UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13395 SONIC AUTOMOTIVE, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-201079 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5401 E Independence Blvd, Charlotte, North Carolina 28212 (Address of principal executive offices) (Zip Code) (704) 532-3320 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of May 14, 1998, there were 5,027,452 shares of Class A Common Stock, par value $.01 per share, and 6,250,000 shares of Class B Common Stock, par value $.01 per share, outstanding. INDEX TO FORM 10-Q PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements (Unaudited) 3 Consolidated Statements of Income - Three-month periods ended March 31, 1997 and March 31, 1998 Consolidated Balance Sheets - December 31, 1997 and March 31, 1998 Consolidated Statement of Stockholders' Equity - Three-month period ended March 31, 1998 Consolidated Statements of Cash Flows - Three-month periods ended March 31, 1997 and March 31, 1998 Notes to Unaudited Consolidated Financial Statements ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 10-Q 14 SIGNATURES 15 2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars and shares in thousands except per share amounts) (Unaudited) Three Months Ended March 31, 1997 1998 -------- -------- REVENUES: Vehicle sales $ 85,605 $228,569 Parts, service and collision repair 10,979 28,965 Finance and insurance 2,201 6,247 -------- -------- Total revenues 98,785 263,781 COST OF SALES 87,557 228,600 -------- -------- GROSS PROFIT 11,228 35,181 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,748 26,640 DEPRECIATION AND AMORTIZATION 218 815 -------- -------- OPERATING INCOME 2,262 7,726 OTHER INCOME AND EXPENSE: Interest expense, floor plan 1,338 3,235 Interest expense, other 132 1,061 Other income 134 44 -------- -------- Total other expense 1,336 4,252 -------- -------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 926 3,474 PROVISION FOR INCOME TAXES 339 1,338 -------- -------- INCOME BEFORE MINORITY INTEREST 587 2,136 MINORITY INTEREST IN EARNINGS OF SUBSIDIARY 46 -- -------- -------- NET INCOME $ 541 $ 2,136 ======== ======== BASIC NET INCOME PER SHARE $ 0.19 ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 11,250 ======== DILUTED NET INCOME PER SHARE $ 0.19 ======== WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 11,374 ======== See notes to unaudited consolidated financial statements. 3 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, December 31, 1998 1997 (Unaudited) ------------ ----------- (in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 18,304 $ 23,391 Marketable equity securities 270 247 Receivables (net of allowance for doubtful accounts of $523,000 and $554,000 at December 31, 1997 and March 31, 1998, respectively) 19,784 22,128 Inventories (Note 3) 156,514 150,819 Deferred income taxes 405 405 Due from affiliates 1,047 1,014 Other current assets 1,048 1,969 -------- -------- Total current assets 197,372 199,973 PROPERTY AND EQUIPMENT, NET 19,081 19,796 GOODWILL, NET (Note 2) 74,362 86,072 OTHER ASSETS 635 651 -------- -------- TOTAL ASSETS $291,450 $306,492 ======== ======== See notes to unaudited consolidated financial statements. 4 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, December 31, 1998 1997 (Unaudited) ------------ ----------- (in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable - floor plan $ 133,236 $ 128,152 Trade accounts payable 6,612 7,554 Accrued interest 1,071 1,445 Other accrued liabilities 10,748 12,893 Payable to affiliates 445 445 Current maturities of long-term debt (Note 4) 584 584 --------- --------- Total current liabilities 152,696 151,073 LONG-TERM DEBT (NOTE 4) 38,640 49,982 PAYABLE TO THE COMPANY'S CHAIRMAN 5,500 5,500 PAYABLE TO AFFILIATES 4,394 4,192 DEFERRED INCOME TAXES 1,079 1,079 INCOME TAX PAYABLE 4,776 4,822 COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY: Preferred Stock, $.10 par, 3.0 million shares authorized; 3,960 shares issued and outstanding at March 31, 1998 -- 3,366 Class A Common Stock, $.01 par, 50.0 million shares authorized; 5.0 million shares issued and outstanding 50 50 Class B Common Stock, $.01 par, 15.0 million shares authorized; 6.3 million shares issued and outstanding 63 63 Paid-in capital 68,045 68,045 Retained earnings 16,186 18,322 Unrealized gain (loss) on marketable equity securities 21 (2) --------- --------- Total stockholders' equity 84,365 89,844 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 291,450 $ 306,492 ========= ========= See notes to unaudited consolidated financial statements. 5 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars and shares in thousands) (Unaudited)
