonic, as Borrower, Ford Motor Credit Company ("Ford Credit"), as Agent and Lender, and Chrysler Financial Company, L.L.C. ("Chrysler Financial"), as Lender. 10.2 Promissory Note dated August 10, 2000 executed by Sonic in favor of Ford Credit pursuant to the Credit Agreement. 10.3 Promissory Note dated August 10, 2000 executed by Sonic in favor of Chrysler Financial pursuant to the Credit Agreement. 10.4 Guaranty dated August 10, 2000 by the subsidiaries of Sonic named therein, as Guarantors, in favor of Ford Credit, as Agent for the Lenders under the Credit Agreement. 10.5 Security Agreement dated August 10, 2000 by Sonic in favor of Ford Credit, as Agent for the Lenders under the Credit Agreement. 10.6 Security Agreement dated August 10, 2000 by the subsidiaries of Sonic named therein in favor of Ford Credit, as Agent for the Lenders under the Credit Agreement. 25 10.7 Master Construction Loan Agreement dated as of June 23, 2000 (the "Construction Loan Agreement") between the subsidiaries of Sonic named therein, as borrowers, and Ford Credit, as lender. 10.8 Permanent Loan Agreement dated as of June 23, 2000 (the "Permanent Loan Agreement") between the subsidiaries of Sonic named therein, as borrowers, and Ford Credit, as lender. 10.9 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named therein, as borrowers, in favor of Ford Credit, as lender, pursuant to the Construction Loan Agreement. 10.10 Promissory Note dated June 23, 2000 by the subsidiaries of Sonic named therein, as borrowers, in favor of Ford Credit, as lender, pursuant to the Permanent Loan Agreement. 10.11 Guaranty dated June 23, 2000 by Sonic in favor of Ford Credit guaranteeing the obligations of the subsidiaries of Sonic under the Construction Loan Agreement and the Permanent Loan Agreement. 10.12 Security Agreement dated June 23, 2000 by Sonic in favor of Ford Credit pursuant to the Construction Loan Agreement and the Permanent Loan Agreement. 10.13* Sonic Automotive, Inc. 1997 Stock Option Plan, Amended and Restated as of June 5, 2000 (incorporated by reference to Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg. No. 333-46272)). 10.14* Sonic Automotive, Inc. Employee Stock Purchase Plan, Amended and Restated as of June 5, 2000 (incorporated by reference to Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg. No. 333-46274)). 27 Financial data schedule for the nine month period ended September 30, 2000 (filed electronically). * Filed Previously 26