Unrealized Gain/(Loss) on Preferred Class A Class B Marketable Total Stock Common Stock Common Stock Paid-In Retained Equity Stockholders' Shares Amount Shares Amount Shares Amount Capital Earnings Securities Equity -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1997 -- $ -- 5,000 $ 50 6,250 $ 63 $ 68,045 $ 16,186 $ 21 $ 84,365 Issuance of Preferred Stock (Note 2) 3,960 3,366 -- -- -- -- -- -- -- 3,366 Net unrealized loss on marketable equity securities -- -- -- -- -- -- -- -- (23) (23) Net income -- -- -- -- -- -- -- 2,136 -- 2,136 BALANCE AT ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== MARCH 31,1998 3,960 $ 3,366 5,000 $ 50 6,250 $ 63 $ 68,045 $ 18,322 $ (2) $ 89,844 ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
See notes to unaudited consolidated financial statements. 6 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Three Months Ended March 31, 1997 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 541 $ 2,136 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 218 815 Minority interest 46 -- Gain on sale of marketable equity securities (134) -- Changes in assets and liabilities that relate to operations: Receivables 1,155 (1,203) Inventories 10,956 14,910 Other assets 17 (665) Notes payable - floor plan (10,211) (13,405) Accounts payable and other current liabilities (534) 1,323 Income tax payable -- 46 -------- -------- Total adjustments 1,513 1,821 -------- -------- Net cash provided by operating activities 2,054 3,957 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired (Note 2) -- (9,422) Purchases of property and equipment (830) (622) -------- -------- Net cash used in investing activities (830) (10,044) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt -- 19,688 Payments of long-term debt (129) (8,346) Receipts from (advances to) affiliate companies 389 (168) -------- -------- Net cash provided by financing activities 260 11,174 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,484 5,087 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,679 18,304 ======== ======== CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,163 $ 23,391 ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Preferred Stock issued pursuant to acquisition (Note 2) $ -- $ 3,366 See notes to unaudited consolidated financial statements. 7 The following Notes to Unaudited Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contain estimates and forward-looking statements as indicated herein by the use of such terms as "estimated", "expects", "approximate" or "projected". Such statements reflect management's current views, are based on certain assumptions and are subject to risks and uncertainties. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed, or anticipated in any such forward-looking statements. Important factors that could cause actual results to differ from those projected or estimated are discussed herein. SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (All tables in thousands except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation -- The accompanying unaudited financial information for the three months ended March 31, 1997 and 1998 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1997. New Accounting Standards -- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Standard establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted the interim-period reporting requirements of this standard for the three months ended March 31, 1998. Comprehensive income amounted to $656,000 and $2.1 million for the three months ended March 31, 1997 and March 31, 1998, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Standard redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. This Statement will be effective for the Company's fiscal year ending December 31, 1998, and need not be applied to interim financial statements in the initial year of its application. The Company has not yet completed its' analysis of which operating segments it will disclose, if any. Per Share Data - The calculation of diluted net income per share considers the potential dilutive effect of options to purchase 798,000 shares of Class A Common Stock at a price ranging from $12-$14.50 per share under both the Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors and the Sonic Automotive, Inc. 1997 Stock Option Plan. The calculation also considers the potential dilutive effect of the Sonic Automotive, Inc. Employee Stock Purchase Plan, a warrant to purchase 44,000 shares of common stock at $12 per share and conversion of the 3,960 outstanding shares of Series III Preferred Stock. 2. BUSINESS ACQUISITIONS Pending Acquisitions The Company has entered into agreements to acquire four dealerships and two dealership groups. The estimated aggregate purchase price for these acquisitions, $80.2 million, is payable in cash, Class A Convertible Preferred Stock and warrants to purchase shares of Class A Common Stock. In addition, the Company may be required to make additional payments contingent on the future performance of the dealerships and the dealership groups. Acquisitions Completed During the Three Months ended March 31, 1998 During the first three months of 1998, the Company completed its previously announced acquisitions of Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center (the "Clearwater Acquisition") located in Clearwater, Florida for a total purchase price of $14.9 million. The acquisition was financed with $11.5 million in cash borrowed under a revolving credit facility (See Note 4) and $3.4 million in Series III Convertible Preferred Stock. In addition, by April 30, 1999 the Company will be required to pay an additional amount equal to 50% of the combined pre-tax earnings of the entities acquired, such amount not to exceed $1.8 million. The amount paid will be accounted for as goodwill. 8 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (All tables in thousands except per share amounts) 2. BUSINESS ACQUISITIONS -- Continued The Clearwater Acquisition was accounted for using the purchase method of accounting and the results of operations of the Clearwater Acquisition have been included in the accompanying consolidated financial statements from January 1, 1998, the effective date of acquisition. The purchase price of the acquisition has been allocated to the assets and liabilities acquired based on their estimated fair market value at the acquisition date as follows: Working capital $ 2,681 Property and equipment 364 Goodwill 11,808 --------- Total purchase price $ 14,853 ========= The following unaudited pro forma financial information presents a summary of consolidated results of operations as if the Clearwater Acquisition and the dealership groups acquired in 1997 had occurred as of January 1, 1997 after giving effect to certain adjustments, including amortization of goodwill, interest expense on acquisition debt and related income tax effects. The pro forma financial information does not give effect to adjustments relating to net reductions in floor plan interest expense resulting from re-negotiated floor plan financing agreements or to reductions in salaries and fringe benefits of former owners or officers of acquired dealerships who have not been retained by the Company or whose salaries have been reduced pursuant to employment agreements with the Company. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that would have occurred had the acquisitions been completed on January 1, 1997. These results are also not necessarily indicative of the results of future operations. Three Months Ending March 31, 1997 ------------ Total revenues $ 260,776 Gross profit $ 31,206 Net Income $ 2,067 Diluted net income per share $ 0.18 3. INVENTORIES Inventories consist of the following: December 31, March 31, 1997 1998 ------------ --------- New vehicles $118,751 $110,970 Used vehicles 27,990 29,216 Parts and accessories 9,085 10,019 Other 688 614 -------- -------- Total $156,514 $150,819 ======== ======== 4. LONG-TERM DEBT The Company has a secured, revolving acquisition line of credit (the "Revolving Facility") from Ford Motor Credit Company ("Ford Motor Credit") with a maximum lending commitment of $75 million bearing interest at prime rate (8.5% at March 31, 1998). The Revolving Facility will mature in two years, unless the Company requests that such term be extended, at the option of Ford Motor Credit, for a number of additional one year terms to be negotiated by the parties. As of March 31, 1998, a total of $44.8 million was outstanding under the Revolving Facility. The Revolving Facility currently contains certain negative covenants. The Company did not meet the debt to tangible equity ratio at March 31, 1998 and has obtained a waiver with regard to such requirement from Ford Motor Credit. 9 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued (All tables in thousands except per share amounts) 5. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not have a materially adverse effect on the Company's financial position or future results of operations and cash flows. 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the Unaudited Consolidated Financial Statements and the related notes thereto. Results of Operations The following table summarizes, for the periods presented, the percentages of total revenues represented by certain items reflected in the Company's Consolidated Statements of Income. Percentage of Total Revenues for Three Months Ended March 31, 1997 1998 ------ ------ Revenues: New vehicle sales ........................... 63.7% 58.3% Used vehicle sales .......................... 23.0% 28.4% Parts, service and collision repair ......... 11.1% 11.0% Finance and insurance ....................... 2.2% 2.3% ----- ----- Total revenues .............................. 100.0% 100.0% Cost of sales ............................... 88.6% 86.7% ----- ----- Gross profit ................................ 11.4% 13.3% Selling, general and administrative ......... 9.1% 10.4% ----- ----- Operating income ............................ 2.3% 2.9% Interest expense ............................ 1.5% 1.6% ----- ----- Income before income taxes .................. 0.9% 1.3% ===== ===== Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Revenues. Revenues grew in each of the Company's primary revenue areas for the first three months of 1998 as compared with the first three months of 1997, causing total revenues to increase 167.0% to $263.8 million. New vehicle sales revenue increased 144.5% to $153.7 million in the first three months of 1998, compared with $62.9 million in the first three months of 1997. The increase was due primarily to an increase in new vehicle unit sales of 119.1% to 6,617, as compared with 3,020 in the first three months of 1997 resulting principally from additional unit sales contributed by the acquisitions of Jeff Boyd Chrysler-Plymouth-Dodge in June 1997, Lake Norman Dodge and Affiliates in September 1997, Ken Marks Ford in October 1997, Dyer Volvo and the Bowers Dealerships and Affiliated Companies in November 1997, and Clearwater Toyota, Clearwater Mitsubishi, and Clearwater Collision Center effective January 1998 (the "Acquisitions"). The remainder of the increase was due to a 11.6% increase in the average selling price of new vehicles resulting principally from sales of higher priced import vehicles contributed by the Acquisitions. Used vehicle revenues from retail sales increased 263.0% to $56.5 million in the first three months of 1998 from $15.6 million in the first three months of 1997. The increase was primarily due to an increase in used vehicle unit sales of 241.5% to 4,333, as compared with 1,269 in the first three months of 1997, resulting from additional unit sales contributed by the Acquisitions. The Company's parts, service and collision repair revenue increased 163.8% to $29.0 million in the first three months of 1998 compared to $11.0 million in the first three months of 1997, principally due to the Acquisitions. Finance and insurance revenue increased $4.0 million, or 183.9%, principally due to increased new vehicle sales and related financing. Gross Profit. Gross profit increased 213.3% to $35.2 million in the first three months of 1998 from $11.2 million in the first three months of 1997 principally due to increases in revenues contributed by dealerships acquired. Gross profit as a percentage of sales increased to 13.3% from 11.4% due to increases in new vehicle gross margins resulting from sales of higher margin import vehicles contributed by acquired dealerships, as well as improved gross margins of used vehicles resulting from efforts made to improve management of used vehicle inventories. Selling, General and Administrative Expenses. Selling, general and administrative expenses, including depreciation and amortization, increased 206.2% to $27.5 million in the first three months of 1998 from $9.0 million in the first three months of 1997. Such expenses as a percentage of revenues increased to 10.4% from 9.1% principally due to expenses inherent with growth and the Acquisitions. 11 Interest Expense. Interest expense increased 192.2% to $4.3 million from $1.5 million. The increase was primarily due to a $1.9 million increase in floor plan interest incurred by the Acquisitions. The remaining increase was due to $0.9 million in interest incurred on acquisition related indebtedness. Net Income. As a result of the factors noted above, the Company's net income increased by $1.6 million in the first three months of 1998 compared to the first three months of 1997. Liquidity and Capital Resources : The Company's principal needs for capital resources are to finance acquisitions, service debt and fund working capital requirements. Historically, the Company has relied primarily upon internally generated cash flows from operations, borrowings under its various credit facilities, borrowings and capital contributions from its stockholders, and proceeds generated from its Initial Public Offering to finance its operations and expansion. The Company currently has a global floor plan credit facility with Ford Motor Credit Company ("Ford Motor Credit") for all its dealership subsidiaries (the "Floor Plan Facility"). As of March 31, 1998, there was an aggregate of $128.2 million outstanding under the Floor Plan Facility. The Floor Plan Facility at March 31, 1998 had an effective rate of prime less 0.9%, subject to certain incentives. Typically new vehicle floor plan indebtedness exceeds the related inventory balances. The inventory balance is generally reduced by the manufacturer's purchase discounts, and such reduction is not reflected in the related floor plan liability. These manufacturer purchase discounts are standard in the industry, typically occur on all new vehicle purchases, and are not used to offset the related floor plan liability. These discounts are aggregated and generally paid to the Company by the manufacturer on a quarterly basis. The Company makes monthly interest payments on the amount financed under the Floor Plan Facility but is not required to make loan principal repayments prior to the sale of the vehicles. The underlying notes are due when the related vehicles are sold and are collateralized by vehicle inventories and other assets of the Company. The Floor Plan Facility contains a number of covenants, including among others, covenants restricting the Company with respect to the creation of liens and changes in ownership, officers and key management personnel. During the first three months of 1998, the Company generated net cash of $4.0 million from operating activities, compared to $2.1 million in the first three months of 1997. The increase was attributable principally to a decrease in inventory levels and increased net income. Cash used for investing activities, excluding amounts paid in acquisitions, was approximately $622,000 for the first three months of 1998 and related primarily to acquisitions of property and equipment. Cash provided by financing activities for the first three months of 1998 of $11.2 primarily reflects amounts borrowed under the Revolving Facility to finance the purchase of the Clearwater Dealerships. The Company has a secured, revolving acquisition line of credit (the "Revolving Facility") from Ford Motor Credit with a maximum lending commitment of $75 million bearing interest at prime rate. The Revolving Facility will mature in two years, unless the Company requests that such term be extended, at the option of Ford Motor Credit, for a number of additional one year terms to be negotiated by the parties. Amounts to be drawn under the Revolving Facility are to be used for the acquisition of additional dealerships and to provide general working capital needs of the Company not to exceed $10 million. As of March 31, 1998, a total of $44.8 million was outstanding under the Revolving Facility. The Revolving Facility currently contains certain negative covenants. The Company did not meet the specified debt to tangible equity ratio at March 31, 1998 and has obtained a waiver with regard to such requirement from Ford Motor Credit. Capital expenditures, excluding amounts paid in acquisitions, were $0.8 million and $0.6 million for the three months ended March 31, 1997 and 1998, respectively. The Company's principal capital expenditures typically include building improvements and equipment for use in the Company's dealerships. During the first three months of 1998, the Company completed its previously announced acquisitions of Clearwater Toyota, Clearwater Mitsubishi, and Clearwater Collision Center located in Clearwater, Florida for a total purchase price of $14.9 million. The acquisition was financed with $11.5 million in cash borrowed under a revolving credit facility and $3.4 million in convertible preferred stock. In addition, by April 30, 1999 the Company will be required to pay an additional amount equal to 50% of the combined pre-tax earnings of the entities acquired, such amount not to exceed $1.8 million. The Company has entered into agreements to acquire four dealerships and two dealership groups. The estimated aggregate purchase price for these acquisitions, $80.2 million, is payable in cash, Class A Convertible Preferred Stock and warrants to purchase 12 shares of Class A Common Stock. In addition, the Company may be required to make additional payments contingent on the future performance of the dealerships and the dealership groups. The Company believes that funds generated through future operations and availability of borrowings under its floor plan financing (or any replacements thereof) and its other credit arrangements will be sufficient to fund its debt service and working capital requirements and any seasonal operating requirements, including its currently anticipated internal growth, for the foreseeable future. The Company incurred a tax liability of approximately $7.0 million in connection with the change in its tax basis of accounting for inventory from LIFO to FIFO, which is payable over a six-year period beginning in January 1998. As of March 31, 1998, the remaining balance of this liability was $5.8 million. The Company expects to be pay such obligation with cash provided by operations. The Company expects to fund any future acquisitions from its future cash flow from operations, additional debt financing (including the Revolving Facility) or the issuance of Class A Common Stock or issuance of other convertible instruments. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This standard establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted the interim-period reporting requirements of this standard for the three months ended March 31, 1998. Comprehensive income amounted to $656,000 and $2.1 million for the three months ended March 31, 1997 and March 31, 1998, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures and Segments of an Enterprise and Related Information". This Standard redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. This Statement will be effective for the Company's fiscal year ending December 31, 1998, and need not be applied to interim financial statements in the initial year of its application. The Company has not yet completed its analysis of which operating segments it will disclose, if any. 13 PART II - OTHER INFORMATION Item 6. Exhibits (a) Exhibits: 4.1 Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock. 10.1* Asset Purchase Agreement dated December 30, 1997 between Sonic Automotive, Inc., as buyer, and M&S Resources, Inc. .Clearwater Auto Resources, Inc. and Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schuman, and Timothy McCabe as shareholders of the sellers (incorporated by reference to Exhibit 99.1 to the Company's Current Report of Form 8-K dated March 30, 1998 (the "March 1998 Form 8-K")). 10.2* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as of March 24, 1998 between Sonic Automotive, Inc., as buyer, and M&S Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schuman, and Timothy McCabe as shareholders of the sellers (incorporated by reference to Exhibit 99.2 to the March 1998 Form 8-K). 10.3 Asset Purchase Agreement dated as of February 4, 1998 between Sonic Automotive, Inc., as buyer, and Hatfield Jeep Eagle, Inc., Hatfield Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota West, Inc., and Hatfield Hyundai Inc., as sellers and Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as Trustee of the Bud C. Hatfield, Sr. Special Irrevocable Trust as shareholders of the sellers. 10.4 Agreement and Plan of Merger dated as of February 10, 1998 between Sonic Automotive, Inc., as buyer, and Capitol Chevrolet, Inc., Capitol Imports, LTD., and Frank E. McGough, Jr., as sellers. 10.5 Stock Purchase Agreement dated as of March 16, 1998 between Sonic Automotive, Inc., as buyer, and Freeman Smith, as stockholder and the other stockholders named therein. 10.6* Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors (incorporated by reference to Exhibit 10.69 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 27 Financial data schedule for the three month period ended March 31, 1998 (filed electronically). (b) Reports on Form 8-K. On March 30, 1998, the Company filed a Current Report on Form 8-K, dated March 24, 1998, pursuant to Item 2 of such form, reporting the Clearwater Acquisition and containing Unaudited Pro Forma Financial Statements Reflecting the Business Combination of Sonic Automotive, Inc. and Clearwater Dealerships. * Filed Previously 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SONIC AUTOMOTIVE, INC. (Registrant) Date: May 14, 1998 By: /s/ O. Bruton Smith ------------ --------------------------------- O. Bruton Smith Chairman and Chief Executive Officer Date: May 14, 1998 By: /s/ Theodore M. Wright ------------ -------------------------------- Theodore M. Wright Vice President-Finance, Chief Financial Officer, Treasurer, Secretary and Director 15 INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR SONIC AUTOMOTIVE, INC. FOR THE QUARTER ENDED March 31, 1998 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS 4.1 Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock. 10.1* Asset Purchase Agreement dated December 30, 1997 between Sonic Automotive, Inc., as buyer, and M&S Resources, Inc. .Clearwater Auto Resources, Inc. and Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schuman, and Timothy McCabe as shareholders of the sellers (incorporated by reference to Exhibit 99.1 to the Company's Current Report of Form 8-K dated March 30, 1998 (the "March 1998 Form 8-K")). 10.2* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as of March 24, 1998 between Sonic Automotive, Inc., as buyer, and M&S Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schuman, and Timothy McCabe as shareholders of the sellers (incorporated by reference to Exhibit 99.2 to the March 1998 Form 8-K). 10.3 Asset Purchase Agreement dated as of February 4, 1998 between Sonic Automotive, Inc., as buyer, and Hatfield Jeep Eagle, Inc., Hatfield Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota West, Inc., and Hatfield Hyundai Inc., as sellers and Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as Trustee of the Bud C. Hatfield, Sr. Special Irrevocable Trust as shareholders of the sellers. 10.4 Agreement and Plan of Merger dated as of February 10, 1998 between Sonic Automotive, Inc., as buyer, and Capitol Chevrolet, Inc., Capitol Imports, LTD., and Frank E. McGough, Jr., as sellers. 10.5 Stock Purchase Agreement dated as of March 16, 1998 between Sonic Automotive, Inc., as buyer, and Freeman Smith, as stockholder and the other stockholders named therein. 10.6* Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors (incorporated by reference to Exhibit 10.69 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 27 Financial data schedule for the three month period ended March 31, 1998 (filed electronically). * Filed Previously 16